THE CREDIT MONEY AND STATE MONEY APPROACHES
L. Randall Wray
primary purpose of this article will be to draw out explicitly the link between
the state money and credit money approaches, after first discussing the nature
of money via historical and sociological analysis.
IMPORTANCE OF THE HISTORICAL RECORD
analyses of money begin with some story about the evolution of money from sea
shells, to precious metals, to bank deposits and finally to modern “fiat” money.
Why do economists feel a need to turn to history? I suppose it is primarily to
shed light on the nature of money, to focus attention on those characteristics
of money that they believe to be essential. The barter story highlights the
medium of exchange and store of value functions of money. A natural propensity
to truck and barter is taken for granted. Attention is diverted away from social
behavior and toward individual utility calculation. Social power and economic
classes are purged from the analysis, while “the market” is exalted. Fundamental
change, if it exists at all, is transactions-cost reducing except where
government interferes, creating inefficiencies.
contrast, the credit approach locates the origin of money in credit and debt
relations, while markets are secondary or even non-existent. The analysis is
social—at the very least it requires a bilateral relation between debtor and
creditor. The unit of account is emphasized as the numeraire in which credits
and debts are measured. The store of value function could also be important, for
one stores wealth in the form of others’ debts. On the other hand, the medium of
exchange function is de-emphasized; indeed, one could imagine credits and debits
without a functioning market.
of those adopting a credit approach would want to push social analysis much
farther. Innes (1913, 1914, 1932) suggests that we can locate the origins of
credit and debt relations in the elaborate system of tribal wergild designed to
prevent blood feuds. Wergild fines were paid directly to victims and their
families, and were established and levied by public assemblies. A long list
fines for each possible transgression was developed, and a designated
“rememberer” would be responsible for passing it down to the next generation.
Note that each fine was levied in terms of a particular good that was both
useful to the victim and more-or-less easily obtained by the perpetrator.
Hudson (2004) reports, the words for debt in most languages are synonymous with
sin or guilt, reflecting these early reparations for personal injury.
Originally, until one paid the wergild fine, one was “liable”, or “indebted” to
the victim. We still think of a traffic fine as an “obligation” to pay, and
speak of the criminal’s debt to society. Hudson also makes it clear that the
words for money, fines, tribute, tithes, debts, manprice, sin, and, finally,
taxes are so often linked as to eliminate the possibility of coincidence. It is
almost certain that wergild fines were gradually converted to payments made to
an authority. This could not occur in an egalitarian tribal society, but had to
await the rise of some sort of ruling class. As Henry (2004) argues for the case
of Egypt, the earliest ruling classes were probably religious officials, who
demanded tithes (ostensibly, to keep the gods happy). Alternatively, conquerors
require payments of tribute by a subject population. Tithes and tribute thus
came to replace wergild fines, and fines for “transgressions against society”,
paid to the rightful ruler, could be levied for almost any conceivable activity.
Eventually, taxes would replace most fees, fines and tribute. These could be
self-imposed as democracy swept away the divine right of kings to receive such
payments. “Voluntarily-imposed” taxes proved superior to payments based on naked
power or religious fraud because of the social nature of the decision to impose
them “for the public good”. The notion that such taxes “pay for” provision of
“public goods” like defense or infrastructure added another layer of
justification, as did the occasionally successful attempt to convert taxes from
a “liability” to a “responsibility”. In any case, with the development of
“civil” society and reliance mostly on payment of taxes rather than fines,
tithes, or tribute, the origin of such payments in the wergild tradition have
been wiped clean from the collective consciousness.
key innovation, then, lay in the transformation of what had been the
transgressor’s debt to the victim to a universal “debt” or tax obligation
imposed by and payable to the authority. The next step was the recognition that
the obligations could be standardized in terms of a unit of account. At first,
the authority might have levied a variety of fines (and tributes, tithes, and
taxes), in terms of goods or services to be delivered, one for each sort of
transgression. When all payments are made to the single authority, however, this
wergild sort of system becomes cumbersome. Unless well-developed markets exist,
those with liabilities denominated in specific goods or services could find it
difficult to make such payments. Or, the authority could find itself blessed
with an overabundance of one type of good while short of others.
Denominating payments in a unit of account would simplify matters—but would
require a central authority. As Grierson (1977, 1979) remarked, development of a
unit of account would be conceptually difficult. (See also Henry 2004.) It is
easier to come by measures of weight or length—the length of some anatomical
feature of the ruler (from which, of course, comes our term for the device used
to measure short lengths), or the weight of a quantity of grain. By contrast,
development of a money of account used to value items with no obvious
similarities required more effort. Orthodoxy has never been able to explain how
individual utility maximizers settled on a single numeraire. (Gardiner 2004;
Ingham 2004) While use of a single unit of account results in efficiencies, it
is not clear what evolutionary processes would have generated the single unit.
Further, the higgling and haggling of the market is supposed to produce the
equilibrium vector of relative prices, all of which can be denominated in the
single numeraire. However, this presupposes a fairly high degree of
specialization of labor and/or resource ownership—but this pre-market
specialization, itself, is hard to explain. Once markets are reasonably
well-developed, specialization increases welfare; however, without
well-developed markets, specialization is exceedingly risky, while
diversification of skills and resources would be prudent. It seems exceedingly
unlikely that either markets or a money of account could have evolved out of
individual utility maximizing behavior.
sure, we will never “know” the origins of money. First, the origins are lost “in
the mists of time”—almost certainly in pre-historic time. (Keynes 1930, p. 13)
It has long been speculated that money predates writing because the earliest
examples of writing appear to be records of monetary debts. Recent scholarship
indicates that the origin of writing is exceedingly complex--it is not so simple
to identify what is “writing”. (Schmandt-Besserat 1989) Similarly, it is not
clear what we want to identify as money. Money is social in nature and it
consists of a complex social practice that includes power and class
relationships, socially constructed meaning, and abstract representations of
social value. (More below.) As Hudson (2004) rightly argues, ancient and even
“primitive” society was not any less complex than today’s society. (And Gardiner
(2004) argues that ancient language—the most social of all behavior—was more
complex than modern language.) Economic relations were highly embedded within
complex social structures that we little understand. When we attempt to discover
the origins of money, we are identifying institutionalized behaviors that appear
similar to those today that we wish to identify as “money”. Orthodox economists
see exchange, markets, and relative prices wherever they look. For the orthodox,
the only difference between “primitive” and modern society is that these early
societies are presumed to be much simpler—relying on barter or commodity monies.
Hence, economic relations in earlier society are more transparent; innate
propensities are laid bare in the Robinson Crusoe economy for the observing
economist. While heterodox economists try to avoid such “economistic” blinders,
tracing the origins of money necessarily requires selective attention to those
social practices we associate with money—knowing full well that earlier
societies had complex and embedded economies that differ remarkably from ours.
negative assessment does not mean that I believe we can learn nothing from a
study of money’s history. Far from it. Nonetheless, we must be modest in our
claims. Further, we should always keep in mind the purpose of the historical
analysis: to shed light on the nature of the social institution we call “money”.
AS A SOCIAL RELATION
Institutionalists have long viewed money as an institution, indeed, as the most
important institution in a capitalist economy, most economists have not delved
deeply into this. (Dillard 1980) However, if we are to understand the nature of
money, it is important to uncover the social relations that are obscured by this
discussed above, the typical economic analysis starts with barter and the
innovative use of money as a medium of exchange. On the surface, this appears to
be an “evolutionary” approach that recognizes human agency. However, the
orthodox economists turn money into a “natural” phenomenon free from social
economists allow that money is a human invention assuming different forms in
different times and places, they adopt an evolutionary perspective that
de-emphasizes money’s contingency and its ultimate foundation in social
convention. As capitalist economies became more complex, money ‘naturally’
assumed increasingly efficient forms, culminating in the highly abstract,
intangible money of today. (Carruthers and Babb 1996, p. 1558)
propensity to “truck and barter” leads naturally to the development of markets.
The market, itself, is free of social relations—one checks ideology, power, and
social hierarchies at the door when one enters the market place. It is then
“natural” to choose a convenient medium of exchange to facilitate impersonal
transactions. The ideal medium of exchange is a commodity whose value is
natural, intrinsic—free from any hierarchical relations or social symbolism.
Obviously, precious metal is meant to fit the bill. The value of each marketed
commodity is denominated in the medium of exchange through the asocial forces of
supply and demand. Regrettably, nations have abandoned the use of intrinsically
valuable money in favor of “fiat” monies. Some economists (Wanniski, Greenspan
before he headed the Fed) advocate return to a gold standard, but most accept
that this is politically infeasible. Hence, it is necessary to remove as much
discretion as possible from monetary and fiscal authorities, to try to ensure
that modern fiat money operates in a manner similar to operation of a commodity
money. Monetary growth rules, prohibitions on treasury money creation, balanced
budget requirements, and the like (not to mention currency boards and dollar
standards for developing nations), are all attempts to remove discretion and
thereby restore the “natural”, asocial, monetary order. Even some “pure credit”
theorists argue that government is, or should be, in the same situation as any
other “individual”, with “liabilities” that have to “compete” in frictionless
financial markets. (Merhling 2000; Rossi 2000)
“forget” that money is a social creation, with social relations hidden under
money’s veil. As Hilferding put it:
In money, the
social relationships among human beings have been reduced to a thing, a
mysterious, glittering thing the dazzling radiance of which has blinded the
vision of so many economists when they have not taken the precaution of
shielding their eyes against it. (Quoted in Carruthers and Babb, 1996, p. 1556)
Simmel put it more
concisely: money transforms the world into an “arithmetic problem”. (Quoted in
Zelizer 1989, p. 344) The underlying relations are “collectively ‘forgotten
about’” in order to ensure that they are not explored. (Carruthers and Babb
1996, p. 1559) Doubters need only examine how money is introduced into modern
macroeconomic (“arithmetic”) analyses (and recall Friedman’s 1969 famous
presumption that money is simply dropped by helicopters).
CREDIT THEORY OF MONEY
Schumpeter made a useful distinction between the “monetary theory of credit” and
the “credit theory of money”. The first sees private “credit money” as only a
temporary substitute for “real money”. Final settlement must take place in real
money, which is the ultimate unit of account, store of value, and means of
payment. Exchanges might take place based on credit, but credit expansion is
strictly constrained by the quantity of real money. Ultimately, only the
quantity of real money matters so far as economic activity is concerned. Most
modern macroeconomic theory is based on the concept of a deposit multiplier that
links the quantity of privately created money (mostly, bank deposits) to the
quantity of high powered money, HPM. This is the modern equivalent to what
Schumpeter called the monetary theory of credit, and Friedman (or Karl Brunner)
is the best representative.
credit theory of money, by contrast, emphasizes that credit normally expands to
allow economic activity to grow. This new credit creates new claims on HPM even
as it leads to new production. However, because there is a clearing system that
cancels claims and debits without use of HPM, credit is not merely a temporary
substitute for HPM. Schumpeter does not deny the role played by HPM as an
ultimate means of settlement, he simply denies that it is required for most
Schumpeter, Innes focused on credit and the clearing system. Innes mocked the
view that “in modern days a money-saving device has been introduced called
credit and that, before this device was known all purchases were paid for in
cash, in other words in coins.” (1913, 389) Instead, he argued “careful
investigation shows that the precise reverse is true”. (1913, 389) Rather than
selling in exchange for “some intermediate commodity called the ‘medium of
exchange’”, a sale is really “the exchange of a commodity for a credit”. Innes
called this the “primitive law of commerce”: “The constant creation of credits
and debts, and their extinction by being cancelled against one another, forms
the whole mechanism of commerce…” (1913, 393) The following passage is critical.
By buying we become
debtors and by selling we become creditors, and being all both buyers and
sellers we are all debtors and creditors. As debtor we can compel our creditor
to cancel our obligation to him by handing to him his own acknowlegment [sic] of
a debt to an equivalent amount which he, in his turn, has incurred. (1913, 393)
The market, then,
is not viewed as the place where goods are exchanged, but rather as a clearing
house for debts and credits. Indeed, Innes rejected the typical analysis of the
village fairs, arguing that these were first developed to settle debts, with
retail trade later developing as a sideline to the clearing house trade. On this
view, debts and credits and clearing are the general phenomena; trade in goods
and services is subsidiary—one of the ways in which one becomes a debtor or
creditor (or clears debts).
emerge to specialize in clearing:
Debts and credits are
perpetually trying to get into touch with one another, so that they may be
written off against each other, and it is the business of the banker to bring
them together. This is done in two ways: either by discounting bills, or
by making loans. (Innes 1913, 402)
There is thus a
constant circulation of debts and credits through the medium of the banker who
brings them together and clears them as the debts fall due. This is the whole
science of banking as it was three thousand years before Christ, and as it is
to-day. (Innes 1913, 403)
THE STATE THEORY
distinction is made by Goodhart (1998), between the metalist approach and the
chartalist—or state money--approach. The latter emphasizes that money evolves
not from a pre-money market system but rather from the penal system. (Grierson
1977, 1979; Goodhart 1998; Wray 1998) Hence, it highlights the important role
played by “authorities” in the origins and evolution of money. More
specifically, the state (or any other authority able to impose an obligation)
imposes a liability in the form of a generalized, social unit of account--a
money--used for measuring the obligation. This does not require the
pre-existence of markets, and, indeed, almost certainly predates them. Once the
authorities can levy such obligations, they can name what fulfills this
obligation. They do this by denominating those things that can be delivered, in
other words, by pricing them. This resolves the conundrum faced by
methodological individualists and emphasizes the social nature of money and
markets—which did not spring from the minds of individual utility maximizers,
but rather were socially created.
that the state can choose anything to function as the “money thing” denominated
in the money of account: “Validity by proclamation is not bound to any material”
and the material can be changed to any other so long as the state announces a
conversion rate (say, so many grains of gold for so many ounces of silver).
(Knapp 1924, 30) What Knapp called the State money stage begins when the state
chooses the unit and names the thing accepted in payment of obligations to
itself. The final step occurs when the state actually issues the money-thing it
accepts. In (almost) all modern developed nations, the state accepts the
currency issued by the treasury (in the US, coins), plus notes issued by the
central bank (Federal Reserve notes in the US), plus bank reserves (again,
liabilities of the central bank)—HPM. The material from which the money thing
issued by the state is produced is not important (whether it is gold, base
metal, paper, or even digitized numbers at the central bank). No matter what it
is made of, the state must announce its nominal value (that is to say, the value
at which the money-thing is accepted in meeting obligations to the state).
insisted that even state money is credit, however, it is a special kind of
credit, “redeemed by taxation”. (1914, p. 168) For the government, a dollar is a
promise to ‘pay’, a promise to ‘satisfy’, a promise to ‘redeem,’ just as all
other money is. Innes argues that even on a gold standard it is not gold that
government promises to pay. If government paper money is submitted in exchange
for gold, government promises to pay have not been reduced:
It is true that all the
government paper money is convertible into gold coin, but redemption of paper
issues in gold coin is not redemption at all, but merely the exchange of one
form of obligation for another of an identical nature. (1914, p. 165)
Whether the government’s IOU is printed on paper or on a gold coin, it is
indebted just the same. What, then, is the nature of the government’s IOU? This
brings us to the “very nature of credit throughout the world”, which is “the
right of the holder of the credit (the creditor) to hand back to the issuer of
the debt (the debtor) the latter’s acknowledgment or obligation”. (1914, p. 161)
The holder of a
coin or certificate has the absolute right to pay any debt due to the government
by tendering that coin or certificate, and it is this right and nothing else
which gives them their value. It is immaterial whether or not the right is
conveyed by statute, or even whether there may be a statute law defining the
nature of a coin or certificate otherwise. (1914, p. 161)
then, is special about government? The government’s credit “usually ranks in any
given city slightly higher than does the money of a banker outside the city, not
at all because it represents gold, but merely because the financial operations
of the government are so extensive that government money is required everywhere
for the discharge of taxes or other obligations to the government.” (1914, p.
154) The special characteristic of government money, then, is that it is
“redeemable by the mechanism of taxation” (1914, p. 15): “[I]t is the tax which
imparts to the obligation its ‘value’…. A dollar of money is a dollar, not
because of the material of which it is made, but because of the dollar of tax
which is imposed to redeem it” . (1914, p. 152)
contrast, orthodox economists are “metalists” (as Goodhart 1998 calls them), who
argue that until recently, the value of money was determined by the gold used in
producing coins or by the gold backing paper notes. However, in spite of the
amount of ink spilled about the gold standard, it was actually in place for only
a short period. Typically, the money-thing issued by the authorities was not
gold-money nor was there any promise to convert the money-thing to gold. Indeed,
as Innes insisted, throughout most of Europe’s history, the money-thing issued
by the state was the hazelwood tally stick: “This is well seen in medieval
England, where the regular method used by the government for paying a creditor
was by ‘raising a tally’ on the Customs or on some other revenue getting
department, that is to say by giving to the creditor as an acknowledment [sic]
of indebtedness a wooden tally.” (1913, p. 398) Other money-things included clay
tablets, leather and base metal coins, and paper certificates. Why would the
population accept otherwise “worthless” sticks, clay, base metal, leather, or
The government by
law obliges certain selected persons to become its debtors…. This procedure is
called levying a tax, and the persons thus forced into the position of debtors
to the government must in theory seek out the holders of the tallies or other
instrument acknowledging a debt due by the government , and acquire from them
the tallies by selling to them some commodity or in doing them some service, in
exchange for which they may be induced to part with their tallies. When these
are returned to the government treasury, the taxes are paid. How literally true
this is can be seen by examining the accounts of the sheriffs in England in the
olden days. They were the collectors of inland taxes, and had to bring their
revenues to London periodically. The bulk of their collections always consisted
of exchequer tallies, and though, of course, there was often a certain quantity
of coin, just as often there was, one at all, the whole consisting of tallies.
(1913 p. 398)
Contrary to orthodox thinking, then, the desirability of the money-thing issued
by the state was not determined by intrinsic value, but by the nominal value set
by the state at its own pay offices.
the state has created the unit of account and named what can be delivered to
fulfill obligations to the state, it has generated the necessary pre-conditions
for development of markets. The evidence suggests that early authorities set
prices for each of the most important products and services. Once prices in
money were established, it was a short technical leap to creation of markets.
This stands orthodoxy on its head by reversing the order: first money and
prices, then markets and money-things (rather than barter-based markets and
relative prices, and then numeraire money and nominal prices). The next step was
the recognition by government that it could issue the money-thing to purchase
the mix it desired, then receive the same money thing in the tax payments by
subjects/citizens. This would further the development of markets because those
with tax liabilities but without the goods and services government wished to buy
would have to produce for market to obtain the means of paying obligations to
IMPLICATIONS FOR OPERATION OF MODERN MONEY SYSTEMS
a modern government spends, it issues a check drawn on the treasury; its
liabilities increase by the amount of the expenditure and its assets increase
(in the case of a purchase of a good produced by the private sector) or some
other liabilities are reduced (in the case of a social transfer). The recipient
of the check will almost certainly present it to a bank for currency or deposit.
In the former case, the bank’s reserves are first increased and then are reduced
by the same amount. In the latter case, reserves are credited in the amount of
the deposit. The reserves credited as the bank’s asset and as the central bank’s
(CB) liability are nothing less than a claim on government-issued money, or, a
leveraging of HPM. In other words, treasury spending by check really is the
equivalent of “printing money” in that it increases the supply of HPM. Unless
bank required reserves increase by an equivalent amount, the banking system
finds itself with excess reserves after the treasury has spent.
important thing to notice is that the treasury can spend before and without
regard to previous receipt of taxes or prior bond sales. In the US, taxes are
received throughout the year (although not uniformly as tax payments are
concentrated around April 15 ). These are mostly paid into special tax accounts
held at private commercial banks. (Bell 2000) It is true that the treasury
transfers funds to its account at the CB when it wishes to spend, but this is
really a reserve maintenance operation designed to minimize effects on reserves.
When the treasury spends, bank reserves increase by approximately the same
amount (less only cash withdrawals) so that the simultaneous transfer from tax
accounts to the CB neutralizes reserve effects. Tax payments lead to a reserve
drain as the treasury submits checks received to the CB for clearing, at which
point the CB debits bank reserves.
additions to/subtractions from reserves are carefully monitored and regulated by
coordination between the CB and the treasury. Things would be much simpler and
more transparent if tax receipts and treasury spending were perfectly
synchronized. In that case, the treasury’s spending would increase reserves, and
the simultaneous tax payments would reduce them. If the government ran a
balanced budget there would be no net impact on reserves, so there would be no
need for complex coordination between the CB and treasury using tax and loan
accounts. However, when spending exceeds tax revenues (a budget deficit), there
is a net injection of reserves. It is possible that the extra reserves created
happen to coincide with growing bank demand for reserves—in which case the
treasury and CB need do nothing more. More probably, the net injection of
reserves leads to excess reserves, offered in the overnight market. Excess
reserves cause the overnight rate to fall below the CB’s target, inducing it to
drain reserves either through an open market sale or by reducing its discounts.
When the treasury runs a sustained deficit, the CB must continually intervene,
eventually running out of bonds to sell. This is why, over the longer run,
responsibility for bond sales to drain excess reserves must fall to the
treasury—which faces no limit to its own sales of bonds as it can create new
bonds as needed.
it may sound strange, we conclude that treasury bond sales are not a borrowing
operation at all, but are a reserve draining operation (that substitutes one
kind of government liability for another). Indeed, the treasury cannot really
sell bonds unless banks already have excess reserves, or unless the CB stands
ready to provide reserves the banks will need to buy the bonds. If the treasury
typically tried to first “borrow” by selling bonds before it spent, it
would be draining reserves it will create only once it spends. As it
drained required or desired reserves, it would cause the fed funds rate to rise
above the CB’s target—inducing an open market purchase and injection of
Another way of putting it is that government spends by issuing IOUs, and the
private sector uses those IOUs to pay taxes and buy government bonds. Obviously,
if government spending were the only source of these IOUs, the private sector
could not pay taxes or buy bonds before the government provided them. In
the real world, government spending on goods and services is the main, but not
the only source, of the IOUs needed by the private sector to pay taxes and buy
government bonds. In addition, the CB provides reserves through discounts or
open market operations (or, gold and foreign currency purchases), and these IOUs
are perfect substitutes for treasury IOUs.
conclude that the purpose of government bond sales is not to borrow reserve, but
to offer an interest-earning alternative to undesired reserves that would
otherwise drive the fed funds (overnight) rate toward zero. Note that if the CB
paid interest on excess reserves, the treasury would never need to sell bonds
because the overnight interest rate could never fall below the rate paid by the
CB on excess reserves. Note also that in spite of the widespread belief that
government deficits push up interest rates, they actually reduce the overnight
rate to zero unless the treasury and CB coordinate efforts to drain the
resulting excess reserves. (For proof, note that for many years the overnight
interest rate in Japan has been kept at zero, in spite of government deficits
that reached 8% of GDP, merely by keeping some excess reserves in the banking
system.) On the other hand, budget surpluses drain reserves, causing a shortage
that drives up the overnight rate unless the CB and treasury buy and/or retire
government debt. Needless to say, orthodoxy has got the interest rate effects of
government budgets exactly backwards.
INTEGRATION OF THE CREDITARY AND STATE MONEY APPROACHES
To put it as
simply as possible, the state chooses the unit of account in which the various
money things will be denominated. In all modern economies, it does this when it
chooses the unit in which taxes will be denominated and names what is accepted
in tax payments. Imposition of the tax liability is what makes these money
things desirable in the first place. And those things will then become the
money-thing at the top of the “money pyramid” used for ultimate clearing.
Of course, most
transactions that do not involve the government take place on the basis of
credits and debits, that is, privately-issued money-things. This can be thought
of as leveraging activity—a leveraging of HPM. However, this should not be taken
the wrong way—we are not hypothesizing some fixed leverage ratio (as in the
orthodox deposit multiplier story). Further, in all modern monetary systems the
central bank targets an overnight interest rate, standing by to supply HPM on
demand to the banking sector (or to withdraw it from the banking sector) to hit
its target. Thus, both the CB and treasury supply HPM. However, the central bank
never drops HPM from helicopters. It either buys assets or requires collateral
against its lending, and it may well impose other “frown” costs on borrowing
banks. Hence, while central bank provision of HPM provides a degree of “slop” to
the system, the value of HPM is ultimately determined by what the population
must do to obtain it from government.
privately-supplied credit money is never dropped from helicopters. Its issue
simultaneously puts the issuer in a credit and debit situation, and does the
same for the party accepting the credit money. For example, a bank creates an
asset (the borrower’s IOU) and a liability (the borrower’s deposit) when it
makes a loan; the borrower simultaneously becomes a debtor and a creditor. Banks
then operate to match credits and debits while net clearing in HPM. Borrowers
operate in the economy to obtain bank liabilities to cancel their own IOUs to
banks. There is an important hierarchical relation in the private debt/credit
system, with power—especially in the form of command over society’s
resources—underlying and deriving from the hierarchy. Ultimately, the ability to
impose liabilities, name the unit of account, and issue the money used to pay
down these liabilities gives a substantial measure of power to the authority.
There is, thus, the potential to use this power to further the social good,
although misunderstanding or mystification of the nature of money results in an
outcome that is far below what is economically feasible.
Far from springing
from the minds of atomistic utility maximizers, money is a social creation. The
private credit system leverages state money, which in turn is supported by the
state’s ability to impose social obligations mostly in the form of taxes. This
allows society to marshal resources for the public purpose. While it is commonly
believed that taxes “pay for” government activity, actually obligations
denominated in a unit of account create a demand for money that, in turn, allows
society to organize social production, partly through a system of nominal
prices. Much of the public production is undertaken by emitting state money
through government purchase, although extra-monetary means are also invoked
(conscription for the military; eminent domain; “nationalization” of resources;
control exercised through rules and regulations). Much private sector activity,
in turn, takes the form of “monetary production”, or M-C-M’ as Marx put it,
that is through monetary purchase of required inputs with a view to realizing
“more money” with the sale of final product. The initial and final purchases are
mostly financed on the basis of credits and debits—that is, “private” money
creation. Because money is fundamental to these production processes, it cannot
be neutral. Indeed, it contributes to the creation and evolution of a “logic” to
the operation of a capitalist system, “disembedding” the economy to a degree
never before encountered. At the same time, many of the social relations can be,
and are, hidden behind a veil of money. This becomes most problematic with
respect to misunderstanding about government budgets, where the monetary veil
conceals the potential to use the monetary system in the public interest.
This paper presents a summary of Chapter
8 of my book, L.R. Wray (ed), Credit and State Theories of Money:
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