Credit Theory of Money

Gavin Mitchell-Innes was an early thinker in the area, got support mostly in US and Germany (two up and coming powers at the time, not in Britain, the power at the time. This feels significant). Another name is Chartalism (from latin charta, meaning “token”).

Theory i sthat money is not a commodity but an accounting tool. “For a Credit Theorist can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter.”

“Historically, such abstract systems of accounting emerged long before the use of any particular token of exchange.”

Money matters because it’s an IOU. Conventional wisdom says banknote should be a promise to pay a certain amount of real money (gold/whatever), Credit Theory says banknote is just a promise to pay *something* of a certain value.

“Conceptually, the idea that a piece of gold is really just an IOU is always rather difficult to wrap one’s head around, but something like this must be true, because even when gold and silver coins were in use, they almost never circulated at their bullion value.”

This theory allows for the trading of debts. I give you something, you give me an IOU, I can give that IOU to a third party for something else. They can then give the IOU to someone else, etc, etc. All that matters for the IOU to have value is people’s faith that the original issuer is good for it.

“In this sense, the value of a unit of currency is not the measure of the value of an object, but the measure of one’s trust in other human beings.”

pg 46-7

Why Economics started in 1776

-Money and trade had been around like, forever, so why did we only get a discipline of Economics in 1776?
-We needed government policy creating markets, like England was doing at the time. Beyond laws and police, they were also implementing monetary policy pegging the value of currency to silver but by only “pegging” and not directly using, they were also greatly increasing the money supply
-That required careful regulation of the banks supplying paper money. France and Sweden had already tried creating state-supported central banks, but they failed because they let the currencies get too speculative. So theorists of Smith’s day felt pegging money to precious metals was the answer

Why do they cling to barter?

-Smith’s goal was to create a Newtonian Physics of economics. Concept of a separate sphere called “The Economy” was relatively new in his day, and he wanted to show that it operated by rules like physics
-Newton was a Deist, believed in a clockmaker god who set the universe in order, Smith wanted to show the same thing. This is the “invisible hand” of the market
-This assumption of a kind of divine providence behind the market depends on a voluntary contract type model of exchange, in which all trades are barter for mutual advantage.
-So basically the fundamental belief of modern economics depends on viewing The Economy as a sphere of mutually beneficial trades orchestrated by a divine invisible hand. Allowing the more human relationships into this model raises questions about the divine perfection of it all.

Real uses of barter: when money fails

-The real uses of barter come when people who were used to money don’t have much of it anymore. Like immediately post-Soviet Russia or Argentina in 2002. Or in POW camps and prisons.
-Early medieval Europe after the collapse of the Roman Empire, and again after Carlingian empire collapsed. People keep accounts in the old imperial currency, even though they no longer have the coins.
-Adam Smith’s examples all come from societies where they did use money as a unit of account, but since it was slightly scarce they would trade in goods until it was more available.

“The law making tobacco legal tender in Virginia seems to have been an attempt by planters to oblige local merchants to accept their products as a credit around harvest time.”

pg 37-8

More real early economics

We’re starting with two imaginary people from an early section. Josh who has shoes but needs potatoes, Henry who has potatoes but needs shoes.
-If they were Iroquois, Henry would tell his wife he needs shoes, his wife would tell the other matrons, and if they approved he’d get some shoes from the community stockpile. To each according to his needs, basically
-If they were in a small, intimate community, Henry would tell Josh his shoes were nice, and Josh would give them to him. The potatoes wouldn’t enter in because both would assume that if Josh ever needed potatoes, Henry would give him some.
–One interesting little aside, particularly nice things thus get passed around a lot, since people compliment them and then are given them. But if you really want to keep something, you say it was a gift.
-Even in a fairly large, impersonal town, Henry’s wife would strategically mention he needs shoes, Josh’s wife would get him to give Henry the shoes, and then Henry owes Josh “one,” which Josh would call in when he needed/wanted something from Henry.

“In any of these scenarios, the problem of ‘double coincidence of wants’ so endlessly invoked in the economics textbooks, simply disappears. Henry might not have something Joshua wants right now. But if the two are neighbors, it’s obviously only a matter of time before he will.

This in turn means that the need to stockpile commonly acceptable items in the way that Smith suggested disappears as well. With it goes the need to develop currency. As with so many actual small communities, everyone simply keeps track of who owes what to whom.”

pg 34-36

Real Bartering

-Barter does exist, just rarely between fellow villagers
-Nambikwara of Brazil: if one band sees the cooking fires of another nearby, they’ll send emissaries to negotiate a trade meeting. If accepted, they hide the women and children and invite the men over to talk. Chiefs give a speech praising the other band and belittling his own, they put aside weapons, sing and dance, then individuals approach each other to trade. They have this really ritualized thing where they argue over if the things they want are any good, agree on a trade, and then with mock-force take the things they’ve agreed to trade. Then they have a big feast.
-So basically for the Nambikwara, “Barter… was carried out between people who might otherwise be enemies and hovered about an inch away from outright warfare– and, if the ethnographer is to be believed– if one side later decided they had been taken advantage of, it could very easily lead to actual wars.”
-Gunwinggu of Western Arnhem Land in Australia: They have a region-wide moiety system (kinship groups where everyone in a group is part of one lineage), so people are basically divided up into teams and can only marry people from other teams. They have a big festival called the dzamalag where after some initial negotiations, strangers come to another group’s main camp. They sing and dance, then do flirty dances, fuck, and give them trade goods. When everyone’s satisfied, the host group gives the visitors their own trade goods in return. Then everyone eats.
-Point is, barter happens during “meetings with strangers who will, likely as not, never meet again, and with whom one certainly will not enter into any ongoing relations. This is why a direct one-on-one exchange is appropriate: each side makes their trade and walks away.” It’s also why there are big rituals involving food and dance and “shared pleasures,” and why they make light of the tension of possible hostility between them through play.

Real History of Not Bartering

-Six Nations of the Iroqouis: main economic institution was longhouses where goods were stockpiled and alloated by women’s councils. Nobody traded arrowheads for slabs of meat.
-“The definitive anthropological work on barter by Caroline Humphrey, of Cambridge, could not be more definitive in its conclusions: ‘No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.'”

Smith’s Founding Myth of Economics

“What, he begins, is the basis of economic life, properly speaking?”
-“certain propensity in human nature… the propensity to truck, barter, and exchange one thing for another. Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.” But humans always swap and compare things. Even logic and conversation are forms of trading, and “humans will always try to seek their own best advantage, to seek the greatest profit they can from the exchange.”
-Drive to exchange creates division of labor and thus civilization
-People naturally specialize into what they’re better at, and then they end up with surpluses. But if the other people in their societies don’t have the right surpluses to trade, everyone’s fucked. “So everyone will inevitably start stockpiling something they figure that everyone else is likely to want.” Which then makes that commodity even more valuable. Yadda yadda yadda, precious metals, yadda yadda yadda, currency.
-This creates the notion of “the economy” as a separate sphere of human life. It’s where trading takes place

pg 25-8

History of Myth of Barter

-Adam Smith used it in 1776 to create discipline of economics as a moral philosophy professor
-Aristotle used it in 330BC, speculating that families must have started by producing everything they needed themselves, then gradually specializing and trading, so money naturally developed to make trade easier
-During age of exploration barter stories disappeared because everyone was discovering old-fashioned tribes and weren’t none of them bartering. “Most sixteenth- and seventeenth- century ravelers in the West Indies or Africa assumed that all societies would necessarily have their own forms of money, since all societies had governments and all governments issued money.”
-Back to Smith: he vigorously objected to idea governments create money. Following in John Locke’s footsteps. Locke thought Govt begins in need to protect private property and operates best when limited to that. Smith added that property, money, and markets were older than political institutions, and were the very foundation of human society. If govts “should play any role in monetary affairs, it should limit itself to guaranteeing the soundness of the currency. It was only by making such an argument that he could insist that economics is itself a field of human inquiry with its own principles and laws– that is, as distinct from, say, ethics or politics.”

pg 24-5

Religious Materialism

“The attempt to connect myth to social structure has mostly been a failure.”

“There is this great article called ‘Explaining the Political Ambivalence of Religion‘. It’s focused on political science, but I think it’s lessons apply broadly: religion and religious stories neither is defined by the area it comes from, nor does religious tradition define the culture of that area. Instead, how people use those stories and traditions are used is what’s important. After all, we all know the same stories and traditions have been used to justify both the violent conquests of Crusades and the austere, collectivist pacifist Amish and Hutterite communities. The Catholic Church helped prop up right-wing dictatorships in Europe and South America, fight against those same South American dictatorships through liberation theology, and bring down the Communist dictatorships in Poland and Slovakia all in the 70’s and 80’s. That’s what Philpott means by the political ambiguity of religion: each religious tradition can do many things, its specific political theology that matters most. The anthropologist Clifford Geertz’s famous Islam Observed also speaks to this: the Islam he experienced in Morocco and Indonesia were very, very different as they had been shaped by local conditions (and also shape local conditions).”

“I remember encountering one as an undergraduate (which unfortunately I have never been able to find again) which connected creation myths with primary crops. In areas where cereals dominated, people tend to grow out of the ground or be created from dust (cf. Genesis 2:7). In areas where tubers (potatoes, sweet potatoes, yams, cassava) were the primary crops, however, creation myths tend to involve chopping up a ceremonial figure and scattering their parts. [For those who don’t know, tuber crops are propagated not by seeds but by chopping them up and letting them grow anew in the ground–every eye on your potato could become a new potato plant if chopped and cared for properly.] I wouldn’t be surprised if this could be to some degree extended to other forms of agriculture. The original Indo-European creation myth was likely something like one twin slaughtering another (see Bruce Lincoln’s work on this–I think it is is still accepted), obviously related to their most important food source of flocks and herds of various animals.”

via This /r/AskHistorians Comment