A Meme for Money, Part 3: Framing the Alternative Approach

By L. Randall Wray

In Part 2 we looked at the mainstream framing of discussion about money and about the economy and society more generally. Following Lakoff, my argument is that framing is important and that so far orthodoxy is winning all of the important policy debates because it has the better framing. Policy is always and everywhere a moral issue—not merely an economic issue and certainly not a technical issue. To win policy debates, we must—like orthodoxy—engage the moral issues. We can take the higher moral ground.

(Thanks for all the comments; I have just returned from Finland. I’ll get around to a few responses to comments tomorrow. A bit shout-out to the 300 who attended an MMT-infused conference on full employment policy in Helsinki to listen to my presentation! Little did I know that Finland is a bastion of MMTers.)

The approach that I take is the Modern Money Theory (MMT) approach. In the discussion that follows, I will presume that readers have a working understanding of MMT.[1] It goes without saying that I believe MMT provides a correct description of the operation of modern monetary systems, so it makes sense to base our alternative meme on the correct approach to money. However, this particular post is not so much concerned with a correct theory, but rather with developing a progressive meme for money—a story of money’s origins, nature, functions, and operations that can serve as an alternative to the orthodox story briefly presented last time.

There are several approaches to the history of money that are consistent with the alternative meme. I prefer the one I adapted from the great Cambridge numismologist Philip Grierson, who located money’s origins in the ancient practice of Wergild.[2] I find that story to be most consistent with what I understand about tribal society—but, again, what is important is the frame.

According to Grierson, money evolved as unit of account used to measure debts for the purpose of paying fines in compensation. This is inherently a social story, not an individualistic story. The purpose of the payment was social: to prevent blood feuds and to maintain social cohesion. Further, the fees were established by agreement in social assemblies, socially imposed, and payment was collectively enforced. There was no “higgling and haggling”, no “market exchange”, no thought to individual “efficiency”.

Further, the story begins with a debt—not a voluntary transaction between equals to satisfy personal preferences, but with a wronged party who demands compensation or else retribution will be taken. With the imposition of a fine, the social assembly turns the tables: the perpetrator becomes the debtor, the victim is the creditor. The debtor is finally “redeemed” by the payment of the fine. With that, the slate is wiped clean, restoring equality and social cohesion.

With that framing, money is not something that intermediates trade between self-interested globules of desire, but rather is part of an institutionalized practice designed to further the interests of the community—maintaining peace and justice.

To be sure, we do not know exactly how payment of fines “in-kind” (there was a specific payment to be made depending on infraction: a pig for this, a bushel of wheat for that; note also that the practice of paying “bride-price” to the family losing a female to marriage is also an example of a wergild “fine”) to harmed individuals were transformed into payments of money to the authorities (fines, fees, and later taxes).

Again, there are alternative stories. My favorite is that with the transformation from tribal society to a “civilized” command society, the authorities were able to first obtain a share of the fines paid and later to transform transgressions into “crimes against the crown” (later, against society) rather than against identifiable victims. It then made sense to establish a measuring unit (the money unit) to measure the fine and to value the things delivered in payment, and later to actually issue the means of paying the fine–a money “thing”, currency, to be used in paying fines.

Note that this reverses the orthodox sequence: first liabilities, then a money unit, then a money “thing”, and finally money prices and markets based on sales for money. Why did markets develop? Not to barter what you have but don’t want, but rather to obtain the means of debt (tax) settlement.

And while the “creation of money” as a means to move resources to the authority (in payment of fines, fees, tithes, and then taxes) was not initially a progressive development, with the rise of the democratic state the monetary system could be used to further the public purpose—including promoting peace and justice.

Of course, even the modern state also uses the monetary system to pursue war and conquest, and as well private interest that runs counter to the public interest. But for reasons we will discuss, use of money is—on the whole—a progressive development that supports economic activity in the public interest, in spite of the danger (often a reality) that money can be used in inimical ways.

In truth, the same can be said of the development of democracy.

What is important for our argument here is that we need to change the focus—away from money as cost-minimizing medium of exchange and to money as an institution, as Geoff Ingham has long argued (echoing the work of Dudley Dillard[3]). And leaving to the side all the ancient history and speculation on money’s origins and evolution, it is clear that our modern monetary system arose with the development of capitalism and the rise of the modern state. That is to say, the capitalist state.

In that respect, all the stories about barter are irrelevant for two reasons. First, production for “the market” bears no resemblance to hypothesized production for barter. Capitalist production begins with money, to produce commodities for sale, to realize “more money” (as Marx, Veblen and Keynes all insisted). Capitalists do not produce with a view to exchange for other commodities—they want money and if they do not get it, the production was a failure. And hence, there must be a credit system to supply the production process with the money it needs to start and to ensure that purchasers have the money (indeed, the “more money”) that validates capitalist production.

Second, in almost every case, the money of account is a state money of account—chosen by the state and sometimes backed by legal tender laws, but always backed by a tax system. Indeed, it could be said that currency issued by the government is “the means of tax settlement”. (Today, we should include central bank supplied reserves in the definition of currency—that is, high powered money, HPM—since taxes are paid for customers by banks whose reserves are debited.) Previous to the European Monetary Union, exceptions to what Charles Goodhart called the “one currency, one nation” rule were rare, usually limited to small states closely connected to another, or to currency board arrangements. And when a new nation was formed (usually by breaking up a nation), one of its first acts would be to create a new currency.[4]

So, modern moneys are “state moneys”.

The alternative frame must therefore stress this dual link between money and capitalism and between money and the (capitalist) state—as Ingham insists. The Crusoe-Friday meme is not useful either for understanding the way our system works, or for framing our discussion about how to use money to further the public and private interests.

To that end, we need to begin with the state and its money, that is, with the state and its treasury and central bank at the center of our monetary system.

On one level, that monetary system is a set of credits and debits: I Owe You’s and You Owe Me’s. One of our memes is: “money is what we owe each other”; or: “money is the tie that binds”.

These IOUs are recorded on balance sheets, with banks handling much of the record keeping. At the aggregate level, all the IOUs must cancel—there are always two entries, a debit on one account and a credit on another—but that takes away all the fun, all the action, all the power.

If I strike you, you are struck by me and so the two cancel but that does not mean there is no impact.

The credits/debits necessarily represent a social relation—the creditor and debtor are related in a social bond. While we normally think it is better to be a creditor than a debtor, throughout history both parties have always been thought to be tainted by this relationship. In any case, it is unavoidable in a society in which much of the economy is organized through and oriented toward the monetary system—which itself consists of layer upon layer of debits and credits.

While we can imagine a Crusoe-Friday barter economy, it excludes by assumption these credits and debits and the social relationship of creditor to debtor. Even if Crusoe and Friday decide to use seashells as a “money” medium of exchange there is no social relationship, no creditor, no debtor—just an impersonal relation with the commodity for which one traded. The seashell “money” is asocial—as befitting a theory that denies the very existence of society.

Note also that in the currently fashionable economic models that use a “representative agent” (ie: Real Business Cycle and Dynamic Stochastic General Equilibrium models) the debits and credits would be silly—you owe yourself—which is precisely why there’s no room for money, whether it is social or not.

Our alternative approach needs the debts, the power of creditor over debtor, and the threat of bankruptcy. It also needs the state in the center. We’ve already mentioned the state’s choice of the monetary unit. It is difficult to perceive how the haggling of a number of self-interested individuals bartering a reasonably large number of items could ever settle on a single measuring unit.

In any case, it is rather clear that today, at least, it really is the state that chooses the unit, taxes in the unit, and issues the currency denominated in that unit (again, we recognize the caveat that there are a few minor exceptions plus one major exception in which EMU member states chose to adopt a common unit and chose to constrain currency issue through self-imposed rules).

So while we can imagine a creditary system without the state at the center, it wouldn’t be our capitalist system with the “bourgeois” state (or democratic state, depending on one’s ideological orientation) pursuing the interests of the dominant capitalist class (or the public purpose depending on one’s political persuasion).

We could also imagine the capitalist state functioning without money, with only the private sectors keeping accounts in a mutually approved unit of account on the books of private banks. Rather than using money to move resources to itself, the state could use force to take what it wanted—from workers and capitalists. This would be a sort of command state economy operating outside the capitalist monetary system (perhaps a feudal system but with a modern state).

As Warren Mosler always jokes, in the old days you’d go to the pub for some drinks and wake up in the crown’s navy with a big bump on the head. From this view, the use by the state of the monetary system to exercise claims on resources is a big improvement as one can choose to sell or to withhold labor and other resources from the state’s use. Join the navy if you want, but drink freely in the pub tonight without worry that you’ll be in uniform tomorrow.

To be sure, however, this development of the monetary system to be used for both production and allocation is not without negative aspects. It is difficult to conceive how organized prostitution as well as illicit drug “markets” could have reached their current level of development in the absence of the monetary system. (While one could imagine some one-off “sex for coke” barter, sophisticated and violent long-distance trade based on complex production chains would be difficult to organize without money.)

As much of the “trade” in sex and drugs runs across national borders, it is unlikely that it would have been possible without well-organized currency exchanges and especially the international reserve currency in which illegal activities are priced. I’m sure the drug cartels thank Uncle Sam for providing the almighty dollar to lubricate their trade.

Still, on balance, the development of the monetary system must be beneficial. Government purchases what it needs and imposes liabilities (mostly taxes and fees today, not fines) to ensure a demand for its currency. In that sense we say “taxes drive money”. While taxes are largely an involuntary liability, sales to government are largely voluntary. Exactly what one does to obtain the means of paying taxes (“money”, although technically taxes are paid using HPM, with payment handled by private banks) is at least in part discretionary.

But, as they say, only death and taxes are unavoidable. Most people have to sell something to get the means of paying taxes.