What is money? (II)

21 Jun, 2021 at 18:28 | Posted in Economics | 16 Comments

Currently the credit theory dominates monetary theorizing and policy debate. So, policy analyses implicitly make assumptions about money as if its properties qua  money were those of a form of debt credit.

Meme: "Money is money!" - All Templates - Meme-arsenal.comCurrently prominent examples include Minsky as well as proponents of Modern Money Theory (MMT). Hyman Minsky, who has been as infl uential as any money theorist in recent times, coined in passing, in a substantive piece, the familiar and frequently repeated aphorism that ‘everyone can create money; the problem is to get it accepted’ . Underpinning this clearly is the credit theory. If the nature of money lies in the nature of credit/debt, then any and all credit/debt is money, even that momentarily accepted between friends or relatives. So, anyone can indeed create money. Credit theorists must accept this. Alfred Mitchell Innes, perhaps the most influential credit theorist, embraced this. He thought that, therefore, any credit/debt ought to serve as a general means of payment. Minsky clearly does not accept the latter implication and was pointing to a problem of how a money qua  a form of debt is to become accepted. MMT proponents follow suit. The story they tell is very much like the one outlined just now re government debt and taxation. In my view, no aspect of the story withstands scrutiny. It is bank debt (positioned as money) not government debt that is involved in money constitution, government taxes and fines are not a debt in any technical or legal sense, and it is far from obvious that people accept to hold money just because they have to use some of it to pay taxes, etc.

Tony Lawson


  1. I think Lawson misses a couple of points that are critical to MMT stories (there are at least two poles and chartalists with a state theory of money occupy one; credit theory occupies the other and MMT dances the slack wire strung between them). First, money extinguishes debt; debt may expand and extend money, but money can also contract and extinguish debt. Second, credit leverages economic rents. Keynes in the original is more than a bit sloppy about the efficiency of capital investment in an uncertain world; Minsky rewrote Keynes in an underappreciated way, by terming returns on capital investment as quasi-rents. Investors are not seeking returns from virtuous additions to productivity; investors in an uncertain world are seeking the assured returns accrued by applied economic power. Debt must be collectable to be credible as money stable in its unit of account. The state in its fiscal capacity is competing as the ultimate extractor of economic rents and vast torrent of taxes and bond payments associated with a marketable national debt serves to stablize the unit of account, which providing hedges to private lending and credit creation.

    • The earliest documented money was barley and silver. Two material with several special charecteristics. Barley was the standard for paying taxes/rent/land lease in the earliest known states. This was done by taking 1/3 of the crop at the treshing. The special characteristics wich still adheres to whatever is named money is that barley by adding human work (planting, watering etc.) grew in value over time. This value-growth was also an function of the photosynthesis and the end result was much more barley. Up to 100 times more according to Mesopotamian sources from the period. The ability to feed hungry workers and by that being able to decide what work should be done.
      Silver on the other hand has (or had then anyway) a very stable value. Its value in feeding hungry workers depended totally on the conversion factor. Which was established by the state – the Palace. Probably a sort of trade agreement with other palaces, which lacked foodstuffs but could produce timber and stone and useful metals. And which accepted the exchange value of sliver to deliver ston or timber or usefuli metals.
      The market value (supply and demand) for barley varied depending on hunger and if it was harvest time. To keep the exchange between barley and silver between the palaces on the same level, the value of silver also had to be adjusted depending on time of the year. And as there was an extra growth factor in barley from the photosynthesis, this came to be written in for silver also. Silver “loans” fromthe palaces or other actors to the Mesopotamian traders was given an rent of 20 percent.
      Money and its value – including the rent illusion – seems to be possible to explain from human social experience, class interests and the keeping up of traditions.

      • The unit of account (in Mesopotamia) was a quantity of barley. It does not follow that barley itself was used as money. The temple issued clay tokens as receipts for barley deposits. It seems likely that these would have been used as money, though evidence is lacking. Silver was primarily used in foreign trade.

        • The unitt of account in Mesopotamia (UR III) was a quantity of barley and/or a weight of silver. Both were used one and one and together. The important step in going from commoditty-money (wich were a method of measuring working-time) to what we call real money was de decision to declare an equivalence betwean a certain measure of barley and a certain weight of silver. The reason for this declaration might have been that Mesopotamia produced surplus of foodstuffs (mostly grain – barley) and that the mountainous areas around the crescent coud produce stone and metals, butt lacked in foodstuff. One usful text is https://mprl-series.mpg.de/media/proceedings/11/6/Proceedings11Chap06.pdf and in Englunds HARD WORK-WHERE WILL IT GET YOU? LABOR MANAGEMENT IN UR I11 MESOPOTAMIA we find a translation of a cuneiform document “37 female workers (receiving) 3 (ban of barley
          iti.12.Sk per month over a period of) 12 months, ” that is barley used as money in money wages.and Englund writes “Depending on the economic sector, silver, barley, fish, or workdays served as means of comparison or as measure of standardized norms and performance expectations.

          • The temple set exchange rates, or prices, for various commodities, yes. The reason being, surely, to facilitate accounting for trade.
            Your paper is a bit meta for me. My ruminations on money have not yet led me to need a theory of value. The interesting parts don’t seem to contradict my view.
            I’m not convinced you can conclude from that tablet that barley itself was used as money. Two other possible interpretations occur to me:
            1) The women were fed not paid.
            2) The women were paid in money denominated in a unit of account which happened to be named after a quantity of food.

            • The answer to the question of fed not paid or “paid in money denominated in a unit of account which happened to be named after a quantity of food” might be found in the beerhouses. Which used barley to make the beer.

      • The unit of account often has a mythic tie to something more tangible and apparently always had. Money — a fiction after all — needs a good story. Your account made me think of FDR and the gold standard in 1933: all the theatre associated with fixing a price for gold and piling up bullion in vaults at Fort Knox even as actually using or even owning gold as a monetary metal was made absolutely illegal for any but the state.
        I think MMT would assert that stabilizing the unit of account for a fiat currency is accomplished by the managed operations of governments and banks (aka palaces).
        I do wonder why anyone can be convinced that, unmanaged, any commodity — grain or metal — is “naturally” anything but volatile. The point of money is to build a bridge to the future that establishes mechanism for resolving the inevitability of surprise and disappointed expectations.

        • The good story was barley. Wich actually grew over time when left on its on own in the ground. It seems probable thatt agriculture began by collecting without previus seeding. https://en.wikipedia.org/wiki/Ohalo_II That story was lost in translation to Grece and Rome. Even Aristotle got problems when trying to explain with goats and sheep. The creation of money was not the use of different goods as tokens for value but part of the trade agreement between sovereigns inside the fertile crescent and on the outside, to lock a certain volume of barley to a certain weight silver. This combination and abstraction of labor in agriculture and mining/metalsmithing to a common value. The amounts were probably established by comparing the output per capita and year (or years) between a barley village and a silver village. Money is of cause always managed. Ánd to change the management takes social revolution (not only changing of the guards).

  2. This is quite good hitting many points as to the real nature of money.

  3. And yet you then have to explain why the USD is the general means of payment in the USA, why the CAD is the general means of payment in Canada; but neither country’s currency is generally accepted in the other country.

  4. “If the nature of money lies in the nature of credit/debt, then any and all credit/debt is money, even that momentarily accepted between friends or relatives.”

    Not so. The credit must be transferable to be money, i.e. a third party may accept it in payment if they believe its issuer will redeem it.

    “it is far from obvious that people accept to hold money just because they have to use some of it to pay taxes”

    There are clear historical examples, as I recall Innes cites some of them. Lawson is offbase here, the MMT story holds up though I don’t think it is complete.

  5. Almost everything considered money has a degree of risk. From a US perspective:
    1. US Dollar bills are risk free. They are explicitly good for settlement of all transactions.
    2. Insured deposits are basically cash equivalents; maybe you could lack access for a day during a bank resolution.
    3. Short term Treasury bills are mostly risk-free; there is very short-term price risk and tight b/o
    4. Longer term Treasury bills and bonds; have duration/price risk
    5. Uninsured bank deposits; have some degree of counterparty risk
    6. Treasury-only MMMF; while they can mark at par there is some minor redemtion risk
    7. Prime MMMF – price risk
    8. ABCP, Corp bonds, etc have credit and duration risk
    9. Commodities, crypto, etc: ha ha ha

  6. Yes and all this is validated by among others David Graeber in his book “Debt The First 5000 Years”. The old Robinson Crusoe story from Adam Smith,etc. is proven to be wrong by empirical evidence.It´s time to move on. https://wiserdaily.wordpress.com/2016/06/15/history-2-origin-of-money/

    • When I followed your link I came to a text where money is silver or coins. The roots to the strange behaviour of money instead lies in the (artificial) eqvivalence between barley and silver. Which as far as I can understand it was made quite some time – kYears- before the earliest “metalism” and coins.

  7. Money – as far as I have been able to trace it – began as Barley and Silver. Barley was the export from Mesopotamia ans Silver was a useful token for credit, as there was no metal at all in Mesopotamia. Silver was more expensive to forge than to buy. Outside Mesopotamia Barley was valuable – concentrated and durable food. Where food was scarce.
    The absurd idéa of rent/profit etc. might have traveled over from Barley and the multiplication from seeding to crop. There is an interesting diagram showing the extreme acceleration in human energy capture by the Neolithic revolution and the sedentary agriculture in http://kfrserver.natur.cuni.cz/gztu/pdf/HABERL_energeticMetabolism_sustainability_2006.pdf (fig 1 s.91)
    That extreme acceleration may have created the illusion that rent had some sort of natural base.

    • Modern Money & Public Purpose 1:
      The Historical Evolution of Money and Debt
      -L. Randall Wray, Research Director of the Center for Full Employment and Price Stability and Professor of Economics, University of Missouri-Kansas City
      – Michael Hudson, President, Institute for the Study of Long-Term Economic Trends and Distinguished Research Professor, University of Missouri-Kansas City

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