Capital is something tangible and valuable that can be exchanged for something else. It cannot be created out of thin-air; it has to be built up first (through saving/delayed consumption/expended energy).
Money as debt is not Capital, it is a promise of Capital:
- Of course a loan is money as debt, but actually most of the money sloshing around our current economic system is initially coming from loans (see my other post on Central Banking and Fractional Reserve), so most of the money used in our system is money as debt.
- Money as debt is created ex-nihilo by banks when they issue a loan.
- Even cash: coins (except coins made of precious metals) and bills are a promise. Indeed, cash is sitting on the liability side of the Balance Sheet of the central Bank. A long time ago (more like ~50 years ago), Central Banks held gold as assets on their balance sheet, and issued bills and coins as promise for gold (on the liability side). Users of those bills would use them, knowing that the bills/coins themselves were a promise for gold and could be redeemed as such at the bank.
- Nowadays, cash is not even backed with a promise for gold, it is back with the “full faith and credit” of the government (meaning the government taxation ability to extract value from the population to then redeem those liabilities with things of similar value).
Money as debt is working based on trust: I trust, when I accept a payment with cash (bills and coins), or with a cash transfer from bank to bank, that I will be able to exchange at a later stage this money for something of equal value. Should the trust be broken, numbers on an accounts are just electrons (not extremely valuable) and coins and bills are just metals (of low value those days for most coins) and paper (again, not extremely valuable, certainly lower than the figure written on it).
What form can take capital? Anything valuable intrinsically:
It could be a car, a house, a factory, a machine, raw material, land…
Something intangible like a patent or copyrighted book/song cannot be considered Capital for single owner, as the value of this particular thing depends on the promise for Society to enforce the exclusive right for the user to use it. If Society fails on that promise, the patent can then be used by everybody, and the book/song can be copied/listened to freely. If the promise is broken, the value (for the owner) goes to almost zero.
Still, for Society as a whole, such an invention, or creation may be invaluable (think about the rabies vaccination or Beethoven 5th Symphony, those do not belong to anybody anymore, but are still extremely valuable to Society. They are Capital, but for Society, not an individual.
Gold is also Capital in the sense that it takes energy to dig out of the ground and refine (so it is limited in quantity) and it is valuable to most people on Earth since time immemorial, so it fits the definition of Capital. I may do another post on that later.
Easiest way to understand capital comes from a comic book written by Irwin A. Shiff (who died last month, R.I.P.). This is a great read so I encourage spending a bit of time on it. The first few pages deal with the essence of what is Capital. After that the author describes the effect of government on the economy. It is still an interesting read, but out of scope of this post.
Note: In the comics, the Author makes reference to loan not being issued due to not enough “deposits” available at the bank to do so because of consumer credit crowding out investment credit. This was true a long time ago when banks were making loans based on deposits, but since the start of the fractional reserve banking system, this is not true anymore; the Bank can make new loans just by crediting the borrower account with new electronic digits (see post on Central Banking and Fractional Reserve).
Realistopinion 