Modern banknotes actually work on a similar principle, except in reverse.15 Recall here the little parable about Henry’s IOU. The reader might have noticed one puzzling aspect of the equation: the IOU can operate as money only as long as Henry never pays his debt. In fact this is precisely the logic on which the Bank of England—the first successful modern central bank—was originally founded. In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank—in effect, to circulate or “monetize” the newly created royal debt. This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it), but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist.16
If nothing else, this approach helps solve one of the obvious mysteries of the fiscal policy of so many early kingdoms: Why did they make subjects pay taxes at all? This is not a question we’re used to asking. The answer seems self-evident. Governments demand taxes because they wish to get their hands on people’s money. But if Smith was right, and gold and silver became money through the natural workings of the market completely independently of governments, then wouldn’t the obvious thing be to just grab control of the gold and silver mines? Then the king would have all the money he could possibly need. In fact, this is what ancient kings would normally do. If there were gold and silver mines in their territory, they would usually take control of them. So what exactly was the point of extracting the gold, stamping one’s picture on it, causing it to circulate among one’s subjects—and then demanding that those same subjects give it back again?
This does seem a bit of a puzzle. But if money and markets do not emerge spontaneously, it actually makes perfect sense. Because this is the simplest and most efficient way to bring markets into being. Let us take a hypothetical example. Say a king wishes to support a standing army of fifty thousand men. Under ancient or medieval conditions, feeding such a force was an enormous problem—unless they were on the march, one would need to employ almost as many men and animals just to locate, acquire, and transport the necessary provisions.17 On the other hand, if one simply hands out coins to the soldiers and then demands that every family in the kingdom was obliged to pay one of those coins back to you, one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with things they want. Markets are brought into existence as a side effect.
This is a bit of a cartoon version, but it is very clear that markets did spring up around ancient armies; one need only take a glance at Kautilya’s Arthasasatra, the Sassanian “circle of sovereignty,” or the Chinese “Discourses on Salt and Iron” to discover that most ancient rulers spent a great deal of their time thinking about the relation between mines, soldiers, taxes, and food. Most concluded that the creation of markets of this sort was not just convenient for feeding soldiers, but useful in all sorts of ways, since it meant officials no longer had to requisition everything they needed directly from the populace, or figure out a way to produce it on royal estates or royal workshops. In other words, despite the dogged liberal assumption—again, coming from Smith’s legacy—that the existence of states and markets are somehow opposed, the historical record implies that exactly the opposite is the case. Stateless societies tend also to be without markets.
As one might imagine, state theories of money have always been anathema to mainstream economists working in the tradition of Adam Smith. In fact, Chartalism has tended to be seen as a populist underside of economic theory, favored mainly by cranks.18 The curious thing is that the mainstream economists often ended up actually working for governments and advising such governments to pursue policies much like those the Chartalists described—that is, tax policies designed to create markets where they had not existed before—despite the fact that they were in theory committed to Smith’s argument that markets develop spontaneously of their own accord.
This was particularly true in the colonial world. To return to Madagascar for a moment: I have already mentioned that one of the first things that the French general Gallieni, conqueror of Madagascar, did when the conquest of the island was complete in 1901 was to impose a head tax. Not only was this tax quite high, it was also only payable in newly issued Malagasy francs. In other words, Gallieni did indeed print money and then demand that everyone in the country give some of that money back to him.
Most striking of all, though, was language he used to describe this tax. It was referred to as the “impôt moralisateur,” the “educational” or “moralizing tax.” In other words, it was designed—to adopt the language of the day—to teach the natives the value of work. Since the “educational tax” came due shortly after harvest time, the easiest way for farmers to pay it was to sell a portion of their rice crop to the Chinese or Indian merchants who soon installed themselves in small towns across the country. However, harvest was when the market price of rice was, for obvious reasons, at its lowest; if one sold too much of one’s crop, that meant one would not have enough left to feed one’s family for the entire year, and thus be forced to buy one’s own rice back, on credit, from those same merchants later in the year when prices were much higher. As a result, farmers quickly fell hopelessly into debt (the merchants doubling as loan sharks). The easiest ways to pay back the debt was either to find some kind of cash crop to sell—to start growing coffee, or pineapples—or else to send one’s children off to work for wages in the city, or on one of the plantations that French colonists were establishing across the island. The whole project might seem no more than a cynical scheme to squeeze cheap labor out of the peasantry, and it was that, but it was also something more. The colonial government was were also quite explicit (at least in their own internal policy documents), about the need to make sure that peasants had at least some money of their own left over, and to ensure that they became accustomed to the minor luxuries—parasols, lipstick, cookies—available at the Chinese shops. It was crucial that they develop new tastes, habits, and expectations; that they lay the foundations of a consumer demand that would endure long after the conquerors had left, and keep Madagascar forever tied to France.
Most people are not stupid, and most Malagasy understood exactly what their conquerors were trying to do to them. Some were determined to resist. More than sixty years after the invasion, a French anthropologist, Gerard Althabe, was able to observe villages on the east coast of the island whose inhabitants would dutifully show up at the coffee plantations to earn the money for their poll tax, and then, having paid it, studiously ignore the wares for sale at the local shops and instead turn over any remaining money to lineage elders, who would then use it to buy cattle for sacrifice to their ancestors.19 Many were quite open in saying that they saw themselves as resisting a trap.
Still, such defiance rarely lasts forever. Markets did gradually take shape, even in those parts of the island where none had previously existed. With them came the inevitable network of little shops. And by the time I got there, in 1990, a generation after the poll tax had finally been abolished by a revolutionary government, the logic of the market had become so intuitively accepted that even spirit mediums were reciting passages that might as well have come from Adam Smith.
Such examples could be multiplied endlessly. Something like this occurred in just about every part of the world conquered by European arms where markets were not already in place. Rather than discovering barter, they ended up using the very t
echniques that mainstream economics rejected to bring something like the market into being.
In Search of a Myth
Anthropologists have been complaining about the Myth of Barter for almost a century. Occasionally, economists point out with slight exasperation that there’s a fairly simple reason why they’re still telling the same story despite all the evidence against it: anthropologists have never come up with a better one.20 This is an understandable objection, but there’s a simple answer to it. The reasons why anthropologists haven’t been able to come up with a simple, compelling story for the origins of money is because there’s no reason to believe there could be one. Money was no more ever “invented” than music or mathematics or jewelry. What we call “money” isn’t a “thing” at all, it’s a way of comparing things mathematically, as proportions: of saying one of X is equivalent to six of Y. As such it is probably as old as human thought. The moment we try to get any more specific, we discover that there are any number of different habits and practices that have converged in the stuff we now call “money,” and this is precisely the reason why economists, historians, and the rest have found it so difficult to come up with a single definition.
Credit Theorists have long been hobbled by the lack of an equally compelling narrative. This is not to say that all sides in the currency debates that ranged between 1850 and 1950 were not in the habit of deploying mythological weaponry. This was true particularly, perhaps, in the United States. In 1894, the Greenbackers, who pushed for detaching the dollar from gold entirely to allow the government to spend freely on job-creation campaigns, invented the idea of the March on Washington—an idea that was to have endless resonance in U.S. history. L. Frank Baum’s book The Wonderful Wizard of Oz, which appeared in 1900, is widely recognized to be a parable for the Populist campaign of William Jennings Bryan, who twice ran for president on the Free Silver platform—vowing to replace the gold standard with a bimetallic system that would allow the free creation of silver money alongside gold.21 As with the Greenbackers, one of the main constituencies for the movement was debtors: particularly, Midwestern farm families such as Dorothy’s, who had been facing a massive wave of foreclosures during the severe recession of the 1890s. According to the Populist reading, the Wicked Witches of the East and West represent the East and West Coast bankers (promoters of and benefactors from the tight money supply), the Scarecrow represented the farmers (who didn’t have the brains to avoid the debt trap), the Tin Woodsman was the industrial proletariat (who didn’t have the heart to act in solidarity with the farmers), the Cowardly Lion represented the political class (who didn’t have the courage to intervene). The yellow brick road, silver slippers, emerald city, and hapless Wizard presumably speak for themselves.22 “Oz” is of course the standard abbreviation for “ounce.”23 As an attempt to create a new myth, Baum’s story was remarkably effective. As political propaganda, less so. William Jennings Bryan failed in three attempts to win the presidency, the silver standard was never adopted, and few nowadays even remember what The Wonderful Wizard of Oz was originally supposed to be about.24
For state-money theorists in particular, this has been a problem. Stories about rulers using taxes to create markets in conquered territories, or to pay for soldiers or other state functions, are not particularly inspiring. German ideas of money as the embodiment of national will did not travel very well.
Every time there was a major economic meltdown, however, conventional laissez-faire economics took another hit. The Bryan campaigns were born as a reaction to the Panic of 1893. By the time of the Great Depression of the 1930s, the very notion that the market could regulate itself, so long as the government ensured that money was safely pegged to precious metals, was completely discredited. From roughly 1933 to 1979, every major capitalist government reversed course and adopted some version of Keynesianism. Keynesian orthodoxy started from the assumption that capitalist markets would not really work unless capitalist governments were willing effectively to play nanny: most famously, by engaging in massive deficit “pump-priming” during downturns. While in the ’80s, Margaret Thatcher in Britain and Ronald Reagan in the United States made a great show of rejecting all of this, it’s unclear how much they really did.25 And in any case, they were operating in the wake of an even greater blow to previous monetary orthodoxy: Richard Nixon’s decision in 1971 to unpeg the dollar from precious metals entirely, eliminate the international gold standard, and introduce the system of floating currency regimes that has dominated the world economy ever since. This meant in effect that all national currencies were henceforth, as neoclassical economists like to put it, “fiat money” backed only by the public trust.
Now, John Maynard Keynes himself was much more open to what he liked to call the “alternative tradition” of credit and state theories than any economist of that stature (and Keynes is still arguably the single most important economic thinker of the twentieth century) before or since. At certain points he immersed himself in it: he spent several years in the 1920s studying Mesopotamian cuneiform banking records to try to ascertain the origins of money—his “Babylonian madness,” as he would later call it.26 His conclusion, which he set forth at the very beginning of his Treatise on Money, his most famous work, was more or less the only conclusion one could come to if one started not from first principles, but from a careful examination of the historical record: that the lunatic fringe was, essentially, right. Whatever its earliest origins, for the last four thousand years, money has been effectively a creature of the state. Individuals, he observed, make contracts with one another. They take out debts, and they promise payment.
The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time—when, that is to say it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of Money has been reached that Knapp’s Chartalism—the doctrine that money is peculiarly a creation of the State—is fully realized … To-day all civilized money is, beyond the possibility of dispute, chartalist.27
This does not mean that the state necessarily creates money. Money is credit, it can be brought into being by private contractual agreements (loans, for instance). The state merely enforces the agreement and dictates the legal terms. Hence Keynes’ next dramatic assertion: that banks create money, and that there is no intrinsic limit to their ability to do so: since however much they lend, the borrower will have no choice but to put the money back into some bank again, and thus, from the perspective of the banking system as a whole, the total number of debits and credits will always cancel out.28 The implications were radical, but Keynes himself was not. In the end, he was always careful to frame the problem in a way that could be reintegrated into the mainstream economics of his day.
Neither was Keynes much of a mythmaker. Insofar as the alternative tradition has come up with an answer to the Myth of Barter, it was not from Keynes’ own efforts (Keynes ultimately decided that the origins of money were not particularly important) but in the work of some contemporary neo-Keynesians, who were not afraid to follow some of his more radical suggestions as far as they would go.
The real weak link in state-credit theories of money was always the element of taxes. It is one thing to explain why early states demanded taxes (in order to create markets.) It’s another to ask “by what right?” Assuming that early rulers were not simply thugs, and that taxes were not simply extortion—and no Credit Theorist, to my knowledge, took such a cynical view even of early government—one must ask how they justified this sort of thing.
Nowadays, we all think we know the answer to this question. We pay our taxes so that the government can provide us with services. This starts with security services
—military protection being, often, about the only service some early states were really able to provide. By now, of course, the government provides all sorts of things. All of this is said to go back to some sort of original “social contract” that everyone somehow agreed on, though no one really knows exactly when or by whom, or why we should be bound by the decisions of distant ancestors on this one matter when we don’t feel particularly bound by the decisions of our distant ancestors on anything else.29 All of this makes sense if you assume that markets come before governments, but the whole argument totters quickly once you realize that they don’t.
There is an alternative explanation, one created to be in keeping with the state-credit theory approach. It’s referred to as “primordial debt theory” and it has been developed largely in France, by a team of researchers—not only economists but anthropologists, historians, and classicists—originally assembled around the figures of Michel Aglietta and Andre Orléans,30 and more recently, Bruno Théret, and it has since been taken up by neo-Keynesians in the United States and the United Kingdom as well.31
It’s a position that has emerged quite recently, and at first, largely amidst debates about the nature of the euro. The creation of a common European currency sparked not only all sorts of intellectual debates (does a common currency necessarily imply the creation of a common European state? Or of a common European economy or society? Are these ultimately the same thing?) but dramatic political ones as well. The creation of the euro zone was spearheaded above all by Germany, whose central banks still see their main goal as combating inflation. What’s more, tight money policies and the need to balance budgets having been used as the main weapon to chip away welfare-state policies in Europe, it has necessarily become the stake of political struggles between bankers and pensioners, creditors and debtors, just as heated as those of 1890s America.