Does Money Matter?
Edward C. Harwood
[Reprinted from the Henry George News, March,
At the time this essay was published, Edward C.
Harwood was director of the American Institute for Economic
Research at Great Barrington, Massachusetts and a trustee of the
Henry George School. He was a recognized monetary authority.
Important publications prepared by the Institute's staff of experts
are: Cause Control of the Business Cycle, What Will Deflation or More
Inflation Mean to You? Where Are We Going? and Reconstruction of
Economics. The newest publication, soon to be released, is entitled
Unfortunately, the label "money" is almost useless for
economic discussions. The confusions involved in the current use of
this word have become even greater than those described by Henry
George 60 years ago. We at the American Institute for Economic
Research have concluded that those who would report on money-credit
matters in a manner scientifically sound and therefore useful must
avoid using the label or name "money" wherever practicable
and must specify more precisely what they are talking about.
Most exchange transactions in a modern industrial society such as
that in the United States involve the use of what may be called a
purchasing medium. The principal purchasing media used in this country
include silver and other coins, paper currency of various kinds, and
demand deposits or checking accounts. The last named are transferred
from one person to another by the familiar process of writing checks.
Nearly everyone has learned that the purchasing media called paper
currency can be counterfeited. Those who remember their American
history also know that genuine currency can be issued by a government
in such great amounts that the exchange value rapidly decreases. Such
was the situation with the Continental "shin-plasters"
during the American Revolution and with the "greenbacks"
during the Civil War. In many instances elsewhere in the world similar
excessive issues of genuine paper currencies have continued to such an
extent that the paper currencies have become nearly worthless. The old
German mark was one example; the French franc, now worth less than 1
per cent of its 1914 exchange value, is another.
Perhaps few readers realize that demand deposits or checking accounts
can be created by the banking system. Henry George asserted that the
depositor in a bank" ... cannot draw money out until he has put
money in." This statement is erroneous, and Henry George
himself was well on the way to correcting it when he left unfinished
at his death the final portion of his book, The Science of
Political Economy. (Unfortunately, some of Henry George's
followers seem determined to regard all that he wrote as a kind of
revealed truth, more or less analogous to a religious revelation, in
spite of his own brilliant and nearly completed effort to report more
adequately on economic matters.) The fact is that the commercial
banking system creates huge totals of purchasing media in the form
both of checking accounts and paper currency, purchasing media that no
one ever deposited in the first place.
For example, during World War II, the nation's commercial banks
monetized a large portion of the federal debt. The Treasury delivered
bonds to the banks, which then literally created checking accounts of
corresponding dollar amount against which the Treasury drew checks to
pay for munitions, etc. The huge volume of newly created purchasing
media made possible increased efiective demand for goods in the
markets with a resulting bidding up of prices generally that continued
long after the war.
More recently, the commercial banks have similarly created new demand
deposits as they increased mortgage and installment loans. One result
has been more inflationary purchasing media in circulation with
further increases in prices and artificial stimulation of business
Some of the banks' loans are secured by or represent goods produced
and enroute to the nation's markets. Even though the borrowers in
these instances also may receive newly created demand deposits (or
checking accounts usable as purchasing media), as long as there are
goods corresponding in value reaching the markets, effective demand
and supply are in balance and no general price changes either up or
down occur. Such newly created purchasing media are not
Many people find it difficult to understand how banks create
purchasing media in the form of checking accounts, but the process is
simple. When a borrower gives the bank a promissory note, the
equivalent amount (less interest if that is deducted in advance) is
credited to his checking account precisely as though he had deposited
paper currency or other purchasing media. Anyone who reflects on the
matter and remembers that he has never been notified that his bank is
lending part of his checking account to some borrower, should readily
realize that the bank must create new checking accounts or additions
to existing accounts for many borrowers. (The savings banks and the
savings departments of the commercial banks function differently. They
do not create checking accounts but loan to others purchasing
media deposited in such banks by savers.)
A great and prolonged period of "prosperity" can be made
possible by inflationary expansion of purchasing media. Of course, the
aftermath always has been deflation and sudden descent of business
activity to depression levels.
Nevertheless, while the inflationary prosperity continues (perhaps
for several years as in 1922 to 1929 or 1946 to 1956), few people will
believe that there are any serious underlying maladjustments such as
those analyzed so well by Henry George. And when depression comes with
widespread unemployment and bankruptcies, few will believe that Henry
George's remedy would help.
That the mass misery of Asia is attributable in large part to
fundamental economic relationships clearly described by Henry George,
few adequately informed persons would doubt; that the widespread
poverty in Europe similarly is explainable as Henry George explained
it seems equally indisputable; but that the economic "laws"
described by Henry George are inexorably operating here in the United
States is far from clear to those deluded by the "money illusion,"
prolonged inflationary prosperity on the one hand and deflationary
depressions on the other.
The basic question raised by Henry George in Chapter I of Progress
and Poverty is, "Why, in spite of increase in productive
power, do wages tend to a minimum which will give but a bare living?"
Few people in the United States today believe that there is any such
tendency; and fewer still have the economic understanding to realize
that such a long-run tendency must be observed by comparing, for
example, the average conditions of the 1920's and 1930's with the average
conditions of the 1820's and 1830's.
The obvious fact is that the "money illusion" hides the
operation of fundamental "laws" from all but the keenest and
statistically skilled observers. Remedying the periodic abuses of the
money-credit system would by no means even alleviate the long-run
tendencies described by Henry George; but those long-run tendencies
may never be recognized for what they are nor be correctly attributed
to the basic cause, even by most intelligent citizens, as long as the
veil of the "money illusion' is permitted to obscure the view.
That is one important reason why money matters, and it is why
Georgists in particular might find it advantageous to be far better
informed in this respect than Henry George ever succeeded in being.
Continuing to explore the monetary aspects of economics, as he was
doing at the time of his death, would seem to be a more fruitful
occupation for Georgists than clinging to the errors he was trying to
- Henry George The Science
Of Political Economy>/I>, Robert Schalkenbach Foundation,
Book V, Chapter I. Chapter I.
- Henry George Progress and
Poverty, Robert Schalkenbach Foundation, page 61.