This is the fourth in a series of posts on money. Part I. Part II. Part III.
We now have two types of stories about money. In one, money is accepted because it represents some specific person’s promise. The tally sticks on which medieval innkeepers recorded customers’ debts, and which themselves could be used as a means of payment. The statements of ownership of grain in temple storehouses in Mesopotamia, statements that could change hands to buy things without the grain itself moving an inch. The tokens in my mill parable.
In the other kind of story, money is a completely arbitrary social convention. I accept these things as money because I know that you will do the same, and you accept them because you know that someone else will, and so on. But nobody has taken upon themselves an obligation to accept them. We have an infinite regress, floating free from any specific promise by any specific entity.
Is there any reason we should prefer a story of money as a debt or a promise, over an idea of money as a pure social convention? After all, what matters to you as a user of money in your everyday life is that others will accept it in the same way as you do. Why they accept it isn’t important. It turns out there are two reasons to go with a debt story: evidence, and origins.
First, we have plenty of evidence that records of debt do serve as money, such as the examples above. It’s not that debt accounts for all money. There’s the case of the “social currencies” used in some societies to establish and repair social relationships (arrange a marriage, atone for a murder). These might be shells or giant stone wheels—things that are neither useful in themselves nor representations of any particular person’s obligation. They are pure social convention: this thing is money because we all agree that it is money. There are gold and silver, which at various times in various places have attained a status of being money in and of themselves. But promises also serve as money. My story of the mill is a simplified parable to lay bare the underlying mechanism, but the idea behind it is real.
Second, there’s the problem of origins of a system where money is only a convention, without a promise behind it. Once it’s up and running, it works, but how does it get started? Somebody has to be the first one to accept a thing as money, and to do that they need to believe that others will also accept it, and that's a reasonable thing for them to believe because … ? And there’s no good answer to that.
If money starts as debt or as transferable records of ownership of some real thing, the problem of origins goes away. Your reason for starting to accept money is as clear as the individual promise behind it. If you trust the promise, or if you trust the temple priests to acknowledge the statement of ownership, then the thing you’re using as money is not an arbitrary social convention. It is inherently a claim on something real. That’s not changed by the fact that you can use it to buy, in principle, anything, not just the thing that it directly gives you a right to. The promise or the statement of ownership is merely the backing, the reality that gives other people the confidence to accept money as money, for whatever purpose they may conceive.
So the debt story has a lot to recommend it. And we can add a useful twist on it by bringing in a state or government.
The state can impose a tax, and it can simultaneously specify that your tax obligation is to be discharged in these things—these coins with the king’s profile on them, these dollars, whatever the state chooses. Now there’s a clear motive for other people to accept the money as payment. You have to pay taxes, and this money stuff is what you need in order to pay them. And even if you yourself don’t owe any taxes, other people will, and their tax-driven willingness to accept the state’s money gives you a good reason to accept it yourself. This is the kernel of the idea of money known as “chartalism.”
The state has played a nice trick on the principle of debt-backed money. In the parable of the mill, the tokens that I issued had value because they represented my credible promise to provide something of value to anyone who handed one over to me. State money is different. The government hasn’t taken on an obligation to hand you something valuable when you bring in its coins. Instead, it has imposed an obligation upon you, but promised that you will be released from that obligation if you bring in its tokens.
This has some advantages over the use of voluntary, private debts as the backing of money. For those private arrangements to work, enough people have to have reason to believe that the creditor, the one making the promise, will have both the ability and the will to honor his/her promise. Governments typically don’t have that kind of credibility problem. Do you think the government will impose taxes? Do you think the government will insist that people actually pay those taxes using the government’s form of money? Then you have every reason to believe that other people will accept the government’s form of money.
There’s also the question of geographic reach. The usefulness of a private loan as money is limited by the area over which the borrower can be known well enough for people to trust his promise. A government’s credibility reaches into every corner of the territory over which it exercises effective control, everywhere that it can actually collect taxes.
What about gold and silver? I slipped them an exception above and wrote that they have sometimes “attained a status of being money in and of themselves.” When people were trading long distances, beyond the range of their own sovereign’s ability to tax (and to regulate economic affairs in general), they sometimes used precious metals as something acceptable “internationally.” And when invaders looted cities, they would often strip the churches or temples of gold and silver decoration; the attackers placed no artistic value on what they stole, but they knew that if they melted it down they could get it accepted far and wide. So there is something peculiar about the role of gold and silver, something I can’t thoroughly explain.
But that “something” should not be confused with the idea that precious metals are inhernetly money, or that any other form of money is only “honest” or “true” if it represents a claim on some specific amount of gold or silver. To see the fallacy here, consider the case of silver and gold coins, stamped with the king’s likeness.
If the metal itself is the essence of the money, then what’s the point of stamping the king’s face all over it? It’s a lot of work for nothing. Well, not really for nothing, because precious-metal coins typically traded at greater value than the equal quantity of unstamped metal. The king could use a single one of his silver coins to buy unstamped silver weighing as much as two of his coins. So his face on the coin was worth something after all. But why?
One answer is that the monarch’s stamp was a way of “vouching for” the weight and purity of the coin. In this explanation, the metal is still the thing that is the real carrier of the coin’s value; the royal imagery merely saves you the time of precisely weighing and chemically testing every coin that you’re offered. This sounds plausible, but …
It turns out that a funny thing happened at the border of the kingdom. Coins that had literally been “worth more than their weight in gold,” suddenly weren’t. If the king’s face was there only as authentication of the coin’s metal content, that shouldn’t have happened. People on the other side of the border weren’t part of the kingdom, but they should have had some sense of the king’s honesty. What was different about these “foreigners” was that they had no legal obligations to some other country’s king. Since he couldn’t force them to pay tax in his coin, they had no reason to accept his coins for anything more than their underlying value. (Well, they had a little reason, for when they did trade across the border.)
The upshot is that money is as money does, and there are things that function perfectly well as money even though they are “no more” than promises of debt or valid payment of tax obligations.