By L. Randall Wray

Last week I asserted that coins have never been a form of commodity money; rather they have always been the IOUs of the issuer. Essentially, a gold coin is just the state’s IOU that happens to have been stamped on gold. It is just a “token” of the state’s indebtedness—nothing but a record of that debt. The state must take back its IOU in payments made to itself. “Taxes drive money”—these “money things” are accepted because there are taxes “backing them up”, not because they have embodied gold. As promised, this week I will begin try to dispel the view that coins used to be commodity monies. Next week, we will finish up the discussion.

In this Primer I do not want to go deeply into economic history—we are more interested here with how money “works” today. However, that does not mean that history does not matter, nor should we ignore how our stories about the past affect how we view money today. For example, a common belief (accepted by most economists) is that money first took a commodity form. Our ancient ancestors had markets, but they relied on inconvenient barter until someone had the bright idea of choosing one commodity to act as a medium of exchange. At first it might have been pretty sea shells, but through some sort of evolutionary process, precious metals were chosen as a more efficient money commodity.

Obviously, metal had an intrinsic value—it was desired for other uses. (And if we take a Marxian labor theory of value, we can say metal had a labor value as it had to be mined and refined.) Whatever the case, that intrinsic value imparted value to coined metal. This helped to prevent inflation—that is, decline in the purchasing power of the metal coin in terms of other commodities—since the coin could always be melted and sold as bullion. There are then all sorts of stories about how government debased the value of the coins (by reducing precious metal content), causing inflation.

Later, government issued paper money (or base metal coins of very little intrinsic value) but promised to redeem this for the metal. Again, there are many stories about government defaulting on that. And then finally we end with today’s “fiat money”, with nothing “real” standing behind it. And that is how we get the Weimar Republics and the Zimbabwes—with nothing really backing the money it now is prone to causing hyperinflation as government prints up too much of it. Which leads us to the gold bug’s lament: if only we could go back to a “real” money standard: gold.

In this discussion, we cannot provide a detailed historical account to debunk the traditional stories about money’s history. Let us instead provide an overview of an alternative.

First we need to note that the money of account is many thousands of years old—at least four millennia old and probably much older. (The “modern” in “modern money theory” comes from Keynes’s claim that money has been state money for the past 4000 years “at least”.) We know this because we have, for example, the clay tablets of Mesopotamia that record values in money terms, along with price lists in that money of account.

We also know that money’s earliest origins are closely linked to debts and record-keeping, and that many of the words associated with money and debt have religious significance: debt, sin, repayment, redemption, “wiping the slate clean”, and Year of Jubilee. In the Aramaic language spoken by Christ, the word for “debt” is the same as the word for “sin”. The “Lord’s Prayer” that is normally interpreted to read “forgive us our trespasses” could be just as well translated as “our debts” or “our sins”—or as Margaret Atwood says, “our sinful debts”.*

Records of credits and debits were more akin to modern electronic entries—etched in clay rather than on computer tapes. And all early money units had names derived from measures of the principal grain foodstuff—how many bushels of barley equivalent were owed, owned, and paid. All of this is more consistent with the view of money as a unit of account, a representation of social value, and an IOU rather than as a commodity.

Or, as we MMTers say, money is a “token”, like the cloakroom “ticket” that can be redeemed for one’s coat at the end of the operatic performance.

Indeed, the “pawn” in pawnshop comes from the word for “pledge”, as in the collateral left, with a token IOU provided by the shop that is later “redeemed” for the item left. St. Nick is the patron saint of pawnshops (and, appropriately, for thieves), while “Old Nick” refers to the devil (hence, the red suit and chimney soot) to whom we pawn our souls. The Tenth Commandment’s prohibition on coveting thy neighbor’s wife (which goes on to include male or female slave, or ox, or donkey, or anything that belongs to your neighbor) has nothing to do with sex and adultery but rather with receiving them as pawns for debt. By contrast, Christ is known as “the Redeemer”—the “Sin Eater” who steps forward to pay the debts we cannot redeem, a much older tradition that lay behind the practice of human sacrifice to repay the gods.*

We all know Shakespeare’s admonition “neither a borrower nor a lender be”, as religion typically views both the “devil” creditor and the debtor who “sells his soul” by pawning his wife and kids into debt bondage as sinful—if not equally then at least simultaneously tainted, united in the awful bondage. Only “redemption” can free us from humanity’s debts owing to Eve’s original sin.

Of course, for most of humanity today, it is the original sin/debt to the tax collector, rather than to Old Nick, that we cannot escape. The Devil kept the first account book, carefully noting the purchased souls and only death could “wipe the slate clean” as “death pays all debts”. Now we’ve got our tax collector, who like death is the only certain thing in life. In between the two, we had the clay tablets of Mesopotamia recording debits and credits in the Temple’s and then the Palace’s money of account for the first few millennia after money was invented as a universal measure of our multiple and heterogeneous sins.

The first coins were created thousands of years later, in the greater Greek region (so far as we know, in Lydia in the 7th century BC). And in spite of all that has been written about coins, they have rarely been more than a very small proportion of the “money things” involved in finance and debt payment. For most of European history, for example, tally sticks, bills of exchange, and “bar tabs” (again, the reference to “wiping the slate clean” is revealing—something that might not be done for a year or two at the pub, where the alewife kept the accounts) did most of that work.

Indeed, until very recent times, most payments made to the Crown in England were in the form of tally sticks (the King’s own IOU, recorded in the form of notches in hazelwood)—whose use was only discontinued well into the 19th century (with a catastrophic result: the Exchequer had them thrown into the stoves with such zest that Parliament was burnt to the ground by those devilish tax collectors!) In most realms, the quantity of coin was so small that it could be (and was) frequently called in to be melted for re-coinage.

(If you think about it, calling in all the coins to melt them for re-coinage would be a very strange and pointless activity if coins were already valued by embodied metal!)

So what were coins and why did they contain precious metal? To be sure, we do not know. Money’s history is “lost in the mists of time when the ice was melting…when the weather was delightful and the mind free to be fertile of new ideas—in the islands of the Hesperides or Atlantis or some Eden of Central Asia” as Keynes put it. We have to speculate.

One hypothesis about early Greece (the mother of both democracy and coinage—almost certainly the two are linked in some manner) is that the elites had nearly monopolized precious metal, which was important in their social circles tied together by “hierarchical gift exchange”. They were above the agora (market place) and hostile to the rising polis (democratic city-state government). According to Classical scholar Leslie Kurke, the polis first minted coin to be used in the agora to “represent the state’s assertion of its ultimate authority to constitute and regulate value in all the spheres in which general-purpose money operated… Thus state-issued coinage as a universal equivalent, like the civic agora in which it circulated, symbolized the merger in a single token or site of many different domains of value, all under the final authority of the city.”** The use of precious metals was a conscious thumbing-of-the-nose against the elite who placed great ceremonial value on precious metal. By coining their precious metal, for use in the agora’s houses of prostitution by mere common citizens, the polis sullied the elite’s hierarchical gift exchange—appropriating precious metal, and with its stamp asserting its ultimate authority.

As the polis used coins for its own payments and insisted on payment in coin, it inserted its sovereignty into retail trade in the agora. At the same time, the agora and its use of coined money subverted hierarchies of gift exchange, just as a shift to taxes and regular payments to city officials (as well as severe penalties levied on officials who accepted gifts) challenged the “natural” order that relied on gifts and favors. As Kurke argues, since coins are nothing more than tokens of the city’s authority, they could have been produced from any material. However, because the aristocrats measured a man’s worth by the quantity and quality of the precious metal he had accumulated, the polis was required to mint high quality coins, unvarying in fineness. (Note that gold is called the noble metal because it remains the same through time, like the king; coined metal needed to be similarly unvarying.) The citizens of the polis by their association with high quality, uniform, coin (and in the literary texts of the time, the citizen’s “mettle” was tested by the quality of the coin issued by his city) gained equal status; by providing a standard measure of value, coinage rendered labor comparable and in this sense coinage was an egalitarian innovation.

From that time forward, coins commonly contained precious metal. Rome carried on the tradition, and Kurke’s thesis is consistent with the statement of St. Augustine, who declared that just as people are Christ’s coins, the precious metal coins of Rome represent a visualization of imperial power—inexorably doing the emperor’s bidding just as the reverent do Christ’s.*** Note, again, the link between money and religion.

OK, that gets us to Roman times. Next week we examine coinage from Rome through to modern times.

*Payback: debt and the shadow side of wealth, by Margaret Atwood, Anansi 2008.
**Coins, Bodies, Games, and Gold, by Leslie Kurke, Princeton University Press, Princeton, New Jersey, 1999; xxi, 385; paper $29.95 (ISBN 0-691-00736-5), cloth $65.00 (ISBN 0-691-01731-X).
***If anyone knows the source for St. Augustine’s comparison of people to coins, please provide it. I thank Chris Desan, David Fox, and other participants of a recent seminar at Cambridge University for the discussion I draw upon here.


  1. What restrictions to the application of MMT does a reserve currency face? For example, some MMT policy recommendations requires the government to have complete control over taxation (to combat inflation and to create the need for the currency). Clearly there is international demand for the reserve currency. Yet, they do not have taxing power over foreign dollar denominated transactions to counter inflation. Further control of “foreign” eurodollars is largely outside of the control of Fed. I think these two examples are likely immaterial to the application of MMT. But back to my original question, has MMT been thoroughly vetted the concept of a reserve currency to understand if there are any specific considerations in the application of MMT.

  2. Convertible hard currency lovers argue that using government CPI figures, $7 of 2011 USD currency is required to purchase $1 worth of goods and services from 1966. Do we receive 7x the “aggregate value” from the increased standard of living that a 1x (computers, food, health care, shelter and other) good and services purchase provides? Obviously we can't buy 7x the amount of oranges or gas (as lovers of convertible hard currencies point out). However, the value we receive from 2011 purchases of large screen HDTV, computers, health care advances and other goods and services must be greater than 7x the value received 45 years ago. That is, the value must be greater than 7x so that when commodities and simple goods and services are included, the “aggregate value” we receive averages to the 7x that BIS reports. I'm not sure how to analytically answer this question (if you know please let me know), but the value whatever it is, would be the “actual inflation”. That said, shouldn't currency be a “store of wealth” or “store of value” over time?

  3. If money is a good, why shouldn't it depreciate like any other good?Inflation is 'wear and tear' on money in that model – required so that people are predisposed to purchase today's output rather than try and get more tomorrow.In other words we need money to wear out over time.

  4. If this is all true Randy, why do they still use Gold pieces in Dungeons and Dragons where its been 10 silver pieces and 100 copper pieces since 1974?

  5. @Jeff – should a river current be a store of water over time? Things of value should store value, currency should serve to move them from place to place. Stagnant currency shouldn't store value any more than stagnant water turns a waterwheel. (It's no accident that they come from the same root)Another way to think of it is- what's has more immediate value- an hour of work today, or an hour of equivalent work that someone did 50 years ago? The value marker for the 50 year old labor really shouldn't be equivalent in value to the present labor, because it's specific significance has diminished with time.

  6. Hi Jeff;I don't think that the dollar being the world's reserve currency limits the U.S. government's currency sovereignty. It just means that foreign central banks hold onto some of the dollars their citizens and companies earn rather than turning them over to their treasury – to be spent buying things that are for sale in dollars. The fact that several trillion of those dollars are still "out there" gives a lot of people (including all non-MMT economists) a major collective case of the willies. They worry that the Chinese, for example, might some day use their dollar reserves to hurt U.S. interests. Many people even impute some deep nefarious purpose to the decision of the Chinese to accumulate dollar reserves. The important thing to remember is that all of those dollars and dollar bonds remain non-convertible. The only thing China can ever require the U.S. to give for them is – more dollars. Which the U.S. creates by fiat in any amount it needs.Not to go too far off-topic, but the biggest effect of other countries holding dollar reserves is to improve the real terms of trade for the U.S. in relation to those countries. Americans get to consume real furniture, automobiles, toaster ovens etc., while the Chinese people get to enjoy whatever happiness they feel over the fact that their central bank owns some U.S. Treasury securities.I don't think fluctuations of the foreign exchange rate are "inflation", even if they result in an increase in the nominal price of a commodity (the common example is oil). I don't think a one-time price shock, even if it is severe, technically counts as inflation either. It is only when different economic actors have enough power to shift a large price shock back and forth among themselves that an inflationary "spiral" is generated. This hasn't happened since the 1970s and we should not expect it to happen now. Workers' bargaining power has all but disappeared. When we get gas-price shocks today, we take the bus more often or walk.Cheers

  7. This one Randy?"St. Augustin on Sermon on the Mount, Harmony of the Gospels and Homilies on the Gospels: Nicene and Post-Nicene Fathers of the Christian Church, Part 6" (Sermon XL) Just above Sermon XLI here: the end of the page:Christ's coin is man. In him is Christ's image, in him Christ's Name, Christ's gifts, Christ's rules of duty

  8. It seems to me (speculating) that one reason for historically using gold in coinage was probably counterfeit prevention. You can't easily counterfeit a gold coin without having gold. Gold is a rare and limited commodity – for the most part, you can't get more of it without a mine. And a gold mine is a difficult thing to keep secret, and liable to be taken over by the King.Granted, a lot of historical monetary transactions were not carried out with currency at all, but rather by using a record keeping system like the King's tally sticks or notches in clay tablets. But the King's tally sticks could not be counterfeited because the King physically possessed them. They are analogous to the ACH system or to Fedwire, rather than being analogous to currency.

  9. "People as coins" just might be a rabbinic allusion:"When Caesar puts his image on a thousand coins, they all look alike. But when God puts His image on a thousand people, they all come out different."

  10. Great stuff. Making a similar case for 'account' money over commodity money is the book 'The lost science of money' by Stephen Zarlenga.All very interesting, but it seems to clear to me that we're headed straight back to a gold standard, so what is the use of little people knowing this?I'll tell you. Little people can make their own currencies.

  11. Dear mr. Wray. Since we 're on the subject of gold coins it would very interesting to hear your comments on the State of Utah accepting US mint gold coins (as far as i have understood in market prices instead of just face value) as payment for taxes.How does a limited introduction of a semi-Gold standard in the US change things for the US dollar?

  12. Thanks Karl. So there are two paradigms here of money.But I might reconcile the two like this. Work done in 1966 is converted to a currency through a wage but because of "economic growth" the value of that work diminishes over time. If however, we had economic deflation than that stored value in the currency would actually increase over time. And if one was a shrewd investor perhaps you can "store" that work in something that will be more "productive: (a house (until 2007), a particular stock, a high interest bond or a finite commodity like gold)?The above makes sense provided economic growth is greater than inflation.

  13. Dale on the exchange rate/inflation comment. We know that the trade deficit is funded by banking loans (money supply expansion) since we consume more than we produce. Provided the "productive value" (i.e. GDP growth rate) that imports create in the economy is larger than the – inflation rate plus the nominal interest rate- of servicing the debt than I agree exchange rate fluctuations may not be inflationary. That said, I'm not sure how to quantify how much a cheap TV impacts GDP.

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  15. Also regarding the comment that an increase in "oil price" would have people walk or take the bus. That is true, but from the perspective of an increase in the standard of living, that would imply a decrease for some, although in your view it would be transient in nature as opposed to permanent. I agree this hold until (and if) we see peak oil (or peak commodity), than the standard of living would be expected to decrease. But I'm not sure if economically if this is defined as "inflationary" or not. Yet when abundance of resources leads to price stability, we accept is as disinflationary.

  16. "Our ancient ancestors had markets, but they relied on inconvenient barter until someone had the bright idea of choosing one commodity to act as a medium of exchange."Today, are there two "commodities" serving as medium of exchange, currency and demand deposits?

  17. I made my personal discovery of MMT on August 20 while reading a post at The Oil Drum. ( , comment by Murray), so I haven't yet done exhuastive study, but …I think this particular installment of the MMP is weak. MMT is a theory about fiat money. The history of how we, the civilized world, got to the point of having fiat money is interesting, but only after the student has a firm understanding of the axioms that ground the theory. By analogy think of history of quantum physics vs. the theory of quantum physics. There will probably always be some legitimate doubt about how to interpret Babylonian clay table markings, but I don't sense that there are contending schools of MMT that dispute each other on this historical question. Where is there an axiomatic development of MMT, uncluttered by asides about ancient history? Surely we all agree USA, and all governments whose reach extends beyond a few hundred yards, use fiat money. What are the rules, the axioms, of fiat money?

  18. Why do you say that 'state is indebted to it's citizens' when it issues money, even tough it is the public that is indebted to the state by future tax liabilities?Shouldn't argument 'government borrows from it's citizens' be the upside down 'public borrows from the government medium of exchange they need to cover future tax liabilities?'In what sense state goes into debt to the public when it issues money?

  19. Anonymous & PZ: I think this particular installment of the MMP is weak. MMT is a theory about fiat money. No, MMT is a theory about money, period. Money is fiat money, credit/debt. Fiat money is just money without bells & whistles, money that operates without inessential constraints that just make analysis more complicated. The basic axiom is that money is a form of credit/debt. PZ: In what sense state goes into debt to the public when it issues money? In every sense. A state is indebted to its citizens when it issues money because that is what state money is – debt of the state. The guy who gets a dollar from the state is getting a statement that the state owes him something. The public is not indebted to the state by receiving dollars, it becomes indebted by receiving letters from the IRS – anti-dollars, negative dollars. Things are simpler than you think they are. "The public borrowing medium of exchange …" is a kind of "Ricardian" overcomplication that gets things upside down – and is inaccurate – the public does not have two liabilities, the "borrowing" repayment & the "future tax liabilities" but just one, the tax. Dollars have value because people expect future tax liabilities. They aren't the liabilities themselves, but the means to extinguish them. It is good to "have a dollar "= to have the state owe you a dollar, because it is bad to owe a dollar, especially to a powerful modern state.

  20. "coins have never been a form of commodity money…"  I understand the MMT concept that money has no intrinsic value other than as a medium of exchange for goods and services. I also understand and agree that fiat currency reflects this economic reality more accurately than a currency backed by precious metals. However, what I don't understand is how a precious metal currency cannot be treated as a commodity.  Fiat paper money and coins have no value other than the promise of exchange — the IOU of the issuer. They are made of a material that has marginal value and cannot be easily converted into other things of value. Money based on gold however is not like this. The very material it is made of is valuable as a raw material, which can be used to make many things of value besides being used as money. Gold coins can be melted down and made into jewelry for example. Paper money cannot do this (except as expensive wall paper).  In a precious metal currency then, one could exchange the paper notes for actual gold coins that could then be bartered any number of ways — as an acceptable form of money, or as the commodity metal that has inherent value as a raw material. How is that NOT commodity money?

  21. I have seen photos of ancient coins. Many coins in these photos are missing some metal that has been clipped off the rim of the coin. Question: Were these clipped coins accepted at face value if offered in payment of taxes?If we have any information as to the answer to this question, I should count it count it important in deciding the commodity money issue.

  22. Calgacus: "The guy who gets a dollar from the state is getting a statement that the state owes him something."What does it own? By hoarding money public gains liberation from future tax liabilities in a sense that it does not have to toil away real resources in order to provide state with tax liabilities, it can just draw down on its savings.But tax liabilities were imposed by the sovereign in the begin with. It can change them at will, and collect even more if it wants to. It does not promise that any savings will be enough to gain liberation from future tax liabilities. It is 'pay what we tell you or we throw you to the jail' kinda coercive system."public does not have two liabilities, the "borrowing" repayment & the "future tax liabilities" but just one, the tax. "I agree that there is only one liability. But money that public owns – money state has spent to existence but not yet taxed – is means to extinguish that liability. They are part of a same liability.The point is that state does not go into debt or promise anything when it issues money. Only liability and therefore only debt is that of the publics to the state.

  23. I don't know if it's a transatlantic or sectarian thing, but the line in the Lord's Prayer that I learnt in school read:"Forgive us our debts, as we forgive our debtors"

  24. PZ:All money is credit and therefore the correlative of debt.Commercial exchange involves the simultaneous creation of credits and debts: When a sale takes place, the buyer receives real goods and becomes the seller's debtor, whereas the seller becomes the buyer's creditor and receives a credit on the buyer. The money we receive when we sell our labour, or the goods we produce, is simply a legal account of the debt incurred by the buyer. We are all, therefore, both creditors and debtors, to varying degrees: We accumulate debts by buying and earn credits by selling, and relieve ourselves of the former by cancelling them against the latter (the bringing together of debts and credits so that one can be cancelled against the other is the function of banks).This is straightforward enough when we consider private commerce, where the agents involved can promise to pay their debts by selling real goods or services. But governments are not producers. When a government buys goods or services from private agents, it cannot promise to repay its debts by selling something in order to earn the necessary credit. With what, then, does it promise to repay the debt owed to the producer? The answer is remission of tax liabilities. By levying a tax (imposing a debt) on the seller, the government becomes her creditor. The seller must then earn at least an equal magnitude of credit on the government in order to cancel her debt (the tax liability).When you realise this you start to realise another reason why your taxes don't and can't pay for government spending (in addition to the fact that the government issues the currency with which you pay your taxes in the first place): The tax liability is a private debt, and a public credit. The money the government spends is a public debt and a private credit. When the two are brought together (when taxes are paid), by definition, they *cancel each other out*. "A's money is B's debt to him and when B repays his debt, A's money is gone."

  25. If anyone knows the source for St. Augustine’s comparison of people to coins, please provide it. Without seeing the reference in more detail — I would assume that Augustine is referencing the Parable of the Lost Coin (Luke 15:8-10) which goes:“Or what woman having ten coins* and losing one would not light a lamp and sweep the house, searching carefully until she finds it? 9And when she does find it, she calls together her friends and neighbors and says to them, ‘Rejoice with me because I have found the coin that I lost.’ 10In just the same way, I tell you, there will be rejoicing among the angels of God over one sinner who repents.” Question on ancient coinage and precious metals:I'd agree with your point that coins had value as tokens rather than simply bullion value. However, there's the fact that coinage debasement was, historically speaking, a way of trying to make imperial money go further in Rome, and did tend to result in inflation. Even though the value of coin was not equal it the value of the metal in it (which is why minting was a profit making operation and counterfeiting was attractive) wouldn't it be quite plausible that the amount of precious metal generally going into a higher value coin provided some sort of a break on the number of coins that could be put in circulation? Thus, if you debased the coinage it wasn't so much that you were getting less precious metal that had people valuing the coinage at less, but that this was a sign that went along with the fact that the government was minting more coins.Similarly, with the gold standard, the advantage (such as it was) was not that people had any particular use for gold, but rather that so long as the government stuck to the gold standard (and excluding sudden huge gold strikes such as the Spanish conquest of America or the California gold rush) it tended not to be able to increase the money supply much faster than the growth of the economy (which tended to mirror the growth of gold discovery.) The problem is that the gold supply couldn't be adjusted to deal with economy shocks, which is why fiat money is actually more stable than gold backed money, so long as one has a relatively sane central bank. –DarwinCatholic

  26. I happen to be reading Capital at the moment, and it seems to me that this account of money gets to Marx's point about circulation much more directly than his own theory about "commodity money" does. Marx in chapter 3 has to go through this whole turgid explanation of how gold becomes the universal money commodity, and then from there to analyzing the logic of commodity exchange, to then finally show the power relation between the holder of money and the holder of the commodity (spoiler: the one with the gold is in charge).This gets to the point much more directly, and without all the mental gymnastics, since the gold coin is, at its very origin, already a creditor-debtor relation in terms somewhat similar to Marx's. I know that most people don't want to consider their intellectual program in any way at all related to Marxian ideas (at least not in public), but it interests this one reader, at least.

  27. PZ: Lewis MacKenzie's explanation is excellent. (Except for the part that governments are not producers. They can be, if they want to be, and it can be helpful to incorporate this into one's thinking.)The point is that state does not go into debt or promise anything when it issues money. Only liability and therefore only debt is that of the publics to the state.The state certainly does go into debt, and promise something when it issues money. It promises that this money=credit owNed by the private sector=debt owEd by the government can be used to extinguish liabilities to the state, debts going the other way, as Lewis lucidly explained. This money/private credit/government debt can be used to buy knicknacks at the Smithsonian Museum Gift Shoppe, buy gold at the Treasury Golde Shoppe if there is a gold standard, and buy freedom from the tax man by extinguishing tax liabilities.

  28. Anonymous gave a shout out for "The Lost Science of Money" by Stephen Zarlenga. I second that and recommend it to all. Chapter 1 begins with a reference to Aristotle (Ethics, 1133) – here's the citation from Wikipedia Nomisma (Greek: νόμισμα) was the ancient Greek word for "money" and is derived from nomos (νόμος) "anything assigned, a usage, custom, law, ordinance".[1]"….but money has become by convention a sort of representative of demand; and this is why it has the name 'money' (nomisma)-because it exists not by nature but by law (nomos) and it is in our power to change it and make it useless." Aristotle, Nicomachean Ethics [1133b 1].[2]The notion that money exists "by law … and it is in our power to change it" is the essence of Sovereign money, something any organized political society needs to operate. This means money can be whatever the bounded State chooses for the territory it controls. That can be set by the monarch, a dictator or the people's government. It will work as long as the supply in circulation is in relative balance with the needs of internal markets for exchange and the tangible assets of the State. The relative value of currency needs to be maintained so that the investments of its people and the State can add to the net relative asset value of the state/nation. This is achieved by sovereign control of supply. Who issues money is the key. Sovereign money must not be an IOU. Bonds are IOUs and can be traded. That doesn't make them money. Counterfeiting of money by criminals within and enemies without, as the British did with the U.S. Continental and French Assignats and Hitler with the Pound in WW-II, must be found and prevented. Prior to development of sophisticated printing techniques that made counterfeiting more difficult; commodities of a fixed weight were easier to manage for average people. The Greenbacks of the Civil War era had the printing technology advantage. The problem for a Sovereign with commodity based money is that it gets in the position of being at the mercy of the market value of that commodity. The Sovereign will, if it can, attempt to control the value of the commodity. When Nixon closed the gold window it was being redeemed at $35 an ounce when the world market was $42. Easy money for those that could make the trade.The historic problem with Sovereign currency it that, by design, it won't work in the territory of other Sovereign States. Even if commodity content matches local coinage, it is not legal tender. I remember Canadian coins were unwelcome where I lived in Wisconsin in the 1960’s, even though they worked in coin machines. Each State/Nation must control its currency. Zarlenga gives many examples from history which point out the flaws of commodity money. Foreign exchange covers that base, as inconvenient as that is. Because sovereign currencies can loose relative value through over-supply due to mismanagement, crime, and enemy action, global benchmarks are useful. After the closing of the gold window, the U.S. dollar over time became the global benchmark. I don't claim to understand what happened after 1971, when I was just 25, but the U.S. dollar has, at this date, declined in relative value along with most other sovereign currencies. Not much of a benchmark. Perhaps that is asking too much of a sovereign currency? (more in post 2)

  29. Part 2An international trade currency may be needed, but there's no planetary sovereign to issue it, much less manage it. Where the dollar once may have functioned both as a national and global currency, that seems to be working less and less. Precious metals are commodities and an asset class that the global market appears to be using as a benchmark for sovereign/fiat currencies. The managers of those currencies don't really like this, so we are in a currency war.The way that commodities were used in the past for money is not lost to the ages. The history has been captured in centuries worth of writing. It is directly related to finance, banking and trade between States.Zarlenga explains how some Greek States and the early Roman Republic established non-commodity money for commerce internal to their controlled territory. These sovereign currencies protected them from gold and silver commodity manipulations of Mediterranean traders. Predatory trading existed then, like now, to benefit from regional differences in the gold-silver ratio that were only known to a few. (see part 2)From "The Lost Science of Money" by Stephen Zarlenga MONETARY "SECRET OF THE AGES" – A DICHOTOMY IN THE – GOLD/SILVER RATIO BETWEEN EAST AND WEST The second ancient mechanism was the monetary "secret of the ages" – a difference in the gold/silver ratio between east and west. For thousands of years this mechanism was a great source of power to who­ever held it. Elements of the Roman establishment drew great strength from their control over it, until its effects helped bring down Rome from within. Venice's profits from it helped spark the Renaissance. It was quietly used for centuries by Jewish merchants getting transplanted from Asia into Europe. Control over it helped shift the balance of commercial power in Europe in 1500 from Venice to Portugal/Antwerp, then to Holland, and finally to England. In short, it was one of the primary forces that shaped modem capitalism. It worked like this: The gold/silver ratio in the West was kept high, ranging over millennia, from 9 to 1, to 16 to 1. However, the ratio in India and Asia was kept low – usually about 6 or 7 to 1. This meant that silver taken from Europe to India exchanged for nearly twice as much gold in India as it did in Europe. The nexus of the trade was the land bridge above the Middle East; whoever controlled that area usually controlled the trade. If it was controlled from the West, they got 100% more gold for their Silver than the local value. It worked just as well from the East. If they controlled the trade they received 100% more silver for their gold. If control was shared, trade would probably have been at a 9 to 1 ratio, giving each establishment a profit on exchange. The existence of this dichotomy and its significance is almost unknown. William Jacob discusses it, and Del Mar also discovered it: … pp. 85-86More in Part 3

  30. Part 3 A global information system about the status of commodities, prices and trading in something of a real time nature is recent. As new technologies emerged which collected transaction information and made it visible to more people, the trading game got more complex. Credit/debt created lots of IOUs, the majority of which were not issued by the Sovereigns. If it all falls apart, what will we use for money? As Anonymous notes: "Little people can make their own currencies." While that is a logical scenario, if we get to that point, we will have all lost more than we can bear.How do we get to some balance between the relative asset value of existing human social capital, the collective asset value of the built environment and usable increments of the natural environment, taking into account the renewing and non-renewable losses, and have nominal currencies that work? The American Monetary and Financial Security Act in Zarlenga's book is such a proposal and a version has been introduced in the U.S. House of Representatives. Similar action would be needed in other nations in order that sovereign money is brought to this standard. Information and research is at:

  31. Note:A major source for Stephen Zarlenga was the "Science of Money" by Alexander Del Mar published in 1885. This and other of Del Mar's works are on line at Google books and other sites. In 1866 del Mar was appointed director of the U.S. Bureau of Statistics. An expanded bio about this highly reputable author is at

  32. Calgacus: Of course, it's true that governments can be producers if they choose to(e.g. by setting up state-owned manufacturing industries or what have you). But in order to become producers, in the first instance, they must acquire the productive resources to do so, without offering any commodity in exchange. So in this sense, I think the point stands.

  33. Lewis MacKenzie:It's a minor disagreement and I phrased it too critically before. But I believe the historical sequence was states, then money, then markets. Ancient states already had plenty of resources and production when monetary economies were arising. My main idea was to compare tax payments to other payments to the state to clarify things for PZ if I could. States have to start out with the resources to make meaningful what they sell in taxation: freedom from the taxman, not having your head displayed on a pike. "Forgive us our debts, as we forgive our debtors"is better. Michael Hudson has written a good amount on ancient and biblical economics & how it is embodied in ancient and religious texts, which should often be interpreted economically. And has pointed out how many ideas expressed there are rather in advance of much modern "economics". 🙂

  34. Lewis MacKenzie: "When a sale takes place, the buyer receives real goods and becomes the seller's debtor, whereas the seller becomes the buyer's creditor and receives a credit on the buyer.This is straightforward enough when we consider private commerce, where the agents involved can promise to pay their debts by selling real goods or services. But governments are not producers. When a government buys goods or services from private agents, it cannot promise to repay its debts by selling something in order to earn the necessary credit. With what, then, does it promise to repay the debt owed to the producer? "Nothing I say. Government purchases are not voluntary transactions like private purchases, where both sides gain benefit. They are more like extortion: 'give us what we want, or else!'Only reason government's money is accepted in the first place is that there is tax liability. If there were not, government could not buy anything. Moreover, tax liability was imposed at will by the ruler. It does not promise it will stay the same, in fact, if government follows the rules of functional finance tax rates would be constantly changing, due to changing economic conditions.If government would be to impose tax liability to it's citizens than every citizen has to provide one apple to the tax collector every year, would you say all the apples in the forests would be now part of the national debt?If it taxed fishes, all fish in the ocean?Pair of shoes, all shoes in the world?List could go on forever.

  35. PZ: Though directed at Lewis MacKenzie, I will answer. (To Lewis, BTW, I of course agree with your point above in an abstract, fundamental manner.) If government would be to impose tax liability to it's citizens than every citizen has to provide one apple to the tax collector every year, would you say all the apples in the forests would be now part of the national debt?You've almost got it. That is close to the right way to think of things. 🙂 Once the apple, fish, shoe has been presented to the government, who agrees it is an apple etc, but not before, and before it is taken in payment for taxes, it becomes "part of the national debt". That's when the apple changes "its character from that of a mere commodity to that of a token of indebtedness."On the same page of Mitchell-Innes' article that Lewis quoted from, Mitchell-Innes answers your question, using gold instead of apple, fish, shoes. "The reader may here raise the objection that whatever may have been the practice in olden times and whatever may be the scientific theory we do in the present day in fact use gold [apples, fish, shoes] for making payments besides using credit instruments. A dollar or a sovereign, he will say, are a certain weight of gold and we are legally entitled to pay our debts with them.But what are the facts? Let us take the situation here in the United States. The government accepts all the gold of standard fineness and gives in exchange gold coins weight for weight, or paper certificates representing such coins. Now the general impression is that the only effect of transforming the gold into coins is to cut it into pieces of a certain weight and to stamp these pieces with the government mark guaranteeing their weight and fineness. But is this really all that has been done? By no means. What has really happened is that the government has put upon the pieces of gold a stamp which conveys the promise that they will be received by the government in payment of taxes or other debts due to it. By issuing a coin, the government has incurred a liability towards its possessor just as it would have done had it made a purchase, -has incurred, that is to say, an obligation to provide a credit by taxation or otherwise for the redemption of the coin and thus enable its possessor to get value for his money.In virtue of the stamp it bears, the gold has changed its character from that of a mere commodity to that of a token of indebtedness. In England the Bank of England buys the gold and gives in exchange coin, or bank-notes or a credit on its books. In the United States, the gold is deposited with the Mint and the depositor receives either coin or paper certificates in exchange. The seller and the depositor alike receive a credit, the one on the official bank and the other direct on the government treasury. The effect is precisely the same in both cases. The coin, the paper certificates, the bank-notes and the credit on the books of the bank, are all identical in their nature, whatever the difference of form or of intrinsic value. A priceless gem or a worthless bit of paper may equally be a token of debt, so long as the receiver knows what it stands for and the giver acknowledges his obligation to take it back in payment of a debt due."See also his second article, the paragraph after "The United States government achieves the same result by a somewhat different method.", p.162 in original numbering.

  36. I just got through with Randall Wray's book "Understanding Modern Money", quite interesting I admit. I've also had a look at what Ludwig von Mieses says about money and credit. And now I am more confused than ever. I still can't figure out how we ended in the mess we are in right now and how we will ever manage to get out of it without major pain. I do not have a very high esteem of governmental institutions, especially after what I have seen over the last decades. I believe it is pretty hard to find one government that is sovreign, not just the puppet of some hidden powers. The colonialisation methods described by Wray are still in use today. And it is time to worry when the biggest terrorists in history declare war on terror, just to produce more of it.But besides all this I am wandering if there is a place on earth where Wray's theory has been applied so far? Has anyone experiemnted with it and obtained some results? Sorry for being a bit off theme.Dietmar

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