Alfred Mitchell Innes on the Credit Theory of Money

Alfred Mitchell Innes (1864–1950) wrote the following article on the nature of money:

Mitchell Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2: 151–168.

This is one of two important articles he wrote (the other is Mitchell Innes 1913). Mitchell Innes was a British diplomat, expert on finance, and served in the British Embassy in Washington D.C. from 1908 to 1913. (As an aside, there seems to be some confusion about whether his surname was merely “Innes,” or whether he bore the hyphenated or non-hyphenated double-barrelled surname “Mitchell Innes.” In what follows, I assume the latter and call him “Mitchell Innes,” but I might be wrong on this.)

There is a useful set of essays in L. R. Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes (Cheltenham, UK, 2004) examining the legacy of Mitchell Innes’s work on monetary theory. The modern Post Keynesian or advocate of Modern Monetary Theory (MMT) does not have to agree with everything in Mitchell Innes’s papers or his, at times, strident presentation of his credit theory, in order to recognise that he made important contributions to the theory of money.

In this post, I will summarise Mitchell Innes’s original article, as follows:

(1) Mitchell Innes (1914: 159) attributed the origin of the credit theory of money to the Scottish economist Henry Dunning Macleod (1821–1902), a writer whose work on banking and credit is much underrated (see MacLeod 1902). Mitchell Innes saw his own work as a “more consistent and logical development of … [sc. Macleod’s] teaching.”

(2) Mitchell Innes noted that, in his day, people thought that gold and silver were “the only real money and that all other forms of money are mere substitutes” (Mitchell Innes 1914: 151), an erroneous view in his opinion.

Money is explained by the credit theory of money, which is that money is, in essence, credit:

“the Credit Theory is this: that a sale and purchase is the exchange of a commodity for a credit. From this main theory springs the sub-theory that the value of credit or money does not depend on the value of any metal or metals, but on the right which the creditor acquires to ‘payment,’ that is to say, to satisfaction for the credit, and on the obligation of the debtor to ‘pay’ his debt, and conversely on the right of the debtor to release himself from his debt by the tender of an equivalent debt owed by the creditor, and the obligation of the creditor to accept this tender in satisfaction of his credit.” (Mitchell Innes 1914: 152).

The credit nature of money can be seen, above all, in bank money (or fractional reserve demand deposits), a form of negotiable, transferable credit.

It is a credit that redeems a debt. Mitchell Innes (1914: 155) argued that payment is, in the end, the promise to “cancel our debt by an equivalent credit expressed in terms of our abstract, intangible [sc. monetary] standard.”

Even government money is a “‘promise to pay,’ just like a private bill or note” (Mitchell Innes 1914: 155). Mitchell Innes states:

“ …. the dollar is a measure of the value of all commodities, but is not itself a commodity, nor can it be embodied in any commodity. It is intangible, immaterial, abstract. It is a measure in terms of credit and debt. Under normal circumstances, it appears to have the power of maintaining its accuracy as a measure over long periods. Under other circumstances it loses this power with great rapidity. It is easily depreciated by excessive indebtedness, and once this depreciation has become confirmed, it seems exceedingly difficult and perhaps impossible for it to regain its previous position.” (Mitchell Innes 1914: 159).

Thus the monetary unit is an intangible and abstract thing (Mitchell Innes 1914: 155).

(3) I would contend that Mitchell Innes showed an awareness of the endogenous nature of the money supply in a developed capitalist nation:

“Every merchant who pays for a purchase with his bill, and every banker who issues his notes or authorises drafts to be drawn on him, issues money just as surely as does a government which issues drafts on the Treasury, or which puts its stamp on a piece of metal or a sheet of paper, and of all the false ideas current on the subject of money none is more harmful than- that which attributes to the government the special function of monopolising the issues of money. If banks could not issue money, they could not carry on their business, and when the government puts obstacles in the way of the issue of certain forms of money, one of the results is to force the public to accustom itself to other and perhaps less convenient forms.” (Mitchell Innes 1914: 152).

A related point here is how absurd the Austrian obsession with private sector, fractional reserve banking or public sector money creation is: capitalism has always, in its real world form, had endogenous money, with promissory notes or bills of exchange, as well as bank money, creating an elastic money stock.

(4) It is the confidence that the community has in government credit and the necessity of obtaining government money for payment of taxation that makes it of greater relative value than private bank money, promissory notes and bills of exchange:

“The dollar of government money in America is equal to that of bank money, because of the confidence which we have come to have in government credit, and it usually ranks in any given city slightly higher than does the money of a banker outside the city, not at all because it represents gold, but merely because the financial operations of the government are so extensive that government money is required everywhere for the discharge of taxes or other obligations to the government. Everybody who incurs a debt issues his own dollar, which may or may not be identical with the dollar of any one else’s money. It is a little difficult to realize this curious fact, because in practice the only dollars which circulate are government dollars and bank-dollars and, as both represent the highest and most convenient form of credit, their relative value is much the same, though not always identical” (Mitchell Innes 1914: 154).

Even government money is a credit in the sense that it can be used to cancel debt owed to the government.

(5) Mitchell Innes (1914: 161) in fact had the following insight that has made its way into Modern Monetary Theory (MMT):

“most … government money finds its way to the banks, and we pay our tax by a cheque on our banker, who hands over to the treasury the coins or notes or certificates in exchange for the cheque and debits our account. This, then – the redemption of government debt by taxation – is the basic law of coinage and of any issue of government ‘money’ in whatever form. It has lain forgotten for centuries, and instead of it we have developed the notion that somehow the metallic character of the coin is the really important thing whereas in fact it has no direct importance.”

(6) On pages 156–158, Mitchell Innes digresses and discusses the monetary reforms in Britain in the 1690s and how this was erroneously interpreted by Metallists.

(7) Mitchell Innes argues that

“… while the monetary unit may depreciate, it never seems to appreciate. A general rise of prices at times rapid and at times slow is the common feature of all financial history; and while a rapid rise may be followed by a fall, the fall seems to be nothing more than a return to a state of equilibrium. I doubt whether there are any instances a fall to a price lower than that which prevailed before the rise, and anything approaching a persistent fall in prices, denoting a continuous rise of the value of money, appears to be unknown. (Mitchell Innes 1914: 159).

He means by this that throughout history price inflation has generally been the rule. Perhaps that it is a somewhat exaggerated view: there have been aberrant periods like 1873–1896 where almost continuous price deflation occurred.

(8) Mitchell Innes engages in a lengthy (p. 165ff.) discussion of how price inflation is explained by his theory, but his ideas here seem of little merit to me, and I will not summarise them.

BIBLIOGRAPHY

MacLeod, H. D. 1902. Theory and Practice of Banking (6th edn), Longmans, Green, Reader, & Dyer, London.

Mitchell Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5: 377–408. (reprinted in L. R. Wray (ed.). 2004. Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 14–49).

Mitchell Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2: 151–168 (reprinted in L. R. Wray (ed.). 2004. Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 50–78).

Wray, L. R. (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham, UK. 79–98.

David Graeber Videos

I’ve been reading David Graeber’s Debt: The First 5,000 Years (Brooklyn, N.Y., 2011), and hope to review some of the chapters soon. I do recommend this book.

In the meantime, here are interesting videos where David Graeber talks about his work in the book on money and debt, and, above all, the debt origin of money.

Graeber’s anthropological work on the debt origin of money is a very interesting confirmation of the modern Chartalist view on this subject: that money is essentially an IOU, that debt has played a major role in the historical origin of money, and that the neoclassical pure barter origin of money is a myth (or, at least, requires substantial revision). Money’s role as an abstract unit of account/money of account (often arising from weight units, wergild-like social practices, and even planning and design as in ancient Mesopotamia) has been neglected in modern scholarship. For the opposing Austrian and neoclassical view on the origin of money from barter spot transactions, see Menger (1892) and Kiyotaki and Wright (1989; 1991; 1992).

I will end with a brief digression here on Chartalism, since Graeber mentions this theory. Chartalism as a theory of money was developed by Georg Friedrich Knapp (1905; English translation 1924), was taken up by Keynes in his Treatise on Money (1930), and was revived by economists in the late 20th century associated with Post Keynesianism, like L. Randall Wray (1998) and mavericks like Charles A. E. Goodhart (the work of Alfred Mitchell-Innes 1913 and 1914 on credit money is also highly relevant).

The macroeconomics we call Modern Monetary Theory (MMT)* appears to have been independently developed by Bill Mitchell and Warren Mosler (who called his theory “soft currency economics”), and chartalist ideas were mixed in as MMT subsequent developed. I quote Warren Mosler:

“The origin of MMT is 'Soft Currency Economics' .... I had never read or even heard of Lerner, Knapp, [Innes], Chartalism, and only knew Keynes by reading his quotes published by others. I 'created' what became know as 'MMT' entirely independently of prior economic thought. It came from my direct experience in actual monetary operations, much of which is also described in the book.”
http://mmtwiki.org/wiki/History_of_MMT

But Chartalism clearly was a later important influence on Modern Monetary Theory (MMT), and the latter goes well beyond the original theories of Knapp or Mitchell-Innes. Some leading proponents of MMT hold that it is now an independent macroeconomic theory (others like Mark Hayes regard MMT as a sub-branch of Post Keynesianism). At the very least, Post Keynesianism can be regarded as the important macro-theory that stands behind MMT as one of its intellectual fathers, so to speak.

Footnote
* L. Randall Wray states:

“... somehow [sc. Chartalism] ... got the name Modern Money Theory. We think the first time those exact words were used might have been in a comment to Bill’s blog in 2007; if anyone can find that comment or a previous use, please send it along. It also looks like Bill used the term “modern monetary theory” in an academic paper in 2008.”
L. Randall Wray, “MMP Blog #30: What is Modern Money Theory?,” January 1, 2012.

____________________


“Debt: The First 5,000 Years,” C-span Interview (by Doug Henwood), August 23, 2011.











BIBLIOGRAPHY

Kiyotaki, N. and Wright, R. 1989. “On Money as a Medium of Exchange,” Journal of Political Economy 97: 927–954.

Kiyotaki, N. and Wright, R. 1991. “A Contribution to the Pure Theory of Money,” Journal of Economic Theory 53: 215–235.

Kiyotaki, N. and Wright, R. 1992. “Acceptability, Means of Payment, and Media of Exchange,” Federal Reserve Bank of Minneapolis Quarterly Review 2–10.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1918. Staatliche Theorie des Geldes (2nd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1921. Staatliche Theorie des Geldes (3rd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

Menger, C. 1892. “On the Origin of Money,” Economic Journal 2: 238–255.

Mitchell-Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

Mitchell-Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2 (January–December): 151-168.
N.B. There seems to be some confusion about whether Alfred Mitchell-Innes had a double-barrelled surname or not.

Mosler, W. 1995.“Soft Currency Economics,”
http://www.mosler.org/docs/docs/soft0004.htm

Mosler, W. 2010. The Seven Deadly Innocent Frauds of Economic Policy, Valance Co., St Croix, U.S.V.I.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar, Cheltenham.

The History of Modern Monetary Theory

My last post got a bit hijacked by my attempt to write a digression on the origin of Modern Monetary Theory (MMT), which has also been called Chartalism, neo-Chartalism, the Kansas City approach, and soft currency economics. It strikes me that the subject deserves a post in its own right, so I will attempt one here (bear in mind there is some repetition).

Chartalism in the historical sense should be distinguished from Modern Monetary Theory. Chartalism was a theory of money developed by Georg Friedrich Knapp (1905; English translation 1924), which he called the “state theory of money.” This was taken up by Keynes in his Treatise on Money (1930). It appears to me that economists in the late 20th century associated with Post Keynesianism revived Chartalism as a theory, with the work of Alfred Mitchell-Innes (1913 and 1914) on credit money, including Charles A. E. Goodhart (although, strictly speaking, Goodhart does not regard himself as a Post Keynesian; see Goodhart 2005: 817).

Chartalism has been one source of MMT, and an early proponent L. Randall Wray appears to have used the term to describe the macrotheory he was developing. Randall Wray states:

“... somehow [sc. Chartalism] ... got the name Modern Money Theory. We think the first time those exact words were used might have been in a comment to Bill’s blog in 2007; if anyone can find that comment or a previous use, please send it along. It also looks like Bill used the term “modern monetary theory” in an academic paper in 2008.”
L. Randall Wray, “MMP Blog #30: What is Modern Money Theory?,” January 1, 2012.

The broader sources of Modern Monetary Theory are as follows:

(1) G. Frederick Knapp’s work (1905; 1973 [1924]);
(2) Mitchell Innes’s work (1913; 1914).
(3) Keynes;
(4) Abba Lerner’s functional finance model (1943; see also Lerner 1944; 1947; 1951);
(5) Post Keynesianism (with influence from both Keynes and Michał Kalecki), and
(6) Hyman Minsky’s work (e.g., the employer of last resort idea and the financial instability hypothesis).

Economists who stand out as inventors of Modern Monetary Theory include L. Randall Wray (1998), William F. “Bill” Mitchell, and Warren Mosler.

L. Randall Wray explains the origin of MMT:

“[sc. the origin of MMT] ... goes back to PKT (Post Keynesian Thought) in the early 1990s—the first internet discussion group I ever heard of. It started off with all the stars of heterodox economics—Paul Davidson, Herb Gintis, Michael Perelman, Ed Nell; even Hyman Minsky contributed a post or two. And then there was ... Bill Mitchell ... He had little tolerance for Keynes but otherwise I found myself agreeing with him more often than with anyone else. On Kalecki, on Marx, on fiscal policy, and especially against the Austrians that were slowly but surely killing PKT.

And one other guy stood out—a hedge fund manager named Warren Mosler who was continually pushing two things. First there was something he called soft currency economics. It sounded to me like good old Keynesian economics from the Treatise on Money, which followed Knapp’s state theory of money. ....

What Warren also added was a much deeper understanding of bank reserves and treasury bonds. I came at this from the PK endogenous money, horizontal reserves view of Basil Moore. There’s nothing seriously wrong with that, but it never understood why a sovereign government would sell bonds. Warren explained bond sales as a reserve drain, and lightbulbs went off. Exactly right: government sells bonds to hit the overnight interest rate target. I think it was Mat Forstater who brought the final piece of the puzzle: Lerner’s functional finance approach.”

Wray, L. R. 2011. “MMT: A Doubly Retrospective Analysis,” December 11.

By 1995, Warren Mosler called his theory “soft currency economics.” I quote Warren Mosler:

“The origin of MMT is ‘Soft Currency Economics’ .... I had never read or even heard of Lerner, Knapp, [Innes], Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations ... .”
http://mmtwiki.org/wiki/History_of_MMT

Mosler, as I understand it, has a connection with Paul Davidson (see also this interview for Mosler’s passing remarks about Charles Goodhart and the LSE). One of Mosler’s early publications was published in the Journal of Post Keynesian Economics (Mosler 1997-1998: 167-182).

Chartalism clearly was an important influence on other Modern Monetary Theory economists, but MMT, as it now exists, goes well beyond the original theories of Knapp or Mitchell-Innes.

The leading proponents of MMT hold that it is now an independent macroeconomic theory (by contrast, the Cambridge Post Keynesian Mark Hayes regards MMT as a sub-branch of Post Keynesianism). At the very least, Post Keynesianism can be regarded as the important macro-theory that stands behind MMT as one of its intellectual fathers, so to speak.

Perhaps it is even possible to think of MMT economists as a new generation of Post Keynesians—that is, as a younger generation that has developed Post Keynesian theory in new ways.

Appendix
I will end this post with a list of advocates and supporters of MMT (mainly academics):

Warren Mosler
Randall Wray
Bill Mitchell
Pavlina Tcherneva
Stephanie A. Kelton (formerly Stephanie Bell)
Mat Forstater
Ed Nell
Scott Fullwiler
Mike Norman

BIBLIOGRAPHY

Bell, S. 2000. “Do Taxes and Bonds Finance Government Spending?,” Journal of Economic Issues 34.3: 603-620.

Goodhart, C. A. E. 2005. “What is the Essence of Money?” (Reviewing: Geoffrey Ingham, The Nature of Money, Polity, Cambridge, 2004), Cambridge Journal of Economics 29: 817–825.

Keynes, J. M. 1930. A Treatise on Money, Macmillan, London.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1918. Staatliche Theorie des Geldes (2nd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1921. Staatliche Theorie des Geldes (3rd edn.), Duncker & Humblot, Munich and Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.

Lerner, A. P. 1944. The Economics of Control, New York, Macmillan.

Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.

Lerner, A. P. 1951. The Economics of Employment, New York, McGraw Hill.

Mitchell, Bill, 2011. “MMT is Biased Towards Anti-Crony,” December 28.
http://bilbo.economicoutlook.net/blog/?p=17528#more-17528

Mitchell, W. and J. Muysken. 2008. Full Employment Abandoned: Shifting Sands and Policy Failures, Edward Elgar, Cheltenham.

Mitchell-Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

Mitchell-Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2 (January–December): 151-168.

Mosler, W. 1995. “Soft Currency Economics,”
http://www.mosler.org/docs/docs/soft0004.htm

Mosler, W. 1997-1998. “Full Employment and Price Stability,” Journal of Post Keynesian Economics 20.2: 167-182.

Mosler, W. 2010. The Seven Deadly Innocent Frauds of Economic Policy, Valance Co., St Croix, U.S.V.I.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar, Cheltenham.

Wray, L. R. 2011. “MMT: A Doubly Retrospective Analysis,” December 11.
http://neweconomicperspectives.blogspot.com/2011/12/mmt-doubly-retrospective-analysis.html

Keynes’s Early Life, 1909–1914

I have written up part 3 of notes and trivia on Keynes’s early life. Part 2 is here. My reading material has been D. E. Moggridge’s Maynard Keynes: An Economist’s Biography (London, 1992), and Robert Skidelsky’s John Maynard Keynes: Hopes Betrayed 1883–1920 (vol. 1; London, 1983).

My biographical details of interest and trivia:

(1) In 1908, Keynes was offered one of two lectureships in economics (the other went to Walter Layton), with a salary of £100 a year (Skidelsky 1983: 185). He began lecturing at Cambridge on “money, credit and prices” on 19 January 1909 (Skidelsky 1983: 211). At first, this was mainly a way of returning to Cambridge and escaping from the drudgery of his India Office job, but Keynes was eager to “display his professional competence” in economics (Skidelsky 1983: 207). Keynes’s workload had reached 100 hours of lecturing in his third year at Cambridge, or 4 hours a week over the 3 terms (Skidelsky 1983: 211).

(2) After Alfred North Whitehead (1861–1947) (who was also the doctoral supervisor of Bertrand Russell) was favourable to the revised version of his dissertation on probability, on 16 March 1909, Keynes was elected to a prize fellowship at King’s College, Cambridge, which he held for the rest of his life (Skidelsky 1983: 204; Moggridge 1992: 185).

(3) Keynes founded an economic society at Cambridge called the Political Economy Club, which included dons, postgraduates and undergraduates, whose first meeting was on 22 October 1909 (Moggridge 1992: 189; Skidelsky 1983: 212). Some of the students who were admitted to this club were to become important economists, and included the following:

Dennis Robertson
Hubert Henderson (who came up to Cambridge in 1909)
Fredrick Lavington
Dudley Ward
Hugh Dalton.

(4) Keynes showed an interest in monetary economics from 1909, being influenced by the oral tradition of Marshall at Cambridge (Moggridge 1992: 198). He had read Eugen von Böhm-Bawerk’s Recent Literature on Interest (trans. W. A. Scott and S. Feilbogen; New York and London, 1903) around 1905–1906, so was not unaware of Austrian economics (Moggridge 1992: 198).

(5) When Indian students were the subject of a racist slur at Cambridge, Keynes condemned this and defended them and their abilities in May 1909 (Skidelsky 1983: 213–214). I can’t help but contrast Keynes’s liberalism with Hayek’s slur against his Indian students at the LSE.

(6) From 1910 Keynes was already showing an interest in the psychology of investors and the question of expectations under conditions of uncertainty (Skidelsky 1983: 208) – a very important theme for his later work.

(7) In October 1911, Keynes was appointed as editor of the Economic Journal, probably the most respected economics periodical in Britain. He began the task of editing it in late December 1911, and was editor until 1945 (Moggridge 1992: 208). Keynes was 28. In those days, refereeing of articles was not so common a practice, and Keynes appears to have made many decisions on acceptance and rejection of articles himself (Moggridge 1992: 209).

(8) Around 1911 Keynes seems to have had some contact with the Fabian socialists at Cambridge, and his father wrote a curious sentence in his diary entry for 6 September 1911:

“Maynard avows himself a Socialist and is in favour of confiscation of wealth” (quoted in Moggridge 1992: 190).

Despite this, Keynes’s other political activities and loyalties appear to be quite Liberal in these years: he joined the Eighty Club (a progressive liberal society), was the secretary of the Cambridge University Free Trade Committee, and supported the Liberal party in elections (Moggridge 1992: 190).

I suspect one shouldn’t read too much into Neville Keynes’s diary entry. Progressive taxation may be all that Neville Keynes had in mind when he said that Maynard was “in favour of confiscation of wealth” (for some evidence confirming this, see Skidelsky 1983: 241) – for the simple truth is that many 19th century Liberals found progressive taxation unacceptably radical, even a form of “socialism.” Whatever other policy positions were entailed by Keynes declaring “himself a Socialist,” I wonder whether Maynard’s support for Fabianism was much more than a flirtation or phase. The evidence is overwhelming that Keynes identified himself as a Liberal for most of his life by actions as well as words. His Fabian flirtation is also strangely at variance with his political beliefs before 1914 as sketched by Skidelsky (1983: 209).

(9) John Maynard Keynes entered the Bloomsbury Group (which existed from c. 1904 until around the 1940s) from about 1909 (Skidelsky 1983: 242–243) or around 1911 (Moggridge 1992: 217–218). Skidelsky (1983: 243) dates the beginning of the Bloomsbury Group to March 1905.

Leonard Woolf remembered the “Old Bloomsbury” as composed of the following people:

Vanessa and Clive Bell
Virginia and Leonard Woolf
Adrian and Karin Stephen
Lytton Strachey
Maynard Keynes
Duncan Grant
E. M. Forster
Saxon Sydney-Turner
Roger Fry
Desmond and Molly MacCarthy
Julian, Quentin and Angelica Bell
David Garnett.

This group provided Keynes with the focus for his social and intellectual life while in London (Moggridge 1992: 218). Keynes was to become a financial patron of Bloomsbury from the First World War onwards (Skidelsky 1983: 250). From 1911, Keynes tended to spend the middle of each week in London, a practice he continued until 1937 (Skidelsky 1983: 250), which increased his contact with the Bloomsbury group.

(10) In March 1910, Keynes read about half of Adam Smith, early in his holiday with Duncan Grant through Greece and Asia Minor, praising it as a “wonderful book” (Skidelsky 1983: 254). He visited Troy on his trip and returned via Berlin, arriving in Britain on 8 May 1910.

(11) In the summer of 1910 Keynes worked on logic and the justification of induction (Skidelsky 1983: 254–255).

(12) Keynes began publishing technical articles on economics in 1908. The following is a list of his publications from 1908–1914:

J. M. Keynes, 1908. “Rents, Prices, and Wages,” Economic Journal 18.71 (Sep.): 472–473.

J. M. Keynes, 1909. “Recent Economic Events in India,” Economic Journal 19.73 (Mar.): 51-67.

J. M. Keynes, 1914. “Currency in 1912,” Economic Journal 24.93 (Mar.): 152–157.

J. M. Keynes, 1914. “War and the Financial System, August, 1914,” Economic Journal 24.95 (Sep.): 460–486.

J. M. Keynes, 1914. “The Trade of India in 1913–14,” Economic Journal 24.96 (Dec.): 639–642.

J. M. Keynes, 1914. “The Prospects of Money, November, 1914,” Economic Journal 24.96 (Dec.): 610–634.

Keynes wrote a number of book reviews, but these stand out as of interest:

J. M. Keynes, 1911. “The Purchasing Power of Money: Its Determination and Relation to Credit, Interest, and Crisis. by Irving Fisher, Harry G. Brown” (review), Economic Journal 21.83 (Sep.): 393–398.

J. M. Keynes, 1912. “Theory of Political Economy. by W. Stanley Jevons” (review), Economic Journal 22.85 (Mar.): 78–80.

J. M. Keynes, 1912. “The Economic Principles of Confucius and his School. by Chen Huan-Chang” (review), Economic Journal 22.88 (Dec.): 584–588.

J. M. Keynes, 1913. “Gold, Prices, and Wages. by J. A. Hobson,” Economic Journal 23.91 (Sep.): 393–398.

J. M. Keynes, 1913. “The Standard of Value. by David Barbour” (review), Economic Journal 23.91 (Sep.): 390–393.

J. M. Keynes, 1914. “What is Money? by A. Mitchell Innes” (review), Economic Journal 24.95 (Sep.): 419–421.
(this is in fact a positive review of Innes 1913, and Keynes [p. 421] actually says that Innes’s “historical conclusions ... have, I think, much foundation.” For more on Keynes’s endorsement of Innes’s credit theory of money and Chartalism, see here).

J. M. Keynes, 1914. “Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen” (review), Economic Journal 24.95 (Sep.): 417–419.
[for more analysis of this article, see my post here.]

(13) Keynes’s reputation as a monetary reformer was almost entirely the result of his book Indian Currency and Finance (Macmillan and Co, London, 1913), a work which defended India’s gold exchange standard, in which there was a partial domestic paper currency in India convertible into gold for capital account transactions. Keynes defended this system as allowing a greater elasticity of money supply (Skidelsky 1983: 275).

But an additional point which, I think, escapes Keynes’s biographers is that Keynes appears to have endorsed Mitchell Innes’s credit theory of money and Georg Friedrich Knapp’s Chartalism, as I have pointed out in another post. That puts Keynes into the world of heterodox monetary thinkers well before the 1920s.

(14) Keynes was appointed to the Girdler’s Lectureship in Economics at Cambridge in December 1910 (Skidelsky 1983: 264).

(15) Keynes met Ludwig Wittgenstein in October 1912 at Cambridge and helped to have him elected to the Apostles (Skidelsky 1983: 266).

(16) Keynes served on the Royal Commission on Indian Finance and Currency in 1913 (Skidelsky 1983: 277). He contributed to the discussion on whether India should have its own central bank, and helped write a proposal for such a bank.

(17) Keynes started to purchase stocks and shares in a significant way from 1910, including speculative activity. In July 1914, Keynes had an overdraft of 1,000 pounds for speculative purposes (more detail in Skidelsky 1983: 286–288).

LINKS

John Maynard Keynes – Timeline.

John Maynard Keynes, Wikipedia.

BIBLIOGRAPHY

Mitchell Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

Keynes, W. Milo (ed.). 1975. Essays on John Maynard Keynes, Cambridge University Press, London.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography, Routledge, London.

Skidelsky, R. J. A. 1983. John Maynard Keynes: Hopes Betrayed 1883–1920 (vol. 1), Macmillan, London.

Keynes on Metallism versus Chartalism in 1914

There is a most interesting book review, now almost forgotten, written by John Maynard Keynes and published in 1914, in which Keynes reviews both the original German edition of Ludwig von Mises’s Theorie des Geldes und der Umlaufsmittel (Theory of Money and Credit; Munich and Leipzig, 1912), and Geld und Kapital (Money and Capital; Leipzig, 1912) by the German Chartalist Friedrich Bendixen (see Keynes 1914a).

The Chartalist theory of money derived from Georg Friedrich Knapp’s Staatliche Theorie des Geldes (The State Theory of Money; original German edition 1905; English translation 1924), which has been one of the important sources of recent Chartalism or Modern Monetary Theory.

Although Keynes was not hostile to Mises, nevertheless it is clear from his view of Bendixen’s book that Keynes already repudiated the Metallist position on money and was receptive to Knapp’s Chartalism. Keynes says:

“[sc. Bendixen says that the] … old ‘metallist’ view of money is superstitious, and Dr. Bendixen trounces it with the vigour of a convert. Money is the creation of the State; it is not true to say that gold is international currency, for international contracts are never made in terms of gold, but always in terms of some national monetary unit; there is no essential or important distinction between notes and metallic money; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance. With the exception of the last, the only true interpretation of which is purely dialectical, these ideas are undoubtedly of the right complexion. It is probably true that the old ‘metallist’ view and the theories of regulation of note issue based on it do greatly stand in the way of currency reform, whether we are thinking of economy and elasticity or of a change in the standard; and a gospel which can be made the basis of a crusade on these lines is likely to be very useful to the world, whatever its crudities or terminology.” (Keynes 1914a: 418).

Keynes (1914b) also published in 1914 a positive review of Mitchell Innes’s 1913 essay “What is Money?” Keynes (1914b: 421) even said explicitly in this latter review that he thought that Innes’s “historical conclusions ... have, I think, much foundation.”

So Keynes the monetary reformer was already moving to the Chartalist and credit theories of money by 1914, only a few years after he had begun lecturing in economics at Cambridge university in January 1909 (for Keynes’s education and emergence as an economist, see my post here).

BIBLIOGRAPHY

Bendixen, Friedrich. 1912. Geld und Kapital, Duncker & Humblot, Leipzig.

Keynes, J. M. 1914a. “Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen” (review), Economic Journal 24.95 (Sep.): 417–419.

Keynes, J. M. 1914b. “What is Money? by A. Mitchell Innes” (review), Economic Journal 24.95 (Sep.): 419–421.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

Mises, L. von. 1912. Theorie des Geldes und der Umlaufsmittel, Duncker & Humblot, Munich and Leipzig.

Mitchell Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

David Graeber on the Origins of Money

I have just finished reading David Graeber’s Debt: The First 5,000 Years (Brooklyn, N.Y., 2011). While I will not review the whole book, a review of some of the chapters on the origins of money is worthwhile, with reference to some of the specialist literature cited by Graeber.

We won’t get very far without defining what money is, however. Money’s functions are usually divided into the following:

(1) money of account or a unit of account,
(2) a means of payment and medium of exchange and
(3) a store of value.

Graeber (2011: 21) notes that historically economists have been obsessed with the medium of exchange role, and treat the latter as the primary role.

But a crucial division can be made between (a) money conceived as what Keynes called an abstract money of account (that is, money as an abstract unit of account) and (b) things which function as an actual means of payment and medium of exchange, which act as money in an abstract or physical way.

The money of account is the unit of account in which prices and debts are measured. It is abstract. But it is clear you can have an abstract money of account without a large role for an actual physical medium of exchange. For example, in practice, many exchanges in an economy might be done by credit transactions.

Graeber notes that the mainstream view of money as emerging from barter spot trades goes back to Adam Smith (Graeber 2011: 24). The modern neoclassical economics profession is obsessed with barter because they regard money as a neutral veil and their “real” analysis of economies is essentially that of a barter system (Graeber 2011: 44–45).

It is important to note that Graeber does not deny that money in some historical circumstances can emerge from barter between strangers, especially in long distance trade. Graber cites the cacao money of Mesoamerica and the salt money of Ethiopia as instances of money emerging through barter (Graeber 2011: 75; on Ethiopian salt money, see Einzig 1949: 123–126). Graeber also cites the views of Max Weber (1978: 673–674) and Karl Bücher (1901), who argued that money emerged from barter between different societies, not within societies (Karl Polanyi may also have held a position close to this).

The points that can be made against the standard barter theory of money are as follows:

(1) the view that money can only ever emerge from barter spot transactions must be rejected.

(2) even the assumption lying behind standard neoclassical theory that money-less communities come to have economies dominated by barter spot trades is contradicted by the evidence of anthropology.

Money-less societies are frequently dominated by debt/credit transactions, or “gift exchange,” not by barter spot trades (on barter, see Chapman 1980; Heady 2005; Humphrey 1984). Even in cases where goods exchange for goods in spot trades, social relations can complicate matters considerably, and historically barter seems to have been prevalent between one community and another, or, that is to say, between people who were strangers and where relationships were implicitly or explicitly hostile (Graeber 2011: 29–30; cf. Heady 2005: 267). In small human communities, gift exchange and credit transactions in goods, services or social relations can largely overcome the immediate double coincidence of wants problem encountered in barter spot trades, and in such communities there may exist a ranked list of various things according to their value, in which certain things are also deemed roughly equivalent (Graeber 2011: 36; Graeber 2011: 395, n. 24 notes that Ralph Hawtrey was one of the few economists to consider the role of deferred payments).

Situations in which barter is observed in groups of human beings in modern times where some good emerges as a medium of exchange (as in cigarettes in POW camps, for example) can hardly be regarded as confirming the barter origin of money theory, because the people concerned in these cases were already perfectly familiar with money (Graeber 2011: 37).

In ancient Mesopotamia, money as a unit of account seems to have been the invention of temple and palace institutions. These were state institutions with large internal centrally planned economies, with complex weights and measurements for internal accounting of the products produced, received and distributed, and rent and interest owed. The units of account were (1) the shekel of silver (which was equal to the monthly grain ration) and (2) barley. One gur of barley was equal to the shekel. The shekel of silver was set by temple/palace planners to equal to the monthly grain ration (i.e., a gur of wages in barley) doled out to their workers. Thus they seem to have designed a unit of account from the major weight units: many prices were probably even set and administered in the money of account which developed from weight units (Graeber 2011: 39; Hudson 2003; 2004a; 2004b). Payment could be made in silver but in fact was probably not done so in reality very often. The economy operated on credit/debt transactions and payment could be made in real goods.

While a non-enumerated system of debts/credits or gift exchange might not give rise to money, there is clearly a role for debt in the history of money (Graeber 2011: 40), and Graeber draws attention to the work of Alfred Mitchell Innes (1864–1950), who published two important papers on money and the debt/credit origins of money (see Mitchell Innes 1913 and 1914). As a matter of interest, Alfred Mitchell Innes was influenced by the Scottish economist Henry Dunning Macleod’s (1821–1902) credit theory of money (see MacLeod 1902).

In many periods of history when coined money did exist, such as the European Middle Ages, it was actually very scarce, and societies continued to operate on debt/credit transactions: in reality the following conceptual development is wrong:

barter > money > credit.

In the real world, gift exchange and debt/credit arrangements existed long before money, and societies could develop an abstract unit of account in which debt/credit transactions were still the predominant system (Graeber 2011: 40). The use of coinage, when it was developed, could remain uneven and coins scarce. Instances when barter has become a predominate system (as after the collapse of the Soviet Union or Argentina after 2001) are usually when currency collapses (Graeber 2011: 40).

In a society where debt/credits are the major transaction, IOUs/debts can be transferable and used as a means of payment or medium of exchange. Graeber thinks of an example:

“Say, for example, that Joshua were to give his shoes to Henry, and, rather than Henry owing him a favour, Henry promises him something of equivalent value. Henry gives Joshua an IOU. Joshua could wait for Henry to have something useful, and then redeem it. In that case Henry would rip up the IOU and the story would be over. But say Joshua were to pass the IOU on to a third party—Sheila—to whom he owes something else. He could tick it off against his debt to a fourth party, Lola—now Henry will owe that amount to her. Hence money is born.” (Graeber 2011: 46).

A type of medium of exchange could emerge in theory in this way in small communities, or communities of specific people like merchants where IOUs can be verified. The empirical evidence demonstrates that this is precisely how promissory notes and bills of exchange become a medium of exchange. A kind of debt money can emerge in communities where there exist people willing to accept it or cancel the debt IOUs (Graeber 2011: 74). Graeber notes how for centuries English shops issued their own wood, lead or leather token money as debt money redeemable at the particular merchant’s store (Graeber 2011: 74). Graeber’s eclectic view on the origins of money is expressed in this way:

“Throughout most of history, even where we do find elaborate markets, we also find a complex jumble of different sorts of currency. Some of these may have originally emerged from barter between foreigners: the cacao money of Mesoamerica and the salt money of Ethiopia are frequently cited examples. Other arose from credit systems, or from arguments over what sort of goods should be acceptable to pay taxes or other debts. Such questions were often matters of endless contestation.” (Graeber 2011: 75)

Graeber, however, doubts that local or community debt/IOU money systems can “create a full-blown currency system, and there’s no evidence that they ever have” (Graeber 2011: 47). But this is where Georg Friedrich Knapp’s (1842–1926) chartalist theory of money comes in (see Knapp 1905; Knapp 1973 [1924]). When the state issues IOUs it can do so on a large scale, and then demand the same IOU tokens back as payment of taxes. Graeber notes the use of tally sticks in the Middle Ages: the British exchequer could issue them, and they would circulate as tokens of debt owed to the government (Graeber 2011: 48–49), but also circulate as a medium of exchange within England accepted for payment of taxes (Davies 2002: 146–151).

Graeber (2011: 59–62) also refers to the thesis of Grierson on how wergeld-like customs could create a system of measurement of relative values (Grierson 1978: 11; Grierson 1977).

The origins of money, then, lie in different sources, and not simply in a barter origin of money theory.

I end with a curious but important fact: Graeber notes how primitive monies – like shell money in the Americas or Papua New Guinea, cattle money in Africa, bead money, feather money, and so on – are often rarely used to buy everyday items in the societies that use them. Instead, they are employed in social relations like marriages and to settle disputes (Graeber 2011: 60). The story of money is rather more complex than neoclassical economists imagine.


BIBLIOGRAPHY

Bücher, K. 1901. Industrial Evolution (trans. S. Morley Wickett), H. Holt and Co., New York.

Chapman, A. 1980. “Barter as a Universal Mode of Exchange,” L’Homme 20.3: 33–83.

Davies, Glyn. 2002. A History of Money: From Ancient Times to the Present Day (3rd edn.), University of Wales Press, Cardiff.

Einzig, Paul. 1949. Primitive Money: In Its Ethnological, Historical, and Economic Aspects, Eyre & Spottiswoode, London.

Fayazmanesh, S. 2006. Money and Exchange: Folktales and Reality, Routledge, New York.

Graeber, David. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.

Grierson, P. 1977. The Origins of Money, Athlone Press and University of London, London.

Grierson, P. 1978. “The Origins of Money,” Research in Economic Anthropology 1: 1–35.

Hart, K. 1986. “Heads or Tails? Two Sides of the Coin,” Man n.s. 21.4: 637-656.

Heady, P. 2005. “Barter,” in J. Carrier (ed.), A Handbook of Economic Anthropology, Edward Elgar Publishing Limited, Cheltenham. 262–274.

Hudson, M. 2003. “The Creditary/Monetarist Debate in Historical Perspective,” in S. A. Bell and E. J. Nell (eds), The State, the Market, and the Euro: Chartalism versus Metallism in the Theory of Money, Edward Elgar, Cheltenham. 39–76.

Hudson, M. 2004a. “The Archaeology of Money: Debt Versus Barter Theories of Money’s Origins,” in L. R. Wray (ed.), Credit and State Theories of Money: the Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 99–127.

Hudson, M. 2004b. “The Development of Money-of-Account in Sumer’s Temples,” in M. Hudson and C. Wunsch (eds.), Creating Economic Order: Record-Keeping, Standardization, and the Development of Accounting in the Ancient Near East, CDL Press, Bethesda, MD. 303–329.

Humphrey, C. 1984. “Barter and Economic Disintegration,” Man 20.1: 48–72.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

MacLeod, H. D. 1902. Theory and Practice of Banking (6th edn), Longmans, Green, Reader, & Dyer, London.

Mitchell Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.

Mitchell Innes, A. 1914. “The Credit Theory of Money,” Banking Law Journal 31.2 (January–December): 151-168.

Weber, M. 1978. Economy and Society: An Outline of Interpretive Sociology (eds. G. Roth and C. Wittich; trans. E. Fischoff et al.), University of California Press, Berkeley and London.

Bibliography on the Origins of Money

I will start a bibliography here on the origins of money, and I will attempt to update it.

For the standard Classical, Austrian and neoclassical accounts of the origin of money, see Smith (1811): 16–17, Jevons (1875), Menger (1892), Menger (1909): 555–610 (translation in Menger 2002 [1909]: 25–108), Mises (1998) [1949]: 402–404, Kiyotaki and Wright (1989), Kiyotaki and Wright (1991), Kiyotaki and Wright (1992), and Iwai (2001).

For heterodox theories on the origins of money in ancient Egypt, see Henry (2004). See also Bogoslovsky (1987) (cf. Holtz 1984), and for the history of Egyptian media of exchange, see Curtis (1951). For Mesopotamia, see Hudson (2004) and Hallo (1996): 18-25. For Greece, see the review of the work of Laum (1924) in Economica 14 (1925): 218–222; see also Peacock (2003–2004), Peacock (2006), Peacock (2011), and Semenova (2011).

Grierson (1977) and Grierson (1978) provide important analysis of the role of wergeld-like social customs in the origin of money, by arguing that wergeld provided societies with tariffs of compensation in which heterogeneous types of injury and damage were measured by means of abstract and concrete units of account. Peacock (2003–2004) develops the thesis of Grierson.

For a good starting point for anyone wishing for a specialist treatment of the origins of money from the heterodox economics perspective, see Semenova 2011.


BIBLIOGRAPHY

Arestis, P. and M. Sawyer (eds.), 2006. A Handbook of Alternative Monetary Economics, Edward Elgar, Cheltenham.

Ashley, W. M. 1925. “Heiliges Geld: Eine Historiche Untersuchung über den Sakralen Ursprung des Geldes by Bernhard Laum” (Review), The Economic Journal 35.138: 288–289.

B[?], A. R. 1925. “Heiliges Geld: Eine historische Untersuchung über den sakralen Ursprung des Geldes by Bernhard Laum” (Review), Economica 14: 218–222.
N.B. The surname of the author is not listed.

Bell, D. 1991. “Modes of Exchange: Gift and Commodity,” Journal of Socio-Economics 20.2: 155–167.

Bell, S. and J. F. Henry, 2001. “Hospitality versus Exchange: the Limits of Monetary Economies,” Review of Social Economy 59.2: 203–226.

Bogoslovsky, E. S. 1987. “On the Process of Appearance of Money in Ancient Egypt,” Altorientalische Forschungen 14: 227–236.

Crump, T. 1981. The Phenomenon of Money, Routledge & Kegan Paul, London.

Curtis, J. W. 1951. “Media of Exchange in Ancient Egypt,” The Numismatist 64.5: 482-491.

Davies, J. K. 2001. “Temples, Credit, and the Circulation of Money,” in A. Meadows and K. Shipton (eds.), Money and its Uses in the Ancient Greek World, Oxford University Press, Oxford. 117-128.

Dowd, K. 2001. “The Emergence of Fiat Money: A Reconsideration,” Cato Journal 20.3: 467–476.

Einzig, Paul. 1966. Primitive Money: In Its Ethnological, Historical, and Economic Aspects (2nd edn.), Pergamon Press, Oxford.

Goodhart, C. A. E. 1998. “The Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas,” European Journal of Political Economy 14.3: 407–432.

Graeber, D. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.

Grierson, P. 1977. The Origins of Money, Athlone Press and University of London, London.

Grierson, P. 1978. “The Origins of Money,” Research in Economic Anthropology 1: 1–35.

Hallo, W. W. 1996. Origins: The Ancient Near Eastern Background of Some Modern Western Institutions, Brill, New York. pp. 18-25.

Hart, K. 1986. “Heads or Tails? Two Sides of the Coin,” Man n.s. 21.4: 637-656.

Heidel, W. A. 1926. “Heiliges Geld, eine historische Untersuchung über den sakralen Ursprung des Geldes by Bernhard Laum” (Review), Classical Philology 21.2: 191–192.

Henry, J. F. 2004. “The Social Origins of Money: The Case of Egypt,” in L. R. Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham, UK. 79–98.

Holtz, J. 1984. Kritik der Geldentstehungstheorien. Carl Menger, Wilhelm Gerloff und eine Untersuchung über die Entstehung des Geldes im alten Ägypten und Mesopotamien, Dietrich Reimer Verlag, Berlin.

Hudson, M. 2004. “The Archaeology of Money: Debt Versus Barter Theories of Money’s Origins,” in L. R. Wray (ed.), Credit and State Theories of Money: the Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 99–127.

Humphrey, C. 1984. “Barter and Economic Disintegration,” Man 20.1: 48–72.

Ingham, G. 2004. “The Emergence of Capitalist Credit Money,” in L. R. Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 173–222.

Ingham, G. 2006. “Further Reflections on the Ontology of Money,” Economy and Society 36.2: 264–265.

Ingham, G., 2000. “Modern Money,” in J. Smithin, J. (ed.), 2000. What is Money?, Routledge, London and New York.

Innes, A. M. 1913. “What is Money?,” Banking Law Journal May: 377–408.

Iwai, K. 2001. “The Evolution of Money,” in A. Nicita and U. Pagano (eds.), The Evolution of Economic Diversity, Routledge, London and New York. 396–431.

Jevons, W. S. 1875. Money and the Mechanism of Exchange, H.S. King & Co., London.

Jevons, W. S. 1923. Money and the Mechanism of Exchange (25th edn.), Kegan Paul, Trench, Trubner, London.

Kim, H. S. 2001. “Archaic Coinage as Evidence for the Use of Money,” in A. Meadows and K. Shipton (eds.), Money and its Uses in the Ancient Greek World, Oxford University Press, Oxford. 7-21.

Kim, H. S. 2002. “Small Change and the Moneyed Economy,” in P. Cartledge, E. E. Cohen and L. Foxhall (eds.), Money, Labour and Land. Approaches to the Economies of Ancient Greece, Routledge, London and New York. 52-66.

Kiyotaki, N. and Wright, R. 1989. “On Money as a Medium of Exchange,” Journal of Political Economy 97: 927–954.

Kiyotaki, N. and Wright, R. 1991. “A Contribution to the Pure Theory of Money,” Journal of Economic Theory 53: 215–235.

Kiyotaki, N. and Wright, R. 1992. “Acceptability, Means of Payment, and Media of Exchange,” Federal Reserve Bank of Minneapolis Quarterly Review 2–10.

Knapp, G. F. 1973 [1924]. The State Theory of Money, Augustus M. Kelley, Clifton, NY.

Kraay, C. M. 1964. “Hoards, Small Change and the Origin of Coinage,” Journal of Hellenic Studies 84: 76–91.

Laum, B. 1924. Heiliges Geld: eine historische Untersuchung über den sakralen Ursprung des Geldes, Mohr, Tübingen.

Lo Cascio, E. 2003. Credito e moneta nel mondo romano: atti degli Incontri capresi di storia dell'economia antica: Capri, 12-14 ottobre 2000, Edipuglia, Bari.

Mastromatteo, G. and L. Ventura, 2007. “The Origin of Money: A Survey of the Contemporary Literature,” International Review of Economics 54. 2: 195–224.

Mauss, Marcel. 2002. The Gift: The Form and Reason for Exchange in Archaic Societies (trans. W. D. Halls), Routledge, London.

Menger, C. 1892. “Geld,” in Handwörterbuch der Staatswissenschaften (vol. 3). 730–757.

Menger, C. 1892. “On the Origin of Money” (trans. C. A. Foley), Economic Journal 2: 238–255.

Menger, C. 1909. “Geld,” in J. Conrad et al. (eds.), Handwörterbuch der Staatswissenschaften (vol. 4; 3rd edn.), Fischer, Jena. 555–610.

Menger, C. 1923. Grundsätze der Volkswirtschaftslehre (2nd rev. edn.), Hölder-Pichler-Tempsky, Vienna.

Menger, C. 2002 [1909]. “Money” (trans. L. B. Yeager and M. Streissler), in M. Latzer and S. W. Schmitz (eds.), Carl Menger and the Evolution of Payments Systems, Edward Elgar, Cheltenham, UK. 25–108. [N.B. this is a translation of Menger 1909.]

Menger, C. 2007. Principles of Economics (trans. Grundsätze der Volkswirtschaftslehre [1st edn. 1871] by J. Dingwall and B. F. Hoselitz), Ludwig von Mises Institute, Auburn, Alabama.

Minnen, P. van. 2008. “Money and Credit in Roman Egypt,” in W. V. Harris (ed.), The Monetary Systems of the Greeks and Romans, Oxford University Press, Oxford. 226-241.

Mises, L. von. 1998 [1949]. Human Action: A Treatise on Economics. The Scholar’s Edition, Ludwig von Mises Institute, Auburn, Ala.

Mises, L. von. 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala.

Moini, M. 2001. “Toward a General Theory of Credit and Money,” Review of Austrian Economics 14.4: 267–317.

Müller-Wollermann, R. 1988–1991. “Funktionsträger von Geld im Alten Ägypten,” in S. Schoske (ed.), Akten des vierten Internationalen Ägyptologen Kongresses: München 1985 (vol. 4), Helmut Buske, Hamburg. 147–158.

Murphy, Robert P. 2003. “The Origin of Money and Its Value,” Mises Daily, September 29, http://mises.org/daily/1333

Peacock, M. S. 2003–2004. “State, Money, Catallaxy: Underlaboring for a Chartalist Theory of Money,” Journal of Post Keynesian Economics 26.2: 205–225.

Peacock, M. S. 2006. “The Origins of Money in Ancient Greece: The Political Economy of Coinage and Exchange,” Cambridge Journal of Economics 30: 637–650.

Peacock, M. S. 2011. “The Political Economy of Homeric Society and the Origins of Money,”Contributions to Political Economy 30: 47–65.

Powell, M. 1978 “A Contribution to the History of Money in Mesopotamia Prior to the Invention of Coinage,” in B. Hruška and G. Komoróczy (eds.), Festschrift Lubor Matouš, Eötvös Loránd Tudományegyetem, Ókori Történeti Tanszekek, Budapest. 211–243.

Pryor, F. L. 1977. “The Origins of Money,” Journal of Money, Credit and Banking 9.3: 391–409.

Robert, R. 1956. “A Short History of Tallies,” in A. C. Littleton and B. S. Yamey (eds.), Studies in the History of Accounting, Richard D. Irwin, Homewood, Il. 75–85.

Roberts, K. 2011. The Origins of Business, Money, and Markets, Columbia University Press, New York.

Rothbard, M. N., 2009, The Essential von Mises, von Mises Institute, Auburn, Alabama.

Schaps, D. M. 2001. “The Conceptual Prehistory of Money and its Impact on the Greek Economy,” in M. S. Balmuth (ed.), Hacksilber to Coinage: New Insights into the Monetary History of the Near East and Greece. A Collection of Eight Papers Presented at the 99th Annual Meeting of the Archaeological Institute of America, The American Numismatic Society, New York. 93-104.

Schaps, D. M. 2004. The Invention of Coinage and the Monetization of Ancient Greece, University of Michigan Press, Ann Arbor

Schaps, D. M. 2008. “What Was Money in Ancient Greece?,” in W. V. Harris (ed.), The Monetary Systems of the Greeks and Romans, Oxford University Press, Oxford. 38-48.

Seaford, R. 2004. Money and the Early Greek Mind: Homer, Philosophy, Tragedy, Cambridge University Press, Cambridge.

Semenova, A. 2011. “Would You Barter With God? Why Holy Debts and not Profane Markets Created Money,” American Journal of Economics and Sociology 70.2: 376–400.

Semenova, A. 2011. The Origins of Money: Evaluating Chartalist and Metallist Theories in the Context of Ancient Greece and Mesopotamia, PhD dissert. University of Missouri-Kansas City, Kansas City, Missouri.
https://mospace.umsystem.edu/xmlui/bitstream/handle/10355/10843/SemenovaOriMonEva.pdf?sequence=1

Smith, A. 1811. An Inquiry into the Nature and Causes of the Wealth of Nations (11 edn; vol. 1), Oliver D. Cooke, Hartford.

Smithin, J. (ed.). 2000a. What is Money?, Routledge, London and New York.

Smithin, J. 2000b. “‘Babylonian Madness’: On the Historical and Sociological Origins of Money,” in J. Smithin, J. (ed.), 2000. What is Money?, Routledge, London and New York.

Tymoigne, É. and L. R. Wray. 2006. “Money: An Alternative Story,” in P. Arestis and M. Sawyer (eds.), A Handbook of Alternative Monetary Economics, Edward Elgar, Cheltenham. 1–16.

von Reden, S. 1997. “Money, Law and Exchange: Coinage in the Greek Polis,” Journal of Hellenic Studies 117: 154–176.

von Reden, S. 2002. “Money in the ancient economy: A survey of recent research,” Klio 84.1: 141–174.

Wittenburg, A. and B. Laum, 1995. “Bernhard Laum und der sakrale Ursprung des Geldes,” in H. Flashar (ed.), Altertumswissenschaft in den 20er Jahren. Neue Fragen und Impulse, Franz Steiner Verlag, Stuttgart. 259-274.

Wray, L. R. 1998. Understanding Modern Money: The Key to Full Employment and Price Stability, Edward Elgar, Cheltenham.

Wray, L. R. 2002. “State Money,” International Journal of Political Economy32.3: 23–40.

Wray, L. R. (ed.). 2004. Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham.

Wray, L. R. 2008. “Banking, Finance and Money,” in J. B. Davis and W. Dolfsma (eds.), The Elgar Companion to Social Economics, Edward Elgar, Cheltenham. 478–495.


Appendix: Bibliographical Resources for the Ancient Near East

The first money we know of emerged in the ancient Near East in Mesopotamia. For those interested in resources for searching the research literature on the ancient Near East, the following are useful:

(1) “Elenchus Bibliographicus Biblicus,” 1920–1967, Biblica, Rome.
Elenchus Bibliographicus Biblicus, 1968–1984, Rome.
Elenchus of Biblica, 1985–, Editrice Pontificio Istituto Biblico, Rome.

A comprehensive annual bibliography, which covers nearly all relevant journals for the ancient Near East. This work contains extensive indices. For 1920–1967, the index was published in the journal Biblica (Pontificium Institutum Biblicum, Rome). Then it became a separate publication, the latest version of which is Elenchus of Biblica (1985 onwards).

(2) “Keilschriftbibliographie,” 1932–, Orientalia (published quarterly), Pontificium institutum biblicum, Rome.

Published in the Journal Orientalia, this is an index for work on the Ancient Near East. The index has subject and name indices, and is published as the last article in one volume of Orientalia biannually. The index provides bibliographical references to publications in the previous year under ten subject areas, viz., General, Writing and Epigraphy, Language and Philology, History of the Ancient Middle East, Religion and Mythology, Law, Science and Technology, Geography, and Archaeology.

(3) Hupper, W. G., 1987–, An Index to English Periodical Literature on the Old Testament and Ancient Near Eastern Studies. Metuchen, N. J.

This index contains citations for over six hundred journals in English for Near Eastern archaeology, history, language, science, and theology from 1793 to 1970. Five volumes have appeared, and a further five are planned.

My Posts on the Origin of Money

I have assembled a set of two lists of links and a bibliography below, as follows:

(1) my posts on the origin of money and the debate between David Graeber and Robert P. Murphy;
(2) some external links on the debate between David Graeber and Robert P. Murphy, and
(3) a bibliography on the origin of money.

First, however, I will give a quick summary of Graeber’s view on the origin of money in his recent book (Graeber 2011). It is curious that, in discussion of Graeber’s book, many people cannot even get his arguments right. It is important to note that Graeber does not deny that money in some historical circumstances can emerge from barter between strangers, especially in long distance trade. Graeber cites the cacao money of Mesoamerica and the salt money of Ethiopia as instances of money emerging through barter (Graeber 2011: 75; on Ethiopian salt money, see Einzig 1949: 123–126). Graeber also cites the views of Max Weber (1978: 673–674) and Karl Bücher (1901), who argued that money emerged from barter between different societies, not within societies (Karl Polanyi may also have held a position close to this). What Graeber denies is that the Mengerian or the barter spot trade theory is a universal theory of the origin of money.

Money-less societies are frequently dominated by debt/credit transactions, or “gift exchange,” not by barter spot trades. Even in cases where goods exchange for goods in spot trades, social relations can complicate matters considerably, and historically barter seems to have been prevalent between one community and another, or, that is to say, between people who were strangers and where relationships were implicitly or explicitly hostile (Graeber 2011: 29–30).

While a non-enumerated system of debts/credits or gift exchange might not give rise to money, there is clearly a role for debt in the history of money (Graeber 2011: 40). In the real world, gift exchange and debt/credit arrangements existed long before money, and societies could develop an abstract unit of account in which debt/credit transactions were still the predominant system (Graeber 2011: 40). The use of coinage, when it was developed, could remain uneven and coins scarce.

In a society where debt/credits are the major transaction, IOUs/debts can be transferable and used as a means of payment or medium of exchange. Graeber thinks of an example:

“Say, for example, that Joshua were to give his shoes to Henry, and, rather than Henry owing him a favour, Henry promises him something of equivalent value. Henry gives Joshua an IOU. Joshua could wait for Henry to have something useful, and then redeem it. In that case Henry would rip up the IOU and the story would be over. But say Joshua were to pass the IOU on to a third party—Sheila—to whom he owes something else. He could tick it off against his debt to a fourth party, Lola—now Henry will owe that amount to her. Hence money is born.” (Graeber 2011: 46).

A type of medium of exchange could emerge in theory in this way in small communities, or communities of specific people like merchants where IOUs can be verified. The empirical evidence demonstrates that this is precisely how promissory notes and bills of exchange become a medium of exchange. A kind of debt money can emerge in communities where there exist people willing to accept it or cancel the debt IOUs (Graeber 2011: 74). Graeber notes how for centuries English shops issued their own wood, lead or leather token money as debt money redeemable at the particular merchant’s store (Graeber 2011: 74). Graeber’s eclectic view on the origins of money is expressed in this way:

“Throughout most of history, even where we do find elaborate markets, we also find a complex jumble of different sorts of currency. Some of these may have originally emerged from barter between foreigners: the cacao money of Mesoamerica and the salt money of Ethiopia are frequently cited examples. Other arose from credit systems, or from arguments over what sort of goods should be acceptable to pay taxes or other debts. Such questions were often matters of endless contestation.” (Graeber 2011: 75)

Graeber, however, doubts that local or community debt/IOU money systems can “create a full-blown currency system, and there’s no evidence that they ever have” (Graeber 2011: 47). But this is where Georg Friedrich Knapp’s (1842–1926) chartalist theory of money comes in (see Knapp 1905; Knapp 1973 [1924]). When the state issues IOUs it can do so on a large scale, and then demand the same IOU tokens back as payment of taxes. Graeber notes the use of tally sticks in the Middle Ages: the British exchequer could issue them, and they would circulate as tokens of debt owed to the government (Graeber 2011: 48–49), but also circulate as a medium of exchange within England accepted for payment of taxes (Davies 2002: 146–151). Graeber (2011: 59–62) also refers to the thesis of Grierson on how wergeld-like customs could create a system of measurement of relative values (Grierson 1978: 11; Grierson 1977).

The origins of money, then, lie in different sources, and not simply in a barter origin of money theory.

Graeber also notes how primitive monies (called non-commercial money or social currency) – like shell money in the Americas or Papua New Guinea, cattle money in Africa, bead money, feather money, and so on – are often rarely used to buy everyday items in the societies that use them. Instead, they are employed in social relations like marriages and to settle disputes (Graeber 2011: 60). A commercial money can most probably arise through non-commercial money.

The story of money is thus rather more complex than neoclassical economists or Austrians imagine.

My list of posts on the origin of money and the other links are below:

“Debate on the Origin of Money,” August 25, 2012.

“The Origin of Money in the Digest of Justinian,” August 21, 2012.

“Alfred Mitchell Innes on the Credit Theory of Money,” March 24, 2012.

“A Note on Menger on the Nature and Origin of Money,” July 28, 2012.

“Philip Grierson on the Origin of Money,” March 21, 2012.

“Observations on Non-Commercial Money,” February 18, 2012.

“Money as a Unit of Account and its Origins,” February 11, 2012.

“Quiggin on the Origin of Money,” February 10, 2012.

“David Graeber on Debt and Money, Part 2,” February 9, 2012.

“David Graeber versus Robert Murphy: A Review,” January 24, 2012.

“David Graeber on the Origins of Money,” January 23, 2012.

“Bibliography on the Origins of Money,” January 19, 2012.

“Alla Semenova on the Origins of Money,” January 15, 2012.

“Mises on the Origin of Money,” January 12, 2012.

“The Origins of Money,” January 8, 2012.

“Menger on the Origin of Money,” January 5, 2012.

“Money as Debt,” December 26, 2011.

“David Graeber’s Response to Robert Murphy,” September 9, 2011.

“The Origin of Coinage in Ancient Greece,” April 29, 2011.


EXTERNAL RESOURCES

Graeber, David, 2009. “Debt: The First Five Thousand Years,” Eurozine.com, 20th August.
An early summary of Graeber’s work on debt.

“What is Debt? – An Interview with Economic Anthropologist David Graeber,” Nakedcapitalism.com, August 26, 2011.
The original interview with Graeber that sparked the debate.

Gene Callahan, “Fiat Currency,” Saturday, August 27, 2011.
A summary of Graeber’s interview that sparked off a debate between Gene Callahan and Robert Murphy.

Robert P. Murphy, “Have Anthropologists Overturned Menger?,” Mises Daily, September 1, 2011.
This is Robert P. Murphy’s response to Graeber’s interview at Nakedcapitalism.com.

Robert Murphy, “David Graeber’s Response to My Article,” Mises.org, September 8, 2011.
This is a summary of David Graeber’s comments on Robert P. Murphy’s article “Have Anthropologists Overturned Menger?.”

Robert Murphy, “Murphy Replies to David Graeber on Menger and Money,” Mises.org, September 8, 2011.
This is Murphy’s reply to David Graeber’s comments.

David Graeber, “On the Invention of Money – Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics. A Reply to Robert Murphy’s ‘Have Anthropologists Overturned Menger?,’” September 13, 2011.
David Graeber’s final response to Murphy, published on Nakedcapitalism.com.


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Bücher, K. 1901. Industrial Evolution (trans. S. Morley Wickett), H. Holt and Co., New York.

Crump, T. 1981. The Phenomenon of Money, Routledge & Kegan Paul, London.

Curtis, J. W. 1951. “Media of Exchange in Ancient Egypt,” The Numismatist 64.5: 482-491.

Davies, J. K. 2001. “Temples, Credit, and the Circulation of Money,” in A. Meadows and K. Shipton (eds.), Money and its Uses in the Ancient Greek World, Oxford University Press, Oxford. 117-128.

Dowd, K. 2001. “The Emergence of Fiat Money: A Reconsideration,” Cato Journal 20.3: 467–476.

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Henry, J. F. 2004. “The Social Origins of Money: The Case of Egypt,” in L. R. Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham, UK. 79–98.

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Hudson, M. 2004. “The Archaeology of Money: Debt Versus Barter Theories of Money’s Origins,” in L. R. Wray (ed.), Credit and State Theories of Money: the Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 99–127.

Humphrey, C. 1984. “Barter and Economic Disintegration,” Man 20.1: 48–72.

Ingham, G. 2004. “The Emergence of Capitalist Credit Money,” in L. R. Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 173–222.

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Money as a Unit of Account and its Origins

Economists have arguably neglected the unit of account (or measure of value) function of money, and instead focused too much on money’s medium of exchange role.

A. Chapman has made the following important point about money as a measure of relative values:

“… scholars such as Marx (1973: 142), Schneider (1974: 255) and Melitz (1970: 1027) concerned with the prehistory of money have noted that the standard usage occurs quite independently from money as a universal equivalent, also termed all-purpose money. Referring to Menger, Einzig (1949: 367) even suggests that standards for evaluating stored wealth may historically have preceded barter. This seems unlikely if only because most known hunters, gatherers and fishers did not accumulate much ‘wealth’ but many did barter. The standard is not necessarily represented by a material object. For example, it may consist of imaginary units or of a mathematical device for calculating relative worth of goods against a given symbol or entity.” (Chapman 1980: 53).

A related question is how the development of a measure of value for evaluating the worth of various kinds of stored wealth might have had a role in origins of money.

When we examine those early civilizations where stored wealth came to be an important element in the community, it makes a great deal of sense.

The origin of money in ancient Mesopotamia appears to be in the development of an abstract money of account in the temple and palace institutions. These temples and palaces were institutions with large internal centrally planned economies, with complex weights and measurements for internal accounting of the products produced, received and distributed, and rent and interest owed. Many prices were set and administered in the money of account which developed from weight units. The two units of account were (1) the shekel of silver (which was equal to the monthly grain ration) and (2) barley (Hudson 2004). Silver money of account spread to the private economy mostly notably as a means of paying debts to temples and palaces (Hudson 2004: 115). But many ordinary people could pay in commodities, and the administered pricing system in terms of silver/grain developed in the temples was to assist in calculation of payments in kind.

In ancient Egypt, money appears as the most important unit of account called the deben (or uten), which was a unit of weight, originally equated to 92 (or 91) grams (Henry 2004: 92; there was also the unit called the khar for measuring wheat or barley, and 1 khar was equivalent to 2 deben of bronze). The measure of value for various goods was thus fixed weight units and historically no doubt these units arose from copper, silver, grain and gold. The unit of account system appears to have been developed by complex palace, government and temple institutions for internal accounting. While goods came to be denominated in terms of deben, in early times during the period of the Old Kingdom there were no physical deben changing hands in the private economy. That is to say, the deben did not function as a physical means of payment, and did not emerge by barter spot transactions as the most saleable medium of exchange. Even though goods and services were measured in a deben unit of account, payment was made in goods.

An important element in both these historical processes was the institution (or institutions) where surplus products were stored from taxation, tribute and gifts. These institutions dealt with complex flows, in and out, of goods: they were palace and temple complexes. Accounting systems, weight measures and writing are connected with just such institutions, and, importantly, some abstract unit of account arose by which to measure relative values of stored goods and inflows or outflows of goods. Since loans were also no doubt made from surplus products stored, repayment of loans in kind was facilitated by a unit of account.

In primitive human societies by the end of the Stone Age (c. 2.9 million years to 4500 BC), before the literate urban civilizations, agricultural communities developed where surpluses were stored, most probably held as a communal resource. The question of how the origins of a unit of account or measure of value could be related to the emergence of stored wealth is an interesting research question that deserves further study.

BIBLIOGRAPHY

Chapman, A. 1980. “Barter as a Universal Mode of Exchange,” L’Homme 20.3: 33–83.

Einzig, Paul. 1949. Primitive Money: In Its Ethnological, Historical, and Economic Aspects, Eyre & Spottiswoode, London.

Henry, J. F. 2004. “The Social Origins of Money: The Case of Egypt,” in L. R. Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham, UK. 79–98.

Hudson, M. 2004. “The Archaeology of Money: Debt Versus Barter Theories of Money’s Origins,” in L. R. Wray (ed.), Credit and State Theories of Money: the Contributions of A. Mitchell Innes, Edward Elgar, Cheltenham. 99–127.