"Solari Builders: Understanding Money and the Economy with Prof. Richard A. Werner"
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By Ricardo Oskam
At the recent gathering in Northern Italy that concluded the Solari Builders pilot course, Professor Richard A. Werner addressed two fundamental questions: What is money? And what problem does money’s existence solve?
Werner, a recurrent guest at Solari, is a German economist who, after training at the London School of Economics and Oxford, spent his formative years in Japan—as the first Shimomura Fellow at the Development Bank of Japan and then as chief economist at the Jardine Fleming investment bank in Tokyo. In the mid-1990s, he coined the term “quantitative easing,” proposing to the Bank of Japan something rather different from what central banks later carried out borrowing the same terminology. Werner’s 2003 book, Princes of the Yen, which described how Japan’s central bankers inflated and then burst a bubble to force through reform, outsold Harry Potter in Japan for six straight weeks.
Before diving into contemporary monetary theory, Werner took the Solari Builders group through one thousand years of history. With the Builders having visited a famous Italian Duomo the day before his presentation—a cathedral that was six centuries in the making—he tackled the question of how some of Europe’s most impressive cathedrals were built. Laborers contributed to structures they knew they would never see completed in their lifetimes, making the cathedrals a true testimonial to a higher culture where one honored God with every brick laid. Today, Werner notes, we would not be able to replicate those buildings at any sane cost, despite having better technology.
Since 1992, Prof. Werner has argued that banks do not pass along existing savings but create money out of thin air—the Credit Creation Theory. Werner used empirical evidence that he painstakingly gathered (rather than rely on axioms or theoretical deductions) to prove his claim to be true and disprove other theories such as the intermediation theory of banking (which claims that banks are just financial intermediaries, both individually and collectively) or the fractional reserve theory of banking (which claims that banks are individually financial intermediaries but collectively create money through fractional reserve banking).
The common thread uniting the historical examples Werner references is the creation of money as an animating force. The stone wheel money of Yap and the split tally stick made of cheap hazelwood (the grain of its split being a unique fingerprint to identify its validity) became money because people accepted them as money. His point, arriving through the back door of history, is that our own money is the same instrument, with the promise thinned out—a claim with no commodity behind it.
The tally stick was also the original accounting method: charge on one side, discharge on the other, cash recorded as it moves, checked afterwards against the counter-rolls kept in the Treasury, making it hard to lie. Double-entry accounting came later, and in Werner’s reading of it, represented not an advance in transparency but a smokescreen. Interest was illegal in Christian Europe, and the goldsmith-bankers had more than interest to hide: they were lending out gold left in their care and writing deposit certificates for gold nobody had deposited.
To truly understand the economy, we must understand what money is and how its successful use is intertwined with our governance system and a healthy culture that supports a fundamental level of trust. Will the rapid influx of newly created money in our economy facilitate borrowing for productive purposes—leading to growth without inflation—or will it further raise consumer prices and spawn asset bubbles?
