Thomas Edison and Henry Ford explain Modern Monetary Theory in 1921

Edison and Ford were Deficit Owls

by Serban V.C. Enache

In December 1921, Henry Ford and Thomas Edison visited the Muscle Shoals nitrate and water power projects near Florence, Alabama. Thomas Edison gave an interview with the The New York Times, “Ford Sees Wealth In Muscle Shoals.” With fair use, and in the interest of posterity and public purpose, I reproduce Edison’s views on finance and the economy – which are 100 percent consistent with Modern Monetary Theory. I also add my own observations to address any confusions – that may arise from his statements – and I abstain from making any commentary based on political ideology.

“The water power that can be developed here will equal or surpass, I believe, any other development in this country to date. There are coal, iron, useful kinds of rocks, minerals and metals right close at hand on every side. The wonder to me is that they have gone so long undeveloped.”

“Whether or not we take hold of Muscle Shoals is now up to Congress. We have made our offer – the only constructive bid made for the property. We do not seek to make money out of it. We will have to take a small profit out of it, of course, say 8 percent, but we do not ask the 20 or 30 percent profit which others would demand. We would like to build here a great and perpetual benefit to the people, always to be owned by them and operate in their service. All I ask of Congress is to give me the opportunity. And I’m going to leave that to you, if you wish me to come down here, to see that Congress does.”

“I will recommend to Congress that it complete the dam and give the lease to Mr. Ford, for three reasons. First. The Capacity of power here and the industrial plants built on the Sheffield shore make this the greatest munitions plant in the country. Its possibilities for providing quickly and in tremendous quantities all sorts of war materials is almost incomprehensible. Whether or not any one operate the plant, it should be completed and kept ready to go into operation. With that done, no nation would attack without hesitation. It would be the greatest insurance against war that we have. Second. To get the property is one thing, to operate it successfully is an other. Ford is known as a great manufacturer, with great conceptions, who moves rapidly to their realization. He is the one logical man to do this thing. Third. The whole country has an abiding faith that Ford will not operate it to get every dollar possible out of it for himself. He will make it an American institution, doing the greatest good for the greatest possible number.”

“Make it perfectly clear that I’m not advocating any changes in banks and banking. Banks are a mighty good thing. They are essential to the commerce of the country. It’s the money broker, the money profiteer, the private banker, that I oppose. They gain their power through a [unclear] and false value given to gold. Gold is a relic of Julius Caesar and interest is an invention of Satan.”

Interest is a markup; it is a flow; it is unearned increment. Banks create and destroy money by making entries on their own ledgers using the Government’s currency as the unit of account. The Government does not forgo any seigniorage when banks issue loans. Banks are constrained in their lending by their capital and the actual demand for loans. They do not print the currency. They do not create net money. The only way they could pull off the aforementioned is if the Government (the legislative power) allowed them to operate with negative capital. The bank as a vehicle or tool is amoral; it can be used for good or ill.

“Gold is intrinsical of less utility than most metals. The probable reason why it is retained as the basis of money is that it is easy to control. And it is the control of money that constitutes the money question. It is the control of money that is the root of all evil.”

Money is credit. Money is debt. Most people confuse money (IOUs) with the medium in which it’s recorded in. Things like gold, silver, wood, grain, clay tablets… these things are commodities, not IOUs. By tying the issuance of currency to the supply of gold, the Government forgoes a good portion of its economic sovereignty – while the gold cartels, in turn, gain a good measure of influence over society and over the Government’s economic policies.

“How can the system be improved or changed? It can come about in several ways. One way would be to produce so much gold that its psychological hold would be broken. If we all had mines in our back yards or if synthetic gold could be made and sold 10 cents a pound, you would soon see gold disappear as the basis for money. And we are nearing just that; only a few days ago a scientist developed that lead, one of the basic metals, and heretofore an element by itself, is actually a compound. We do not know how near we are from finding that gold, too, is a compound. All the wealth in the world, according to our present standards, may be rendered worthless by the discovery that gold can be made synthetically.”

“In that case people could no longer have confidence in it. Money ought to be plentiful and gold is not plentiful. It would be plentiful if it were mined in as large quantities as it could be, but an artificial scarcity is maintained by those who use gold to monopolize money. That is one way to do it – make it so plentiful that it drowns its fictitious value and drowns the superstition of the people along with it.”

“Then there is another way – the method my friend Ford proposed the other day. He proposes just to go along and forget about gold. He says that the Government can finance Muscle Shoals without applying to money brokers for permission, and I think he is absolutely right about it.”

“Of course, as long as the world is on the gold basis, we shall have to recognize it as an element in international trade, but it is not necessary for commerce within our own borders. In internal business we can forget it. And we do forget it. If everybody in the United States suddenly demanded gold for their money, there would not be enough gold. Gold and money are separate things, you see. Gold is the trick mechanism by which you can control money. Gold is not money until the people of the United States and other nations put their stamp on it. It is not the gold that makes the dollar. It is the dollar that makes the gold. Take the dollar out of the gold, and leave it merely yellow metal, and it sinks in value. Gold is established by law, just as silver was, and gold could be disestablished, demonetized by law, just as silver was. When silver was demonetized, the former so-called dollar became worth about 50 cents.”

A metal standard is not a creation of the market, nor does it spawn from any law of nature. It is a Government policy choice – a self-imposed constraint which limits the Government’s space in conducting fiscal and monetary policy. A metal standard monetary regime does not prevent speculation, does not prevent boom and bust cycles, does not maintain price stability, does not discipline market participants or politicians in Government. Quite the opposite, it makes the Government unable to take counter-cyclical fiscal measures. If the metal standard is maintained during the downward cycle and conditions are severe – it can lead to sovereign default or horrendous unemployment and poverty.

“But would not Mr. Ford’s suggestion that Muscle Shoals be financed by a currency issue raise some objections?” Mr. Edison was asked.

“Certainly. There is a complete set of misleading slogans kept on hand for just such outbreaks of common sense among people. The people are so ignorant of what they think are the intricasies of the money system that they are easily impressed by big words. There would be new shrieks of ‘fiat money,’ and ‘paper money’ and ‘green-backism,’ and all the rest of it – the same old cries with which the people have been shouted down from the beginning.”

Commodities have intrinsic value. Fiat money has extrinsic value. The Government imposes money obligations on the public (fines, fees, taxes, imposts), obligations extinguishable only in its fiat currency, and it announces the legal penalties for those who don’t pay. The root demand for Government currency is Government money taxation. Taxation is a sufficient method to drive demand for the currency and give it (extrinsic) value. This method is coercive but efficient. Another method to drive demand for the currency is through persuasion, but this method is inefficient.

“But maybe we have passed beyond the time when the thoughtful 2 percent – you know, I gather from my questionnaire that only 2 percent of the people think,” and Mr. Edison smiled broadly. “Maybe they can’t shout down American thinkers any longer. The only dynamite that works in this country is the dynamite of a sound idea. I think we are getting a sound idea of the money question. The people have an instinct which tells them that something is wrong, and that the wrong somehow centers in money. They have an instinct also, which tells them when a proposal is made in their interests or against them.”

“Now, as to paper money, so called everyone knows that paper money is the money of civilized people. The higher you go in civilization the less actual money you see. It is all bills and checks. What are bills and checks? Mere promises and orders. What are they based on? Principally on two sources – human energy and the productive earth. Humanity and the soil – they are the only real basis of money.”

Friedrich List insisted on the same grounds for the same goals back in the 19th century. In his treaties “On a Railway System in Saxony as the Foundation of a General German Railway System,” which appeared in 1833, he wrote: “People will probably ask me, where will Bavaria get the money to complete such giant works [railways]? I answer, that I have not yet seen any silver or gold in any of the canals or railways. To build them we use only consumer goods, steel, stones, wood, manpower, the power of animals. But is there not a surplus of all this in Bavaria? To the extent that we transform this surplus into canals and railways, which are not yet in existence, we create permanent and enduring value, we create an instrument which doubles the productive power of the entire nation. The money, however, does not leave the country, it only settles accounts.”

Continuing with Edison’s views…

“Don’t allow them to confuse you with the cry of ‘paper money.’ The danger of paper money is precisely the danger of gold – if you get too much it is no good. They say we have all the gold of the world now. Well, what good does it do us? When America gets all the chips in a game, the game stops. We would be better off if we had less gold. Indeed, we are trying to get rid of our gold to start something going. But the trade machine is at present jammed. Too much paper money operates the same way. There is just one rule for money, and that is, to have enough to carry all the legitimate trade that is waiting to move. Too little or too much are both bad. But enough to move trade, enough to prevent stagnation on the one hand and not enough to permit speculation on the other hand, is the proper ratio.”

Money is a political constraint. A Government that spends and taxes in its own free floating fiat currency can operate with negative equity indefinitely without any risk of bankruptcy. Real constraints consist in: available land, available materials, available labor, and know-how. Sound fiscal policy is (ought to be or can be) that which allows the Government’s debt and fiscal positions to go where they may, so long as full employment and price stability are achieved and maintained.

“Then you see no difference between currency and Government bonds?” Mr. Edison was asked.

“Yes, there is a difference, but it is neither the likeness nor the difference that will determine the matter; the attack will be directed against thinking of bonds and currency together and comparing them. If people ever get to thinking of bonds and bills at the same time, the game is up.”

The difference between a regular banknote one has in his or her wallet, and a Treasury note is that the latter is a bond with a maturity date and interest yield attached to it – while the former is a permanent bond with zero interest yield.

“Now, here is Ford proposing to finance Muscle Shoals by an issue of currency. Very well, let us suppose for a moment that Congress follows his proposal. Personally, I don’t think Congress has imagination enough to do it, but let us suppose that it does. The required sum is authorized – say 30 million dollars. The bills are issued directly by the Government, as all money ought to be. When the workmen are paid off, they receive these United States bills. When the material is bought it is paid in these United States bills. Except that perhaps the bills may have the engraving of a water dam, instead of a railroad train and a ship, as some of the Federal Reserve notes have. They will be the same as any other currency put out by the Government; that is, they will be money. They will be based on the public wealth already in Muscle Shoals, and their circulation will increase that public wealth, not only the public money but the public wealth – real wealth.”

Edison stresses the importance of expanding the country’s production capacity – and he touches on the positive impact of a healthy money velocity on the economy.

“When these bills have answered the purpose of building and completing Muscle Shoals, they will be retired by the earnings of the power dam. That is, the people of the United States will have all that they put into Muscle Shoals and all that they can take out for centuries – the endless wealth-making water power of that great Tennessee River – with no tax and no increase of the national debt.”

Federal Government programs and projects are financed from Federal Government fiscal debits, not tax revenue. To understand the various purposes of Government money taxes, please read “Taxes For Revenue are Obsolete,” written by the, then, Chairman of the New York FED Beardsley Ruml in 1946.

“But suppose Congress does not see this, what then?” Mr. Edison was asked.

“Well, Congress must fall back on the old way of doing business. It must authorize an issue of bonds. That is, it must go out to the money brokers and borrow enough of our own national currency to complete great national resources, and we then must pay interest to the money brokers for the use of our own money. That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.”

Again, with the expression ‘national debt,’ Edison is referring to saving accounts at the Central Bank. Also notice that Edison isn’t claiming that bankers print or issue the Government’s currency. He refers to the bankers as ‘money brokers.’ He then states that the Government has to pay interest to these brokers for the use of its own money. Before the Government can tax and or pay interest on its own currency, it has to spend it first into existence. The natural interest rate of fiat money is zero. Anything below zero is a tax, anything above zero is a subsidy.

“Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of 30 million dollars of their own money the people of the United States should be compelled to pay 66 million dollars – that is what it amounts to with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 percent to the stated cost.”

Edison is basically attacking rent seekers and the phenomenon of economic rent. What is economic rent? Unearned increment squeezed from public and private investments and labor and from natural monopolies (land, mineral deposits, the broadcast spectrum etc). Income obtained without any enterprise, without any labor, without any cost of production. Patents, interest, arbitrage, and political lobbying are also examples of rent seeking.

“But here is the point. If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 percent, whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way.”

“If the Government issues bonds, it simply induces the money brokers to draw 30 million dollars out of the other channels of trade and turn it into Muscle Shoals; if the Government issues currency, it provides itself with enough money to increase the national wealth at the Muscle Shoals without disturbing the business of the rest of the country. And in doing this it increases its income without adding a penny to its debt.”

“It is absurd to say that our country can issue 30 million dollars in bonds and not 30 million dollars in currency. Both are promises to pay; but the one (promise) fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.”

Edison is making the case for OMF (Overt Money Financing), which means deficit spending without bond issuance; exactly what MMTers prescribe.

“Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt-edged paper. Why? Because the Government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency on Muscle Shoals, instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?”

“The people must pay anyway; why should they be compelled to pay twice, as the bond system compels them to pay? The people of the United States always accept their Government’s currency. If the United States Government will adopt this policy of increasing its national wealth without contributing to the interest collect – for the whole national debt is made up of interest charges – then you will see an era of progress and prosperity in this country such as could never have come otherwise.”

Today, like back then, the saying “national debt” refers to the sum of Government interest-bearing bonds – sum of money the Government has to pay the holders of the bonds. When we analyze the semantics, however, and understand that all money is credit/debt, we may categorize Government debt in three forms: cash & coins, reserve (checking) accounts at the Central Bank, and securities (saving) accounts at the Central Bank. One way to look at the national debt is all the money the Government has spent so far without taxing it away. In Edison’s context, however, he is referring to interest-bearing bonds only, that is, saving accounts at the Federal Reserve.

“Are you going to have anything to do with outlining this proposed policy?” Mr. Edison was asked.

“I am just expressing my opinion as a citizen. Ford’s idea is flawless. They won’t like it. They will fight it, but the people of this country ought to take it up and think about it. I believe it points the way to many reforms and achievements which cannot come under the old system.”

Clearing up any confusions

Money is a record of a debit or a credit. Someone’s financial asset is someone else’s financial liability. One’s financial debt is another’s financial savings. Double-entry book-keeping. As such, debt-free money is a non-sequitur. Interest-free money, however, is something else entirely; it is a valid concept. It is what Edison referred to and stressed the importance of.

Looking at the macro picture, MMT (Modern Monetary Theory) makes the following observations, which are accounting facts, not opinions. The Government fiscal deficit is the net financial surplus of the non-government sector. The Government debt = the non-government sector’s stock of financial savings. The non-government sector is composed of the domestic private sector (domestic firms and households) and the foreign sector (foreign households, firms, and governments). All government debt in the world = worldwide private sector financial savings.

(G-T)+(I-S)+(X-M)= 0

(G-T)= -(I-S)-(X-M)

Closing remarks

The purpose of this article is not to promote or engage in economic hagiography. It’s not a portrayal of saints or gurus; these men (Edison and Ford) were simply correct in their premise and conclusion regarding Muscle Shoals and the monetary system as a whole – and that’s what posterity needs to remember and recognize from this episode of history, for our generations did not.

Serban V.C. Enache is a Romanian journalist and indie author. Though interested in history, politics, and economics, his true passion is for medieval fantasy fiction.

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