Vox Day is having the same kind of problem with Robert Wenzel and the Economic Policy Journal that I had just about one year ago: it appears that Wenzel and his troop are fundamentally confused about the nature of money, which is why they have been so consistently wrong in anticipating “inflation” due to “money printing by the Fed”, as if currency was the only, or indeed even the primary, form of money.
I think the questions involved are just too abstract for most people, even most very bright people. Money is such a tangible, useful mundane and everyday thing it’s hard to believe that understanding its roots and origins is an intellectual exercise comparable to medieval metaphysics.
And yet this is true. Read this if you don’t believe me (pdf.).
I was looking at that pdf article in connection with some correspondence I was having with Steve Keen – also on the blogroll – who I had read somewhere was a “chartalist“, which is a branch of economics that, well….I don’t know. I mean wikipedia has a description, but I’m not quite sure what it means and I don’t know if anyone else is either.
What I do know is that from what I have seen the chartalist ideas of the origin of money and the government’s role in monetary matters is useful and interesting but, I think, a bit off. It’s good to point out that the nature of money and the nature of government are related, perhaps inseparable. But to identify that relationship is not to explain it or understand it, and this is where chartalists get very close to the issue at hand while very confused people like Robert Wenzel miss the mark completely and trail off into an error filled abyss from which they appear unable to escape.
For my part I’ve discussed money in this metaphysical sense quite a bit on the blog, such as here and here and here. But the best description of the nature of money and the government’s relationship with it and to it is this:
Now the law, as it happens, has a lot to say about money and pretty much always has, although nature herself serves up gold as a medium of exchange and a store of value, and no one had to pass a law for this. It can be discerned by each individual for himself. And it was, from long ago.
Where, then, does the positive, written law of civilization come in on money matters?
When trade and commerce flourish – as they do in civilization as opposed to primitive tribes, for example – people trade freely with gold or other common media of exchange. The law making authority – government – merely defines usable and universally understood quantities and then implements those definitions through bureaus of “weights and measures”. It says, for example, that a “dollar” is defined as 1/20th of an ounce of gold. And then someone brings their gold to the government bureau which can measure out an ounce and stamp it into a $20 coin. And this in fact is what historically happened. You didn’t have to have weight scales at every meat counter.
Then the dollar is divided into more useful quantities: the half-dollar; the quarter, dime, nickel and penny. The penny – 1/100th of a dollar – was and remains the smallest denomination of the currency. People were, of course, free to deal in even smaller quantities if they so wished. But this was the smallest the government was willing to go, for entirely practical reasons. There is no moral objection as such to ever smaller subdivisions of the dollar, but there are practical objections. Imagine if everything was haggled over to fractions of a penny. Trade would basically come to a halt.
It would not be going too far to say that this public service – defining a monetary unit of account and assuring its integrity through bureaus of weights and measures so that people can deal with each other justly and efficiently in commerce – is the very first duty of government. It is also a paradigm of what the government can do with the law, and do well (which is to say effectively) and also of good faith, honesty and integrity. It is the establishment of a clear and readily understood convention that applies to all equally, and favors no one. Just what every law should be, and really what every true law must be – and is.
To the extent the government departs from this important, basic and easily understood function in money matters it has become corrupt, then, in the most fundamental way – with regard to its first and foremost duty. There can be no doubt about this and no alternative conclusion. A government that does not – or worse, refuses to – establish and define its monetary unit of account is a fraud. Nothing about the law, government or civilization itself could be more certain.
The problem with that quote, though, is that I wrote it. It is not a chartalist, or monetarist, or Keynesian, or Austrian, or any other kind of economics school of thought monetary theory or idea. It appears to be unique to me, although I would hasten to add that it is no more than a few baby steps from the understanding imparted to me quite a few years ago by an economics professor named Richard Timberlake. But it’s not a “Timberlake-ian” idea either. I haven’t talked to Antal Fekete about it, but he’s another one of those economists out there who are more or less sui generis, yet this isn’t anything he maintains, either. There’s a lawyer who dabbles in this area as well named Edwin Vieira. He has an impressive resume that includes Harvard this and that, but I don’t think he has broken down the ideas quite this way, either.
Yet for all that, and no matter how alone I may be in my understanding of the nature and origins of money, I’m forced to conclude that I am the only one who has it right. I have no idea why this should be the case, but the scenario I outlined above in that quote is one of those things that seems to be intuitively obvious and self-evident once you achieve a certain minimal level of knowledge in the area.
Why people as smart as Vox Day are missing this probably has something to do with the fact that almost everyone with a keen interest in the subject – with the exception of Mr. Vieira – is a non-lawyer. And when you get to the bottom of economics and begin examining the very foundations of it – the nature of money – you find that money in that sense is always a function of the law.
The chartalists have that much right. But going on from there, I seem to be all by myself again. That doesn’t make me wrong, though sometimes I wish I were.
Lawyers on Strike 
i suggest finding a copy of David Graeber’s book on debt, or the collection of conference papers in “credit and state theories of money”. “When trade and commerce flourish – as they do in civilization as opposed to primitive tribes, for example – people trade freely with gold or other common media of exchange. ” this is historically inaccurate. to say the least. “primitive” tribes” in fact have historically used symbols much closer to credit cards then to gold or “other media of exchange” when dealing within a community (so did serfs in medieval Europe. hence the tally-sticks). bartering happens much more with strangers or possible enemies. historically coinage has emerged alongside wars and the need to feed standing armies by extracting food and labor from the local population (either through expropriation, or more easily through taxation).
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I know from the cited article that Michael Hudson, for example, has done extensive work on the history of money. My intent here was not to duplicate that or challenge it but rather to point out money’s obvious role in facilitating trade and commerce and the legitimate government relationship to money through establishing the unit of account. I wasn’t maintaining that trade and commerce didn’t exist at all in primitive tribes, but I think it is axiomatic that by comparison they don’t “flourish” in primitive societies as they do in more civilized ones.
Thanks for the comment. Merry Christmas.
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A couple of points, first, there is a debate in the theory of money as to which use of money is fundamental. One school, which traces the origin of money to a hypothetical barter (Robinson Crusoe) economy, sometimes incorrectly assumed to be historically true, sees money as chiefly a medium of exchange. The Chartalist view situates the origin of money in credit, with money as a unit of account as fundamental to the accounting. Michael Hudson observes that the earliest records of writing are credit ledger found in Mesopotamia. The unit of account was set by government and used to assess tax obligations to the state, namely, taxes, fees and fines, with state money serving as a tax credit. This was the origin of state money.
There is an extensive body of literature on the history and theory of money, as Nathan pointed out in his comment. For the Chartalist view, see L. Randall Wray, Money, The Credit Money and State Money Approaches and Money, as well as Warren Mosler, Soft Currency Economics for a contemporary analysis.
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It may be that the government sets the unit of account and uses it to assess tax obligations historically. It does not follow that this is the essence of it, and that the government therefore has or should have the power to create money at will with no natural restraints whatever. This is my basic disagreement with the chartalist position. I think it is quite proper, indeed obligatory, for the government to establish and quantify the monetary unit of account, but I also think the government is then as bound by that as anyone else.
What I’ve done in response to some chartalist insights, though, is to revise this position somewhat and run with the idea that the government can have the power to change the definition of the unit of account. But it cannot have the power to eliminate it entirely and leave the unit of account undefined. I can never go that far. It leads to the problems we are experiencing today, and it will always lead to those problems over time.
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What do you see as the problems we are facing today and what do you propose as the reasons for them with respect to the existing monetary system? Presumably you mean the high level of private and public debt. MMT dismisses the significance of sovereign debt for currency sovereigns. See, for example, Scott Fulwiller, Interest Rates and Fiscal Sustainability. The EZ is a different matter since those countries gave up currency sovereignty. MMT predicted the outcome at the time the EMU was entered into. MMT accounts for the private debt level in two ways, Minsky’s financial instability hypothesis (Wray was a student of Minsky) and Wynne Godley’s sectoral balance approach which states that the sum of the government and non-government fiscal balance is zero as an identity. Excessive private indebtedness occurs when government chronically inject too little net financial assets into non-government through its fiscal balance.
I am also not sure what you mean by, “What I’ve done in response to some chartalist insights, though, is to revise this position somewhat and run with the idea that the government can have the power to change the definition of the unit of account. But it cannot have the power to eliminate it entirely and leave the unit of account undefined.” I assume you mean by establishing a numeraire that defines the unit of account in terms of a commodity, like a particular measure of gold of specifies fineness. Really the only effective way to do that is through convertibility, and that means shifting from a non-convertible to a convertible system.
MMT simply begins with a description of the existing monetary system. Then it articulates the policy options given that system. All types of monetary systems have advantages and disadvantages.
MMT observes that convertibility limits policy options, which is the reason that gold convertibility was abandoned during the Great Depression and then ended for international transactions by Nixon in 1971. The tradeoff is a greater possibility of inflation. However, MMT shows how inflation can be avoided through the sectoral balance approach, functional finance, and financial regulation.
Under convertibility the potential for inflation may be less, but there is a greater possibility of deflation and also default, and there is no policy remedy for it short of abandoning convertibility. The chief threat the developed world faces today is deflation, the evidence for which is depression level unemployment and a chronic output gap.
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You come very readily to the point.
This is where economics meets law. Without convertibility, the government is allowed an ipse dixit that renders all the intricate efforts to limit it, such as the constitution, ineffective: the government declares value where there is none. If it can do that, it becomes a law unto itself or, put another way, lawless. To “limit policy options” is simply to say that the government cannot make something so just by saying it, by decree. Policy options are, in fact, thus limited whether the government chooses to recognize it or not, which is precisely why there is no effective way out of the mess we are in other than a jubilee and a reset.
If this principle is formally abandoned you have effectively abandoned the law, at least in terms of what governs us as a practical matter. And if you look around this is exactly what has happened, and this is exactly the complaint that is bubbling up out of the populace at large.
We can be governed by the rule of law or we can submit to an illusory claim that ipse dixit with sufficient force behind it rules the world, but we cannot do both. If that limits policy options, so be it.
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I don’t think you have this quite right. I suggest you read the work of Prof. William K. Black, Associate Professor of Economics and Law at the University of Missouri-Kansas City in the Department of Economics and the School of Law, on the way the financial crisis should have been handled legally and what can still be done about the underlying cause, which was principally a legal matter rather than chiefly a financial one. He subscribes to MMT and fully appreciates the relationship of economics and law. He is a very open person and I am confident he would be open to discussing this with you should you be interested in pursuing it. Here is his contact info.
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It’s great how you go right to the heart of the matter. You are a fearless thinker, right or wrong. This is an extremely admirable quality, and I mean that quite sincerely.
That said, Steve Keen has mentioned Prof. Black to me before. Without going into too much detail right now – I did email him as you suggested – I think it’s fairly obvious that one of the chief lessons of the recent crisis is that criminally prosecuting people has been very ineffective at addressing the issues involved. There are many reasons for this, some having to do with the nature of the criminal justice processes, but the basic reason is the same as for everything else: when the government issues a promise to pay that is not redeemable, the government itself commits a fraud, or what would be a fraud if done by anyone else. No one’s promise to pay can become payment ipse dixit. The promise of payment and payment itself must be distinct, and the latter cannot be in the absolute control of the promissor.
Since there is no principled way to distinguish the conduct itself, in practice it is only distinguished by who does it: the government has the privilege and can extend the privilege to others. Again, in practice, this works out corruptly or arbitrarily, including those circumstances in which the government chooses to prosecute someone. It is quite common for those selected to feel they are being unfairly singled out, for the simple reason that they necessarily are being unfairly singled out. And from the other side, there is no principled way to decide who to prosecute either.
Yet if the same kind of conduct can be perfectly legal and very profitable for some – but criminal for others – that is precisely the collapse of the rule of law. It is different sets of rules for different people. That cannot be remedied by picking who to prosecute better, and in any case there’s no way to do that.
So although clearly Prof. Black’s efforts and background are great, and I am anxious to hear from him, I doubt that he “fully” appreciates the relationship between economics and law, although I am sure that he appreciates it after a fashion.
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I agree with you that the rule of law is breaking down in the current environment, Government has to a great degree been captured by certain elites, and double-standard is being erected that creates privilege for a few and what is in effect repression of basic rights and justice for the rest. I’m sure you will have an interesting discussion with Bill when you get together on this.
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