It might be helpful, then, to consider what these alternative theories actually were.
Mitchell-Innes was an exponent of what came to be known as the Credit Theory of money, a position that over the course of the nineteenth century had its most avid proponents not in Mitchell-Innes’s native Britain but in the two up-and-coming rival powers of the day, the United States and Germany. Credit Theorists insisted that money is not a commodity but an accounting tool. In other words, it is not a “thing” at all. You can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter. Units of currency are merely abstract units of measurement, and as the credit theorists correctly noted, historically, such abstract systems of accounting emerged long before the use of any particular token of exchange.
The obvious next question is: If money is a just a yardstick, what then does it measure? The answer was simple: debt. A coin is, effectively, an IOU. Whereas conventional wisdom holds that a banknote is, or should be, a promise to pay a certain amount of “real money” (gold, silver, whatever that might be taken to mean), Credit Theorists argued that a banknote is simply the promise to pay
of the same value as an ounce of gold. But that’s all that money ever is. There’s no fundamental difference in this respect between a silver dollar, a Susan B. Anthony dollar coin made of a copper-nickel alloy designed to look vaguely like gold, a green piece of paper with a picture of George Washington on it, or a digital blip on some bank’s computer. Conceptually, the idea that a piece of gold is really just an IOU is always rather difficult to wrap one’s head around, but something like this must be true, because even when gold and silver coins were in use, they almost never circulated at their bullion value.
How could credit money come about? Let us return to the economics professors’ imaginary town. Say, for example, that Joshua were to give his shoes to Henry, and, rather than Henry owing him a favor, Henry promises him something of equivalent value.
Henry gives Joshua an IOU. Joshua could wait for Henry to have something useful, and then redeem it. In that case Henry would rip up the IOU and the story would be over. But say Joshua were to pass the IOU on to a third party—Sheila—to whom he owes something else. He could tick it off against his debt to a fourth party, Lola—now Henry will owe that amount to her. Hence is money born. Because there’s no logical end to it. Say Sheila now wishes to acquire a pair of shoes from Edith; she can just hand Edith the IOU, and assure her that Henry is good for it. In principle, there’s no reason that the IOU could not continue
circulating around town for years—provided people continue to have faith in Henry. In fact, if it goes on long enough, people might forget about the issuer entirely. Things like this do happen. The anthropologist Keith Hart once told me a story about his brother, who in the ‘50s was a British soldier stationed in Hong Kong. Soldiers used to pay their bar tabs by writing checks on accounts back in England. Local merchants would often simply endorse them over to each other and pass them around as currency: once, he saw one of his own checks, written six months before, on the counter of a local vendor covered with about forty different tiny inscriptions in Chinese.
What credit theorists like Mitchell-Innes were arguing is that even if Henry gave Joshua a gold coin instead of a piece of paper, the situation would be essentially the same. A gold coin is a promise to pay something else of equivalent value to a gold coin. After all, a gold coin is not actually useful in itself. One only accepts it because one assumes other people will.
In this sense, the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other human beings.
This element of trust of course makes everything more complicated. Early banknotes circulated via a process almost exactly like what I’ve just described, except that, like the Chinese merchants, each recipient added his or her signature to guarantee the debt’s legitimacy. But generally, the difficulty in the Chartalist position—this is what it came to be called, from the Latin
, or token—is to establish why people would continue to trust a piece of paper. After all, why couldn’t anyone just sign Henry’s name on an IOU? True, this sort of debt-token system might work within a small village where everyone knew one another, or even among a more dispersed community like sixteenth-century Italian or twentieth-century Chinese merchants, where everyone at least had ways of keeping track of everybody else. But systems like these cannot create a full-blown currency system, and there’s no evidence that they ever have. Providing a sufficient number of IOUs to allow everyone even in a medium-sized city to be able to carry out a significant portion of their daily transactions in such currency would require millions of tokens.
To be able to guarantee all of them, Henry would have to be almost unimaginably rich.
All this would be much less of a problem, however, if Henry were, say, Henry II, King of England, Duke of Normandy, Lord of Ireland, and Count of Anjou.
The real impetus for the Chartalist position, in fact, came out of what came to be known as the “German Historical School,” whose
most famous exponent was the historian G.F. Knapp, whose
State Theory of Money
first appeared in 1905.
If money is simply a unit of measure, it makes sense that emperors and kings should concern themselves with such matters. Emperors and kings are almost always concerned to established uniform systems of weights and measures throughout their kingdoms. It is also true, as Knapp observed, that once established, such systems tend to remain remarkably stable over time. During the reign of the actual Henry II (1154–1189), just about everyone in Western Europe was still keeping their accounts using the monetary system established by Charlemagne some 350 years earlier—that is, using pounds, shillings, and pence—despite the fact that some of these coins had never existed (Charlemagne never actually struck a silver pound), none of Charlemagne’s actual shillings and pence remained in circulation, and those coins that did circulate tended to vary enormously in size, weight, purity, and value.
According to the Chartalists, this doesn’t really matter. What matters is that there is a uniform system for measuring credits and debts, and that this system remains stable over time. The case of Charlemagne’s currency is particularly dramatic because his actual empire dissolved quite quickly, but the monetary system he created continued to be used, for keeping accounts, within his former territories for more than 800 years. It was referred to, in the sixteenth century, quite explicitly as “imaginary money,” and derniers and livres were only completely abandoned, as units of account, around the time of the French Revolution.
According to Knapp, whether or not the actual, physical money stuff in circulation corresponds to this “imaginary money” is not particularly important. It makes no real difference whether it’s pure silver, debased silver, leather tokens, or dried cod—provided the state is willing to accept it in payment of taxes. Because whatever the state was willing to accept, for that reason, became currency. One of the most important forms of currency in England in Henry’s time were notched “tally sticks” used to record debts. Tally sticks were quite explicitly IOUs: both parties to a transaction would take a hazelwood twig, notch it to indicate the amount owed, and then split it in half. The creditor would keep one half, called “the stock” (hence the origin of the term “stock holder”) and the debtor kept the other, called “the stub” (hence the origin of the term “ticket stub.”) Tax assessors used such twigs to calculate amounts owed by local sheriffs. Often, though, rather than wait for the taxes to come due, Henry’s exchequer would often sell the tallies at a discount, and they would circulate, as tokens of debt owed to the government, to anyone willing to trade for them.
Modern banknotes actually work on a similar principle, except in reverse.
Recall here the little parable about Henry’s IOU. The reader might have noticed one puzzling aspect of the equation: the IOU can operate as money only as long as Henry never pays his debt. In fact this is precisely the logic on which the Bank of England—the first successful modern central bank—was originally founded. In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank—in effect, to circulate or “monetize” the newly created royal debt. This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it), but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist.
If nothing else, this approach helps solve one of the obvious mysteries of the fiscal policy of so many early kingdoms: Why did they make subjects pay taxes at all? This is not a question we’re used to asking. The answer seems self-evident. Governments demand taxes because they wish to get their hands on people’s money. But if Smith was right, and gold and silver became money through the natural workings of the market completely independently of governments, then wouldn’t the obvious thing be to just grab control of the gold and silver mines? Then the king would have all the money he could possibly need. In fact, this is what ancient kings would normally do. If there were gold and silver mines in their territory, they would usually take control of them. So what exactly was the point of extracting the gold, stamping one’s picture on it, causing it to circulate among one’s subjects—and then demanding that those same subjects give it back again?
This does seem a bit of a puzzle. But if money and markets do not emerge spontaneously, it actually makes perfect sense. Because this is the simplest and most efficient way to bring markets into being. Let us take a hypothetical example. Say a king wishes to support a standing army of fifty thousand men. Under ancient or medieval conditions, feeding such a force was an enormous problem—unless they were on the march, one would need to employ almost as many men and animals just to locate, acquire, and transport the necessary provisions.
On the other hand, if one simply hands out coins to the soldiers and
then demands that every family in the kingdom was obliged to pay one of those coins back to you, one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with things they want. Markets are brought into existence as a side effect.
This is a bit of a cartoon version, but it is very clear that markets did spring up around ancient armies; one need only take a glance at Kautilya’s
, the Sassanian “circle of sovereignty,” or the Chinese “Discourses on Salt and Iron” to discover that most ancient rulers spent a great deal of their time thinking about the relation between mines, soldiers, taxes, and food. Most concluded that the creation of markets of this sort was not just convenient for feeding soldiers, but useful in all sorts of ways, since it meant officials no longer had to requisition everything they needed directly from the populace, or figure out a way to produce it on royal estates or royal workshops. In other words, despite the dogged liberal assumption—again, coming from Smith’s legacy—that the existence of states and markets are somehow opposed, the historical record implies that exactly the opposite is the case. Stateless societies tend also to be without markets.
As one might imagine, state theories of money have always been anathema to mainstream economists working in the tradition of Adam Smith. In fact, Chartalism has tended to be seen as a populist underside of economic theory, favored mainly by cranks.
The curious thing is that the mainstream economists often ended up actually working for governments and advising such governments to pursue policies much like those the Chartalists described—that is, tax policies designed to create markets where they had not existed before—despite the fact that they were in theory committed to Smith’s argument that markets develop spontaneously of their own accord.
This was particularly true in the colonial world. To return to Madagascar for a moment: I have already mentioned that one of the first things that the French general Gallieni, conqueror of Madagascar, did when the conquest of the island was complete in 1901 was to impose a head tax. Not only was this tax quite high, it was also only payable in newly issued Malagasy francs. In other words, Gallieni did indeed print money and then demand that everyone in the country give some of that money back to him.
Most striking of all, though, was language he used to describe this tax. It was referred to as the
the “educational” or “moralizing tax.” In other words, it was designed—to adopt the
language of the day—to teach the natives the value of work. Since the “educational tax” came due shortly after harvest time, the easiest way for farmers to pay it was to sell a portion of their rice crop to the Chinese or Indian merchants who soon installed themselves in small towns across the country. However, harvest was when the market price of rice was, for obvious reasons, at its lowest; if one sold too much of one’s crop, that meant one would not have enough left to feed one’s family for the entire year, and thus be forced to buy one’s own rice back, on credit, from those same merchants later in the year when prices were much higher. As a result, farmers quickly fell hopelessly into debt (the merchants doubling as loan sharks). The easiest ways to pay back the debt was either to find some kind of cash crop to sell—to start growing coffee, or pineapples—or else to send one’s children off to work for wages in the city, or on one of the plantations that French colonists were establishing across the island. The whole project might seem no more than a cynical scheme to squeeze cheap labor out of the peasantry, and it was that, but it was also something more. The colonial government was were also quite explicit (at least in their own internal policy documents), about the need to make sure that peasants had at least some money of their own left over, and to ensure that they became accustomed to the minor luxuries—parasols, lipstick, cookies—available at the Chinese shops. It was crucial that they develop new tastes, habits, and expectations; that they lay the foundations of a consumer demand that would endure long after the conquerors had left, and keep Madagascar forever tied to France.