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Wednesday, May 18, 2016

Should We Care About The History Of Money?

When reading about economic theory, one of the arcane areas of argument that comes up is the origin of money. From the perspective of knowledge for the sake of knowledge is a good thing, one cannot complain about this. However, if you are interested in understanding the current monetary system, this debate is largely a red herring. In this post, I discuss some of the criticisms of  "neo-Chartalism" by Anwar Shaikh in his new book Capitalism (link to my discussion of that book).

(UPDATE) I realise now that I should have given this article the title "Should We Care About The Origins Of Money?" I will leave the article title as-is, but I want to emphasise that I am just referring to the study of the historical origins of money, and not all monetary history. For example, we need to look at the history of 1930s to understand the implications of a currency peg system.

What Is Chartalism?

Chartalism could be summarised as "the state theory of money:" money is a unit of account that is given value by the taxing power of the state. Probably the only reason that anyone is interested in the theory is that it was adopted by Modern Monetary Theory (MMT). I wrote a short primer on what I saw as the modern implications of the idea, but it probably would have been better to use the term "neo-Chartalism" instead of Chartalism in that article.

Chartalism as a school of historical thought was mainly associated with Innes and Knapp, who published about a century ago. Although they have been quoted by various MMT authors, my reading of the MMT literature is that the specifics of their historical theories were viewed as extremely important. Anwar Shaikh describes the historical context of their work, and argues that that the details of their theories do not stand up completely to modern scrutiny.

These authors were saved from obscurity as the result of Keynes approval of Knapp's theory, and his argument that we have had "state money" for 4000 years. (Hence the term "modern money" was a bit of an in-joke.) The MMT version of Chartalism is focussed more on how taxes drive the value of the money, rather than its historical origins, and is sometimes called "neo-Chartalism" to distinguish it from the earlier version of the theory.

Shaikh Versus MMT

Although Shaikh's text is academic and even-handed, one can read between the lines and see that he is not particularly amused with MMT. In addition to taking on the historical theories of Knapp and Innes, he criticises the writings of modern MMT authors, such as Randall Wray.

My reading of his complaints are that they are political, and lack substance. In Chapter 15 of Capitalism, he states that MMT authors "extol the powers of the state," and that the theories are based on a government that "spontaneously arises, and in the interest of benefitting the population, imposes a monetary tax on them..."

He then discusses the struggles of the British colonial authorities to impose the use of the pound in their Nigerian colony. 

None of this is novel to anyone familiar with the wider MMT literature. Most MMT discussions of taxes emphasise the fact that taxes are imposed. Imposition implies force. In Chapter 3 of Randall Wray's Understanding Modern Money, he discusses how real world colonial governors imposed the usage of European currencies in their colonies.

Is Modern Macro Useful Outside Of Modern Societies?

Shaikh also draws a distinction between a "debt" and a tax liability imposed by the state. From a technical standpoint, he is presumably correct. However, this is a purely technical distinction, and it does not completely reflect common usage of terms. In English, we say that we "owe money to the government" if we have taxes due, which is the same phrasing we use for financial obligations that are undoubtedly debt. (David Graeber argues in Debt: The First 5000 Years that formal debt obligations piggy-backed upon the social obligations that already existed in societies, which is why there has been strong acceptance amongst individuals of the need to pay back debt.)

More generally, he argues that we cannot use the terminology "debt" for all of the various social obligations incurred in traditional societies.

One again, this is reasonable, but it is unclear why this would come up in a book about economic theory of capitalist societies. Modern economic theory has absolutely nothing useful to say about the practical problems that would face the inhabitants of a group organised around ceremonial gift-giving (potlatch). Is an analysis of the governmental budget constraint going to offer insights about what is the best strategy for gift giving over the next three fishing seasons? How are we going to adapt utility functions to the society where the objective is to give objects away for the consumption of others? The deep insight of growth economics -- that people need to be more productive -- is even more vacuous when translated to a non-industrial society. "When you go fishing, catch more fish per hour!" is advice that is not going to impress anyone.

Even if we look at a somewhat familiar society like the Roman Empire, it is unclear that modern economic theory would have anything useful to say.It is unclear that a rigid distinction between the "private sector" and the "public sector" is applicable anywhere outside of nation-states with a permanent bureaucratic government.

(Of course, one might argue that modern economic theory has almost nothing useful to say about the real economic problems facing modern societies, such resource depletion and climate change.)

Perhaps modern economic theory could give some nuggets of wisdom to other societies. At the same time, we could say the same thing about the works of William Shakespeare.

Origins Of Money

If we have a hard time applying modern economic theory to ancient societies, it is straightforward to see that we cannot get too exercised about the instruments that they used as money. For us, the notion of money is intertwined with the existence of a banking system. Modern banking system developed over centuries, and they are far more complex entities than their equivalents in earlier eras. We will have a hard time relating our notions of money to the views of ancients.

As a result, Shaikh is entirely reasonable to ask why some MMT authors invoke a 4000 year history of state money in order to justify a Job Guarantee programme. This topic is best viewed as an eccentric academic debate.

The bigger question is why the topic of the origin of money even arose in the first place. One argument is that the MMT authors were properly placing their work within the academic tradition. However, another explanation is that they are attempting to counter-act myths about the Gold Standard by creating new narrative about the origin of money. (A standard way of framing the debate about the Gold Standard is to argue that men existed in free market economic harmony, based upon the free exchange of goods for gold. Then governments interfered with the functioning of money, causing all manners of economic dysfunction. Returning to the Gold Standard will help return us to this idyllic state once again.)

As a political strategy, it may make sense to re-frame the discussion of the origin of money. However, it is probably not a good idea wasting intellectual capital engaging in arguments about the exact nature of Babylonian commerce.

(c) Brian Romanchuk 2016


  1. " he states that MMT authors "extol the powers of the state," and that the theories are based on a government that "spontaneously arises, and in the interest of benefitting the population, imposes a monetary tax on them...""



  2. Being not familiar with the MMT literature I am guessing the logic goes like this:

    The state arises to fulfil the needs of its citizens, this requires the ability to finance these needs, taxation being the means.

    The taxation powers of the state are justified by the social obligations of the citizens of the state.

    In return the state guarantees the employability of citizens (i.e. the Job Guarantee).

    Money arises as a means by which tax is efficiently raised and then redistributed as required.

    Does this make any sense? Is it the logic behind MMT?


    1. I would say yes, although MMT does not go to far into the justification of government policy; the assumption is that the reader can come up with reasons why we need a government.

      But they do argue that money is very useful for raising taxes. The historical alternative was payment-in-kind, but that is an unworkable system once economic activity is specialised. People producing things that are not useful for a war would avoid supporting a war, which is obviously unfair.

    2. Here you need to read John Henry's paper on the origins of money in Egypt. Hydro engineers who traveled all around the country progressively lost ties with tribal members and started to think of way to gain control over the production and distribution of output.
      Religion takes over magic progressively as hydro engineers promote irrational thinking to benefit themselves (basically, if you do not give me what I want the gods won't provide water).
      So the state did not emerge spontaneously and to benefit others. It emerges to control output via deceit (religion) and force for the benefit of a few. Money and accounting emerged to track dues and their fulfillment

  3. We should care about the origins of money. I think that the reason Wray emphasizes the history of money is to show that the classic econ story of money evolving as a way to facilitate barter exchange in previously (supposedly) exclusively barter exchange economies is the wrong way to look at the function of money. Especially in our monetary economies today. That false (in my opinion) barter exchange history is still being used today as a foundation to support a lot of very shaky neoclassical economics.

    1. I would agree that there was a lot of shoddy history in old classical textbooks, but I have not seen stories of barter in the modern neoclassical literature. No equations.

      But even if the ancients engaged in barter, would it affect whether or not the economy today is a barter economy?

      Furthermore, it is not just barter, there is the debate about the origin of money -public or private? If you look at Canada, we had free banking and privately issued tokens as money (I wrote about the tokens earlier). I am not an expert on the free banking part, but the system was only lightly regulated. (To what extent there was a central bank, it was the Bank of England, and the English did not care too much about what happened to some colonists in the frozen tundra.) One could easily argue that the Canadian dollar's origins were private, and the state money came later. Does this invalidate the theory of MMT about the present state of the Canadian dollar?

    2. Does this invalidate the theory of MMT about the present state of the Canadian dollar? I guess not. As long as you preface every discussion with "this all applies only in the situation where the government is the monopoly issuer of the freely floating fiat currency and where that government has the ability to tax effectively and accepts payment of that tax in its own currency. Actually, that is what most of the MMT scholars do seem to say almost each and every time. I imagine it must get very tiring to do so :)

    3. As an aside, I gave a longer answer to your and Tom Hickey's comments in a new article. I really did not think about the barter issue when writing the article; I was focussed on the questions raised by Shaikh.

      As for the assumption about free-floating currencies, it's a real pain. I have just finished off my next report, and discussed the assumption in Chapter 1, and wrote that it applies to everything in the report. The problem is when people quote you without providing that context; you then end up having to backtrack what you originally wrote, adding in the qualifications that are skipped in the text that they quoted.


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