Why did they make subjects pay taxes at all?

State Theory helps us solve one of the mysteries of the fiscal policy of early kingdoms: Why did they make subjects pay taxes at all?

If Adam Smith were right, and gold and silver naturally became money because free markets wanted them, then why wouldn’t the king just grab control of the gold and silver mines and become powerful that way?

Lots of early kings DID do that. But then what was the point of extracting the gold, stamping a picture on it, circulating it, and then demanding that people give it back again?

But if money and markets DON’T emerge naturally, it makes sense. That’s how you create a market.

If you want to support a standing army of 50,000 men, feeding them is really hard. But if you just give them coins and then demand that everyone in the whole kingdom pay you some of those coins, you turn your whole economy into a big machine to feed soldiers, because now everyone in the kingdom has to find a way to help feed soldiers so they can get the coins they need to pay you.

pg 49-50

Cryptocurrency and Credit Theory

The system of IOUs Graeber described when explaining Credit Theory, with Henry’s IOUs circulating all over the place, got me thinking.

He says something to the effect of “Of course Henry would have to be fabulously rich to have all transactions be carried out using tokens of his promise to pay a debt, which is why it’s usually the king who backs all that shit.”

Bitcoin/cryptocurrencies claim to be decentralized and thus revolutionary, but one of my big problems with them has always been that there’s no power backing them. It’s like they took the fiat idea of “all that matters is people’s faith in the currency’s value” to the extreme, totally ignoring the fact that people have faith in fiat currencies because they have faith in the entity that backs them’s power. Like, the dollar doesn’t just have value because people believe it does, the dollar has value cause the US will probably kill you if you say it doesn’t. At the very least it will be more inclined to let you live if you say it does.

What if, instead of mining and doing ledger work and all that, you earned bitcoin by putting up some property or service, some thing of value as backing for that coin? Loooots of regulating and enforcing has to go into this now, but of course the other huge problem with cryptocurrencies is their ridiculous game of make-believe about how they can run a power structure with no regulation or enforcement.

I don’t really know how this would work in practice, but the idea of a decentralized currency backed by the wealth and power of a great range of people instead of the wealth and power of a single entity is very appealing. Will have to flesh out further.

OK, so after reading the next paragraph of Debt I want to flesh this out a little further. Modern currency is backed by debt of the state, right? State sells bonds to banks which creates the debt that the banks then circulate. So what we’re talking about is the same thing, except letting people play the role that banks currently play. The Central Bank of our new system will take loans from people and give them currency in return.

Tally Sticks

“One of the most important forms of currency in England in Henry’s time were notched ‘tally sticks’ used to record debts. Tally sticks were quite explicitly IOUs: both parties to a transaction would take a hazelwood twig, notch it to indicate the amount owed, and then split it in half. The creditor would keep one half, called ‘the stock’ (hence the origin of the term ‘stock holder’) and the debtor kept the other, called ‘the stub’ (hence the origin of the term ‘ticket stub.’) Tax assessors used such twigs to calculate amounts owed by local sherriffs. Often, though, rather than wait for the taxes to come due, Henry’s exchequer would often sell the tallies at a discount, and they would circulate, as tokens of debt owed to the government, to anyone willing to trade for them.”

Pg 48

State Theory of Money

So the big issue with Credit Theory is that whoever is writing all these IOUs that a money supply is based on has to be obscenely wealthy, which is why it’s usually The King or whoever who does it.

“The real impetus for the Chartalist position, in fact, came out of what came to be known as the ‘German Historical School,’ whose most famous exponent was the historian G.F. Knapp, whose State Theory of Money first appeared in 1905.”

Emperors and kings had always handled units of measure, so it makes sense they’d handle money too, under the chartalist model.

Monetary systems of measurement are remarkably stable. Under Henry II from 1154-1189, almost everyone in Europe was still using Charlemagne’s system from about 350 years earlier, even though some of the coins in his system never even existed, almost none of his coins were still around, and the ones that were were wildly variable in size/quality.

Actually Charlemagne’s system stayed in place for over 800 years, coming to be referred to as “imaginary money,” and derniers and livres were only abandoned as units of account around the time of the French Revolution.

But according to State Theory, what the money is made of (Silver or leather or fish or paper) doesn’t matter, as long as the state takes payment for taxes in it, because that becomes currency.

Actual modern banknotes are kind of the opposite though. They’re not backed by debts OF The King’s, they’re backed by debts TO the king. The Bank of England was founded in 1694 with a loan made by a consortium of bankers worth about 1.2 million Pounds. In return, they got a royal monopoly on issuing banknotes, basically that they could circulate IOUs from the king to them for that loan. (King owes bankers money for that loan, King writes a million IOUs, bankers give those IOUs to people to use as currency).

pg 47-8

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.

Free Speech

Discussed on Twitch

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