Monetary Theory
E.C. Riegel

Christopher M. Quigley B.Sc., M.M.I.I., M.A.


In a life spanning over 70 years, one of the greatest students of money, and its meaning, was the American E.C. Riegel. Many regarded him as a genius for his understanding of the nature and functioning of money as a human and social institution. This essay is a direct introduction to his main ideas on this subject, as, increasingly, people are beginning to realise the need for a more stable monetary unit. In essence, in his book "Flight From Inflation" he identified money as the mathematics of value and argued, that for a democracy to thrive, he believed the "money power" must be free. He basically viewed any political economic monetary system as socialist. For this reason he was at odds with Adam Smith's view of the World. Indeed, he felt that Smith in his "Wealth Of Nations" pre-empted Marx as a social theorist. Regardless of his views, Riegel has come to be respected for his unswerving belief in mankind and his heroic efforts to champion practical freedom based on the realities of exchange systems, which are based on value.

The freedom of exchange is the foundation of all freedoms, and the freedom of exchange unencumbered is the truest democratic freedom of mankind. Civilization began with exchange, and exchange began with whole barter i.e. things traded for things. The first improvement on whole barter was indirect barter. This was the practice of utilizing commodities of common use as reserves to be later traded for items of immediate need.
The adoption of precious metals, such as gold and silver, developed this trend. This step reflected a growing emphasis upon facility in exchange. Accordingly, through the passage of time, a new means of completing transactions arose through the practice of depositing precious metals with goldsmiths, who in turn issued warehouse receipts. Such pieces of paper became negotiable through custom, and so purchases could be effected by their transfer.

Acceptance of negotiable gold receipts, i.e. promises of future delivery, marked the first real step toward the utilization of money. It was at this point that barter was finally fully split into two halves, WITH THE BUYER RECEIVING VALUE AND THE SELLER RECEIVING ONLY A CLAIM. This was the first faint glimpse of the tremendous liberating power of money. We can also see that the ideal of money is to split barter absolutely in half, without any limitations imposed upon the seller. Hence, we realise that money is a device that operates within the trading community, for that community's own self-interest. The necessity of splitting barter into halves in order to motivate trade is the motivating force: sellers want to sell and buyers want to buy with the least amount of inconvenience.

IN A COMMUNITY MONEY IS ISSUED BY A BUYER. Such a money issuer, must, in exchange for the goods and services he buys from the market, place other goods or services into the market. Thus money as a money instrument is evidence of a purchase that is issued by a purchaser to the seller. Therefore, money is actually backed by the value surrendered by the seller and potentially backed by a value in the possession of the next seller. To print bills and mint coins is not to issue or create money. This has no more monetary significance than if you were to write a cheque and leave it in your chequebook. Instruments that have not been put into exchange are non-existent in the World of exchange and money. Money simply does not exist until it has been successfully accepted in exchange. In theory, two factors are necessary for money creation. A buyer who issues it, and a seller who accepts it. Since the seller expects in turn to reissue the money to some other seller, it will be acknowledged that money springs from mutual interest and co-operation among traders and not from authority.

It is a fallacy to think that a government can issue money. Money can be issued only by a buyer for himself, and he must in turn be a competitive seller to recapture it and thus complete the cycle. This competitive co-operation for goods and services creating value in the market is actually what makes money work. This competitive situation, in which the trader redeems his original monetary issue, through the sale of his own goods and services, assumes that the community's money will maintain its stability. All enigma as to what causes money to circulate and maintain its power is thus dissolved by comprehending this natural law of money issue. THIS LAW STATES THAT THE LEGITIMATE ISSUE OF MONEY IS CONFINED TO PERSONAL ENTERPRISERS IN THE MARKET PLACE, SINCE, THEY ALONE, BY THE LOGIC OF THEIR SITUATION, ARE ABLE ISSUERS OF VALUE. Thus, in essence: money is issued by a purchaser, but it must be issued by a purchaser who can, and is, prepared to issue value; it is a tradesman's agreement to carry on split barter among themselves.

We see that money is the mathematics of value exchanged based on mutual agreement. The monetary instrument is but the evidence of the consummated trade. It is a mistake to attribute purchasing power to the instrument, for it has none. It is merely the conduit through which purchasing power flows; such purchasing power lying in the commodities or values exchanged. From this analysis we can deduce that commercial banks do not "lend" money. They, in fact, permit the "borrower" to issue money. Once given permission, the borrower now has the legal authorization to write cheques to the extent of the loan and tender them in trade. UPON THEIR ACCEPTANCE BY A SELLER, WHO IN FACT PROVIDES VALUE, new money has come into existence. This money remains in circulation until such time as the borrower, through becoming a seller, recaptures money with which to liquidate the loan.

From the premise of the natural law of money issue, it must be accepted, that governments cannot qualify as issuers because they are not in the real situation of personal enterprisers. They cannot qualify, as they do not barter. They do not bid for money in the market place. Their taxing power relieves them entirely from selling. They take by taxing. When they are admitted to the issue power, their issue cannot be a genuine promise to deliver value in trade. It must, of necessity, be counterfeit, regardless of any statutory laws intended to validate it. From this failure to discriminate between money issued through bank credit by personal enterprisers and by governments, has come an inflationary mixture of true and false money that will eventually threaten social order. Money cannot be issued in perpetuity by man-made laws; it operates by its own natural law. To ignore this law invites uncontrolled inflation.

The destructive force of inflation is not confined to its covert taxing power. This is only its early manifestation. Its later destructiveness lies in its power to amend, and finall, to nullify the contractual relationship upon which the social order depends. The whole philosophy of freedom is encompassed in the single phrase; POWER TO CONTRACT. While a small distortion of the unit of account impairs contracts previously written, a consistent inflation actually destroys all existing contracts and prevents the making of new ones.

Adam Smith in his political economy allocated the money power to the state, thus he ante-ceded Marx as a socialist. It is his followers, unconscious socialists, and not those of Marx, who constitute the greatest peril to the order of free exchange. The Smith philosophy is taught in all the schools and colleges. Students become indoctrinated by this ideology unaware that in its monetary concept it is contrary to the true philosophy of personal enterprise and individuality. An unnatural monetary system begets unnatural economic manifestations. How can a free economy work
with the monetary system socialised? Rampant inflation makes a mockery of any true accounting for any true contract. When the future businessman discovers that his pride in cash was a delusion and a snare; that his cash reserves, which he meant to freeze have melted and evaporated; that his balances might have been preserved if they had been cast into materials; that his bonds and money claims on others have shrunken and that he might have profited had he known enough to get into debt; that his tax refunds are far less in power than those paid in; that he must pay capital gain taxes on what are actually losses; then that businessman will realise that the whole contemporary inflationary accounting picture is a delusion.

If money is issued under the natural law of issue, unit stability will be in evidence. Under natural law, if exchange plays no tricks on us, we are all really working for ourselves. We will all be interested in stability. In reality we are all buying for ourselves; we are all selling for ourselves. But just exactly what is it we are buying and selling? In the final analysis, it is simply human energy, mental and physical. Labour is the basic, or virgin, commodity. It has no quality of obsolescence, for it is always associated with the latest, and therefore, the timeliest products. IT IS THE ONLY VALUE. Others have comprehended this, from the premise that all value is labour and since money is based on value, they have reached the correct conclusion that money must be, in actual fact, labour. However, the fatal error that labour money planners have made is that they set a measure of labour, such as an hour, as a unit of value. While it is true that labour, both physical and mental is the only value, and therefore, the sole commodity that passes through exchange, IT DOES NOT FOLLOW THAT ALL LABOUR IS OF EQUAL VALUE. Labour may be so unintelligently applied that it is completely worthless. We are all labourers, and therefore, fountains of wealth because we all emit human energy. We must, however, direct that energy to meet the demands of our fellow labourers. By the measure to which we successfully respond to this demand will our energy be valued. Money is not a measure of value, it is a method of stating a value that has already been determined through exchange.

If money is ultimately the mathematics of value set by exchange, what is value? VALUE IS THE RELATIONSHIP OF DESIRE. It is arrived at in the mind by comparing one thing with another. Thus what actually takes place in trading is the determination of values and this mental process is the act of "moneyizing". It is a mathematical process. As the act of
"moneyizing" is psychological, so the act of "monetizing" is material. It should also be noted that both arise out of and do not ante-cede, exchange. Trade produces money; money cannot produce or induce trade. TRADE, LIKE MONEY, IS A SOCIAL PHENOMENON BASED ON MUTUAL CO-OPERATION AND INTEREST.

In conclusion, value, mathematically compared, is money. The purpose of the medium is to achieve split barter and to allow the monetary unit of exchange to be universally accepted for any good or service. The discovery of the power of money as a social mechanism has freed mankind and has been immensely influential in the development of society and civilization. Its importance cannot be over emphasised. However since 1909 the influence of government policy, both national and international, has steadily brought about monetary debasement. Should the level of inflation currently in place be allowed to continue, sound money will be driven out by bad "fiat" legal tender. This problem will only be resolved when our leaders come to terms with the realisation
that there is a natural law governing the issuance of media of exchange, and if this law continues to be broken by socialist ideology, the very bedrock of the western tradition of freedom and individuality will be broken.

Published In Financial Sense Online 2007


Flight From Inflation
The Monetary Alternative
E.C. Riegel

Edited By
Spencer Heath MacCallum & George Morton
The Heather Foundation
Los Angeles, California.

Christopher M. Quigley