Credit and State Theory of Money, 2004
Scanned by Arno Mong Daastoel arno@daastol.com 2005-11-01
Note: In chapter 2 and 3, I have used the original pagination of Innes, and
excluded the new pagination of Wray.
Spine of book:
Credit
and State Theories of Money L.
Randall Wray
THE COVER shows tallies used in Agricento (
Credit and State Theories of Money
The Contributions of A. Mitchell Innes
Edited by
L. Randall Wray
Professor of Economics,
Edward Elgar
© L. Randall Wray, 2004; Chapter 6 © Geoffrey Gardiner.
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system or transmitted in any form or by any means,
electronic, mechanical or photocopying, recording, or otherwise without the
prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
Glensanda House
Glos GL50 1UA
Edward Elgar Publishing, Inc.
A catalogue record for this book is available from the British Library
ISBN 1 84376 513 6
Typesetting in Plantin by Geoffrey Gardiner
Printed and bound in
Notes on Contributors vii
Acknowledgements x
1. Introduction 1
L. Randall
Wray and Stephanie Bell
2. What is Money? 14
A. Mitchell
Innes
3. The Credit Theory of Money 50
A. Mitchell
Innes
4.
The Social Origins of Money: The Case of
5. The Archaeology of Money: Debt versus Barter
Theories
of Money's Origins 99
Michael
Hudson
6. The Primacy of Trade Debts in the Development of
Money 128
Geoffrey W.
Gardiner
7.
The Emergence of Capitalist Credit Money 173
Geoffrey Ingham
8. Conclusion: The Credit Money and State Money
Approaches 223
L. Randall Wray
Index 263
Stephanie
Bell,
Assistant
Professor of Economics,
Stephanie
Bell earned a M.Phil, from
Geoffrey W. Gardiner;
email: geoffrey.gardiner@btopenworld.com.
Geoffrey W.
Gardiner has been for 20 years a self-financed, independent researcher.
Previously, he spent 31 years with Barclays Bank Trust Company Limited, the
asset management arm of the international banking group, Barclays PLC. Besides
executorship, and personal, corporate and charitable trust administration, his
duties included estate planning, taxation advice and negotiation, and
investment management. He is an authority on farming economics and taxation, a
member of the Cambridge Policy Conference
on the Future of British Agriculture, and a contributor to
Gardiner is
an Associate of the Chartered Institute of Bankers and holds its Trustee
Diploma. He is a Fellow of the
Vlll
family of John Maynard Keynes, and members of'The
Bloomsbury Set'. Currently he follows with care the development of
archaeogenetics and archaeometallurgy, and the research of the International
Scholars Conference on Ancient Near Eastern Economies.
John F. Henry,
Professor of Economics,
John Henry
earned his A.B. at
Dr Michael Hudson,
President, Institute for the Study of Longterm
Economic Trends (ISLET); email: hudsonmi@aol.com.
Michael
Hudson's other affiliations include: Distinguished Research Professor of
Economics, UMKC, 2001-present; Research Fellow,
Geoffrey Ingham, Fellow
and Director of Studies in Social and Political Sciences, Christ's College,
Geoffrey Ingham is Fellow and Director of Studies in
Social and Political Sciences, Christ's College,
ix
to economists. His book Capitalism Divided? (1984)
on the development of the British economy had popular as well as academic
influence. He has worked on a social and political theory of money for several
years for several years (The Nature of Money,
L. Randall Wray,
Professor of Economics,
L. Randall
Wray is a Senior Research Associate, the Center for Full Employment and Price
Stability (at UMKC), a senior scholar at the Levy Economics Institute, and a
visiting professor at the
I WOULD like to thank all of the contributors to this
volume, but especially Geoffrey Gardiner - a true master of all trades - who
helped so much in preparation of the text. Eric Tymoigne provided crucial
research assistance. In addition, I would like to thank my colleagues at the
The two chapters by A. Mitchell Innes are reprinted
from the Banking Law Journal by permission of A.S. Pratt & Sons and
its parent company, The Thomson Corporation.
L. Randall Wray and Stephanie Bell
WHY WOULD a rather obscure functionary in Her
Majesty's Foreign Service deserve a volume devoted to his dabblings in monetary
history and theory? A. Mitchell Innes seems to have contributed only two
articles on money, both to the Banking Law Journal, the first in 1913
and the second in 1914. He also wrote an article Love and the Law, published
in January 1913 in The Hibbert Journal, as well as a couple of book
reviews in The Economic Journal. Much later, he published two articles
on incarceration and criminal justice, which were collected in a short book
entitled Martyrdom in Our Times and which are tangentially related to
themes in his earlier articles. (In the intervening years he authored a couple
of reports for Her Majesty.) Admittedly, this does not amount to much of a career
as a monetary theorist. Still, the authors collected here are convinced that
Innes does have something interesting, unique and relevant to say nearly a
century later.
In 1914,
John Maynard Keynes reviewed the original 1913 article by Innes (Keynes 1914).
Keynes began by noting that Innes's theory of money followed that of Henry
Dunning Macleod (called McLeod by Keynes), a prolific writer who contributed
books on currency, credit, banking, political economy, philosophy and economic
history. In the review, Keynes immediately rejected as a fallacy the 'theory of
the effect of credit' that Macleod and Innes supposedly shared. This cryptic
comment, however, was followed by a favourable summary of Innes's arguments
concerning credit and currency. Keynes approvingly noted Innes's rejection of
the typical story about money evolving from commodity money to credit money.
While faulting Innes for a lack of reference to 'authorities', Keynes approved
of his argument that the value of coins was never determined by embodied
precious metals; rather, they were 'all token coins, their exchange value as
money differing in varying degrees from their intrinsic value' (Keynes 1914, p.
420). He provided a long quote from Innes summarizing the latter's belief that
the use of credit 'is far older than that of cash' and 'the numerous instances,
he adduces in support
of this, from very remote
times are certainly
2
interesting' (Keynes 1914, p. 421). Keynes concluded
his review with the following endorsement:
Mr. Innes's development of this thesis is of unquestionable interest. It
is difficult to check his assertions or to be certain that they do not contain
some element of exaggeration. But the main historical conclusions which he
seeks to drive home have, I think, much foundation, and have often been unduly
neglected by writers excessively influenced by the 'sound currency' dogmas of
the mid-nineteenth century. Not only has it been held that only intrinsic-value
money is 'sound', but an appeal to the history of currency has often been
supposed to show that intrinsic-value money is the ancient and primitive ideal,
from which only the wicked have fallen way. Mr. Innes has gone some way towards
showing that such a history is quite mythical (Keynes 1914, p. 421).
There are two
interesting things to note about Keynes's review. First, it is significant that
the article, published in a banking law journal, had caught Keynes's eye
(seeming to validate the claim by that journal's editor that a controversy had
erupted on the publication of the article - see Chapter 8). This makes it all
the more surprising that Innes's two articles seem to have shortly disappeared
from view for some three-quarters of a century. We have not been able to find
any other citations to Innes in the major journals or relevant books before the
1990s.
Second, it
is interesting to speculate that these contributions by Innes led Keynes to his
own research into ancient monies mostly between 1920-26. Most of that research
remained unpublished, and was collected as drafts in Volume 28 of his collected
works. Some of the ideas, however, showed up in his Treatise on Money published
some years after the review of Innes. In the meantime, Keynes had discovered
Frederic Knapp's state money approach and helped to get his book translated to
English (Knapp 1905/1924). Knapp's German edition had preceded the Innes
articles by nearly a decade, although there is no indication that Innes was
familiar with Knapp's work.
So far as we
know, the first explicit attempt to link the approaches was in Wray (1998).
While Knapp's name comes up now and then in Keynes's collected works, we have
not found mention of Innes.
As the contributions to this present volume will make
clear, there is an overlap - although not a simple one - between Knapp's state
money approach and Innes's credit money approach that must have intrigued
Keynes. However, the promising integration that may have sparked Keynes's
interest was lost in the watered-down version of Chartalism passed down by
Josef Schumpeter. Some of the ideas were briefly resurrected in the 'functional
finance' and 'money as a creature of the state' approach of Abba Lerner, but
these, too, were mostly forgotten
3
during the heyday of 1960s' and 1970s' 'Keynesianism'
in which interest in money was reduced to debate about the slopes of the LM
curve and the forces that would equilibrate money demand and money supply.
Theories of money became increasingly simplistic and silly with the rise of New
Classical, Real Business Cycle and even New Keynesian approaches to
macroeconomics. Serious monetary research was left to the fringe in economics
(Post-Keynesians, Institutionalists, Political Economists, Social Economists),
or to other disciplines such as Sociology or Anthropology. To some extent,
then, this volume can be seen as an attempt to reconstruct the path that was
not taken, or, to put it in a more positive light, to explore the sort of
approach to money to which Innes had pointed.
To our
knowledge, the work of Innes was not recovered until the mid 1990s, when his
1913 article began to be referenced by Post-Keynesian monetary theorists.
Further investigation led us to discover the 1914 response to his critics, as
well as his 1932 book on incarceration and criminal justice. Over the past
decade, especially since publication of Understanding Modern Money (Wray
1998) and a series of articles on the 'neo-Chartalist' approach, interest in
these early contributions by Innes has grown. Unfortunately, the Banking Law
Journal in which they were published is difficult to obtain (although a
subscription on-line service makes them available to law libraries). Hence, we
had for quite some time planned to find a way to make them more widely
available. Meantime, through the wonders of the internet, the authors gathered
for this present volume had been engaged in a discussion of the ideas expounded
by Innes. Hence, we came to the conclusion that a volume that reprinted the
original articles together with current thinking on the nature of money would
be timely and useful.
In the next
section, we examine the life and work of Alfred Mitchell Innes. We will spend
some time on his 1932 book because it contains an interesting interpretation of
the evolution of the Western justice system that is related to the state money
views discussed in later chapters. We then turn to notes on the two original
articles on money published by Innes in 1913 and 1914, as well as a summary of
the chapters written for this volume.
The Innes family name derives from the Gaelic 'Innes'
- an island territory. The Innes Clan descends from Berowald, who was granted
the Barony of Innes by Malcolm IV in 1160. Berowald's grandson, Sir Walter
4
Innes, was the first to use the name after receiving
territorial lands of the 'Innes' islands in confirmation from Alexander II in
1226. Now members of the landed gentry, the Innes family prospered, extending
and consolidating their estates. Then, in 1767, the lands of Innes were sold to
the Earl of Fife, and members of the Innes clan left
Alfred
Mitchell-Innes (the hyphen was not used in his publications) was born in
Though
formally retired, Innes served on numerous investigatory committees, writing
several reports, including one on Bees and Honey (1928) and one on the Poisons
and Pharmacy Acts (1930). Unfortunately, both essays were published on Her
Majesty's Stationery and, consequently, can only be examined on site in
5
discourage misdeeds against society but to provide
sizeable revenues, needed to carry out frequent warfare. Indeed, as Innes
explains, 'the King would have been the last person to wish to cure his
subjects of committing acts which were so profitable to him' (1932, p. 13).
Instead, trial and imprisonment were important means through which court fees
and fines were collected.
Over time,
years of ruinous warfare and devastating plagues left
According to
Innes, the incarceration of poor, young men - between the ages of 16 and 23 -
was particularly disturbing. In particular, he discovered that, for the most
part, an imprisoned man suffered 'nothing fundamentally wrong', except that
'his nerves are on edge and the strain of poverty is too much for him' (1932,
p. 44). The combination of poverty and temperament (e.g. mental deficiency,
excessive nervousness or an adventurous nature) can be too much for some 'poor
defectives [who] easily become petty thieves; they have no power to repress
their momentary desires; if they find a desirable object, such as money or
jewellery, within their reach, they take it quite naturally, as a monkey would'
(1932, p. 53). Because there was nothing fundamentally wrong with these
individuals, Innes did not believe that prisoners could be 'reformed' and then
safely reintroduced into society. Instead, by robbing these otherwise harmless
men of their liberty and sense of responsibility and subjecting them to
'extreme monotony, enforced idleness and perpetual supervision ... it is easy
to see how a mere offender becomes a hardened criminal' (1932, p. 41). Innes
developed personal relationships with many young offenders during his frequent
prison visits, and it is clear that he was deeply affected by these
interactions. He said, 'only those who get to know these lads intimately, to
know how helpless, how pathetic, how lovable they are, see the full tragedy of
their lives' (1932, p. 55). Innes viewed their circumstances as tragic not only
because of the way they were forced to live but because of the part society
played in driving them
6
to commit the acts that landed them behind bars. The
poor were constantly bombarded with advertisements, images of 'brilliantly
lighted windows, glittering with gold and silver and cheap jewellery', and bus
and tram stations were plastered with 'pictures of houses the poor can never
hope to own' (1932, p. 64). How, then, Innes wondered, could we punish them
'when we have employed all our art to tempt them to their offence?' (ibid.)
Innes
believed that the root cause of criminal behaviour was poverty. When combined
with mental deficiencies (or nervous or excitable temperaments), it can be
extremely difficult for some individuals to repress their desires. A curative
solution, Innes argued, cannot come from the mechanical enforcement of laws and
the exaction of penalties. Rather it must stem from human compassion and
knowledge:
To become a good dog-doctor it is necessary to
love dogs, but it is also necessary to understand them - the same as with us, with the difference
that it is easier to understand a dog than a man and easier to love him. How
simple and obvious a truth, and yet what
English Government has at any time thought it necessary to understand, much
less to love, the poor, before inflicting their 'treatment' on them (1932, p.
69).
Innes did
not believe that there was anything curative or compassionate about the Western
criminal justice system. As such, he proposed a variety of reforms, including
the abolition of imprisonment for those facing debt-related charges. The bulk
of his reform proposals were designed to mimic the Oriental approach, which he
describes in his second essay, Until Seventy Times Seven, written while
Innes was living in
7
This
comparison of Eastern and Western traditions is interesting in light of the
arguments of several of the chapters in this present volume (in particular,
those by Henry, Hudson, Ingham and Wray). As several authors emphasize, our
verb 'to pay' derives from 'to pacify' and is almost certainly linked to the
ancient practice of wergild, or payment of a fine to victims to prevent blood
feuds. The Eastern traditions discussed by Innes are similar to the ancient
wergild practices in
Martyrdom in
Our Times was Innes' last published work. Until his death in
1950, he enjoyed golf, fishing, shooting and riding.
Chapter 2 reprints the original 1913 article in which
Innes skewers the conventional view on the evolution of money (a view still
propagated by Samuelson, for example). In the conventional view, barter is
replaced by a commodity money that can be used as a medium of exchange. Only
much later is credit discovered, which can substitute for money and thereby
reduce transactions costs. Innes reverses this evolution, arguing that by its
very nature, money is credit - even if it happens to take the physical form of
a precious metal. This leads to a much different take on markets, on money and
on credit relations.
8
Chapter 3
reprints the original 1914 article in which Innes responds to the apparently
vigorous debate set off by his 1913 article. In addition, the article clarifies
and extends some of the 1913 article - taking up, for example, a discussion of
the relation between credit and inflation. He also touches on issues related to
what later would become known as the Chartalist or State Money approach - that
is, the role that government plays in the monetary system. While government money
is always debt (just as is the case of all forms of money), Innes discusses the
special status of government - notably, its ability to impose a tax liability.
Because of this, the only real 'debt' incurred by a government that issues a
nonconvertible currency is the promise to accept that currency in payment of
tax liabilities.
In Chapter
4, John Henry traces the origins of money to the earliest transition away from
communal society. In doing so, he relates the analysis of Innes to the origins
of money in ancient
In Henry's
view,
According to
Henry, and following the argument made by Innes, money has no value in and of
itself. It is not 'the thing' that matters, but the ability of one section of
the population to impose its standard on the majority, and the institutions
through which that majority accepts the will of the minority. Money, then, as a
unit of account, represents the class relations that developed in
9
accord with the historical facts of the development of
money in
In Chapter
5, Michael Hudson argues that money has evolved from three traditions, each
representing payment of a distinct form of debt. Archaic societies typically
had wergild-type debts to compensate victims of manslaughter and lesser
injuries. It is from these debts that the verb 'to pay' derives, from the root
idea 'to pacify'. Such payments were made directly to the victims or their
families, not to public institutions. They typically took the form of living,
animate assets such as livestock or servant-girls. Another type of obligation
took the form of food and related contributions to common-meal guilds and
brotherhoods. This is the type of tax-like religious guild payment described by
Laum, who in turn was influenced by G. F. Knapp. Neither of these types of
payment involved general-purpose trade money.
According to
Hudson
argues that by positing that individuals engaged in trucking and that money
developed out of bartering to minimize transaction costs, the orthodox model
does not take account of the historical role played by public bodies in
organizing a commercial infrastructure for bulk production and for settling the
debt balances that ensued, and hence for
10
money and credit. This objective obliged the large
institutions to design and oversee weights and measures, and to refine and
supply monetary metals of attested purity. This occurred more than two thousand
years before the first coins were struck. Hence, like Innes,
In Chapter
6, Geoffrey Gardiner explores links between the approaches of Adam Smith and
Innes. Gardiner uses a great deal of historical analysis to make the point
emphasized by Innes that 'money is debt'. He concludes that credit is the
lifeblood of civilization. There are two forms of credit, primary credit, that
is newly created credit, and secondary credit, loans made through the use of
assignable debts. The level of economic activity is determined by three
factors: 1) the amount of new credit created; 2) the speed with which newly
created credit circulates, either by being spent or lent; and 3) the rate at
which credit is destroyed by the repayment of debt. There is a limit on the
amount of new credit that can be created safely, so it is impossible to keep an
economy booming by the unlimited expansion of credit. The' Trade Cycle' is
thus fundamentally a phenomenon of a credit cycle. When the prudential limit on
the creation of new debt is reached, savers can be encouraged to spend so that
workers can earn the money they need to make their desired purchases.
Gardiner
suggests that if savers refuse to spend, their savings should be allowed to
diminish through inflation. He argues that experience has shown that mild
inflation is the least damaging method of curing an excessive build up of debt.
The discovery of the means of monetizing of debt was a very great step in the
economic development of human beings, but the full implication of this
discovery has not been fully realized. Much analysis still relies on a loanable
funds argument which sees saving as the only source of 'finance' of investment
spending. Further, most analysis sees inflation as an unqualified hindrance to
growth, that must be fought at nearly any cost. Only an analysis that
recognizes the importance of credit can advance theory and policy formation.
In Chapter
7, Geoffrey Ingham focusses more directly on the nature of money in a
capitalist economy. He argues that Innes provided one of the most concise,
logical and empirically valid critiques of the orthodox economic position.
However, he suggests that in order to understand the historical distinctiveness
of capitalism, the admittedly confused distinction between money and credit
should not be entirely abandoned. According to Ingham, saying that all money is
essentially a credit is not
11
the same as saying that all credit is money. In other
words, he argues that not all credits are a final means of payment, or
settlement.
For Ingham,
the question hinges not on the form of money or credit -as in most
discussions within orthodox economic analysis - but on the social relations
of monetary production. These relations comprise the monetary space and
the hierarchy of credibility and acceptability by which money is
constituted. The test of 'moneyness' depends on the satisfaction of both of two
conditions. First, the claim or credit is denominated in an abstract money of
account. Monetary space is a sovereign space in which economic
transactions (debts and prices) are denominated in a money of account. Second,
the degree of moneyness is determined by the position of the claim or credit in
the hierarchy of acceptability. Money is that which constitutes the
means of final payment throughout the entire space defined by the
money of account.
In Ingham's
view, a further important consideration is the process by which money is
produced. As Innes had observed, members of a giro (created for the settlement
of debt) cleared accounts without use of coin as early as Babylonian banking.
However, these credit relations did not involve the creation of new money. In
contrast, the capitalist monetary system's distinctiveness is that it contains
a social mechanism by which privately contracted credit relations are routinely
'monetized' by the linkages between the state and its creditors, the central
bank, and the banking system. Capitalist 'credit money' was the result of the
hybridization of the private mercantile credit instruments ('near money' in
today's lexicon) with the sovereign's coinage, or public credits. In
conclusion, Ingham argues, the essential element is the construction of myriad
private credit relations into a hierarchy of payments headed by the central or
public bank which enables lending to create new deposits of money - that
is, the socially valid abstract value that constitutes the means of final
payment.
In the final
chapter, Randall Wray provides a final assessment of the contributions of
Innes, with some attention paid to summarizing the reactions of the other
contributors. Wray examines the reasons shown for the concern with origins,
history and evolution of money by all the contributors, as well as by orthodox
economists. The chapter argues that stories told about money's evolution shed
light on the nature of money assumed by the story-teller. The barter/commodity
money story told by orthodoxy is consistent with the antisocial, 'natural'
approach to economics adopted by mainstream economists. He contrasts this with
the 'social' stories told by the contributors of this volume, and by Innes.
Wray also examines in detail the 'social' nature of
money. The chapter argues that an integration of the creditary (or, credit
money) and
12
Chartalist (or State Money) approaches brings into
sharp focus the social relations encountered in a monetary system. Wray
concludes that Innes offered an unusually insightful analysis of money and
credit - he not only provided the clearest exposition of the nature of credit,
but he also 'anticipated' (in the English language) Knapp's 'State Money'
approach (or, what Lerner much later called the 'money as a creature of the
state' approach.)
To put it as
simply as possible, the state chooses the unit of account in which the various
money-things will be denominated. In all modern economies, it does this when it
chooses the unit in which taxes will be denominated. It then names what will be
accepted in payment of taxes, thus 'monetizing' those things. And those things
will then become what Knapp called the 'valuta money', or, the money-thing at
the top of the 'money pyramid' used for ultimate or net clearing in the
non-government sector. Of course, most transactions that do not involve the
government take place on the basis of credits and debits, that is, in terms of
privately issued money-things. In spite of what Friedman assumes, the privately
supplied credit money is never dropped from helicopters. Its issue
simultaneously puts the issuer in a credit and debit situation, and does the
same (although reversed) for the party accepting the credit money. In contrast,
the state first puts its subjects or citizens (as the case may be) in the
position of debtors, owing taxes, before it issues the money things accepted in
tax payment. This is the method used by all modern nations to move resources to
the state sector. Hence, for both government-money and private credit money, it
is impossible to conceive of monetary neutrality - money is always by nature
representative of a social relation that must matter.
Pharmacy
Acts (1930), Report of the Departmental
Committee on the Poisons and Pharmacy Acts,
the Standing
Committee on Honey,
Keynes, John Maynard (1914), 'What is Money?', review
article
in Economic
Journal, 24 (95), Sep. 1914, pp. 419-21.
Keynes, John Maynard (1982), The Collected Writings
of John
Maynard
Keynes, Volume XXVIII, Social, Political and Literary
Writings, edited by Donald Moggridge, Macmillan Cambridge University Press,
Chapter 2, 'Keynes and Ancient Currencies', pp. 223-94.
13
Knapp, Georg Friedrich (1924, translation of German
edition of
1905), The
State Theory of Money,
Mitchell-Innes, Alfred (1932), Martyrdom in Our
Times: Two
Essays on
Prisons and Punishments,
Mitchell-Innes, Alfred (1921a), The Economic
Journal, 31(123)
(Sep. 1921),
373-5, Review by A. M. Innes of The Financial Organisation of Society, by
Harold G. Moulton.
Mitchell-Innes, Alfred (1921b), The Economic
Journal, 31(124)
(Dec. 1921),
522-5. Review by A. M. Innes of The Functions of Money, by William F.
Spalding.
Mitchell-Innes, Alfred (1913), 'What is money?', Banking
Law
Journal, May,
pp. 377-408.
Mitchell-Innes, Alfred (1914), 'The credit theory of
money',
Banking Law
Journal, (Dec/Jan.), 151-68.
Wray, L. Randall (1998), Understanding Modern
Money: The
Key to Full
Employment and Price Stability,
377 THE
BANKING LAW JOURNAL May 1913
BY A. MITCHELL INNES.
The fundamental theories on which the modern science
of political economy is
based are these:
That under primitive conditions men lived and live by
barter;
That as life becomes more complex barter no longer
suffices as a method of
exchanging commodities, and by common consent one particular commodity
is fixed on which is generally acceptable; and which therefore, everyone will
take in exchange for the things he produces or the services he renders and
which each in turn can equally pass on to others in exchange for whatever he
may want;
That this commodity thus becomes a "medium of
exchange and measure of
value."
That a sale is the exchange of a commodity for this
intermediate commodity which
is called "money;"
That many different commodities have at various times
and places served as this
medium, of exchange, - cattle, iron, salt, shells, dried cod, tobacco,
sugar, nails, etc.;
That gradually the metals, gold, silver, copper, and
more especially the first two,
came to be regarded as being by their inherent qualities more suitable
for this purpose than any other commodities and these metals early became by
common consent the only medium of exchange;
That a certain fixed weight of one of these metals of
a known fineness became a
standard of value, and to guarantee this weight and quality it became
incumbent on governments to issue pieces of metal stamped with their peculiar
sign, the forging of which was punishable with severe penalties; That Emperors,
Kings, Princes and their advisers, vied with each other in the middle ages in
swindling the people by debasing their coins, so that those who thought that
they were obtaining a certain weight of gold or silver for their produce were,
in reality, getting less, and that this situation produced serious evils among
which were a depreciation of the value of money and a consequent rise of prices
in proportion as the coinage became more and more debased in quality or light
in weight;
That to economize the use of the metals and to prevent
their constant transport a
machinery called "credit" has grown up in modern days, by
means of which, instead of handing over a certain weight of metal at each
transaction, a promise to do so is given, which under favorable circumstances
has the same value as the metal itself. Credit is called a substitute for gold.
So universal is the belief in these theories among
economists that they have
grown to be considered almost as axioms which hardly require proof, and
nothing is more noticeable in economic works than the scant
378
historical evidence on which they rest, and the absence of critical
examination of their worth.
Broadly speaking these doctrines may be said to rest
on the word of Adam Smith,
backed up by a few passages from Homer and Aristotle and the writings of
travelers in primitive lands. But modern research in the domain of commercial
history and numismatics, and especially recent discoveries in Babylonia, have
brought to light a mass of evidence which was not available to the earlier
economists, and in the light of which it may be positively stated - that none
of these theories rest on a solid basis of historical proof - that in fact they
are false.
To start, with Adam Smith's error as to the two most
generally quoted instances
of the use of commodities as money in modern times, namely that of nails
in a Scotch village and that of dried cod in Newfoundland, have already been
exposed, the one in Playfair's edition of the Wealth of Nations as long ago as
1805 and the other in an Essay on Currency and Banking by Thomas Smith,
published in Philadelphia, in 1832; and it is curious how, in the face of the
evidently correct explanation given by those authors, Adam Smith's mistake has
been perpetuated.
In the Scotch village the dealers sold materials and
food to the nail makers, and
bought from them the finished nails the value of which was charged off
against the debt.
The use of money was as well known to the fishers who
frequented the coasts and
banks of
In both these instances in which Adam Smith believes
that he has discovered a
tangible currency, he has, in fact, merely found - credit.
Then again as regards the various colonial laws,
making corn, tobacco, etc.,
receivable in payment of debt and taxes, these commodities were never a
medium of exchange in the economic sense of a commodity, in terms of which the
value of all other things is measured. They were to be taken at their market
price in money. Nor is there, as far as I know, any warrant for the assumption
usually made that the commodities thus made receivable were a general medium of
exchange in any sense of the words. The laws merely put into the hands of
debtors a method
379
of liberating themselves in case of necessity, m the absence of other
more usual means. But it is not to be supposed that such a necessity was of
frequent occurrence, except, perhaps in country districts far from a town and
without easy means of communication.
The misunderstanding that has arisen on this subject
is due to the difficulty of
realizing that the use of money does not necessarily imply the physical
presence of a metallic currency, nor even the existence of a metallic standard
of value. We are so accustomed to a system in which the dollar or the sovereign
of a definite weight of gold corresponds to a dollar or a pound of money that
we cannot easily believe that there could exist a pound without a sovereign or
a dollar without a gold or silver dollar of a definite known weight. But
throughout the whole range of history, not only is there no evidence of the
existence of a metallic standard of value to which the commercial monetary
denomination, the "money of account" as it is usually called,
corresponds, but there is overwhelming evidence that there never was, a
monetary unit which depended on the value of a coin or on a weight of metal;
that there never was, until quite modern days, any fixed relationship between
the monetary unit and any metal; that, in fact, there never was such a thing as
a metallic standard of value. It is impossible within the compass of an article
like this to present the voluminous evidence on which this statement is based;
all that can be done is to offer a summary of the writer's conclusions drawn
from a study extending over several years, referring the reader who wishes to
pursue the subject further to the detailed work which the writer hopes before
long to publish.
The earliest known coins of the western world are
those of ancient
oldest of which, belonging to the settlements on the coast of
380
writers are agreed that the bronze coins of ancient
All that is definiteIy known is that, while .the
various Greek States used the same
money denominations, stater, drachma, etc., the value of these units
differed greatly in different States, and their relative value was not
constant, - in modern parlance the exchange between the different States varied
at different periods. There is, in fact, no historical evidence in ancient
The ancient coins of
value, and the most striking thing about them is the extreme
irregularity of their weight. The oldest coins are the As and its fractions,
and there has always been a tradition
that the As, which was divided into 12 ounces, was originally a pound-weight of
copper. But the Roman pound weighed about 327 1/2 grammes and Mommsen, the
great historian of the Roman mint, pointed out that not only did none of the
extant coins (and there were very many) approach this weight, but that they
were besides heavily alloyed with lead; so that even the heaviest of them,
which were also the earliest, did not contain more than two-thirds of a pound
of copper, while the fractional coins were based on an As still lighter. As
early as the third century B.C. the As had fallen to not more than four ounces and
by the end of the second century B.C. it weighed no more than half an ounce or
less.
Within the last few years a new theory has been
developed by Dr. Haeberlin,
according to whom the original weight of the As was based not on the
Roman pound but on what he calls the "Oscan" pound, weighing only
about 273 grammes; and he seeks to prove the theory by ,.taking the average of
a large number of coins of the different denominations. He certainly arrived at
a mean weight pretty closely approximating his supposed standard, but let us
look at the coins from which he obtains his averages. The Asses which ought to
weigh a pound, vary in fact from 208 grammes to 312 grammes with every shade of
weight between these two extremes. The Half-Asses, which ought to weigh 136,5
grammes weigh from 94 grammes to 173 grammes; the Thirds-of-an-As, which ought
to weigh 91 grammes, weigh from 66 grammes to 113 grammes, and the
Sixth-of-an-As, weigh from 32 grammes to 62 grammes, and so on for the rest,
This, however, is not the only difficulty in accepting Haeberlin's theory,
which is inherently too improbable and rests on too scant historical evidence
to be credible. An average standard based on coins showing such wide variations
is inconceivable; though coins may and do circulate at a nominal rate greater
than their intrinsic value as bullion they cannot circulate at a rate below
their intrinsic value. They would, in this case, as later history abundantly
proves, be at once melted and used as bullion. And what would be the use of a
standard coin-weight which showed such extraordinary variations? What would be
the use of a yard-measure which might be sometimes two foot six and sometimes
381
three foot six, at the whim of the maker; or of s pint which might
sometimes be but two-thirds of a pint and sometimes s pint and a half?
I have not space here to go into the ingenious
hypothesis by which Haeberlin
explains the subsequent reduction of the As, at first to one-half the
Oscan pound and then gradually sinking as time went on; both of our historians
are agreed that from about B.C. 268 the copper coins were mere tokens and that
both heavy and light coins circulated indiscriminately.
Up to this time the As had been the fixed monetary
unit, however much the coins
may have varied; but from now on the situation is complicated by the
introduction of several units or "monies of account," which are used
at the same time,* the Sesterce or Numus, represented by a silver coin
identical in value with the old As Aeris Gravis or Libral As, as it was
sometimes called; a new As worth two-fifths of the old As, and the Denarius
worth ten of the new Asses and therefore four Libral Asses, and represented,
like the Sesterce, by a silver coin.
The coining of the Sesterce was soon abandoned and it
only reappeared fitfully
much later on as a token coin of bronze or brass. But as the official
unit of account it continued till the reign of the Emperor Diocletian in the
third century of our era, and we thus get the remarkable fact that for many
hundreds of years the unit of account remained unaltered independently of the
coinage which passed through many vicissitudes.
As a general rule, though there were exceptions, the
silver Denarii remained of
good metal until the time of Nero who put about ten per cent of alloy in
them. Under subsequent Emperors the amount of alloy constantly increased till
the coins were either of copper with a small amount of silver, or were made of
a copper core between two thin plates of silver, or were mere copper coins
distinguishable from the other copper coins only by the devices stamped on
them; but they continued to be called silver.
Whether or not the silver Denarius was intrinsically
worth its nominal value or not
is, a matter of speculation, but fifty years later, according to
Mommsen, the legal value of the coin was one-third greater than its real value,
and a gold coin was for the first time introduced rated at far above its
intrinsic value.
In spite of the degradation of the coin, however, the
Denarius, as a money of
account, maintained its primitive relation to the Sesterce, and it
remained the unit long after the Sesterce had disappeared.
Gold coins were but little used till the time of the
Empire, and though, as a
general rule, the quality of the metal remained good, the average
weight, decreased as time went on, and the variations in their weight, even in
the same reign, were quite as remarkable as in the others. For example in the
reign of Aurelian the gold coins weighed from three-
*The same phenomenon of more than one monetary unit at the same time is
common in later ages.
382
and-a-half grammes to nine grammes, and in that of Gallienus from
four-fifths of a gramme to about six-and-three-quarters grammes, without any
difference greater than half a gramme between any one coin and that nearest it
in weight.
There can hardly be stronger evidence than we here get
that the monetary
standard was a thing entirely apart from the weight of the coins or the
material of which they were composed; These varied constantly, while the money
unit remained the same for centuries.
An important thing to remember in reference to Roman
money is that, while the
debased coins were undoubtedly tokens, there is no question of their
representing a certain weight of gold or silver. The public had no right to
obtain gold or silver in exchange for the coins. They were all equally legal
tender, and it was an offense to. refuse them; and there is good historical
evidence to show that though the government endeavored to fix an official value
for gold, it was only obtainable at a premium.
The coins of ancient Gaul and
composition, and as they were modelled on the coins in circulation in
Greece, Sicily and Spain, it may be presumed that they were issued by foreign,
probably Jewish, merchants, though some appear to have been issued by tribal
chieftains. Anyhow, there was no metallic standard and though many of the coins
are classed by collectors as gold or silver, owing to their being imitated from
foreign gold or silver coins, the so-called gold coins more often than not,
contain but a small proportion of gold, and the silver coins but little silver.
Gold, silver, lead and tin all enter into their composition. None of them bear
any mark of value, so that their classification is pure guess-work, and there
can be no reasonable doubt but that they were tokens.
Under the Frankish Kings, who reigned for three
hundred years (A. D. 457-751),
the use of coins was much developed, and they are of great variety both
as to type and alloy. The monetary Unit was the Sol or Sou, and it is generally
held that the coins represented either the Sou or the Triens, the third part of
a Sou, though, for the purposes of accounts the Sou was divided into twelve
Denarii. They are of all shades of alloy of gold with silver, from almost pure
gold to almost pure silver, while some of the silver coins bear traces of
gilding. They were issued by the kings themselves or various of their
administrators, by ecclesiastical institutions, by the administrators of towns,
castles, camps, or by merchants, bankers, jewellers, etc. There was, in fact,
during the whole of this period, complete liberty of issuing coins without any
form of official supervision. Throughout this time there was not a single law
on the currency, and yet we do not hear of any confusion arising out of this
liberty.
There can be no doubt that all the coins were tokens
and that the weight or
composition was not regarded as a matter of importance. What was
important was the name or distinguishing mark of the issuer, which is never
absent.
383
I have made this rapid survey of early coinages to
show that from the beginning of
the rise of the art of coining metal, there is no evidence of a metallic
standard of value, but later history, especially that of þ France up to the
Revolution, demonstrates with such singular dearness the fact that no such
standard ever existed, that it may be said without exaggeration that no
scientific theory has ever been put forward which was more completely lacking
in foundation. If, in this article, I confine myself almost exclusively to
French history, it is not that other histories contain anything which could
disprove my contention, - indeed all that is known to me of English, German, Italian,
Mohammedan and Chinese history amply support it, - but the characteristic
phenomena of the monetary situation are strongly marked in France, and the old
records contain more abundant evidence than seems to be the case in other
countries. Moreover, French historians have devoted more attention to this
branch of history than, so far as I know, those of other countries. We thus get
from French history a peculiarly clear and connected account of the monetary
unit and its connection with commerce on the one hand and the coinage on the
other. But the principles of money and the methods of commerce are identical
the world over, and whatever history we choose for our study, we shall be
carried to the same conclusions.
The modern monetary history of
the Carolingian dynasty at the end of the eighth century. The Sou and
the Denarius or Denier its twelfth part, continued to be used for money
computation, and there was added a larger denomination, the Livre, divided into
twenty Sous, which became the highest unit, and these denominations subsisted
right up to the Revolution in 1879. The English pound, divided into twenty
shillings and 240 pence corresponds to the Livre and its divisions, from which
the British system seems to be derived.
Le Blanc, the seventeenth century historian of the
French coinage avers, and later
authorities have followed him, that the livre of money was originally a pound-weight of silver, just as
English historians have maintained that the English money pound was a pound of silver. He supports his contention by a few
quotations, which do not necessarily bear the meaning he gives them, and there
is no direct evidence in favor of the statement. In the first place there never
was a coin equivalent to a livre, nor
till long after Carolingian times was there one equivalent to a sou.* The only Royal coin at that time,
so far as we know, was the denier, and its value, if it had a fixed value, is
unknown. The word denier, when
applied to coin, just as the English
penny, frequently means merely a coin in general, without reference to its
value, and coins of many different values were called by these names. Moreover,
the deniers of that time vary in
weight and to some extent in alloy, and we
*The Gros Tournois of the thirteenth century. It did not, however, long
remain of the value of a sou.
384
know positively from a contemporary document that the term livre as applied to a commercial
weight, was not identified with any single weight but was merely the name of a
unit which varied in different communities. The fact is that the wish to prove
the identity between a livre of money
and a livre of weight is father to
the thought. We know nothing on the subject, and when some time later we do
obtain a certain knowledge, the livre
and the pound of money were by no
means the equivalent of a livre or a pound weight of silver. What we do know
for certain is that the Sol and the Denier in
There are only two things which we know for certain
about the Carolingian
coins. The first is that the coinage brought a profit to the issuer. When
a king granted a charter to one of his vassals to mint coins, it is expressly
stated that he is granted that right with the profits and emoluments arising
therefrom. The second thing is that there was considerable difficulty at
different times in getting the public to accept the coins, and one of the kings
devised a punishment to fit the crime of refusing one of his coins. The coin
which had been refused was heated red-hot and pressed onto the forehead of the
culprit, "the veins being uninjured so that the man shall not perish, but
shall show his punishment to those who see him." There can be no profit
from minting coins of their full face value in metal, but rather a loss, and it
is impossible to think that such disagreeable punishments would have been necessary
to force the public to accept such coins, so that it is practically certain
that they must have been below their face value and therefore were tokens, just
as were those of earlier days. It must be said, however, that there is evidence
to show that the kings of this dynasty were careful both of the weight and the
purity of their coins, and this fact has given color to the theory that their
value depended on their weight and purity. We find, however, the same pride of
accuracy with the Roman mints; and also in later days when the coinage was of
base metal, the directions to the masters of the mints as to the weight, alloy
and design were just as careful, although the value of the coin could not
thereby be affected. Accuracy was important more to enable the public to
distinguish between a true and a counterfeit coin than for any other reason.
From the time of the rise of the Capetian dynasty in
A. D. 987, our knowledge of
the coinage and of other methods employed in making payments becomes
constantly clearer. The researches of modern French historians have put into
our possession a wealth of information, the knowledge of which is absolutely
essential to a proper understanding of monetary problems, but which has
unfortunately been ignored by economists, with the result that their statements
are based on a false view of the historical facts, and it is only by a
distortion of those facts that the belief in the existence of a metallic
standard has been possible.
385
Throughout the feudal period the right of coinage
belonged not alone to the king
but was also an appanage of feudal overlordship, so that in France there
were beside the royal monies, eighty different coinages, issued by barons and
ecclesiastics, each entirely independent of the other, and differing as to
weights, denominations, alloys and types. There were, at the same time, more
than twenty different monetary systems. Each system had as its unit the livre, with its subdivisions, the sol and the denier, but the value of the
livre varied in different parts of the country and each different livre had its distinguishing title, such
as livre parisis, livre tournois, livre
estevenante, etc. And not only did the value of each one of these twenty or
more livres differ from all the
others, but the relationship between them varied from time to time. Thus the livre de tern was in the first half of
the thirteenth century worth approximately the same as the livre tournois; but in 1265 it was worth 1.4 of the tournois, in
1409 it was worth 1.5 of a tournois, and from 1531 till its disappearance, it
was worth two tournois. At the beginning of the thirteenth century the livre tournois was worth 0.68 of a livre parisis, while fifty. years later
it was worth 0.8 of a parisis; i.e.,
five tournois equalled four parisis, at which rate they appear to
have remained fixed. These two units were both in common use in official
accounts.
From the time of Hugues Capet down to that of Louis
XIV (1638) almost the entire
coinage was of base metal containing for the most part less than
one-half of silver, and for at least two centuries previous to the accession of
We now come to the most characteristic feature of the
finance of feudal
and the one which has apparently given rise to the unfounded accusations
of historians regarding the debasement of the coinage. The coins were not
marked with a face value, and were known by various names, such as Gros
Tournois, Blanc à la Couronne, Petit
Parisis, etc. They were issued at arbitrary values, and when the king was in
want of money, he "mua sa
monnaic," as the phrase was, that is to say, he decreed a reduction of
the nominal value of the coins. This was a perfectly well recognized method of
taxation acquiesced in by the people, who only complained when the process was
repeated too often, just as they complained of any other system of taxation
which the king abused. How this system of taxation worked will be explained
later on. The important thing to bear in mind for the present is the fact -
abundantly proved by modern researches - that the alterations in the value of
the coins did not affect prices.
Some kings, especially Philippe le Bel and Jean le
Bon, whose constant wars kept
their treasuries permanently depleted, were perpetually "crying
down" the coinage, in this way and issuing new coins of different types,
which in their turn were cried down, till the system became a serious abuse.
Under these circumstances the coins had no stable value, and they were bought
and sold at market prices which sometimes
386
fluctuated daily, and generally with great frequency. The coins were
always issued at a nominal value in excess of their intrinsic value, and the
amount of the excess constantly varied. The nominal value of the gold coins
bore no fixed ratio to that of the silver coins, so that historians who have
tried to calculate the ratio subsisting between gold and silver have. been led
to surprising results; sometimes the ratio being 14 or 15 to 1 or more, and at
other times the value of the gold apparently being hardly if at all superior to
that of silver.
The fact is that the official values were purely
arbitrary and had nothing to do with
the intrinsic value of the coins. Indeed when the kings desired to
reduce their coins to the least possible nominal value they issued edicts that
they should only be taken at their bullion value. At times there were so many
edicts in force referring to changes in the value of the coins, that none but
an expert could tell what the values of the various coins of different issues
were, and they became a highly speculative commodity. The monetary units, the livre, sol and denier, are perfectly distinct from the coins and the variations
in the value of the latter did not affect the former, though, as will be seen,
the circumstances which led up to the abuse of the system of
"mutations" caused the depreciation of the monetary unit.
But the general idea that the kings wilfully debased
their coinage, in the sense of
reducing their weight and fineness is without foundation. On the
contrary towards the end of the thirteenth century, the feeling grew up that
financial stability depended somehow on the uniformity of the coinage, and this
idea took firm root after the publication of a treatise by one Nicole Oresme
(famous in his time), written to prove the importance of a properly adjusted
system of coinage issued if not at its intrinsic value, at least at a rate not
greatly exceeding that value, the gold and silver coins each in their proper
ratio; and he attached especial importance to their maintenance at a fixed
price.
The reign of
time of great prosperity, and amid the trouble of succeeding reigns, the
purchasing power of money decreased with extraordinary rapidity. The money had,
as people said, become
"faible," and they clamored for the "forte monnaie" of the regretted
But prices still moved upwards, and a "cours volontaire," a voluntary
387
rating, was given by the public to the coins, above their official
value. In vain Kings expressed their royal displeasure in edicts which declared
that they had re-introduced "forte
monnaie" and in which they peremptorily commanded that prices in the
markets should be reduced and that their coins should only circulate at their
official value. The disobedient merchants were threatened with severe
penalties; but the more the kings threatened, the worse became the confusion.
The markets were deserted.
Impotent to carry out their well-meant but mistaken
measures, the kings had to
cancel their edicts, or to acquiesce in their remaining a dead letter.
The most famous of these attempts to return to "forte monnaie," by means of
a
reduction of the price of silver, was that introduced by Charles the
Fifth, the pupil in financial matters, of Nicole Oresme. With the most
praiseworthy obstinancy he stuck to his point, persuaded that he could force
the recalcitrant metals to return to their old prices. As the coins disappeared
from circulation, owing to their bullion value being higher than their nominal value,
the king manfully sacrificed his silver plate to the mint as well as that of
his subjects, and persuaded the Pope to excommunicate the neighboring princes
who counterfeited his coins, or at least manufactured coins of less value for
circulation in
The system of wilful "mutations" of the
money, for the purpose of taxation, was
not confined to
*Curious that is to say, to those who hold to the metallic theory of
money. In fact it is quite simple, though I have not here space to explain it.
388
is full of such incidents. In all these countries and cities, the
monetary unit was distinct from the coins, (even when they bore the same name,)
and the latter varied in terms of the former independently of any legislation,
in accordance possibly with the apparently ceaseless fluctuations in the price
of the precious metals. In Amsterdam and in Hamburg in the eighteenth century,
an exchange list was published at short intervals, and affixed in the Bourse,
giving the current value of the coins in circulation in the City, both foreign
and domestic, in terms of the monetary unit - the Florin in Amsterdam and the
Thaler in Hamburg, both of them purely imaginary units. The value of these
coins fluctuated almost daily, nor did their value depend solely on their eight
and fineness. Coins of similar weight and fineness circulated at different
prices, according to the country to which they belonged.
It must be remembered that, until recent years there
was no idea that in
Though it would be hard to imagine a greater contrast
than that between the
condition of feudal
But there were no coins bearing a fixed relation to
any of these various pounds
and, in consequence, when Alexander Hamilton wrote his report on the
establishment of a mint, he declared that, while it was easy to state what was
the unit of account, it was "not equally easy to pronounce what is
considered as the unit in the coins." There being, as he said, no ~ formal
regulation on the point it could only be inferred from usage; and he came to
the conclusion that on the whole the coin best entitled to the character of the
unit was the Spanish dollar. But the arguments which he gave in favor of the
dollar lost, as he himself said, much of their weight owing to the fact that
"that species of coin has never had any settled or standard value
according to weight or fineness; but has been permitted to circulate by tale
without regard to either." Embarrassed by this cir-
389
cumstance, and finding in fact that gold was the less fluctuating metal
of the two, Hamilton had difficulty in deciding to which of the precious metals
the monetary unit of the United States should in future be " annexed"
and he finally concluded to give the preference to neither, but to establish a
bi-metallic system, which, however, in practice was found to be unsuccessful.
One of the popular fallacies in connection with
commerce is that in modern days
a money-saving device has been introduced called credit and that, before this device was known, all purchases were
paid for in cash, in other words in coins. A careful investigation shows that
the precise reverse is true. In olden days coins played a far smaller part in
commerce than they do to-day. Indeed so small was the quantity of coins, that
they did not even suf6ce for the needs of the Royal household and estates which
regularly used tokens of various kinds for the purpose of making small
payments. So unimportant indeed was the coinage that sometimes Kings did not
hesitate to call it all in for re-minting and re-issue and still commerce went
on just the Mme.
The modern practice of selling coins to the public
seems to have been quite
unknown in old days. The metal was bought by the Mint and the coins were
issued by the King in payment of the expenses of the Government, largely I
gather from contemporary documents, for the payment of the King's soldiers. One
of the most difficult things to understand is the extraordinary differences in
the price which was paid for the precious metal by the French Mint, even on the
same day. The fact that the price often, if not always, bore no relation to the
market value of the metal has been remarked on by writers; but there is nothing
in any record to show on what it was based. The probable explanation is that
the purchase and sale of gold and silver was in the hands of a very few great
bankers who were large creditors of the Treasury and the purchase of the metals
by the Mint involved a financial transaction by which part payment of the debt
was made in the guise of an exorbitant price for the metal.
From long before the fourteenth century in
countries), there were in common use large quantities of private metal
tokens against which the governments made constant war with little success. It
was not indeed till well on in the nineteenth century that their use was
suppressed in
390
by the necessity of having some instrument for retail commerce to make
more general use of the government coins which from frequent
"mutations" were not always popular, and partly because it was
believed that the circulation of a large quantity of base tokens somehow tended
to raise the price of the precious metals, or rather, perhaps, to lower the
value of the coinage; just as economists to-day teach that the value of our
token coinage is only maintained by strictly limiting its output.
The reason why in modern days the use of private
tokens has disappeared is
more due to natural causes, than to the more efficient enforcement of
the law. Owing to improved finance coins have acquired a stability they used
not to have, and the public has come to have confidence in them. Owing to the
enormous growth of government initiative these tokens have come to have a
circulation which no private tokens could enjoy, and they have thus supplanted
the latter in the public estimation, and those who want tokens for small
amounts are content to buy them from the government.
Now if it is true that coins had no stable value, that
for centuries at a time there
was no gold or silver coinage, but only coins of base metal of various
alloys, that changes in the coinage did not affect prices, that the coinage
never played any considerable part in commerce, that the monetary unit was
distinct from the coinage and that the price of gold and silver fluctuated
constantly in terms of that unit (and these propositions are so abundantly
proved by historical evidence that there is no doubt of their truth), then it
is clear that the precious metals could not have been a standard of value nor
could they have been the medium of exchange. That is to say that the theory
that a sale is the exchange of a commodity for a definite weight of a
universally acceptable metal will not bear investigation, and we must seek for
another explanation of the nature of a sale and purchase and of the nature of
money, which undoubtedly is the thing for which the commodities are exchange.
If we assume that in pre-historic ages, man lived by
barter, what is the
development that would naturally have taken place, whereby he grew to
his present knowledge of the methods of commerce? The situation is thus explained
by Adam Smith:
"But when the division of labor first began to take place, this
power of
exchanging must frequently have been very much clogged
and embarrassed in its operations. One man, we shall suppose, has more of a
certain commodity than he himself has occasion for, while another has less. The
former consequently would be glad to dispose of, and the latter to purchase, a
part of this superfluity. But if this latter should chance to have nothing that
for former stands in need of, no exchange can be made between them. The butcher
has more meat in his shop than he himself can consume, and the brewer and the
baker would each of them be willing to purchase a part of it. But they have
nothing to offer in exchange, except the different productions of their
respective trades, and the butcher is already provided with all the bread and
beer which he has immediate occasion for. No change can in this case be made
between them. He cannot o6er to be their merchant nor they his customers; and
they are
391
all of them thus mutually less serviceable to one
another. In order to avoid the inconveniency of such situations, every prudent
man in every period of society, after the first establishment of the division
of labor, must naturally have endeavored to manage his affairs in such a
manner, as to have at all times by him, besides the peculiar produce of his own
industry, a certain quantity of some one commodity or other, such as, he
imagined that few people would be likely to refuse in exchange for the produce
of their industry."
"Many different commodites, it is probable, were successively both
thought of
and employed for this purpose. ...... In all
countries, however, men seem at last to have been determined by irresistible
reasons to give the preference, for this employment, to metals above every
other commodity."
Adam Smith's position depends on the truth of the
proposition that, if the baker or
the brewer wants meat from the butcher, but has (the latter being
sufficiently provided with bread and beer) nothing to offer in exchange, no
exchange can be made between them. If this were true, the doctrine of a medium
of exchange would, perhaps, be correct. But is it true?
Assuming the baker and the brewer to be honest men,
and honesty is no modern
virtue, the butcher could take from them an acknowledgment: that they
had bought from him so much meat, and all we have to assume is that the
community would recognize the obligation of the baker and the brewer to redeem
these acknowledgments in bread or beer at the relative values current in the
village market, whenever they might be presented to them, and we at once have a
good and sufficient currency. A sale, according to this theory, is not the
exchange of a commodity far some intermediate commodity called the "medium
of exchange," but the exchange of a commodity for a credit.
There is absolutely no reason for assuming the
existence of so clumsy a device as
a medium of exchange when so simple a system would do all that was
required. What we have to prove is not a strange general agreement to accept
gold and silver; but a general sense of the sanctity of an obligation. In other
words, the present theory is based on the antiquity of the law of debt.
We are here fortunately on solid historical ground.
From the earliest days of which
we have historical records, we are in the presence of a law of debt, and
when we shall find, as we surely shall, records of ages still earlier than that
of the great king Hamurabi, who compiled his code of the laws of Babylonia 2000
years B.C., we shall, I doubt not, still find traces of the same law. The
sanctity of an obligation is, indeed, the foundation of all societies not only
in all times, but at all stages of civilization; and the idea that to those
whom we are accustomed to call savages, credit is unknown and only barter is
used, is without foundation. From the merchant of
392
It is here necessary to explain the primitive and the
only true commercial or
economic meaning of the word "credit." It is simply the
correlative of debt. What A owes to B is A's debt to B and B's credit on A. A
is B's debtor and B is A's creditor. The words "credit" and
"debt" express a legal relationship between two parties, and they
express the same legal relationship seen from two opposite sides. A will speak
of this relationship as a debt, while B will speak of it as a credit. As I
shall have frequent occasion to use these two words, it is necessary that the
reader should familiarize himself with this conception which, though simple
enough to the banker or financial expert, is apt to be confusing to the
ordinary reader, owing to the many derivative meanings which are associated
with the word "credit." Whether, therefore, in the following pages,
the word credit or debt is used, the thing spoken of is precisely the same in
both cases, the one or the other word being used according as the situation is
being looked at from the point of view of the creditor or of the debtor.
A first class credit is the most valuable kind of
property. Having no corporeal
existence, it has no weight and takes no room. It can easily be
transferred, often without any formality whatever. It is movable at will from
place to place by a simple order with nothing but the cost of a letter or a
telegram. It can be immediately used to supply any material want, and it can be
guarded against destruction and theft at little expense. It is the most easily
handled of all forms of property and is one of the most permanent. It lives
with the debtor and shares his fortunes, and when he dies, it passes to the
heirs of his estate. As long as the estate exists, the obligation continues,*
and under favorable circumstances and in a healthy state of commerce there
seems to be no reason why it should ever suffer deterioration.
Credit is the purchasing power so often mentioned in
economic works as being
one of the principal attributes of money, and, as I shall try to show,
credit and credit alone is money. Credit and not gold or silver is the one
property which all men seek, the acquisition of which is the and object of all
commerce.
The word "credit" is generally technically
defined as being the right to demand
and sue for payment of a debt, and this no doubt is the legal aspect of
a credit today; while we are so accustomed to paying a multitude of small
purchases in coin that we have come to adopt the idea, fostered by the laws of
legal tender, that the right to payment of a debt means the right to payment in
coin or its equivalent. And further, owing to our modern systems of coinage, we
have been led to the notion that payment in coin means payment in a certain
weight of gold.
Before we can understand the principles of commerce we
must wholly divest our
minds of this false idea. The root meaning of the verb "to
pay" is that of "to appease," "to pacify," "to
satisfy," and while a
*In modern days statutes of limitation have been passed subjecting the
permanence of credits to certain limitations. But they do not affect the
principle. On the contrary, they confirm it.
393
debtor must be in a position to satisfy his creditor, the really
important characteristic of a credit is not the right which it gives to
"payment" of a debt, but the right that it confers on the holder to
liberate himself from debt by its means - a right recognized by all societies.
By buying we become debtors and by selling we become creditors, and being all
both buyers and sellers we are all debtors and creditors. As debtor we can
compel our creditor to cancel our obligation to him by handing to him his own acknowledgment
of a debt to an equivalent amount which he, in his turn, has incurred. For
example, A having bought goods from B to the value of 4100, is B's debtor for
that amount. A can rid himself of his obligation to B by selling to C goods of
an equivalent value and taking from him in payment an acknowledgment of debt
which he (C, that is to say) has received from B. By presenting this
acknowledgment to B, A can compel him to cancel the debt due to him. A has used
the credit which he has procured to release himself from his debt. It is his
privilege.
This is the primitive law of commerce. The constant
creation of credits and
debts, and their extinction by being cancelled against one another,
forms the whole mechanism of commerce and it is so simple that there is no one
who cannot understand it.
Credit and debt have nothing and never have had
anything to do with gold and
silver. There is not and there never has been, so far as I am aware, a
law compelling a debtor to pay his debt in gold or silver, or in any other
commodity; nor so far as I know, has there ever been a law compelling a
creditor to receive payment of a debt in gold or silver bullion, and the
instances in colonial days of legislation compelling creditors to accept
payment in tobacco and other commodities were exceptional and due to the stress
of peculiar circumstances. Legislatures may of course, and do, use their
sovereign power to prescribe a particular method by which debts may be paid,
but we must be chary of accepting statute laws on currency, coinage or legal
tender, as illustrations of the principles of commerce.
The value of a credit depends not on the existence of
any gold or silver or other
property behind it, but solely on the solvency of the
debtor, and that depends solely on whether, when the debt becomes due, he in
his turn has sufficient credits on others to set off against his debts. If the
debtor neither possesses nor can acquire credits which can be offset against
his debts, then the possession of those debts is of no value to the creditors
who own them. It is by selling, I repeat, and by selling alone - whether it be
by the sale of property or the sale of the use of our talents or of our land
that we acquire the credits by which we liberate ourselves from debt,
and it is by his selling power that a prudent banker estimates his client's
value as a debtor.
Debts due at a certain moment can only be cancelled by
being offset against
credits which become available at that moment; that is to say that a
creditor cannot be compelled to accept in payment of a debt due to him an
acknowledgment of indebtedness which he himself has given
394
and which only falls due at s later time. Hence it follows that a man is
only solvent if he has immediately available credits at least equal to the
amount of his debts immediately due and presented for payment. If, therefore,
the sum of his immediate debts exceeds the sum of his immediate credits, the
real value of these debts to his creditors will fall to an amount which will
make them equal to the amount of his credits. This is one of the most important
principles of commerce.
Another important point to remember is that when a
seller has delivered the
commodity bought and has accepted an acknowledgment of debt from the
purchaser, the transaction is complete, the payment of the purchase is final;
and the new relationship which arises between the seller and the purchaser, the
creditor and the debtor, is distinct from the sale and purchase.
For many centuries, how many we do not know, the principal
instrument of
commerce was neither the coin nor the private token, but the tally,*
(Lat. talea. Fr. taille.
The labors of modern archaeologists have brought to
light numbers of objects of
extreme antiquity, which may with confidence be pronounced to be ancient
tallies, or instruments of a precisely similar nature; so that we can hardly
doubt that commerce from the most primitive times was carried on by means of
credit, and not with any "medium of exchange."
In the treasure hoards of
generally heavily alloyed with iron. The earliest of these, which date
from between 1000 and 2000 years B. C., a thousand years before the
introduction of coins, are called aes
rude and are either shapeless ingots or are cast into circular discs or
oblong cakes. The later pieces, called
aes signdtum, are all cast into cakes or tablets and bear various devices.
These pieces of metal are known to have been used as money, and their use was
continued some considerable time after the introduction of coins.
The characteristic thing about the aes rude and the ags signatum is that, with rare
exceptions, all of the pieces have been purposely broken at the time of manufacture
while the metal was still hot and brittle or
*Their use was not entirely abandoned till the beginning of the
nineteenth Century. **Hence the modern term "stock" as meaning
"capital."
395
"short," as it is technically called. A chisel was placed on
the metal, and struck a light blow. The chisel was then removed and the metal
was easily broken through with a hammer blow, one piece being usually much
smaller than the other. There can be no reasonable doubt but that these were
ancient tallies, the broken metal affording the debtor the same protection as
did the split hazel stick in later days.
The condition of the early Roman coinage shows that
the practice of breaking off
a piece of the coins - thus amply proving their token character - was common
down to the time when the casting of the coins was superseded by the more
perfect method of striking them.
In
in which were a number of cakes of silver (whether pure or base metal is
not stated), stamped with a mark similar to that found on early Greek coins.
All of them have a piece purposely broken off. There were also found thin discs
with pieces cut or torn off so as to leave an irregularly serrated edge.
In hoards in
same age as the Italian copper cakes. While some of these are whole,
others have a piece hacked off one end.
Among recent discoveries in ancient
documents which have been found are what are called "contract
tablets" or - "shubati tablets" - the word shubali, which is present on nearly all of them, meaning
"received." These tablets, the oldest of which were in use from 2000
to 3000 years B. C., are of baked or sun-dried clay, resembling in shape and
size the ordinary cake of toilet soap, and very similar to the Italian copper
cakes. The greater number are simple records of transactions in terms of "she," which is understood by
archaeologists to be grain of some sort.
They bear the following indications:
The quantity of grain.
The word "shubati" or received.
The name of the person from whom received.
The name of the person by whom received.
The date.
The seal of the receiver or, when the King is the
receiver, that of his "scribe" or
"servant."
From the frequency with which these tablets have been
met with, from the
durability of the material of which they are made, from the care with
which they were preserved in temples which are known to have served as banks,
and more especially from the nature of the inscriptions, it may be judged that
they correspond to the medieval tally and to the modern bill of exchange; that
is to say, that they are simple acknowledgments of indebtedness given to the seller
by the buyer in payment of a purchase, and that they, were the common
instrument of commerce.
But perhaps a still more convincing proof of their
nature is to be found in the fact
that some of the tablets are entirely enclosed in tight-fitting clay envelopes
or "cases," as they are called, which have to be broken off
396
before the tablet itself can be inspected. On these "case
tablets," they are called, the inscription is found on the case, and it is
repeated on the inclosed tablet; with two notable omissions. The name and seal
of the receiver are not found inside. It is self-evident that the repetition of
the essential features of the transaction, on the inner tablet which could only
be touched by destroying the case, was, just as in the other instances, for the
protection of the debtor against the danger of his tablet being fraudulently
tampered with, if it fell into dishonest hands. The particular significance of
these "case tablets" lies in the fact that they were obviously not
intended as mere records to remain in the possession of the debtor, but that
they were signed and sealed documents, and were issued to the creditor, and no
doubt passed from hand to hand like tallies and bills of exchange. When the
debt was paid, we are told that it was customary to break the tablet.
We know, of course, hardly anything about the commerce
of those far-off days,
but what we do know is that great commerce was carried on and that the
transfer of credit from hand to hand and from place to place was as well known to
the Babylonians as it is to us. We have the accounts of great merchant or
banking firms taking part in state finance and state tax collection, just as
the great Genoese and Florentine bankers did in the middle ages, and as our
banks do to-day.
In
banks and instruments of credit long before any coins existed, and
throughout practically the whole of Chinese history, so far as I have been able
to learn, the coins have always been mere tokens.
There is no question but that credit is far older than
cash.
From this excursion into the history of far remote
ages, I now return to the
consideration of business methods in days nearer to our own, and yet
extending far enough back to convince the most sceptical reader of the
antiquity of credit.
Tallies were transferable, negotiable instruments,
just like bills of exchange,
bank-notes or coins. Private tokens (in
The clearing houses of old were the great periodical
fairs, whither went
merchants great and small, bringing with them their tallies, to settle
their mutual debts and credits. "Justiciaries" were set over the
fairs to hear and. determine all commercial disputes, and to "prove thy
tallies according to the commercial law, if the plaintiff desires this."
The greatest of these fairs in
397
The origin of the fairs of which I have spoken is lost
in the mists of antiquity. Most
of the charters of which we have record, granting to feudal lords the
right to hold a fair, stipulate for the maintenance of the ancient customs of
the fairs, thus showing that they dated from before the charter which merely
legalized the position of the lord or granted him a monopoly. So important were
these fairs that the person and property of merchants traveling to them was
everywhere held sacred. During war, safe conducts were granted to them by the
princes through whose territory they had to pass and severe punishment was
inflicted for violence offered to them on the road. It was a very general
practice in drawing up contracts, to make debts payable at one or other of the
fairs, and the general clearance at which the debts were paid was called the pagamentum. Nor was the custom of
holding fairs confined to medieval
At some fairs no other business was done except the
settlement of debts and
credits, but in most a brisk retail trade was carried on. Little by
little as governments developed their postal systems and powerful banking
corporations grew up, the value of fairs as clearing houses dwindled, and they
ceased to be frequented for that purpose, long remaining as nothing but festive
gatherings until at last there linger but few, and those a mere shadow of their
golden greatness.
The relation between religion and finance is
significant. It is in the temples of
They were a strange jumble, these old fairs, of
finance and trading and religion
and orgy, the latter often being inextricably mixed up with the church
ceremonies to the no small scandal of devout priests, alarmed lest the wrath of
the Saint should be visited on the community for the shocking desecration of
his holy name.
There is little doubt to my mind that the religious
festival and the settlement of
debts were the origin of all fairs and that the commerce which was there
carried on was a later development. If this is true, the connection between
religion and the payment of debts is an additional indication if any were
needed, of the extreme antiquity of credit.
The method by which governments carry on their finance
by means of debts and
credits is particularly interesting. Just like any private individual,
the government pays by giving acknowledgments of indebted-
398
ness - drafts on the Royal Treasury, or on some other branch of the
government or on the government bank. This is well seen in medieval England,
where the regular method used by the government for paying a creditor was by
"raising a tally" on the Customs or on some other revenue-getting
department, that is to say by giving to the creditor as an acknowledgment of
indebtedness a wooden tally. The Exchequer accounts are full of entries such as
the following: -"To Thomas de Bello Campo, Earl of Warwick, by divers
tallies raised this day, containing 500 marks delivered to the same Earl."
"To .... by one tally raised this day in the name of the Collectors of the
small customs in the
I have already explained how such acknowledgments
acquire a value in the case
of private persons. We are all engaged in buying and selling, we
manufacture commodities for sale, we cultivate the ground and sell the produce,
we sell the labor of our hands or the work of our intelligence or the use of
our property, and the only way in which we can be paid for the services we thus
render is by receiving back from our purchasers the tallies which we ourselves
have given in payment of like services which we have received from others.
But a government produces nothing for sale, and owns
little or no property; of what
value, then, are these tallies to the creditors of the government? They
acquire their value in this way. The government by law obliges certain selected
persons to become its debtors. It declares that so-and-so, who imports goods
from abroad, shall owe the government so much on all that he imports, or that
so-and-so, who owns land, shall owe to the government so much per acre. This
procedure is called levying a tax, and the persons thus forced into the
position of debtors to the government must in theory seek out the holders of
the tallies or other instrument acknowledging a debt due by the government, and
acquire from them the tallies by selling to them some commodity or in doing
them some service, in exchange for which they may be induced to part with their
tallies. When these are returned to the government treasury, the taxes are
paid. How literally true this is can be seen by examining the accounts of the
sheriffs in
The general belief that the Exchequer was a place
where gold or silver was
received; stored and paid out is wholly false. Practically the entire
business of the English Exchequer consisted in the issuing and receiving of
tallies, in comparing the tallies and the counter-tallies, the stock and the
stub, as the two parts of the tally were popularly called, in keeping the
accounts of the government debtors and creditors, and in cancelling the tallies
when returned to the Exchequer. It was, in fart, the great clearing house for
government credits and debts.
399
We can now understand the effect of the
"mutations de la monnaie," which I
have mentioned as being one of the financial expedients of medieval
French kings. The coins which they issued were tokens of indebtedness with
which they made small payments, such as the daily wages of their soldiers and
sailors. When they arbitrarily reduced the official value of their tokens, they
reduced by so much the value of the credits on the government which the holders
of the coins possessed. It was simply a rough and ready method of taxation,
which, being spread over a large number of people, was not an unfair one,
provided that it was not abused.
Taxpayers in olden days did not, of course, have in
fact to search out the owners
of the tallies any more than to have to-day to seek for the holders of
drafts on the Bank of England. This was done through the bankers, who from the
earliest days of history were always the financial agents of the governments.
In
There can be little doubt that banking was brought to
Babylonia, who spread over the Greek Colonies of the Asiatic coast
settled on the Grecian mainland and in the coast towns of northern
The monetary unit is merely an arbitrary denomination,
by which commodities are
measured in terms of credit, and which serves, therefore as a more or
less accurate measure of the value of all commodities. Pounds, shillings and
pence are merely the a, b, c, of algebra, where a = 20, b = 240 c. What was the
origin of the terms now in use is unknown. It may be that they once stood for a
certain quantity or weight of some commodity. If it is so, it would make no
difference to the fact that they do not now and have not for countless
generations represented any commodity. Let us assume that the unit did once
represent a commodity. Let us assume, for example, that in the beginning of
things, some merchant thought fit to keep his customers' accounts in terms of a
certain weight of silver called a shekel, a term much used in antiquity. Silver
was, of course, a commodity like any other; there was no law of legal tender,
and no one was entitled to pay his debts in silver, any more than any one was
obliged to accept payment of his credits in silver. Debts and credits were set
off against one another as they are to-day. Let us assume that a hundred
bushels of corn and a shekel of silver were of the same value. Then so long as
the price of the two did not vary, all would be well; a man bringing to the
merchant a shekel's weight of silver or a hundred bushels of corn would equally
receive in his books a credit of one shekel. But supposing that for some
reason, the value of
400
silver fell, so that a hundred bushels of corn would now exchange not
for a shekel of silver but for a shekel and a tenth. What would then happen?
Would all the creditors of the merchant suddenly lose because their credit
was-written down as shekels of silver, and the debtors of the mer- chant gain
in the same proportion, although their transactions may have had nothing
whatever to do with silver? Obviously not; it is hardly likely that the
creditors would agree to lose a tenth of their money merely because the
merchant had found it convenient to keep their accounts in shekels. This is
what would happen: The owner of a shekel of silver, the price of which had
fallen, would be informed by the merchant that silver had gone to a discount,
and that in future he would only receive nine-tenths of a shekel of credit for
each shekel of silver. A shekel of credit and a shekel weight of silver would
no longer be the same; a monetary unit called a shekel would have arisen having
no fixed relation to the weight of the metal the name of which it bore, and the
debts and credits of the merchants and his customers would be unaffected by the
change of the value of silver. A recent author gives an example of this when he
mentions a. case of accounts being kept in beaver-skins. The beaver-skin of
account remained fixed, and was equivalent to two shillings, while the real
skin varied in value, one real skin being worth several imaginary skins of
account.
All our modern legislation fixing the price of gold is
merely a survival of the late-
medieval theory that the disastrous variability of the monetary unit had
some mysterious connection with the price of the precious metals, and that, if
only that price could be controlled and made invariable, the monetary unit also
would remain fixed. It is hard for us to realize the situation of those times.
The people often saw the prices of the necessaries of life rise with great
rapidity, so that from day to day no one knew what his income might be worth in
commodities. At the same time, they saw the precious metals rising, and coins
made of a high grade of gold or silver going to a premium, while those that
circulated at their former value were reduced in weight by clipping. They saw
an evident connection between these phenomena, and very naturally attributed
the fall in the value of money to the rise of the value of the metals and the
consequent deplorable condition of the coinage. They mistook effect for cause,
and we have inherited their error. Many attempts were made to regulate the
price of the precious metals, but until the nineteenth century, always
unsuccessfully.
The great cause of the monetary perturbations of the
middle ages were not the
rise of the price of the precious metals, but the fall of the value of
the credit unit, owing to the ravages of war, pestilence and famine. We can
hardly realize to-day the appalling condition to which these three causes
reduced
"The ravages of an English army on a hostile soil
were terrible, the ravages of the French troops in their own country were not
less terrible, -the ravages of roving bands of half-disciplined soldiers, who
were almost
401
robbers by instinct, were still more terrible, and
behind all these, more terrible, if possible, than the English or French
armies, or the "free companies," were the gangs of criminals let
loose from prison to do all kinds of villainy, and the bands of infuriated
peasants robbed of their homes, who sallied forth from the woods or caves which
had sheltered them and burnt up what in their hasty marches the troops had left
undestroyed. No regard for station, or age, or sex was there - no difference
was made between friend or foe. At no time in the whole history of
The sufferings of the fifteenth century were hardly less terrible than
those of the
fourteenth and the picture given of
"Whilst the northern countries, up to the walls of
Mersey on one side of England, and to the gates of
York and the mouth of the Humber on the other, were being ravaged by the Scots,
and whilst French, Flemish, Scottish and other pirates were burning the towns
and killing the inhabitants of the East, the West and the South coasts of
England, or carrying them oK as slaves, two other enemies were let loose upon
this country. Famine and pestilence, the fruits of war, destroyed what man
failed to reach."
Again and again the country was swept by famines and
plagues, and murrain
mowed down flocks and herds. And it was not only in those early days
that such terrible ravages occurred. The condition of
Purchases are paid for by sales, or in other words,
debts are paid for by credits,
and, as I have said before, the value of a credit depends on the debtor
being also a creditor; in a situation such as that which I have described
(though it must not be thought that there were no intervals of comparative
prosperity), commerce was practically at a standstill, credits were of little
value. At the same time the governments had accumulated great debts to maintain
their armies and to carry on their continual war-like operations, and were
unable to levy the taxes which should pay for them. It was impossible that,
under such conditions, the value of credit (in other words the value of the
monetary unit) should not fall. It is quite unnecessary to search for imaginary
arbitrary depreciations of the coinage to explain the phenomenon.
The reader may here raise the objection that whatever
may have been the practice
in olden times and whatever may be the scientific theory
402
we do in the present day in fact use gold for making payments besides
using credit instruments. A dollar or a sovereign, he will say, are a certain
weight of gold and we are legally entitled to pay our debts with them.
But what are the facts? Let us take the situation here
in the
government accepts all the gold of standard fineness and gives in
exchange gold coins weight for weight, or paper certificates representing such
coins. Now the general impression is that the only effect of transforming the
gold into coins is to cut it into pieces of a certain weight and to stamp these
pieces with the government mark guaranteeing their weight and fineness. But is
this really all that has been done? By no means. What has really happened is
that the government has put upon the pieces of gold a stamp which conveys the
promise that they will be received by the government in payment of taxes or
other debts due to it. By issuing a coin, the government has incurred a
liability towards its possessor just as it would have done had it made a
purchase, -has incurred, that is to say,
an obligation to provide a credit by taxation or otherwise for the redemption
of the coin and thus enable its possessor to get value for his money.
In virtue of the stamp it bears, the gold has changed
its character from that of a
mere commodity to that of a token of indebtedness. In
Money, then, is credit and nothing but credit. A's
money is B's debt to him, and
when B pays his debt, A's money disappears. This is the whole theory of
money:
Debts and credits are perpetually trying to get into
touch with one another, so that
they may be written off against each other, and it is the business of
the banker to bring them together. This is done in two ways: -either by discounting bills, or by making loans. The first is the more old
fashioned method and in Europe the bulk of the banking business consists in
discounts while in the
The process of discounting bills is as follows: A sells
goods to B, C and D, who
thereby become A's debtors and give him their acknowledgments of
indebtedness, which are technically called
bills of exchange, or more
shortly bills. That is to say A
acquires a credit on B, C and D. A buys goods from E, F and G and gives his
bill to each in payment. That is to say E, F and G have acquired credits on A.
If B, C and D could sell
403
goods to E, F and G and take in payment the bills given by A, they could
then present these bills to A and by so doing release themselves from their
debt. So long as trade takes place in a small circle, say in one village or in
a small group of near-by villages, B, C and D might be able to get hold of the
bills in the possession of E, F and G. But as soon as commerce widened out, and
the various debtors and creditors lived far apart and were unacquainted with
one another, it is obvious that without some system of centralizing debts and
credits commerce would not go on. Then arose the merchant or banker, the latter
being merely a more specialized variety of the former. The banker buys from A
the bills held by him on B, C and D, and A now becomes the creditor of the
banker, the latter in his turn becoming the creditor of B, C and D. A's credit
on the banker is called his deposit and he is called a depositor. E, F and G
also sell to the banker the bills which they hold on A, and when they become
due the banker debits A with the amount thus cancelling his former credit. A's
debts and credits have been "cleared," and his name drops out, leaving
B, C and D as debtors to the bank and E, F and G as the corresponding
creditors. Meanwhile B, C and D have been doing business and in payment of
sales which they have made, they receive bills on H, I and K. When their
original bills held by the banker become due, they sell to him the bills which
H, I and K have given them, and which balance their debt. Thus their debts and
credits are "cleared" in their turn, and their names drop out,
leaving H, I and K as debtors and E, F and G as creditors of the bank and so
on. The modern bill is the lineal descendant of the medieval tally, and the
more ancient Babylonian clay tablet.
Now let us see how the same result is reached by means
of a loan instead of by
taking the purchaser's bill and selling it to the banker. In this case
the banking operation, instead of following the sale and purchase, anticipates
it. B, C and D before buying the goods they require make an agreement with
the-banker by which he undertakes to become the debtor of A in their place,
while they at the same time agree to become the debtors of the banker: Having
made this agreement B, C and D make their purchases from A and instead of
giving him their bills which he sells to the banker, they give him a bill
direct on the banker. These bills of exchange on a banker are called cheques or
drafts.
It is evident that the situation thus created is
precisely the same which ever
procedure is adopted, and the debts and credits are cleared in the same
manner. There is a slight di6erence in the details of the mechanism, that is
all.
There is thus a constant circulation of debts and
credits through the medium of the
banker who brings them together and clears them as the debts fall due.
This is the whole science of banking as it was three thou- sand years before
Christ, and as it is to-day. It is a common error among economic writers to
suppose that a bank was originally a place of safe deposit for gold and silver,
which the owner could take out as he required it. The idea is wholly erroneous
and can be shown to be so from the study of the ancient banks.
404
Whatever commercial or financial .transaction we
examine, whether it be the
purchase of a penn'orth of vegetables in the market or the issue of a
billion dollar loan by a government, we find in each and all of them the same
principle involved; either an old credit is transferred or new ones are
created, and a State or a banker or a peasant is prosperous or bankrupt
according as the principle is observed or not, that debts, as they fall due,
must be met by credits available at the same moment.
The object of every good banker is to see that at the
end of each day's
operations, his debts to other bankers do not exceed his credits on
those bankers, and in addition the amount of the "lawful money" or
credits on the government in his possession. This requirement limits the amount
of money he has to "lend." He knows by experience pretty accurately
the amount of the cheques he will have to present for payment to other bankers
and the amount of those which will be presented for his payment, and he will
refuse to buy bills or to lend money - that is to say, he will refuse to incur
present obligations in return for future payments - if by so doing he is going
to risk having more debts due by him on a certain day than he will have credits
on that day to set against them. It must be remembered that a credit due for
payment at a future time cannot be set off against a debt due to another banker
immediately. Debts and credits to be set off against each other must be "due"
at the same time.
Too much importance is popularly attached to what in
in hand and in the United States the
reserves, that is to say the amount of
lawful money in the possession of the bank, and it is generally supposed that
in the natural order of things, the lending power and the solvency of the bank
depends on the amount of these reserves. In fact, and this cannot be too
clearly and emphatically stated, these reserves of lawful money have, from the scientific point of view, no more
importance than any other of the bank assets. They are merely credits like any
others, and whether they are 25 per cent or 10 per cent or one per cent or a
quarter per cent of the amount of the deposits, would not in the least affect
the solvency of the bank, and it is unfortunate that the United States has by
legislation given an importance to these reserves which they should never have
possessed. Such legislation was, no doubt, due to the erroneous view that has
grown up in modern days that a depositor has the right to have his deposit paid
in gold or in "lawful .. money." I am not aware of any law expressly
giving him such a right, and under normal conditions, at any rate, he would not
have it. A depositor sells to his banker his right on someone else* and,
properly speaking, his sole right so long as the banker is solvent, is to
transfer his credit to someone else, should the latter choose to accept it. But
the laws of legal tender which most countries** have adopted, have produced
indirect consequences which were not originally foreseen or intended. The
purpose of such laws was not to make gold or silver a standard of payment but
merely to require that creditors should not refuse payment
*This contract was called in Roman law a " mutuum."
**
405
of their credit in coins issued by the government at the value
officially put upon them, no matter of what metal they were made; and the
reason for these laws was not at all to provide a legal means of paying a debt,
but to keep up the value of the coins, which, as I have explained, were liable
to constant fluctuation either by reason of the governments issuing them at one
value and accepting them at another, or by reason of the insolvency of the
government sowing to their excessive indebtedness.
We may leave to lawyers the discussion of what may be
the legal effect of such
laws; the practical effect in the mind of the public is all that
concerns us. It is but natural that in countries in which, like England and
America, the standard coin is a certain weight of gold, a law providing that
creditors shall accept these coins or the equivalent notes in full satisfaction
of their debts, and mentioning no other method of settling a debt, should breed
m the public mind the idea that that, is the only legal way of settling a debt
and that, therefore, the creditor is entitled to demand gold coins.
The effect of this impression is peculiarly
unfortunate. When suspicion arises in
the minds of depositors, they immediately demand payment of their credit
in coins or their equivalent namely a credit on the State bank, or "lawful
money," - a demand which cannot possibly be complied with, and the result
is to augment the panic by the idea getting abroad that the bank is insolvent.
Consequently at the beginning of a stringency, every bank tries to force its
debtors to pay their debts in coin or credits on the government, and these
debtors, in their turn, have to try to extract the same payment from their
debtors, and to protect themselves, are thus forced to curtail their
expenditure as much as possible. When this situation becomes general, buying
and selling are restricted within comparatively narrow limits, and, as it is
only by buying that credits can be reduced and by selling that debts can be
paid, it comes to pass that everybody is clamoring for payment of the debts due
to them and no one can pay them, because no one can sell. Thus the panic runs
in a vicious circle.
The abolition of the law of legal tender would help to
mitigate such a situation by
making everybody realize that, once he had become a depositor in a bank,
he had sold his credit to that bank and was not en- titled to demand payment in
coin or government obligations. Under normal conditions a banker would keep
only enough coins or credits on the government to satisfy those of his clients
who want them, just as a bootmaker keeps a stock of boots of different
varieties, sufficient for the normal conditions of his trade; and the banker
can no more pay all his depositors in cash than the bootmaker could supply
boots of one variety to all his customers if such a demand were suddenly to be
made on him. If bankers keep a supply of cash more than is normally required, it
is either because there is a law compelling them to do so, as in the United
States, or because a large supply of cash gives confidence to the public in the
solvency of the bank, owing to the idea that has grown up regarding the
necessity for a "metallic basis" for loans; or again because, owing
to
406
the prevalence of this idea, there may suddenly occur an abnormal demand
for the payment of deposits in this form.
It would be hard, probably, to say to what extent laws
of legal tender can be
successful in maintaining the real or the apparent value of coins or
notes. They do not appear to have been so in colonial days, and indeed Chief
Justice Chase, in his dissenting opinion in the famous legal tender cases of
1872, expressed the view that their effect was the reverse of what was
intended; that, instead of keeping up the value of the government notes, the
law actually tended to depress them. However this may be, and I am not inclined
to agree with Mr. Chase, it seems to me to be certain that such laws are
unnecessary for the maintenance of the monetary unit in a country with properly
conducted finances. "Receivability for debts due the government," to
use Chief Justice Chase's expression, relative to inconvertible notes, is the
real support of the currency, not laws of legal tender.
But it may be argued that it is at least necessary
that the government should
provide some standard "money" which a creditor is bound to
accept in payment of his debt in order to avoid disputes as to the nature of
the satisfaction which he shall receive for the debt. But in practice no
difficulty would be experienced on this score. When a creditor wants his debt
paid, he usually means that he wants to change his debtor; that is to say he
wants a credit on a banker, so that he can use it easily, or keep it unused
with safety. He therefore, insists that every private debtor shall, when the
debt is due, transfer to him a credit on a reputable banker; and every solvent
debtor can satisfy his creditor in this manner. No law is required; the whole
business regulates itself automatically.
During the suspension of specie payments in
from 1797 in 1820, there was no gold coin in circulation, its place
being taken by Bank of England notes which were not legal tender, and the value
of which constantly varied in terms of gold. Yet no embarrassment was noticed
on this score, and commerce went on just as before.
On no banking question does there-exist more confusion
of ideas than on the
subject of the nature of a banknote. It is generally supposed to be a
substitute for gold and, therefore, it is deemed to be necessary to the safety
of the notes that their issue should be strictly controlled. In the
407
English banknote together with that of all English money fell, it was
due, as was amply proved by Thomas Tooke in his famous "History of
Prices." to the fact that Great Britain, by its enormous expenditure
abroad for its military operations and its subventions to foreign countries,
had accumulated a load of debt which greatly exceeded its credits on those
countries, and a fall of the value of the English pound in terms of the money
of other countries was the necessary result. When the debt was gradually
liquidated, and English credit returned to its normal value, the price of gold
of course fell in terms of the pound.
Again when for many gears, Greek money was at a
discount in foreign countries,
this was due to the excessive indebtedness of
In the
the money was depreciated in the country itself, owing to the excessive
indebtedness of the government to the people of the country.
A bank note differs in no essential way from an entry
in the deposit register of a
bank. Just like such an entry, it is an acknowledgment of the banker's
indebtedness, and like all acknowledgments of the kind, it is a "promise
to pay." The only difference between a deposit entry and a bank note is
that the one is written in a book and the other is on a loose leaf; the one is
an acknowledgment standing in the name of the depositor, the other in the name
of "the bearer." Both these methods of registering the debts of the
bank have their particular use. In the one case the deposit or any portion of
it can be transferred by draft, and in the other it, or a fixed portion of it,
can be transferred by merely transferring the receipt from hand to hand.
The quantitative theory of money has impelled all
governments to regulate the
note issue, so as to prevent an over issue of "money." But the
idea that some special danger lurks in the bank-note is without foundation. The
holder of a bank-note is simply a depositor in a bank, and the issue of
bank-notes is merely a convenience to depositors. Laws regulating the issue of
bank-notes may make the limitations so elastic as to produce no effect, m which
case they are useless; or they may so limit them as to be a real inconvenience
to commerce, in which case they are a nuisance. To attempt the regulation of
banking by limiting the note issue is to entirely misunderstand the whole
banking problem, and to start at the wrong end. The danger lies not in the
bank-note but in imprudent or dishonest banking. Once insure that banking shall
be carried on by honest people under a proper understanding of the principles
of credit and debt, and the note issue may be left to take care of itself.
Commerce, I repeat, has never had anything to do with
the precious metals, and if
every piece of gold and silver now in the world were to
408
disappear, it would go on just as before and no other effect would be þ
produced than the loss of so much valuable property.
The gold myth, coupled with the law of legal tender,
has fostered the feeling that
there is some peculiar virtue in a central bank. It is supposed to
fulfil an important function in protecting the country's stock of gold. This
is, perhaps, as good a place as any other for explaining what was really
accomplished when, after centuries of ineffectual efforts to fix the price of
both the precious metals, the governments of Europe succeeded in fixing that of
gold, or at least in keeping the price within narrow limits of fluctuation.
It was in the year 1717 that the price of gold was
fixed by law at its present value
in England, slightly above the then market value, but it was not until
some time after the close of the Napoleonic wars that the metal obeyed the
Royal mandate for any length of time, and when it did there were two main
reasons: The greater stability of the value of credit and the enormous increase
in the production of gold during the nineteenth century; The first of these
causes was the result of the disappearance of plagues and famines and the
mitigation of the ravages which accompanied earlier wars, and the better
organization of governments, especially as regards their finance. These changes
produced a prosperity and a stability in the value of credit - especially
government credit - unknown in earlier days. The second cause prevented any
appreciation of the market value of gold, and the obligation undertaken by the
Government and the Bank of England to buy gold in any quantity at a fixed price
and to sell it again at practically the same price prevented its depreciation.
Had they not done so, it is safe to say that the market price of gold would not
now be, as it is, £ 3. 17. 10 ½ an
ounce. For some years, indeed, after the resumption of cash payments in
The governments of the world have, in fact, conspired
together to make a corner
in gold and to hold it up at a prohibitive price, to the great profit of
the mine owners and the loss of the rest of mankind. The result of this policy
is that billions of dollars worth of gold are stored in the vaults of banks and
treasuries, from the recesses of which they will never emerge, till a more
rational policy is adopted.
Limitations of space compel me to close this article
here, and prevent the
consideration of many interesting questions to which the credit theory
of money gives rise; the most important of which, perhaps, is the intimate
relation between existing currency systems and the rise of prices.
Future ages will laugh at their forefathers of the
nineteenth and twentieth
centuries, who gravely bought gold to imprison in dungeons in the belief
that they were thereby obeying a high economic law and increasing the wealth
and prosperity of the world.
A strange delusion, my masters, for a generation which
prides itself on its
knowledge of Economy and Finance and one which, let us hope, will not
long survive. When once the precious metal has been freed from the shackles of
laws which are unworthy of the age in which we live, who knows what uses may
not be in store for it to benefit the whole world?
Scanned and edited by arno@daastol.com
please report errors. Innes' own misprinting is not corrected, however. I have,
nevertheless, indented his two major quotations.
Transcript from: The Banking Law Journal, Vol. 31 (1914),
Dec./Jan., Pages 151-168.
By A. Mitchell
Innes
[Editor’s Note.
– So much has been written on the subject of “money” that a scientific Writer
like Mr. Innes is often misunderstood. Many economists and college professors
have differed with the statements made in his first paper, but it seems that
none were able to disprove his position. Following this number there will
appear a symposium of criticisms and replies to the first paper, and we
cordially invite criticisms and replica to this his second paper.]
The article which appeared in the
May, 1913, number of this JOURNAL under the title “What is Money?” was a
summary exposition of the Credit Theory of money, as opposed to the Metallic
Theory which has hitherto been held by nearly all historians and has formed the
basis of the teaching of practically all economists on the subject of money.
Up to the time of Adam Smith, not
only was money identified with the precious metals, but it was popularly held
that they formed the only real wealth; and though it must not be thought that
the popular delusion was held by all serious thinkers, still, to Adam Smith
belongs the credit of having finally and for all time established the principle
that wealth does not reside in precious metals.
But when it came to the question of
the nature of money, Adam Smith’s vision failed him, as the contradictory
nature of his statements attests. It could not have been otherwise. Even to-day
accurate information as to the historical facts concerning money is none too
accessible: in the day of Adam Smith, the material on which to found a correct
theory of money was not available, even had he possessed the knowledge with
which to use it. Steuart perceived that the monetary unit was not necessarily
identified with coinage, Mun realized that gold and silver were not the basis of
foreign trade, Boisguillebert had boldly asserted that paper fulfilled all the
functions which were performed by silver. But apart from a few half-formed
ideas such as these, there was nothing which could guide Adam Smith in the
attempt to solve the problems of his part of his Inquiry, and, having convinced
himself of the truth of his main contention that wealth was not gold and
silver, he was faced with two alternatives. Either money was not gold and
silver, or it was not wealth, and he inevitably chose the latter alternative.
Herein, however, Adam Smith came into conflict not with a popular delusion but
with the realities of life as learnt from the universal experience of mankind.
If money is not wealth, in the common acceptation of the word as meaning that
mysterious “purchasing power” which alone constitutes real riches, then the
whole of human commerce is based on a fallacy. Smith’s definition of money as
being, not wealth, but the “wheel which circulates wealth,” does not explain
the facts which we see around us, the striving after money, the desire to
accumulate money. If money were but a wheel, why should we try to accumulate
wheels. Why should a million wheels be of more use than one, or, if we are to
regard money as all one wheel, why should a huge wheel serve better than a
small one, or at any rate a moderate one. The analogy is false.
Much has been written since the
days of Adam Smith on the subject of money, and much useful investigation has
been made, but we still hold to the old idea that gold and silver are the only
real money and that all other forms of money are mere substitutes. The
necessary result of this fundamental error is that the utmost confusion
prevails in this branch of the science of political economy, as any one will
see who cares to take the trouble to compare the chapters on “Wealth,” “Money,”
“Capital,” “Interest,” “Income” in the works of recognized authorities since
Adam Smith. There is hardly a point on which any two agreed.
How complete the divorce is between
the experience of daily life and the teaching of the economists can best be
seen by reading, for example,
It is only when we understand and
accept the credit theory, that we see how perfectly science harmonizes with the
known facts of everyday life.
Shortly. The Credit Theory is this:
that a sale and purchase is the exchange of a commodity for credit. From this
main theory springs the sub-theory that the value of credit or money does not
depend on the value of any metal or metals, but on the right which the creditor
acquires to “payment,” that is to say, to satisfaction for the credit, and on
the obligation of the debtor to “pay” his debt and conversely on the right of
the debtor to release himself from his debt by the tender of an equivalent debt
owed by the creditor, and the obligation of the creditor to accept this tender
in satisfaction of his credit.*
Such is the fundamental theory, but
in practice it is not necessary for a debtor to acquire credits on the same
persons to whom he is debtor. We are all both buyers and sellers, so that we
are all at the same time both debtors and creditors of each other, and by the
wonderfully efficient machinery of the banks to which we sell our credits, and
which thus become the clearing houses of commerce, the debts and credits of the
whole community are centralized and set of against each other. In practice,
therefore, any good credit will pay any debt.
Again in theory we create a debt
every time we buy and acquire a credit every time we sell, but in practice this
theory is also modified, at least in advanced commercial communities. When we
are successful in business, we accumulate credits on a banker and we can then
buy without creating new debts, by merely transferring to our sellers a part of
our accumulated credits. Or again, if we have no accumulated credits at the
moment we wish to make a purchase, we can, instead of becoming the debtors of
the person from whom we buy, arrange with our banker to “borrow” a credit on
his books, and can transfer this borrowed credit to our seller, on undertaking
to hand over to the banker the same amount of credit (and something over) which
we acquire when we, in our turn, become sellers. Then again, the government,
the greatest buyer of commodities and services in the land, issues in payment
of its purchases+ vast quantities of small tokens which are called coins or
notes, and which are redeemable by the mechanism of taxation, and these credits
on the government we can use in the payment of small purchases in preference to
giving credits on ourselves or transferring those on our bankers.
So numerous have these government
tokens become in the last few centuries and so universal their use everyday
life – far exceeding that of any other species of money – that we have come to
associate them more especially with the word “money.” But they have no more
claim to the title than any other tokens or acknowledgements of debt. Every
merchant who pays for a purchase with his bill, and every banker who issues his
notes or authorizes drafts on the Treasury, or which puts its stamp on a piece
of metal or a sheet of paper, and of all the false ideas current on the subject
of money none is more harmful than that which attributes to the government the
special function of monopolizing the issues of money. If banks could not issue
money, they could not carry on their business, and when the government puts
obstacles in the way of the issue of certain forms of money, one of the results
is to force the public to accustom itself to other and perhaps less convenient
forms.
As can be clearly proved by careful
study of history, a dollar or a pound or any other monetary unit is not a fixed
thing of known size and weight, and of ascertained [End of page 152] value, nor
did government money always hold the pre-eminent position which it to-day
enjoys in most countries – not by any means.
In France not so long ago, not only
were there many different monetary units, all called by the same name of livre, but these livres – or such of
them as were used by the government – were again often classified into forte monnaie and faible monnaie, the government money being faible. This distinction implied that the
government money was of less value than bank money, or, in technical language,
was depreciated in terms of bank money, so that the bankers refused, in spite
of the legal tender laws, to accept a livre
of credit on the government as an equivalent of a livre of credit on a bank.
The kings and their councillors
were often puzzled by this phenomenon, and the consequences which flowed from
it. Time and again they issued money which they certainly believed to be
“forte,” and declared to be so by law, and yet soon after, they had to avow
that in some mysterious manner, it had “devenu faible,” become weak.
With the apparent exception of
As may well be imagined, much
confusion usually prevailed in money matters, and the extreme difficulty of
settling in what standard debts should be paid and contracts, especially as
regards rents should be fulfilled, often caused serious discontent. To remedy
this the kings of
We, who are accustomed to the
piping times of peace and to long periods of prosperity and government
stability hardly realize how unstable a thing any given monetary unit may be.
When we in the United States hear of a fall in the value of the paper of some
bank or the money of some foreign government and see it quoted at a discount in
terms of the dollar, we are accustomed to think of the dollar as an invariable
unit and of the depreciated money as being something which has departed in
value from our invariable standard. But when we take the trouble to study
history we find that the [End of page 153] dollar of the American Government
and the pound of the English Government have by no means always been the stable
things we now imaging them to be. The English pound was in use in all the
American colonies, and yet the pound of each differed from that of the mother
country. In the early days of the American Union, the different official monies
differed from the standard in use in business and were at a heavy discount in
terms of the latter.
The notion that we all have to-day
that the government coin is the one and only dollar and that all other forms of
money are promises to pay that dollar is no longer tenable in the face of the
clear historical evidence to the contrary. A government dollar is a promise to
“pay,” a promise to “satisfy,” a promise to “redeem,” just as all other money
is. All forms of money are identical in their nature. It is hard to get the
public to realize this functional principle, without a true understanding of
which it is impossible to grasp any of the phenomena of money. Hard, too, is it
to realize that in
The one essential condition to the
stability of all money by whomsoever issued is, as I explained in the former
article, that it should be redeemable at the proper time, not in pieces of
metal, but in credit. A credit redeems a debt and nothing else does, unless in
virtue of a special statute or a particular contract.
The main obstacle to the adoption
of a truer view of the nature of money is the difficulty of persuading the
public that “things are not the way they seem,” that what appears to be the
simple and obvious explanation of every-day phenomenon is incompatible with
ascertainable, demonstrable facts – to make the public realize, as it were,
that while they believe themselves to be watching the sun’s progress round the
earth, they are really watching the progress of the earth round the sun. It is
hard to disbelieve the evidence of our senses.
We see a law which establishes in
the United States a “standard dollar” of a definite weight of gold of a certain
fineness; we see a law making the acceptance of [End of page 154] these coins
in payment of debt obligatory on the creditor – a law which is cheerfully
obeyed without question; we see all commercial transactions carried on in
dollars; and finally we everywhere see coins (or equivalent notes) called
dollars or multiples or fractions thereof, by means of which innumerable
purchases are made and debts settled. Seeing all these things, what more
natural than to believe that, when the Law declared a certain coin to be the
Standard Dollar, it really became so: that when we pronounce the word “dollar”
we refer to a standard coin, that when we do our commercial transactions we do
them, theoretically at least, in these coins with which we are so familiar.
What more obvious that when we give or take a “promise to pay” so many dollars,
we mean thereby a promise to pay golden coins or their equivalent.
Suddenly we are told that our
cherished beliefs are erroneous, that the Law has no power to create a standard
dollar, that, when we buy and sell, the standard which we use is not a piece of
gold, but something abstract and intangible, that when we “promise to pay” we
do not undertake to pay gold coins, but that we merely undertake to cancel our
debt by an equivalent credit expressed in terms of our abstract, intangible
standard; that a government coin is a “promise to pay,” just like a private
bill or note. What wonder if the teacher of the novel doctrine is view with
suspicion? What wonder if the public refuses to be at once convinced that the
earth revolves around the sun?
So it is, however. The eye has
never seen, nor the hand touched a dollar. All that we can touch or see is a
promise to pay or satisfy a debt due for an amount called a dollar. That which
we handle may be called a dollar certificate or a dollar note or a dollar coin;
it may bear words promising to pay a dollar or promising to exchange it for a
dollar coin of gold or silver, or it may merely bear the word dollar, or, in
the case of the English sovereign, worth a pound, it may bear no inscription at
all, but merely a king’s head. What is stamped on the face of a coin or printed
on the face of a note matters not at all; what does matter, and this is the
only thing that matters is: What is the obligation which the issuer of that
coin or note really undertakes, and is he able to fulfill that promise,
whatever it may be?
The theory of an abstract standard
is not so extraordinary as it first appears, and it presents no difficulty to
those scientific men with whom I have discussed the theory. All our measures
are the same. No one has ever seen on ounce or a foot or an hour. A foot is the
distance between two fixed points, but neither the distance nor the points have
a corporeal existence. We divide, as it were, infinite distance or space into
arbitrary parts, and devise more or less accurate implements for measuring such
parts when applied to things having a corporeal existence. Weight is the force
of gravity as demonstrated with reference to the objects around us, and we
measure it by comparing the effect of this force on any given objects with that
exerted on another known object. But at best, this measure is but an
approximation, because the force is not exerted everywhere equally.
Our measure of time is a thing to
which no concrete standard can be applied, and an hour can never be reckoned
with perfect accuracy. In countries where solar time is used, the hour is the
twenty-fourth part of the time reckoned from sunset to sunset, and the standard
is therefore of the roughest. But because the people who calculate thus live in
countries where the difference between the length of a day in summer and in
winter is not so great as it is further north, they feel no inconvenience from
this inaccuracy, and indeed they do not seem to be aware of it – so strong is
the force of habit.
Credit and debt are abstract ideas,
and we could not, if we would, measure them by the standard of any tangible
thing. We divide, as it were, infinite credit and debt into arbitrary parts
called a dollar or a pound, and long habit makes us think of these measures as
something fixed and accurate; whereas, as a matter of fact, they are peculiarly
liable to fluctuation.
Now there’s only one test to which
monetary theories can be subjected, and which they must pass, and that is the
test of history. Nothing but history can confirm the accuracy of our reasoning,
and if our theory cannot stand the test of history, then there is no truth in
it. It is no use to appeal to the evidence of our senses, it is useless to [End
of page 155] cite laws in support of a theory. A law is not a scientific truth.
The law may assert that a certain piece of metal is a standard dollar, but that
does not make it so. The law might assert that the sun revolved around the
earth, but that would not influence the forces of nature.
Like causes produce like effects,
and if governments had been able to create standard coins having a fixed value
in terms of the monetary unit, the monetary history of the world must have been
different from what it has been. While modern historians deplore the wickedness
of medieval monarchs who brought all sorts of evils on their people by their
unprincipled debasements of the coinage, the kings themselves, who should have
been pretty good judges, attributed their misfortunes to the wickedness of
their subjects, impelled by lust of gain to clip and file the coins, and to
force the precious metals above their official, or as the royal documents said,
their “proper value” – and to clip the coins, and to offer or take the coins at
any but their official value were crimes for which severe penalties were
enacted.
The rise of the value of the gold
ecus of France and the gold guineas of England, the latter popularly valued as
high as 30 shillings though officially issued at 20 shillings may with some
plausibility be accounted for on the theory that silver not gold was the
“standard of value,” and that it is perfectly natural that gold may vary in
terms of silver, as much as any other commodity. But how account for the fact
that the “gros tournois,” a coin of good silver, constantly rose in value in
spite of all the kings could do to prevent it, and in spite of the fact that it
was being progressively reduced in weight. How account for the fact that, when
in the fifteenth century, the gulden became one of the most used of the
monetary units of
Let us then
look at the facts a little more closely.
It
is not King Jean or King Philippe or Edward or Henry who have been, the depredators
of money, but King War, the great creator of debts, helped by his lieutenants,
plague, murrain and ruined crops—whatever, in fact, prevents debts from • being
punctually, discharged. It is not recoinage acts which have been the restorers
of the value of money, but Peace, the great creator of credits, and upon the
invariable truth of this-statement the credit theory of money must largely
depend. Now, for seven years—from 1690 to 1697—the country had been engaged in
the most costly war ever known to English history up to that time. The armies of the allies had to be maintained
largely by English subsidies, and Parliament, feeling its newly acquired
strength, and as unable as the rest of the country to appreciate the character of the great Dutch-man who devoted
his life to their service, doled out supplies with a stingy hand. At the same
time a series of disastrously wet and cold seasons, which the Jacobites attributed
to the curse of God on the Usurper, did great damage to agriculture. The customs
dues fell to half, and the people could-not pay their taxes. The country was
over head and ears in debt.
Now observe. In 1694 the
combatants were already exhausted, and negotiations
for peace were unsuccessfully started. Throughout 1695, the war languished, and
it
was evident that peace was absolutely necessary. In 1696 war was practically
over, and
in 1697 peace was signed. The floating debt was funded through the agency of
the newly founded Bank of England and foreign commerce by means of which
credits on foreign countries was acquired, was once again able to expand. These
three Causes are amply sufficient to account for the restoration of the value
of English money, and had there been any one at that time who understood the
nature of money, he could have predicted with absolute certainty the disastrous
effect that the creation of a huge floating debt would have on the value of
money and could have foretold the healing effect of the peace and the funding
of the debt and the return of agricultural prosperity. He could have saved the
government the wholly unnecessary expense (small, however, when compared with
the total indebtedness) of the recoinage act. Far from^ doing, anything to
alleviate the situation, the Act intensified "the crisis, and it was in
spite of the Act, not because of it, that the finances of the country gradually
returned to a normal condition.
I must here turn aside for a moment to
explain the nature of a funding of debt. I said in the former article:
"Hence it follows that a man is only solvent if he has immediately available credits at least equal to the
amounts of his debts immediately due and presented for payment. If therefore the sum of his
immediate debts exceeds the sum of his immediate credits, the real value of
these debts to his creditors will fall to an amount which will make them equal
to the amount of his credits." The same thing of course applies to the
indebtedness of a country.
The debts which count in the depreciation of the monetary unit are
those which' are contracted without any provision for their payment and which
are either payable at sight as in the case of currency notes or payable at
short terms and have to be constantly renewed for want of credits with which
to cancel them. William's war debt was incurred for the maintenance of the
English armies and for the payment of the subsidies with-which he had fed the
allies. In 1694 the association of rich British merchants calling themselves
the Bank of England was formed for the express purpose of providing money to
pay the war expenses. They did not supply him with gold in large quantities,
but with immediately available credits. That is to say the merchants who
possessed or could command large credits both at home and abroad, undertook to
cancel with their credits the debts incurred by the government, and at the same
time undertook not to present for payment the credits which they thus acquired
on the government, on condition of the government paying to them an annual
interest. This is what is meant by funding a debt or raising a loan. The
immediate floating debt of the gov- [End of
page 157] ernment is cancelled, so far as the
government is concerned, and ceases consequently to affect the value of the
monetary unit. In place of the load of debt clamoring for payment, there is
only the interest on the debt, probably not more than five or six per cent, of
the capital, an amount which under, normal circumstances a- country has no
difficulty in meeting.
I have dwelt on the financial
situation of 1696 for the reason that it exposes better than any other case
with which I am acquainted the fallacies of the arguments of the upholders of
the theory of a metallic standard. To them the standard is a little piece of
metal, and so long as someone (any one apparently) does not reduce its size or
mix it with dross or clip bits out of it, it must remain invariable, unless,
indeed, the government gives forced currency to its paper notes which are held
by economists to be promises to pay in the standard metal, and which,
therefore, it is maintained, fall if the promise cannot be redeemed.
Now in the case under examination
it cannot be argued, as did the Bullion Committee of 1810 that the fall in the
value of the pound was due to excessive issue of Bank of England notes,
because, the Bank having just been started, there can have been no great
circulation of notes. Nor can it be attributed to a forced currency of
government notes, as in the case of the American war of independence or the
civil war, because in this instance there was no government paper money. And
consequently, the facts of the economic situation being ignored, it is
attributed to the clipping of the coinage.
Those who glibly talk of the
arbitrary depreciation of the monetary unit through manipulations of the
coinage do not realize how difficult a thing it is to carry through any change
of a standard measure to which a people has been accustomed by long use. Even
when the government money has become permanently depreciated and fixed at a
lower level, bankers have, as history shows, been slow to adopt the new
standard.
Even the strongest governments
hesitate to undertake the difficult task of changing the existing system of
weights and measures. Every scientific man in England and America is in favor
of introducing the metric system of weights and measures, and (in England) a
decimal system of money, and the change has been preached and advocated for
many years, but so far without success. No, to ask us to believe that the coin
clippers wielded a power which enabled them to change the standard of our money
is to overtax our credulity. Why, even smaller changes than those mentioned
have been attended with great difficulties. Though in
This slight sketch of the Credit Theory of
money which I was able to give in the space allotted to me in the May, 1913,
number of the journal and the
summary indication in that and the present number of the evidence in support
of that theory, which the student of the paths and byways of history may expect
to find—this must suffice for the present. I do not expect that conversion to
the newer doctrine will be rapid, but the more earnestly the problems of money
and currency and banking are studied, the more sure it is that the metallic
theory of money must before many years be abandoned. There are literally none
of these problems which can be explained on the old theory. There is literally
no evidence which, when weighed and sifted, supports the theory of a metallic
standard. The fact that the monetary unit is a thing distinct from the coinage
is no new discovery. It was pointed out by a distinguished economist, Sir James
Steuart, who wrote before the days of Adam Smith, and among modern writers
Jevons calls attention to the phenomenon. The frequent use of the expressions
''money of account" and "ideal money " in older writings shows
that the idea was familiar to many. As the middle ages wore on, and the
increase of government expenditure brought about a great increase in the
quantity of coins, money became, naturally enough, identified with the coinage,
which circulated in abundance when trade was good, and which dis- [End of page
158] appeared in times of distress when there was little to buy and sell. Hence
arose the popular delusion that abundance of coins meant prosperity and the
want of them was the' cause of poverty. When the kings tried to supply the want
by fresh coinages, the new pieces disappeared in bad times like the old, and
the phenomenon could only be accounted for on the assumption that
evilly-disposed persons exported them, melted them or hoarded them for their
private gain, and heavy penalties were decreed against the criminals, who by
their act plunged the country into poverty. No doubt a certain amount of
exporting and melting took place, when the coins of high intrinsic value (a
very small proportion of the whole), the monnaie blanche, as it was
called in France, rose above its official value, but the absurdity of the
popular outcry for more coins was well exposed by that fine old economist, the
Sieur de Boisguillebert, who pointed out that the apparent abundance and
scarcity of coins was deceptive, and that the amount of coinage was in"
both cases the same, the only difference being that while trade was brisk,
comparatively few coins by their rapid circulation appeared to be many; while
in days of financial distress, .when trade was, as not infrequently happened in
the middle ages, almost at a standstill, coins seemed to be scarce.
The present writer is not the first
to enunciate the Credit Theory of money. This distinction belongs to that
remarkable economist H. D. Macleod. Many writers have, of course, maintained
that certain credit instruments must be included in the term "money,"
but Macleod, almost the only economist known to me who has scientifically
treated of banking and credit,* alone
saw that money was to be identified with credit, and these articles are but a
more consistent and logical development of his teaching. Macleod "wrote in
advance of his time and the want of accurate historical knowledge prevented his
realizing that credit was more ancient than the earliest use of metal coins.
His ideas therefore never entirely clarified themselves, and he was unable to
formulate the basic theory that a sale and purchase is the exchange of a
commodity for a credit and not 'for a piece of metal or any other tangible
property. In that theory lies the essence of the whole science of money.
But even when we have grasped this
truth there remain obscurities which in the present state of our knowledge
cannot be entirely eliminated.
What is a monetary unit? What is a dollar?
We do not know. All we do know for
certain—and I wish to reiterate and emphasize the fact that on this point the
evidence which in these articles I have only been able briefly to indicate, is
clear and conclusive—all, 1 say, that we, do know is that the dollar is a
measure of the value of all commodities, but is not itself a commodity, nor can
it be embodied in any commodity. It is intangible, immaterial, abstract. It is
a measure in terms of credit and debt. Under normal circumstances, it appears
to have the power of maintaining its accuracy as a measure over long periods.
Under other circumstances it loses this power with great rapidity. It is easily
depreciated by excessive indebtedness, and once this depreciation has become
confirmed, it seems exceedingly difficult and perhaps impossible for it to
regain its previous position. The depreciation (or part of it) appears to be
permanently acquired; though there is a difference in this respect between
depreciation in terms of foreign money and a depreciation of the purchasing
price of the credit unit in its own country.
But while the monetary unit may depreciate, it never seems to
appreciate. A general rise of prices at times rapid and at times slow is the
common feature of all financial history; and while a rapid rise may be followed
by a fall, the fall seems to be nothing more than a return to a state of
equilibrium. I doubt whether there are any instances of a fall to a price lower
than that which prevailed before the rise, and anything approaching a
persistent fall in prices, denoting a continuous rise of the value of money,
appears to be unknown. [End of page 159]
That which maintains the steadiness
of the monetary unit (in so far as it is
steady) appears, to be what Adam Smith calls the " higgling of the
market," the tug of war which is constantly going on between buyers and
sellers, the former to pay as little of the precious thing as possible, the
latter to acquire as much as possible. Under perfectly normal conditions, that
is to say when commerce is carried on without any violent disturbances, from
whatever cause, these two forces are probably well-balanced, their strength is
equal, and neither can obtain any material advantage over the other. In the
quiet seclusion of those peaceful countries which pursue the even tenor of
their way uninfluenced by the wars or the material development of more
strenuous lands, prices seem to maintain a remarkable regularity for long
periods.
The most interesting practical
application of the credit theory of money will, I think, be found in the
consideration of the relation between the currency system known as the gold
standard and the rise of prices. Several economists of the present day feel
that such a relation exists, and explain it on the theory of the depreciation
of the value of gold owing to the operation of the law of supply and demand, a
law, however, which can hardly be regarded as applicable to the case.
We know how it works in ordinary commerce.
If the production of a commodity increases at a rate greater than the demand,
dealers, finding their stock becoming unduly large, lower the price in order
to find a market for the surplus. The lowering of the price is a conscious act.
Not so, however, in the case of
gold, the price of which, estimated in money, is invariable; and we must seek
another reason. It will, I think, be found in the theory here advanced that the
value of a credit on any debtor depends on an equation between the amount of debt
immediately payable by the debtor credit and the amount of credits which he has
immediately available for the cancellation of his debts.
Whenever we see in a country signs
of a continuous fall in the value of the credit unit, we shall, if we look carefully,
find that it is due to excessive indebtedness.
We have seen in the Middle Ages how
prices rose owing to the failure of consecutive governments throughout
If I am not mistaken, we shall find
at the present day a precisely similar result of far different causes. We shall
find, partly as a result of our currency systems, nations, governments,
bankers, all combining to incur immediate liabilities greatly in excess of the'
credits available to meet them.
We imagine that, by maintaining gold
at a fixed price, we are keeping up the value of our monetary unit, while, in
fact, we are doing just the contrary. The longer we maintain gold at its
present price, while the metal continues to be as plentiful as it now is, the
more we depreciate our money.
Let me try to make this clear.
In the previous article I explained
(pp. 398-402) the nature of a coin or certificate and how they acquired their
value by taxation. It is essential to have that explanation clearly in mind if
what follows is to be intelligible. To begin with it will be well to amplify
that explanation, and to present the problem in a rather different aspect.
We are accustomed to consider the issue of money as a precious
blessing, and taxation as a burden which is apt to become well nigh
intolerable. But this is the reverse of the truth. It is the issue of money
which is the burden and the taxation which is the blessing. Every time a coin
or certificate is issued a solemn obligation is laid on the people of the
country. A credit on the public treasury is opened, a public debt incurred. It
is true that a coin does not purport to convey an obligation, there is no law
which imposes an obligation, and the fact is not generally recognized. It is nevertheless the simple truth. A
credit, it cannot be too often or too emphatically stated, is a right to
"satisfaction." This right depends on no statute, but on common or
cus- [End of page 160] tomary law. It is
inherent in the very nature of credit throughout the world. It is credit. The
parties can, of course, agree between themselves as to the form which that
satisfaction shall take, but there is one form which requires no negotiation or
agreement, the right of the holder of the credit (the creditor) to hand back to
the issuer of the debt (the debtor) the latter's acknowledgement or obligation,
when the former in his turn becomes debtor and the latter creditor, and thus
to cancel the two debts and the two credits. A is debtor to B and gives his
obligation or acknowledgement of debt. Shortly afterwards, B becomes debtor to
A and hands back the acknowledgement. The debt of A to B and of B to A, the
credit of B on A and that of A on B are thereby cancelled.
Nothing else but a credit gives this
common law right, and consequently every document or instrument, in whatever
form or of whatever material, which gives this right of cancelling a debt by
returning it to the issuer is a credit document, an acknowledgement of debt,
an "instrument of credit."
Now a government coin (and therefore
also a government note or certificate which represents a coin) confers this
right on the holder, and there is no other essentially necessary right which
is attached to it. The holder of a coin or certificate has the absolute right
to pay any debt due to the government by tendering that coin or certificate,
and it is this right and nothing else which gives them their value. It is
immaterial whether or not the right is conveyed by statute, or even whether
there may be a statute law defining the nature of a coin or certificate
otherwise. Legal definitions cannot alter the fundamental nature of a financial
transaction.
It matters not at all what object
the government has in view in issuing their tokens, whether its object is to pay
for a service rendered or to supply the "medium of exchange." What
the government thinks it is doing when it gives coins in exchange for bullion,
or what name the law gives to the operation—all this is of no consequence. What
is of consequence is the result of what they are doing, and this, as I have
said, is that with every coin issued a burden or charge or obligation or debt
is laid on the community in favor of certain individuals, and it can only be
wiped out by taxation.
Whenever a tax is imposed, each
taxpayer becomes responsible for the redemption of a small part of the debt
which the government has contracted by its issues of money, whether coins,
certificates, notes, drafts on the treasury, or by whatever name this money is
called. He has to acquire his portion of the debt from some holder of a coin or
certificate or other form of government money, mid present it to the Treasury
in liquidation of his legal debt. He has to redeem or cancel that portion of
the debt. As a matter of fact most of the government, money finds its way to
the banks, and we pay our tax by a cheque on our banker, who hands over to the
treasury the coins or notes or certificates in exchange for the cheque and
debits our account.
This, then—the redemption of
government debt by taxation—is the basic law of coinage and of any issue of
government "money "in whatever form. It has lain forgotten for
centuries, and instead of it we have developed the notion that somehow the
metallic character of the coin is the really important thing whereas in fact it
has no direct importance. We have grown so accustomed to paying taxes or any
other debt with coins, that we have come to consider it as a sort of natural
right to do so. We have come to consider coins as "money "par
excellence, and the matter of which they are composed as in some mysterious way
the embodiment of wealth. The more coins there are in circulation, the more
"money" there is, and therefore the richer we are.
The fact, however, is that the more government, money there is in
circulation, the poorer we are. Of all the principles which we may learn from
the credit theory, none is more important than this, and until we have
thoroughly digested it we are not in a position to enact sound currency laws.
One
may imagine the critics saying: "There maybe something in what you say. It
is rather curious that the government should take gold coins in payment of a
debt and should not undertake to accept any other commodity. Perhaps, as you
say, the stamping of the coin does give it a special character, perhaps the
issue of a coin may be regarded as the creation of an obligation, however
contrary the theory may be to what [End of page 161] I have hitherto been taught. Still, I cannot altogether see things in
your way. In any case, whatever may be the effect of the stamping of a coin, it
does not alter its value in any way. When I present you-with a sovereign or a
$5 piece, I really pay my debt to you, because I am giving you something that
is intrinsically worth that amount. You can melt it and sell it again for the
same amount, if you wish. What then is the use of making such a point of the obligation which is undertaken by the
issue of a coin?"
A similar criticism was made in
somewhat different language in a review of my previous article. The author
wrote as follows: — "Mr. Innes says that modern governments have
conspired to raise the price of gold, but in this he errs. No legislation of
the present time fixes the price of gold or attempts to do so.
Now let us see on whose side the
error lies. If it were true, as my critic says, and as many economists hold,
that, all the governments of the world do is to enact that certain weight of
gold shall be called a pound or a dollar, it is certain that such a law
"would produce no effect on the market price of gold. No one would pay any
attention to so futile a law. But, as I have already said, the government
invests a certain weight of gold when bearing the government stamp with
extraordinary power, that of settling debt to the-amount of a pound or a
dollar. This is a very different thing from merely calling it by a certain
name. As history however conclusively proves, even this would not suffice to
fix the price of gold in terms of the monetary unit if the government confined
itself to buying only so much gold as was required for the purpose of the
coinage. But the English government has taken a far more important step than
this. It has done what medieval governments never did; it has bound the Bank of
England (which is really a government department of a rather peculiar kind) to
buy all gold offered to it at the uniform price of £3 17a 9d an ounce, and to sell it again at
£3 17s 10 ½ d an ounce. In
other words, the bank is bound to give for an ounce of gold a credit on its
books for £3 17s 9d, and to
give gold for credit, at a small profit of 1 ½ d an ounce. If this is not fixing the price of gold, words
have no meaning.
The
The Government of the
When a farmer disposes of his corn
to a merchant in return for money, he is said to have sold it. He may have
received bank notes, or a cheque or coin or the merchant's bill or note—it
matters not which. The transaction is a true sale. Now let us suppose that the
farmer took the merchant's note for the value of the corn and that the latter,
instead of selling the corn for his profit, declared that it was not his
intention to buy the corn, but merely to keep it on deposit for the owner, and that
he would keep it till the owner or the holder of a bill presented it
to be exchanged for the corn again. This situation of the merchant would be
precisely similar to that of the Government to-day with respect to the purchase
of gold. The farmer would deposit the money with his banker and would get a
credit on the banker in exchange for it. There, so far as the farmer was
concerned, the matter would end. The note would eventually find its way to the
merchant’s banker and would be set off against his credit in the
bank books. If he was in a very large way of business, like the government, and
great quantities of his notes were on the market, there would be no difficulty
in getting the corn in exchange for a note if any one wanted it at the price at
which the merchant had received it. If
no one wanted it at that price, it would remain on the merchant's hands and he
would lose the whole price paid. It does not in the least matter to the farmer
what view the merchant takes of the
transaction. He has disposed of his corn, and never wants to see it again. He
has got for it what he wanted, namely money, and that is all he cares about.
The same is true with reference to the
relations between the government and the gold miners or gold dealers. They
dispose of their gold to the mint and in return they get money, and that is all they care
about. What the government does with the gold, or what view they take of the
transaction is immaterial.
Now if we can conceive our merchant
acting as the government does, he might, instead of keeping the corn and
issuing his notes or bill, sew the corn into sacks of various sizes, print on
the sacks the amount of money he had paid for the corn contained in them and
then hand them back to the farmer. These sacks would then be money, and if such
awkward money could be used they would circulate just as the notes would and
just as our coins do. Debtors to the merchant would have the option of handing
them back to him intact in payment of their debts or, it they wished to do so,
they could use the corn, and the merchant's obligation would then be
automatically cancelled by their action. The only difference between the sack
of corn and the gold coin is one of convenience, the one being large and
unwieldy, the other small and portable.
Now what consideration would
influence the holder of the sack of corn in his decision - whether to use the
corn or keep the sack intact and pay his debt with it? Obviously he would be
influenced by the market value of the corn as compared with the amount of debt
which could be paid with the obligation. If the market price of corn were
superior to the amount of the debt, it would be at once used as corn. If the
market price were equal to the debt, part would be used as corn and part would,
perhaps, for a time, be used in payment of debt; but all would before long
find its way to the mill. If, however, the amount of the debt, as printed on
the sack, were superior to the market value of the corn, then the sack would be
kept intact and it would be used for paying debt.
It would thus be easy to see from the
number of sacks in circulation whether our merchant was buying corn at or above
its market price. If he continued buying, and the sucks in circulation
continued to increase, it would be a sure sign that they were worth more as
money than they were as corn; and when the time came, as it would inevitably
come—be lie never so rich—when he would no longer be able to provide credits
[End of page 163] for the redemption of the sacks, their value would fall by
the amount which he hail paid for the corn in excess of the price at which the
market could absorb it for consumption.
This is one of the most important
corollaries to the credit theory. A coin will only remain in circulation for any length of time if its nominal
value exceeds the intrinsic value of the metal
of which it is composed, and this is true not only theoretically but historically. Indeed, it is so self-evident that it might
be received as axiomatic, and would be, had we
not involved ourselves in a maze of false ideas.
To apply this corollary to a country
like
Hence I said in my last article that
the governments of the world were holding up gold at a prohibitive price.
If we believed in eggs as we now
believe in gold, eggs might now be selling at a dollar a piece. They would pour
into
Now let us return for a moment to
our eccentric corn merchant, and see whether the peculiarity of his situation
can throw any more light on the financial position of the
If our merchant persisted in his singular
method of business and paid a higher price for the corn than other merchants
were willing to pay, corn would pour into his warehouses, and the market would
be flooded with his paper or with sacks of corn bearing his obligation for the
amount of the purchase price. However rich he might be, his obligations would
soon exceed the amount of his credits; the bankers would refuse to take his
paper or his sacks at their nominal value, and they would fall to a discount.
[End of page 164] In vain he would protest that his bills and sacks were good,
so long as the sacks were of full weight and that his warehouses contained
enough corn to cover the bills at the price at which he had bought it. The
bankers would reply that the corn was not salable at his price and that he
must meet his obligations in credits, not in corn.
If this is true with
reference to our merchant, it must also be true with reference to government
issues. If the government is really buying gold at an excessive price, and if,
in consequence, it is issuing its obligations which are immediately payable in
excess of its credits which are immediately available, then, its obligations
must be falling in, value. Owing to the immense power of the government, partly
through its legislative power and partly through the enormous extent of its
commercial and financial transactions, it may be possible more or less to
conceal the fact. But the fact must be there, if we can discover it. And the fact is there in the shape of
rising prices.
First let us see, whether the
government is issuing obligations in excess of its credits.
From what I have said in those two articles follows the
important principle that, a government
issue of money must be met by a corresponding
tax. It is the tax which imparts to the obligation its “value.” A dollar of
money is a dollar, not because of the material of which is made, but because of
the dollar of tax which is imposed to redeem it.
But what do we see? The
Any provision whatever being made for its
extinction. It is true that all the
government paper money is convertible into gold coin; but redemption, of
paper issues in gold coin is not redemption, at all, but merely the exchange of
one form of obligation, for another of an identical nature. This debt at present amounts to
nearly throe billion dollars, and, of course increases as more and more gold is
brought to the mint and returned to the owners stamped with the government
obligation, or deposited in the Treasury against certificates. Of this amount,
about one-third is normally in circulation.
As regards the coins and notes in circulation, the public stands to the
government in precisely the same relation as does the holder of a banknote to
the bank. The public are depositors
with the government. But as regards
the bulk of the coins and certificates, which are not normally in circulation* the public would, if the government
were in the same position as a commercial company or a bank, clamor for payment
of the debt, and if it were not properly paid, the debtor would be declared a
bankrupt. But because we do not realize
that the financial needs of a government do not differ from those of a private
person, and that we have just as much right to "payment" of a gold
coin as we have to " payment " of a banknote, it does not occur to us
to make any such demand on the government, and the coins and certificates
accumulate with the banks.
Such being the situation, there can,
if the Credit Theory is correct, be no question but that the money of the
American Government is depreciating. But it will readily occur to those who
have read so far that, if this is the case, we-should find, in accordance with
the principles here laid down, that, there would be to-day the same phenomenon
as there was in the middle ages when a similar situation arose: - namely two
monetary standards, the higher standard being the undepreciated standard of the
banks, and the other, with the same name as the former, being the depreciated
standard of the government. We might, in short, expect to find two dollars, a
" bank dollar " and a "current dollar," and we would then
have, just as in the middle ages, two prices for commodities, the bank price
being used by wholesale dealers and the current, price, which would be he
standard of the coinage, being used for the retail trade. We should then
probably see the difference, between the two gradually increasing, and retail
prices rising while wholesale prices in terms of the bank money remaining more
or less stationary. [End of page 165]
But we see nothing of all this. On the contrary, there is
apparently no special depreciation of the government money, but a gradual rise
of prices, a rise which, if it implies the depreciation of any money, implies
evidently the depreciation of all money, by whomsoever issued; and there is
nothing in the credit theory, if considered by itself, which would lead the
student to think that a general fall in the value of bank money or merchants'
money would follow an excessive indebtedness on the part of the government.
Assuming then, that the rise of
prices does indicate a general depreciation of money, an explanation which is
accepted by most writers, and assuming that, so far as the government money is
concerned, the depreciation is satisfactorily explained by the credit theory;
to what are we to attribute the fact that this depreciation is not confined to
government money, but is shared by all the money of the country.
It must be at once admitted that
much difficulty surrounds this question. The workings of the forces of commerce
that control prices have always been obscure, and are not less so than they formerly
were - probably, indeed, more so. The great combinations which are such
powerful factors in the regulation of prices in America, and the great
speculative financial interests whose operations affect the produce markets, do
not let the public into their secrets, if they have any. Though we may talk
vaguely about the rise of the cost of production, increase of homo consumption,
tariffs, trusts, etc. the fact seems to be that we have very little accurate
knowledge of how a rise of price of any particular article starts, and until we
can get exact concrete information covering in minute detail a great number of
transactions both large and small, we shall remain a good deal in the dark as
regards the forces behind the vise of prices, whatever theory we cling to.
Having made these prefatory remarks, I now proceed to give what seem to me
cogent reasons for believing that a depreciation of government money, as
distinct from bank money, must, under present circumstances, be followed by a
general depreciation of all money throughout the country, that is to say, a
general rise of prices, and not by a mere rise of prices in terms of government
money, prices in terms of bank money remaining stationary.
Throughout history there seems to
have been a general tendency for bank money to follow the downward course of
government money sooner or later, and the difficulty of drawing a sharp line
between the two would necessarily be greater now than formerly, both owing to
the fact that the depreciation of government money in our day is more gradual
and therefore more insidious than it formerly was, and because the enormous
quantity of government money on the market makes it a much more dominant factor
in trade than it was in the middle ages. There are at present as I have just
said, nearly three billion dollars of government money in the
Again in old days the financial
straits of the governments were well known to the bankers and merchants, who
knew too that every issue of tokens would before long be followed by an
arbitrary reduction of their value. Under these circumstances no banker in his
senses would take them at their full nominal value, and it was easy to draw a
sharp distinction between government money and bank money. To-day, however, we
are not aware that there is anything wrong with our currency. On the contrary,
we have full confidence in it, and believe our system to be the only sound and
perfect one, and there is thus no ground for discriminating against government
issues. We are not aware that government money is government debt, and so far
from our legislators realizing that the issue of additional money is an
increase of an already inflated floating debt, Congress, by the new Federal
Reserve Act, proposes to issue a large quantity of fresh obligations, in the
belief that so long as they are redeemable in gold coin, there is nothing to
fear. [End of page 166]
But by far the most important factor
in the situation is the law which provides that banks shall keep 15 or 20 or 25
per cent, (as the case may be) of their liabilities in government currency.
The effect of this law has been to spread the idea that the banks can properly
go on lending to any amount, provided that they keep this legal reserve, and
thus the more the currency is inflated, the greater become the obligations of
the banks. The, importance of this consideration cannot be too earnestly
impressed on the public attention. The law which was presumably intended as a
limitation of the lending power of the banks has, through ignorance of the
principles of sound money, actually become the main cause of over-lending, the
prime factor in the rise of prices. Each new inflation of the government debt
induces an excess of banking loans four or five times as great as the
government debt created. Millions of dollars worth of this redundant currency
are daily used in the payment of bank balances; indeed millions of it are used
for no other purpose. They lie in the vaults of the New York Clearing House,
and the right to them is transferred by certificates. These certificates “font
la navette" as the French say. They go to and fro, backwards and forwards
from bank to bank, weaving the air.
The payment of clearing house
balances in this way could not occur unless the currency,, were redundant: It
is not really payment at all, it is a purely fictitious operation, the
substitution of a debt due by the government for a debt due by a bank. Payment
involves complete cancellation of two debts and two credits, and this
cancellation is the only legitimate
way of paying clearing house debts.
The existence, therefore, of a
redundant currency operates to inflate bank loans in two ways, firstly, by
serving as a "basis" of loans and secondly by serving as a means of
paying clearing house balances. Over ten million dollars have been paid in one
day by one bank by a transfer of government money in payment of an adverse
clearing house balance in
Just as the inflation of government
money leads to inflation of bank money, so, no doubt, the inflation of bank
money leads to excessive indebtedness of private dealers, as between each
other. The stream of debt widens more and more as it flows.
That such a situation must bring
about a general decline in the value of money, few will be found to deny. But
if we are asked to explain exactly how a general excess of debts and credits
produces this result, we must admit that we cannot, explain. Or, at least, it
must be admitted by the present writer that he cannot explain; though others
with more insight into the phenomena of commerce may probably be able to supply
his lack of knowledge.
It is easy to see how the price of
any particular commodity rises, when the demand exceeds the supply. It is easy
to see how the money of any particular country or bank may depreciate, if it is
known to be in financial difficulties owing to excessive indebtedness. We can
see the machinery at work.
But how are we to see the machinery
by which prices are raised, owing to a general excess of debts and credits,
where no one recognizes that such an excess exists, when no one realizes that
there is any cause for the depreciation of money?
I am inclined to think that the
explanation may be found in the disturbance of the equilibrium between buyers
and sellers to which 1 have already referred. Money is easier to come by than
it would be under ordinary circumstances, and, while the power of the buyer to
obtain the highest possible price for his goods is not diminished, the desire
of the buyer to pay as little as possible is lessened, his resistance is
weakened, he loses in the tug of war. A general spirit of extravagance is
engendered, which enables the seller to win as against the buyer. Money really
loses its value in the eyes of the buyer. He must have what he wants
immediately, whether the price is high or low. On the other hand, the excessive
ease with which a capitalist can obtain credit, enables him to hold up
commodities speculatively, for a higher price. It puts a power into the hands
of the speculator which he would not normally have.
These, however, are mere suggestions on my
part and I do not pretend that they supply a completely satisfactory
explanation of the mechanism by which prices are raised. Sellers are also
buyers, and buyers are also sellers, and it is by no means clear [End of page
167] why a man, in his capacity as seller should have more power
one way than as a buyer he has in another.
The whole subject, however, of the
mechanism of a rise of prices is one which merits a careful study on the part
of those who have a more intimate knowledge of the workings of commerce than
the present writer can lay claim to.
Before closing this paper, it may be
useful to summarize the principal points which it has been the aim of the
writer to bring before students of this most interesting1 and little
understood branch of political economy.
There is no such thing as a medium
of exchange.
A sale and purchase is the exchange
of a commodity for a credit.
Credit and credit alone is money.
The monetary unit is an abstract
standard for the measurement of credit and debt. It is liable to fluctuation
and only remains stable if the law of the equation of credits and debts is
observed.
A credit cancels a debt; this is the
primitive law of commerce. By sale a credit is acquired, by purchase a debt is
created. Purchases, therefore, are paid for by sales.
The object of commerce is the
acquisition of credits.
A banker is one who centralises the
debts of mankind and cancels them against one another. Banks are the clearing
houses of commerce.
A coin is an instrument of credit or
token of indebtedness; identical in its nature with a tally or with any other
form of money, by whomsoever issued.
The issue of money is not an
exclusive privilege of government, but merely one of its functions, as a great
buyer of services and commodities. Money in one form or another is, in fact,
issued by banks, merchants, etc.
The depreciation of money in the
middle ages was not due to the arbitrary debasement of the weight and fineness
of the coins. On the contrary, the government of the middle ages struggled
against this depreciation which was due to wars, pestilences and famines - in
short to excessive indebtedness.
Until modern days, there never was
any fixed relationship between the monetary unit and the coinage.
The precious metals are not a
standard of value.
The value of credit does not depend
on the existence; of gold behind it, but on the solvency of the debtor.
Debts due at a certain moment can
only be off-set against credits which become available at that moment.
Government money is redeemed by
taxation.
The government stamp on a piece of
gold changes the character of the gold from that of a mere commodity to that of
a token of indebtedness.
The redemption of paper money in
gold coin is not redemption at all, but merely the exchange of one form of
obligation for another of an identical nature.
The "reserves of lawful
money" in the banks have no more importance than any other bank asset.
Laws of legal tender promote panics.
The governments of the world have
conspired together to make a corner in gold and hold it up at an excessive price.
The nominal value of the dollar coin
exceeds the market value of the gold of which it is made. Coins can only remain
in circulation for any length of time if their nominal value exceeds their
intrinsic value.
The issue of coins in exchange for
gold at a fixed and excessive price, without providing taxes for their
redemption, causes an inflation of government money, and thus causes an
excessive floating debt and a depreciation of government money.
Large reserves of "lawful
money'' in the banks are evidence of an inflation of the government currency.
The inflation of government money induces
a still greater inflation of credit throughout the country, and a consequent
general depreciation of money.
The
depreciation of money is the cause of rising prices.
1.
Reprinted from The Banking Law
Journal, Vol. 31 (Jan.-Dec. 1914): pp. 151-68, and reproduced with the
permission of the copyright holder. Only obvious errors in the original text
have been corrected. The author’s style in use of punctuation, spelling and
capitals has been retained.
2.
Readers are warned that it is
essential to bear constantly in mind the definition of credit, as laid down in
the first article. Those who are not accustomed to this literal use of the word
‘credit,’ may find it easier to substitute in their minds the word ‘debt.’ Both
words have the same meaning, the one or other being used, according as the
situation is being discussed from the point of view of the creditor or the
debtor. That which is a credit from the point of view of the creditor is a debt
from the point of view of the debtor.
3.
Modem governments, unfortunately, do
not limit their issues of money to the payment of purchases. But of this later
on.
4.
I do not wish to be understood as
saying that the retail trade followed the standard of the coins, except to the
extent that they shared the fate of the king’s livre. Owing to the abuse of the system of ‘mutations’ and the
attempted monetary reforms, it is probable
that the coins often suffered not only the depreciation of the king's lime, but
had their own independent fluctuations.
5.
Like the livre in
6.
Goschen's 'Theory of Foreign
Exchanges' must be included among scientific treatises on credit. Hartley
Withers's recent works, 'The Meaning of Money' and 'Money Changing' are
practical rather than scientific treatises. They are indispensable to the
student.
7.
Editor's note: the pages are those
of the original article in The Banking
Law Journal of 1913. The original page numbers are given in square brackets
in this edition.
8.
Even when the coins that once were
silver were most debased, they were still regarded as silver in theory, though
not in practice.
9.
The views on the subject of gold
were, however, rather mixed.
10. Owing
to the government policy of monopolizing the issue of money in small
denominations, the amount in circulation increases largely at certain seasons
of the year.
John F.
Henry
HERE ARE several ways to classify theories of money.
For the purpose of this argument, the most telling distinction is between ose
theories that see money as a technical development, and those roposing that
money is a social relationship. The former, generally following the thesis of
Karl Menger (1892), promote the view that money is a thing, arising as a
medium of exchange to reduce the transactions costs associated with inefficient
barter arrangements. Such theories usually are associated with the
'metallists', as it is normally some precious metal that arises to serve as the
medium through which market exchange takes place (Goodhart, 1998). More
important, this approach assumes an underlying equality among participants in
the exchange relationship. As exchange must be voluntary in order for all
parties to benefit, no coercive arrangements can exist that would negate
freedom of choice.
Those who
see money as a social relationship stress the significance of money as a unit
of account in which obligations are both created and extinguished. Money, then,
represents a relation between those who claim these obligations and those who
must service those claims. Exchange is, at best, of secondary importance in
such accounts, as markets need not exist for money to evolve: while money may
indeed serve as a medium of exchange, this is not a necessary function (Ingham,
1996). Such theories necessarily connote (or at least imply) some underlying
inequality, as those who claim obligations must be in a superior position to
those who are obligated to the former. Otherwise, there would be no social
reason to fulfil said obligations or any mechanism to enforce payment. (For
elaboration of the differences in these approaches, see
The work of A. Mitchell Innes clearly falls into the
second category. While it is true that much of his analysis is undertaken
within the framework of a relatively modern exchange, or commercial, economy,
79
80
and that he goes too far in equating the obligations
of pre-civil societies with those of the present, the underlying foundation
from which every main point in his argument flows rests on social obligations:
From the earliest days of which we have historical records, we are in
the presence of a law of debt . . . The sanctity of an obligation is, indeed,
the foundation of all societies not only in all times, but at all stages of
civilization; and the idea that to those whom we are accustomed to call savages,
credit is unknown and only barter is used, is without foundation. From the
merchant of China to the Redskin of America; from the Arab of the desert to the
Hottentot of South Africa or the Maori of New Zealand, debts and credits are
equally familiar to all, and the breaking of the pledged word, or the refusal
to carry out an obligation is held equally disgraceful (Innes, 1913, p. 391).
Here, I want
to subject the above accounts to historical examination, using ancient
What do we know of Egyptian prehistory and its early,
Pharaonic, history? Clearly, not as much as we would like. In analysing and
evaluating the early stages of Egyptian evolution, one must draw on limited
archaeological evidence, comparative methodology, and theory. Despite whatever
limitations exist, I believe we know enough to make sense of
Through the
middle of the fourth millennium, there is a rough-and-ready equality among the
various populations who occupied the
81
(northern)
In the
4400-4000 period (that of the Badarian culture), the first evidence of
agriculture in Upper (southern)
In the
so-called Naqada period (4000-3000), inequality continued to evolve, and by
3000 BC there is clear evidence of kingship - the famous Narmer Palette of this
date shows King Narmer ('Baleful Catfish'), identified in some accounts with
the legendary Menes, unifier of all Egypt, wearing the crowns of both Upper and
Lower Egypt. In the second phase of the Naqada period (3500-3200) there is
'...a distinct acceleration of the funerary trend . . . whereby a few
individuals were buried in larger, more elaborate tombs containing richer and
more abundant offerings' (Midant-Reynes, 2000b, p. 53). We see a tremendous
increase in the quality and variety of craft products, including copper tools
replacing those of stone. 'The picture of Naqada II society is thus revealed as
a blueprint for the development of a class of artisans who were specialized in
the service of the elite' (ibid., p. 55). While it might be tempting at
this point to locate the source of inequality in technological change, this
would be inappropriate. In the north, the Maadi population, which practised a
pastoral-agriculture economy, appears to be as technologically advanced as
those of the south, using copper as the dominant material in its tools.
However, there is no evidence of stratification or hierarchical developments
among this population.
In the
Naqada III period (3200-3000), one sees evidence of kingship emerging. This
period is labelled Dynasty 0 as it is unclear that there were kings proper, but
grave goods now include gold and lapis lazuli, an imported good of high social
value in later periods. As well, the Palermo Stone (c. 2400), which
traces Egyptian history from a mythical past to the point when the god Horus
(the falcon, son of Osiris) gives the throne to Menes (Narmer) in 3000,
indicates several kings or proto-kings during
82
this period, including King Scorpion, a rather famous
character in this chronicle.
What seems
to have occurred in this one to two hundred year period is an expansion from
the south (the Naqada) and gradual absorption of the northern populations with
the Naqada arrangements predominating. This was probably the consequence,
initially, of trade arrangements where the agricultural surpluses of the south
were traded for manufactured goods of the north. The key element in these
economic relations was control over the trade flows with the Levant (Middle
East) which required large boats that could only be constructed with cedar
coming out of what is now
It is worth
observing at this point that this expansion from the south was not based on
war. Though some historians struggle to interpret this process as accompanied
by aggression - as, after all, orthodoxy would have it that people are
'innately aggressive' - there is no evidence to support such an interpretation
(see, Midant-Reynes, 2000a, pp. 237-46).
What do we
see of substance during the period after 3000 indicating a change in the social
character of Egyptian society? (And it can now properly be called 'Egyptian.')
Writing exists: clay tags on pots identify them as belonging to a king. A
system of what can loosely be considered taxation, related to these tags, is in
place.
83
hierarchical social organization of the living and the
state controlled by the king - a politically motivated transformation of the
belief system with direct consequences in the socio-economic system' (Bard,
2000, p. 70). The (dead) king became the mediator between the living and the
forces of the netherworld (nature), and represented a cosmic order in the
world. The new religion, as will be shown, is of utmost importance for
understanding the economic relations that the new
During the
Early Dynastic Period (3000-2625), the above developments continue to develop
and solidify themselves as increasingly 'normal.' Anedjip (c. 2900) is the
first king to assume the 'nesu-bit' name (he of sedge and honey), signifying
the combining of divine and mortal. Tomb construction became more elaborate and
the amount, variety, and quality of grave goods continued to escalate, showing
an enormous amount of waste. (One tomb was 'saturated up to "three
feet" deep with aromatic oil. Almost 5,000 years after the burial, the
scent was still so strong that it permeated the entire tomb' [ibid., p.
73]). With the tomb complex of Djoser (c. 2650) - the step pyramids - we see
the transition to the grand pyramids of the
In the
To explain the origins of money in
Tribal
society is a non-exchange, non-propertied society that follows the rule of
hospitality - all had a right to subsistence that was collectively produced by
its members on collectively held means of production. Such a society is
nonpolitical in that no authority could exist independent of
84
the
population as a whole. Privilege, connoting superior-inferior relations, was
absent as privilege is antithetical to equality. As such organizations operated
on the basis of consensus, it would be inconceivable that the population would
bestow privilege on some to the detriment of the majority.
In this
society, there could be no debt. For every debtor there must be a creditor, and
such a relationship is one of inequality with creditors having economic power
over debtors. Such an arrangement runs counter to the rule of hospitality,
violating the right of some - debtors - to subsistence. True, tribal members
were placed under various obligations - they must contribute to production,
provide for the well-being of their members, etc. - and debt is an obligation.
But, such obligations were internal to the collective itself and of a
reciprocal nature: all had obligations to all. There was no arrangement in
which some would owe obligations to others in a non-egalitarian relationship.
(See
Up to about
4400 BC, the evidence is that Egyptian populations lived in egalitarian, tribal
arrangements. By the period 3200-3000, tribal society had been transformed into
class society, and over the next 500 years the class structures became
solidified around a semi-divine kingship. How can one explain such a
transformation and what does all this have to do with money?
It is very clear that the transition was based on
agriculture, and successful agriculture depended on some degree of control of
the
With early
success, one would expect a concomitant growth in the division of labour. Early
surpluses allowed some specialization which allowed greater surplus, and so on.
Tribal populations recognized the importance of specialization, and while a
good deal of such specialization was based on gender (men hunted, women
gathered, etc.), they also practised
intra-gender specialization where
some men, say,
were
85
recognized (and trained) as skilled hunters. At some
point it would be recognized that some should specialize in hydraulic
activities to increase the ability to control the
They also
learned something else. As full-time specialists, they would develop skills
and, in particular, knowledge that was not shared by all members of the community.
And, as these populations became increasingly dependent on agriculture, they
also become increasingly dependent on the specialized knowledge of the
engineers.
Gradually, given the physical separation of the
engineers for extended periods of time, and the monopoly over knowledge, it is
probable that the income of the engineers rose faster than that of the average
tribal member. All members would have seen a rise in their standard of living,
but the engineers would have seen a relatively greater increase. It is very
likely, and the evidence supports this, that in the early stages of this
development, the difference in growth rates were minuscule. But, over
centuries, even a 0.05% difference would result in clearly observable absolute
differences by the end of that time. This development would correspond to the
Badarian period of 4400-4000.
The next
stage of social evolution corresponds to the Naqada expansion resulting in the
unification of
86
river could not be in a position to regulate the flow
of water on which they were dependent. During years of low inundation, one
village taking too much of the available water would endanger the production
process of villages downstream. During periods of high inundation, failure to
attend to needed repairs to the levees in one region would obviously affect not
only that area but the whole valley beyond the breach (Bowman and Rogan, 1999,
p. 34). We also know that in this period, there was a significant shift in the
ecology of this region resulting in greater aridity, thus a reduced water flow
(Nissen et al., 1993, p. 1). Such a development would promote the need for
control superseding any particular tribe's needs or abilities.
Thus, the
engineer-administrators, originally based in one tribal organization and
practising egalitarian relations with other members of their tribe, would now
be called upon to use their knowledge and skills to administer an extended
physical area that would include any number of tribes. That is, the engineers
increasingly saw themselves as independent of any particular tribe and were now
responsible for the well-being of a large population, independent of tribal
status. Their job caused them not only physical separation, but social separation
from their tribe. And not only social separation, but economic separation. They
were now full-time specialists who controlled a significant flow of goods and
labour and upon whom the majority of the population were dependent. The old
collective rights and obligations of tribal society were being abridged and one
group - the majority - was increasingly obligated to another. Inequality was
growing and now becoming marked. In other words, economic classes were forming.
This corresponds to the Naqada II period of 3500-3200.
By
3200-3000, this process of differentiation had hardened and we see the
formation of a class society with religion as its unifying force and the
dominant class - something of a feudal nobility - extracting economic surplus
from the producing majority. Tribal reciprocity, though not totally abrogated
(see below), was no longer the universal standard among the Egyptian
populations, and was replaced by an economy of limited redistribution (in
Polanyi's terms).
Before
turning to the evidence supporting this interpretation, it is important to note
several general considerations. In all this, the tribal population had to give
its consent to what was unfolding - at least initially. A segment of an
egalitarian society cannot (and would not) simply set itself up as a separate
and unequal class de nova. Among other problems with such an
interpretation, where would this segment get its idea of inequality? The idea
must follow from the practice of inequality, and this practice would have to
develop as a consequence of historical
87
accident rather than conscious plan. In
Secondly,
while the substance of tribal society was increasingly gutted, the
emerging class had to maintain the forms of that organization. This was
necessary in order to present the veneer that nothing fundamental had changed
when, in fact, everything of substance had been altered. To keep the
flow of surplus moving in its direction, the now-ruling class had to present
the appearance that the older relations were intact. As well, though this is
less important, tribal forms were what the nobility was accustomed to, and it
is much easier to manipulate that with which one is familiar than to attempt to
operate within a strange environment. Essentially, the facade of equality had
to be maintained while inequality was growing and solidifying.
Pharaonic
As the
economy of the
88
permitted the continuation of the form of that
structure even as the king and priesthood usurped the social control previously
exercised by the various clans. In short:
The phyle system as an institution, then, played an important role in
the development and success of Egyptian kingship in the
In order to
maintain their position as a ruling class, the hydraulic engineers, now priests
organized around a central authority, had to keep the flow of goods and labour
moving in their direction. The older tribal obligations to provide the resources
to construct and maintain the hydraulic system were now converted - in part -
to maintain a privileged section of the population that no longer functioned,
except in a ceremonial fashion, as specialized labour in the production
process. How was this accomplished?
Tribal
societies practised magic in which the community exercised a collective
relationship with their deceased ancestors who were believed to inhabit a
spirit world that was part of nature. The deceased were to continue to fulfil
their social obligations by communicating tribal commands to those forces of
nature which could not be understood by pre-scientific populations. The
hydraulic engineers subverted the substance of tribal magic while maintaining
its form in elevating the king to a position of authority in communing with
nature.
Totemism differs from mature religion in that no prayers are used, only
commands. The worshippers impose their will on the totem by the compelling
force of magic, and this principle of collective compulsion corresponds to a
state of society in which the community is supreme over each and all of its
members ... The more advanced forms of worship, characteristic of what we call
religion, presupposed surplus production, which makes it possible for a few to
live on the labour of the many (Thomson, 1949/1965, p. 49).
The
importance of religion, embodied in the funerary institutions - in particular,
the elaborate tombs known as the pyramids - cannot be underestimated in
understanding the process through which the flow of economic surplus was
controlled and the relation of this control to money.
89
The king had been chosen and approved by the
gods and after his death he retired into their company. Contact with the gods, achieved through
ritual, was his
prerogative, although for practical purposes the more mundane elements were delegated to
priests. For the people of
Signifying
the new state of affairs was the temple which was not only '... an
architectural expression of royal power, it was for them a model of the cosmos
in miniature' (Goelet, 2002, p. 285). And, while the pharaohs were careful not
to supplant the clan (magic) cults with the new centralized religion (until the
ill-fated experiment of Akhetaten, that is), the pharaoh became '...
theoretically, the chief priest of every cult in the land' (ibid., p.
288).
The state
religion was structured around Re and Osiris, emphasizing continual renewal in
a never-ending cycle of repetition. The ideological thrust was one of
permanence and long-standing tradition. Thus, even as change took place and
fundamental political innovations were introduced, '. . . (the) tendency for
Egyptian kings (was) not to emphasize what innovations they were instituting,
but rather to stress how they were following long traditions . . .' (ibid., p. 287).
In a social
context, the engineer-priests presented the image that nothing fundamental had
changed, given the continuation of various institutional features of tribal
society. In substantial point of fact, the world had been irrevocably altered.
But, until the class-hold of the priests was firmly entrenched, until
sufficient time had passed to separate this society from its tribal
foundations, the priests had to maintain the myth that things had remained as
they always had been - and always would be.
Essentially,
the spirit world was converted to one of gods, and the control of nature,
previously seen as a generally sympathetic force, was now in the hands of the
priests. Nature itself became hostile and its forces, controlled by gods,
required pacification through offerings. The king -the 'one true priest' - and
the priests placed themselves as the central unifying force around which
continued economic success depended. In so doing, they could maintain the flow
of resources that provided their enormously high levels of conspicuous
consumption and wasteful expenditures that certified their status as envoys to
the natural world.
The significance of religion in the origin and
development of money and monetary relations should not be underestimated. As
Innes noted some ninety years ago:
90
The relation between religion and finance is significant. It is in the
temples of
They were a strange jumble, these old fairs, of finance and trading and
religion and orgy, the latter often being inextricably mixed up with the church
ceremonies to the no small scandal of devout priests ... (Innes, 1913, p. 397).
(For a
fuller account on the relation among money, religion, and various other social
institutions - including prostitution - see Kurke, 1999.)
Under the
new social organization, tribal obligations were converted into levies (or
taxes, if one views this term broadly enough). The economic unit taxed was not
the individual but the village (Eyre, 1999, p. 44). As well, the king and
priests did not arbitrarily assign a tax level on the village, but tax
assessors and collectors (scribes) met with the village chief who would
assemble the village council to negotiate the tax (ibid., p. 43). This
appears to have been done on a biennial basis known as 'counting of cattle', a
census that also served as the dating for the various reigns of the king (Shaw,
2000b, pp. 4-5; Hornung, 1999, p. 7). Should a village renege on its obligation
(default), the chief responsible for the collection of taxes could be flogged
by the scribes (Eyre, 1999, p. 40). Note that such a punishment makes the chief
responsible to the priests rather than to the clan, further eroding the
substance of tribal relations. Supervising all the local or regional scribes,
and assuring both competence and honesty in this process, was a vizier who
exercised central authority in the name of the king (ibid., p. 43;
Strudwick, 1985). It should be noted that in the elaborate bureaucratic
structure that developed by the fifth dynasty, viziers served as the connecting
link among the Overseers of the Granaries, of the Treasury, and of Labour
(Strudwick, 1985, pp. 258, 275-6). These were the most important departments of
the bureaucracy and, given the above argument, it is clear why there should be
some interconnection among them. And, there is some evidence that the Overseer
of the Treasury bore a religious title (rnnwti) (ibid., p. 283).
The economic
surplus collected in the form of taxes was directed toward the priests who then
redistributed some portion through the various levels of the bureaucracy, the
temple artisans, and the workers who laboured on the various religious and
hydraulic projects. Hence, Egyptian society (along with others of this type)
can be labelled an
91
economy based on 'redistribution' (Polanyi 1944/57, op.
cit.). However, it is important not to misunderstand the nature of this
term. Such economies did not engage in full redistribution as it would defeat
the whole purpose of such an economy if all production were to be first
directed to the centre, then flow back through all segments of society in some
elaborate redistribution system. Not only would such a system be markedly
inefficient, but what would be the point? Rather, only a portion of the
economic surplus, produced by the majority of the population, would flow to the
centre, and this share of output would then be apportioned among the minority
segments of society as stated above. The priests, of course, would claim the
lion's share.
While tribal
society clearly had been abrogated in the economic relationship between clans
and members of the priestly class, it continued to hold at the village level,
though in attenuated form. In the
In addition
to the portion of the surplus collected now as taxes, the king also collected
royal gifts as a form of tribute from foreign populations. As the goods that
formed this income could be in the same form as the income that flowed from the
internal population, but was the property of the king proper, it had to be kept
apart from the internally generated income (Bleiberg, 1996).
All this
required the development of an elaborate accounting system through which both
assessments and payments could be recorded, and royal gifts could be kept
separate from taxes.
92
At some early point in the
The fact
that the deben bore no relation to any specific object, but referred to
an arbitrary unit of weight only, is a certain indication that Egyptian money
was decidedly not based on some 'intrinsic value.' What was true for
A few
surviving contracts, mainly from the New Kingdom, demonstrate that goods were
then valued in terms of the deben (and labour services in the pyramid
cities determined by the deben value of consumption goods), but no debens
ever changed hands (Bleiberg, 1996, p. 26; Grierson, 1977, p. 17; Ifrah,
1981/2000, pp. 72-4). Administered price lists were established, but the
Egyptians had no coinage until the Ptolemaic period of the last three centuries
BC. Basically, the scribes (and increasingly other sections of the population)
maintained their accounts in the decreed unit of account, but payments were
made in goods. 'Such divergences between the money in which prices are reckoned
and the commodities in which debts are discharged represent... a fairly common
phenomenon in history.' (Grierson, 1977, p. 17). In other words, money does not
originate as a medium of exchange but as a unit of account (and something of a
store of value with regard to the king's treasury), where the measure of value
is arbitrarily specified by decree, and goods and services of various qualities
and quantities can then be assigned a monetary value to allow a reasonable form
of bookkeeping to keep track of tax obligations and payments and to maintain
the separate accounts of the king. It should also be noted that the deben did
not serve as means of payment (as with modern money), but did function
as the means (or measure) through which payment was made (following Grierson,
1977, above).
Now, the
process through which this (or any) unit of account was developed was a
necessarily difficult one.
93
Units of value, like units of area, volume, and weight, could only be
arrived at with great difficulty, in part because natural units are absent, in
part because of the much greater diversity of commodities diat had to be
measured and the consequent difficulty of finding common standards in terms of
which they could reasonably be compared (Grierson, 1977, p. 18).
And money as
simply a non-tangible abstract unit in which obligations are created and
discharged, while it may appear obtuse to a modern economist, should not be all
that difficult to comprehend. After all, we use on a daily basis any number of
such abstractions:
The eye has never seen, nor the hand touched a dollar. All that we can
touch or see is a promise to pay or satisfy a debt due for an amount called a
dollar . . . What is stamped on the face of a coin or printed on the face of a
note matters not at all; what does matter, and this is the only thing that
matters is: What is the obligation which the issuer of that coin or note really
undertakes, and is he able to fulfil that promise, whatever it may be?
The theory of an abstract standard is not so
extraordinary as it at first appears, and it presents no difficulty to those scientific
men with whom I have discussed the theory. All our measures are the same. No
one has ever seen an ounce or a foot or an hour .. . We divide, as it were,
infinite distance or space into arbitrary parts, and devise more or less
accurate implements for measuring such parts when applied to things having a
corporeal existence ...
Credit and debt are abstract ideas, and we could not,
if we would, measure them by the standard of any tangible thing. We divide, as
it were, infinite credit and debt into arbitrary parts called a dollar or a
pound, and long habit makes us think of these measures as something fixed and
accurate; whereas, as a matter of fact, they are peculiarly liable to
fluctuations (Innes, 1914, p. 155).
While we do
not have a good account of the process through which the unit of account was
developed for
In
pre-agricultural
With the
development of agriculture, one sees the introduction of clay tokens
representing quantities of grain, oils, etc., and units of work. These tokens
indicate a major conceptual leap as well as a need for systemization.' [T]he
conceptual leap was to endow each token shape ... with a specific meaning'
(Schmandt-Besserat, 1992, p. 161). Previously, any markings, such as those on
tally sticks, could not be understood outside the context in which they were
notched. With tokens, anyone conversant
with the system
could immediately understand
their
94
meanings. Moreover, as each token represented a
particular object, it was now possible to systematically '. . . manipulate
information concerning different categories of items, resulting in a complexity
of data processing never reached previously' (ibid.).
In the fourth
millennium, accompanying urbanization or the formation of classes, these tokens
assumed new shapes, were of a higher quality indicating production by
specialized craft workers, and featured lines and marks which required the
development of writing and reading skills. Writing emerges from bookkeeping (ibid.,
pp. 165-6). The marks are designed to solve the technical problem of
storage and cumbersome tallying. When tokens were few in number, it was easy to
both store and count them. With a growth in the number and types of token, a
new system had to be developed to allow easy maintenance 'of the books.' Hence,
a particular mark indicated so many tokens, and one mark replaced the physical
presence of (say) ten tokens.
We also now
begin to see tokens as part of the funerary goods found in grave sites, and
these are only found in the graves of the wealthier members of society. Tokens
are a status symbol, indicating a change from egalitarian to hierarchical
society (ibid., p. 171). Eventually, the production of tokens and their
administration becomes a temple activity, associated with the system of
taxation that has supplanted the older tribal obligations (ibid., pp.
178-9). Writing - in this case the marks on the clay tokens that are the unit
of account - was 'invented to keep track of economic transactions' (Bleiberg,
1996, p. 22).
In
We observe
the same sort of calculation in
As well, loans - again, insofar as these arrangements
can be considered loans - and their repayment were calculated in grain. As it
is inconceivable that such economic relations would consist only of the
exchange of grain now for grain later, particularly when no interest was
changed, grain, again, should not be taken literally, but as a unit of account
(Bleiberg, 2002, p. 259).
95
It is
important to note that in
96
relations that developed in
A. Mitchell
Innes's theoretical account, developed nearly a century ago and long ignored by
economists, is in accord with the historical facts of the development of money
in
1. This
essay was written while I was Visiting Professor at the
Bard, K. (2000),
'The emergence of the Egyptian state', in
Shaw
(2000a): pp. 61-88.
Bell, S. (2001), 'The role of the state and the
hierarchy of
money', Cambridge
Journal of Economics, 25(2), 149-63.
the limits
of monetary economies', Review of Social Economy, 59(2), 203-26.
Bleiberg, E. (1995), 'The economy of ancient
Sasson et
al., eds, Civilizations of the Ancient Near East, vol. 3,
Bleiberg, E. (1996), The Official Gift in
OK:
Bleiberg, E. (2002), 'Loans, credit and interest in
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Bowman, A. and Rogan, E. (1999), Agriculture in
From
Pharaonic to Modern Times,
Eyre, C. (1999), 'The village economy in pharaonic
in Bowman
and Rogan: pp. 33-60.
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Goelet, O. (2002), 'Fiscal renewal in ancient
language,
symbols, and metaphors', in
Goodhart, C. (1998), 'The two concepts of money:
implications
for the analysis of optimal currency areas', European Journal of Political
Economy, 14, 407-32.
Grierson, P. (1977), The Origins of Money,
Athlone
Press.
Hendricks, S. and Vermeer, P. (2000), 'Prehistory:
from
the
paleolithic to the Badarian culture', in Shaw (2000a): pp. 17-43.
Hornung, E. (1999), History of Ancient
Ifrah,G. (1981/2000), The Universal History of
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Ingham, G. (1996), 'Money is a social relation', Review
of
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Economy, 54(4), 243-75.
Innes, A. M. (1913), 'What is money?', The Banking
Law
Journal, 30,
May, 377-408.
Innes, A. M. (1914), 'The credit theory of money', The
Banking Law
Journal, 31, Dec/Jan., 151-68.
Katary, S. (1999), 'Land-tenure in the
role of
women smallholders and the military', in Bowman and Rogan: pp. 61-82.
Kurke, L. (1999), Coins,
Bodies, Games, and Gold: The
Politics of Meaning in Archaic
Malek, J. (2000), 'The
89-117.
Menger, K. (1892), 'On the origin of money', Economic
Journal, 2(6),
239-55.
Midant-Reynes, B. (2000a), The Prehistory of
Midant-Reynes, B. (2000b), 'The Naqada period', in
Shaw
(2000a): pp.
44-60.
Nissen, H., Damerow, P. and Englund, R. (1993), Archaic
Bookkeeping,
Polanyi, K. (1944/1957), The Great Transformation,
Roth, A. (1991), Egyptian Phyles in the
Schmandt-Besserat, D. (1992), Before Writing, vol.
1,
From
Counting to Cuneiform,
Shaw, I. (2000a), The
Shaw,
change in
Smithin, J., ed. (2000), What is Money?,
Routledge.
Strudwick, N. (1985), The Administration of
Old Kingdom,
98
Thomson, G.
(1949/1965), Studies in Ancient Greek
Society: The
Prehistoric
Michael
Hudson
MONEY
HAS evolved from three traditions, each representing payment of a distinct form
of debt. Archaic societies typically had wergild-type debts to compensate
victims of manslaughter and lesser injuries. It is from these debts that the
verb 'to pay' derives, from the root idea 'to pacify.' Such payments were made
directly to the victims or their families, not to public institutions. They
typically took the form of living, animate assets such as livestock or servant
girls. Another type of obligation took the form of food and related
contributions to common- meal guilds and brotherhoods. This is the type of
tax-like religious guild payment described by Laum (1924), who in turn was
influenced by G.F. Knapp. Neither of these types of payment involved
general-purpose trade money.
The kind of general-purpose money
our civilisation has come to use commercially was developed by the temples and
palaces of
Accounting prices were assigned to
the resources of these large institutions, expressed in silver
weight-equivalency, as were public fees and obligations. Setting the value of a
unit of silver as equal to the monthly barley ration and land-unit crop yield
enabled it to become the
99
100
standard
measure of value and means of payment, although barley and a few other
essentials could be used as proxies as their proportions were fixed. Under
normal conditions these official proportions were reflected in transactions
with the rest of the economy.
In positing that individuals engaged
in trucking and bartering developed money to minimize their transaction costs,
the private enterprise model does not take account of the historical role
played by public bodies in organizing a commercial infrastructure for bulk
production and settling the debt balances that ensued, and hence of money and
credit. This objective obliged the large institutions to design and oversee
weights and measures, and to refine and supply monetary metals of attested
purity. This occurred more than two thousand years before the first coins were
struck.
Most economists assume that modern
ways of organizing production, money and fiscal policy are so natural as not to
need much explanation. The anthropologist Marcel Mauss (1925) viewed debt
practices and the charging of interest as so general that the practices of
surviving tribal communities could be taken as proxies for early
When it comes to such theorizing
about the early development of money and other social institutions, the
economics discipline has yet to experience the shakeout that led philologists
and assyriologists to drop the assumption of universal practices leading
equally naturally to modern usages. There is no evidence that money evolved 'naturally'
out of barter or for that matter in an agricultural or pastoral context. Such a
world has been imagined on the ground of abstract logic at odds with the
archaeological and historical record.
Criticisms of this intolerantly
modernist 'universalist' approach have come mainly from philologists examining
the development of language, and assyriologists dealing with
101
intelligent
individuals, they quickly figured out how to exchange their commodities for the
crops and other raw materials they needed by deciding on common denominators in
the form of the modern monetary metals - silver, gold and copper. In this way
markets were 'worked out little by little,' without the need for catalysts,
detours or quantum leaps and mutations.
Such autonomous individuals and
markets are more a product of modern ideology than of civilisation 'in its
infancy.' How did society accumulate tools and capital in the first place if
not in ways that involved market exchange and monetary payments? One hardly can
imagine neolithic or Sumerian communities leaving specialized professions
requiring expensive capital investment to autonomous individuals or guilds
seeking to maximize their own economic advantage. Such a society would have
polarized quickly, impoverishing large parts of the citizenry and therefore
losing their armed forces. It seems to have been to avoid this polarisation
that most economic life outside of primary agriculture and food production was
centralized in (or at least coordinated by) Mesopotamia's large public
institutions.
Among the early social processes
requiring monetary means of settlement other than for the market exchange of
commodities were wergild-type fines for personal injury - hardly 'commodity
transactions' in which broken noses and manslaughter were negotiated through
the marketplace. Another example are the in-house transfers for
Attempts to trace modern practices
only back to early
102
Exchange in Bronze Age Mesopotamia
(4500-1200 BC) was conducted along lines similar to those that anthropologists
have found in many parts of the world: not by payment on the spot but by
running up debt balances. From gift exchange through redistributive palace
economies, such balances typically were cleared at harvest time, the New Year,
the seasonal return of commercial voyages or similar periodic occasions. The
most important debts were owed to the chiefs in tribal communities or to the
public institutions in redistributive economies. These authorities also
typically were charged with mediating trade in prestige goods and imports,
including the monetary metals, as well as performing their communities' basic
welfare functions. Similar phenomena have been found in tribal chiefdoms, but
were hyperdeveloped in
In light of Mesopotamian precedence
in developing the economic practices that led to the modern world, Benveniste's
observation (1971:5) that ancient languages were 'just as complete and no less
complex than those of today' applies equally to archaic economic structures.
These were as complex and systematic as modern practices but different, as
Polanyi's group made a start in tracing half a century ago. But there is no
reason to assume that modern modes of economic organisation are natural and
universal. Along these lines Benveniste also made an observation that might
just as well be made with regard to financial historiography: 'Certain types of
problems have been abandoned. One no longer yields as easily as formerly to the
temptation to erect the individual characteristics of a language or a
linguistic type into universal qualities ... At no moment of the past and in no
form of the present can one come upon anything "primordial" ' (1971).
The
fact that words for debt in nearly all languages are synonymous with 'sin' or
'guilt' reflect an origin in reparations for personal injury. German Schuld (debt,
sin) bears the meanings both of offence and the obligation to make restitution.
Conversely, lösen (cognate to English 'loosen') and einlosen mean
to atone for a sin or to redeem or dissolve a liability, perhaps even literally
in the sense of untying one's livestock left as pledges in the public pound to
ensure payment of the fine/debt. Likewise mediaeval Swedish used sakir or
saker mostly as meaning 'obliged to pay a fine' and only a few times in
the sense of 'punishable, guilty,' notes Springer (1970:41ff.). 'We find in Old
Norse the weak verb saka in the sense of "to accuse, blame, harm,
scathe," as well as sekta, "to sentence to a fine,
103
penalize,
punish," and the nouns sok for "offense charged, accusation,
suit (in court)" and sekt for "guilt, penalty." ' Outside
of the Germanic languages Benveniste (1973:147) finds that,'In Armenian "partk,"
"debt," designates also "obligation" in general,
the fact of "owing," just like German Schuld', applicable
both to moral and commercial debts.
Wergild fines and taxes reflected
social status, as can be seen in the metonymy of Greek time. At first
the word connoted 'worth', 'esteem' or 'valuation', and subsequently 'wealth'
and hence, 'tax assessment.' Used as a legal term it signified the penalty
deemed appropriate in law - death, exile or a monetary liability to compensate
a victim. The latter was not a 'creditor' in the modern sense of the term, but
a party to whom a liability was owed. The Homeric usage of time as
associated with valuation referred to the assessment of'damages with a view to
compensation, and so compensation, satisfaction, especially in money' (Liddell
and Scott, Greek-English Lexicon 1901:1554). The verb timoreo meant
to avenge or to help by way of redressing injuries. Perhaps the most lasting
economic impact of personal injury debts was to bring into being debt
collection practices that in time would be spliced onto the idea of
interest-bearing commercial and agrarian debts.
In the classical period time came
to denote 'the nominal value of which an Athenian citizen's property was rated
for the purposes of taxation, his rate of assessment, rateable property'
(Liddell and Scott 1901:1555), forming the root for the word timocracy - rule
by property holders or other wealthy persons. The Athenian timetes was
an official charged with appraising damages, penalties or taxes, similar in
function to the Roman censor in charge of taking the census and rating the
property of citizens.
Bernard
Laum, a follower of Knapp, traced money back to the contributions of food and other
commodities to guild organisations of a religious character. In his view, their
root is to be found in the communal sacrifice. Members of temple brotherhoods
were obliged to make ceremonial contributions or kindred payments to the
temples or other redistributive households. Laum (1924) interpreted these
payments as early food money, for whose value the monetary metals later were
substituted. But although food contributions bore an administered price in the
sense of being standardized in amount, it would be a quantum leap to deem them
'money.' Along with injury fines these formalities represent personal
liabilities, mainly for restitution or, in time, tax assessment, but not yet
the freely negotiated market exchange of commodities.
The
media for tax payments would seem to be the bridge concept. The German word for
money, Geld, derives from Gothic gild, 'tax,' but an early
connection to paying fines is indicated by Old Icelandic gjald, 'recompense,
punishment, payment', and Old English gield, 'substitute,
104
indemnity,
sacrifice' (Benveniste 1973:58). The idea combines the ethic of mutual aid with
the idea of a standardized equality of contributions. In the first instance
religious institutions would have sanctified these contributions and given them
the connotation of fixed obligatory payments. Such payments to the community's
corporate bodies appear to have been transformed into tributary taxation when
cities were conquered by imperial overlords and turned these institutions into
collection agents. This inverted the traditional relationship of voluntary gift
givers or sacrificers gaining status by their contributions reflecting
openhandedness and wealth. As taxes were coercive levies, their payers lost
status by submitting to a tributary position.
Among Indo-European speakers and
earlier in
Money in the form of standardized
weights of metal emerged out of the large public institutions in the mixed
'public/private' economies of
Mesopotamian temples and palaces
existed alongside the family-based rural economy, endowed with their own land,
herds of cattle and dependent labour rather than taxing the community's
families for their means of support. The written laws that have come down to us
deal mainly with these institutions, and Kozyreva (1991:115f.) notes their
limited scope: 'The ancient Mesopotamian law books certainly were not codes of
law in the modern sense,' for rather than applying to the entire
society, they were limited to the public sector in its interface with the rest
of the economy. Laws such as those of Hammurapi were not a society-wide code
but a set of laws governing public sector relations. 'Cases that seemed obvious
and indisputable are not mentioned in the Laws of Hammurapi at all; for
example, murder, theft, and sorcery. Such cases were decided in court according
to custom,' evidently by oral common law. The court cases that have come down
to us do not refer to his laws or follow their prescriptions. (For instance,
there are no 'eye for an eye, tooth for a tooth' rulings.)
105
Under feud law, fines were not owed
to the temples, palaces or the state but to victims of personal injury and
their families. Wergild-type fines for manslaughter and lesser offences
typically were denominated in cattle or servant girls, not monetary
commodities. The financial role of such penalties was not to create a monetary
base, but to bring into being the means of enforcing debt collection. They were
not taxes, and played no fiscal role and indeed no monetary role as such. Being
paid to the victims, they belong to the sphere of oral common law used by
society at large prior to the written royal laws that governed the large
institutions. The monetary metals stem from a different tradition, associated
with debt, interest and rent payments to the large institutions of
Cattle,
slave girls and even wives were pledged as collateral or paid as wergild-type
fines. But they were hardly the same thing as being media of commercial
exchange. Some confusion also has developed around the fact that money's
seemingly inherent role as a store of value and means of satisfying debts
(including those for manslaughter and other personal injury) has fostered a
tendency to conflate it with capital. Believing that the term 'capital' derives
from 'cattle' (as in 'pecuniary'), many popularisers have viewed cattle as
primordial money. This suggests a pastoral, animate origin of money used as
capital to produce offspring in the form of young animals as proto-interest.
The implication is that money's origins were individualistic and small scale,
evolving from herding and farming economies to a more sophisticated use in civilisation's
industrial and commercial stages.
This view fails to realize that
livestock terminology was a metaphoric use of the specific for the general. The
metaphor did not come into general usage until about 2000 BC (Steinkeller 1981;
I discuss the metaphoric use of archaic 'birth' words for interest in Hudson
2000a). The Sumerian term for interest, mash, was that for kid, a baby
goat. Interest was paid at particular intervals - harvest time in agriculture,
or by the time the principal had doubled, in five years (that is, 60 months at
the standardized commercial interest rate of l/60th per month) for longer-term
mercantile loans. A principal yielded interest much as calves gave birth,
although in this case it was time itself that gave birth as interest tended to
be paid seasonally (much as animals are born at particular times of the year).
In classical
106
the
birth of the new moon. Hence, capital and interest went together as cattle and
calf (Gk. tokos, Lat. foenus), or in
This metaphor seems to have diffused
outside of Mesopotamia along with its financial practice and terminology, and
even monetary weights, measures and contractual forms (
Many economic writers still follow
the logic outlined most notoriously by Heichelheim (1958) in pointing out that
livestock can reproduce themselves, 'giving the lie to the doctrine of
Aristotle that "money is barren" ' (Politics 1258a, Bk. I, ch.
x). If livestock were the first money, the charging of interest in the form of
calves born to cattle lent out would have had a productive basis. However,
anthropologists have established that the livestock used in debt transactions
throughout the world are pledged to creditors, not lent out. Creditors receive
antichretic interest in the form of calves produced by the debtor's own cattle.
These pledges are unproductive to the debtor, who often ends up losing his
means of livelihood and liberty. The general principal is that interest-bearing
debt in a rural context tends to absorb the economic surplus rather than
promote and finance its creation.
Whether the link between money and
the means of paying debts originally consisted of animate livestock or
inanimate silver will help determine how monetary prices and interest rates
were determined. And this in turn will help answer the question of how payment
for goods and
107
services
came to be monetized, along with tax payments, rents and other fees paid to
public bodies.
If the 'capital:interest' principle
did not derive directly from that of 'livestock: calf,' then it is necessary to
trace how monetary interest payments did evolve. One clue is that the earliest
interest is attested to have been paid in silver. There are no traces anywhere
of it being paid in the form of offspring of livestock. If money is to be
defined as capital that earns interest, then silver rather than livestock (or
Heichelheim's 'seeds') represent the first such money.
Another clue to the origins of
monetary interest is the fact that its major early recipients were the temples
and palaces of
This public creditor status required
a means of payment. Indeed, already in
What is true
for today's paper money thus was true of silver. Its value was established
by public institutions accepting it as payment. Silver served
as the unit
of account to measure the value of obligations and commodities within these
institutions, and was the preferred store of value and standard of exchange
vis-a-vis (and by) the economy at large. For monetary historians, therefore, the
significance of these public institutions lies in their use of silver as an
administrative vehicle to assign values to internal resource flows and debt
service owed by merchants and other consignees within the temples and palaces
and between them and the rest of the economy. Aristotle merely stated what had
been long-established practice when he voiced the chartalist idea of money as
being a legal institution, with the government determining its value.
108
To
Adam Smith monetary commodities emerged as vehicles to help individuals 'truck
and barter.' Before money, barter is said to have involved so confusing an
array of cross-pricing relationships that it prompted buyers and sellers to
seek a single commodity to serve as an agreed upon standard. According to this
fable the monetary breakthrough lay in designating monetary commodities -
silver, copper or even grain - against which merchants priced (that is,
co-measured) their wares. Douglass North (1984) depicts the process as one of
minimizing transaction costs, a tendency he believed was best promoted by
private transactors.
This view depicts individuals as
developing money on their own as a medium to purchase goods and services. Its
use as a medium to pay taxes and other debts is deemed to have resulted from
its convenience in such mercantile exchanges, not the other way around. Instead
of recognizing public institutions as playing a positive economic role, today's
monetarist ideology turns the study of economic history into an object lesson
to depict the public sector as an intrusive parasite, levying taxes and causing
inflation by debasing the coinage or devaluing the currency to take a rake-off
from the trade and investment activities of enterprising individuals.
This ideology defines societies as
consisting of individuals whose main monetary transaction was to exchange
products they had made for those they wanted to consume or acquire. There seems
to have been little need either for credit or for public institutions to be
involved in this exchange process. Governments are not recognized as having
played a productive role, but only as distorting markets by imposing coercive
taxes, living off the private sector and abusing their power to issue coinage
(or in later times paper credit) by their inherent lack of restraint. In stark
contrast the private sector is assumed to have acted historically in a
responsible and self-restrained manner, providing a democratic market check on
government excesses.
This antigovernment scenario of
money emerging as a convenient (North would say cost-cutting) way of conducting
barter by means of refined pieces of metal does not explain where monetary and
economic order came from in the first place, if not from public bodies. There is
no recognition of any need for public oversight to sponsor honest weights and
measures in order for exchange and payments to be conducted smoothly in a
standardized, honest manner. Nor is there an awareness of the degree to which
the three classical functions of money all reflect a strong interface with
obligations owed to the public sector: to serve as a
109
measure
or standard of value, as a means of payment in settling transactions, and as a
store of value over time.
Following Adam Smith in explaining that
early traders found that the medium most widely desired was silver (followed by
copper, as gold's value was too high to be convenient for retail transactions),
most economic theorists note that in addition to being widely desired, these
metals had the advantage of being standardized, readily portable, divisible
into small denominations, and could be saved. Upon reflection, however, it
should not be accepted on faith that using monetary metal was simpler than
barter. To begin with, the high value of silver and gold implied that they
would be used only for large transactions. In the Old Babylonian period
(2000-1600 BC), notes Marvin Powell (1999:16), a shekel 'represented a month's
pay', thereby limiting the ability of most people to pay on the spot for consumer
transactions. Measuring smaller quantities of monetary metal became more
error-prone, with deviations rising to about 3 per cent for small weights.
Samuelson (1961) notes that silver
has the drawback of tarnishing in air, while gold is soft 'unless mixed with an
alloy,' but gold and silver tended to be naturally alloyed in the ancient Near
East. They thus were not intrinsically uniform in quality, but had to be
refined. Babylonian loan and sales contracts typically specify silver of 7/8ths
(that is, 21-carat) purity, and gold was alloyed in more varying proportions
(Powell 1999). This condition may sound easier in principle than it was in
practice, for Babylonian 'wisdom literature' and the Old Testament are full of
denunciations of merchants using false weights and measures or adulterating
their products. To cope with this problem public bodies were needed to attest
to and legitimize their purity and weight, and to declare fraudulent monetary
practices sacrilege.
It would take more than two thousand
years after the use of weighed pieces of metal (Hacksilber or ponderata)
for this drawback to be addressed by standardizing coinage around the 8th
century BC, and ultimately for coins to be milled along the edges to prevent
clipping. The fact that the word 'money' derives from Rome's Temple of Juno
Moneta, where silver and gold coinage was struck during the Punic Wars, shows
how deeply the link between money, the refining of precious metals and
religious sanctification was grounded in civilisation's earliest epochs (Eliade
1962).
Polanyi (1957) put the 'convenience
for truck and barter' approach in perspective by distinguishing three modes of
exchange. First came the reciprocity of gift exchange and mutual aid. Then, in
the Bronze Age, came the redistributive mode, characterized by prices
administered by the large governing institutions, the palace and temples.1
At the end of
110
this
process came price-making markets responding flexibly to shifts in supply and
demand.
All three types of exchange and
pricing have tended to coexist in any given epoch. Most palace-dominated
economies had room for private transactions (Edzard 1996). For instance, when
crops failed late in the Ur III period c. 2100 BC, the price of grain
supplied by independent producers rose sharply Qacobsen 1953). Most economies
throughout history have been 'mixed economies' in which public and 'private'
sectors have coexisted in a symbiosis. Gift exchange still applies to many
interpersonal transactions, even as market exchange in one form or another is
found in archaic
Monetary historians thus find
themselves dealing with shifts of emphasis within mixed economies. Early money
was becoming a common denominator as more goods were sold than were exchanged
as gifts, but payment typically was delayed until a convenient time for the
payer, often an annual calendrical date such as harvest time. Each crop tended
to have its own particular harvest date. The tendency was for delays in payment
beyond this point to begin accruing interest, and here too one finds a
counterpart to Polanyi's three stages of commodity pricing. Babylonian loans
might be extended without interest among family members, business partners and
other colleagues whose professional relations created family-type bonds. In classical
antiquity it was normal for aristocrats to extend interest-free loans to each
other through eranos clubs (a corollary to the 'gift-exchange' mode).
Babylonian interest rates were administered, with the normal commercial
interest rate remaining stable at the equivalent of 20 per cent per annum for
many centuries. In the agricultural sphere, however, creditors (often public
officials) are found demanding as high an interest rate as the market would
bear (the 'modern' or free-market mode of lending). Even in the modern world,
interest rate regulation has been lifted only quite recently. The lesson is
that all three modes of debt tend to coexist in each epoch, although each epoch
has its dominant mode of exchange and lending.
Each epoch also has its distinctive
means of financing the public sector. The modern fiscal mode is to leave
profit-making activities to the private sector and then tax its income, but
antiquity viewed such taxation as a form of tribute reflecting a subjugated and
hence unfree status.
111
of
value (pricing) and as a means of quantifying and settling balances among the
various departments of the temple or palace households, as well as their
balances with the rest of the economy.
To
provide a plausible scenario for how precious metals were adopted as money, it
is necessary to explain where the silver and other monetary metals came from
and how they were put into circulation (and also how broadly they circulated).
It was not simply a case of a miner spending his time finding and digging up
silver ore, refining it and then trading it with some other person who spent a
co-measurable amount of time and effort weaving cloth, growing crops or herding
and shearing sheep for their wool. For one thing, these metals had to be
imported into Mesopotamia from across the Iranian plateau to the east, and west
to Cappadocia in central
Obtaining these metals was only the
first step in making them usable for monetary payments. The first
characteristic of any exchange system must be the creation of weights and
measures, for the essence of monetary exchange is co-measurability between the
monetary medium and the commodities, assets (land and tools) or labour time
being paid for. Inasmuch as the major resource flows within the public
institutions were rations to feed their dependent labour, while the major
payments from communities to the palace and temples consisted of crops, silver
was made co-measurable with barley. The idea was to administer prices for the
essential transactions in which the various departments of the temples and
palaces interfaced with each other and with the economy at large -the value of
crops, rents, fees and commodity purchases.
Recipients of rations were not
obliged to buy their food with money wages, for the public institutions
established their key monetary pivot by making the shekel-weight of silver (240
barley grains) equal in value to the monthly consumption unit, a 'bushel' of
barley, the major commodity being disbursed. The silver shekel was assigned the
same accounting value as that for the gur of barley. These two measures became
equal standards of value against which other commodities were measured,
112
creating
a bimonetary price ratio that was the first step in administering prices. It
enabled accounts to be kept interchangeably in silver and barley so as to
coordinate production and land rents, trade and services, debt and its interest
charges in a single overall system.2 Rural obligations such as
public fees and user costs for tools, draft animals, seeds or water as well as
fines could be paid in barley or other products assigned a silver/barley price.
By the end of the third millennium
royal proclamations had established the use of silver money as a tool to
allocate the flow of resources and leasing of productive assets. As an adjunct
to their specialisation of labour and the debts owed to the public
institutions, the primary role of money was to denominate obligations within
and between the temples and palace. In an epoch when trade was sponsored by
these large institutions, the main commercial role of money was to denominate
the debts owed for handicrafts advanced to
A specialisation of labour already
had to be in place to mount the colonisation and trade programme needed to
bring silver and other raw materials into
To quantify these resource flows a
measurement system had to be developed and prices assigned. On the broadest
level 'money' represented the overall schedule of interlocking price ratios.
This enabled flows of commodities, rents and fees to be quantified, allocated
and made fungible, so that land rents and related rural debts could be paid in
crops at the official price equivalencies.
The economy's defining monetary
transactions occurred as accounting entries on tablets within the large
institutions. Money's role was to provide the price dimension needed to
quantify and administer
113
these
activities on a monthly and annual basis. These accounting prices were an
intrinsic part of the system of weights and measures, with weighed silver
designated as the common denominator, it being also the sanctified store of
value. Prices were not determined by shifts in market supply and demand or in
the supply of silver, or even of barley. Like our acre, bushel or pound they
were supposed to provide stability by being uniform and unchanging. That is the
essence of any reference point -standardisation, not variability.
To standardize the forward-planning
process, the basic measures were made calendrical so that they could be
disbursed on a regular basis. This was a precondition for making the
distribution of rations and materials automatic. An administrative calendar was
created on the basis of a year divided into months of identical length. The
traditional lunar calendar would not do, for its average month was 29 Vi days,
produced by alternating durations ranging from 28 to 30 days. To avoid this
variability the temples created artificial 30-day months and a 360-day
administrative year. This left 5% days over at the end, a period that was made
part of the extra-calendrical New Year (whose celebration spanned the 11-day
gap between the 354-day lunar year and the normal 365-day solar year). In this
way the administrative calendar took its place alongside the lunar 'festival'
calendar that had been followed since the Palaeolithic.
The 30-day administrative month was
reflected in the gur of barley used to divide monthly rations of food into
daily units. It was divided into 60 parts (kur), enabling two meals to be eaten
each day out of the monthly ration quota. In a similar fashion the mina of
silver was divided into 60 shekels. And just as silver and barley were made
co-measurable on a 1:1 basis, the designated ratios for other key products to
be disbursed were administered in conveniently round numbers so as to keep
account-keeping as simple as possible.
This system of calendrical measures
provided a unified set of standards and reference points. The rate of interest
was set at the unit fraction, a shekel per mina (that is, l/60th) per month. The
sexagesimal division of monetary weights attests to their development within
the temples. It was calendrical, just as our division of the hour into 60
minutes reflects the originally institutional demarcation of time.
It was natural enough for officials
to adopt these measures, prices and interest rates in their personal dealings.
Under normal conditions such transactions followed the price leadership of the
institutions to which the officials belonged. To be sure, price variability did
occur in
114
variations
represented a deviation from the fixed order administered by the large
institutions. Likewise in the case of interest rates, members of the royal
bureaucracy lent money on their own account, especially to cultivators on
institutional lands. This 'privatisation' of public practice became more
characteristic as production and trade shifted away from the large institutions
to personal households, especially outside of Mesopotamia where the role of
centralized public institutions was not as pronounced, e.g., in tax farming.
In classical Greece the word for the
monetary unit - the stater - meant 'weight' (semantically cognate to shekel
in Akkadian) and also took on the meaning 'lending out at interest' (Lysias
10, cited in Kroll 2001). This indicates a feature that ultimately favoured
silver as the general-purpose money: its key role in denominating interest payments,
as well as payments to the public sector.
Kroll finds silver mentioned in
eleven parts of the laws attributed to Solon, 'such as payments of fines in
drachms into the public treasury for libel, for the rape or the procuring of a
free woman, and for an archon's refusal to discharge one of his legal
responsibilities; payments by the state for sacrificial animals, to bounty
killers of wolves, and to victors in the Olympic and Isthmian Games; and sums
collected and disbursements paid out by officials known as the naukraroi, whose
fund was called the naukraric silver, naukrarikon argurion' (Kroll
2001). These laws are dated c. 594 BC, over half a century before
coinage was introduced to the region. Kroll also notes that Lysias (12.19)
remarked that the payment 'need not have been in silver, since even in the late
5th century the public treasury would accept anything of value, including
slaves.' Silver functioned as a measure of value and also a store of value,
above all to denominate debts, starting with those owed to the public
institutions. Only gradually did its role develop as a medium of personal trade
and exchange.
The
large public institutions were essential catalysts in organizing the commerce
that modern critics of government planning assume to have been developed
spontaneously by individuals. The use of silver in their transactions was
economized by the system functioning largely on the basis of debts mounting up
as unpaid balances due. For small retail sales such as occurred when ale women
sold beer, the common practice for consumers was not to pay on the spot but to
'run up a tab,' much as is done in bars today.3
115
Such debts now are settled on
payday, but
Conducting transactions by running
up debt balances enabled money (that is, silver) not to be used as a
means of payment. Indeed, to the extent that money indeed emerged out of exchange
transactions, it was as a means of settling debts, mostly to the large
institutions and their official 'collectors.' As noted earlier, it also was
through the commercial role of these institutions in long-distance trade that
the monetary metals were imported and put into circulation. The major way most
families obtained silver evidently was to sell surplus crops produced on their
own land or land leased from these institutions on a sharecropping basis. The
palace also may have distributed silver to fighters after military victories,
or perhaps on the occasion of the New Year or royal coronation as suggested by
the anthropologist Arthur Hocart (1927).
Silver's use in exchange derived
from its role as a unit of account. This is what gave it a general character
beyond that of just another commodity. Inasmuch as it emerged via the planning
process that spread from the economy's temples and palaces, advocates of the
state theory of money will note that these public institutions were the
ultimate guarantors of the value of silver, by accepting it in payment of
obligations owed to them.
However, while the public sector
guaranteed the value of silver as general-purpose money, it did not uphold the
sanctity of debt claims. Just the opposite. Babylonian rulers annulled the
accumulation of debts periodically, most notably at the outset of their first
full year on the throne. It was these debt annulments that kept
What distorted Babylonian economic
life was not a 'monetary problem' as such, but a rural debt problem. Bumper
crops did not lead to a collapse of prices as occurs today. However, crop debts
could not be paid when the harvest failed. There was no notion that market
shifts in prices or interest rates might have restored equilibrium. Commercial
interest rates remained stable at customary levels century after century,
regardless of the supply of silver. (However, the borrower's degree of distress
was a factor in rates charged for barley debts, which varied much more than
rates charged on commercial silver debts.) Monetary adjustments were
unnecessary because royal 'debt management' annulled the debts that accrued
when crops failed and debts grew too large for the rural economy to pay, especially
in times of military conflict.
116
The
idea that money originated as a vehicle to settle debts rather than paying for
goods on the spot as quasi-barter causes cognitive dissonance to modern
monetarists. The thought that public institutions acted as civilisation's
monetary catalysts creates an even greater ideological distress. Putting these
two ideas together - the origins of money as a means to pay commercial and
rental obligations to public bodies - stands the individualistic antigovernment
view of monetary origins on its head. Matters are further aggravated by the
fact that as rulers were charged with maintaining the rhythms of nature, they
proclaimed Clean Slates to restore balance by annulling debts owed to the
palace, its collectors and other creditors.
Sensing these threats to modern
libertarian creditor-oriented values, many economists either ignore early
economic history or, more often, misrepresent the public context for early
monetary relations to fit their preconceptions. Fritz Heichelheim's Ancient
Economic History, first published in 1938 and greatly expanded in a 1958
English translation, is perhaps the most notorious compendium of such
misreading. It has confused the history of money, debt and interest partly
because it was the earliest general survey to appear. The author's libertarian
antipathy to government intervention, above all in the monetary sphere,
prompted him to ignore anything positive about public institutions. Attributing
mercantile innovations to individuals acting on their own, he reconstructed
civilisation's early economic history along individualistic lines. He attempted
to defend his error by seeking to censor alternative views, responding
intolerantly to Trade and Markets in the Early Empires by Polanyi's
group by decrying the fact that it had been published at all! Such is the path
to intellectual serfdom led within academia by the Free Market school of
individualists.
Sidestepping the dominant role of
117
along
with weights and measures to form a system of interlocking parts able to
coordinate resource flows and denominate debts owed to the public institutions.
Trade outside the large institutions
was less regulated. In times of scarcity, prices for commodities might rise for
sales by individuals. Commodities that fluctuated in price were relatively rare
or were not an intrinsic part of the institutional core activities. Foster
(1995) and Powell (1999) point to examples of trade outside of these
institutions at higher prices as demonstrating the ineffectiveness of public
price controls, but this does not seem to have been the aim of administered
prices.
Taking matters out of context,
Samuelson (1967:54f.) views money as a means of payment for what essentially
are barter deals among individuals. 'Even in the most advanced industrial
economies', he writes, 'if we strip exchange down to its barest essentials and
peel off the obscuring layer of money, we find that trade between individuals
or nations largely boils down to barter.' Yet the specialisation of labour
meant that different production cycles could not be handled in this way! All
societies have run up debts to bridge the gap between planting and harvesting,
the consignment of goods to traders and their seasonal return from their sea
voyage or caravan, or advances of raw materials to craftsmen to make finished
products.
Beneath what Samuelson dismisses as
'the obscuring layer of money' is credit, that is, debt. And it is the dynamics
of debt that led to economic crises that deranged antiquity's economic balance,
just as it disturbs today's domestic and international relations. It was one
thing to manage money, another to manage interest-bearing debt, although each
sphere affected the other. The analysis of economic relations in terms of
barter unrealistically separates monetary from debt analysis. Yet most monetary
discussion assumes that trade always has needed to be financed by full
immediate payment, either in bartered goods or in money. Neither Heichelheim, Samuelson
or other neoclassical economists have acknowledged the problem of debts
mounting up in excess of the means to pay or the role played by royal 'debt
management' in the form of Clean Slates designed to restore balance and
equity to the monetary/debt system.
The essential point to recognize is
that the early monetary system was a more complex phenomenon than the monetary
commodity itself. Its major initial application was to facilitate settlement of
the debts that ensued from
118
system,
as were rent debts. Viewing trade as barter obscures these debt relations
between public and private enterprise.
The underlying problem is one of
ideological blinders. The individualistic theory has been expounded in the form
of an antigovernment fable of how money might have originated among
individuals, or at least among modern individuals transplanted five thousand
years into the past and paying cash on the barrel. Such speculation describes a
world that hypothetically might have developed, but without regard to how
civilisation's early economic institutions actually evolved. Its criterion for
acceptability has become simply whether its assumptions are logically
consistent, not whether they are grounded in historical reality.
Perceiving monetary silver and gold
to be nothing more than commodities, economic liberals strip away money's
institutional role and its association with debt, and hence with the need for
public regulation. The banker's view sees money as a hard commodity (or backed
by such, and whose value derives from exchange), not a social institution.
Bankers argue that governments should leave money and credit to the private
sector, except to bail them out of their own bad loans. Just as
Hoping to limit money and credit
creation to their own deposits, modern financial institutions have a vested
interest in denouncing government regulation, not to speak of discouraging the
public sector's rival ability to create its own money and credit. They are
pleased to believe that their own forerunners created civilisation's money and
credit system on a sound basis until governments got into the act and ran down
economies by onerous taxation, over-regulation, inflationary over-issue of
money and general financial and commercial mismanagement. But this view hardly
has found empirical confirmation.
Examining the records of
119
this
theorizing in
Innes
(1913) was one of the first observers to recognize the extent to which early
exchange was conducted by running up debt balances rather than by settling
transactions on the spot. In this respect he anticipated the anthropological
studies of gift exchange in communities where mutual aid is the norm. But like
Mauss his point of reference was not the Bronze Age
Neither of these two types of
non-commercial obligation involved the kind of payment for commodities usually
analysed by monetary historians. It has been assyriologists who have revealed a
system of payments to the public institutions in which the specialization of
labour first developed, including the sponsoring of long-distance trade and the
exchange of specialized commodities with the population at large. User costs
paid to these institutions have become the essence of Assyriological studies of
the cuneiform records that reveal how money developed historically.
These accounting records appear in
the context of
120
Assyriologists have taken care to
stay clear of economic ideology, precisely because the lines of their research
are not helped by modernist individualistic preconceptions. For this reason
most economists have steered clear of Assyriology, electing to pick up the
history of money only in classical antiquity when coinage developed, as if Near
Eastern civilization's monetary and legal institutions had not been providing a
context for two or three thousand years.
Monetary historiography based on the
cuneiform record stands in contrast to the deductive approach of modern
economic individualism. That school starts with the assumption that individuals
seeking their own self-interest must have developed nearly all modern social
institutions. In this view such individuals hit upon the fortuitous invention
of money as a means of economizing on the transaction cost of their commercial
exchanges in the context of what had been barter trade. Commodity prices traded
by individuals are the focus, not the economic context of production by
professions organized by the temples, palace or other public agency, or
payments to the public sector, or even payments to other individuals for
non-commodity transactions such as compensation for personal injury. Credit and
its interest charges are viewed only as occurring at the margin, not as the
starting point of monetary analysis.
Inasmuch as assyriologists start
with the actual documentation in the form of tablets, letters and public
inscriptions describing the workings of the temples and palaces that mediated
the specialization of labour and exchange in Early Bronze Age Mesopotamia, it
is appropriate to summarize this chapter by reviewing the findings of what has
come to be known as the New Economic Archaeology.
The power to create money and expand
the credit supply historically has tended to be in the hands of public bodies.
Ever since its Bronze Age inception, money's power has been established by the
public sector's willingness to accept it in payment for public fees and taxes.
Today it is no longer just a commodity, nor is it backed by a commodity, but by
the government's obligation to pay the bearer.
Early monetary power was based on
the precious metals as the ultimate monetary means of settlement, above all for
international payments as what James Steuart called 'the money of the world.'
But in time the real monetary power became the ability of designated banking
institutions to create paper credit on the monetary base. But this base has
progressively shifted from gold and silver bullion to government debt -promises
to pay either out of tax power or, as a last resort, simply printing the money.
In analysing the evolutionary paths
culminating in modern economies, Polanyi and his colleagues traced how modes of
exchange proceeded
121
from
reciprocity to redistribution within the large public institutions. More
recently the International Scholars' Conference on Ancient Near Eastern Economies
(ISCANEE), a transnational group of philologists, archaeologists and
economists, has set out to avoid the anachronisms of modern categories in
creating an economic history of civilization prior to classical antiquity.
Since the 1990s the ISCANEE has issued
a series of monographs published by Harvard University's Peabody Museum that
carry on the tradition started half a century ago by Polanyi's working group at
Columbia University. The group contains philologists from nearly every region
and period of the Bronze Age Near East, including Robert Englund and Dietz
Edzard (early Sumer), Piotr Steinkeller and Mark Van De Mieroop (Ur III),
Johannes Renger (the Old Babylonian period), Carlo Zaccagnini (Nuzi), Muhammed
Dandamayev, Michael Jursa and Cornelia Wunsch (the neo-Babylonian period).
Baruch Levine and William Hallo have focussed on how
By tracing the evolution of royal
laws and related inscriptions, myth and ritual, commercial documents and
private letters, these philologists have reconstructed civilization's formative
Bronze Age period from the actual records, tracing how economic categories were
transformed from
The colloquia convened by this group
of scholars are published by Harvard's
122
order'
by cancelling rural debts, liberating bondservants and restoring land-rights to
cultivators who had forfeited them.
The group met in November 2000 at
the
By contrast, Samuelson (1967:52)
reflects the general confusion among economists by conflating money with debt.
'Along with capital and specialization', he writes, 'money is a third aspect of
modern economic life.' But where is the role of debt? General-purpose money
arose essentially for the purpose of paying the debts that arose as a result of
society's specialization of professions, and this occurred initially in the
large public institutions.
With
these questions and observations we are brought back to Innes's early intuitive
contributions.
Rather
than originating with private individuals trucking and bartering, money was
created as a medium to denominate and pay obligations to the large public
institutions. The Mesopotamian breakthrough lay in creating a system of price
equivalencies that gave a sense of proportion. The value dimension was provided
by accounting formalities that enabled temples and palaces to coordinate their
internal resource flows and dealings with the rest of the economy.
Silver was used more as a unit of
account than an actual means of settlement. Rent for land leased out by temple and
palace collectors in exchange for a share of the crop was estimated in advance
of the harvest, based on what the land was expected to yield under normal
conditions. This rental charge was recorded as a debt, to be paid at harvest
time. Crop shortfalls led to debts, along with debts owed to the temple and
palace for water,
advances of tools and
animals, and emergency
123
borrowings,
as well as debts to public ale women for beer provided during the year, to be
paid at harvest time.
Modern bank money is not a commodity
but is a form of debt, while government paper money is nominally a public debt,
albeit one that is not expected to be paid. What the government does is promise
to accept its money in payment to itself. The holder of such high-powered money
is in a position to exchange it for the taxes or other public payments owed.
The essence of modern financial
systems is that one party's debts are paid by transferring claims on other
parties, so that the means of payment represent the promise of some party to
pay. The money in our pockets is government debt, at least nominally. The money
in our checking accounts is backed by government bonds held by the banking
system as 'high-powered money,' supplemented with private sector debts. Our
deposit is itself the bank's debt (liability) to us as the depositor. Such
credit is a monetization of the economy's debt functions. Interest-bearing
securities and other debts are potential credit money, as they can be borrowed
against and hence monetized by the banking system.
But antiquity's debts only rarely
were transferable (e.g., among Assyrian traders who were closely associated).
Money was not yet potential credit, but simply the means of denominating debts
in terms of weighed pieces of metal to which a value was assigned. It is true
that debt brought money into being as a means of settlement, but the debts
themselves were the primary cause; money was the response, the designated
general means of payment. The public sector's administered prices, interest rates,
rental charges and crop estimates provided the context within which economies
grew accustomed to operate on a stable basis. Only thereafter could price
flexibility begin to make headway.
The monetary breakthrough was one of
standardization. The essence of money is not to be sought in the material from
which it was made, but in the fact that it provided a common denominator to
co-measure prices. As a measure of value, silver was intended to remain as
constant as the weight itself. Monetary inflation did not exist, nor did
shortages of silver create a debt problem. What enabled debts to be paid and
goods exchanged for each other was the fact that money's role as a unit of
account enabled a price schedule to be created for the commodities that could
be used to pay debts to these institutions. Book prices were designated to
provide a stable context for production, land rental and the consignment of
merchandise to traders. Exchange took place by running up floating balances
(debts) that were denominated in the monetary standard.
Why were individuals willing to
accept silver in exchange? No doubt silver jewellery had a symbolism that gave
it value in conspicuous
124
consumption
in the form of prestigious ceremonial gifts for burials to honour one's
ancestors and for one's relations on the occasion of marriage or for other
ceremonial rituals, as well as to make prestigious contributions to the
temples. As antiquity's public institutions were creditors, not debtors, people
were led to accept it as a general means of settlement at the point where
temples and palaces accepted it in payment for public fees.
Monetarists depict money as
reflecting private dealings, with little necessary interface with public
institutions. But as the currency system and debt overhead become unstable,
questions now are being raised as to whether money and debt once again should
be regulated in a way designed to minimize economic polarization. It is
beginning to be recognized that what most people deem to be monetary problems
are basically debt problems. These are deemed 'monetary' because they involve
banks. If bank debts go bad, their depositors' checking and saving accounts are
wiped out (although the government may bail them out by deposit insurance
programmes). But in antiquity there were no banks engaged in credit creation.
The debt problem did not involve a 'monetary' problem in the modern sense of
the term.
1.
See Diakonoff (1982), Archi (1984) (especially Renger's
article) and Hudson and Levine (1996) regarding palace exchange.
2. Hammurapi's laws (c.
1750) maintained this central monetary pivot in order to stabilize crop-rental
relationships by ruling that silver rental debts and other fees could be paid
in barley at the official rate. Other administered prices served to stabilize
public/private leasing arrangements and the sale of commodities to the rest of
the economy. The laws of Eshnunna c. 2000 BC start by establishing such
equivalencies. Assurbanipal's coronation prayer (668 BC) cites the prices of
barley, oil and wool that one could buy for a shekel of silver. See
3. We know this because
§§16-17 of the Edict of Ammisaduqa (1648 BC) annulled debts to ale women as
part of the royal Clean Slate. (The Edict is translated in ANET 11:40.) For a
general discussion see Hudson (2002), Ch. 5.
Algaze,
Guillermo (1993), The Uruk World System: The
Dynamics of Expansion in Early
Mesopotamian Civilization,
Archi,
Alfonso, ed. (1984), Circulation of Goods in Non-Palatial
Context in the Ancient Near East,
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Benveniste,
Emile (1966
Linguistics,
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Emile (1969
Society,
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Igor (1982), 'The structure of Near Eastern society
before the middle of the 2nd
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Igor, ed. (1991), Early Antiquity,
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Edzard,
Dietz Otto (1996), '
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"State" in Sumer and Akkad,' in M. Hudson and B. Levine, eds, Privatization
in the Ancient Near East and Classical World, Cambridge, MA: Peabody Museum
Bulletin no. 5, Harvard University, pp. 109-28.
Finley,
Moses (1981), Economy and Society in Ancient
Foster,
Benjamin R. (1995), 'Social reform in ancient
Mesopotamia,' in K. D. Irani and
Morris Silver, eds, Social Justice in the Ancient World,
Hallo,
William W. (1996), Origins: The Ancient Near Eastern
Background of Some Modern Western
Institutions,
Heichelheim,
Fritz (1938), An Ancient Economic History, from
the Palaeolithic Age to the Migrations of the Germanic, Slavic and Arabic Nations, vol.
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Heichelheim,
Fritz (1960), review of Polanyi et al., 'Trade and
markets in the early empires,' Journal
of the Economic and Social History of the Orient, 3, 108-10.
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Arthur M. (1927), Kingship,
Hudson,
Michael (1992) 'Did the Phoenicians introduce the
idea of interest to
Hudson,
Michael (1995), 'Roscher's Victorian views on
financial development,' Journal
of Economic Studies, 22, 187-208.
Hudson,
Michael (2000a), 'How interest rates were set, 2500
BC-1000 AD: mas, tokos and fsenus as
metaphors for interest accruals,' Journal of the Economic and Social History
of the Orient, 43, 132-61.
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Anthropology, Non-Market Economies, Marburg: Metropolis Verlag, pp. 301-36.
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Hudson,
Michael (2003), 'The creditary/monetarist debate
in historical perspective,' in
Stephanie Bell and Edward Nell, eds, The State, the Market and the Euro:
Chartalism versus Metallism in the Theory of Money,
Hudson,
Michael (2004), 'The development of money in
Hudson,
Michael and Baruch Levine, eds (1996), Privatization
in the Ancient Near East and
Classical World,
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Michael and Baruch Levine, eds (1999), Urbanization
and Land Oivnership in the Ancient
Near East,
Hudson,
Michael and Marc Van De Mieroop, eds (2002), Debt
and Economic Renewal in the Ancient
Near East,
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A. Mitchell (1913), 'What is money?,' Banking Law
Journal, 377-408.
Jacobsen,
Thorkild (1953), 'The reign of Ibbi-Suen,' Journal of Cuneiform Studies, 21,
100-10.
Knapp,
Georg Friedrich (1905), The State Theory of Money,
4th ed.,
Kozyreva,
N. V. (1991), 'The Old Babylonian period of
Mesopotamian history,' in Diakonoff,
Early Antiquity (1995), pp. 98-123.
Kroll,
John H. (2001), 'Observations on monetary Instruments
in pre-coinage
Laum, Bernard (1924), Heiliges Geld, Tübingen:
Mohr.
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and Scott (1901), Greek-English Lexicon, 8th ed.,
Mauss,
Marcel (1925), The Gift,
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Alfredo and C. C. Lamberg-Karlovsky (2001),
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the trade networks of the
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economic history,' Journal of
Institutional and Theoretical Economics, 140.
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Karl, Conrad M. Arensberg, and Harry W Pearson
(1957), Trade and Markets in the
Early Empires,
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Karl (1957), Primitive, Archaic, and Modern
Economies: Essays of Karl Polanyi, ed. George Dalton,
Powell, Marvin A. (1997 Leiden), 'Wir müssen
alle unsere
Nische nuzten: monies, motives, and
methods in Babylonian economics,' in J. G. Dercksen, ed., Trade
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Johannes (1979), 'Interaction of temple, palace and
private enterprise,' in the Old
Babylonian economy,' in Eduard Lipinski, ed., State and
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Johannes (1984), 'Patterns of non-institutional trade
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University of Pennsylvania, pp. 41-7.
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Piotr (1981), 'The renting of fields in early
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Achaemenid period: the evidence from private archives,' in Hudson and Van De
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Geoffrey
W. Gardiner
IN
THE opening sentences of his paper What is Money, Mitchell Innes
reminded his readers that the accepted theory of political economy was that
'under primitive conditions men live by barter,' but 'as life becomes more
complex barter no longer suffices as a method of exchanging commodities, and by
common consent one particular commodity is fixed on which is generally
acceptable ... this commodity thus becomes a medium of exchange and measure of
value.' This same theory is the major theme of the first four chapters of Adam
Smith's The Wealth of Nations.
Innes suggests that Smith's
explanation of the probable progression is not entirely sound. Innes is right,
as this chapter endeavours to demonstrate; Smith's perspective needs, as Innes
stated, some correction.
We accept, however, that Adam Smith
is right in suggesting in the same chapters that human progress was rapidly
advanced once specialisation of function was adopted, the 'division of labour'
as he calls it. The very first paragraph of his book reads:
The greatest improvement in the productive power of labour, and the
greater part of the skill, dexterity,
and judgement with which it is anywhere directed, or applied, seem to have been the effect of the division of labour (Adam
Smith, 1776).
Having
thus divided up the necessary tasks between them, humans need to exchange the
results of their labours one with another, and barter is an obvious means of
doing this. Smith does not pay much attention to the possibility that when
division of labour first began, the division was the result of arbitrary
authority, and that the allocation of the product of labour was by an
authoritarian rationing, not by free exchange. He declares without hesitation
that the division of labour is 'not originally the effect of any human wisdom.'
Instead he proposes a 'certain propensity in
128
129
human
nature, ... the propensity to truck barter and exchange one thing for another.'
Smith is only partly right: human
beings do have a propensity to barter, but they also have a propensity to
cooperate with fellow humans under the authority of a leader, a chief, or a
council of elders. The surviving records of an early agricultural/industrial
society, that of Bronze Age Mesopotamia, show an organisation of economic
activity very tightly regulated by the state, or by the local temple, which in
turn was controlled by elite local families. It is at its least reminiscent of
'cooperative socialism,' and perhaps amounted to full-blooded 'centralised
socialism,' to use modern terminology. On the other hand there may have been
similarities with the mediaeval guild systems whose elite, powerful leaders
persuaded the political authority to authorise them to establish controls,
standards and protection from competition.
The merchants in Bronze Age society
were not completely free agents, but appear to have been a body of people
authorised by the state or temple to undertake some specific trading on behalf
of the community, to which, human nature being what it is, they may have added
unrecorded private deals. At the very least they were always nominally servants
of the community. Even in 1800 BC a trading partnership would operate under
state regulation. The word 'merchant' {tamkarum) appears as an official
title, not merely a freely chosen activity which anyone could assume whenever
it suited. Records found on the edge of the Assyrian sphere of influence show
that merchants operated as members of what we might today call 'limited
partnerships' which had to be authorised by the government in distant Assur.
If there was free trade of a more
informal kind, its records have not survived. Despite the absence of surviving
evidence, one should not however totally dismiss the possibility that free
market - 'trucking and bartering' - took place, for even today the 'black' or
'grey' economies do not keep extensive records, and in ancient days they
certainly would not have wanted to go to the vast expense of the complex
process of making permanent records on baked clay tablets, the only form of
record which has survived in quantity. Unfortunately the majority of records we
have from the very early period, that is before 1500 BC, are obviously those of
a palace or temple bureaucracy, which, just like modern bureaucracies, did not
pursue cost containment: the bureaucrats' main concern was doubtless to protect
themselves from accusations of embezzlement. From the later Babylonian period,
which continues to produce cuneiform records until about 200 BC, there are records
of private transactions. But that era was in many ways as advanced as any
society before the railway age.
130
Most scholars, rightly or wrongly,
prefer to assume that the earliest trade was conducted by command economies,
closely controlled by the state, if it existed, or by the clan elders in more
primitive conditions. In the days when mankind was exclusively
'hunter-gatherer,' one can assume that the organisation of division of labour
was an extended family affair, with a 'pater familias' in firm charge, as
hunter/gatherers must surely have lived in very small groups, all closely
related.
Regulation was needed at a very
early stage for trade. The idea that barter, that is the direct free exchange
of goods and services, was a viable basis for an economy is unrealistic for two
reasons. First, due to the seasonal nature of many products, the things which
people need to exchange may not be produced at the same time of the year.
Second, and even more important, is the fact that most productive activities involve
a sequence of stages from the production of the primary raw material to the
sale of the finished product. The perfecter of the finished article has nothing
to exchange with the producer of the raw material: the latter has to supply on
credit terms, that is on trust that at some future time he will be reimbursed
in some way.
The word credit is derived,
very appropriately, from the Latin word for 'to trust'. The opinion of modern
economists, and of course of Innes, is that the division of labour, from the
very first moment it was applied, required the creation of a credit system of
some kind. It was absolutely necessary to be able to trust one's fellow
workers' promises to reward one appropriately at some future moment for one's
own products or services. It would have helped to have an enforcing authority,
and that makes it all the more likely that trade was conducted in a regulated
way, not by free individual option. There seems little point in disputing that
contention, as it is obvious that a completely free market economy has rarely,
if indeed ever, existed. We all rely on the existence of an enforcement system.
We rely on the rule of law. Mitchell Innes made this point forcefully and
correctly.
Credit and law are therefore the
basic essentials of economic progress. It is necessary to be able to enforce a
promise. Promises are just as freely 'trucked, bartered and exchanged' as are
physical goods. The commonest kind of bargain must always have been an exchange
of a present physical product or a present service in return for a promise of
something of equal worth in the future. But there surely would have been other
bargains in which one party traded a promise of future supply against the other
party's promise of a future action. It is the trading of promises which is the
hallmark of an advanced stage of social organisation.
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We
can explain the need for credit more clearly by elaborating the same example
which Adam Smith uses in Chapter 2 of The Wealth of Nations (1776), for
there he mentions 'a particular person makes bows and arrows.' In more refined
practice there might be two people, the bowyer (maker of bows) and the fletcher
(maker of arrows). Another might act as woodsman, coppicing the trees to
produce the material for arrows. A second, more specialised woodsman might seek
out the special woods, such as yew, which made the best bows. A specialist
huntsman used the weapons. Yet another skilled technician knapped the flints to
make the ultra-sharp arrowheads, the invention of which turned mankind in the
Mesolithic Age into the most dangerous and destructive of all animals.
Let us assume that the huntsman is
in need of a supply of arrows, but until he can hunt he has nothing to give in
exchange. So he promises the fletcher ten haunches of venison in exchange for a
supply of arrows. In modern terminology he is asking for 'trade credit.' In
evidence of his promise he notches ten bones and gives them to the fletcher.
These are his 'markers.' The fletcher needs wood, so he asks the woodsman for
trade credit, promising haunches of venison when the hunter has been
successful. He could hand over some of the markers of the huntsman as evidence
of his promise.
The various deals might be notified
to the headman, who, we may confidently assume, will also require a reward of
venison in return for a promise to enforce the deals. The huntsman gets his
arrows, and goes off to the hunt. Having been successful, he pays off his debts
to the holders of his markers. The chief gets his reward too.
We cannot be sure that such
arrangements ever happened exactly as thus surmised, but notched bones do
survive from hunter-gatherer settlements of the Stone Age. Indeed some are very
elaborately notched, suggesting to some scholars quite sophisticated
accounting. Others claim that the earliest notched bones are calendrical in
character. This scholarly dispute may be of no great significance as accounting
techniques must at some stage absorb calendrical technology, as time is an important
factor in accounting, and the transition from astronomical notation to a
notation of obligations is, we are informed, documented by c. 9000 BC
(Schmandt-Besserat 1992).
The long established tendency to
think of Stone Age people as mere savages, incapable of such sophistication, is
surely quite wrong. Mesolithic and Neolithic peoples may have lacked the
accumulation of technical knowledge of modern people, but they did not lack
their
132
intelligence.
Indeed there is the evidence of the complexity of ancient languages to suggest
a decline in some intellectual abilities in modern times, not a rise. It has
been further assumed that the settlers in the remotest and most barren places
were the most savage. There are few places as remote and so infertile as the
Sticks are easier to notch than
bones, and the notched stick was the main method of keeping permanent accounts
in places with ample supplies of wood until the end of the 18th century. In
Chapter 5 of The Universal History of Numbers (1994) Georges Ifrah
introduces his readers to the mode of using notched sticks. In the first
sentence of the English edition of this comprehensive work of impressive
scholarship he tells his readers that notched sticks - tally sticks - were
first used at least 40,000 years ago. He states that as a method of accounting
the notched stick has stood the test of time. He suggests that only the
invention of fire is older technology than the accounting tally. In the first
part of the chapter Georges Ifrah describes notched sticks merely as a means of
counting, but on the second page he explains how the tally can be used as a
form of bill and receipt, and then likens it to a wooden credit card, nearly as
efficient and reliable as the plastic ones with magnetic stripes and microchips
with which people today are so familiar.
We have already seen from our
example that a promise given from clan member A to clan member B could in
principle be assigned to clan member C. Rules have to be worked out to provide
for this. A formal law of contract is needed. The law may say that the benefit
of a promise can only be assigned if the person who has given the promise
agrees. The Common Law of England took the view that a promise could always be
assigned so long as assignment was not excluded by the specific terms of the
original promise, and provided that the person who has given the promise is
notified of the assignment. Later legal developments allow for the creation of
promises that can be assigned without notice to the promisers, and also of
promises which can be enforced by the bearer of the marker which evidences the
promise.
Another circumstance which is
implicit in our account is that if the benefit secured by a promise can be
transferred to another party, it can be traded, that is exchanged for some
other commodity or for a service, or
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for
another promise for the same. Something which can be traded can therefore also
be used as a medium of exchange. For a means of exchange to be most convenient,
it helps if a standardised promise is used. As described in Chapter 5 by
Professor Michael Hudson, an example from early
The three commonly recognised
characteristics of money are that it should be a medium of exchange, a measure
of value and a unit of account, and a store of value. We can readily see that
promises are also 'stores of value.' So a tradable promise or 'debt' has the
first and the third of the three characteristics which economic theory applies
to money. Is not the second characteristic of money, that it should be 'a
measure of value,' implicit too? Is not a promise of any kind capable of being
a measure of value? It is however inconvenient to have multiple measures of
value, and the tendency is to use one commodity alone as the basis of the
common measure of value. For reasons we have to guess, silver became a popular
standard at a very early date, and was the predominant standard in one location
or another for at least 4,000 years.
Trade credit is the essential
foundation of the whole economic system, and the essential financial problem of
economic development is to monetise trade credit, to turn it into an instrument
for transferring value, for measuring value and for storing value.
But first it was necessary to
standardise the common unit of account. The gur of barley has a great
weakness as a standard of value; the yield of the barley fields varies
dramatically from year to year, and therefore supply as a ratio of demand is
never the same from year to year. Naturally that affects the value of the
barley relative to other products. Ideally a medium of exchange should be
something which cannot readily vary in value in terms of other products. The
ideal medium for the purpose is one which is of itself comparatively useless,
is fairly permanent, and which can by convention be given a set value. Innes
suggested that there never was a monetary unit which depended on a metallic
standard, by which we take him to mean that the monetary unit never was related
to the intrinsic value of the metal as a commodity. Instead, the relationship
was arbitrary and/or customary. Can we not go further and suggest that, to be
usable as a means of exchange, the commodity chosen as the measure of value
must be given an exchange value substantially above its intrinsic value as a
commodity, so that its value is immune from the effects of supply and demand on
its price? At that point, barley and other foods and essential
134
raw
materials cease to be an ideal means of exchange. It is not a good idea to
enhance the value of the chosen commodity of exchange beyond the true commodity
value if the commodity is a necessity of life. Luckily silver and gold are not
necessities of life.
It
is clear that any promise to provide goods or services can, if it is
trustworthy, be traded, and therefore can be used as a virtual means of
exchange. It is money in all but name. But a conventional medium of exchange is
more useful. The most popular medium of exchange for the last 5,000 years has
been silver, or, to be more accurate, a promise to provide a quantity of
silver, measured by weight, has been the commonest medium of exchange. However
the actual silver itself quickly became irrelevant in established communities,
especially so if they were peaceful. Bullion is the accessory of war, not of
peaceful trade.
Few or no records survive from most
of the places in the world where early trade took place. From mediaeval Europe
one comprehensive set of records of a trader exists, those of Francisco di
Marco Datini of
We have no accounting records from
the widespread Megalithic Culture of the Neolithic Age which built Stonehenge
and Carnac, and which extended from
135
prestige,
not for any intrinsic value, or for use in exchange. A jurist might suggest to
anthropologists that in practice the distinction between gift exchange and
trade has never been easy to make. The overlap could be nearly total.
Archaeological
evidence exists in abundance from Bronze Age Mesopotamia.3 When a
great river flows through an alluvial desert, it often changes course and
leaves some cities high and dry, and therefore immune from nature's most
destructive forces. Lacking other convenient materials,
Bronze Age records, as Innes
remarks,5 show the development of credit for trade, and even more
important the development of what modern banker's jargon calls 'documentary
credits.' The alluvial plains of the Tigris and
We tend nowadays to think of
religion as the non-material activity of mankind. Did not Jesus expel the
moneychangers from the
In the earliest records scholars
find that Babylonian merchants accepted advances of cloth from the temple
workshops, in return for which they promised to supply a fixed quantity of
silver at a later date. No interest is prescribed in the extant tablets, but
that is not really surprising for even modern trade credit rarely states a rate
of interest. The interest element is built into the price, and becomes an issue
only if the debt is not paid on the due date.
We do not know what happened to the
silver the merchants paid to the temples. We assume that it must have been used
to buy something for the
136
community.
The merchants who traded down the
We can make this presumption because
we know that documentary credits were issued which represented amounts of
silver. The
As Professor Michael Hudson (2002)
points out:
As so many of these documents are unbroken, it looks as though they
were used as semi-permanent stores of value,
at least in the sense of a viable claim or record of such value. What would have been needed for them to have
been used as money would have been for them
to have passed freely from hand to hand.
The
transfer would have been in exchange for commodities, fulfilling Innes'
assertion that a sale or purchase is an exchange of a commodity for a promise.
If one looks upon the temple as a sort of bank, as Innes suggests, one could
then describe the documents in modern terms as bankers' acceptances. They would
be, effectively, bills of exchange payable to bearer, and the receipt on the
outside seems to have exactly the same effect in law as a modern acceptance by
a banker of a bill of exchange. Klaas Veenhof (1999) has found this to have
been the case among Assyrian merchants. In a recent article he mentions
cuneiform tablets that represent:
[p]romissory notes which do not mention the creditor by name, but refer
to him as tamkarum, 'the
merchant/creditor.' In a few cases such notes at the end add the phrase 'the bearer of this tablet is tamkarum'
(wabil tuppim sut tamkarum). This clause suggests the possibility of a transfer of
debt-notes and of ceding claims, which would
make it a precursor of later 'bearer cheques'
Such tablets would have facilitated
the flow of money and especially the collection of debts when creditor and/or
debtor were in different places.6
137
However, the temples in those early
days seem not to have fulfilled all banking functions. In the later Babylonian
period, after 800 BC, the Egibi family accepted deposits and made loans, but
the rate of interest was the same in both cases. Dr Cornelia Wunsch, who has
studied the Egibi archive, accepts (Wunsch 2002, p. 247) the view expressed by
Bogaert (1996) that as there was no interest rate spread from which to make a
profit, this was not true banking. Perhaps we can speculate that there was some
other source of profit from the transactions, of which there is no record.
There might have been an arrangement fee or some other payment on the
side. But there would have been no need to make a record of the supplementary
transaction if the fee were taken in cash or, more likely, deducted from the
loan, a common practice in later ages.7
What records did the temples keep of
the issuance of these case tablet receipts for silver? Did they know how much
they owed in total? To keep proper track of debts and their redemption required
a very sophisticated technique, that of double entry bookkeeping. Scholars who
can read cuneiform tablets are not normally skilled accountants, but they have
looked at the ancient records from the second millennium BC onwards for
evidences of double-entry bookkeeping. When the scholars met in conference in
November 2000 at the British Museum, Professor William Hallo of Yale presented
a paper in which he gave the evidence he had discovered to show that precursors
of double-entry bookkeeping had been used in the second millennium BC to keep
track of amounts due to a temple and the redemption of those obligations. The
accounts were not of transactions in money or silver but of physical items like
sheep. (Hallo 2004) Double-entry bookkeeping is just as useful to keep track of
physical things as it is of money, and it is perfectly logical that the
technique should have first been used to account for them.
There are also documents in which a
merchant promises to pay a certain quantity of silver to a named payee, but
some are guaranteed by a prestigious local merchant and are assignable. These
documents seem to be the ancestors of modern bills of exchange, as Veenhof
(1999) has noted. Some documents simply use the term tamkarum (merchant)
as the payee. Perhaps the effect is that the debtor will pay what is owed to
anyone who holds this official designation. It is unlikely to mean just anyone
who happens to be doing deals. The society was bureaucratic, and the merchant
was virtually a palace or temple official, or had some institutional
authorisation, somewhat like a British chartered company in the 18th century or
a statutory company in the 19th century and later.
In sum, not only was trade credit in
use from the very earliest time, but very sophisticated means were found to
monetise trade debts, that is to make them tradable for other things.
138
Although
silver, by becoming a medium of exchange, must have acquired a value higher
than its intrinsic value as a not very useful commodity, the Babylonians did
not invent anything like modern coinage, which has, as Innes suggests, a value
in exchange even further above its intrinsic value as metal. Even after the
people of Asia Minor had invented coins and they had been adopted by the Greek
world, the Babylonians still preferred to measure silver by weight, under the
illusion no doubt that that mattered! It was not until Alexander the Great
conquered the region that coins were commonly used. It seems quite likely that
in the area which was the heartland of the great
Such was the fame of the coins
issued in the area now called Afghanistan that when the great archaeologist,
Sir Aurel Stein, visited the area in 1907 he found that the old Arsacidian and
Bactrian coins were being forged to sell to collectors (Stein 1912). Strangely,
when he reached Dunhuang (he called it 'Tunhuang'), 1,000 miles or so to the
east, and the ancient gateway of
139
wrecked
the normal political control, and the merchants, though in a society well
acquainted with paper money, had reverted in the troubles to bullion, not to
coins. Stein called the process 'archaic,' and noted that the merchants used
two slightly different sets of scales, one being for buying and the other for
selling. The difference gave the merchant a small profit. Stein clearly
considered the practice of using bullion by weight as an emergency measure, the
result of political instability. The store of silver he had equipped himself
with had been bought by weight measured with a third set of scales, which were
not correct for Dunhuang use. He was £3 short by the Dunhuang measure. The
incident shows the inconvenience of using actual silver, instead of some
documentary substitute for it, such as the Babylonians of the second millennium
BC had learned to use.
The growth of the use of coins had
earlier been a feature of the Athenian Empire, and they seem to have very
greatly facilitated trade between the cities of the Mediterranean seaboard, for
their use coincided with a considerable expansion of seagoing trade. When the
Dark Age descended on Western Europe, the use of coins declined and so did
seaborn trade in the
Innes approved the theory that a
means of exchange becomes the recognised money of a state when the state is
prepared to accept that means of exchange in payment of amounts due to the
state for taxes and other burdens. As Viking leaders like Erik Bloodaxe had no
intention of paying any taxes to Saxon Kings why was Erik prepared to accept
the coins? There are two probable answers. One is that coins are always
acceptable if their bullion value is reliable; this coinage was mostly full
bodied, very sound. Erik would doubtless not have accepted it otherwise. The
second answer could be that Erik and his men spent many of the coins on English
merchandise, and the English merchants could use the coins to pay their taxes
to the English rulers. If this is what happened, the payment of danegeld must
have had the effect of vastly strengthening the English economy, the same
effect which Maynard Keynes later warned would be the effect of forcing
140
War
I. Perhaps that is why the English kings were eventually able to defeat the
Danes. In 1919 Maynard Keynes made the important point that to acquire the gold
for reparations payments,
That coins were still being valued
in Saxon times in some places by their weight is evidenced by a tiny set of
scales now in The Manx Museum on the Isle of Man. The scales were specifically
designed to weigh Irish coins of the early era. That does not prove that their
exchange value really depended on the bullion value; it merely illustrates that
some people thought it did!
After the flurry of coin production
to pay danegeld,
At much the same time the Knights
Templar were providing for travellers, at any rate those who were pilgrims, a
credit card as a substitute for cash.
Despite
the antiquity of the practice of monetising debts, it was still not
sufficiently highly developed when the Industrial Revolution started. It is
very strange that the importance of trade credit is ignored by economists, yet
it is by far the commonest form of credit, and has for most of history been the
normal way of capitalising a trade. Nowadays we think of a bank loan as the
normal way of financing production, of financing work-in-progress and debtors,
but in practice trade credit is still the major
141
source
of credit, and in earlier times it was even more important, as can be seen from
a case study.
This case study also highlights the
need for a better system: conveniently it is related to the personal well-being
of the famous economist Adam Smith, author of The Wealth of Nations, published
in 1776. Smith held the post of Professor of Moral Philosophy at
Thus the 'capitalist system' is
based on a chain of debt, and even the most humble workman is a capitalist if
he is granting credit to the organiser of the production.
When Adam Smith became famous and
richer he offered to give up the £300 annuity. The Duke refused the offer, as
he regarded his bond as binding, an example of how seriously obligations were
taken.
There
proved to be several ways of providing a community with transferable debts for
use as money. One was for the state to provide it. State debts, commonly in the
form of tallies, were the one way of doing it.
142
The
other method was for tallies issued by merchants to be used. As Innes
describes, there seems to have been an active trade in both throughout the
mediaeval era. But state debt was not regarded as reliable. Adam Smith in
Chapter 2 of Book II of The Wealth of Nations wrote that in 1696 tallies
for government debt were trading at 40, 50 and even 60 per cent discount to
face value. Consequently an attempt was made to found a bank whose capital base
was invested in land, not government debt. Surprisingly it failed, and the Bank
of England, whose capital base was invested entirely in government debt, was
the winner, perhaps because to start with a very generous 8 per cent was paid
on the Bank's loan to the government, plus a huge management fee. But the real
significance of the Bank of England was that it put behind the government
credit the full weight of the might of the great merchants of
Elementary economic textbooks tend
to ignore both government and private tallies, and to concentrate instead on
the issue of coins, which can take the form of both private and state debt,
though the former also tends to be ignored by textbooks. The minting of coins
is a valuable privilege, and in the mediaeval era the right to mint coins was
much prized by feudal magnates.8 A powerful ruler monopolised that
privilege for himself, and it gradually became a royal prerogative. Yet coinage
was commonly in short supply. The Duke of Buccleuch may have found it quite
difficult to get hold of coins with which to pay Adam Smith's annuity for
during the reign of King George III there was a strange reluctance to issue
coins. At one time the shortage became so urgent that a large number of Spanish
silver coins were overstruck and issued as British coins. The use of privately
issued brass tokens also became more common at about that time. Thousands of
tons of tokens were produced in
Coins were no doubt equally rare in
the British North American colonies. British policy towards
143
which
were used as paper money by the colonial governments. Some states and cities
overdid the issues with catastrophic results. Adam Smith thought them totally
unsound. The bonds paid no interest and were not redeemable for 15 years from
issue. Smith urged that they should be valued by discounting them at 6 per cent
to their redemption date. It did not occur to him, despite his theories of the
free market, that so long as the supply and demand for the bonds as a means of
exchange was kept balanced, there was no reason why they should yield interest.
In 1764 the British Government acted to ban the paper currencies. The effect
was doubtless catastrophic. It must have ruined the credit base of the
colonies.
Banknotes were another convenient
substitute for money, but there were problems with them. The Scots were
pioneers of banking and the issue of banknotes. That may have been partly
prompted by the fact that
A popular view among economists is
that the founding of the Bank of England monetised the government debt.
Although it may have had the capability to monetise government debt, its
primary action seems to have been the very opposite: it took government debt
out of circulation, for government debts, doubtless evidenced by tallies, with
perhaps short redemption dates, were replaced by a large bank loan secured on
an irredeemable government annuity. If the structure which was created in 1694
were being founded today, it would be described as principally an investment
trust of government loans, not as a bank. The arrangement the Bank of England
made with the government would be described as a funding of the government
debt, that is the replacing of short-term liabilities with long-term ones. That
reduces the amount of government debt which can circulate as money, so the
common academic view of the purpose of the creation of the Bank of England
looks mistaken. The circulating money which the Bank could create was its
notes, but these were commonly issued to private individuals in exchange for
commercial
144
bills
of exchange. They were therefore mostly a means of monetising private debt, not
government debt. Details of the early issues of notes are hazy, but in 1697 the
Bank was being criticised for having, in modern terminology, a capital adequacy
ratio of less than 50 per cent. When the Bank of England was created in 1694,
it was given a monopoly of banking for 65 miles around
Although the Bank of England
contributed to liquidity it seems that what it supplied was nowhere near enough
for the needs of the economy. The fact that the only note which survives from
the early era is for the sum of £555 and is made out in favour of a named
individual may be an indication that the Bank did not then see itself as the
provider of a national currency. When the state fails to provide a medium of
exchange, the public has to invent its own. This it did. The means it adopted
was the bill of exchange, the improved paper version of the mediaeval wooden
tally stick and the Babylonian baked clay tablet. The extent to which the bill
of exchange became the main means both of monetising debts, and of providing a
means of exchange, is illustrated by figures prepared in the late 1830s by a
Mr. Leatham, and quoted by Henry Tooke in his 1844 An Enquiry into the
Currency Principle. Tooke writes:
That
transactions to a very large amount are adjusted by bills of exchange has long
been known and admitted in general terms; but the vastness of the amount was
not brought distinctly under the notice of the public till the appearance of a
pamphlet by the late Mr. Leatham, an eminent banker at
Mr.
Leatham gives the process by which, upon the data furnished by the returns of
stamps, he arrives at these results; and I am disposed to think that they are
as near an approximation to the truth as the nature of the materials admits of
arriving at. And some corroboration of the vastness of the amounts is afforded
by a reference to the adjustments at the clearing house in London, which in the
year 1839 amounted to £954,401,600, making an average amount of payments of
upwards of £3,000,000 of bills of exchange and
145
RETURN
OF BILL STAMPS, FOR 1832 TO 1839 INCLUSIVE |
||
|
Bills
created in THE p
Office. |
Bill Average
amount in circulation, at one
time in each year. |
1832 |
£356,153,409 |
£59,038,852 |
1833 |
£383,659,585 |
£95,914,896 |
1834 |
£379,155,052 |
£94,788,763 |
1835 |
£405,403,051 |
£101,350,762 |
1836 |
£485,943,473 |
£121,485,868 |
1837 |
£455,084,445 |
£113,771,111 |
1838 |
£465,504,041 |
£116,316,010 |
1839 |
£528,493,842 |
£132,123,460 |
|
cheques
daily effected through the medium of little more than £200,000 of bank notes.
As
illustrative of the position for which Mr. Leatham contends, and conclusively,
as I think, that bills of exchange perform the functions of money, he observes,
For
a great number of years, it had been the custom of merchants to pay the
clothiers in small bills of £10, £15, £20, and so up to £100, drawn at two
months after date on
The use of bills of exchange as
popular currency is unknown in modern times, and consequently their importance
in earlier times is missed by modern economists, and especially by monetary
theorists. The most common bill of exchange is an instruction by the seller of
goods to the buyer of goods to pay a fixed sum at a future date, usually 30, 60
or 90 days hence. The buyer, or his bank, signs the bill to show he or it
accepts the liability. The benefit of the bill can be transferred to a third
party, to a fourth, to a fifth and so on without limit. Each new transferor
endorses
146
the
bill and thereby becomes liable upon it if the original debtor defaults. An
endorsement is, as its name suggests, a signature on the reverse of the bill.
If one runs out of space, an attachment called an allonge is made to
hold further signatures. A bill which has a string of endorsements by reputable
traders is better than gold, better than the notes of a small country bank, and
even better than a Bank of England note in that it carries interest, for the
price at which it changes hands is determined by discounting the period to
maturity at an appropriate rate of interest.
It will, one trusts, occur to
monetary theorists that the capability for the creation of money in the form of
bills of exchange is potentially infinite, but of course in practice the need
for acceptable names to appear on the bills limits the free creation of bills.
Correctly used the bills will never exceed the amount of trade credit
outstanding. The total amount will tend therefore to reflect the level of
economic activity. We can see glimmering before us the monetary theorist's
ideal, a money supply which reflects economic activity exactly and therefore is
not inflationary. Unfortunately bills were not always correctly used. There is
no perfect system.
The period covered by Leatham's
figures was one of great economic advance. The first passenger railway had
opened two years before his first figure, and the railway age was in full
swing. We can note that in seven years the amount of bills outstanding more
than doubled. Yet the bullion reserves of the Bank of England did not double.
Tooke quotes figures produced by a Mr. Pennington for some of the years
included in Leatham's figures. They show the bullion held by the Bank as
£6,283,000 in July 1834, £7,026,000 in January 1836, £9,336,000 in January 1839
and a mere £3,785,000 in July 1839. Economic activity could not therefore be
closely related to the bullion reserves of the Bank of England. During the same
period, the Bank of England was not, it seems, increasing the supply of its
bank notes at the same rate as the expansion of the economy for Pennington's
figures show the value of notes in circulation with the public as £18,283,000
in July 1834, £19,076,000 in January 1836, £21,336,000 in January 1839 and
£18,049,000 in July 1839. The bank put the security of its notes above all
other requirements, and continued its cautious attitude until 1917 when the
Treasury lost patience with the Bank's caution, and took over the issue of
low-value notes. The Treasury notes had no gold backing.
147
If
an obligation is assignable, it can be used both as a medium of exchange and as
a store of value. If the obligation is not only assignable but is expressed in
terms of the standard measure of value, it can properly be regarded as money.
As Innes makes clear, by nature all
money is assignable debt. A pound note is theoretically a debt of the Bank of
England. A bank deposit is a debt of the bank. A holding of gold is a portable
form of debt. It may be argued that modern coins do not fit into the category
of assignable obligations. They are issued, usually by the state, in return for
value given, but the state has no intention of making a reverse exchange.
Admittedly it could commandeer goods from other citizens in order to redeem
coins offered to it by a holder, but it never does so. At one time, but not
nowadays, the state accepted coins in payments to itself, and that sufficed to
make them acceptable to all. That acceptability has continued even though the
British Treasury no longer takes any coins back.
Obviously
the holder of a coin is a creditor, because he has obtained it by a supply of
goods or services, but who is the debtor? As Adam Smith puts it in Chapter 2 of
Book 3 of The Wealth of Nations : 'A guinea may be considered as a bill
for a certain quantity of necessaries and conveniences upon all the tradesmen
in the neighbourhood.' By bill he means a bill of exchange, the normal
debt instrument of his time.
If a person holds such coins, he or
she got them by providing goods and services to the community, and consequently
is morally entitled to goods and services in return. He or she is not a
creditor of any specific person or institution, but is recognised as a creditor
by anyone who provides him or her with goods in return for his or her gold.
Although the nominal debtor is the issuer of the coins, in practice anyone who
accepts them in payment has volunteered himself as the debtor pro tent. With
forms of money other than gold and silver or those currencies deemed to be
legal tender by statute, the fact that money is by nature assignable debt is
more obvious.
Mitchell Innes is categorical on
this point. In his summary at the end of his paper he states, 'A sale and
purchase is an exchange of a commodity for a credit' (1914, p. 168). The coins
or banknotes the seller receives for his supply are the measure of the credit
he has given to the purchaser, and, more widely, they reflect the debt society
as a whole owes him.
The modern practicality is that the
state has no intention of redeeming currency notes, but will accept them in
payment of debts to itself, or for exchange into its own bonds. We mentioned
earlier that Adam Smith objected to the North American Colonies use of 15-year
bonds as
148
currency,
and wanted them to be valued at a discount to maturity of 6 per cent. Yet
modern governments issue notes with no maturity date at all. The notes of the
Bank of England do bear the legend 'I promise to pay the bearer on demand the
sum of ...' and this promise is signed by the Chief Cashier. However if one
tries to present one of these notes at the Bank and demands payment, the
payment takes the form of another note bearing exactly the same promise! In
reality, therefore, with modern banknotes too, the real debtor is anyone who
accepts them in exchange for supplying goods or services. By accepting the
notes, the vendor/recipient has acknowledged by his action that the holder of
the notes is a creditor of society, and the recipient in turn expects to
acquire the same privilege. So long as he or she does so, the banknotes are
acceptable currency. To paraphrase a remark of Aristotle 'From customary
practices, moral rights develop.' As with coins, a holder of banknotes has
acquired them by supplying goods or services in exchange, and therefore has an
undoubted moral right to an equal value of goods and services from the
community.
But the Bank of England, like other
central banks, goes through the motions of keeping a stock of assets to balance
the notes outstanding. Since 1844 the Bank had been divided into two
departments, The Banking Department, which holds the accounts of the
institutions which bank there, and The Issue Department, which publishes
a balance sheet showing the issued notes as liabilities, and on the other side
of the balance sheet are the assets in which the proceeds of the note issue
have been invested. Mostly the assets are government debts, but often the
assets will include commercial bills of exchange. The income earned by the
assets is handed over to the British Treasury, less the cost of managing the
note issue. It may sound like a bureaucratic farce, but the practice at least
makes it clear that banknotes are a debt, and the asset backing gives
confidence though only psychologists might be able to explain why.
Although most commercial bills of
exchange reflect sales of goods and services, they can easily be manufactured
to reflect no worthwhile movement of value. One fraudulent practice was known
as 'kite-flying.' What happened was that two collaborators would issue bills to
each other and discount them with banks. When the time came for payment they
would repeat the process. There would seem to be no limit on the amount of
credit which could be created by the unscrupulous, but the restraining factor
was the need for at least one 'good name' to appear on a bill-Without it the
discount rate could be horrific. Nor was the discount rate on bills affected by
usury laws which restricted the rate of interest chargeable, or the total
prohibition on interest which the mediaeval church tried to enforce. One of the
suggested reasons for the popularity of
149
bills
was that they were exempt from such religious restrictions. The reason for the
exemption was supposed to be the fact that the discounter of a bill of exchange
was taking a risk. Reward for risk was approved; receiving interest, supposedly
without risk, was condemned. In real life situations the rate of interest
reflects the degree of risk. The church's total ban on interest was
unrealistic, and the existence of a devious way of avoiding it was an economic
necessity.
It has been observed time and time
again in the last 400 years that banks can create credit very freely, because
they know that the drawing down of a loan automatically creates the deposit
which balances the lending. When a bank has agreed to lend, the moment that the
loan is drawn down by the payment of a cheque drawn upon it, a deposit to match
it is also created at the receiving bank. Therefore the moment a borrowing
takes effect, the saving to match it must arise as well. Even if the borrowing
is to finance a capital project, the saving to match that capital investment
must come into being automatically the moment the loan is drawn down to make a
payment. As all money is effectively transferable debt, then money can be
created by creating debt. Once it is realised that all money is some form of
debt, it becomes obvious that money can only be created by creating debts. This
has been understood by good economists for hundreds of years, but is rarely
understood by the public. But, as Innes makes clear, although all money is
debt, not all debt is money.
All
financial matters, like that just described, become easier to understand when
die reader is conversant with the principles of double-entry bookkeeping. That
is harder than it sounds as most of the world's accountants seem to be unsure
of the reasons for the procedures they have learned to follow. Double entry is
used because of the basic fact that every movement of value has two aspects,
and both should be recorded in a proper set of accounts. For the giver of value
the transaction is a credit, for by giving value he has earned a credit, he is
owed the equivalent. For the receiver the transaction is a debit, because he is
a debtor for the value.
The basic rules of double-entry
bookkeeping are as follows:
1)
debit value in, credit value out;
2) debit receipts, credit
payments;
3) debit assets, credit
liabilities;
4) debit losses, credit
profits.
150
People whose only experience of
accounts is their bank account are always puzzled by rule 2. That a payment is
credited to cash, and a receipt of money is debited, sounds very odd to them,
as on their bank accounts exactly the opposite happens. But the bank account is
how the customer's transactions appear in the bank's accounts, not the
customer's. A bank statement is a copy of the bank's books. When a customer has
a credit balance that means the bank owes money to the customer. Any additional
deposit in the account increases the bank's liability to the customer, so his
account is credited. The customer's record in his own books of his banking
transactions - if he keeps any - must show the items on the opposite sides to
those shown on the bank's statement.
That an asset is a debit is also
puzzling, but it represents 'value in.' If I buy an asset, my payment will be
credited to my cash account, and the balancing debit will be to the asset account.
If I sell the asset to a customer, I will credit the asset account, and debit
the customer with the cost. When the customer sends me a cheque in payment I
will credit his account in my books with the sum, and debit the money to my
cash or bank account. But by bank account I mean the bank's account in my
books, not my account in the bank's books.
Every transaction has to be recorded
twice, or a multiple of twice, in any set of accounts, each as a debit and as a
credit. There are no exemptions to this rule. The need to record things twice
seems to have occurred to those responsible for accounts at least 4,000 years
ago. When a sheep was due to the temple from a peasant, the temple would record
the sheep as owed by the peasant, and list it as a part of the income of the
temple. When the sheep actually appeared, the peasant's record would be
credited, the debt wiped out, and the temple would add the sheep to the list of
the sheep it owned. The accounts of that era went no further along the road of
developing the full sophistication of a modern accounting system, but, as has
been mentioned earlier, the basic element of a double record seems to have been
there.
Of course double entry serves
another purpose. As the debits and credits must always add up to the same
figure there must be an error if they do not. When computers came into use,
those who programmed them were not always properly conversant with accounting
principles, but they were sure a computer could not make a mistake. Some
therefore devised single-entry systems of computer accounts, with predictably
disastrous results.
There is a huge body of evidence of
the existence of an earlier accounting system, practised over a very wide area.
It was based on a system of tallies in the form of clay tokens, or other
objects, and existed from at least as early as 8,000 BC. The possibility that
these tokens were
151
part
of an accounting system was first publicised by an American scholar, Denise
Schmandt-Besserat. The British anthropologist, Richard Rudgley, has implied in
Chapter 3 of his book Lost Civilisations of the Stone Age (1999) that
she was too conservative in her view of the accounting abilities of
Palaeolithic and Mesolithic peoples. George Ifrah (1994) in his book on Numbers
also suggests that accounting techniques go back to the Old Stone Age. Ifrah
reveals the great arithmetical skills of the ancients, but there is still some
misapprehension as to the ease with which numbers were handled. There is a
popular assumption that only the advent of Arabic numerals into western Europe
allowed easy calculation.9 The fact that Roman numerals remained in
common use in
We
have seen how easy it was to turn trade credit into money. Strangely economists
have rarely noticed that this facility to create credit could be inflationary.
Instead they have concentrated on the ability of banks to create money, and
tried to find ways of limiting that. As we have seen, when a bank grants a
loan, the drawing down of that loan creates a debt, and when the amount drawn
down is paid into the account of the recipient of the payment which drew the
loan down, it creates a credit. In the aggregate the accounts of banks are
always in balance. So in theory a bank can grant unlimited loans in the
knowledge that the amount lent will always appear somewhere as a deposit to
balance the lending. The snag for the bank granting the loan would seem to be
that the deposit might be made in another bank. Actually this is no problem at
all. If one bank has a loan not backed by a deposit, another bank will have a
deposit which is unlent. The two have to meet up; the bank with the excess
lending will
152
borrow,
directly or indirectly, the excess deposit from the other bank. As Mitchell
Innes says on page 168 of his second paper, 'A banker is one who centralises
the debts of mankind and cancels them against one another. Banks are the
clearing houses of commerce.'
To put it in the simple words of the
treasurer of a large modern bank, 'If we are short, we know the money has to be
somewhere. Our only problem is to find it, and pay the price asked for it.'
The problem of finding the money is
made much easier for a bank if it is a member of a clearing system. For those
financial institutions which are not in clearing systems the problem is more
difficult. Those institutions are more likely to restrict their lendings to the
amount of deposits they already have, for if they do not, making up the deficit
might cost more in interest than was obtainable on the loan made. In
In theory there were factors
restricting the unlimited creation of credit. Economic textbooks usually
concentrate on the need which banks have to pay out cash. The customer granted
a loan may want banknotes, and in that case the amount lent does not turn up in
the banking system as an unlent deposit. In such a case the bank's credits in
respect of lending go up, and its credit in respect of cash goes down. What if
the amount of cash it holds is not enough to meet all demands? Then it will
have to buy notes from the Issue Department of the Bank of England. If the Bank
of England puts a limit on the amount of notes it will issue, surely this will
be a restraint on lending.
In the 19th century the Bank of
England put severe restraints on the issue of notes, but as we have seen the
public circumvented that restriction by turning bills of exchange into money.
In those days the Bank was under an obligation to redeem its notes in gold, if
required, so it had an incentive to restrict its note issue. We have seen above
from Mr. Leatham's figures that the prejudicial effect on the economy was
limited, though it did have an influence. After the ending of the 'Gold
Standard' Parliament tried to achieve a similar effect by putting restrictions
on the issue of bank notes. The 'Fiduciary Issue' was the name given to the
total of Bank of England notes in issue, and Parliament required that the
amount issued should not exceed what it had authorised. But whenever an
increase was asked for, it was automatically granted. The exercise of asking
Parliamentary authority became a farce, and it was dropped. It was realised
that the issue must be exactly what the public demanded at any one time.
153
One idea for restricting the
creation of credit was a remarkable example of the lack of understanding by
politicians and some economists of the principles of double-entry bookkeeping.
It was popular on or off for 30 years. It was called special deposits. The
idea was that banks should be obliged to deposit extra amounts with the Central
Bank, amounts over and above the working balances they need, and any other
prescribed amount required as a formal reserve.
A close look at the detailed
bookkeeping of special deposits reveals that the only way a bank can make a
deposit at the Central Bank is to obtain, directly or indirectly, some form of
financial instrument drawn on the Central Bank. That financial instrument could
be banknotes, but they are an unlikely payment medium because, as currency does
not earn interest, the banks keep only sufficient to enable them to cover their
customers' day-by-day demands for it. It is pointless for a bank to give to the
Central Bank a cheque drawn on itself: that can only force the Central Bank to
lend the money back to the originating bank. If the bank has money owing to it
by another bank, it can draw on that bank instead. This would cause the second
bank to draw on its own balance at the Central Bank at the very time when the
Central Bank is probably requiring it also to make special deposits.
Therefore the only practicable way
in which the banks can increase their aggregate deposits at the Central Bank is
to pay into the Bank cheques, or other forms of payment, drawn on the Central
Bank (i) by the government, (ii) by some other customer of the Central Bank, or
(iii) by the Bank on itself. The actual process might well be a little more
roundabout than that, but the effect is the same.
Special
deposits were a very popular instrument of policy with British governments from
about 1960 onwards, and the events that resulted make excellent case studies to
illustrate the folly of the procedure. Analysis shows that, when British banks
increase their deposits at the Bank of England, the Bank lends or invests the
deposited money. It has the usual options: (i) to lend to the British
government; (ii) to buy British government stocks ('gilts'); (iii) to buy
commercial bills of exchange. Sometimes it will lend money to the government which
will itself use it to buy investments. It is, of course, likely, if not
inevitable, that the investments bought either by the Bank or by the government
will be the same ones as those which have been sold by the banks in the first
place. The procedure looks ridiculous, as indeed it is! Put at its simplest the
procedure is: (i) the Bank of England lends money to the government which (ii)
uses it to buy government stocks or bills of exchange from the banks. With the
money received (iii) the clearing banks make special deposits at the Bank of
England. The effect of special deposits is (iv) to
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transfer
lendings (government stocks or bills of exchange) from the commercial banks to
the Bank of England. All that has happened is that there has been a change of
lender. Nothing more significant has taken place.
The
real effect therefore of special deposits is to transfer some loans to the
Central Bank, and that leaves the commercial banks free to replace what they
have lost by making yet more loans. The economic effect is the opposite of that
intended.
A
bank mostly lends other peoples' money, that is its depositors' money, but it
is obliged to have a reserve of its own shareholders' funds which is related to
its total assets, and in particular for those assets which are loans to its
customers. The rule is that the reserve must be not less than 8 per cent of the
'weighted assets.' We will explain 'weighting' later. The amount of funds
available for calculating the reserve is called 'the capital base' of the bank.
Not all of shareholders' funds necessarily qualify for the capital base as they
may be balanced by assets which are not readily realisable. On the other hand
the capital base can be provided by some loan capital of the bank (and therefore
not constituting shareholder's funds). These loans have to rank lower than
customers' deposits in a liquidation, and are therefore referred to as
'deferred liabilities.' The percentage of the capital to weighted loans to
customers is called 'the capital adequacy ratio.'
In the 19th century the capital
adequacy ratio was as high as 35 per cent (Collins 1988). Gradually the
proportion reduced and in the early 20th century it is thought to have been
nearer 10 per cent. The banks were allowed to keep their true financial
position secret, so one cannot be sure of the true ratio. During World War II
the capital adequacy ratio of British banks as a percentage of all loans fell
to a mere 2 per cent. But 80 per cent of bank loans and investment at that time
were to the government, and therefore considered risk-free. It is permissible
to 'weight' such loans, so that for the purpose of calculating the capital
adequacy ratio their value is reduced.
In 1988 an international agreement
was made which defined the weightings of loans and set the minimum capital
adequacy ratio. The agreement, known as the Basel Capital Accord, came into
full effect in fiscal 1993. The weightings range from nil for short-term loans
to OECD governments, through 50 per cent for loans for domestic mortgages, to
100 per cent for unsecured loans. The minimum capital adequacy ratio is
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8
per cent, of which no more than half may be in the form of deferred loan
capital. The agreement is under revision at the time of writing.
Superficially the Basel Capital
Accord sets a maximum to the amount of lending a bank can do, and therefore
limits its ability to create money. The restriction is only superficial, as if
a bank goes over its limit it can always force some borrowers to fund their
loans via the bond market, and thereby take their borrowings out of the banking
system altogether. In recent times additional measures have been found to get
the loans off the balance sheet, and the general term for the process is called
'securitising bank lendings.' There are a number of other techniques which have
been devised which are supposed to restrict bank lending, but in practice none
have much effect, and many do the opposite of what is intended. 'Overfunding'
is one of the latter. Overfunding is when a government borrows more money than
it needs. It does not reduce the overall credit supply as the money raised by
the funding has to be lent!
The favourite technique of all is to
raise interest rates. The short-term effect of that is to increase the money
supply, as any set of bank statistics will demonstrate, and the longer-term
effect, if it does not completely wreck the economy, is to cause stagflation, a
combination of continuing inflation with stagnation of the economy. The theory
that raising interest rates causes prices to fall is believed to originate with
the answer given by J. Horsley Palmer, Governor of the Bank of England, to
question number 678 of the Althorp parliamentary committee of enquiry into the
monetary system in 1832. The questions and answers were preserved as the
minutes of The Secrecy Committee of the Bank of England and the minutes
are in its archives. Altogether over 5,300 questions were asked by the
committee of people with names like Mr. Baring and Mr. Rothschild, but the
first 913 questions were put to Governor Horsley Palmer. His answer implies
that if money is made more expensive, which was assumed to mean that interest
rates are raised, fewer loans will be sought, demand for goods will
consequently fall, and prices will fall.
The odd thing is that earlier in the
questioning Horsley Palmer was asked about the consequences of a specific
occasion in 1825 when the Bank's discount rate was raised, and in his answer he
said that discounts -that is lending - increased. The empirical evidence he
revealed was therefore at odds with the theory he enunciated, but his theory
was accepted by most academic economists from then onwards. A few economists
objected that if interest rates were higher than in other countries, credit
would be attracted from abroad and prices would rise. The empirical evidence
suggests that this is true. However it was not until January 1923 that the full
evidence was collated. A. H. Gibson, author of a standard textbook on Bank
Rate, published an article in The Bankers
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Magazine of
'Interest is a cost like any other
and will be reflected in my prices,' said a businessman in response to a
question about his reaction to a rise in the official discount rate. But high
interest rates bring recession and unemployment, so the consequence of high
interest rates is a combination of stagnation, if not recession, and some
continuing inflation, a phenomenon which caused the word 'stagflation' to be
invented. The phenomenon was unknown until the policy of raising interest rates
to fight inflation was introduced and regularly followed. In
To summarise, there seems to be no
truly effective way, short of physical controls, of curbing the creation of
credit. Realising that fact, in July 1946 the British Government passed the
Borrowing (Control and Guarantees) Act which forced every borrower of more than
£ 10,000 to seek government permission, but the Act omitted to cover
trade credit. The physical controls were not therefore fully effective, nor
were they well implemented. The Act was abolished in 1985.
Varying
capital adequacy ratios, and the weightings of assets, could be a strong system
of control of the quantity and quality of bank loans, and therefore on the
level of money creation. The level of bank capital would also have to be controlled
in order to make the system effective. Thus permission would have to be sought
for the raising of new capital for banks, and the capitalisation of profits
would also need permission. The need to apply restrictions fairly would surely
inhibit free competition between banks, so it would not be a popular system. It
is also unlikely that the controls would be operated with sufficient wisdom,
and they would be subject to political interference. Both defects were apparent
in the borrowing controls established by the 1946 Act.
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Percipient
economists like to point out that supply and demand for goods and services are
always equal. In a sense therefore the economy at any one point in time is in a
state of equilibrium. On the other hand there are always disturbances taking
place, so one could say that equilibrium is an ideal which never happens.
Whether we agree with the first of these viewpoints will depend on the meaning
of the words 'supply' and 'demand.' Surely what they have to mean in this
context is the volume of goods and services actually traded. 'Supply' does not
mean 'available for sale,' but the total actually sold. Implemented demand is
the reciprocal of that, so by definition they are equal and in equilibrium. This
equality led the French economist Jean Baptiste Say to propose a Law of
Outlets which says that 'Supply creates its own demand.' To most students
the law sounds like nonsense because they instinctively think of supply as the
availability of goods and services, not the actual supply of them to
purchasers.
Is the true meaning of Say's Law
that in the worldwide aggregate the proceeds of sale of all goods and services
sold provide the purchase money for all goods and services acquired? That
sounds logical. It could indeed be described as a fundamental principle of
double-entry bookkeeping, and consequently it should be the first axiom of
economics. Surely it is a truism that in a given period the value of sales of
goods and services must equal the value of goods and services bought. The
proceeds of sale equal the purchase price. Does Say's Law of Outlets therefore
indeed mean that the one finances the other? It can mean that with one proviso:
as we have seen earlier in this paper, there must be a credit system to bridge
the time gap between production and sale. With the proceeds of sale of my
goods, I can buy yours. With the proceeds of your sales you can buy my goods.
But the money for neither purchase is available at the time it is needed, as
each purchase is dependent on the other having taken place.
In a barter economy, which has no
money, one overcomes the problem by a direct exchange of the goods and
services, if that is possible.
Once credit is available to make a
sale for money possible, it would seem that Say's Law ceases to be relevant:
the total of all purchases is no longer financed by the proceeds of all sales,
as some are financed by credit, which may in some cases never be repaid. But if
credit for a purchase is not repaid, then the effective sale price falls to
nil, and in an indirect way Say's Law is still fulfilled. The loss is born,
however, by the giver of the credit, who may not be the same person as the
seller. There is
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however
a circumstance which can wreck the operation of the Law. It is best explained
by a theoretical example.
Manufacturer, John Doe, borrows from
his bank newly created credit and he uses it to pay his workers for their
production. One worker, Richard Roe, does not spend his wages, but deposits
them in a bank. Thus his deposit at the bank is balancing, indeed financing,
that part of John Doe's bank loan which equals the wages paid to Richard Roe.
Richard Roe is thus financing his own production. He is lending his employer
the money with which to pay his own wage! Say's Law cannot operate unless
Richard Roe's wages are spent with someone who will buy Richard's produce.
Richard does not have to spend it himself: he may lend his deposit to someone
who will buy his produce.
This is, one admits, a curious
situation, and probably beyond the comprehension of anyone not well versed in
the principles of double-entry bookkeeping. Keynes in his attacks on saving was
fumbling his way towards understanding it. 'One man's saving is another man's
unemployment,' he said. Major Clifford H. Douglas, the founder of the Social
Credit movement, came nearest to understanding it, for he was sure there was a
gap between the price of all products and the capability to buy them all. But
he did not correctly perceive why that gap existed. He saw its cure clearly
enough, which was to create the purchasing power for someone to buy Richard
Roe's production. He may have wrongly described the aetiology of the disease,
but his remedy - a handout by the state to every citizen - would have been
effective to cure it by increasing demand. An alternative cure is the
establishment of a consumer finance industry which creates the credit/money
needed to buy all demanded produce.
It may seem odd that we should
advocate that Richard must lend his bank deposit to someone, for is it not
already lent to the Bank, which in turn has lent it to his employer, John Doe?
True, but it can be lent again, and indeed has to be lent again. So let us call
the lending which creates new credit 'primary lending,' and any further lending
of the sum thus created can be called 'secondary lending.' So let Richard Roe
make a loan directly to someone who will spend the money Richard has saved.
Once a deposit has been created it
can be used as money, passing from purchaser to seller, and then the seller
also becomes a purchaser from another seller. This can extend to infinity. To
use the normal terminology, once money is created it can 'circulate.' It will
circulate until it is used to pay off a loan. When that happens money equal in
amount to Richard
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Roe's
savings ceases to exist, because a debt has ceased to exist. Mitchell Innes
understood this effect perfectly.
Because a loan becomes money which
can circulate, we can say that an initial grant of credit which is drawn down
has a multiplier effect. A simple loan ends up financing transactions of far
greater value than the original loan. Political economists (and even Maynard
Keynes) used to say that M=IOUs of entrepreneurs, 'M' being the total of money.
That was far too limited. The IOUs can be from anybody. The concept of the
circulation of money led to the statement by the mathematician, Professor
Irving Fisher of an equation which he wrote as MV=PT 'PT' is the value of all
transactions in a given period. 'M' is the total of debt that is in use as
money, and 'V is the speed at which the money circulates. Mathematicians get so
used to talking in symbols that they do not always observe that their symbols
form an equation which is incapable of calculation. How does one multiply money
by speed? What Fisher should have said is that Mf=PT, 'f' being the frequency
with which the total of money has circulated in the given period.
The understanding that the creation
of a debt can have a multiplier effect is of vital importance. It reveals that
Maynard Keynes' trusted friend, Richard Kahn, was not being fully percipient
when he said that 'investment' had a multiplier effect. The mere act of drawing
down a loan can have a multiplier effect on the economy, regardless of whether
the loan is spent on investment (by which Kahn meant what statisticians now
call 'fixed capital formation') or on consumption. If the loans are directed to
create a demand only for consumer products, that demand will in turn create a
need for loans to finance the real investment in plant and equipment which will
supply the additional consumer goods. These loans may be financed by the
secondary credit available as a result of the original loan. That is the true
multiplier, a credit multiplier.
We all know that the level of demand
can vary from time to time, and economists are in the habit of talking about a
'trade cycle.' Is it not likely that what is behind the trade cycle is a credit
cycle? The credit supply is expanded, and there is a consequent boom. But
credit cannot be expanded for ever. At some point the borrowers try to consolidate
and pay down their loans. At that point 'money' becomes scarce, and trade
declines. Worse still prices may decline, making it more difficult to earn the
money to pay off debts. Price deflation is the greatest curse that can befall
any economy, for it makes people become yet more cautious, and a recessionary
downward spiral becomes unstoppable.
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Kahn's
assumption, and that of most economists, is that 'investment,' by which is
meant in this context the creation of new productive equipment, will
automatically bring economic growth. This assumption is invalid, as another
case study will show.
In 1801 a Mr. Kingdom visited Mr.
Samuel Taylor in
While still in America Marc Brunel
had developed an interest in block-making machinery. In 1801 he took out
British patent number 2478 for a suite of machines designed to make rigging
blocks automatically. Bentham was very interested in
One hundred skilled men had lost
their jobs as a result of the invention, but before that happened perhaps three
times as many got one year's work from the making of the machines. They were
the employees of the engineer, Henry Maudslay. So there may have been a
temporary increase in employment from 110 to 410, followed by a reduction to
ten. The final effect was highly deflationary. The capital investment in new
productive equipment had the effect of lowering the incomes of the factors of
production. This must be a common result of capital investment in more cost-effective
means of production. It is this consequence of capital investment which I
suggest ought to be named 'The Brunei Effect.' To celebrate the 300th
anniversary of its foundation, the Bank of England produced in 1994 a graph of
inflation covering the whole 300 years of its
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existence.
From 1694 to 1938 the graph can be seen to show a slight long-term tendency to
deflation in peacetime, though inflation was often very evident in wartime. The
deflationary tendency appears to accelerate after 1801. It seems rational to
assume that this was partly11 the result of the increased use of
automatic machinery driven by steam power, and it justifies the naming of the
phenomenon after Marc Isambard Brunei.12
It
is most enlightening to speculate on the effects of all the possible scenarios
in which the investment in the block-making machinery took place. There are
several.
Let us assume as the first scenario
that the government paid for
The same effect would result if the
government borrowed the money to purchase the machines and that borrowing was
financed by saving by the public, using saving in the sense that the public has
not spent all its income, but has placed some in financial assets, the
financial asset in this case being a loan to the government.
If, however, the extra expenditure
is financed by newly created credit and therefore does not in any way reduce
existing demand, there is an increase in employment of resources. The savings
which balance the loan come from the additional income arising from the
expenditure. There is a rise in gross domestic product. Moreover the created
money may circulate rapidly enough to generate further demand, over and above
the original expenditure it was created to finance, so that gross domestic
product goes up by more than the government's borrowing. The rate of
circulation of created money is a vital factor in deciding the effect of a loan
in expanding the economy.
All these scenarios concern the
period during which
Henry Maudslay's men who built the
machines may have no further orders; therefore 300 of them are redundant. The
machines come into use and all Fox and Taylor's 110 men are redundant. Ten men
get work at
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the
Navy Yard13 using the new machines. Four hundred men are without
incomes, having been earning the previous year. Although the rigging blocks are
cheaper, that does not increase demand for them to any great extent. In fact production
went to 130,000 blocks in 1808 from 100,000 in 1800. That may have been due to
the Battle of Trafalgar which damaged a lot of ships even on the winning side.
In nominal terms the gross domestic
product has declined because rigging blocks are 90 per cent cheaper. It may
also have gone down because 400 men have no income to spend. On the other hand
the government is spending £17,663.95 less and may require that much less in
taxation, or may borrow that much less from the public. If that were true, the
public would have sufficient extra money to buy the product of 100 extra
workmen. There would be disruption but equilibrium should return to produce the
same employment except for Henry Maudslay's men. They had a year's temporary
work producing capital items which will not need replacing for a long time.
Indeed the machines still exist and could still work if wooden rigging blocks
were needed. But although employment remains the same as before the investment,
the output of physical goods and services is slightly increased.
A further scenario is that the
government could have raised additional taxes to pay Maudslay's men to make the
machines. In that scenario the additional taxation would have reduced demand
(and thereby demand for labour) by exactly the amount by which it was raised at
Maudslay's. The ending of the work at Maudslay's and the lowering of taxation
in consequence would reverse relative demands.
It can be seen from these scenarios
that it is only when a project is financed by newly created credit that
employment is increased, and even in that case the effect can be temporary, and
indeed even reduce employment in the long run. The extent of the increase in
labour requirement will be determined by the speed with which the newly created
money circulates. If it circulates not at all, the increase will be only that
financed directly by the new credit. This might happen if the recipients of the
payments financed by the credits used the money to pay off debts. In all other
circumstances there is a multiplier effect. The machines are made and add to
the wealth of the nation; the workers who made them spend their wages on goods
and services; the producers of those goods and services do the same. The
effects can be dramatic, but they come to an end the moment the circulation
ceases, that is when someone 'saves' the money he has received, instead of
spending it. No one can predict when that point will be reached. No computer
programme could ever be devised to make an accurate estimate of the effect.
Hopefully the knock-on effects will be great enough to raise the economy
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to
a new equilibrium level in which a higher level of production, consumption and
employment is sustained. But it can easily relapse. If it does, then another
injection of credit into the system will be required to get things moving
again.
But one cannot go on injecting
credit into the system indefinitely. The public's borrowing capacity is finite,
being a prudent multiple of its income. What happens when the public tries to
repay its borrowing from its income? Demand is automatically reduced; so is
production; so is the public's income. Also, the balances of money capable of
circulating are reduced. A deflationary spiral is induced. It is made worse by
psychological effects. Faced with recession the public tries harder to save,
and the government is urged to reduce expenditure because its revenues are
falling.
The lesson to be learned from the
Brunei incident is that no new capital investment in labour-saving equipment
will increase the overall demand for goods and services unless other new credit
is created to finance the bringing back into production of the resources freed
up by the earlier capital investment. The
Enough
should by now have been said to show that a credit system is the foundation of
a civilisation. The failure of a credit system is the worst thing that can
happen to any economy. Credit comes in many guises and disguises. Indeed at any
moment in time someone is doubtless inventing some new quirk to a form of
credit, if not a new form altogether. One can however identify four major ways
of supplying credit. The oldest is trade credit, which we can define as a
supply of goods or services which are to be paid for later.
The second form is the provision of
risk capital, normally called an 'equity investment,' which is rewarded by a
share of the profits earned, the capital not normally being returned except by
(1) a reduction of capital, (2) a purchase of the shares by the company, or (3)
the liquidation of the enterprise. The third form of credit is the bond, which
is most commonly a fixed loan which pays interest, and which is usually stated
to be repayable on a fixed future date, or on a date between two fixed dates,
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the
actual time being at the option of the debtor. The fourth form of credit is the
bank loan.
Bank loans belong to what we can
call 'the intermediated credit supply,' or perhaps more simply, 'the indirect
credit supply.' These terms imply that the bank is not the primary source of
the money; it is mostly lending money which belongs to its depositors. (It must
however be remembered that the drawing down of a loan granted by a bank
automatically creates the deposit which balances it.) All other forms of credit
belong to the 'disintermediated credit supply.' But that ugly phrase could be
substituted by the simple expression, 'direct credit supply'
New credit creation takes place in
the form of trade credit or of bank loans, so that these are the most important
forms of credit in relation to the control of the economy.
Having seen the ease with which
banks can create new credit, and thereby new money, some commentators have been
led to make two rather wild statements: the first is that the creation of money
is cost-free, and the second is that 'credit can be created at the touch of a
button on a computer.' Both statements are hyperbole.
Bankers make statistical analyses of
the percentage risk which is attached to each category of lending, and modern
banking practice is to make a reserve against profits immediately a loan is
drawn down, the reserve being for the amount which experience has indicated to
be the potential average loss for that category of lending. Moreover the
necessity to maintain a capital base as required by both sensible prudence and
the terms of the Basel Accords is also a cost. That capital base is provided by
the shareholders, and they require a return on that investment consonant with
the risk they are taking. The creation of money by banks is therefore not
cost-free.
An increase in lending only takes
place at the touch of a button when banks pass entries through their books for
the periodic charging and allowing of interest. If the debiting of interest
increases the loan, then the credit supply total goes up, and the balancing
credit is mostly to the accounts of depositors and the rest to the profit and
loss account. In theory, if interest can only be charged by lending the
borrower the money with which to pay it, the loan is categorised as
non-performing, and a reserve should be made against the risk both of being
unable to collect the interest, and of being unable to get repayment of the
loan. Practice doubtless varies as to how seriously non-payment of interest is
taken by regulatory authorities.
Granting a loan is not a 'press the
button' operation, though initially the loan may be created by crediting the
borrower's current account, and debiting a loan account in his or her name.
That operation appears
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immediately
to increase the money and credit supplies, but the crucial moment is when the
amount loaned is paid over to a third party. That payment is very likely to be
in respect of some transfer of value, a sale of goods or services, or of an
asset. The creation of credit is dependent therefore on three factors, firstly
on the permission of the banker, secondly on the willingness of the borrower to
buy, and thirdly on the willingness of some seller to sell. Thus the creation
of credit usually reflects exactly some real transaction, some transfer of real
value from one person to another. The creation of credit is not an independent
act but results from a supply of goods and services unless the payment reflects
a gift. What this means is that the credit supply and the domestic product grow
together. A banker cannot assist the creation of money unless there is an
associated economic benefit passing from a party to another party. Rather than
say that bankers create credit we should more correctly say they enable others,
their borrowers and depositors, jointly to create it. Bankers are only
intermediaries in the creation process.
A payment may be for the acquisition
of some part of the current production of goods and services; alternatively it
may be for the acquisition of an item which is an existing asset, a part
therefore of the past, not current, production of goods and services. In the
latter case the payment is for the acquisition of part of society's existing
capital, for the only satisfactory working definition of 'capital' is that
which remains in existence from some past economic activity. 'Income' by
contrast is the product of current economic activity.
If someone sells a capital asset, he
or she is in the position of having money to spend or lend. The proceeds may be
spent on some product of current economic activity. If however the vendor of a
capital asset buys another capital asset with the proceeds, then the vendor in
the new transaction in turn acquires the capacity either to buy another capital
asset, to lend or to buy some of the product of current economic activity.
Although there may be a very long chain of capital transactions, there will
very likely, one might even say inevitably, be someone at the end of the chain
who either buys some new product himself, or lends his money to some other person
to do the same.
A loan of newly created credit which
is spent by the purchase of a capital asset is innocuous if the vendor retains
the proceeds as a cash investment, in effect lending the purchaser the
wherewithal to make the purchase, but if the vendor spends on current
production, or lends to someone else to do that, the effect is potentially
inflationary. Loans for asset purchases can therefore cause asset price
inflation. It is a truism that the price of major assets such as houses is
entirely dependent on what a purchaser is allowed to borrow, for few people
have the free cash to make
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such
a big purchase. If banks create credit too freely for house purchase, then
house prices will inevitably rise. But because there is likely to be someone at
the end of the chain of capital transactions who becomes a purchaser of some
new product or service, and which is therefore part of the income of society,
not capital, asset price inflation always spills over in the end into general
inflation.
To restrain asset price inflation
requires interference in lending by state regulators. At the time of writing
the Irish government has acted to restrain house price inflation by making it
illegal to lend someone the money to pay the deposit on a house purchase. As Irish
house prices are half the British level the action may have been partly
effective. There is vast empirical evidence of the effect of lending on house
prices. Back in the 1950s British mortgage lenders (called building
societies) had an agreement not to lend on any house built before 1919. The
prices of such properties were very low, and the poor were able to buy them. By
2001 such properties were fetching astronomical prices, as the reluctance to
lend on them has been replaced by enthusiastic lending. The difference in price
over 40 years or so - not adjusted for inflation - was that between £1,000 and
£400,000.
The effect of such unrestrained
lending is to make life hard for the first time house buyer, and to enrich the
heirs of the elderly who owned these properties. The reaction of the young who
are faced with inflation of house prices is to seek higher wages, and this
gives rise to cost-push inflation. Once one owns a house one is insulated for
life against any rise, real or inflationary, in the cost of such a house, so
the young who started their careers as property owners with a grievous burden
of debt find it dissipated by time. In an age in which inflation has been
caused by excessive lending for house purchase, the ownership of a house
becomes a protection against inflation. Once this mentality is established,
inflation, for good or ill, becomes embedded in society. In
During the period of the campaign to
end inflation, the attention of government economists was entirely concentrated
on the money supply. That they equated with bank lending. Raising interest
rates would, they reckoned, discourage borrowing from banks and the money
supply would fall. It did not. It rose, and for a very simple reason.
There are numerous ways of
borrowing, and for industry there are two major alternatives, the bond market
and bank loans. Industry needs a lot
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of
longer-term capital, and when interest rates are low it will seek to raise
money by the issue of long-dated bonds, that is from the direct credit supply.
But if interest rates are high, and in a period of inflation longer-term rates
of interest can be very high, they prefer to borrow short term from the banks,
that is from the intermediated credit supply (indirect credit supply).
Consequently in any period of high interest rates, the money supply, however
defined, will rise spontaneously. When interest rates are low, it will fall
spontaneously.
Faced with a demand for loans, the
banks raise additional capital to provide the necessary capital base required
by the Basel Accord. High interest rates make it easier for them to be
profitable, a phenomenon known as 'the endowment effect.' This is because banks
pay little or no interest on the balances on checking accounts (current
accounts.) Indeed in many countries they are forbidden to pay interest on such
accounts. As a result when interest rates rise, the income of the banks rises
far faster than their costs. Banks at such times have little difficulty in
raising the capital to form the base for huge increases in lending. The most
notorious example was that of Barclays Bank, which in May 1988 raised £920
million of new capital by way of the biggest rights issue ever made in
Banks perform an essential service
by facilitating the creation of credit. However like all useful human
inventions, the capability to create credit can be abused. The amount created
can be too little, leading to unemployment, or it can be too much, leading to
boom and then bust. In either extreme one financial failure can have a knock-on
effect. Because trade credit often extends along a chain of transactions, a
failure at any point in the chain can bring disaster to all who are upstream on
the flow of credit. One businessman gets his calculations wrong and is unable
to pay his debts; the suppliers who have allowed him credit may find that their
resultant loss, due to no fault of their own, makes it impossible for them too
to pay their debts, and so on up the chain.
Because of this domino effect it is
the duty of government to do nothing foolish which might precipitate default
for no good purpose. Unfortunately political economy has been ruled since 1968
by those who are obsessed with the prevention of inflation, the Monetarists.
Monetarist theory has been very unsound, and measures which were thought to
reduce inflation have proved to have the opposite result. Universally they
have had the
effect of destroying
productive businesses quite
168
unnecessarily.
The economic damage normally attributed by theoretical economists to the
phenomenon of inflation is in truth caused by the remedies they propose for the
cure of the disease of inflation, not by the disease itself. The analogy has
often been drawn with the process of bloodletting, used by doctors for the
treatment of fever for centuries before it was realised that it killed the
patient.
A government whose economic inspiration
is from monetarist economics is unlikely to have the ability to regulate
correctly the money-creating process of the banks. Nor is it likely to see that
as components of the intermediated credit supply (that is bank lending) can
readily be replaced by non-intermediated lending (that is bonds or equity
finance), the control of bank lending alone is only a part of the story. A wise
government will study and regulate the whole credit supply. But it will do so
with the knowledge, skill, gentleness and care of a neuro-surgeon, not with the
macho brutality of a radical economic theorist. With remarkable unconcern,
hawkish academics have been singularly destructive. In 1946 the post-war Labour
Government in
The study of the whole credit supply
is the domain of 'Creditary Economics.' The term is new, but the idea is
not. Mitchell Innes called it the Credit Theory of Money. He did not
claim to be originator of the concept, which is not surprising as it must have
occurred to many in the long history of credit. Indeed when one reads the older
writers one sees immediately that for them the money supply consists largely of
endorsed bills of exchange which are clearly documentary credits.
There is but one statement in Innes'
paper which is puzzling. In his summary he states, 'There is no such thing as a
medium of exchange.' One can see what he means by this. He wishes to make it
clear that all money is some form of debt, and there is no means of exchange
which is not debt-based. This is true, so one should define a means of exchange
as being a debt which can serve as a medium of exchange. The process of
169
converting
a debt into a means of exchange can be called 'monetising debts.' If one looks
at the history of economics one can surely see that the monetising of debts,
usually trade debts, has been the most important process, the most important
invention, in the history of commerce, ever since differentiation of labour
first took place sometime in prehistory. One must agree with Mitchell Innes
that gold and silver were not the essentials of a money system. That role was
fulfilled by the documentary credit which originated in trade credit.
We should be happy to proclaim
ourselves his disciples.
Credit
is the lifeblood of civilisation.
There are two forms of credit,
primary credit, that is newly created credit, and secondary credit, loans made
through the use of assignable debts.
There are two parts to the overall
credit supply, direct credit (disintermediated credit), and indirect credit
(the intermediated credit supply).
The level of economic activity is
determined by three factors:
1.
The amount of new credit created.
2.
The speed with which credit, newly created or otherwise,
circulates, either by being spent or lent.
3.
The rate at which credit is destroyed by the repayment of
debt.
There is a limit on the amount of
new credit which can be created safely, so it is impossible to keep an economy
booming by the unlimited expansion of credit. When the prudential limit on the
creation of new debt is reached, savers should be encouraged to spend so that
workers can earn the money they need for their wants, instead of borrowing.
If savers refuse to spend, their
savings should be allowed to diminish through inflation. Experience has shown
that mild inflation is the least damaging method of curing an excessive build
up of debt.
The trade cycle is fundamentally a
phenomenon of credit creation. It reflects a credit cycle.
The discovery of the means of
monetising of debt was a very great step in the economic development of human
beings.
170
1.
This information came from press reports near the site of
the research, and before the formal publication of results.
2. The term Mesolithic is
now applied to late hunter/gatherer societies, and Neolithic to early farmers.
3. To learn how theories of
the development of civilisation have been distorted by ideology as well as by
the extreme asymmetry of archaeological evidence, see Colin Renfrew and Paul
Bahn (2000), Archaeology, third edition, London: Thames and Hudson, p.
476 et passim.
4. The asymmetry of both
archaeological and geological evidence is described by the geneticist,
Professor Steve Jones in his book Almost Like a Whale (1999),
5. Since the time when Innes
wrote about Babylonian financial documents, far too little study has been made
of the documents in the
6. Klaas R. Veenhof, 'Silver
and Credit in Old Assyrian Trade,' in J. G. Dercksen, ed. 1999, Trade and
Finance in Ancient Mesopotamia,
7. This point is made by
Marc Van De Mieroop, in his article in Hudson/Mieroop,(2002), Debt and
Economic Renewal in the Ancient Near East. Dr Cornelia Wunsch's discussion
appears in this same ISLET colloquium. See bibliography.
8. An entertaining as well as
instructive way of studying mediaeval finance can be found in the early books
of the series of six historical novels written by French academician, Maurice
Druon (1970), under the general title, Les Rois Maudits. The books,
which are very well researched, cover much of the first half of the 14fh
century when the
9. Arabic numerals appear to
have first arrived in South-West
10. Brigadier General Sir
Samuel Bentham, a shipwright by training, was the youngest brother of the economist,
Jeremy Bentham. His military title originated from the grant of a commission in
the Russian Army by Potemkin. He created two navies for the Empress Catherine
the Great and Potemkin in the 1780s. Bentham had himself invented woodworking
machinery in 1793, British patent 1838.
171
11. The return to the Gold
Standard six years after the end of the Napoleonic Wars also caused a severe
one-off deflation.
12. The editor tells me the
name Domar Effect could also be used. I prefer
13. The Portsmouth Naval Yard
became for a while the largest factory in the world, exceeding therefore
Boulton and Watt's Soho Foundry in
14. Maynard Keynes' faith in
Kahn's ability is mystifying. Kahn and I were briefly in contact over the
administration of Maynard Keynes' estate and our relationship was difficult. I
found him arrogant and lacking in the necessary expertise. The ultimate
beneficiary of Keynes' estate was King's College,
15. My authority is a
personal letter from the next chief executive of the bank who had the task of
restoring profitability.
16. The sorry story is fully
described by Professor Corelli Barnett in The Lost Victory (1995),
Barnet,
Corelli (1995), The Lost Victory,
Macmillan.
Barnet,
Corelli (2001), The Verdict of Peace,
Macmillan.
Bogaert, Raymond (1996), L'origine de la banque de
depot, Leiden:
A. W. Sijthoff.
Collins,
Michael (1988), Money and Banking in the
History,
Druon, Maurice (1970), Les Rois Maudits, Volumes 1
to 6,
Paris: Le Livre de Poche.
Dercksen,
J. G., ed., (1999), Trade and Finance in Ancient
Mesopotamia, MOS Studies 1,
Gibson,
A. H. (1923), 'The future course of high class
investment values,' The Bankers
Magazine, January, 15-34.
Gilbert,
K. R. (1965), The
Machinery,
Hallo,
William W. (2004), 'Bookkeeping in the 21st Century
BC’ in Michael Hudson and Cornelia
Wunsch, eds, Creating Economic Order: Record-keeping Standard and the
Development of Accounting in the Ancient Near East,
Hudson,
Michael and Marc Van De Mieroop, eds (2002),
Debt and Economic Renewal in the
Ancient Near East,
Ifrah,
Georges (1994), The Universal History of Numbers
(English edition 1998),
172
Ingham, Geoffrey (2004), The Nature of Money,
Polity/Blackwell,
2004)
Innes, A. Mitchell (1913), 'What is money?', Banking
Law
Journal, May:
377-408.
Innes, A. Mitchell (1914), 'The credit theory of
money,'
Banking Law
Journal, January: 151-68.
Jones, Steve (1999), Almost Like a Whale; The
Origin of
Species
Updated,
Kapstein, Ethan B. (1991), Supervising
International
Banks:
Origins and Implications of the Basle Accord,
Keynes, J. M. (1930), The Treatise on Money,
Macmillan.
Renfrew, Colin and Bahn, Paul (1991), Archaeology:
Theories,
Methods and Practice, second edition,
Schmandt-Besserat D. (1992), Before Writing, Volume
One: From
Counting to Cuneiform,
Sinclair, David (2000), The Pound: A Biography,
Century.
Skidelsky, Robert (2000), John Maynard Keynes;
Fighting
for
Smith, Adam (1776), An Inquiry into the Nature and
Causes of
the Wealth of Nations,
Stein, Sir Aurel (1912), Ruins of Desert
Tooke, Thomas (1844), An Inquiry Into The Currency
Principle:
The connection of the currency with prices,
and the expediency of a separation of issue from banking,
Veenhof, Klaas R. (1999), 'Silver and Credit in Old
Assyrian
Trade,' in J. G. Dercksen, ed., Trade and Finance in Ancient Mesopotamia, (MOS
Studies 1)
Wray, Randall (1998), Understanding Modern Money,
Cheltenham, UK, and Northampton,
MA, USA: Edward Elgar.
Wunsch, Cornelia (2002), 'Debt, interest, pledge and
forfeiture
in the Neo-Babylonian and Early Achaemenid period: the evidence from private
archives,' in Hudson and Van De Mieroop, eds (2002), Debt and Economic
Renewal in the Ancient Near East,
Geoffrey Ingham
IN THE late nineteenth and early twentieth centuries,
academic economics took on the conceptual and methodological complexion by
which it is clearly recognizable today. During the famous methodological
conflict (Methodenstreii) at this time, economics separated itself from
other social and historical sciences and put forward its imperialist claim to
provide a superior explanation of all the phenomena customarily dealt with by
its academic kin (Swedberg 1987; Machlup 1978; Schumpeter 1994 [1954]; Ingham
1996a). Analytical economics claimed to be universally valid. The 'laws' of
supply and demand, for example, were considered to be equally applicable to the
ancient economies and primitive societies as they were to the modern world.
Historical change in general and the advance of the 'wealth of nations', in
particular, were seen as the result of increasing efficiency in the conduct of
human economic affairs. Throughout the nineteenth century it was asserted with
an increasing confidence that the twin universal processes of the division of
labour and market exchange, together with an understanding and application of
the laws that governed their development, had brought about these enormous
transformations.
The
proponents of this new 'high theory' in economics looked upon the analytical
simplicity of their models as evidence of their sophistication. The more
abstractly and mathematically they expressed their theorems, the more
scientifically prestigious they could claim to be. The relationship of the
'pure' theory of exchange to economic reality, they argued, was of exactly the
same kind as of the natural sciences to nature - that is to say, for example,
between atomic structure and landscape. Modern economics did not attempt to
describe the modern economic system and its historical evolution. Rather, it
was claimed that
173
174
all its activities could be explained in terms of
concepts and theories of the highest level of generality - such as marginal
utility, supply and demand and so on.
Elements of
the general analytical and methodological framework from which these 'laws'
were derived were, however, paradoxical in relation to actual contemporary
economic developments. The increasingly abstract character of academic
economics was based on a conception of a simple barter economy in which
specialisation and trade maximised welfare. Here, money was merely a 'neutral'
medium of exchange - or 'veil' - over the underlying processes of exchange.
Notwithstanding their analytical sophistication, these models of the 'real' economy
were the direct descendants of Aristotle's 'natural' economy, as this had been
interpreted and developed over the centuries (Schumpeter 1994 [1954]). His
venerable theory of money as a medium of exchange was developed and formalised
mathematically. Its existence was analytically acknowledged and incorporated
into the equations by its conceptualisation as one of the commodities in the
barter economy against which other commodities were valued. This was
accomplished at various levels of abstraction - from Walras's abstract notion
of the numeraire as a standard commodity to Menger's conjectural history
of the origin of money out of the most tradable commodity on a barter economy.1
The heterodox Keynesian economist Minsky scornfully, but accurately, referred
to this approach as the economics of the 'village fair' (Minsky 1982). But,
'capitalist' economies were based upon complex systems of production in large
enterprises that increasingly relied on external money capital in the form of
stocks, bonds and bank credit.
Nevertheless,
the science of economics could present, within its own framework, a
well-reasoned argument for the efficacy of the gold standard as the foundation
for a stable monetary system. In the period immediately before the First World
War, most opinion, professional and lay, would have agreed with Ricardo's
statement that '[t]here can be no unerring measure of either length, of weight,
of time or of value unless there be some object in nature to
which the standard itself can be referred' (David Ricardo in P. Sraffa (ed.)
(1951-5; emphasis added.) The natural substance, gold, as a commodity with a
value-in-exchange, was seen as an inviolable foundation for the standard value
of 'money proper' upon which, if prudence were exercised, the modern credit
system could be safely constructed.2
One by one,
the major economic powers went onto the gold standard and, as an almost
inevitable consequence, enhanced the powers of their central bank (see
Helleiner 1999). Of these, the
175
the gold standard in 1913. Almost at this precise
moment, Innes's two iconoclastic articles appeared in a
Innes recognised that earlier writers - such as
Steuert, Mun, Boisguillebert and Macleod - had seen the essential nature of
money not in terms of a valuable commodity, but as a measure of abstract value.
And he refers to his contemporary credit theorists such as Hartley Withers and
Hawtrey. However, he appears to be unaware of the extent and continuity of
nominalist and credit theories (Innes 1914: p. 152), as these developed, after
the sixteenth century, in the attempt to understand the new forms of credit
money that were associated with the rise of capitalism (Schumpeter 1994 [1954]
remains the most comprehensive account). Furthermore, there is no explicit
indication in either of his two articles that Innes was aware of the analyses
of money that had been produced in the late nineteenth and early twentieth
centuries by the broadly defined, but largely German 'historical school' of
economics (see Ellis 1934). In particular, although Innes places great
importance on the role played by taxation in the production and circulation of
coins as token credit money, he makes no reference to one of this school's most
well-known works -Knapp's State Theory of Money (1973 [1924]). In
writing in the early twentieth century that '[t]here are only two theories of
money which deserve the name ... the commodity theory and the claim theory,'
Schumpeter implied that they were of more or less equal standing at this time.
But, he continued 'by their very nature they are incompatible' (quoted in Ellis
1934: p. 3). Consequently, with the victory and subsequent hegemony
of economic 'theory'
and its commodity
176
conception of money,
the credit theory,
including Innes's brief contribution, virtually disappeared
from mainstream economics.
Innes's
critique of the theory of money as a commodity that functions as a medium of
exchange has two main parts. First, he argues that the use of money does not
require the actual or symbolic physical presence of a 'money-stuff' commodity -
that is, a metallic currency or metallic standard. Rather, money is to be
understood as abstract money of account. Only in modern times under the gold
standard has there been any fixed relationship between the monetary unit and
precious metal. Throughout their entire history, coins, he argued, were
'tokens' in the sense that their value was defined and established not by their
metallic content, but by an abstract unit of account.'The eye has not seen, nor
the hand touched a dollar. All that we can touch or see is a promise to pay or
satisfy a debt due for an amount called a dollar'. The dollar is 'intangible,
immaterial, abstract' (1914: p. 159. See also Innes 1913: p. 399). In other
words, the dollar is a credit, denominated in a money of account, and with
which a debt can be settled. A few years later Keynes unequivocally expressed
the same view:
Money-of-Account, namely that in which Debts Prices and General Purchasing Power are expressed is the
primary concept of a Theory of Money. ...
[m] oney-of-account is the description or title and money is the thing
which answers the description
(Keynes 1930: p. 3; emphasis in original).3
Two
historical instances of a dissociation of the abstract money of account and
coin were commonly referred to at the time and both feature prominently in
Innes's essays. Like Innes, Keynes and the German historical school of
economics used the recent discoveries showing use of money accounting in
Evidence of
a dissociation of money of account and a 'money stuff', such as coin, does not,
in itself, establish that the quality of 'moneyness' was conferred by the
former. It could be argued, for example as Le Blanc had done, that any 'imaginary'
money of account was taken from a previously existing coin (see Innes 1913: p.
385; Einaudi 1936: pp. 229-30). However, Innes used the available
archaeological evidence to
177
challenge the commodity theory axiom that the standard
of value and, therefore, the unit of account, originated in the weight and
fineness of coins. In the first place, the earliest known coins in
Nonetheless,
commodity money theory's contention that deliberate debasement of the coinage was
source of changes in the price level during the Middle Ages has proved to be
remarkably resilient. Issuers could make a profit by a gradual reduction in
precious metal content of the coinage, which, it was argued, caused it to
depreciate. Innes took direct issue with this 'false view of the historical
facts' and offered a different interpretation of mediaeval monetary policy
(Innes 1913: p. 384). As we have already noted, coins were not typically marked
with a face value in mediaeval times, but were assigned values in relation to a
money of account. When they were in need of money, sovereigns would decree a
reduction in the nominal value of the coins - that is, they would 'cry down'
the money. In this way, the sovereign could increase the bullion value of the
coins received in taxation; but, Innes insists, these 'alterations in the
(nominal) value of the coins did not affect prices' (Innes 1913: p. 385. See
also Bloch 1954, and Einaudi 1936).4 It effectively doubled the tax
rate, or, equivalently, doubled the real value (purchasing power) of the coins.
The frequent
arbitrary changes in both the nominal values and metallic content of the myriad
and constantly changing issues of coin throughout mediaeval Europe meant that
'none but an expert could tell what the values...were' (Innes 1913: p. 386).
Under these circumstances, how could the metallic content of the money be
directly and systematically linked to the price of other commodities?
Furthermore, the very long periods of time it took for changes in the price
level to occur following any reduction in metallic content further confirmed
the implausibility of the debasement hypothesis. Innes had 'no doubt that all
the coins were tokens and that the weight and composition was not regarded as a
matter of importance. What was important was the name or
178
distinguishing mark of the issuer, which was never
absent' (1913: p. 382). Although it might be the case, the issuer's mark did
not necessarily guarantee a metallic standard, rather the issuer promised to
accept the token back in payment of a debt. Historically, state issue and state
re-acceptance in the payment of tax debt is, arguably, most important in the
development of money. Coins, like all forms of money, redeem debt and,
therefore, Innes argued 'credit and credit alone is money' (1913: p. 392). In
general, he would have agreed with his contemporary, the sociologist Georg
Simmel, that:
[M]oney is only a claim upon society. Money
appears, so to speak, as a bill of exchange from which the drawee is lacking ... It has
been argued against this theory that metallic money involves credit, that credit creates a
liability, whereas
metallic money payment liquidates any liability; but this argument overlooks the fact that
liquidation of the individual's liability may still involve an obligation for the community.
The liquidation of every private obligation by money means that the community
now assumes this obligation to the creditor... [M]etallic money is also a promise to pay ... (Simmel 1978 [1907]: pp. 177-8. See especially pp. 174-9).
Thus, it can
be argued that, generically, all money is credit. But Innes also bases his
thesis on the argument that a particular species of credit instrument both
predates coinage and has also been the main means of conducting transactions
throughout history. Debtor-creditor relations recorded in money of account
predate the first coins by at least two thousand years (Innes 1914: pp. 155-6).
The Babylonian clay tablets (shubati) of around 2500 BC represented the
acknowledgement of indebtedness measured in a money of account - that is, they
were 'money' (Innes 1913: p. 396). After his enthusiastic study of ancient
numismatics, referred to as his 'Babylonian Madness' (see Ingham 2000), Keynes
was to make essentially the same argument in A Treatise on Money (1930).
However, Innes takes this much further in maintaining that these financial
instruments continued to be the major forms of money throughout the coinage
era. He implies that there was a direct path of development from clay tablets,
brittle metal objects and tally sticks - all of which could be broken in two to
signify a credit-debtor relation - to modern bills of exchange and other
commercial paper. All these devices enabled the clearance of debts without
recourse to any circulating medium.5 Innes's version of the credit
theory of money has, then, three main elements. First, money is primarily an
abstract measurement of value. Second, all forms of money are credit in that
their value consists in their ability to redeem a debt; 'money' cannot exist
without the existence of a debt to be redeemed. Third, credit instruments
predate coined
179
currency and historically represent the major form
that money has taken. Again it should be noted that this assertion is much more
radical than other heterodox theories of the time in its insistence that forms
of 'credit' not only predate coined money, but have also been the most
important means of contracting and settling debts throughout history.
Innes's
articles provide a lucid critique of the commodity theory of money. Before I
became aware of this work, I had used and developed the similar contemporary
formulations of Knapp, Simmel and Keynes to draw out and emphasise the
conceptualisation of money as a social relation, not a thing. To say that money
is credit is to say that money is constituted by a social relation. Money, even
in its virtual form as a book entry, only becomes an exchangeable 'commodity'
after its quality of 'moneyness' has been constituted by the social relations
between the issuers and users of money (Ingham 1996; 2000b). Despite this
agreement with Innes, there are, however, four areas where I believe that his
analysis could be extended, clarified and augmented. I shall offer only brief
remarks on two of them; that is, on the ideology of metallic money; and the
problem of the credit money explanation of inflation. The questions of the
origins of money of account and the historical singularity of capitalist credit
money will be dealt with more extensively.
In the first
place, Innes, rather surprisingly, makes no attempt to explain the remarkable
persistence of a theory that is so 'completely lacking in foundation' (Innes
1913: p. 383). But Innes did brusquely observe that the exchange value of gold
was not even produced by the market. Rather the gold standard was
authoritatively established by the central bank with its promise to buy gold
with its own notes at an announced price. And, '[i]f this is not fixing the
price of gold, words have no meaning'(Innes 1914: p. 162, emphasis added).
However, in addition to creating a standard, anchoring money in gold had the
effect of ideologically naturalizing, and thereby concealing, the social
relation of credit that underpinned the monetary promise to pay. Monetary
systems, as I shall argue, are essentially social and political arrangements
that are based on either an equilibrium of competing interests or consensual
agreement, and, as such, they are fragile (
In his
second article, Innes confesses that he is unable fully to explain inflation in
the modern era with his credit theory of money (1914: pp. 166-8). His brief and
rather sketchy attempt does not warrant an extended discussion, but it has some
interest. In the first place, it
180
suggests, as we shall also see in the following
discussion of credit, that Innes is not entirely free from the orthodox
economic conceptions of which he is so scornful. On the basis of his credit
theory, he believes - like the 'monetarists' of the late twentieth century - that
'over-lending', especially to governments, is the 'prime factor in the rise of
prices'. But he is unable to explain how 'a general excess of credits and
debits produces this result' (Innes 1914: p. 167). On this level, Innes implies
a quantity the ory in which the nature of the quantum is changed - from money
'proper', in the orthodox Fisher version, to the debits and credits of his own
theory. Had he considered the full implications of his theory, then, it might
have been more apparent to him that a simple quantitative ratio does not make
conceptual sense with regard to credit, as the monetarists were to discover to
their cost in the 1980s. Money is credit, which is a social relation that
cannot be satisfactorily expressed in a linear model of the relation between
the two variables of the quantity of money and prices. Credit creation may
indeed fuel inflation; but it can also lead to a situation of debt deflation.
However, I
would suggest that Innes was moving along the right lines. He was inclined to believe
that the depreciation of money is the result of 'disturbance of the equilibrium
between buyers and sellers'. But this is not the equilibrium of mainstream
economics, borne of the interplay of subjective preferences. It is rather the
result of a 'tug of war' in which, for example, the capitalists' access to easy
credit puts 'power into the hands of the speculator [to] hold up commodities
... for a higher price' (Innes 1914: p. 167). But, with his very last sentence,
Innes remained in agreement with orthodoxy that 'the depreciation of money is
the cause of rising prices' (1914: p. 168). He did not take the more radical
route actually to reverse the causation, as is implied by the 'cost-push' and
'mark-up' theories of modern Post-Keynesian economics, or Weber's (1927,1978)
sociological conception in which prices are the 'outcome of the struggle for
economic existence.' (See the discussion in Ingham 2002; Wray 2004.)
Innes acknowledges that his essays do not offer an
explanation for the origins of the abstract money of account.7
However, without an alternative, commodity theory's conjecture that the origins
of the money of account lie in the division of the valuable commodity into
units that could be weighed and then given a numerical value cannot be
dismissed so easily. Money of account is taken for granted in the commodity
theory,
181
which assumes that the primeval market produces a
transactions cost-efficient medium of exchange that becomes the standard of
value and money of account. It is argued that coins evolved from the weighing
of pieces of precious metal that were cut from bars and only later, after
standardisation, counted. For example, the Babylonian shekel was
originally not only an element in the unit of account, but also a bar of
silver. However, as we shall see, there are both a priori and empirical
grounds for reversing the causal direction. Money of account is logically
anterior and historically prior to the market.
Indeed, it
must be said that Innes does appear to see the seriousness of the problem for
his claim that a metallic standard was never the basis for money. Rather, he
passes over the question of the standard of value's referent with the analogy
that 'we divide, as it were, infinite credit and debt into arbitrary parts
called a dollar or a pound, and long habit makes us think of these as something
fixed and accurate ...' (Innes 1914: p. 155). His reference to measures of
physical phenomena only serves to emphasise the lacuna. To be sure, ounces and
feet are abstractions, but Innes doesn't pursue the question of whether
'infinite credit' is of the same order as, say, 'infinite weight' or 'infinite
distance'. Merely to say that the unit of account is an abstraction does not in
itself refute the notion that the unit originates in the 'natural' commodity,
as Ricardo averred. As they stand, Innes's arguments do not constitute a robust
challenge to the classical commodity theory of money.
Keynes
realised that if the Babylonian material, which represented the earliest known
evidence of writing, could not provide an answer to the question of the
'historical' origins of money of account, then, it was unlikely to be
decisively resolved.8 However, a stronger a priori case for
the primacy of money of account - that is to say, of its 'logical' origins -can
be made than the one put forward by Innes (Ingham 2000, 2002; see also Hicks,
1989; Hoover 1996; Aglietta and Orlean 1998). Furthermore, reasonably coherent
historical and sociological arguments can be adduced in empirical support
(Grierson 1977).
In the first
place, without making a number of implausible assumptions, it is difficult to
envisage that an agreed money of account could emerge from myriad bilateral
barter exchange ratios based upon subjective preferences, as the Mengerian
commodity theory implies. One hundred goods, it should be noted, could yield
4,950 exchange rates (Davies 1994: 15). How could discrete barter exchange
ratios of, say, 3 chickens to 1 duck, or 6 ducks to 1 chicken, and so on,
produce a universally recognised unit of account? The conventional economic
answer that a 'duck standard' would emerge 'spontaneously' involves a circular
argument. A single 'duck standard' cannot be the equilibrium
182
price of ducks established by supply and demand
because, in the absence of a money of account, ducks would continue to have a
range of unstable exchange ratios. As opposed to discrete truck and barter,
which produces myriad bilateral exchange ratios, a true market, which produces
a single price for ducks, requires first and foremost a stable unit of account.9
As opposed to the commodity duck, the monetary duck in any duck standard, would
be an abstract duck. Walras, the founder of modern economics' general
equilibrium analysis, identified the theoretical problem over a century ago and
introduced the 'auctioneer' and a 'numeraire' to get the trading started
in his mathematical model of the market. Market exchange requires only a money
of account. As the third-century BC Babylonians, eighteenth-century AD
Bostonians, and countless others knew, money is essentially money accounting,
which can be accompanied by payment in kind and/or myriad media of exchange and
payment. (On eighteenth-century Boston's cashless monetary system, see Baxter
1945.)
If it is implausible
that market exchange, in itself, could produce the abstraction of a money of
account, what is its origin? The nineteenth-century German historical school
argued that the 'idea' of money is to be found in the scale of tariffs for the
measurement of debts to be paid in compensation for injuries and damages laid
down in institutions such as wergild ('worth-payment') (see Einzig
1966). The evidence from Germanic tribal societies post-dates Babylonian money
of account and early coinage, but it may be argued that wergild-type
institutions were basic to elementary tribal society. The numismatist Grierson
has provided the most thorough analytical reworking of this conjecture
(Grierson 1977). First, and unlike an orthodox Mengerian economic approach, he
makes a sharp distinction between barter and money exchange. 'The parties in
barter-exchange are comparing their individual and immediate needs, not values
in the abstract' (Grierson 1977: p. 19, emphasis added). Second, Grierson
implies a distinction between money in general and its specific forms. 'Behind
the phenomenon of coin there is the phenomenon of money, the origins of which
are not to be sought in the market but in a much earlier stage of communal
development, when worth and wergild were interchangeable terms' (Grierson 1977:
p. 33). He concedes that there is no direct evidence that wergild institutions
predated the appearance of markets, but argues that the concept of moneysworth
could not have been produced by the market.
The conditions under which these laws were put together would appear to
satisfy much better than the market mechanism, the prerequisites for the
establishment of a monetary system. The tariffs for damages were established
183
in public assemblies, and ... Since what is
laid down consists of evaluations of injuries, not evaluations of commodities, the
conceptual difficulty of devising a common measure for appraising unrelated objects is
avoided (Grierson 1977:20-21).
I have
suggested elsewhere that Grierson's hypothesis may be interpreted in a
Durkheimian sociological framework in which money of account is a 'collective
representation' for which the analogue is society itself (Ingham 1996a:
519-21).10 Wergild expressed two fundamental elements
of social structure: the utilitarian and the moral evaluation of social roles
and positions. The indemnity schemes of the wergild aimed to compensate for
functional impairment, but also expressed society's normative order. The scale
of fines and tariffs were related to both injuries and insults.l1
In other words, the analogue for value is not to be found in the costs of
producing a 'natural' substance such as gold, as the early nineteenth-century
positivist economists assumed, but failed to demonstrate. Nor can a scale of
value, which is necessary for a money of account, be deduced from the
subjective preferences that form the assumptions of modern neoclassical
economic analysis. Money has its origins in debt, as Innes maintained. And
primordial debt is a debt to society, where we must assume money, in the sense
of abstract value, originated.12
There would also appear to be the need for
clarification of Innes's conception of credit money. If all forms of money are
essentially 'credit', why does Innes find it necessary to argue that
bilaterally contracted credit relations have actually been more important,
contrary to most established opinion, than coinage itself? Are the distinctions
between the different forms of money of any significance? Is the token credit
in the form of coin the same as the tally stick or bill of exchange?
Notwithstanding his generic identification of money with money of account,
Keynes, for example, maintained the conventional distinction between
'Money-Proper' and 'Acknowledgements of Debt' in his classification of 'the
schemes and forms' of money (Keynes 1930: 9). In his understandable eagerness to
establish the credit theory of money, Innes, perhaps missed the significance of
some of the historical changes in the form money has taken.
The attachment
of the German 'historical school' to the credit theory of money was only one,
albeit important, aspect of their feud with the
184
economic theorists. More generally, as I have already
pointed out, the historians and sociologists rejected the claim that the laws
of economics were universally applicable. They insisted on the historical
specificity of capitalism as a distinct and unique form of economy that had
developed in
It should be
stressed that these writers were not concerned with the material substance of
the form of money - that is to say, with Menger's problem of the substitution
of 'worthless' paper for precious metal. Rather, they were pointing to the
historically singular development of what Post-Keynesian economists later were
to call the 'endogenous' creation of money - that is to say, by the creation of
money deposits through bank lending and transferable debt.
Innes's
position on these issues in the history of monetary thought appears to be
rather different. His argument that money is essentially an abstract measure of
value and that all money is credit are much the same as those of his unacknowledged
contemporaries in the heterodox camp. But, he is at odds with them in not
identifying the character of capitalism as a 'monetary production economy',
based in the availability of an elastic supply of credit money. In this
respect, Innes's argument is logically consistent: as all money
generically is credit, the issue of capitalist credit money is not significant.
However, I shall suggest that the manner in which he universalises the
existence of credit qua money obscures the nature of the causal role
played by an historically specific form of credit in the long historical
transition from
Innes
grounds his conception of the universal character of money in a 'primitive law
of commerce'; that is to say, 'the constant creation of credits and debts and
their extinction by being cancelled against one another' (1913: p. 393).
Notwithstanding the scorn he pours on commodity theory for its axioms, Innes is
in fact guilty of a similar
185
offence. On one level, his explanation simply involves
the substitution of one universal 'law' for another. The 'primitive law of
commerce' replaces Adam Smith's law of 'the tendency to truck barter and
exchange'. However, there is no such universal 'law' - in either case. Nor can
the 'sanctity of an obligation' based on the 'antiquity of the law of debt' be
taken as a sociological universal (Innes 1913: p. 391). In his references to
'obligations' and 'promises', rather than media of exchange, Innes quite
properly focusses attention on the fact that money is actually constituted by
social relations (Ingham 1996a). But he does not appear fully to appreciate
that the social and political foundations of credit relations -that is of all
monetary relations, and their historical variation in the development of
different forms of money, require an explanation.
This
approach also prevented Innes from making important distinctions between
different forms of credit relation. As I shall argue in the following section
on the development of capitalist money, it is important to distinguish between
the multilateral book clearance of debt and the actual creation of money
through bank lending, in the form of transferable debt. Similarly, Innes does
not make an explicit distinction between the existence of bilateral debt,
acknowledged, for example, by the two pieces of the tally stick, and the
transferability of such a promise to pay to a third party. Whilst we may agree
with Innes that all money is credit (or debt), it does not follow that the
converse is true. Not all credit (or debt) is money. Innes tends to assume the
existence of a social system of banking intermediaries in which interpersonal
credits and debits can be cleared and which is able to issue credit money in
the form of impersonal transferable circulating debt (Innes 1913: p. 392).14
It is the
extensive transferability of debt and the creation of a hierarchy of
acceptability that was crucially important in the development of the form of
(circulating) credit money. As we shall see, these institutions were slowly and
painstakingly constructed. This was a complex process that involved social and
political transformation. It cannot simply be seen as an expression of the
'primitive law of commerce'. Innes tends to oversimplify the complex social and
political changes that have structured the evolution of money since Hammurabi's
day. In a similar analytical manner to his opponents in economic orthodoxy,
Innes fails to acknowledge the historical specificity of capitalist credit
money.
Accounts of the rise of capitalism, influenced by
neoclassical economics or classic Marxism have focussed almost
exclusively on either the
186
exchange or production of commodities.15
Money is seen to play a passive role in these economic processes; its forms and
functions are taken to be merely responses to developments that take place
elsewhere in the 'real' economy (Ingham 1999). However, in addition to the
appearance of extensive markets, machine technology, factory organisation and labour-capital
relations, I would argue that the historical specificity of capitalism is also
to be found in the creation of a means of financing by pure abstract value.
Four questions are involved. First, does it make sense to see capitalism as a
historically specific 'mode' or economic system? Work influenced by mainstream
economic theory, for example, might refer descriptively to 'capitalism', but
explanations and interpretations are couched in terms of ahistorical universals
- such as increases in productivity, or transactions cost efficiency brought
about by the extension of the division of labour and market exchange. However,
assuming that capitalism is to be explained as a particular historically
located system, the second question is whether money undergoes any fundamental
change during its development? In particular, is the distinction between coin
and credit money significant? Third, if money did undergo significant changes,
how are they to be explained? Are monetary changes to be explained as responses
to the 'needs' of the underlying economy? For example, is the bill of exchange
to be explained by its function of economising on the use of precious metal? Or
were significant monetary changes, at least in part, the result of relatively
autonomous social and political changes. Finally, were the changes in money an
independent force in capitalist development?
The idea
that the development of credit money, as a relatively autonomous economic
force, is important in explaining capitalism's development is to be found in
the work of writers who were influenced by the German historical school of
economics and, to a lesser degree, in the French Annates school of
history.16 '[T]he financial complement of capitalist production and
trade', Schumpeter wrote, was so important that the 'development of the law and
practice of negotiable paper and of "created" deposits afford the
best indication we have for dating the rise of capitalism' (Schumpeter 1994
[1954]: p. 78; see also p. 318. This creation of credit money in a banking
system is a self-generating, relatively autonomous process insofar as the
'banks can always grant further loans, since the larger amounts going out are
then matched by larger amounts coming in' (Schumpeter 1917: p. 207 quoted in
Arena and Festre 1999 [1996]: p. 119). Moreover, Schumpeter believed that the
distinctiveness of capitalism was, in part, to be found in the entrepreneur's
role as debtor. Although accumulated wealth 'constitutes a practical
advantage'; usually someone 'can only become an entrepreneur by previously
becoming a
187
debtor'. Moreover, in capitalism 'no one else is a
debtor by the nature of his economic function' (Schumpeter 1934: pp. 101-3,
quoted in Arena and Festre 1999: p. 119). From the French school, Bloch
captured this same essential element of capitalism with the crisp observation
that it is 'a regime that would collapse if everyone paid his debts' (Bloch
1954: p. 77). The essence of capitalism lies in the elastic creation of money
by means of readily transferable debt.17
The
beginning of what Keynes referred to as a 'monetary production economy' is to
be found in the seventeenth century when signifiers of private debt gradually
evolved into widely accepted and then legally enforceable means of payment. At
this time in western Europe, private bank-issued money existed alongside the
sovereign public currencies (Boyer-Xambeu 1994). Eventually, the integration of
state borrowing and bank lending in the creation of 'national' debts led to the
creation of entirely new forms of means of payment. These were based upon
distinctive social relations and forms of organisation that had not existed in
the ancient and classical economies (Weber 1981 [1927], Chapter XX).
These forms
of capitalist credit money were the results of two related changes in the
social relations of monetary production in mediaeval and early modern
These
capitalist non-commodity forms of money cannot be satisfactorily explained
simply as a
process of the progressive
188
'dematerialisation' of money which is driven
exclusively by the rational pursuit of cost efficiency. Orthodox economic
explanations imply that the development of credit and modern forms of finance
result from 'economising' on mining and minting and/or as the response to the
insufficiently elastic supply of commodity money to meet the needs of the
expansion of commerce and industrial production in capitalism. Of course,
economic interest was a spur to the development of advantageous monetary
practices; but these were only made possible as a result of changes in social
and political structure that were, in the first instance, only indirectly
related to the pursuit of economic 'efficiency'. In the first place, monetary
practice, as ever, evolved with regard to the demands made by states in pursuit
of their own interests. Second, the particular character of these changes
cannot be understood outside the exigencies and enabling opportunities that
were presented by the unique configuration of mediaeval
Immediately after the fall of
189
The
resumption of minting on a large scale in the eleventh and twelfth centuries
was an expression of the growth of kingdoms, principalities, duchies and local
ecclesiastical jurisdictions which began to emerge from the feudal networks of
personal allegiances (Bloch 1962). Across
In order to
establish a degree of fiscal coherence across his loosely integrated jurisdiction
of the
It is
essential, as Innes insisted, to understand that the 'imaginary money' was
invariable in that people continued to count in these ratios long after the
debasement, clipping or deterioration of the actual coinage. By the late
seventeenth century, minted pound coins weighed only 7 penny weights of silver,
not the 240 of the money of account; that is to say, 3 per cent of its abstract
ratio. Nonetheless, its purchasing power, in relation to the other coins, was
the same as it had been at the time of Charlemagne's decree. Thus, by the late
Middle Ages, when people priced, they had in mind not coins, but commodities
and obligations
190
denominated in money of account (Einaudi 1954 [1936]:
p. 230).18 The dechrochement of the money of
account from the means of payment firmly established the practice of purely
abstract monetary calculation.
Contrary to
the implications of economic mainstream histories of money, Charlemagne was not
simply motivated to provide a standard measure of value as a 'public good' in
order to facilitate market exchange across an economically integrated Europe.
Rather, as in all previous monetary developments, the fiscal needs of the
church and state were most important. Of these, ecclesiastical transfers across
European Christendom were especially important. But of course, the use of a
standard money of account across the Christian ecumene did indeed eventually
provide the foundation for a trans-European market. The quickening of trade and
the fiscal demands of the myriad jurisdictions increased the output of the
mints. Basically, three kinds of coin were struck, but with countless
variations in weight and fineness - by scores of authorities in many hundreds
of mints. They produced: (i) 'black' money - that is, debased silver pennies
that turned black when rubbed; (ii) 'white' money that shone when rubbed; (iii)
the 'yellow' money of fine gold (Spufford 1988). These circulated freely across
European Latin Christendom; and all were evaluated against a benchmark money of
account. A list of coins used as means of payment in a large transaction in
At a later
stage, the original Carolingian unit of account of pounds, shillings and pence
and coinage was integrated from time to time in actual coins struck by the more
powerful kingdoms. In 1226, Louis of France struck the livre or gros
tournois, which had the weight and fineness of the 'imaginary' sou (shilling).
Thus, for a time, the real and imaginary were reintegrated, at least in the
French provinces. But, eventually, the livre tournois itself existed
only as unit of account, as in the above example of the large transaction in
As the myriad
political jurisdictions grew stronger during the twelfth and thirteenth
centuries, the most powerful asserted their sovereignty by proclaiming their
own moneys of account, most of which were variants of the Carolingian pounds,
shillings and pence (Bloch 1954; Spufford 1988; Boyer-Xambeu 1994; Day 1999:
pp. 59-109). These were not only used to denominate local coins, but also to
impose an exchange value on the
191
'foreign' coins that circulated freely across the
imprecise and permeable territorial boundaries. As both moneys of account and
coinages varied, monetary relations became extremely complex. Under these
circumstances, it is most unlikely that any metallic coin could have served as
the standard, as Innes observed. Under these circumstances, he argued that
monetary policy did not primarily involve manipulation of the metallic content
of coins. Rather, it entailed devaluation and revaluation of the money by
'crying up' and 'crying down' the money of account.20
Coins had
multiple values, one of which was declared in the state of issue, and also
others, expressed in the money of account of the zone of sovereignty in which
it happened to be circulating at the time. The exchange relations between the
values were purely abstract monetary relations in the sense that the money of
account, not their metallic content, determined the relative values of coined
money. In other words, coins and, as we shall see, credit instruments such as
bills of exchange were all established, as money, by moneys of account. In short,
the various media of exchange and payment became money by being counted - not
weighed, or otherwise assayed as a valuable commodity (Boyer-Xambeu 1994: p.
6).21
The separation of moneys of account from means of
payment and the free circulation of coins with multiple territorially
determined values had two important implications for the development of modern
capitalist banking and its distinctive forms of money. First, the circulation
of coins outside their jurisdiction of issue increased the need for
moneychangers whose activities eventually provided the basis for the
recrudescence of deposit banking (Usher 1953 [1934]; Mueller 1997). Second, and
more importantly, these particular circumstances of anarchic coinage and
increasingly long-range trade provided the stimulus for the development of the
bill of exchange into a form of transnational private money denominated in an
agreed money of account. Eventually, when advantages of the new forms of money
had become obvious and irresistible, where states were strong enough to enforce
the transferability of debt, capitalist credit money came into being. Again, it
should be stressed that this was not a straightforward process dictated merely
by a growing awareness of the 'efficiency' of the new forms. The actual outcome
was produced by particular circumstances, which were always accompanied by
conflicts of economic and political interest.
192
By firmly
establishing the practice of abstract money accounting, the fortuitous
separation of money of account and means of payment laid the foundations for
these innovations. The conceptual distinction between, on the one hand, money
of account - as the 'description or title' - and, on the other, money as means
of payment - as 'the thing which answers to the description' would be of
no practical significance if the thing always answered the description or, if
the description referred only to one thing (Keynes 1930; 4, emphasis in the
original). However, the dissociation opened up the possibility of a range of
'things' that might be taken as answering the description and could, therefore,
be used as means of payment. By the late fifteenth century, Pacioli, in his
famous treatise on double-entry bookkeeping, listed nine ways by which payment
could be made. In addition to cash, these included credit, bill of exchange and
assignment in a bank (Lane and Mueller 1985: p. 6). Both these developments -
that is, money changing/deposit banking and credit instruments - occurred in
the relatively autonomous economic and social spaces and interstices that were
to be found in the geopolitical structure of late mediaeval Europe.
It is
possible to discern the gradual development of four concurrent basic elements
of the capitalist credit money system: (i) the (re)emergence of banks of
deposit in the late thirteenth century; (ii) the formation of public banks,
especially in Mediterranean city states in the fifteenth century; (iii) the
widespread use of the bill of exchange as a form of private money used by the
international merchant banker/traders during the sixteenth century; and (iv)
the very gradual depersonalisation and transferability of debt in the major
European states during the seventeenth and early eighteenth centuries, which
transformed the private promises to pay into 'money'. However, the most
decisive final development was the integration of the bankers' private bill
money with the coinage of sovereign states to form the hybridised, or dual,
system of credit money and a metallic standard of value. The latter finally
disappeared during the twentieth century to leave money in its pure credit
form.
Early mediaeval money-changing 'bankers' (bancherii),
whose services were absolutely essential in the monetary anarchy of
multiple and cross-cutting coinages and moneys of account, soon began to take
deposits of cash for safekeeping, which eventually permitted the book clearance
of transfers between depositors. However, these early banks did not issue
credit money in the form of bills and notes and it is largely for
193
this reason that they are referred to as 'primitive' -
that is to say, non-capitalist (Usher 1953 [1934]: p. 264).22
In this
regard, as I have stressed, it is important to distinguish these two distinct
bank practices. Book transfer and clearance between depositors as a means of
payment comes into existence when a sufficient number of deposit accounts are
opened in single enterprise. Here the 'book' money exists as a currency
substitute. Payment by bank transfer was, for example, countenanced by a
Venetian ordinance of 1421 -contadi di banco, in addition to denari
contadi (coined currency) (Usher 1953 [1934]: p. 263). The banker could
also use some of the deposits to make loans or invest in trade without
depriving the depositors of the use of their deposits - unless of course they
all wish to use them at the same time. Both practices augment the stock of
public currency; but this is limited to the particular credit relations that
actually exist between the parties involved. In other words, there exists a
complex network of interpersonal credit relations orchestrated by the bank.
Transfers between accounts had to be conducted in person in the presence of the
banker, as they were in the banks of the ancient and classical world (Usher
1953 [1934]; Weber 1981 [1927]). Written orders were still illegal, although
they were increasingly used. But these were restricted to small networks, as in
sixteenth-century
Accepting
deposits, book clearance of credit and the lending of coined money, as Usher
points out, 'merely transfers purchasing power from one person to another ... [However]...
[b] anking only begins when loans are made in bank credit' (Usher 1953 [1934]:
p. 262). This creation of credit money by lending in the form of issued notes
and bills, which exist independently of any particular level of incoming
deposits, is the critical development that Schumpeter and others identified as
the differentia specifica of capitalism. The issue of credit money in
the form of notes and bills requires the depersonalisation of debt which
enables the transferability of paper promises to pay that can then circulate as
credit money outside the network of any particular banks and its customers.
Bank clearance of debts, as Innes also explains, occurred in
194
involved in the transformation of bilateral or network
personal credit transfers into depersonalised transferable debt: the public
banks and the private bankers' bill of exchange.
The origins of modern capitalism are also to be found
in the mutually advantageous relationships that were forged between these early
deposit bankers and their hosts in the Mediterranean city states. The
'memorable alliance' in the seventeenth century, between financiers and state,
that Weber gave importance to in explaining the rise of capitalism had quite
humble origins in the thirteenth and fourteenth centuries. Money changers
purchased permits from the governments of Mediterranean city states and also
performed various public functions, in return for which they received
protection. By the fourteenth century in
The
situation was different in the European dukedoms and kingdoms. Here the
emphasis was on bullion, not banking. Sovereigns sought to control both money
of account and the issue of coinage by controlling the flow of precious metal.
In the main they looked on their merchants and bankers as competitors whose
book transactions evaded taxation and reduced their seigniorage profits from
minting.
The
large-scale financing of the city-states' protection and warfare costs was
increasingly undertaken by these banks from the late thirteenth century onwards
and banking's fundamental 'liquidity' problem soon appeared. The crash of
Genoese Leccacorvo enterprise in 1261, when it was unable to guarantee more
than 10 per cent of its debts to depositors, anticipated the later and better
known failures in the fifteenth and sixteenth centuries of the Bonsignori of
Sienna, the Bardi and Peruzzi of Florence and the Fugger of Augsburg (Lopez
1979: p. 21). It was partly as a result of these early experiences of
capitalist credit money's instability that the Mediterranean city states'
plutocracies set up the early monopolistic public banks of deposit as a
measure of protection for the
195
critically important function in war finance. These
were established at
As we have
already noted, loans to the city states, by banks that had a reasonably large
number of depositors, 'monetised' the debts. Some loans were in cash, but many
were merely entries in the current accounts, held in a bank of deposit, of the
state's creditors. The banker was substituting his promise to pay the creditor
on the basis of the state's promise to repay him. Suppliers of goods and
services to the state could draw on the account to make their own payments by
bank transfer. Money had been created out of debtor-creditor social relations (Mueller
1997: p. 42; Day 1999: pp. 67-8). This process depended on the trustworthiness
of the banks which, in turn, relied on the legitimacy and viability of the
state. For example, it was noted in late fifteenth-century
As ever, the
continued expansion of bank credit money increased instability, and bank
failures continued to have far-reaching effects in western Europe throughout
the sixteenth century (Usher 1953 [1934]:p. 290; Boyer-Xambeu 1994). As we have
already noted, the 'liquidity' problem of capitalist banking practice consists in
the transformation of many small short-term deposits (bank liabilities),
payable at short notice, into relatively longer-term loans (assets). There can
be no complete or final solution to the liquidity problem in capitalist banking
(Minsky 1986). Credit relations can rupture at any time; but before the
widespread transferability of debt, banking was even more fragile. The
196
availability of creditable promises to pay that could
be transferred impersonally to third parties made it possible to stabilise a liquidity
problem by borrowing short term in the form of bills and notes from other
banks. In addition, banks were then able to issue notes to the value of the
promises to pay that were acceptable as means of payment. In other words, the
solution lay in the construction of denser and more secure social foundations
for the social relations that comprised capitalist credit money. The efficacy
of these changes was only realised when these new 'social technologies' of
credit money creation were established on firmer cultural and political bases.
In particular,
The transformation of the social relation of debt into
the typically capitalist form of credit money began in earnest when signifiers
of debt became anonymously transferable to third parties. The process may be
divided roughly into two periods. First, in the sixteenth century across that
part of
As we have
noted, from the thirteenth century onwards, the princes of Latin Christendom
not only minted their own coins, but also proclaimed, as an expression of
sovereignty, their own version of the Carolingian money of account
(Boyer-Xambeu 1994: p. 6). Consequently, every coin in the promiscuous
'international' circulation might have a different value in each jurisdiction
in which it was to be found. There was now no common yardstick. The extreme
monetary uncertainty is evident in the
197
absence of numerical markings on coins, as Innes
noted. In other words, at the precise moment that the states' pacification of
The modern
bill of exchange originated in Islamic trade and most certainly entered
Until exchange by bill was meticulously dissected by
Boyer-Xambeu et al. (1994), it had been argued - by contemporaries such
as Trenchant and, later, by orthodox economic historians in the twentieth
century -that they could be explained simply by reference to the 'needs of
trade'. On the one hand, the supply of coin was unreliable and risky to
transport; and on the other, the exchange bankers' profits were explained in an
orthodox manner as a result of the 'demand' for bills (see also Day 1999).
Without delving too deeply into the complexities, it is essential that we
understand how again that it was the particular geopolitical structure of late
mediaeval
The bankers
did not simply provide a service that economised on the high transaction costs
that resulted from the existence of the complex and inadequate coinages. Nor
did they make their profits by charging a
198
commission for discounting the bills, or by lending at
a rate of interest. Rather they were able to enrich themselves and promote the
use of bills through a series of exchanges that involved the conversion of one
money of account into another. The bankers met at regular intervals at the
fairs to fix the conto - that is, their own overarching money of
account, expressed in terms of an abstract ecu de marc, upon which the
private bill money was based. Their enrichment depended on the existence of two
conditions. First, the bankers had to maintain the permanent advantage of the
central fair rate (at
In other
words, this state of affairs bore no relationship to a 'market' in bills, as
this is understood in conventional economic analysis. The situation outlined
above and the profit opportunities that it provided was the result of a purely
monetary relation that existed between the myriad moneys of account and their
lack of any stable relationship to the equally varied coinages. The bankers
could control the direction of a bill through the moneys of account of the
myriad jurisdictions in a way that was always favourable to them, as this was
determined by their own money of account (conto) at the central fair
where the accounts were settled. As described by Davazanti in the sixteenth
century, this mode of exchange by bill was exchange per arte, as opposed
to the 'forced' exchange that was determined by the flow of commodities
(Boyer-Xambeu: p. 130). It was constituted, on the one hand, by a particular
configuration of social and political relations that constituted the different
monetary spaces and forms of money, and on the other, by the social
organisation of the bankers, their knowledge of moneys of account and exchange
rates of coins.
Leaving
aside for a moment the longer-term consequences of the bill of exchange for the
development of capitalist credit money, it would be difficult to overemphasise
the more immediate and direct effects on economic life. Until this time,
imports and exports of goods were inextricably linked by quasi-barter exchange.
Moreover, apart from well-established bilateral trade between parties known to
each other, merchants were travellers. After the late fourteenth century, they
became sedentary and the cities expanded. Exchange by bill per arte was
the means by which the 'nations' of bankers enriched themselves by exploiting
the unique opportunities afforded by the particular structure of the late
mediaeval geopolitical and monetary systems. In doing so they expanded the
early capitalist trading system. The bill of exchange system
199
allowed an increase in trade without any increase in
the volume or velocity of coins in the different countries; but this was an
unintended systemic consequence of the exchange bankers' entirely
self-interested exploitation of the particular circumstances. Again as
Davazanti observed: 'If exchange were not carried out by art, there would be
few exchanges, and you would not find another party each time you needed to
remit and draw for trade ... '(cited in Boyer-Xambeu 1994: p. 130). The
exchange banking 'nations' had created a source of enrichment that was
relatively autonomous from the supply and demand for 'real' exchange; but its
consequence was fundamentally to transform the way in which the latter was
organised and pursued.23
Exchange by bill was also one of the practices that
eventually led to issue of credit money by states. In this regard, it must be
noted that this financial instrument did not set in train the same line of
development in its region of origin - Islam (Abu Lughod 1989). Here the narrow
economic conditions for the extended use of the bill in trade were at least as
firm as in
Exchange per
arte - and not simply the use of a form of trade credit in the bill of
exchange - presented the possibility of the dissociation of a bill and the
goods in transit it was supposed to represent. This was known as 'dry exchange'
- that is, the issue of 'pure' credit in the form of a bill without reference
to particular goods. In turn, this eventually led to a further dissociation of
the bill from any particular 'dry exchange' credit relation - that is, to the
growing autonomy of depersonalised debt relations and their eventual evolution
as a form of credit money. Again, it should be emphasised that this further
development was the result of a particular social and political structure.
As we have
noted, verbal and consequently personal contracts based on Roman law
predominated until the sixteenth century, in both casual credit relations and
the more formal arrangements conducted by the early banks of deposit (Usher
1953 [1934]: p. 273). These were made before a notary and witnesses and became
a matter of public record. This form of contract served to fix debt as a
particularistic social relation; and, therefore, until written contracts became
the norm, the transferability of debt to the point where it could serve as a
general impersonal means of payment was not possible.
200
The
widespread use of the bill in 'dry exchange' per arte undoubtedly
hastened the transition from oral to written contracts and opened up the
possibility that the signifier of bilateral debt could be used in the settlement
of a third party debt. 'Bills were drawn for the first and fictitious
destination and the option of a reimbursement in
Significantly,
this further development of the bill into a more generally acceptable means of
payment occurred in
During the
sixteenth century, a singular form of profit-making was made possible by the
exchange bankers' exploitation of the diversity of moneys of account and their
dislocation from the equally varied means of payment that resulted from the
geopolitical structure of myriad weak states.24 At one point, the
transnational exchange bankers brought a degree of integration to the system by
linking the value of the French king's sous tournois and their own
abstract money of account - the ecu de marc. This expressed a particular
balance of power between the princes'
201
sovereign claims, with its attendant tax advantages,
and the bankers' profit-making ventures. However, this balance shifted
dramatically towards the end of the sixteenth century. Two interdependent
forces were involved. First, the exchange bankers' networks weakened to the
point of collapse in the aftermath of the liquidity crises, which they alone
could not stabilise. Secondly, the French state reasserted sovereign control of
its monetary system (see Boyer-Xambeu 1994, Chapter 7). In 1577, the French
monetary authorities effectively removed the foundations for enrichment from
exchange per arte by the establishment of a uniform metallic standard
that reconnected the money of account and means of payment and by the
prohibition of the circulation of foreign coins. Henceforth, exchange by bills
became a financial rather than a monetary relation in the sense that their
value ceased to be fixed in the abstract money of account rate, but rather on
the floating exchange rates of metallic coins (Boyer-Xambeu 1994: p. 202). This
form of exchange and banking in general withered temporarily in face of the
absolutist monarchies' metallic moneys (see Kindleberger 1984, Chapter 6).
However, the new credit money practices moved on geographically to those states
with more powerful merchant-banking classes - such as
Apart from later refinements, the basic organisational
and technical means for producing the various forms of credit money were, from
a practical standpoint, widely available from the sixteenth century.
Contemporary Italian treatises on the new techniques described how the supply
of precious metal coinage could be augmented. Three methods were identified:
bank clearance of debt; the creation of money in the form of claims against the
public debt; and exchange of bills per arte (Boyer-Xambeu 1994).
However, these new non-material forms were restricted to the upper levels of
state finance and commerce. And moreover, the mysteries of 'imaginary money'
and 'fictitious exchange' continued to present intellectual puzzles and
polemics, as they do to this day. As we have seen, bills and promissory notes
were slowly becoming disconnected from the direct representation of goods in
transit or of personal debt; but these forms of commercial paper were not yet
liquid stores of abstract value that were accepted as means of payment. That is
to say, the social and political bases for the transformation of debt into
universally accepted currency lagged far behind practical technical - or
202
even intellectual - capability. Even in
Moreover, it
would appear that social and political structures that had provided the basis
for the new capitalist credit money - in the forms of public debt and private
bills - were in themselves incapable of further expansion. This new 'social
power' in the form of an elastic production of credit money was contradictorily
impeded by the very conditions that had originally encouraged its existence.
For example, informal contracts by which the mercantile plutocracies of the
Italian city states lent to each other through the public banks were constantly
jeopardised by the factional rivalry that was typical of this form of
government. These conflicts also undoubtedly played their part in the general
decline of the Mediterranean city state republics from the sixteenth century
onwards. With regard to the merchant bankers' private bill money, it is
difficult to see how they could have carved out the necessary monetary space
for their bills, based on a sovereign jurisdiction and the necessary level of
impersonal trust. Moreover, as we have noted, it was not even in their
interests to do so, as it would have removed the circumstance from which they
profited. Without a wider base, the liquidity of bills of exchange was almost
entirely restricted to banking and mercantile networks and could not evolve
into credit money currency.
In other
words, there were definite social and political limits to the 'market'-driven
expansion of credit money. The essential monetary space for a genuinely
impersonal sphere of exchange was eventually provided by states. As the largest
makers and receivers of payments and in declaring what was acceptable as of
payment of taxes, states were the ultimate arbiters of currency. They created monetary
spaces that integrated social groups whose interaction was not embedded in
particular social ties or specific economic interests. Until credit money was
incorporated into the fiscal system of states which commanded a secure
jurisdiction involving extensive legitimacy, it remained, in evolutionary
terms, a 'dead-end'.
An
examination of the process by which this transformation took place again shows
that it cannot be explained simply in terms of the rational appraisal of the
cost efficiency and benefits of credit money. In the first place, there was
'rational' opposition to its spread. The economic benefits of credit money were
not self-evident to all contemporaries. In particular,
203
the minting of precious metal coinage was an important
source of revenue and symbol of sovereignty for mediaeval monarchs. But, most
importantly, it should be stressed again that monopolistic monetary spaces for
any form of money were not yet widely secured. Rapidly shifting political
boundaries, the promiscuous circulation of coins across them, not to mention
competing moneys of account, were the norm. Credit money was a product of this
insecure monetary space, but, in turn, these very same circumstances could not
sustain it. In this regard, it is significant that the bills of exchange were
centrally important in the operation of the fairs of
The two
forms of money - or, rather, the structure of social relations and the
interests of the producers of private bills and public coins - were
antithetical and antagonistic. On a most general level, the minting of coin was
both a symbol and a real source of the monarch's sovereignty. Monopoly control
brought great benefits which it was feared would be eroded if exchange by bills
were to displace the coinage. Consequently, strong monarchical states pursued
bullionist policies which inhibited the expansion of trade and the stimulation
of production that could be financed by pure forms of credit money.
But,
paradoxically, the first step in the creation of stable monetary spaces that
could sustain credit money was the strengthening of metallic monetary
sovereignty. It could be said that the stringency and effectiveness of
bullionist policies was a good measure of the sovereignty and the integrity of
the mediaeval monarchical state. And this was nowhere more apparent than in
204
1979).25 It is significant that when
Pacioli's treatise on financial practice and double-entry bookkeeping (1494)
was translated into English in 1588, the section on banking was omitted on
grounds of irrelevance (Lane and Mueller 1985). The controls on exchange and
the domestic unit of account exercised by the English monarchy largely
prevented the promiscuous circulation of coins and multiple moneys of account
that had occurred in continental
In
The temptations of increased seigniorage by means of
debasement had proved too much for Henry VIII in the search to finance his
costly wars.
205
During the 'Great Debasement' (1544-51) the silver
content of the coinage was systematically reduced from 93 per cent to 33 per
cent which resulted in a seigniorage to the crown amounting to over £1.2
million (Goldsmith 1987: p. 178; Davies 1996: p. 203). The exact nature of
narrowly economic effects is unclear; and, in particular, the question of the
relationship between metallic content of coins and prices is disputed (Innes
1913, 1914; Braudel 1984: pp. 356-59; Davies 1996). However, these
considerations aside, the debasement did discredit the monarchy, created confusion
and insecurity, and, like all serious monetary disorder, threatened social
disintegration.
Elizabeth
I's reforms stabilised a coinage that together with the successful prohibition
of foreign coins was now coextensive with the state jurisdiction. Despite the
involvement of
Other
elements of state building aided the creation of monetary sovereignty. It was
precisely at this time that
At this
juncture, however, the late sixteenth-century English state had, in effect,
established a form of money that was structurally the same in all important
aspects to that which had disintegrated in
206
However, the smallest l/2d coin was the value of an
hour's wage labour and, therefore, too large for petty transactions. These were
conducted, as in
However, in
the absence of further events and conditions, this development could just as
readily have been inhibited by a strengthened monarchical monetary sovereignty
- as it had been in
On the one
hand, English kings continued to assert mediaeval royal monetary prerogatives.
Charles I appointed a Royal Exchanger with exclusive powers over the exchange
of money and precious metals; and in 1661 Charles II sought to enforce the old
statutes of Edward III and Richard II licensing bills of exchange (Munro 1979:
p. 212). On the other hand, an increasing number of the same mercantile
supporters of monetary stability also advocated 'Dutch finance' - that is, the
creation and monetisation of a national debt.27 Over a hundred
schemes for a public bank were put forward in the second half of the
seventeenth century with the aim of regularising state revenue and further
removing it from the arbitrary control of a monarchy with absolutist
pretensions (Horsefield 1960). Many were based on
The most
important question of the day concerned the material base for the prospective
banks' issue of credit money - that is, for its actual capacity to honour its
promises to pay. Lessons had been learnt from the earlier experiments. The
circulation of mere promises in the form of deposits and stock held by the
mercantile and affluent classes had proved too unstable in
But, it was
beginning to be realised in some quarters that promises to pay were, indeed,
new forms of money sui generis in that they were not
207
actually representative of any material source of
value. A 'credit theory of money' was emerging.
[0]f all beings that have existence in the minds
of men, nothing is more fantastical and nice than Credit; it is never to be forced; it hangs
upon opinion, it depends upon our passions of hope and fear; it comes many
times unsought for,
and often goes away without reason, and when once lost, is hardly to be quite
recovered .. . [And] no trading nation ever did subsist and carry on its
business by real stock; ... trust and confidence in each other are as necessary
to link and
hold people together, as obedience, love friendship, or the intercourse of speech (Charles
Davenant circa 1682, quoted in Pocock 1975).
But, however
'fantastical' it might be, this trust could be cultivated for 'it very much
resembles, and, in many instances, is near akin to that fame and reputation
which men obtain by wisdom in governing state affairs, or by valour and conduct
in the field' (Charles Davenant circa 1682, quoted in Pocock 1975: p. 77; see
also Sherman 1997). There is evidence to suggest that, during the seventeenth
century, a 'civic morality of trust' that could sustain this credit money
economy had emerged in
Given the
interconnectedness of the bilateral credit relations, defaults had extensive
ramifications: total litigation in the 1580s 'might have been as high as
1,102,367 cases per year or over one suit for every household in the country'
(Muldrew 1998: p. 236). It is possible, but by no means clear, that such a
large-scale use of the law led to the final collapse of the personal ties of
affiliation and dependence of the Middle Ages. In their wake, one might say
that a process of normative reconstruction took place, in which trustworthiness
came to be stressed as the paramount communal virtue rather than a personal
commitment. Just as trust in God was stressed as the central religious duty, it
entailed ' . . . a sort of competitive piety in which virtue of a household
gave it credit . . . (Muldrew 1998: p. 195). In other words, the moral basis of
a trustworthiness, which could support extensive market relations and a credit
money economy, could not be taken for granted as the result of a natural
sociability - or, in Innes's terms, a 'primitive law of commerce'.
208
Rather, it had to be created not only by legal
enactment and enforcement; but also through culture - drama, ballads and
poetry; and education (Muldrew 1998). This was the creation of a sense of
impersonal or universalistic trustworthiness that people could claim by acting
in a reputable manner, and not simply an obligation to honour agreements based
on personal or particularistic ties of family or kin.31
By the late seventeenth century, the two forms of
money were available but unevenly spread across
In this respect, Charles II's debt default in 1672 was
critically important in hastening the adoption of public banking as a means of
state finance and credit money creation. Since the fourteenth century, English
kings had borrowed, on a small scale, against future tax revenues. The tally
stick receipts for these loans achieved a limited degree of liquidity 'which
effectively increased the money supply beyond the limits of minting' (Davies
1996: p. 149). However, compared with state borrowing in the Italian and Dutch
republics, English kings, like all monarchs, were disadvantaged by the very
despotic power of their sovereignty. Potential creditors were deterred by the
monarch's immunity from legal action for default and their successors'
insistence that they could not be held liable for any debts that a dynasty
might have accumulated (Fryde and Fryde 1963 in Carruthers).
With an
impending war with the Dutch, an annual Crown income of less than £2 million,
and accumulated debts of over £1.3 million, Charles II defaulted on
repayment to the tally holders in the Exchequer Stop of 1672. This event was as
important as any in the
209
settlement of 1689. In the first place, William was
intentionally provided with insufficient revenues for normal expenditure and,
consequently, was forced to accept dependence on parliament for additional
funds. Second with William's approval, and the expertise of his Dutch financial
advisors, the government adopted long-term borrowing in the form of annuities
(Tontines). These were funded by setting aside specific tax revenues for the
interest payments (for an excellent summary account see Carruthers 1996: pp.
71-83; Roseveare 1991; the classic path-breaking account remains Dickson 1967).
The state's
creditors were overwhelmingly drawn from the
When subscribed the whole sum would be lent to King William: the government's promise to pay would be the security
for a note issue of the same amount.
The notes so authorised would go out as loans to worthy private borrowers. Interest would be earned both on these
loans and on loans to the government.
Again the wonder of banking. (Galbraith, 1995 [1975]:p. 32; see also
Davies 1996; Carruthers 1996.)
In effect,
the privately owned Bank of England transformed the sovereign's personal debt
into a public debt and, eventually in turn, into a public currency.
Underpinning this transformation in the social production of money was the
change in the balance of power that was expressed in the equally 'hybridised'
concept of sovereignty of the 'king-in-parliament'.
This fusion
of the two moneys, which
210
monarch.32 Second, parliament sanctioned
the collection of future revenue from taxation and excise duty to service the
interest on loans. Here again, the balance between too little and too much
royal power was critically important. Expressed in the concept of sovereignty
of king-in-parliament, it avoided both the factional strife that had prevented
such long-term commitment in the Italian republics and also the absolutist
monetary and fiscal policies that weakened the French state in the eighteenth
century (Bonney 1995; Kindleberger 1984). The new monetary techniques conferred
a distinct competitive advantage, which, in turn, eventually ensured the
acceptability of
The most
important, but unintended, longer-term consequence of the establishment of the
Bank of England was its monopoly to deal in bills of exchange (Weber 1981
[1927]: p. 265). Ostensibly, the purchase of bills at a discount before
maturity was a source of monopoly profits for the Bank. But it also proved to
be the means by which the banking system as a whole became integrated and the
supply of credit money (bills and notes), influenced by the Bank's discount
rate. The two main sources of capitalist credit money that had originated in
Italian banking practice -that is, the public debt in the form of state bonds
and private debt in the form of bills of exchange - were now combined for the
first time in the operation of a single institution. But of critical
importance, these forms of money were introduced into an existing sovereign
monetary space defined by an integrated money of account and means of payment
based on the metallic standard.33
However, it
must be borne in mind that during precisely the same period in which the Bank
of England was established and the full transferability of debt was made
legally enforceable, the precious metal coinage was greatly strengthened. That
is to say, this process did not involve a 'dematerialisation' of money that was
driven - intentionally or teleologically - to greater 'efficiency'. Whether
from a 'theoretical' or 'practical' standpoint, overwhelming intellectual
opinion across
211
towards the creation of the strongest metallic
currency in monetary history.
The monarch
had lost absolute control over money, which was now shared with the bourgeoisie
in what became a formal arrangement of mutual accommodation. Unlike the de
facto and informal linkage between the king's coinage and the exchange
bankers' money of account and bills in sixteenth-century France (Boyer-Xambeu
1994), the English state's integration of the two forms permitted a further
development of credit money. Coin and notes and bills were eventually linked by
a formal convertibility in which the latter was exchangeable for precious metal
coins. This 'hybridised' nature of the system of dual monetary forms was the
result of a compromise in a struggle for control that eventually resulted in a
mutually advantageous accommodation.35
In addition
to the main money supply of precious metal coin and bank notes, there existed
two other important forms of money. On the one hand, inland bills of exchange
continued to play an important role until the mid-nineteenth century in the expanding
capitalist networks of northern
By the 1830s, then, Britons could at different times and places have understood gold sovereigns, banknotes, or bills
of exchange as the privileged local representatives of the pound...the
pound as an abstraction was constituted
precisely by its capacity to assume the heterogeneous forms, since its existence as a currency was determined by the
mediations between them (Rowlinson 1999: pp. 64-5).
Centralisation
of the British monetary system and those of the states that sought to emulate
her capitalist development was an almost inevitable consequence of their
central banks' domestic and, then, international roles in the dual system of
precious metal and credit money. On the one hand, as the banker to a strong
state, the 'public or 'central bank' has direct access to the most sought after
promise to pay - that of the state to its creditors. This social and political
relation between a state and a class of bourgeois creditors constitutes the
capitalist form of credit money. The central bank's notes are at the top of the
hierarchy of
212
promises in a credit money system. By discounting
other less trusted forms of credit for its own notes, it is able to achieve a de
facto dominance, in addition to any formal authority, and thereby maintain
the integrity of the payments system, which constitutes capitalist credit money
(Weber 1981 [1927]; Bell 2001; Aglietta 2002).36 The practices were
classically codified in Bagehot's
Generically, as Innes and many others have insisted,
all money is credit. Money comprises a standard measure of abstract value,
denominated in a unit of account, that is a widely accepted means of payment.
The bearer of money holds a claim to goods. 'Money in turn is but a credit
instrument, a claim to the only final means of payment, the consumers' good'
(Schumpeter 1994 [1954]: p. 321). The representation of the claim has taken
myriad specific forms - shells, paper, entries in ledgers, electronic impulses,
and so forth. Some of these forms have comprised commodities with significant independent
exchange, or market, values -most obviously precious metal coins. But Innes saw
clearly that the relationship between the nominal value of the unit of account
and real value, or purchasing power, could not be explained, in the first
instance, by the 'intrinsic' or market exchange value of precious metal.
'Moneyness' is conferred on a substance or form by the unit of account.
As a theory
of money, however, 'practical metallism' has been one of the means by which
states have attempted to get their money accepted
213
(Schumpeter 1994 [1954]: pp. 699-701). Commodity
theories of money have played a persuasive and ideological role by naturalising
the social relations of credit that constitute money. But 'theoretical
metallism' -that is the belief that money's origins and value is to be found in
the 'intrinsic' exchange value of precious metal of which it is made or
represents - has been unable to provide a satisfactory explanation of money.
Rather, as Innes explained, the bullion value of a nominal money of account was
fixed by an authority. In other words, Innes held that the 'money stuff' of the
classical coinage systems - from first-century BC Lydia to the final demise of
the gold sterling standard in the twentieth century - were no less 'credit' than
bankers' notes and entries in ledgers. The rupee, as Keynes observed in making
the same point, was a promissory note printed on silver (Keynes 1913: p. 26).
The
identification of money as coin, or any other commodity, is a conceptual
category error. By the time Innes was writing, this logical confusion was not
only fixed in everyday commonsense consciousness, it had also become entrenched
academic economic analysis. For example, the early twentieth-century
[C]redit gives Motion, yet itself cannot be
said to exist; it creates Forms, yet has no Form; it is neither Quantity or Quality; it has
no Whereness, or Whenness, Scite, or Habit. I
should say it is the essential Shadow of Something
that is not (Defoe 1710, An Essay on Publick Credit, quoted in Sherman
1997).
Innes
provided one of the most concise, logical and empirical critiques of the
orthodox economic position. However, I have suggested that in order to
understand the historical distinctiveness of capitalism, the admittedly
confused distinction between money and credit should not be entirely abandoned.
As I pointed out earlier, to say that all money is essentially a credit is not
to say that all credit is money. That is to say, not all credits are a final
means of payment, or settlement (see also Hicks 1989). The question hinges not
on the form of money or credit - as in most discussions within orthodox
economic analysis, but on the social relations of monetary production.These
relations comprise the monetary space and the hierarchy of credibility and
acceptability by which money is constituted (see OECD 2002). The test of 'moneyness'
depends on the
214
satisfaction of both of two conditions. First, the
claim or credit is denominated in an abstract money of account. Monetary space
is a sovereign space in which economic transactions (debts and prices) are
denominated in a money of account. Second, the degree of moneyness is
determined by the position of the claim or credit in the hierarchy of
acceptability. Money is that which constitutes the means of final payment
throughout the entire space defined by the money of account (see also Hicks
1989). Pigou's 'money' was 'proper' not simply because it was backed by gold,
but because the state pronounced the abstract money of account and established
its exchange rate with gold.
A further
important consideration is the process by which money is produced. Credit
relations between members of a giro for the book transfer and settlement of
debt were, as Innes observed, extensively used as early as Babylonian banking.
However, these credit relations did not involve the creation of new money. In contrast,
the capitalist monetary system's distinctiveness is that it contains a social
mechanism by which privately contracted credit relations are routinely
'monetised' by the linkages between the state and its creditors, the central
bank, and the banking system. Capitalist 'credit money' was the result of the
hybridisation of the private mercantile credit instruments ('near money' in
today's lexicon) with the sovereign's coinage, or public credits. The essential
element is the construction of myriad private credit relations into a hierarchy
of payments headed by the central or public bank which enables lending to
create new deposits of 'money' - that is the socially valid abstract value that
constitutes the means of final payment.
1.
In order to maximise their exchange
opportunities, rational utility traders would carry stocks of the most tradable
commodity which, consequently, would become the general medium of exchange
(Menger 1892).
2. One
consequence of this conceptualisation of money was the sharp distinction
between 'money' and 'credit', which is maintained to this day in mainstream
economic textbooks.
3. Keynes
is dismissive of economic orthodoxy and commented that 'Something that is used
as a convenient medium of exchange on the spot may approach to being Money ...
But if this is all, we have scarcely emerged from the stage of Barter' (Keynes
1930: p. 3) See Ingham (2000), Hoover (1996). Other contemporaries such as
Simmel pointed to commodity money theory's logical error in assuming that the
measuring instrument need be fabricated from that which it measures. Innes made
the same point in his comment that 'no one has seen an ounce, a foot or an
hour' (1914: p. 155). See also the references in Carruthers and Babb (1996) to
American monetary 'nominalism' at the time of the debate on the gold standard
at the end of the nineteenth century.
215
4.
It also should be noted that the
evidence suggests that another firmly held belief and mainstay of the commodity
theory is also false. The discovery of silver in the
5.
'The general belief that the
Exchequer was a place where gold or silver was received, stored and paid out is
wholly false. Practically the entire business of the English Exchequer
consisted in the issuing and receiving of tallies and the counter-tallies, the
stock and the stub, as the two parts of the tally were popularly called, in
keeping the accounts of the government debtors and creditors, and in cancelling
the tallies when returned to the Exchequer. It was, in fact, the great clearing
house for government credit and debts' (Innes 1913: p. 398).
6.
Schumpeter observed that 'metallists'
were either theoretical and therefore mistaken in their belief that the only
'real' money was precious metal; or else they were 'practical metallists' who
understood that precious money stuff would be more trusted than a mere promise
to pay.
7. See
Ingham (2000) for a discussion on the question of the 'logical' and
'historical' origins of money of account.
8.
As if to emphasise the point, he
made do with a typical bit of whimsical writing '[Money's] origins are lost in
the mists of time when the ice was melting, and may well stretch back into the
paradisaic intervals in human history, when the weather was delightful and the
mind free to be fertile of new ideas - in the Islands of the Hesperides or
Atlantis or some Eden of Central Asia' (Keynes 1930: p. 13).
9. See
White (1990) for a clear distinction between the economic theory of 'pure
exchange' and the structural properties of markets.
10. Nineteenth-century
positivism sought an answer to the origins of money in nature -hence the
commodity. It was argued that other measures, such as length, had natural
analogues - such as yards and cubits. There is of course no natural analogue
for value.
11. For
example, it 'cost four times as much to deprive a Russian of his moustache or
beard as to cut off one of his fingers' (Grierson 1977: p. 20).
12. See
Aglietta and Orlean's La Violence de la Monnaie (1982) in which they
extend Girard's anthropological speculation on sacrifice, as debt to society,
to the genesis of money.
13. Weber
warned that we must not confuse deposit taking and the book clearance of debts
between depositors, by the banks the ancient and classical world, with
capitalist transferability of debt. '[OJne must not think in this connection of
bank notes in our sense, for the modern bank note circulates
independently of any deposit by a particular individual' (Weber 1981: p. 225).
See Cohen (1992) for a recent orthodox economic critique of this view.
14. Some
later twentieth-century versions of the credit theory of money also come very
close to identifying money simply with the creditor-debtor relation and its
creation of assets and liabilities. Arguing that money represents a promise to
pay that is simultaneously an asset for the creditor and a liability for the
debtor, Minsky, for example, concludes that 'everyone can create money; the
problem is to get it accepted'(Minsky 1986: p. 228). It is rather the case that
anyone can create debt; however, the problem is, rather, to get it
accepted as money.
15.
Arrighi's Long Twentieth Century (Arrighi
1994) is an exception that emphasises the essentially financial character of
capitalism from its earliest stages. Weber (1981 [1927]) devotes a great deal
of attention to money and banking, but rather strangely omits it from his ideal
type of capitalism.
216
16. Schumpeter
gave greater prominence to the particular monetary structure of capitalism than
almost all his contemporaries and seems to have had a direct influence on the
French school. (Braudel 1985: pp. 475-6).
17. This
monetary structure also implies the counterintuitive observation that money
would disappear if all debts were simultaneously repaid. One must also add of
course that the converse is also true. But this can be overcome, within limits,
by the creation of more debt and rescheduling. The time terms of debt repayment
and what constitutes an acceptable level (moral and functional) is constantly
negotiated. Economics presents this as an objective element of capitalism, but
it is a socially constructed normative relationship.
18. In
fourteenth-century Venice, for example,' [w]hen the Great Council voted that 3 lire
a grossi should be the base salary of the watchmen to be appointed by the
Signori di Notte, the councillors were probably thinking less about the
metallic content of grossi than about the salary of the noble Signori di
Notte themselves, which was about 6 lire a grossi' (Lane and Mueller
1985: p. 483).
19. As
late as 1614, in the
20. Monetary
policy also involved periodic renegotiations, in recoinages, of the terms of
exchange between possessors of coin and bullion and the sovereign mints. In
part, these aimed to maintain the nominal value of the coin above its bullion
value in order to pre-empt the operation of '
21. Some
large payments did involve weighing (Spufford 1988; Lane and Mueller 1985), but
this was, in effect, payment in kind.
22. 'Primitive'
deposit banks were very similar to the financial institutions which had existed
in
23. Moreover,
banking 'nations' made some of the earliest more general contributions to the
development of capitalist practice that were later to be employed in industrial
production. They set up business schools that specialised in languages and used
arithmetic based on Arabic numerals and the use of the zero, which made
possible the double-entry bookkeeping that was especially important for bill
exchange per arte (Boyer-Xambeu 1994: pp. 23-4).
24. French
kings, for example, were among the most 'despotically' powerful of the
embryonic states (Mann 1986); and they proclaimed monetary sovereignty with
their own money of account and twenty royal mints. But there were also over two
hundred baronial mints in
25. The
attempted ban on bills seriously disrupted the wool trade in 1429 and all
parties lost economically (Munro 1979: p. 196). The question cannot be pursued
here; but, for example, mediaeval
217
26. On
the general significance of this balance of power in the development of
capitalism, see Weber (1981 [1927]); Collins (1980).
27. But
it should be noted that the mercantile interests were not unequivocally opposed
to the monarch's mediaeval metallism. Parliament consistently enforced the
policy of sound metallic money, but insisted that the monarch did not exploit
his monopoly minting powers. In the terms of Schumpeter's distinction, the
'practical' as opposed to the 'theoretical' metallist position was beginning to
take shape. But it should be emphasised that this was not simply, or even
primarily, an 'economic' issue. Sound money was also seen as part of the wider
project to build a strong modern state.
28. In
his Quantulumcunque Concerning Money (1682) the polymath Oxford
professor of anatomy and founder member of the Royal Society, Sir William
Petty, answered his own rhetorical question, 'What remedy is there if we have
too little money?' with 'We must erect a bank, which well computed, doth almost
double the effect of our coined money' (Petty 1682: quoted in Braudel, 1985, I:
p. 475).
29. Indeed,
for modern adherents to the commodity theory of money, it remains 'an unsolved
problem' how the chaotic and fragile public finances could have sustained the
United Provinces as the monetary and commercial centre of the world economy in
the mid-seventeenth century (Goldsmith 1987: p. 198).
30. There
exists a relevant sociology of the emergence of the norms of association in
commercial during the eighteenth century. (See Silver 1990, 1997.)
31. Weber
argues that extensive market relations required the removal of an 'ethical
dualism' which was typical of traditional societies. Weber (1981 [1927]).
Communal relations were governed by an ethic of fairness whereas outsiders were
cheated and ruthlessly exploited. (See also Collins 1980.)
32. Conservative
groups argued that public banks were only consistent with republics and that
the Bank of England effectively gave control of the kingdom to the merchants.
The traditional monarchists would have agreed with Marx's later judgement that
the state had been alienated to the bourgeoisie.
33. The
existence of the national or public debt and the establishment and expansion in
the bill of exchange business hastened the introduction of the law merchant (lex
mercatoria), concerning the transferability or negotiability of debt, into
common law and, thereby, into society at large. Bills, promissory notes,
certificates of deposit and other financial instruments, used in the mercantile
economy, had achieved a degree of transferability in practice and law by the
late seventeenth century, particularly in the
34. Between
1695 and 1740, £17 million of gold as opposed to /J1.2 million of silver was
minted:'. . . the gold standard had practically arrived, silently a century or
more before its legal enactment' (Davies 1994: p. 247).
35. However,
the very same metropolitan interests that had made it possible to adopt the
techniques of 'Dutch finance' also inhibited its immediate further development.
The Bank of England's monopoly of joint stock banking, until this grip was
relaxed in 1826 and then abolished in 1844, stifled any expansion of the
private London banks (which predated the Bank's monopoly) and, arguably,
retarded the growth of the private 'country' banks (Cameron 1967: pp. 18-19
also Davies 1996). Nevertheless, the latter grew rapidly after the middle of
the eighteenth century: by the 1780s there were over
218
one hundred
'country' banks and the number had increased to over 300 in 1800 (Cameron
1967). Some estimates suggest that bank money had significantly exceeded the
metallic coinage by the second half of the eighteenth century (Davies 1996: p.
238).
36. Although
it may seem to some to be an elementary point, it must be stressed that the
'money' in such a credit-money system is actually constituted by the system of
payments through the transfer of credits. If this cannot be effectively
accomplished, the 'money' disappears. This hoary question cannot be pursued
here, but all historical evidence suggests that the disappearance of money in
this way can be avoided by the authoritative provision of an integrating money of
account and a trusted supply of credit at the acme of the hierarchy of credit.
As 'a last resort', this can be injected into the system in the event of
defaults that threaten money's existence.
37. The
two developments are connected. The efforts to enhance the domestic power of
central banks over the supply of credit money is the corollary of the loss of
direct control over exchange rates (Aglietta 2002).
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L.
Randall Wray
DOES
A. Mitchell Innes offer any insights for modern monetary theorists on the
nature of money? It should be obvious from the preceding chapters that we
believe he does. There are two remarkable things about his two articles. First,
there is the clarity of his analysis, much of it based on little more than
hunches about the history of money - a history that largely remained to be
discovered, developed and written over the century that followed publication of
his articles. We certainly would not wish to defend all of these hunches, but
the general interpretation is sound.
Second, it is amazing that the path
laid down by Innes was ignored by almost all subsequent monetary theory. Of
course, Innes was anything but a well-known monetary theorist and his articles
were published in a banking law journal. However, as the journal's editor
remarked in 1914, 'the article attracted world-wide attention, and evoked much
comment and criticism, from economists, college professors and bankers, as well
as from the daily and financial press, because he differed so widely from the
doctrine of Adam Smith and the present theories of political economy.' Still,
it is true that Innes was rarely (if ever) cited, thus, the editor may well
have exaggerated the extent of the debate around his article. On the other
hand, one would have thought that if a Counsellor of the British Embassy in
What is perhaps under-emphasised in
these articles by Innes is the relation between what he called his 'credit
theory of money' and what
223
224
Knapp
called the 'state theory of money'. Clearly, Innes did not ignore 'state
money'. Much of the first portion of the 1913 article is devoted to a
discussion of coinage, and, particularly, to dispelling the notion that money's
value is or was determined by precious metal content - in other words, to a
criticism of the 'metallist' view. Here, Innes sounds like Knapp (and, as will
be discussed below, like Schumpeter; and also like the more recent article by
Goodhart 1998). This is further expanded in the 1914 article, although it is
perhaps more obscure. Most of the rest of the 1913 article, as well as some of
the 1914 contribution, is devoted to exposition of what we might call the
creditary approach to money (or what Schumpeter called the credit theory of
money). Hence, the emphasis on credit theory could lead the casual reader to a
'pure credit' approach with no room for 'state money'. The primary purpose of
my chapter will be to explicitly draw out the link between the state money and
creditary approaches, after first discussing Innes's views on the nature of
money via historical and sociological analysis.
In
the 1913 article, Innes began with an accurate and concise summary of the
typical orthodox approach to money. If there is any doubt about this characterisation,
one need only look at the pseudo-history summarised by Samuelson a half-century
later, which lays out a remarkably similar view nearly point by point
(Samuelson 1973). And one should not limit criticism to economists on this
score. Many historians are just as blinded by gold and other shiny metals as
are orthodox economists. While historians might get more of the 'facts' right,
the general framework adopted is frequently not much different from that of
Samuelson, with a story told about barter being replaced by commodity money and
later by paper money, albeit with less reliance on efficiency-enhancing and
transactions-costs-reducing innovations as the motive force for evolution.
Indeed, historians just as frequently focus on coin, with only the relatively
rare analysis (like that of Mcintosh 1988) focussing on credit. By this I do
not mean to imply that historians (or economists) ignore credit, but rather
that they adopt what Schumpeter called a 'monetary theory of credit' approach
rather than 'a credit theory of money'. The approach of Innes is much closer to
the latter, although, as I'll argue below, Schumpeter's distinction is not
sufficient (identifying Chartalism with a legal tender approach). In any case,
because of their preoccupation with coined currency, historians are not much
closer to discovering 'the nature of money' than are orthodox economists.
225
Why do economists feel a need to
turn to history? Samuelson begins his analysis of money with his
pseudo-history. Austrian economists create an imaginary history of money, and
of banking, to justify their calls for less government intervention. Most of
the 1913 article by Innes relies on historical analysis for presentation of the
creditary approach. All of the chapters of this volume devote considerable
space to historical analysis, even though I did not request this of the
authors. And I have previously used history to advance my case for an
endogenous money approach (Wray 1990) and for understanding modern fiscal and
monetary policy (Wray 1998). I suppose that economists use these histories
primarily as a means to shed light on the nature of money. Just as peoples have
stories about their origins in order to explain (and shape and reproduce and
justify) their character, economists tell stories about the origins of money to
focus attention on those characteristics of money that they believe to be
essential. The barter story is used to draw attention to the medium of exchange
and store of value functions of money. A natural propensity to truck and barter
is taken for granted. Attention is diverted away from social behaviour and
towards individual utility calculation that is believed to precede barter.
Social power and economic classes are purged from the mind, or at least become
secondary. 'The market' is exalted; 'the government' is derided as
interventionist. Fundamental change (evolution), if it exists at all, is
transactions-cost reducing except where government interferes to promote
inefficiencies.
By contrast, the story told by those
who emphasise a creditary approach locates the origin of money in credit and
debt relations. Markets are secondary or even nonexistent. Power relations
could be present - especially in the form of a powerful creditor and weak
debtor -and so could classes. The analysis is social - at the very least it
requires a bilateral (social) relation between debtor and creditor. The unit of
account function of money comes front and forward as the numeraire in which
credits and debts are measured. The store of value function could also be
important, for one could store wealth in the form of debits on others. On the
other hand, the medium of exchange function is de-emphasised; indeed, one could
imagine credits and debits without a functioning market and medium of exchange.
Note, however, that adopting a
credit approach to money does not necessarily lead one to a fundamentally
social approach that deviates greatly from the individual approach of the
barter paradigm. One could envision a scenario in which maximizing individuals
lent and borrowed items, and one could tell some sort of story about how
transactions-costs-reducing forces gradually led to use of a universal unit of
account in which debts were denominated. Eventually, markets could develop for
226
the
purpose of obtaining items (with values denominated in the same unit of
account) to be used in debt settlement. Finally, a medium of exchange could
emerge, to be used in markets and also in settling accounts. While such a story
would deviate somewhat from (and improve somewhat upon) that told by Samuelson
and criticised by Innes, it would represent a social approach to money only in
the sense that the debtor-creditor relation is necessarily more social than is
the barter relation between Crusoe and Friday. But the role for social
processes and decision-making would remain stunted.
All of the authors assembled here
would want to push this much farther. While Innes is perhaps less transparent
than Gardiner, Henry, Hudson or Ingham, I believe that he would endorse their overtly
social analyses. To see why, we need to go beyond the two articles by Innes
reproduced here. In 1932, Innes published a remarkable book, Martyrdom in
our Times (1932), which attacked the
To our knowledge, Innes did not
return to a revision of his earlier work on the credit approach to money in
order to take account of his analysis of
227
justice.
However, I think that such a revision would take us very close to the analyses
provided in this volume, especially those of Henry and Hudson. (See also
Goodhart 1998; Wray 1998.) As Innes suggested, tribal society developed an
elaborate system of wergild designed to prevent the development of blood feuds.
And as he argued, fines were paid directly to victims and their families. The
fines, in turn, were established and levied by public assemblies. We know that
a long list of transgressions and fines for each transgression was developed. A
designated 'rememberer' would be responsible for memorizing this list and for
passing it down to the next generation. There was no need for a universal unit
of account in which transgressions and fines would be measured, because a
specific fine could be assigned to each wrong afflicted on a victim. Note that
the fines were usually levied in terms of a particular good that was both useful
to the victim and more or less easily obtainable by the perpetrator and his
family.
As
Eventually, taxes would replace most
fees, fines and tribute as the revenue source. These could be self-imposed as
democracy swept away the divine right of kings to receive such payments.
'Voluntarily-imposed' taxes proved superior to payments based on naked power or
religious fraud because of the social nature of the decision to impose them
'for the public good'. The notion that such taxes 'pay for' government
provision
228
of
'public goods' like defence or infrastructure added another layer of
justification, as did the occasionally successful attempt to convert taxes from
a 'liability' to a 'responsibility'. If only the government could hold its
spending to the level 'afforded' by tax revenue, all would be right and just.
In any case, with the development of 'civil' society and reliance mostly on
payment of taxes rather than fines, tithes or tribute, the origins of such
payments in the wergild tradition have been wiped clean from the collective
consciousness.
The key innovation, then, lay in the
transformation of what had been the transgressor's 'debt' to the victim to a
universal 'debt' or tax obligation imposed by and payable to the authority -
whether that imposition followed from democratic practices or otherwise.
The next step was the recognition that the obligations could be standardised in
terms of a handy unit of account. As
Denominating payments in a unit of
account would simplify matters -but would require some sort of central
authority. As Grierson has remarked, development of a unit of account in which
debts could be denominated would be difficult. (See also Henry above.) Measures
of weight or length are much easier to come by - the length of some anatomical
feature of the ruler (from which, of course, comes our term for the device used
to measure short lengths), or the weight of a quantity of grain. By contrast,
development of a money of account used to value items with no obvious
similarities required more effort. Orthodoxy has never been able to explain how
individual utility maximisers settled on a single numeraire. (See Gardiner and
Ingham above for logical difficulties with orthodoxy.) While it is fairly
obvious that use of a single unit of account results in efficiencies, it is not
clear what evolutionary processes would have generated the single unit.
Further, the higgling and haggling of the market is supposed to produce the
equilibrium vector of relative prices, all of which can be denominated in the
single numeraire. However, such a market seems to presuppose a fairly high
degree of specialisation of labour and/or resource ownership - but this
pre-market specialisation,
229
itself,
would be hard to explain. Once markets are reasonably well developed,
specialisation would increase welfare; however, in the absence of
well-developed markets, specialisation would be exceedingly risky. In the
absence of markets, diversification of skills and resources would be prudent.
It seems exceedingly unlikely that either markets or a money of account could
have evolved out of individual utility-maximizing behaviour.
Heinsohn and Steiger (1983) offered
a clever solution to this problem. Suppose a society consists mostly of
subsistence farmers, each more or less self-sufficient. The primary crop is
barley grain. In any given year, some farmers do well while others do less
well. Those who fare poorly borrow grain from those who do well, expecting to
pay off the debt in the following year when normal production is restored.
Interest would be charged on the loan to compensate the lender for the dual
risks that the loan might not be repaid and that the lender might find himself
short of grain before the loan is repaid. It would be easy to standardise the
loan as well as the interest because the grain would be fairly uniform. Thus, a
bushel of barley would be loaned, requiring payment a year later of, say, one
and a third bushels. Loans of other items might eventually take place, reckoned
in terms of bushels of barley. This story has several advantages over the
barter story. It does not presuppose specialisation or markets. It has a
plausible explanation for the selection of the unit of account. And, perhaps
most importantly, it is consistent with what we know about all the early monies
of account: these were always based on a unit of weight of grain. Even today,
monetary units used (or recently used) in much of the world reflect the early
origins in these grain units: the pound, the lira, the livre, the shekel and so
on. The typical monetary unit throughout the West was the pound of wheat or
barley grain (close to today's pound), divided into 12 'shillings' and further
subdivided into 240 'pennies' (see Cipolla 1956).
The Heinsohn-Steiger thesis is not
fully satisfactory, however, because it requires self-sufficient farmers. It is
not clear how tribal society with its communal ownership and ties of
reciprocity is transformed into a society of yeoman farmers, each individually
responsible for his own welfare.
230
rather
than individual, with a gens specializing in a particular function. Collective
rights and obligations of the tribe began to break down, inequality rose, and
eventually a ruling class emerged. Tribal obligations were converted into
levies placed on the majority, in the interest of the ruling minority. In
ancient society, these tax levies were placed on entire villages, not on
individuals. Often, tax collection would be 'farmed out' to tax collectors. The
growing administrative burden of keeping track of taxes and payments required
development of the unit of account.
(Just as an aside, and in
confirmation of Henry's thesis, according to Roman tradition, early
specialisation of 'bridge engineers' led to the creation of a class of high
priests. Perhaps this could be traced to a particular Roman gens.
Tradition
has it that the construction of bridges ('pontes' in Latin) was entrusted to a college of pontifices' which later
became the most important of the
religious orders; thus Varro and Dionysius maintain that 'pontifex' (in Rome
a high priest, now used for the Pope) originally meant builder of bridges. These builders, of whom there were five,
were from the earliest beginnings of
the city the guardians of a store of proven technical wisdom and experience in the construction of bridges (Dal
Maso 1974, p. 94).
If Henry is right, specialisation
begat wisdom, begat status, begat religion, begat fines, fees, tribute, tithes
and taxes paid to the Papacy.)
While the analyses are somewhat
different, Henry and Hudson offer approaches that emphasise the fundamentally
social nature of the choice of a unit of account. Further, in their stories,
the proto-function of money was as the unit of account in which debts were
measured, with other functions deriving from this. Markets and prices came later,
and they, too, required administration by an authority. Far from springing from
the minds or natural propensities of atomistic globules of desire, markets were
created and nurtured by a central authority. Finally, both Henry and Hudson
emphasise the role played by taxes or similar payments (fees, fines, tithes,
tribute) in the evolution of the money of account. This stands in stark
contrast to the orthodox stories, which emphasise mutually beneficial exchange,
or even the Heisohn-Steiger approach that emphasises mutually beneficial
('rational') loans.
To be sure, we will never 'know' the
origins of money. First, the origins are lost 'in the mists of time' - almost
certainly in prehistoric time. (Ingham quoted Keynes to the effect that money's
'origins are lost in the mists of time when the ice was melting, and may well
stretch back into the paradisaic intervals in human history, when the weather
was delightful and the mind free to be fertile of new ideas - in the islands of
the Hesperides or Atlantis or some Eden of Central Asia' (Keynes 1930,
231
p.
13).) It has long been speculated that money predates writing because the
earliest examples of writing appear to be records of monetary debts and
transactions. Recent scholarship seems to indicate that the origins of writing
are themselves exceedingly complex. It is not so simple to identify what is
'writing' and what is not. Similarly, it is not clear what we want to identify
as money. Recall that all of the authors collected here insist that money is
social in nature; it consists of a complex social practice that includes power
and class relationships, socially constructed meaning, abstract representations
of social value and so on. (More on this in the next section.) As
When we attempt to discover the
origins of money, what we are in fact attempting to do is to identify complex
social behaviours in ancient societies that appear similar to the complex social
relations in our society today that we wish to identify as 'money'. Orthodox
economists see exchange, markets and relative prices wherever they look. For
the orthodox, the only difference between 'primitive' and modern society is
that these early societies are presumed to be much simpler - relying on barter
or commodity monies. Hence, economic relations in earlier society are simpler
and more transparent; innate propensities are laid bare in the Robinson Crusoe
economy for the observing economist. While heterodox economists try to avoid
such 'economistic' blinders, tracing the origins of money necessarily requires
selective attention to those social practices we associate with money - knowing
full well that earlier societies had complex and embedded economies that differ
remarkably from ours. Imagine a member of tribal society trying to make sense
of the trading floor on Wall Street through the lens of reciprocity!
This negative assessment does not
mean that I believe we can learn nothing from a study of money's history. Far
from it. Nonetheless, we must be modest in our claims. Further, we should
always keep in mind the purpose of the historical analysis: to shed light on
the nature of the social institution we call 'money'.
It
may be worthwhile to explore briefly what we mean by 'money as a social
relation' in some more detail, because it may not be obvious why
232
this
is important. While Institutionalists have long insisted on viewing money as an
institution, indeed, perhaps the most important institution in a capitalist
economy, most economists have not delved deeply into this (Dillard 1980).
However, if we are to understand the nature of money, it is important to
uncover the social relations that are obscured by this institution.
Sociologists have provided some important insights.
As discussed above, the typical
economic analysis starts with a potted history of money, beginning with barter
and the innovative use of money as a medium of exchange. On the surface, this
appears to be an 'evolutionary' approach that recognises human agency. However,
as we shall see, the orthodox economists turn money into a 'natural' phenomenon
free from social relationships. As Carruthers and Babb argue:
Although economists allow that money is a human invention assuming different forms in different times and places, they
adopt an evolutionary perspective that de-emphasises
money's contingency and its ultimate foundation
in social convention. As capitalist economies became more complex, money 'naturally' assumed increasingly
efficient forms, culminating in the
highly abstract, intangible money of today (1996, p. 1558).
The innate propensity to 'truck and
barter' is supposed to lead naturally to the development of markets with prices
established through 'higgling and haggling'. The market, itself, is free of
social relations - one, so to say, checks ideology, power, social hierarchies
and so on, at the door when one enters the market place. It is then 'natural'
to choose a convenient medium of exchange to facilitate such impersonal
transactions. The ideal medium of exchange is itself a commodity whose value is
'natural', innate, intrinsic - free from any hierarchical relations or social
symbolism. Obviously, precious metal is meant to fit the bill. The value of
each marketed commodity can then be denominated in terms of the medium of
exchange, again, through the impersonal and asocial market forces of supply and
demand. Regrettably, nations have abandoned the use of intrinsically valuable
money in favour of 'fiat' monies. Some economists (Jude Wanniski and Alan
Greenspan before he headed the Fed) advocate return to a gold standard, but
most have adopted the position that a return to gold is at least politically
infeasible. Hence, it is necessary to remove as much discretion as possible
from the hands of monetary and fiscal authorities, to try to ensure that our
modern fiat money operates along principles not too far removed from the
operation of a commodity money. Monetary growth rules, prohibitions on money
creation by the treasury, balanced budget requirements, and the like (not to mention currency boards and dollar
standards for
233
developing
nations), are all attempts to remove discretion and thereby restore the
'natural', asocial, monetary order. Some 'pure credit' theorists argue that
government is, or should be, in the same situation as any other 'individual',
with 'liabilities' that have to 'compete' in frictionless financial markets
(Mehrling 1999; Rossi 2000).
Thus,
the orthodox economist (as well as most of the rest of society) 'forgets' that
money is a social creation, even in the intellectually impoverished story told
by Samuelson about Crusoe and Friday. Social relations are hidden under a veil
of money. As Hilferding put it:
In money, the social relationships among human beings have been reduced
to a thing, a mysterious, glittering thing
the dazzling radiance of which has blinded
the vision of so many economists when they have not taken the precaution of
shielding their eyes against it (quoted in Carruthers and Babb, 1996
p. 1556).
Simmel put it even more concisely
when he said that money transformed the world into an 'arithmetic problem'
(quoted in Zelizer 1989, p. 344). The underlying social relations are
'collectively "forgotten about" ' in order to ensure that they are
not explored (Carruthers and Babb 1996, p. 1559). Anyone who doubts this need
only examine the way in which money is introduced into all modern mainstream
macroeconomic ('arithmetic') analyses (and recall Friedman's famous presumption
that money is simply dropped by helicopters).
This
is much more true today than it was a century and a half ago, before the
underlying social relations had become so thoroughly hidden behind the shroud
of respectable analysis. Carruthers and Babb present a very interesting study
of the contrast between the Bullionists and the Greenbackers in their debate
about the monetary system following the US Civil War. Perhaps at no time since
has the monetary system come under question to such a degree. 'Proponents on
both sides entered into a discussion of the nature of money, of why things
possessed economic value, and of the relation between democratic polities and
markets' (op. cit., p. 1565).
The Bullionists presented a position
ancestral to that of today's orthodox economists. The market was natural, true
money had to possess 'intrinsic value', and the laws of Darwinian selection
required that only bullion could serve as true money. As one of the combatants
of the time explained, 'there is all the difference between true money, real
money and paper money, that there is between your land and a deed for it. Money
is a reality, a weight, of a certain metal, of a certain fineness. But a paper
dollar is simply a deed, the legal evidence of the title that I hold to a
dollar' (op. cit., p. 1568). Bullionists were also openly hostile to
government,
234
'suggesting
that it was untrustworthy, incompetent, or corrupt' {op. cit., p. 1572).
Any attempt to impose inherently valueless government paper money on the system
would subvert the operation of economic laws: 'Value was determined by
"natural" laws and to try to control it was to court disaster' {op.
cit., p. 1574). A bullion-based money would restore the 'national honour'
and would constrain governments that are 'weak-willed, corruptible institutions
easily seduced by the temptations of soft money' {op. cit., p. 1576).
Greenbackers explicitly recognised
that money is an institution, whose value is socially determined. They
emphasised the role played by convention in choice of a money. Further, they
argued that choice of the gold standard gave power to the few, while use of a
paper money could spread power and reduce inequality. Greenbackers cleverly
turned around the analogy made by bullionists about land and deeds; as one
remarked: 'True money is not wealth any more than the deed for a farm is the
farm itself; and there is no more use in having our money made of gold than in
having our deeds drawn upon sheets of gold' {op. cit., p. 1569-70). (As
we will see below, neither Knapp nor Innes could have said it better! It also
recalls to mind Keynes's statement about confusing a theatre ticket with the
performance.) They argued that money (whether gold or paper) had value only
because the government made it legal tender. 'Anyone could accept a paper
dollar in payment if she knew it could be used later to buy whatever the person
wanted. The way to enhance exchangeability was for the government to grant full
legal tender powers to paper money' {op. cit., p. 1571). Greenbackers
insisted that use of an inconvertible paper money would help to take power away
from special interests and return it to the population {op. cit., p.
1577). Democratic government had a proper role to play in the monetary system.
'In summary, the greenback debates contested the nature of monetary value and
the proper role of democratic government in finance...[G]reenbackers felt that
economic value could and should be subject to conscious, democratic control' {op.
cit., p. 1573).
Bullionists, like today's orthodox
economists, ignored or hid the social nature of money. Instinctively, they
recognised that rendering markets and commodity money 'natural' helps to make
it appear as if this is in the interest of all of society. If'Darwinian'
processes have selected gold as the most efficient form that money can take,
then any attempt to change this must result in harm to all. Perhaps they also
instinctively saw the value of hiding behind the veil of natural money:
[W]hen
collectively people recognise how much of their world is socially constructed,
social institutions that are based on convention - including
235
relations
of domination - become particularly vulnerable. Through their rhetoric,
greenbackers hoped to unleash a collective realisation that would lead to a new
democratic era, one in which the economy was controlled by the people rather
than by the wealthy few. Bullionists worried that if democratic control were
established over the monetary system and economic value, then nothing else
would be safe {op. cit., 1996, p. 1580).
Before moving on, one further
example from history will help to bring out both the social nature of money as
well as its historical specificity. Kurke examined the social origins of coins
in seventh-century BC
Polanyi had emphasised that in
ancient Greece, the economy was embedded in other non-economic institutions
like 'kinship, marriage, age-groups, secret societies, totemic associations,
and public solemnities' (Polanyi 1968, p. 84), which Kurke argues must have
made a difference for the causes of the invention of coinage. She locates those
causes mainly in a contest between an elite that wished to preserve the
embedded hierarchy of gift exchange and a democratic polis trying to exert
its sovereignty. Hence, the debate she analyses is very nearly the reverse of
that which took place in post-Civil War
. . . the
minting of coin would represent the state's assertion of its ultimate authority
to constitute and regulate value in all the spheres in which general-purpose
money operated simultaneously - economic, social, political, and religious.
Thus state-issued coinage as a universal equivalent, like the civic agora in
which it circulated, symbolised the merger in a single token or site of many
different domains of value, all under the final authority of the city (Kurke 1999,
pp. 12-13).
Let
us see why.
236
According to Kurke, introduction of
coins arose out of a 'seventh/sixth century crisis of justice and unfair
distribution of property' (Kurke 1999, p. 13). At this time, the polis had
gained sufficient strength to challenge the symposia, hetaireiai (private
drinking clubs), and other institutions and xenia (elite networking)
that maintained elite dominance. Elite society relied on social networks and
gift exchange, looking down upon the extending market and use of money - which
were linked at least subconsciously to democracy. Even control over city
government was maintained by bringing city officials within elite networks and
making their livelihood depend upon gifts. City government began to challenge
the authority of this elite, by promoting the market, by coining money and by
trying to substitute salaries for gifts. The agora and its use of coined
money subverted hierarchies of gift exchange, just as a shift to taxes and
regular payments to city officials (as well as severe penalties levied on
officials who accepted gifts) challenged the 'natural order'. It was thus no
coincidence that the elite literary works disparaged the agora as a
place for deceit and that coinage was always noted in such literature for its
'counterfeit' quality - and never mentioned favourably in these works.
For the elite, the perfect metaphor for the agora was the pome (whore)
who worked for money, and she was contrasted with the hetairai (courtesans)
who frequented the symposia to exchange their services for 'gifts'.
In pointed affront to the elite, the
polis coined gold (the most valued of gifts in the hierarchy of gift
exchange) and created cheap public brothels for use by citizens. The
public brothel was seen as democratic, because it 'serves "all
mankind", it is "democratic", and provides women who are
"common to all" ' so that 'any citizen, no matter how poor, could
enjoy a pome' (Kurke 1999, pp. 196-7). As Kurke argues (and as the
Green-backers argued), since coins are nothing more than tokens of the city's
authority, they could have been produced from any material. However, because
the aristocrats measured a man's worth by the quantity and quality of the
precious metal he had accumulated, the polis was required to mint
high-quality coins, unvarying in fineness. The citizens of the polis by
their association with quality, uniform coin gained status. By providing a
standard measure of value, coinage rendered labour comparable and in this sense
coinage was an egalitarian innovation. Predictably, the elite reacted,
attributing the introduction of coins to tyrants intent on destroying the nomos,
the community, the divine order. It is also interesting that in the elite
texts, the invention of money is attributed to the requirements of scorned retail
trade - just as modern economics does, albeit without scorn - rather than to
the struggle to assert sovereignty of the polis. As Kurke argues (and in
line with what Carruthers and Babb
237
argue),
this mystification of the origins of money is ideological - as it remains today
- a purposeful rejection of the legitimacy of democratic government.
In sum, coinage was not a
transactions-cost-minimizing invention but rather emerged from a spatially and
temporally specific contest between an elite that wished to preserve the
embedded hierarchy of gift exchange and a democratic polis moving to
assert its sovereignty. Precious metals were not chosen for coinage to ensure
that nominal value would be maintained by high embodied value but rather
because of the particular role played by precious metals in the hierarchy.
Coins were then mystified by an elite that associated their creation with
petty, debasing and contaminating retail trade. In reality they were linked
from the beginning with provision of government finance (as Grierson 1977
notes, numismatists have come to the conclusion that early coins seem to have
been issued to pay 'soldiers and sailors'). While both the elite and the
supporters of the polis claimed legitimacy for their positions, through
reference to the embedded, natural, order, coinage, development of sovereign
government, and evolution of retail trade all contributed to the gradual (but
always only partial) dis-embedding of the economy. In the views of trie elite,
the evil government only corrupts the natural, embedded economy by coining
metal and reducing the sphere for elite gift exchange. Eventually all this
changes of course, such that by the time of the Bullionist-Greenbacker debates,
the dis-embedded market is 'natural' and the gold coin is the only proper form
that money should take. According to the Greenbacker or its modern equivalent,
the evil and corrupt government tries to embed the economy in social and
political institutions that can only disrupt the natural, dis-embedded and
efficient order. Only by wresting control over the economy away from government
- for example, through bullionism or monetarism - can the market be free to
work its wonders.
The purpose of reducing money to
'arithmetic', then, is to hide the social relations behind a 'natural veil' of
asocial market exchange. To be sure, the veil is transparent to the
over-indebted borrower, to the hungry who lacks money for food, or to the
unemployed without money wages. For the committed ideologue, however, or for
the professional economist, that veil completely obscures the sociological
nature of money in a quite 'useful' way.
238
Schumpeter
made a useful distinction between what he called the 'monetary theory of
credit' and the 'credit theory of money'. The first sees private 'credit money'
as only a temporary substitute for 'real money'. Final settlement must take
place in real money, which is the ultimate unit of account, store of value, and
means of payment. Exchanges might take place based on credit, but credit
expansion is strictly constrained by the quantity of real money. Ultimately,
only the quantity of real money matters so far as economic activity is
concerned. Most modern macroeconomic theory is based on the concept of a
deposit multiplier that links the quantity of privately created money (mostly,
bank deposits) to the quantity of monetary base (or, high-powered money, HPM).
This is the modern equivalent to what Schumpeter called the monetary theory of
credit, and Milton Friedman (or Karl Brunner) is probably the best
representative.
The credit theory of money, by
contrast, emphasises that credit normally expands to allow economic activity to
grow. This newly created credit creates new claims on money even as it leads to
new production. However, because there is a clearing system that cancels claims
and debits without the use of money, credit is not merely a temporary
substitute for money. Schumpeter does not deny the role played by money as an
ultimate means of settlement, he simply denies that money is required for most
final settlements. Hence, he is not guilty of propagating a 'pure credit'
approach with no place reserved for money (such as that adopted by Mehrling or
Rossi).
The similarities to the analysis
provided by Innes are obvious. Like Schumpeter, Innes focussed on credit and
emphasised the clearing of credits and debits. According to Alfred White's
introduction to the April 1913 issue of The Banking Law Journal that
announced Innes's forthcoming May 1913 article, the position taken by Innes was
'That in fact all trading other than direct barter has been upon credit, and
that money is nothing but credit; A's money being B's debt to him, and
when B pays his debt A's money disappears; That the function of banking is to
bring the debts and credits together so that they might be written off against
each other...' (p. 268). Innes mocks the view that 'in modern days a
money-saving device has been introduced called credit and that, before
this device was known all purchases were paid for in cash, in other words in
coins' (Innes 1913, p. 389). Instead, he argues 'careful investigation shows
that the precise reverse is true' {op. cit., p. 389). Rather than
selling in exchange for 'some intermediate commodity called the "medium of
exchange" ', a sale was really 'the exchange of a commodity for a credit'.
239
Innes
calls this the 'primitive law of commerce': 'The constant creation of credits
and debts, and their extinction by being cancelled against one another, forms
the whole mechanism of commerce...' (op. cit., p. 393). The following
passage is critical.
By buying
we become debtors and by selling we become creditors, and being all both buyers
and sellers we are all debtors and creditors. As debtor we can compel our
creditor to cancel our obligation to him by handing to him his own
acknowledgement of a debt to an equivalent amount which he, in his turn, has
incurred. For example, A having bought goods from B to the value of $ 100, is
B's debtor for that amount. A can rid himself of his obligation to B by selling
to C goods of an equivalent value and taking from him in payment an
acknowledgement of debt which he (C, that is to say) has received from B. By
presenting this acknowledgement to B, A can compel him to cancel the debt due
to him. A has used the credit which he has procured to release himself from his
debt. It is his privilege (op. cit., p. 393).
The market, then, is not viewed as
the place where goods are exchanged, but rather as a clearing house for debts
and credits. Indeed, Innes rejects the typical textbook analysis of the village
fairs, arguing that these were first developed to settle debts, with retail
trade later developing as a sideline to the clearing house trade. On this view,
debts and credits and clearing are the general phenomena; trade in goods and
services is merely a subspecies - one of the ways in which one becomes a debtor
or creditor (or clears debts). While Innes does not go so far as to claim that
markets in goods and services are created specifically to provide a way in
which producers can obtain the means of debt settlement, this would certainly
be consistent with his argument.
Finally, banks emerge to specialise
in providing the clearing function:
Debts and
credits are perpetually trying to get into touch with one another, so that they
may be written off against each other, and it is the business of the banker to
bring them together. This is done in two ways: either by discounting bills, or
by making loans. The first is the more old fashioned method and in
Europe the bulk of the banking business consists in discounts while in the
There is
thus a constant circulation of debts and credits through the medium of the
banker who brings them together and clears them as the debts fall due. This is
the whole science of banking as it was three thousand years before Christ, and
as it is today. It is a common error among economic writers to suppose that a
bank was originally a place of safe deposit for gold and silver, which the
owner could take out as he required it. The idea is wholly erroneous . . . (op.
cit., p. 403).
Innes also rejected the view that
banking reserves limit the business of banks. Note that the deposit multiplier
was not really understood by most
240
of
the profession until the 1920s, and of course it became most important in the
Monetarist approach developed by Friedman and Brunner only in the 1960s. But
Innes had offered a critique long before that:
Too much
importance is popularly attached to what in England is called the cash in
hand and in the United States the reserves, that is to say the
amount of lawful money in the possession of the bank, and it is
generally supposed that in the natural order of things, the lending power and
the solvency of the bank depends on the amount of these reserves. In fact, and
this cannot be too clearly and emphatically stated, these reserves of lawful
money have, from the scientific point of view, no more importance than any
other of the bank assets. They are merely credits like any others . . . (op.
cit., p. 404).
We will come back to this issue in a
moment, but note that the position of Innes is similar to that of Schumpeter.
It is the circulation of credits and debits that is the focus of analysis.
Still, both reject a 'pure credit' theory, with each recognizing that 'lawful
money' is required for net clearing (if the bank's credits fall short of its
debits 'at the end of each day's operations' (op. cit., p. 404)). In the
next section we will examine in more detail Innes's analysis of 'lawful money'
- which is far superior to that attributed by Schumpeter to the chartalists.
In the chapter above, Ingham rightly
objects to the tendency of Innes to replace one universalist approach (the
orthodox metallist approach) with another (the 'primitive law of commerce'). As
Ingham notes, we need to distinguish carefully among social relations
(including money) within different types of societies. Ingham is most concerned
with developing a credit theory of money that is appropriate to capitalist
society. Hence, while he agrees that all money is credit, he argues that
not all credit serves as money - a topic to be explored further in the next
section. Further, while Innes's emphasis on the circulation of credits is
well-placed, he should have distinguished carefully between transferable and
nontransferable credit. It may well be true that banks originated out of the
clearing house business, but what is perhaps more distinctive about commercial
banks in the capitalist era is that they create transferable credit
money (notes or deposits).
Actually, I do not think Innes would
disagree with Ingham, rather, Innes probably chose to over-emphasise credit
clearing and exaggerated its universality in response to prevailing views. I do
think he hinted at an understanding that transferability of debt is important,
and he recognised that banks create new credits in addition to serving the
clearing house function. Innes said that both bank notes and bank deposits are
acknowledgements 'of the banker's indebtedness, and like all acknowledgements
of the kind, it is a "promise to pay" ' (op. cit., p. 407).
241
While
he usually speaks of banks as 'the clearing houses of commerce' where 'the
debts and credits of the whole community are centralised and set off against
each other' (Innes 1914, p. 152), he also acknowledges the case in which the
bank creates a debt on itself in anticipation of a sale/purchase between two
parties. (The following passage comes after an example in which a purchase/sale
is achieved through use of bills of exchange, with clearing done by the banker.
Here he presents a case with a sale/purchase without bills of exchange. In the
example, B, C and D are buyers and A is the seller of some goods.)
Now let us see how the same result is reached by means of a loan instead
of by taking the purchaser's bill and selling
it to the banker. In this case the banking operations, instead of following the sale and purchase, anticipates it.
B, C, and D before buying the goods they
require make an agreement with the banker by which he undertakes to become the
debtor of A in their place, while they at the same time agree to become the debtors of the banker. Having made this agreement B, C and D make their purchases from A and
instead of giving him their bills
which he sells to the banker, they give him a bill direct on the banker. These bills of exchange on a banker are called cheques or
drafts (Innes 1913, p. 403).
In other words, the bank makes 'a
loan' by creating 'a deposit', but this is exactly analogous to creation of
credits/debits through use of bills of exchange. (Since today we count bank
deposits as part of the money supply, what Innes is explicating is an
'endogenous' expansion of the money supply, although he rightly calls this
credit.) The banker then needs only to ensure that 'his debts to other bankers
do not exceed his credits on those bankers, and in addition the amount of the
"lawful money" or credits on the government in his possession' (1913,
p. 404). The banker 'knows by experience' the number of his cheques that will
be presented to him for clearing, as well as the number of cheques he will
present to other banks for clearing, thus, knows how much HPM to keep in
reserve for net clearing purposes. 'It must be remembered that a credit due for
payment at a future time cannot be set off against a debt due to another banker
immediately. Debts and credits to be set off against each other must be
"due" at the same time' {op. cit., p. 404). Of course, a
number of practices can be developed to facilitate net clearing, such as
establishment of correspondent banks that would discount bills and provide
reserves for net clearing. Innes does not discuss this and it is not important
for our analysis.
242
As
discussed, Schumpeter distinguished between the monetary theory of credit and
the credit theory of money - a useful distinction that can also be found in
Innes. Neither of them went so far as to adopt a pure credit approach; both
provide a role for 'real' or 'lawful' money. In his second article, The
Credit Theory of Money, Innes (1914) devoted much of the analysis to this
role (ironically, his first article What is Money? spent proportionately
more space on the credit theory, while the second article really delved into
the nature of money while spending far less time on credit). While there is no
evidence that Innes was familiar with the work of Knapp (Knapp's book was not
translated to English until 1924, although it had been published in German in
1905), the similarities are remarkable. Along this line, another useful
distinction is that made by Goodhart (1998), between the metallist approach and
the chartalist approach. Both Innes and Schumpeter rejected the metallist
approach. Schumpeter wrote about the chartalist approach, but unfortunately he
defined it too narrowly. (He identified it as a legal tender approach, much as
that adopted by the Greenbackers. However, neither Knapp nor Innes adopted a
legal tender approach, in which government money is supposedly accepted because
of legal tender laws. Knapp called legal tender laws nothing more than an
expression of a 'pious wish'; Innes called for abolition of legal tender laws,
arguing that they are not the source of 'the real support of the currency' but
rather encourage bank runs.) Innes did not mention the chartalist approach, but
much of his analysis is consistent with it. In this section, I will present the
chartalist and state money approaches (I do not believe there is a real difference
between them) and relate them to the analysis provided by Innes.
Above we have briefly examined an
alternative approach to the origins of money, suggested by the great
numismatist, Grierson, and elaborated in Goodhart (1998) and Wray (1998a).
According to this alternative, money originated not from a pre-money market
system but rather from the penal system (Grierson 1977, 1979; Goodhart 1998).
Hence, we emphasise the important role played by 'government' in the origins
and evolution of money. More specifically, it is believed that the state (or
any other authority able to impose an obligation - what we will describe as
'sovereign power') imposes an obligation in the form of a generalised, social
unit of account - a money - used for measuring the obligation. The next
important step consists of movement from a specific obligation - say, an hour
of labour or a spring lamb that must be delivered - to a generalised, money,
obligation. This does not require the pre-existence of markets, and,
indeed, almost certainly
predates them. Once
the
243
authorities
can levy such an obligation, they can then name exactly what can be delivered
to fulfil this obligation. They do this by denominating those things that can
be delivered, in other words, by pricing them. To do this, they must first
'define' or 'name' the unit of account. This resolves the conundrum faced by
methodological individualists and emphasises the social nature of money and
markets - which did not spring from the minds of individual utility maximisers,
but rather were socially created.
Note that the state can choose
anything it likes to function as the 'money thing' denominated in the money of
account, and, as Knapp emphasised, can change 'the thing' any time it likes:
'Validity by proclamation is not bound to any material' and the material can be
changed to any other so long as the state announces a conversion rate (say, so
many grains of gold for so many ounces of silver). (Knapp 1973 [1924/1905] p.
30). What Knapp called the state money stage begins when the state chooses the
unit of account and names the thing that it accepts in payment of obligations
to itself- at the nominal value it assigns to the thing. The final step occurs
when the state actually issues the money thing it accepts. In (almost) all
modern developed nations, the state accepts the currency issued by the treasury
(in the
Innes insisted that even government
(or state) money is credit. Note, however, that he recognised it is a special
kind of credit, 'redeemed by taxation' (Innes 1914, p. 168). This credit takes
the form of'small tokens which are called coins or notes', issued 'in payment
of its purchases', which its subjects then 'use in the payment of small
purchases in preference to giving credits on ourselves or transferring those on
our bankers' {pp. cit., p. 152). In other words, we can use credits on
government ('currency') to purchase without going into debt (but we can also do
that with bank money, if we first obtain the bank money through sale of goods
or services). Still, for the government, a 'dollar is a promise to
"pay", a promise to "satisfy", a promise to
"redeem", just as all other money is. All forms of money are
identical in their nature' (op. cit.,p. 154). But what is it that the
government 'promises to pay'? Innes argues that even on a gold standard it is
not gold that government promises to pay. If
244
government
paper money is submitted in exchange for gold, government promises to pay have
not been reduced:
It is true
that all the government paper money is convertible into gold coin, but redemption of paper issues in gold coin is not
redemption at all, but merely the exchange
of one form of obligation for another of an identical nature {op. cit., p.
165).
As the Greenbackers argued, it makes
no difference whether the deed is printed on paper or on gold. Likewise,
whether the government's IOU is printed on paper or on a gold coin, it is
indebted just the same. What, then, is the nature of the government's IOU? This
brings us to the 'very nature of credit throughout the world', which is 'the
right of the holder of the credit (the creditor) to hand back to the issuer of
the debt (the debtor) the latter's acknowledgement or obligation' {pp. cit.,
p. 161). Innes explains:
Now a
government coin (and therefore also a government note or certificate which
represents a coin) confers this right on the holder, and there is no other
essentially necessary right which is attached to it. The holder of a coin or
certificate has the absolute right to pay any debt due to the government by
tendering that coin or certificate, and it is this right and nothing else which
gives them their value. It is immaterial whether or not the right is conveyed
by statute, or even whether there may be a statute law defining the nature of a
coin or certificate otherwise {op. cit., p. 161).
What, then, is special about
government? Innes noted that the government's credit 'usually ranks in any given
city slightly higher than does the money of a banker outside the city, not at
all because it represents gold, but merely because the financial operations of
the government are so extensive that government money is required everywhere
for the discharge of taxes or other obligations to the government' (op.
cit., p. 154). The special characteristic of government money, then, is
that it is 'redeemable by the mechanism of taxation' (op. cit., p.
152):' [I] t is the tax which imparts to the obligation its "value"....
A dollar of money is a dollar, not because of the material of which it is made,
but because of the dollar of tax which is imposed to redeem it' (op. cit., p.
152).
By contrast, orthodox economists are
'metallists' (as Goodhart 1998 calls them), who argue that until the twentieth
century, the value of money was determined by the gold used in producing coins
or by the gold that backed up paper notes. However, in spite of the amount of
ink spilled about the gold standard, it was actually in place for only a
relatively brief instant. Typically, the money thing issued by the authorities
was not gold
245
money
nor was there any promise to convert the money thing to gold (or any other
valuable commodity). Indeed, as Innes insisted, throughout most of Europe's
history, the money thing issued by the state was the hazelwood tally stick:
'This is well seen in mediaeval England, where the regular method used by the
government for paying a creditor was by "raising a tally" on the
Customs or on some other revenue getting department, that is to say by giving
to the creditor as an acknowledgement of indebtedness a wooden tally' (Innes
1913, p. 398). Other money things included clay tablets, leather and base metal
coins, and paper certificates. Why would the population accept otherwise
'worthless' sticks, clay, base metal, leather or paper? Because the state
agreed to accept the same 'worthless' items in payment of obligations to the
state.
But a
government produces nothing for sale, and owns little or no property; of what
value, then, are these tallies to the creditors of the government? They acquire
their value in this way. The government by law obliges certain selected persons
to become its debtors. It declares that so-and-so, who imports goods from
abroad, shall owe the government so much on all that he imports, or that
so-and-so, who owns land, shall owe to the government so much per acre. This
procedure is called levying a tax, and the persons thus forced into the
position of debtors to the government must in theory seek out the holders of
the tallies or other instrument acknowledging a debt due by the government, and
acquire from them the tallies by selling to them some commodity or in doing
them some service, in exchange for which they may be induced to part with their
tallies. When these are returned to the government treasury, the taxes are
paid. How literally true this is can be seen by examining the accounts of the
sheriffs in
Contrary to orthodox thinking, then,
the desirability of the money thing issued by the state was never determined by
its intrinsic value, but rather by the nominal value set by the state at its
own pay offices (at which it accepted payment of fees, fines and taxes). Nor,
contrary to Schumpeter and the Greenbackers, was the desirability or use of
government money maintained by legal tender laws.
Once the state has created the unit
of account and named that which can be delivered to fulfil obligations to the
state, it has generated the necessary preconditions for development of markets.
All the evidence suggests that in the earliest stages the authorities provided
a full price list, setting prices for each of the most important products and
services. Once prices in money were established, it was a short technical leap
to the
246
creation
of markets. This stands orthodoxy on its head, by reversing the order: first
money and prices, then markets and money things (rather than barter-based
markets and relative prices, and then numeraire money and nominal prices). The
next step was the recognition by government that it did not have to rely on the
mix of goods and services provided by taxpayers, but could issue the money
thing to purchase the mix it desired, then receive the same money thing in the
tax payments by subjects/citizens. This would further the development of
markets because those with tax liabilities but without the goods and services
government wished to buy would have to produce for market to obtain the means
of paying obligations to the state. As Heinsohn and Steiger (1983) say, the
market is the place to which one turns for earning the means of debt
settlement, including the means of tax settlement. This is quite different from
the orthodox view that markets develop so that individuals may maximise utility
by trading consumables.
As
we have seen, Innes rejected the metallist view and argued 'the dollar is a
measure of the value of all commodities, but is not itself a commodity, nor can
it be embodied in any commodity. It is intangible, immaterial, abstract' (Innes
1914, p. 159). Much of his second article is devoted to examining the value of
the dollar in terms of commodities - that is, the depreciation or appreciation
(the latter, according to Innes, never seems to occur) of the domestic value
of money. (Note that in what follows in this section, we will use the
terminology adopted by Innes, rather than the more current practice, which is
to use the words inflation or deflation to refer to the domestic value of the
currency in terms of commodities, and depreciation or appreciation to refer to
the foreign exchange value of the currency.) He was most concerned with 'the
relation between the currency system known as the gold standard and the rise of
prices' {op. cit., p. 160). He rejects a 'supply and demand' of gold
explanation as inapplicable, especially in any system in which gold is coined
or any system that otherwise operates on a 'gold standard'. He argued that the
relatively high inflation of the Mediaeval period (often called the 'price
revolution') was due to 'the constant excess of government indebtedness over
the credits that could be squeezed by taxation out of a people impoverished by
the ravages of war and the plagues and famines and murrains which afflicted
them' {op. cit., p. 160). He concluded that a similar result is obtained
early in the twentieth century even though policy makers believe they can hold
up the value of the currency by
247
maintaining
a fixed price for gold. Innes argues this is mistaken and indeed contributes to
depreciation of the currency. His arguments are rather difficult to pierce,
thus, it is worthwhile to spend some time with them. I think he is on the right
track, notwithstanding the gentle critique by Ingham; in the final portion of
this section I will correct what I perceive to be his major error.
In his discussion of the
determination of the value of money, he repeats his earlier claim that
government money - no matter what it is made of-is evidence of government debt,
and that it is accepted because it can be used in payment of taxes. He notes
'We are accustomed to consider the issue of money as a precious blessing, and
taxation as a burden which is apt to become well nigh intolerable. But this is
the reverse of the truth. It is the issue of money which is the burden and the
taxation which is the blessing' {op. cit., p. 160). Innes realised this
would strike the reader as a strange interpretation, hence, he devoted several pages
in explanation. Quite simply, when government purchases goods or services by
issuing money, this imposes a burden on the citizenship because a portion of
society's output is moved to the government sector. (He has earlier asserted
that government is mostly a consumer of output, not a producer. Obviously, this
is contingent on the society under analysis, but it certainly applies to
government in the major capitalist economies of the twentieth century.)
Moreover, the government's credit money remains for some time in circulation,
allowing recipients also to put claims on society's output. It can even end up
in banks as reserves of 'lawful money' and thereby generate bank loans and
creation of private credit money. He later says he is not exactly sure how this
generates depreciation of the currency (inflation), a point to which we will
return, but it seems obvious to him that this circulation of credits (both
private and government) must be behind the general rise of prices.
In Innes's view, taxes are a blessing
because they remove from the circulation government money. Effectively, what he
is talking about is the government spending multiplier and the deposit
multiplier. If a government purchase (injection of government money) is
followed by a government tax payment (redemption of government money), then
there will not be a net increase of private sector purchasing power. Some
portion of society's resources will have been moved to the government sector -
which is the purpose of the tax system, although that purpose can be partially
hidden beneath the veil of money. At the same time, 'lawful money' will not
accumulate as banking system reserves when the injection is matched by an equal
reserve drain as taxes are paid. Only government deficit spending (spending in
excess of tax payments) results in a net injection of HPM. Hence, it is only
deficit spending (properly
248
defined,
as we will see below) that depreciates a currency (as a reminder, he means
domestic inflation).
In mediaeval society, currency
depreciation would take place all at once, even in a single day. While
historians and economists alike have long told stories about monarchs who
purposely debased coins (by reducing gold content), Innes denied that this ever
took place. He noted that early coins never had denominations printed on them.
Instead, nominal value was announced by the monarch and maintained at
government pay offices. A coin's nominal value in circulation would be
determined by its value in acceptance of payments to government. When the
monarch found he had already issued too much credit (such that he was unable to
purchase desired goods and services), he would simply reduce the official value
of the coins already issued (such that, say, two coins would have to be
delivered at public pay offices rather than one). By doing so, monarchs
'reduced by so much the value of the credits on the government which the
holders of the coins possessed. It was simply a rough and ready method of
taxation, which, being spread over a large number of people, was not an unfair
one, provided that it was not abused' (Innes 1913, p. 399). In short,
government 'cried down' the coins in place of raising tax rates, but in the
process this would devalue the market value of the government's debt - an
overnight devaluation that would be manifested as soon as markets adjusted
prices upward in terms of government coin.
There is some hint in Innes that the
extent to which net injections would be inflationary depends on the productive
capacity of the economy. Hence, he refers to mediaeval society, with 'plagues
and famines and murrains which afflicted them', presumably holding down
capacity and increasing the inflationary pressures resulting from government
spending. It should be noted that even a 'balanced budget' expansion of
government spending forces a transfer of a portion of output to government
without reducing private sector purchases (the so-called balanced budget
multiplier). If the economy were already operating at full capacity, this would
cause at least some prices to rise due to bottlenecks -depending of course on
institutionalised price setting procedures.
By the time that Innes was writing,
depreciation of the currency relative to domestic production did not occur all
at once because government did not normally 'cry down' currency. Instead, a
sort of 'creeping' depreciation (again, he means inflation) had set in.
Presumably, except in wartime, economies were more able to provide goods and
services desired by government than they had been in the mediaeval period.
However, because government persistently injected
249
more
money into the economy than it drained through taxes, there was continuous
downward pressure on the value of money.
Economists and policy-makers wrongly
assumed they could keep up the value of government money by tying it to gold,
that is, by maintaining buy and sell price points, government would prevent the
sort of depreciation Innes discussed. He faulted this view for two reasons.
First, he argued that when government buys gold it fixes the price of gold by
emitting government obligations: 'In exchange for each ounce of gold the owner
receives in money' (Innes 1914, p. 162). (This is the case even when, as in the
Finally, Innes noted that in the
past the value of private money could deviate from that of government money, if
government engaged in 'crying down' the nominal value of its debts too
frequently. In the past, there would be the equivalent of a 'bank dollar'
(privately issued) and a 'current dollar' (issued by government), whose values
would diverge (op. cit., p. 165). However, by the twentieth century the
value of private money tended to follow very closely the path taken by the
value of government money. This was, Innes speculated, perhaps because of legal
reserve requirements for the banking system and the sheer amount of government
money circulating (which, as we recall, could lead to a multiple expansion of
private money). Further, in the past, devaluation was immediate and well
recognised; by the twentieth century, devaluation was slow and insidious, practically
unnoticed so that 'we are not aware that there is anything wrong with our
currency. On the contrary, we have full confidence in it, and believe our
system to be the only sound and perfect one, and there is thus no ground for
discriminating against government issues' (op. cit., p. 166).
In the end, though, Innes admits
'the forces of commerce that control prices have always been obscure', hence
'we shall remain a good deal in the dark as regards the forces behind the rise
of prices' (op. cit., p. 166). When it comes to what we might call the
'microeconomic' forces that set prices, Innes refers to 'the great combinations
which are such powerful
250
factors
in the regulation of prices' and also presents a potted 'supply and demand'
explanation (pp. 166 and 167, respectively) but admits these 'are mere
suggestions on my part' (p. 166). Ingham rightly casts doubt on Innes's
examination and points to mark-up approaches to firm-level pricing.
This is not the place to present a
theory of pricing and inflation, but it is useful to compare Innes's views with
those of Adam Smith. Like Innes, Smith argued that the reason otherwise
worthless 'paper' was accepted even if it were not made convertible to gold was
because it was redeemable in payment of taxes (Wray 1998). Smith argued that so
long as the paper money was kept scarce relative to the total tax liability, it
might even circulate above par. Like Innes, Smith related the value of money
both to its use in tax payments and to its relative scarcity. While I think it
is indisputable that government 'tokens' will be accepted by taxpayers if they
are redeemable for taxes, and that they will circulate at par value so long as
government accepts them at par value, it is not a simple matter to relate
money's relative value (purchasing power in terms of commodities) to its
scarcity relative to tax liabilities. If an economy is operating at full
capacity (say, during a major war), then government purchases (hence, money
emissions) may well be associated with inflation. Probably more relevantly, if
government raises the prices it is willing to pay for its purchases, this must
almost certainly devalue the currency. Finally, Innes is probably on the right
track when he explains why we no longer have depreciation of government money
without a concurrent depreciation of private money, but he might have placed
more emphasis on the role played by government in maintaining parity - both
through the clearing mechanism (for example, at the Fed - which was a new
invention at the time) and at government pay offices.
In sum, government money is accepted
because the government accepts the same at public pay offices. Ultimately, the
'real' value of money (what it can purchase domestically) is determined by what
must be done to obtain it. For the most part, money is obtained in modern
economies by providing labour services or goods or promises to pay to the
markets. In addition, there are 'transfers' provided mainly by government
(welfare, subsidies, graft, pensions and so on). The easier it is to obtain
money, the lower its value must be - all else equal. In modern economies,
government plays a role in operating a clearing mechanism, partly to facilitate
payments made to itself and partly to ensure that favoured private liabilities
(notably, bank liabilities) always clear at par against government money.
Government can, if it chooses to do so, peg the price of a particular good or
service by standing ready to buy/sell at an administered price.
In the nineteenth
century, many countries
251
periodically
administered the price of gold. As Innes argued, this did not necessarily
stabilise the value of money relative to other domestic commodities. While it
would take us too far afield, I have elsewhere argued that if the government wants
to increase the stability of the domestic value of its currency, a better
choice would be the basic wage (since wages go into the production of all
commodities, to a greater or lesser degree). Still, it would be impossible and
undoubtedly undesirable to completely fix the nominal value of the consumer's
basket of purchased commodities. With technological change and new commodities
that replace older ones, as well as changes of relative proportions of
commodities consumed, money's domestic purchasing power cannot remain rigid. As
Keynes argued, however, some degree of stickiness of money wages is desired
(for money to retain its liquidity) and a government policy directed towards
that purpose seems reasonable.
As government has grown in size
since the time of Innes (although it is apparent that the relative size of
government has waxed and waned throughout recorded history), its pricing
decisions have probably become increasingly important. The government is today
a major price setter, both in terms of wages it pays directly as well as in
prices of privately produced goods and services it purchases. In many or most
countries, government imparts an inflationary bias (or, what Innes called a
tendency toward depreciation) through its formal or informal indexing of prices
it pays. This is, of course, the modern equivalent to the mediaeval practice of
'crying down' the coinage. The mediaeval crown would announce that two coins
rather than one had to be delivered to pay offices; markets would react by
raising prices in terms of the crown's money (since sellers would have to earn
more coins, each of which was now worth less, to pay their taxes). Today, the
government announces it will pay two dollars per hour of labour rather than
one. The impact on market prices is no doubt less direct but still effective.
Government could deflate prices (appreciate the money) by cutting the prices it
paid ('crying up the coinage') but the effects on relative prices and incomes
and wealth, and hence on markets, would be highly disruptive - and thus not
recommended.
Innes
did not really address the foreign value of money, that is, the determination
of exchange rates. However, in most people's minds today, the gold standard has
more to do with fixing exchange rates among currencies than with maintenance of
the domestic value of the currency.
252
And
while gold standards have (thankfully) mostly gone the way of corsets, inkwells
and buggy whips, many modern nations have elected to peg the value of their currencies
to one or more foreign currencies. The European Monetary Union, the Argentinian
currency board, or the Asian pegs attempt to stabilise the foreign value of the
money of these nations.
There is a common view that in the
distant past, precious metal (especially gold) was used as a medium of exchange
among countries. There may be some truth to this, although I suspect its
importance is grossly overstated. We know that bills of exchange were a very
early innovation that allowed long-distance trade across currencies. Even
during the peak of the experiment with a gold standard, the gold did not have
to move because bills of exchange circulated the commodities among nations.
Still, as I have admitted we must be modest in our claims about the distant past,
so let us presume that precious metal was used between nations. Why?
If it is true that 'taxes drive
money' domestically, in the sense that the 'tokens' issued by government are
made generally acceptable because they are accepted at public pay offices (and
as we shall see in the next section, in the sense that the unit in which
government tokens are denominated becomes the money of account), then what
forces determine the acceptability of a nation's currency outside its borders?
In the case of a colony, taxes or tributary payments can be imposed on the
subject population, hence, the coloniser's money will be accepted. (This is how
Europe monetised
The acceptability of a foreign
currency might then diminish to the extent that sovereignty of the foreign
ruler is doubted, or, equivalently, to the degree that there are questions
about the willingness of the foreign population to accept its ruler's tokens.
Private trade was mostly carried on through use of bills of exchange, which did
not involve circulation of sovereign tokens outside the country of issue. But
purchases by the sovereign involved either issue of coin or issue of an
acceptable liability to be held, for example, by a bank that would then issue
its own liabilities for use by the sovereign. Foreign purchases could be
problematic. The
253
situation
of the conduct of a foreign war brings this into sharp relief. When the king of
country A conducts a foreign war against country B, he must hire mercenaries
and purchase provisions largely in country B. Sellers in country B are quite
naturally reluctant to take his tokens - there is little reason to trust him,
and some reason to expect he might lose the war and possibly his crown. If his
tokens are made of precious metal, they will be accepted at least at the value
of the bullion; perhaps they will be worth more - depending on expectations
concerning the outcome of the war, the likelihood that the sovereign would cry
down his debts even if he won the war, the ease with which the coins could be
redeemed for local currency, and so on. But at the very least, the sovereign
could expect that coined metal would be worth its bullion value. This probably
goes at least some way towards explaining why coinage in the form of precious
metal was so persistent, why precious metal coins did circulate in foreign
countries, and why sovereigns - especially from the end of the mediaeval period
forward - were so keen to accumulate gold reserves. I doubt it is a coincidence
that mercantilism, the plunder of the
It is not hard to see why sovereigns
would also want to maintain the belief in the soundness of their coinage,
particularly through its 'purity'. Innes argues that high-quality coinage was
sought mostly to reduce counterfeiting, and no doubt that is true. But if coins
might circulate (abroad) at bullion value, it was necessary to ensure that
precious metal content was believed to be (if not in fact) high. It is also
easy to see why an almost mystical or religious belief that soundness of the
currency at home was also linked to a precious metal would gradually develop
over the decades and centuries. However, when a government's coin circulates at
no more than the value of its embodied precious metal, it is no longer
circulating as money. When a sovereign ships gold to a foreign nation to
purchase mercenaries or supplies, he is effectively engaging in barter. It is
conceivable that trade between nations has taken place on the basis of gold or
some other precious metal, but that should be seen as non-monetary trade -
perhaps the closest thing to barter that has taken place historically on any
significant scale.
It isn't too surprising that
international transactions could take on a non-monetary flavour. If, as we have
argued above, money represents a social relation, then it is tied to a
particular society. Developing a money that can be used across different
societies requires development of particular social relations. The relations
between a coloniser and the colonised can lead to use of a common money,
although with the coloniser using money to maintain a position of power over
the colonised
254
nation.
Relations between two more or less equal sovereign nations are not so simple.
It is a fairly straightforward matter to use bills of exchange or other
liabilities when the total of the financial exchanges is balanced, that is,
when no net clearing is required. Of course, if trade in goods and services is
not balanced, this is no problem if residents of the net exporter will hold
credits denominated in the currency of the importer. This necessarily requires
development of at least a minimal level of continuing social relations between
the two. A gold standard reduces the social relationship required because
financial claims can be converted to precious metal - that is they can be
demonetised.
Alternatively, it can be agreed that
ultimate clearing will take place in the currency of a third nation. When there
is a dominant country, its currency can take the place of bullion. In fact, for
many decades before World War II the
Even if a country chooses to use
gold, pounds or dollars for ultimate clearing, it does not necessarily adopt a
gold, pound or dollar standard -that is, a fixed exchange rate against the
clearing unit. Since the early 1970s, most nations have chosen to float their
currencies (with varying degrees of floatiness); a few have chosen fixed
exchange rates (with varying degrees of fixity). There is only one issue related
to exchange rate regime that I wish to touch upon here. When a sovereign ties
his tokens to a precious metal, he must then obtain the metal before he can
issue tokens. He can receive gold in tax payment, purchase gold (at a fixed
price) or take gold 'on deposit' (the case of the
Trying to fix the exchange rate is
risky business, requiring large reserves. Ultimately, a nation could need 100
per cent reserves to fend off attacks on the exchange rate. In a floating rate
system, the exchange rate
255
seems
to be complexly determined, perhaps even more complexly determined than is the
domestic value of the currency. Economists and policy makers hold a variety of
beliefs about the determinants of exchange rates - most of them border on
superstition. It is commonly believed, for example, that high interest rates
lead to currency appreciation, but counter-examples abound, with interest rates
higher than 100 per cent accompanied by a collapsing currency. A trade surplus
is also supposed to appreciate a currency, but, again, we find a country like
the
When
a modern government spends, it issues a cheque drawn on the treasury; its
liabilities increase by the amount of the expenditure and its assets increase
(in the case of a purchase of a good produced by the private sector) or some
other liabilities are reduced (in the case of a social transfer). The recipient
of the cheque will almost certainly take it to a bank, in which case either the
recipient will withdraw currency, or (more likely) the recipient's bank account
will be credited. In the former case, the bank's reserves are first increased
and then are reduced by the same amount. In the latter case, bank reserves are
credited by the Fed in the amount of the increase of the deposit account. The
bank reserves carried on the books as the bank's asset and as the Fed's
liability are nothing less than a claim on government-issued money, or, a
leveraging of HPM. In other words, treasury spending by cheque really is the
equivalent of 'printing money' in the sense that it increases the supply of
HPM. Unless bank required reserves happened to increase by an equivalent
amount, the banking system will typically find itself with excess reserves
after the treasury has spent, creating HPM. (Some modern systems don't have
256
required
reserves, in which case excess reserves are created if net emission of HPM
exceeds desired reserves.)
The important thing to notice is
that the treasury can spend before and without regard either to previous
receipt of taxes or prior bond sales. In the
On the other hand, tax payments by
households lead to a reserve drain as the treasury submits the cheques to the
Fed for clearing, at which point the Fed debits the bank's reserves. Things
would be much simpler and more transparent if tax receipts and treasury spending
were perfectly synchronised. In that case, the treasury's spending would
increase reserves, and the tax payments would reduce them. If the government
ran a balanced budget there would be no net impact on reserves. In this case
there would be no need for the complex coordination between the Fed and
treasury using tax and loan accounts because there would be no reserve effects
so long as the budget were balanced.
However, let us suppose that the
timing were synchronised but that spending exceeded tax revenues so that a
budget deficit resulted. This means that after all is said and done, there has
been a net injection of reserves. It is possible that the extra reserves
created happen to coincide with growing bank demand for reserves - in which
case the treasury and Fed need do nothing more. More probably, the net
injection of reserves resulting from budget deficits would lead to excess
reserves for the banking system as a whole. The receiving banks would offer
them in the Fed funds' market, but would find no takers. This would cause the
Fed funds' rate to begin to fall below the Fed's target, inducing the Fed to
257
drain
reserves either through an open market sale or by reducing its discounts. When
the treasury runs a sustained deficit, quarter after quarter and year after
year, the Fed would find it was continually intervening to sell bonds;
obviously, it would eventually run out of bonds to sell. This is why, over the
longer run, responsibility for bond sales designed to drain excess reserves
from the system must fall to the treasury - which faces no limit to its own
sales of bonds as it can create new bonds as needed to drain excess reserves.
While it may sound strange, we
conclude that treasury bond sales are not a borrowing operation at all, but are
in fact nothing but a reserve draining operation (that substitutes one kind of
treasury liability for another). This becomes apparent when one recognises that
the treasury cannot really sell bonds unless banks already have excess
reserves, or unless the Fed stands by ready to provide reserves the banks will
need to buy the bonds. If the treasury typically tried to first 'borrow' by
selling bonds before it spent, it would be trying to drain reserves it
will create only once it spends. As it drained required or desired
reserves, it would cause the Fed funds' rate to rise above the Fed's target -
inducing an open market purchase and injection of reserves by the Fed. The
central bank and treasury cannot drain excess reserves that don't exist!
Another way of putting it is that
the government spends by issuing IOUs, and the private sector uses those IOUs
to pay taxes and buy government bonds. Obviously, if government spending were
the only source of these IOUs, the private sector could not pay taxes or buy
bonds before the government provided them through its spending. In the
real world, government spending on goods and services is the main, but not the
only source, of the IOUs needed by the private sector to pay taxes and buy
government bonds. In addition, the central bank provides its IOUs through
discounts or open market operations (or, gold and foreign currency purchases),
and these IOUs are perfect substitutes for treasury IOUs. Most economists have
become confused about all this because they do not understand the nature of the
coordination between the Fed and the treasury.
Indeed, most economists do not
understand that monetary policy has nothing to do with the quantity of money,
but is concerned only with the overnight interest rate. The central bank's
provision of, or removal of, reserves is nondiscretionary and is always merely
in response to actions of the treasury or the private sector. On the other
hand, fiscal operations always impact reserves, and government deficits always
lead to a net injection of reserves.
We conclude that the purpose of
government bond sales is not to borrow reserves - a liability of the government
- but is instead designed to
258
offer
an interest-earning alternative to undesired non-interest-earning bank reserves
that would otherwise drive the Fed funds' (overnight) rate towards zero. Note
that if the Fed paid interest on excess reserves, the treasury would never need
to sell bonds because the overnight interest rate could never fall below the
rate paid by the Fed on excess reserves. Note also that in spite of the
widespread, orthodox, belief that government deficit spending places upward
pressure on interest rates, it would actually cause the overnight rate to fall
to zero if the treasury and Fed did not coordinate efforts to drain the created
excess reserves from the system. (For proof of this, note that for many years
after the mid-1990s, the overnight interest rate in
One could think of government bonds
as nothing more than HPM that pays interest - indeed, as described above, the
government would never need to sell bonds if the Fed paid interest on excess
bank reserves, or if the Fed's interest rate target were zero. Bond sales are
not really a borrowing operation but are instead an interest rate maintenance
operation. Obviously, however, banks are not the only entities in the private
sector that would like to earn interest by holding government IOUs. Indeed,
households and firms generally like to accumulate a portion of their net wealth
in the form of interest-earning government debt. In a growing economy, the
outstanding stock of government IOUs (both interest-earning and
non-interest-earning) will need to grow to keep pace with the demands of the
private sector. This means that a government deficit should be the 'normal',
expected, situation. In contrast, sustained budget surpluses can be achieved
only by draining the government IOUs held as net wealth. This is why government
budget surpluses usually cannot be sustained for long - they reduce the private
sector's disposable income (because taxes exceed government spending) and
destroy private net wealth (by draining government IOUs), and hence set off
tremendous deflationary impacts on the economy.
We can see that Innes's analysis is
consistent with most of the analysis of this section. He did not address in any
detail the nature of treasury bonds - but of course those weren't important
before World War I. Further, the relations between the Fed and treasury had not
been worked out even in 1914. Innes focussed on excessive government credit,
although he did not endorse a balanced budget. He perhaps would not
259
have
endorsed a permanent deficit, either, as it is not clear that he recognised a
general propensity to hold government credits. He did recognise that both
government purchases of goods and services, as well as purchases of gold, lead
to net injections of HPM (lawful money) as we have argued above.
Innes
offered an unusually insightful analysis of money and credit. He not only
provided the clearest exposition of the nature of credit, but he also
anticipated Knapp's 'state money' approach (or, what Lerner much later called
the 'money as a creature of the state' approach). To put it as simply as
possible, the state chooses the unit of account in which the various money
things will be denominated. In all modern economies, it does this when it
chooses the unit in which taxes will be denominated. It then names what will be
accepted in payment of taxes, thus 'monetizing' those things. Imposition of the
tax liability is what makes these money things desirable in the first place.
And those things will then become what Knapp called the 'valuta money', or, the
money thing at the top of the 'money pyramid' used for ultimate or net clearing
in the non-government sector. Of course, most transactions that do not involve
the government take place on the basis of credits and debits, that is, in terms
of privately issued money things.
This can be thought of as leveraging
activity - a leveraging of the money things accepted by government, or, what we
have called high-powered money. However, this should not be taken the wrong way
- we are not hypothesizing some fixed leverage ratio (as in the orthodox
deposit multiplier story). Further, as explained above, we fully recognise that
in all modern monetary systems the central bank targets an overnight interest
rate. This means that it stands by ready to supply HPM on demand to the banking
sector (or to withdraw it from the banking sector) to hit its target. However,
this comes at a cost - the central bank never drops HPM from helicopters. It
either buys assets or requires collateral against its lending, and it may well
impose other 'frown' or supervisory costs on borrowing banks. Hence, while
central bank provision of HPM provides a degree of 'slop' to the system, the
domestic value of the HPM is ultimately determined by what the population must
do to obtain it from government. This mostly involves provision of goods and
services to government in exchange for the HPM that can be used to pay taxes.
As Innes makes clear, HPM is a government liability, hence, issuing HPM
260
puts
the government in debt: 'A government dollar is a promise to "pay", a
promise to "satisfy,", a promise to "redeem," just as all
other money is' (op. cit., p. 154). For what is the government liable?
It is liable to accept its HPM in payments made to itself. '[T]he government,
the greatest buyer of commodities and services in the land, issues in payment
of its purchases vast quantities of small tokens which are called coins or
notes, and which are redeemable by the mechanism of taxes ...' (op. cit.,
p. 152).
Likewise, the privately supplied
credit money is never dropped from helicopters. Its issue simultaneously puts
the issuer in a credit and debit situation, and does the same for the party
accepting the credit money. For example, a bank creates an asset (the
borrower's IOU) and a liability (the borrower's deposit) when it makes a loan;
the borrower becomes a debtor and a creditor. Banks then operate to match credits
and debits while net clearing in HPM: banks are 'the clearing houses of
commerce, the debts and credits of the whole community are centralised and set
off against each other' (op. cit., p. 152). Borrowers operate in the
economy to obtain bank liabilities to cancel their own IOUs to banks. There is
thus a constant circulation in markets that takes on the character of credits
and debits chasing one another. 'This is the primitive law of commerce. The
constant creation of credits and debts, and their extinction by being cancelled
against one another, forms the whole mechanism of commerce . ..'(Innes 1913, p.
393).
It is hoped that the contributions
in this collection, together with the original articles by Innes, offer an
alternative to the 'veil of money' offered in most economic analyses
of'monetary arithmetic'.
Bagehot,
Walter (1927),
the Money Market,
government spending?' Journal of
Economic Issues, 34, 603-20.
Carruthers,
Bruce G. and Babb, Sarah (1996), 'The color
of money and the nature of value:
greenbacks and gold in
Cipolla,
Carlo (1956), Money, Prices, and Civilization in
the Mediterranean World: Fifth to
Seventeenth Century, Princeton:
Cook,
R. M. (1958), 'Speculation on the origins of
coinage.' Historia, 1,257-62.
Davies,
G. (1994), A History of Money from Ancient Times
to the Present Day,
261
Dillard,
Keynes and the institutionalists.' Journal
of Economic Issues, 14, 255-73.
Goodhart,
Charles A. E. (1989), Money, Information and
Uncertainty,
Goodhart,
Charles A. E. (1998), 'Two concepts of money:
implications for the analysis of
optimal currency areas.' European Journal of Political Economy, 1,
407-32.
Grierson,
Philip (1979), Dark Age Numismatics,
Variorum Reprints.
Grierson,
Philip (1977), The Origins of Money,
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Heinsohn,
Gunnar and Otto Steiger (1983), Private
Property, Debts and Interest or: The
Origin of Money and the Rise and Fall of Monetary Economics,
Heinsohn,
Gunnar and Otto Steiger (1989), 'The veil of
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Ingham,
Geoffrey (2000), '"Babylonian madness": on the
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A. Mitchell (1913), 'What is money?' Banking Law
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A. Mitchell (1914), 'The Credit Theory of Money.'
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A. Mitchell (1932), Martyrdom in our Times: Two
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Keynes,,
John Maynard (1930), A Treatise on Money,
Volumes I and II (1976),
Keynes,
John Maynard (1936), The General Theory of
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Georg Friedrich (1924 [1905]), The State Theory
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CM. (1964), 'Hoards, small change and the origin
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Kurke,
Leslie (1999), Coins, Bodies, Games, and Gold,
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Abba P. (1943), 'Functional finance and the
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Lerner,
Abba P. (1947), 'Money as a creature of the state.'
American Economic Review, 37, 312-17.
262
Mcintosh,
Marjorie K. (1988), 'Money lending on the
periphery of
Maddox,
Thomas (1969), The History and Antiquities of
the Exchequer of the Kings of
Mehrling,
Perry (2000), 'Modern money: fiat or credit?'
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Leonardo B. Dal (1999),
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Walter C. (1976), Monies in Societies, San Francisco: Chandler &
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Polanyi,
Karl (1968), Primitive, Archaic and Modern
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G. Dalton
(ed.), Garden City, NY: Anchor Books.
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Walter (1974), How
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Rossi,
Sergio (1999), Review of Understanding Modern
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August, 483-5.
Sayers,
R. S. (1957), Lloyds Bank in the History of
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Samuelson,
Paul A. (1973), Economics, 9th ed., New
Schmandt-Besserat,
Denise (1989), 'Two precursors of
writing: plain and complex tokens.'
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Wray,
L. Randall (1990), Money and Credit in Capitalist
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Approach,
Wray,
L. Randall (1993), 'The monetary macroeconomics
of Dudley Dillard.' Journal of
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Wray,
L. Randall (1998), Understanding Modern Money:
The Key to Full Employment and Price
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Zelizer,
Viviana A. (1989), 'The social meaning of money:
"Special money".' American
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accounting
origins 122
accounting
records
none from Neolithic Europe 134
Aeris
Gravis 18
aes rude 33
aes signatum 33
agricultural
surpluses 82
agriculture,
dependency on 85
Alexander
the Great 138
American
Revolution
cause of 143
antigovernment
scenario 108
Arabic
numerals 151
Aristotle
15, 174
The Politics 106
As,
Roman coin 17-18
Libral Asses 18
assyriology
119
Athenian
period 103
Aurelian
coins in time of 19
bancherii
192
Banco
di Rialto in
bank
money 53, 55, 72-75, 123, 187, 218,243
Bank
of
Banking Department of 148
Issue Department of 148
issue of notes 61
monopoly of bill dealing 210
role of Bank of England notes 46
bankers 20, 27, 35, 38, 44-45, 52-53, 61, 64, 71, 74, 118, 145, 164-165, 192,
194-195, 197-198,200-201, 203,213,223,241,243
object of 44
bankers'
acceptances 136
bankers'
clearing system 152
banking
1, 35-36, 38, 42-43, 46, 61-62, 74, 90, 120, 123,
137, 144, 150, 155, 164, 170,
185-186, 192, 194-197, 199, 201-202, 204-205, 208-210,212,214-217,225, 238-239,
241, 247, 249, 255-256, 258-259
Babylonian banking 11,214
banking reserves 239
capitalist banking 191
liquidity requirements 74
pioneered by Scots 143
regulation of 48
Banking
Law Journal 1
Banking
Law Journal's Editor's Note
50
banknotes
143, 152
banks
34-35, 49, 52, 66, 72, 74, 76-77, 124, 144, 148-
149, 151-154, 156, 166-168, 184,
186, 192-196, 199, 202, 206, 239-241, 247, 256-259
ancient banks 43
banks of deposit 192
British banks 153
claims on banks 193
clearing houses of commerce 260
create credit 164, 166
early public banks 194
for safe deposit 43
Greek banks 47
not originally places of safe
deposit 239
public banks 194
secrecy 154
Bardi
of
barter
11, 14, 108, 117, 130
263
264
a product of monetary breakdown 119
barter paradigm 225
inadequacy of 128
not the precursor of money? 100
Bentham,
Samuel 160
bills
of exchange 35, 42-43, 136-137, 144-145, 152-153,
168, 178, 187, 191, 196-197,
199-200, 203, 206, 211,241,252
Bonsignori
of Sienna 194
Borrowing
(Control and Guarantees Act) 1946 168
Bretton
Woods international monetary system 212
bridge
engineers, priests as 230
Bronze
Age Mesopotamia exchange in 102
Buccleugh,
Duke of 141
bullion
18, 139
of use only for large transactions
109
Bullion
Committee of 1810 61
bullionist
203, 205, 216
Bullionist-Greenbacker
debates 237
bullionists
203, 233-235
calendar
development of 113
lunar calendar 113
calendrical
effects 110
Capetian
dynasty 22
capital
adequacy ratio 144, 154, 156
Capital
Issues Committee 168
capitalism
185
capitalist
credit money 185, 191
Carolingian
dynasty 21
cash
240
cash
in hand 44
central
bank 11,48, 148, 153-154, 174, 179,211,214 centralisation
of the British monetary system 211 Charlemagne
his decree 189
Charles
IPs debt default 208
Charles
V 25
chartalism
2, 8, 12, 107, 224
neo-chartalism 3
cheques
43
are bills of exchange 241
Circulation
of debts and credits 43
class
society
formation in
clay
tablet
Babylonian tablet a tally 43
clay
tokens 93
clean
slates 116, 121
the annulment of debts 116
Clean
Slates
to restore balance 117
clearing
houses 35
clearing
mechanism 250
coin
no standard coin in olden times 26
coinage
an egalitarian innovation 236
Carolingian coins 22
coined money later than credit
instruments 179
coins of base metal 28
coins weaken power of elite 237
commerce not reliant on coins 27
debasement in Middle Ages 14
earliest known coins in west 17
electrum coins 17
Greek drachma 17
holder of coins is a creditor of
society 147
invented for payment of mercenaries
237
social origins of coins examined 235
state issued coinage 235
the stater 17
coined
currency 224
commodities
never a true medium of exchange 16
commodity
money 188, 224
copper
tokens 211
265
credit
1, 7
a substitute for gold 15
all money is credit 178
credit alone is money 31, 76
credit creation fuels inflation 180
credit cycle 10
credit instrument 178
credit money fuels inflation 179
credit theorists 175
gives common law right 65
in exchange for a commodity 30
money is credit 42
new credit, its importance 163
nothing to do with gold or silver 32
the credit cycle 159
credit
and debt
are abstractions 57
credit
clearing
over-emphasized 240
credit
creation is debt creation 118
credit
money 12, 123, 175, 179, 183-186, 193, 201, 203,
211, 240, 247, 260
creation of 196
credit
relations monetized 214
credit
system 130
credit
theory 51
credit
theory of money 66, 223
for a capitalist society 240
v. monetary theory of credit 238
credit
unit
effect of fall in value 40
creditary
approach to money 11, 224
creditary
economics 168
currency
1, 25
metallic currency 176
sound currency dogmas 2
currency
boards 232
currency
of reputation
base of credit 207
customary
law 65
debasement
23
debasement
hypothesis 177
deben
8, 92, 95
a unit of account 92
debt
assignment of 132
debt and sin 102
debt management in
debts caused by crop shortfalls 122
depersonalisation of 199
equated with sin 227
in Sumer 99
law of debt 30
wergild-type debts 9
deficit
spending 247
deflation
long-term tendency to 161
deflationary
spiral 163
Denarius
18
denier
21
deposit
multiplier 239
depreciations
of the coinage 41
Diocletian,
Emperor 19
direct
credit supply 164, 167
discounting
bills 42, 239
disintermediated
credit supply 164
documentary
credits 139
now universal for exchange 138
dollar
different dollars of debt 55
never seen 56
standard dollar 55-57
variable value of 26
what is a dollar 63
domino
effect of debt default 167
double-entry
bookkeeping 137, 149, 153, 157, 192,204
drafts
43
dry
exchange bills 200
economic
growth 160
economic
relations
in primitive societies 231
economy
monetary economy 8
ecus
190
Egibi
of
Anedjip 83
Badarian culture 81
Badarian period 85
266
class and social relations 8
development of a state religion 82
Djoser 83
Dynasty 0 81
Early Dynastic period 83
Egyptian kingship 88
Egyptian prehistory 80
Faiyumian population 80
Fourth Dynasty 87
Greek period 92
growth of inequality 86
growth of specialization 85
hydraulic engineers become priests
" 88
importance of religion 88
Khufu 83
King Narmer 81
King Scorpion 82
Maadi population 81
Menes 81
merinda culture 81
Naqada II period 86
Naqada period 81, 85
no words for buying and selling or
money in Ancient Egypt 95
Osiris, cult of 83
phaoronic 87
phyles 87
Re and Osiris 89
Sneferu 83
standard wage 94
tax system 90
Egyptian
craftsmen 82
electrum
17
endowment
effect 167
Essay on Currency and Banking
by Thomas Smith 15
exchange
medium of 7-8, 14, 16, 28-30, 33,
65, 76, 79, 92,
95, 128, 133-134, 138, 144, 147,
168, 174, 176, 181, 184,214, 225-226, 232, 238, 252
theory of 173
exchange
of bills per arte 201
exchange
value of gold 179
faible monnaie 53
fairs
35
Fed
funds' rate 257
Federal
Reserve Bank 174
fiduciary
issue 152
finance
functional finance 2
financial
assets 161
financial
instruments
a Darwinian evolution? 235
fiscal
policy 100
florin
26
forte monnaie 25, 53
Franklin,
Benjamin
paper money 142
free
market school 116
Friedman,
Fugger
of
funding
of the government debt 143
fusion
of two moneys, gold and credit 209
Gallienus
coins in time of 19
German
historical school 183, 186
Gibson,
A. H. 155
gift
exchange 102, 109-110, 119, 134-135, 235-237
gold 58
cornered by governments 49
fixing price of 48
fixing the price by legislation 39
fixing the price of gold 67
is price of gold raised by
governments 67
market would make price fall 70
token of indebtedness 42
gold standard 47, 174, 176, 179,
212, 234, 243,
249, 251, 253-254
advocated by Greenspan and Wanniski
232
British version 67
267
gold-silver
ratio 24
government
money 55
is redeemed by taxation 77
government
tokens 52 grain
as a unit of account 94
silver as a measure of value 114
greenbackers
233-235, 237
greenbacks
depreciation
of 47
groats
190
gulden
58
Hamilton,
Alexander 27
Hammurapi,
Laws of (also as Hamurabi) 30, 104
harvest
time pay day 115
Heinsohn
and Steiger thesis 229, 230
higgling
of the market 63
high-powered
money (HPM) 259
historical
record, importance of 224
Homeric
usage 103
inconvertible
notes 46
inflation
8, 10, 74-75, 77, 108, 118, 123, 146, 151, 155-
156, 160-161, 165-169, 179, 215,
246-248, 250, 255
deflates debt 180
of government money 75
of house prices 166
Innes,
Alfred Mitchell 1, 3
ancestry 3-4
Bees and Honey 4
biography of 3
clarity of his analysis 223
Martyrdom in Our Times 4, 7
on poverty 5
on prisons and punishments 4
Until Seventy Times Seven 6
why was he ignored 223
Institute
for the Study of Longterm Economic Trends viii,
121
Institutionalists
232 interest 105
a penalty for late payment 91
Babylonian interest rate 110
origins of monetary interest 107
interest rates 106,
113-115, 123, 155-156,
166-167,255,258
Babylonian 110
connection with inflation 155
intermediated
credit supply 167
International
Scholars' Conference
on Ancient Near Eastern
Economies viii, 121
issues
of money
banks must be able to issue money 53
government monopoly unnecessary 52
Italian
city states 195
Jean le Bon 23
Jewish merchants issue coins 20
Jews
of
justice
of tribal society 226
Kahn,
Richard 159
Keynes,
John Maynard 1, 140, 158, 176, 178-179, 181,
183, 187, 192, 230,251
The Treatise
on Money 223
Keynesianism
3
New Keynesian 3
Post Keynesians 3
Knapp,
George Frederick 9, 179, 242
language,
complexity of ancient languages 132
law
of commerce 31
law
of debt 80
Law,
John 143
lawful
money 240-241
lead
20
lead
mining, economics of 141
legal
tender 19, 31-32, 39, 44-46, 48, 53,77, 147
cases on 46
effect of legal tender laws 45
levying a tax 37
268
livre 21
livre detern 23
livre estevenate 23
livre parisis 23
livre tournois 23, 190
loanable
funds argument 10
loans
between farmers 229
limits on 151
Macleod,
Henry Dunning
book on currency, credit, banking,
political economy 1
Marashu,
sons of 38
Mark
53
Martyrdom in our Times by Alfred Mitchell Innes 226 Mauss,
Marcel 100 measure of value 14
mediaeval
bank failures 194 medium of exchange 14, 65,
76, 79, 92, 95, 128, 133-134, 138,
144, 147, 168, 174, 176, 181, 184, 214, 225-226,
232, 238, 252
Menger,
Karl
his thesis 79
Mengerian commodity theory 181
merchant
bankers' private bill money 202
Mesolithic
Age 131
116, 135
trade program 112
transforming economic categories 121
Ur III period 110
Mesopotamian
law 104
metallic
standard of value never existed 16
metallists
79, 244
metals
sources in ancient times 111
Minsky,
H. 174
mixed
economies 110
Mommsen,
Theodore 17
moneta immaginera 176
moneta reale 176
monetarist
124, 240
monetarist
economics 168
monetarist
economists 180
monetarist
ideology 108, 116
monetary
policy 177, 191, 225
monetary
theory of credit 224 monetary unit
arbitrary 38
origins 229
monetising
debts 169
money
as a social relationship 79, 231,
233
capitalist credit money 185
classify theories of 79
coined money 236
commodity money 1, 7, 14, 232, 234
created by debt 149
creation of 151
credit money 1-2, 11
creditary approach to 12, 225
development by public institutions
111
endogenous money approach 225
fiat money 232
high-powered money (HPM) 259
imaginary history of money created
225
in
in
in Elizabethan
is nothing but credit 238
lawful money 240
lawful money as bank reserves 240
money as a creature of the state 2
money of account 183
money of American government, is it
depreciating?
72
mutations 25
nature of money 50
of account 180, 198
origin not in livestock 105
origin of name 109
originates as unit of account 92
quantitative theory of money 47
represents a social relation 12
269
role as unit of account 123
Roman money 19
silver 9
standard money 46
state money approach 12
valuta money 12, 259
wrong theory of origin 100
money
as coin, a conceptual error 213
money
supply 146, 155, 166, 168
moneyness
test of 11, 213
monnaie blanche 62
monnaie faible 142
movable wealth 106 mutations 28
mutations de la monnaie 38
negotiable instruments 35
Neolithic
Age 131
New
Economic Archaeology 120
nobles
190
North
American Colonies 147
North,
Douglass 108
notes
Bank of
numeraire 174, 182, 225, 228, 246
Numus 18
nundinae 36
Oresme, Nicole 24
Oscan
pound 18
Pacioli's
treatise 204
pagamentum 36
panegyris 36
paper
currencies 142
Parys
Mountain Company 142
pay
31
origin of word 'pay' 7
penal
system, origin of 226
penny
21
Peruzzi of Florence 194
Philippe le Bel 23
philology
of money 102
political
economy 1, 51
fundamental theories 14
post-Keynesian
economics 180
post-Keynesian
economists 184
pound
English pound 21
Oscan pound 18
precious
metals
are not a standard of value 76
unsuccessful price regulation 40
price
administered prices 111
price deflation 159
price standardization 113
variation in
primitive
law of commerce 185
private
sector purchasing power 247
private
sector, assumptions about 108
public
bodies
role of 9
role of in commerce 100
purchases
paid for by sales 41
rate
of interest 135
in
Recoinage
Act of 1696 58
redemption
of government debt by taxation 66 redistribution
how it worked 91
redistributive
households 103
redistributive
mode 109
religion:
important in the development of money 89 rememberer 227
rent-in-kind
116
reserves
of lawful money 44
Revolution,
French 20
Roman
numerals 151
Royal
Exchanger, powers of 206
Rudgley,
Richard 151
Samuelson,
Paul 224
Economics 100
saving,
effect of 162
Say, Jean Baptiste 157
Schmandt-Besserat, Denise 151
270
Schumpeter,
Joseph A. 224, 238, 242
securitising
bank lendings 155
Sesterce
18
shekel
114
origin of accounting value of 111
unit of account 181
shilling
21, 58
shubati
tablets 34
silver
58, 122
a commodity like any other 39
as an administrative vehicle 107
use in exchange 115
Simmel,
G. 179
slate,
as record of debt 141
Smith,
Adam 15,50-51, 108-109, 128, 131, 141,223
failure of vision on nature of money
50
his annuity 142
quotation from 29
Smith,
Thomas
Essay on Currency and Banking 15 Social Credit movement
158
social
relations of monetary production 213
Sol
or Sou 20
Solon
his laws 114
solvent,
definition of 32
special
deposits 153
specialization
in early
increases welfare 229
specialization of labour defeats
barter 117
state
money approach 8
state
theory of money 107, 115, 119, 175,224,242
Innes's version 66
stater
114
Stein,
Sir Aurel 138
stock
33
money developed in 99
setting the value of unit of silver
99
trade in 112
Sumerian
communities 101
supply
and demand 64, 110, 113, 133, 157, 173-174, 182,
199, 232, 246, 250
surplus
production
leads to religion 88
tally
33-34, 38, 132, 141, 143, 150, 178, 185
a wooden credit card 132
mediaeval 43
tamkarum 129, 136-137
tax
liabilities 246
taxes
replace fees, fines and tribute 227
temple
merchants
in
temples
as banks 36, 90
thaler
26
tin
20
tokens
17-20, 22, 26-28, 35, 38, 52, 65, 74, 93-94, 142,
176-177, 211, 236, 243, 250,
252-254, 260
coins in Ancient Greece were 17
tokens,
private
eventual suppression of 27
tontine
209
Tooke,
Thomas 47
Townshend,
Charles 141, 143
trade
not just barter 118
trade
credit 131, 133, 135, 137, 140-141, 146, 151, 156,
163-164, 167-169, 199,213
trade
cycle 159
is a credit cycle 10
traded
promises 132
transferable
credit money 240
Treasury
37, 147
Treatise on Money by J. M. Keynes 2, 156, 178, 223
tribal
obligations 230
tribal
obligations become taxes 90
tribal
society in
tributes,
tithes, and taxes 228
triens,
the third part of a sou 20
unit
of account 10
271
development of 92
early days of 26
Uruk
111
usury
laws 148
war
debt 60
weights
and measures 61
wergild 7, 103-104, 182
wergild system 228
wergild-type debts 9, 99
wergild-type fines 101, 105, 119
Wisselbank
of
writing
emerges from bookkeeping 94
invented to keep track of economic
transactions 94
Wunsch,
Cornelia 119, 137
* Readers are warned that it is essential to bear constantly in mind the definition of credit, as laid down in the first article. Those who are not accustomed to this literal use of the word “credit,” may find it easier to substitute in their minds the word “debt.” Both words have the same meaning, the one or other being used, according as the situation is being discussed from the point of view of the creditor or the debtor. That which is a credit from the point of view of the creditor is a debt from the point of view of the debtor.
+ Modern governments unfortunately do not limit their issues of money to the payment of purchases. But of this later on.
* I do not wish to be understood as saying that the retail trade followed the standard of the coins, except to the extent that they shared the fate of the king’s livre. Owing to the abuse of the system of “mutations” and the attempted monetary reforms, it is probable that the coins often suffered not only the depreciation of the king’s livre, but had their own independent fluctuations.
+ Like the livre in
* U.B.: Should probably read:
*
* Even when the coins that once were silver were most debased, they were still regarded as silver in theory, though not in practice.
* The views on the subject of gold were, however, rather mixed.
* Owing to the government policy of monopolizing the issue of money in small denominations, the amount in circulation increases largely at certain seasons of the year.