9 ms·

What is Money? (1913)

81 points by hapnin 9y ago

bwestergard 9y ago
The author of this piece mentions classical political economy, but not Marx, its most trenchant critic. Marx's most interesting and compelling contribution - until recently seldom understood in the English-language literature - was his theory of the "value form" and money as the "necessary form of appearance of value". This contribution is further masked by the common practice of identifying "the labor theory of value" (there is no such singular theory) as Marx's principal contribution. In fact, he was a critic of the many (contradictory and inconsistent) "labor theor[ies] of value" in circulation at the time. "According to Marx, value and money are inseparable yet not identical: without money there can be no value, yet money is not value. Marx’s thesis of the inseparability of value and money overturns the classical theories of value and money and establishes new concepts governing the theory of price. These new concepts rule out the ordinary assumption of price theory, namely, that value is the independent variable that explains the behavior of price, which is conceived to be the dependent variable." - Patrick Murray (https://www.mtholyoke.edu/courses/fmoseley/conference/murray1.pdf https://www.mtholyoke.edu/courses/fmoseley/conference/murray...)
rockyleal 9y ago
The first 2 lines of the article are these: "The fundamental theories on which the modern science of political economy is based are these: That under primitive conditions men lived and live by barter" The basic premise, that barter was (and is) by which 'primitive' (whatever that is) live, has been thoroughly debunked by contemporary anthropologists of money. David Graeber's 'Debt: The first 5000 years" is a must read for anyone interested in the topic of theory of money from the anthroological (i.e., empirical) perspective: https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
- scott_s 9y ago
  I read "Debt" as well, so I had the same reaction. But it should hearten you that the author agrees! Two paragraphs down, he argues: "But modern research in the domain of commercial history and numismatics, and especially recent discoveries in Babylonia, have brought to light a mass of evidence which was not available to the earlier economists, and in the light of which it may be positively stated that none of these theories rest on a solid basis of historical proof—that in fact they are false." A few paragraphs later, he even says: "In both these instances in which Adam Smith believes that he has discovered a tangible currency, he has, in fact, merely found—credit." In other words, the author who wrote this piece, A. Mitchell Innes in 1913, is one of those "contemporary anthropologists of money."
- ucaetano 9y ago
  That's actually quite a poor book. It essentially defines debt as any, absolutely any, sense of liability towards another being. When you define it like that, it isn't only true that debt predate money, it's obvious. Besides that, the book is a collection of anecdotes carefully selected to try to paint a coherent picture. It is clearly written by someone who doesn't understand economics, to a public that doesn't understand economics. It is so full of basic mistakes that it is hard to decide if the problem is ignorance, laziness or malice. But it sells well!
  - joosters 9y ago
    Can you give a few examples of the basic mistakes in the book, please?
    - ucaetano 9y ago
      Sure: "Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s" The level of stupidity in this quote is unbearable. Basic fact checking for 5 seconds on Google would have been enough... Now take that and apply the Murray Gell-Mann Amnesia Effect. And that's before we get into ignominious phrasing such as "I would like to end, then, by putting in a word for the non-industrious poor. At least they aren't hurting anyone." Debt is a book written backwards. It starts with and idea: capitalism is bad and debt is the instrument of capitalism. It then piles up and links selected - but vague and frequently unsourced - anecdotes to try to create a logic supporting that idea. From an economics perspective, it isn't even wrong. But it does sound appealing to anyone who has debt or dislikes capitalism. Therefore, I expect a lot of downvotes. [Edit: typos]
- romwell 9y ago
  Right, and if you read beyond the first 2 lines, you'll find that the whole point of the article is to establish that these lines are false.
220V_USKettle 9y ago
Medium of exchange, store of value, and a unit of account, right?
- tensor_rank_0 9y ago
  exactly.
- dredmorbius 9y ago
  And by some claims: a standard of deferred payment.
devinhelton 9y ago
But throughout the whole range of history, not only is there no evidence of the existence of a metallic standard of value to which the commercial monetary denomination, the “money of account” as it is usually called, corresponds, but there is overwhelming evidence that there never was, a monetary unit which depended on the value of coin or on a weight of metal; that there never was, until quite modern days, any fixed relationship between the monetary unit and any metal; that, in fact, there never was such a thing as a metallic standard of value. This is a very slippery argument. The overall point of the essay is to show that basing one's currency on a metallic standard is silly and destructive. In this quote, the author is correct in that rarely in history has the monetary unit been permanently and inalterably fixed to an exact weight of metal. But -- it has been the norm in history to have a substantial precious metal content in money, with that content being fixed in the short term, and any lessening of the amount leading to charges of debasement, and possibly even the refusal to accept the currency. The reason why precious metals have been an important part of money is trust -- an issue which the author fails to address. It takes a very strong government to make its subjects accept fiat currency. If the sovereign pays his soldiers in fiat currency, the soldiers know that the sovereign can infinitely dilute the currency, making the currency worthless. Whereas if the sovereign pays in coin containing precious metal, the soldier knows the precious metal is likely to be of value in many markets, no matter what the sovereign does. And by requiring money to be made from previous metals, it slows down the rate at which the sovereign can debase the currency (although of course the sovereign can and does slowly reduce the metal content). If you trust your a particular government (or organization, or corporation) completely, then the author's arguments make sense, and you can accept the scrip of that government as currency. But if you don't trust that government completely... then you need a more complete assessment of the pros and cons of different monetary arrangements.
- adrianratnapala 9y ago
  Yes, and the fact that we have successfully used fiat money for several decades is a testament to how well trusted modern governments are. It's a sign that things are going well. Though we can argue about what to expect in the future.
  - 9y ago
simo7 9y ago
It's a cheque that never gets cashed.
- tensor_rank_0 9y ago
  contrariwise, it is infact already cash.
  - simo7 9y ago
    It is to say that money is in principle something only quantitatively different from a loan. In fact, you can see money as a credit towards an extremely trustworthy debtor. So trustworthy that everybody will accept that credit on its face value in exchange for any sort of goods. What's the characteristic of a risky loan, it comes with a very high interest rate right? So what happened when the risk is the lowest possible? The interest rates goes to zero or even negative. That's money, a government-bond of a very stable country with little debt is quasi-money. The difference is only quantitative, makes sense?
    - tensor_rank_0 9y ago
      money is a medium of exchange, a unit of account, and a store of value. a loan is an obligation. its a value with negative valence. > So what happened when the risk is the lowest possible? The interest rates goes to zero or even negative. Makes sense? the risk premium is not the same as the interest paid the lender by the debtor for the privilege of having something now and paying it back later. in this case, the interest rate is the price of money, denominated in money, arbitraged over time. look at it another way, why would anyone make a loan if they didn't stand to gain anything? why would I loan you $5 in order to get $5 back at a later date? I already have $5. now if you give me $5.05 back tomorrow, then I have gained 1% for my sacrifice of letting you hold the money for a day.
      - simo7 9y ago
        > why would anyone make a loan if they didn't stand to gain anything? Exactly. That's precisely the question. If you lend money 1) you bear the risk of not seeing you're money back 2) you're not able to spend that money during the loan period. Even if you don't care about risk and don't want to spend that money 3) you'd still be greedy enough to want something back, right? So let's imagine all 3 points disappear: 1) There is practically no default risk. 2) You could still purchase something by exchanging your credit with goods (and everybody would accept for its nominal value without any discount). 3) This credit certificate you hold in your hands turns out to be very convenient to use. It's so much easier to trade and everybody accepts it and trusts it, why not to use this as "money"? And why to ask something back when it's already providing me more utility then "money" with no disadvantages? So in reality you have a lot of "loans" that end up being called quasi-money exactly for the reasons above. Some countries issue government-bonds with negative interest rates, not only because they are considered very safe investments but also because banks use those type of bonds for their operations making them convenient to hold. Like I've said, it's a quantitative difference not a qualitative one. Money = loan with negative interest rate.
ambernightcrush 9y ago
Reading this a year ago changed my entire outlook on money and public debt for the better.
neom 9y ago
Isn't this just describing variable attributed value exchange with a ledger that isn't inherently reconciled? Maybe I'm mistaken but I thought that was the point of fiat adoption based the realities of physical location?
neilwilson 9y ago
We all create money all the time. We exchange a debt we owe for a debt we own. That's it. And underlying it all is a simple 'proof of burn' concept. Every person has a finite amount of time available to them. When you put some of that 'out of use' by serving others you gain credit from others. The monetary system is essentially a notarised system of time credits which we exchange between ourselves.
- jfoldager 9y ago
  All time credits are not created equal though. Some have to burn half a day to obtain the time credits another make in a year.
- romwell 9y ago
  I think this comment can be taken as a brief summary of the long article. The article includes this passage, which mirrors this idea: >It is by selling, I repeat, and by selling alone—whether it be by the sale of property or the sale of the use of our talents or of our land—that we acquire the credits by which we liberate ourselves from debt, and it is by his selling power that a prudent banker estimates his client’s value as a debtor.
stevenh 9y ago
This is an astroturfing article meant to hypnotize the reader into thinking fiat currency controlled by private banks is a good thing. Its purpose was to normalize this idea of money and grease the tracks for the Federal Reserve Act that would be rammed through congress a few months later.

81 points by hapnin 9y ago

The author of this piece mentions classical political economy, but not Marx, its most trenchant critic. Marx's most interesting and compelling contribution - until recently seldom understood in the English-language literature - was his theory of the "value form" and money as the "necessary form of appearance of value". This contribution is further masked by the common practice of identifying "the labor theory of value" (there is no such singular theory) as Marx's principal contribution. In fact, he was a critic of the many (contradictory and inconsistent) "labor theor[ies] of value" in circulation at the time. "According to Marx, value and money are inseparable yet not identical: without money there can be no value, yet money is not value. Marx’s thesis of the inseparability of value and money overturns the classical theories of value and money and establishes new concepts governing the theory of price. These new concepts rule out the ordinary assumption of price theory, namely, that value is the independent variable that explains the behavior of price, which is conceived to be the dependent variable." - Patrick Murray (https://www.mtholyoke.edu/courses/fmoseley/conference/murray1.pdf https://www.mtholyoke.edu/courses/fmoseley/conference/murray...)

rockyleal 9y ago

The first 2 lines of the article are these: "The fundamental theories on which the modern science of political economy is based are these: That under primitive conditions men lived and live by barter" The basic premise, that barter was (and is) by which 'primitive' (whatever that is) live, has been thoroughly debunked by contemporary anthropologists of money. David Graeber's 'Debt: The first 5000 years" is a must read for anyone interested in the topic of theory of money from the anthroological (i.e., empirical) perspective: https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

scott_s 9y ago
I read "Debt" as well, so I had the same reaction. But it should hearten you that the author agrees! Two paragraphs down, he argues: "But modern research in the domain of commercial history and numismatics, and especially recent discoveries in Babylonia, have brought to light a mass of evidence which was not available to the earlier economists, and in the light of which it may be positively stated that none of these theories rest on a solid basis of historical proof—that in fact they are false." A few paragraphs later, he even says: "In both these instances in which Adam Smith believes that he has discovered a tangible currency, he has, in fact, merely found—credit." In other words, the author who wrote this piece, A. Mitchell Innes in 1913, is one of those "contemporary anthropologists of money."
ucaetano 9y ago
That's actually quite a poor book. It essentially defines debt as any, absolutely any, sense of liability towards another being. When you define it like that, it isn't only true that debt predate money, it's obvious. Besides that, the book is a collection of anecdotes carefully selected to try to paint a coherent picture. It is clearly written by someone who doesn't understand economics, to a public that doesn't understand economics. It is so full of basic mistakes that it is hard to decide if the problem is ignorance, laziness or malice. But it sells well!
- joosters 9y ago
  Can you give a few examples of the basic mistakes in the book, please?
  - ucaetano 9y ago
    Sure: "Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s" The level of stupidity in this quote is unbearable. Basic fact checking for 5 seconds on Google would have been enough... Now take that and apply the Murray Gell-Mann Amnesia Effect. And that's before we get into ignominious phrasing such as "I would like to end, then, by putting in a word for the non-industrious poor. At least they aren't hurting anyone." Debt is a book written backwards. It starts with and idea: capitalism is bad and debt is the instrument of capitalism. It then piles up and links selected - but vague and frequently unsourced - anecdotes to try to create a logic supporting that idea. From an economics perspective, it isn't even wrong. But it does sound appealing to anyone who has debt or dislikes capitalism. Therefore, I expect a lot of downvotes. [Edit: typos]
romwell 9y ago
Right, and if you read beyond the first 2 lines, you'll find that the whole point of the article is to establish that these lines are false.

220V_USKettle 9y ago

Medium of exchange, store of value, and a unit of account, right?

tensor_rank_0 9y ago
exactly.
dredmorbius 9y ago
And by some claims: a standard of deferred payment.

devinhelton 9y ago

But throughout the whole range of history, not only is there no evidence of the existence of a metallic standard of value to which the commercial monetary denomination, the “money of account” as it is usually called, corresponds, but there is overwhelming evidence that there never was, a monetary unit which depended on the value of coin or on a weight of metal; that there never was, until quite modern days, any fixed relationship between the monetary unit and any metal; that, in fact, there never was such a thing as a metallic standard of value. This is a very slippery argument. The overall point of the essay is to show that basing one's currency on a metallic standard is silly and destructive. In this quote, the author is correct in that rarely in history has the monetary unit been permanently and inalterably fixed to an exact weight of metal. But -- it has been the norm in history to have a substantial precious metal content in money, with that content being fixed in the short term, and any lessening of the amount leading to charges of debasement, and possibly even the refusal to accept the currency. The reason why precious metals have been an important part of money is trust -- an issue which the author fails to address. It takes a very strong government to make its subjects accept fiat currency. If the sovereign pays his soldiers in fiat currency, the soldiers know that the sovereign can infinitely dilute the currency, making the currency worthless. Whereas if the sovereign pays in coin containing precious metal, the soldier knows the precious metal is likely to be of value in many markets, no matter what the sovereign does. And by requiring money to be made from previous metals, it slows down the rate at which the sovereign can debase the currency (although of course the sovereign can and does slowly reduce the metal content). If you trust your a particular government (or organization, or corporation) completely, then the author's arguments make sense, and you can accept the scrip of that government as currency. But if you don't trust that government completely... then you need a more complete assessment of the pros and cons of different monetary arrangements.

adrianratnapala 9y ago
Yes, and the fact that we have successfully used fiat money for several decades is a testament to how well trusted modern governments are. It's a sign that things are going well. Though we can argue about what to expect in the future.
- 9y ago

simo7 9y ago

It's a cheque that never gets cashed.

tensor_rank_0 9y ago
contrariwise, it is infact already cash.
- simo7 9y ago
  It is to say that money is in principle something only quantitatively different from a loan. In fact, you can see money as a credit towards an extremely trustworthy debtor. So trustworthy that everybody will accept that credit on its face value in exchange for any sort of goods. What's the characteristic of a risky loan, it comes with a very high interest rate right? So what happened when the risk is the lowest possible? The interest rates goes to zero or even negative. That's money, a government-bond of a very stable country with little debt is quasi-money. The difference is only quantitative, makes sense?
  - tensor_rank_0 9y ago
    money is a medium of exchange, a unit of account, and a store of value. a loan is an obligation. its a value with negative valence. > So what happened when the risk is the lowest possible? The interest rates goes to zero or even negative. Makes sense? the risk premium is not the same as the interest paid the lender by the debtor for the privilege of having something now and paying it back later. in this case, the interest rate is the price of money, denominated in money, arbitraged over time. look at it another way, why would anyone make a loan if they didn't stand to gain anything? why would I loan you $5 in order to get $5 back at a later date? I already have $5. now if you give me $5.05 back tomorrow, then I have gained 1% for my sacrifice of letting you hold the money for a day.
    - simo7 9y ago
      > why would anyone make a loan if they didn't stand to gain anything? Exactly. That's precisely the question. If you lend money 1) you bear the risk of not seeing you're money back 2) you're not able to spend that money during the loan period. Even if you don't care about risk and don't want to spend that money 3) you'd still be greedy enough to want something back, right? So let's imagine all 3 points disappear: 1) There is practically no default risk. 2) You could still purchase something by exchanging your credit with goods (and everybody would accept for its nominal value without any discount). 3) This credit certificate you hold in your hands turns out to be very convenient to use. It's so much easier to trade and everybody accepts it and trusts it, why not to use this as "money"? And why to ask something back when it's already providing me more utility then "money" with no disadvantages? So in reality you have a lot of "loans" that end up being called quasi-money exactly for the reasons above. Some countries issue government-bonds with negative interest rates, not only because they are considered very safe investments but also because banks use those type of bonds for their operations making them convenient to hold. Like I've said, it's a quantitative difference not a qualitative one. Money = loan with negative interest rate.

ambernightcrush 9y ago

Reading this a year ago changed my entire outlook on money and public debt for the better.

neom 9y ago

Isn't this just describing variable attributed value exchange with a ledger that isn't inherently reconciled? Maybe I'm mistaken but I thought that was the point of fiat adoption based the realities of physical location?

neilwilson 9y ago

We all create money all the time. We exchange a debt we owe for a debt we own. That's it. And underlying it all is a simple 'proof of burn' concept. Every person has a finite amount of time available to them. When you put some of that 'out of use' by serving others you gain credit from others. The monetary system is essentially a notarised system of time credits which we exchange between ourselves.

jfoldager 9y ago
All time credits are not created equal though. Some have to burn half a day to obtain the time credits another make in a year.
romwell 9y ago
I think this comment can be taken as a brief summary of the long article. The article includes this passage, which mirrors this idea: >It is by selling, I repeat, and by selling alone—whether it be by the sale of property or the sale of the use of our talents or of our land—that we acquire the credits by which we liberate ourselves from debt, and it is by his selling power that a prudent banker estimates his client’s value as a debtor.

stevenh 9y ago

This is an astroturfing article meant to hypnotize the reader into thinking fiat currency controlled by private banks is a good thing. Its purpose was to normalize this idea of money and grease the tracks for the Federal Reserve Act that would be rammed through congress a few months later.