The amazing capacity of credit to create value -- and to destroy it -- has often been compared to alchemy. After the alchemists failed in their search for the philosopher's stone, the mythical substance that could turn ordinary metals into gold, the power of creating something out of nothing has come to rest solely in the hands of the financiers.
Although George Soros, who titled one of his books "The Alchemy of Finance," may only have used alchemy as a colorful metaphor to point to the wondrous generative capacity of credit, it turns out that there is a much deeper connective bond between alchemy and modern finance, dating back to the 17th century, when the modern financial system was just forming.
The big problem facing England at the time was a scarcity of money. Because the country lacked an adequate circulating medium, commerce was lagging, textile manufacturing was in a tailspin and various unemployment-related social problems kept on increasing. As a solution, pamphleteers famously called for trade restrictions to promote an inflow of precious metals from abroad.
A group of adherents to this view -- social reformers, scientists and political economists -- gathered around the London-based Prussian emigre Samuel Hartlib. The Hartlib Circle, as they became known, wrote and disseminated advice on how to transcend nature's scarcity by advancing agriculture, horticulture, botany, mechanics, manufacturing, chemistry, fishing and so on. They hoped to spark a process of infinite improvement that would gradually eliminate all social, economic and political problems and eventually establish a kingdom of heaven on Earth.
For this process of infinite improvement to become a reality, it was more important than ever to solve the scarcity-of-money problem. The Hartlib Circle first pursued a large-scale alchemical project. They brought together some of the most renowned alchemists and provided them with the requisite resources to conduct their laboratory experiments, hoping that they would discover the magic tincture whereby lead could be turned into gold. However, as their transmutation efforts failed, they turned their attention to other ways of expanding the money stock. They published the first proposals for a generally circulating credit currency, which provided the basic inspiration for the eventual creation of the Bank of England in 1694.
The first credit-money proposal -- to issue paper money backed by land -- was written by William Potter and published in his pamphlet "The Key of Wealth" (alchemists often referred to the philosopher's stone as "the key"). He argued that because his credit currency had the potential to facilitate the infinite-improvement process, its "capacity of inriching this Nation, is in a sort infinite." Indeed, another member of the Hartlib Circle even suggested that a well-functioning system of credit was capable of "multiplying the stock of the Nation, for as much as concernes trading in Infinitum: In breife, it is the Elixir or Philosophers Stone."
The link between alchemy and credit thus existed on three levels. Much like Soros, the first proponents of a generally circulating credit currency used alchemy as a metaphor to describe the value-producing potential of credit. They also viewed alchemy and credit as different solutions to the same problem: the scarcity of money. Most importantly, given that the political-economic worldview of the Hartlibians provided the intellectual foundation for the creation of the modern world of credit, the case can be made that there was a conceptual link between alchemy and credit -- one that was more profound than mere metaphor.
(Carl Wennerlind is an associate professor at Barnard College, Columbia University, and author of the recently published "Casualties of Credit: The English Financial Revolution, 1620-1720." The opinions expressed are his own.)
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