Published:

02/22/2011 06:20pm

Wealth Creation Part Three: Soddy's Role of Money

Frederick Soddy, the 1921 Nobel Prize winner in chemistry, the man who coined the term “isotope,” studied and wrote extensively on economic matters as well. So extensively, economic “experts” at the time, threatened by an outsider’s more insightful views on the human economic condition, said he should stick to chemistry. Thankfully he did not. (Most of Soddy’s ideas on money lending, central banking and economic indicators, which were dismissed by the “experts” of his day, are in use worldwide today.)
Soddy wrote two excellent books on wealth creation, “Wealth, Virtual Wealth and Debt,” and “The Role of Money.” The role of money, in Soddy’s view, held a particular place in society. (In Soddy’s day (and to economists even today), money could mean cash, credit, and loans, which they called “debt-money,” however, in this discussion, Soddy was referring to cash or “paper notes.”) In Soddy’s view, money had no value.
What, you say? Had Soddy gone mad from his intense study of radioactivity? How many pints does an Englishman named Soddy have to drink before money has no value??? Money, he should know, is everything. Money is the goal. We work for money. People who say money can’t buy happiness are shopping at the wrong stores!!!
On the contrary, Soddy was neither mad, nor a greedy capitalist trying to trick people into giving him their money, nor an anarchist or socialist. He was a scientist, stating the facts.
He called money (cash), “the nothing people trade for something.” By nothing, he meant that money was a placeholder, proving that at one time you had something of real value that you traded for money, and the money signified the future “something” you would again trade your money to acquire.
Money (cash) has a representative value only because the government of the central bank issuing the money says so. Sometimes, even with the sincere intentions of said government, the money has less value than they say. Money nowadays is subject to additional market forces such as inflation (money is worth slightly less over time, taking more money to buy the same amount of goods) and deflation (the reverse).
In Soddy’s day, there was no inflation or deflation of money due to money supply as governments were on the gold standard, meaning they literally had an equivalent amount of shiny gold metal in their vaults to “back” the amount of paper (cash) notes and coin in circulation. Central banks didn’t just “print money” as they do today.
Nevertheless, they did (as today) tend to lend too much money, which created “bubbles,” meaning that asset values such as houses, stocks and other things you trade for money were falsely inflated in value from speculation, mania and other forms of delusional optimism. At some point, an asset bubble reaches a point where some of the people sober up and decide the price is too high, and then the people who borrowed money (or used their own money) to buy the overpriced assets are stuck, because they can’t sell them and adequately pay off their loans or other obligations, and the bubble pops. Asset values reset lower (until the sober people are willing to pay them), banks and other creditors take certain assets back, and we do it all over again.
Soddy believed that wealth was created from three things: discovery, natural energy and human diligence. Nowhere did he state that “it takes money to make money.” To Soddy, if you owned a coal mine (for instance), you had wealth, or an asset. Taking that coal out of the ground creates value for you, the people you employ, and the people you sell the coal to. When you trade your coal for money, you now have no more true wealth, just money. You have a placeholder to acquire (or invent) more wealth.
Of course, a balanced life requires wealth (Soddy’s version) AND money. In addition to assets, money buys you time to spend some of it on personal pleasures, but with the ever-fluctuating values of money, you never know how much.
Soddy’s point of all this is that a person focused on true we