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Chapter 8 gave a very general overview of money’s role in an economy in the context of how other social animals organize joint activity (and how we humans organize our activity in ways other than with money). This chapter uses a parable about the construction of a mill to lay out with more substance what money is and how it works. The context is a physical economy in which money doesn’t yet exist. The parable shows how a set of social arrangements around an investment project can lead to the existence of money. Money itself is tied to debt and credit. Extensions of the main story lead to observations about the relationship between saving and investment, and about the government’s role in the monetary system. Appendices discuss: value and money’s roles and attributes; saving not tied to other people’s obligations; and the connection between money and precious metals.
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The mill parable focuses on the link between savings and debt, between your ability to have savings and my willingness to carry debt. But more generally, there can be savings without that particular type of specific obligation, involving instead ownership of productive assets. The essence of having savings stored up is that they give you the ability to obtain things without producing anything, or to obtain things of more value than you are currently producing. If you are currently producing things worth $40,000, that’s the most you can consume—unless you can borrow, or unless you have savings. One way to do that is the way the mill parable illustrates. You handed me something useful in the past, so I have to hand you something useful now, without you doing anything useful now. But what about the ownership of the mill? We assumed in the parable that it would clear 2.5 units of food a year, enough for me to have a unit to eat and 1.5 units to pay my annual debt service to my lenders. But that debt obligation only lasts 10 years. After that, I’m earning 2.5 units a year with no further obligation. Well, I do have to operate the mill, since the food doesn’t grind itself, but I could hire someone to do that. I could pay someone 1 unit of food to operate the mill, then have 1.5 left as my income. There’s no obligation in this income stream from mill ownership. If people stop bringing their grain to be ground, the mill will produce zero. I will have to fire my employee, and my own income will drop to zero. When I borrowed to build the mill I issued coins that represented an obligation: bring this to me in the future, and I will give you food. Owning the mill is good, but it doesn’t provide me with anything analogous in terms of other people’s obligation to provide me with real goods in the future. But as long as people do continue to use the mill, the ownership of it allows me to consume more than I produce. (I’m leaving out the issues of overseeing the employee and seeing to maintenance.) The mill is the savings I have, it’s just in a different form from the coins I put into the farmers’ hands earlier in the story. The other way I can benefit from the mill, besides collecting the annual profit, is to sell it. Someone may be interested in giving up a lot of purchasing power now in return for ownership of the mill and the annual profit that it brings (and that they hope it will continue to bring). If such a buyer exists, I can give up the future profits of the mill in exchange for a large sum of purchasing power now. In a modern economy a bond is like the coins in the mill parable: you give me a specific amount of money now, and I give you a specific amount of money at specific times in the future. The bond represents savings that you have because it also represents an obligation that I have. In contrast, ownership of a share of stock is analogous to ownership of the mill, in that nobody has a future obligation to the saver. If the company is profitable, then you the saver own some of that profit, and it should come to you as some combination of dividends paid to shareholders and in increased market price of the shares. But if the company’s customers stop showing up, you’ll discover that nobody owes you anything. There’s a common thought that gold is the essence of money; sometimes this is expanded to include silver. A striking statement of this view is the speech of Francisco d’Anconia from Ayn Rand’s book Atlas Shrugged:Can you see a potential problem with that idea, and a reason to limit redemption only to tokens that mature in the current year? In the real world, our money doesn’t have maturity dates at all. Why is this generally not a problem?
Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. 4 Most people probably wouldn’t state it as vehemently as Rand, but may hold to some version of it: real money is precious metal, and paper money is only real or legitimate to the extent that it represents a legally enforceable claim on a specific quantity of precious metal. In contrast, note that this chapter has developed the concept and functions of money without reference to gold (except to note that there was no reference to gold). There’s a good reason for that, which is that I think gold fetishism is wrong. More than that, the obsession with gold fails a simple test. Note that nothing stops people from setting up a gold-backed currency of their own. If people really did prefer using such a currency, they would move away from “worthless” paper money (except for enough to pay their taxes), and the all-knowing market would show the superiority of “real” money. Third, there was only a relatively brief window when most of what was then the rich world operated on a gold standard. There were particular conditions that made it viable in the period before World War I, and then different conditions that made it a detriment in the post-war period. Once the Great Depression started, the faster a country left the gold standard, the faster it recovered. 5 Money is a claim on exchange value. Gold and silver are metals that many humans value above any “practical” use they have. That means that in some situations they can be used as claims on exchange value, as money. But gold and silver are not inherently money, and money is not equivalent to gold and silver. What about the more distant historical experience where, as mentioned in Sect. 9.8, gold and silver have sometimes “attained a status of being money in and of themselves.” Recall from Sect. 9.9 the role of effective taxation in supporting the value of a state-issued money. When people were trading long distances, beyond the range of their own sovereign’s ability to tax (and to regulate economic affairs in general), they sometimes used precious metals as something acceptable “internationally.” 6 And when invaders looted cities, they would often strip the churches or temples of gold and silver decoration; the attackers placed no artistic value on what they stole, but they knew that if they melted it down they could get it accepted far and wide. So there is something peculiar about the role of gold and silver. But that “something” should not be confused with the idea that precious metals are money, or that any other form of money is only “honest” or “true” if it represents a claim on some specific amount of gold or silver. To see the fallacy here, consider the case of silver and gold coins, stamped with the king’s likeness. If the metal itself is the essence of the money, then what’s the point of stamping the king’s face all over it? It’s a lot of work for nothing. Well, not really for nothing, because precious-metal coins typically traded at greater value than the equal quantity of unstamped metal. The king could use a single one of his silver coins to buy unstamped silver weighing as much as two of his coins. So his face on the coin was worth something after all. But why? One answer is that the monarch’s stamp was a way of “vouching for” the weight and purity of the coin. In this explanation, the metal is still the thing that is the real carrier of the coin’s value; the royal imagery merely saves you the time of precisely weighing and chemically testing every coin that you’re offered. This sounds plausible, but … It turns out that a funny thing happened at the border of the kingdom. Coins that had literally been “worth more than their weight in gold,” suddenly weren’t. If the king’s face were there only as authentication of the coin’s metal content, that shouldn’t have happened. People on the other side of the border weren’t part of the kingdom, but they should have had some sense of the king’s honesty. What was different about these “foreigners” was that they had no legal obligations to some other country’s king. Since he couldn’t force them to pay tax in his coin, they had no reason to accept his coins for anything more than their underlying value. (Well, they had a little reason, for when they did engage in trade across the border.) Lastly, ask yourself whether you’ve ever accepted payment in regular ol’ U.S. dollars, whether for work or in return for an object you were selling. Did you feel you were getting cheated by being paid in a currency that wasn’t backed by precious metal? Did it cross your mind that you might be unable to find anybody else willing to accept the “fake money” you’d been paid with, because it wasn’t backed by gold? Probably not, and it’s no wonder. You’ve lived your whole life in an economy where the money wasn’t backed by gold, and yet it’s extremely unlikely that you’ve ever encountered a situation where someone refused payment in “mere” dollars and wanted gold instead. Money is as money does, and U.S. currency, whether paper bills or entries in bank accounts, acts in all ways like money, even though it is “no more” than promises of debt or valid payment of tax obligations so there’s something question-begging about insisting that it’s not “real” money. Money itself may be magical, but there’s nothing magical about precious metals that makes them money in some essential way that other things aren’t. Problem 9.1 Consider two scenarios. In both of them, there is the desire to undertake an investment activity of $1,000. The difference is that in World A the investor owns $1,000 worth of savings, but there is no current saving. In World B there is no stock of savings, but there is a willingness to engage in saving worth $1,000. In which world is the investment actally possible? Explain how that would happen, and what would prevent investment in the other world. Problem 9.2 Look at a different scenario from Problem 9.1. Each of you 10 original farmers agrees to my deal, but none of you wants to work harder, nor do you want to consume less. “No problem,” you say, “I’ll just take all the tokens I received and go buy a whole unit of food from someone else.” So you go to Jill Hill and give her all your tokens. She’s just like you, Dear Reader—she doesn’t feel like working harder or consuming less, so she takes the tokens from you and goes off and finds another farmer. Carry this idea to its logical conclusion: what happens when there are no more farmers for the person holding the money to go and try to buy the food from? What happens to the money? What happens to the price of food? What happens to my ability to undertake my investment project? Problem 9.3 Section 9.4 suggested that a token that matured in 1952 could be brought into the mill in 1953 and treated just the same as a token that had matured in 1953.Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. 4
Can you see a potential problem with that idea, and a reason to limit redemption only to tokens that mature in the current year?
In the real world, our money doesn’t have maturity dates at all. Why is this generally not a problem?
Part of the confusion here is that, for an individual, having $100 million saved up actually is useful. You could go and spend 10, or 50, or all 100 of those millions, and in an economy with a GDP of $14 trillion, you would certainly find someone to respond to your money by making something to sell you. But the economy as a whole can’t live off of money savings accumulated in the past. Money saved in the past only helps the economy as a whole in the present if it was used in the past to create capital that allows the economy to produce desired goods and services in the present.
A useful discussion of chartalism is in [ 5].
A classic treatment of bubbles is [ 4].
Reprinted in [ 6].
See [ 2].
The rest of this example follows Graeber [ 3].
Zurück zum Zitat Bezemer, D. J. (2009). Banks as social accountants: Credit and crisis through an accounting lens. Munich Personal RePEc Archive, paper No. 15766. http://mpra.ub.uni-muenchen.de/15766/1/MPRA_paper_15766.pdf. Accessed Aug 4, 2015. Bezemer, D. J. (2009). Banks as social accountants: Credit and crisis through an accounting lens. Munich Personal RePEc Archive, paper No. 15766. http://mpra.ub.uni-muenchen.de/15766/1/MPRA_paper_15766.pdf. Accessed Aug 4, 2015.
Zurück zum Zitat Eichengreen, B. & Sachs, J. (1985). Exchange rates and economic recovery in the 1930s. The Journal of Economic History, 45, 925–946. CrossRef Eichengreen, B. & Sachs, J. (1985). Exchange rates and economic recovery in the 1930s. The Journal of Economic History, 45, 925–946. CrossRef
Zurück zum Zitat Graeber, D. (2011). Debt: The first 5000 years. Brooklyn: Melville House. Graeber, D. (2011). Debt: The first 5000 years. Brooklyn: Melville House.
Zurück zum Zitat Kindleberger, C. P. (1989). Manias, panics, and crashes: A history of financial crises. New York: Basic Books. CrossRef Kindleberger, C. P. (1989). Manias, panics, and crashes: A history of financial crises. New York: Basic Books. CrossRef
Zurück zum Zitat Tcherneva, P. R. (2006). Chartalism and the tax-driven approach to money. In P. Arestis & M. Sawyer (Eds.), Handbook of Alternative Monetary Economics (pp. 69–86). Cheltenham: Edward Elgar. Tcherneva, P. R. (2006). Chartalism and the tax-driven approach to money. In P. Arestis & M. Sawyer (Eds.), Handbook of Alternative Monetary Economics (pp. 69–86). Cheltenham: Edward Elgar.
Zurück zum Zitat The Daily Paul. (2010). Francisco d. Anconia’s (Ayn Rand’s) money speech in ‘Atlas Shrugged’. http://www.dailypaul.com/133313/francisco-d-anconias-ayn-rands-money-speech-in-atlas-shrugged. Accessed Feb 24, 2014. The Daily Paul. (2010). Francisco d. Anconia’s (Ayn Rand’s) money speech in ‘Atlas Shrugged’. http://www.dailypaul.com/133313/francisco-d-anconias-ayn-rands-money-speech-in-atlas-shrugged. Accessed Feb 24, 2014.
- What Money Is
- Chapter 9
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