America's Money Machine

260 PART III/DEBACLE OF AN IDEA
argument is generally over the rate of expansion and the quality of the
circulation.
Simply expressed, the proposition says no more and no less than that
ifa cloth merchant doubles his yardage sales he must double the number
ofyardsticks in his establishment. So obvious is the distinction that some
theorists include in their equation a factor for "velocity of circulation,"
but regrettably, the raw material of their data do not permit such fine
factoring. Since production ofeconomic wealth is expressed in monetary
terms, as the only common denominator, the theory becomes a cat chasing
its tail, for the production figure will rise as prices rise, themselves
a function of the monetary supply, and as no satisfactory price index has
ever been devised that will satisfy all interests, so no deflator has been
devised to exclude the effect of the money supply in the equation. For
that matter, neither has "velocity ofcirculation" been adequately defined.
A second misconception is that prices must be stable or rising-and the
attempt to maintain stable prices through monetary manipulation became
a swamp which the Federal Reserve entered in 1923 and in which
it has been hopelessly mired ever since. l
Actually, if advancing technology means anything, it is that goods
should gradually decrease in price as the forces of nature are harnessed
for their greater production. The only reason prices must be stable, or
rising, is that of supporting a burden of interest payments on a burden
ofdebt that steadily rises as a function and effect ofthe monetary system.
A third misconception is that debt, or debt instruments, can be or serve
as money. To accept this view is to cast aside the traditional definition of
money as a medium of exchange, a standard of deferred payments, and
a store of wealth. Since a particular debt must be repaid-at least such
is commonly believed-the extinguishment ofa debt instrument that has
been monetized,that is, has been made the basis oflegal tender currency,
would cause a contraction of the "money supply" and, supposedly, economic
catastrophe. Therefore new debt must be incurred and monetized
to maintain the former equilibrium. To encourage such debt attractive
terms must be given; that is, the monetary authority must advance legaltender
currency in exchange for the debt at lower terms than the prevailing
market. This is known as the discount rate. That the Federal Reserve
is continually in the market buying debt instruments-either private or
public (Treasury)-is a persistent stimulus to the creation of debt. The
amount of this debt today defies calculation.