Money

by Felix Martin

  There are obvious similarities between this eruption of sub-sovereign and private moneys in Argentina in 2002 and the IOU economy that sprang up in Ireland during its bank closure. But there was also a crucial difference. In Ireland, the government had been trying earnestly to prevent the shutdown of the monetary system, and it had actively encouraged the search for sources of private monetary credit that could substitute for bank deposits in preparation for the closure. In Argentina, it was the government itself that imposed the effective closure of the banks, as the central plank of a policy to forestall a run and to prevent the flight of capital into foreign currencies. By the same token, the creation of quasi-currencies was not done in patriotic alliance with the government against a common enemy. It was an act of open defiance of the government’s draconian monetary policy. The government, it was widely held, had lost its bearings. It was working for the interests of blood-sucking usurers and foreign capitalists: its policies were harmful and illegitimate. The local politicians, businesses, and communities that fought them by issuing their private currencies saw themselves as a monetary version of France’s famous Maquis—the “Army of Shadows” that organised popular resistance to the puppet Vichy government during the Second World War.4 To the dismay of the monetary authorities and their advisers, their efforts were effective. In April 2002, the International Monetary Fund (IMF) warned the Argentine government that the efflorescence of substitute moneys had “complicated economic management, raised the threat of inflation, and undermined confidence in the public finances.”5 Until the peso regained its monopoly over the monetary franchise, the government would not be in control of the country.

  The stuff of central bankers’ nightmares: a token good for five Créditos.

  (illustration credit 4.1)

  Argentina’s experience is not the only example of a guerrilla war waged by a Monetary Maquis against government economic policy. When the Soviet Union disintegrated in the early 1990s, a similar thing happened. Financial shock therapy aimed to impose hard budget constraints on companies that had lived off continuous subsidies for decades. The idea was to liquidate the unviable enterprises in an avalanche of creative destruction, from which a brighter corporate future would emerge. But the managers of the enterprises themselves were not persuaded. When their access to the official banking sector dried up and they were invited quietly to exit the stage, they had a better idea. They created their own monetary networks with which to settle trade—circles of companies connected by supply chains that could accumulate trade credit with one another and then use it to offset debts without the use of the national money. By 1997, the share of inter-company trade settled in this way in Russia was estimated at around 40 per cent.6 Workers were paid with tokens or vouchers. A Ukrainian analyst summed up the scale of their issuance: “The known number of such private and self-accounting moneys in the Ukraine is in the hundreds, and in Russia must amount to tens of thousands.”7 A contemporary study of the phenomenon had a title that neatly summed up the problem facing the authorities. It was called The Vanishing Rouble.8

  Contesting the jurisdiction of a government whose country is disintegrating is perhaps easy to do. But attempts to escape the sovereignty of the national money are not confined to periods of crisis. In the developed West there are today thousands of private moneys in circulation—albeit most on a limited scale. Under the generic descriptions of LETS—Local Exchange Trading Schemes—and mutual credit networks, community and business organisations all over Europe and America actively maintain private monetary networks. The idiosyncratic ideologies of the issuing organisations are often advertised in the names of their currencies. The London district of Brixton, for example, has its Brixton Pound—a name which combines the organisers’ objective of keeping purchasing power in the local economy with the historic lustre of the official British denomination. The upstate New York college town of Ithaca, on the other hand, has its Ithaca Hours—the Marxist undertones of which are deliberate, since the unit of account is an abstract hour of labour. The largest of these schemes are very large. The WIR mutual credit network—a sophisticated club of small businesses in Switzerland—has over 60,000 member companies, and settled the equivalent of more than 1.5 billion Swiss francs’ worth of trade in 2011.9 The smallest are very small: even the humble babysitting circle, after all, is a simple private monetary network.10

  Private moneys like these pose no existential threat to the official, national money, and the authorities generally treat them as harmless sideshows. Yet at the back of every central banker’s mind is the cautionary tale of Argentina—an example of what can happen if the state loses its franchise over the institution of money. And it is a tale familiar from the histories of even the most advanced and powerful nations. One of the most provocative acts of the British Crown’s jurisdiction over its American possessions was to outlaw the colonies’ printing of their own monies—and one of the first acts of the First Continental Congress was to authorise the printing of a new currency with which to finance the War of Independence. Were LETS schemes and mutual credit networks ever to outgrow their modest communitarian objectives, one could be sure that governments would soon condemn the infringement on a basic element of their constitutional power.11 Not for nothing does the very first article of the Constitution of the United States give Congress the exclusive power to mint money.12 In the mind of the conservative politician, with good historical reason, it is but a short step from the Crédito to the Continental Dollar—from cocking a picturesque snook at globalisation to monetary insurrection; and from monetary insurrection to political revolt.13

  It is hardly surprising, as a result, that—except when frustrated by the direst of crises, and with the exception of the odd unthreatening community project—the modern state has always made absolutely certain that it has exclusive control over the institution of money within its jurisdiction.

  Or has it?

  MONEY IN UTOPIA—AND IN THE REAL WORLD

  With the Aegean invention of economic value and of the economy as an objective space, the conceptual preconditions for money were in place. But conceptual preconditions are one thing: the practical business of organising society using money is another. How was money to work in practice? In theory, it was simple. With a universally understood language of economic value, prices could be argued over and agreed, credit and debt accumulated by individuals, and those balances then used to offset other debts and credits against other counterparties. Anyone who bought anything would, in effect, issue their own money—a liability to the value of the price agreed, precisely matched by the credit that accrued to the seller. That seller would then be able to transfer this credit to a third party when he, in turn, agreed a price at which to buy something. Everyone would have just as much money as he needed, there would always be enough money to go around, and money’s promise to deliver both freedom and security would be fulfilled.

  This monetary Utopia is none other than the model on which mutual credit networks like the Soviet trade credit rings and, more sustainably, the Swiss WIR are built. When one member provides goods or services for another, it receives in the opposite direction acknowledgement of credit. This credit, meanwhile, is agreed to be good to settle debts due not only to the original purchaser, but to any member of the network. Like the money balances that the inhabitants of Yap kept track of with their limestone fei, it is a credit not against the original issuer, but against society as a whole—or against the body politic of a credit network’s members. There are two basic preconditions for the successful functioning of such a system. First, every member must maintain his creditworthiness. Only then can society be confident in the value of his money. Second, all members must know one another, if not at first hand, then at second; or have some other grounds, by convention or compulsion, to accept society’s word for an unknown member’s credit. In LETS networks enthused by a spirit of localism and community, in associations of small business screened and organised with legendary Swiss efficiency, and o
n tiny Pacific islands, it is possible for these preconditions to be met. In any larger, less cohesive, society—let alone any society that already enjoys the institutions of a state—their attainment is, however, altogether more challenging.

  The generic problem is well known to political theorists. As James Madison, the chief architect of the United States Constitution, wrote in the Federalist Papers, “[i]f men were angels, no government would be necessary.”14 And if men were angels—if there was never any question of their overspending, or defaulting, or simply skipping town, and if they trusted one another implicitly—no government money would be necessary either.15 Everyone could issue their own IOUs, those IOUs would be readily accepted by all, and the entire economy would operate as a vast mutual credit network. But men are no more angels in economics than in politics. In a utopian community, money can consist of credit accumulated against the abstract notion of society—because every member has actively opted into that community. But in the real world, the hard-nosed creditor is bound to see herself facing not the noble ideal of the community but the altogether less fanciful prospect of the individual issuer. And the problem with the individual issuer is that he may default on his liabilities—and that other people might believe he will default. Money on any significant scale can therefore never consist of liquid credit accumulated against “society.” The alternative is obvious—and was so at money’s birth. Money will naturally consist of liquid credit accumulated against society’s more concrete manifestation: the sovereign.

  However one looks at it, the sovereign enjoys some distinct advantages as an issuer of money. In purely practical terms, sovereigns make a lot of payments. This was true even in the ancient world. Under the constitution of Athens and other city states like it there were numerous public offices to be filled—to say nothing of the need for soldiers. Before the advent of money, the fulfilment of these roles was treated as a public duty. By the fifth century BC, however, Athens was, in the words of the great politician Pericles, “a salary-drawing city.”16 Jury, magistracy, and military service were all paid in money. Citizens were paid to attend public festivals and even, by the fourth century BC, to turn up to the assembly to vote on legislation.17 So the sovereign conducted by far the largest volume of economic transactions, with by far the largest number of people. And the economic dominance of ancient sovereigns was as nothing compared to today’s overwhelming presence of the state. In 2011, government spending as a percentage of Gross Domestic Product (GDP—a reasonable proxy for the total volume of transactions in an economy) in the United States was 41 per cent. In France, it was more than 56 per cent.18 The trade credit networks of Russia and Ukraine often clustered around public utilities. Because they were both large buyers and large billers, credit against them was easy to come by and easy to spend. But how much easier to earn and discharge credit against the state itself.

  The sovereign has other unique advantages. Above all, it enjoys, by definition and unlike any private agent, political authority. The sovereign’s creditworthiness therefore rests not on our assessment of its ability to earn credit in the marketplace, but on the strength of this authority and on the sovereign’s willingness to deploy it to accumulate credit from its subjects via taxation. More than its dominant size in the market, it is the sovereign’s dominant power outside the market that makes its IOUs so effective as money.19 And what is more, it has been argued, the sovereign’s political power confers on its liabilities a status that transcends both the state’s vast market and its legal power. So long as the state is held to be legitimate, its money enjoys trust not only on commercial or legal, but on ideological and even spiritual grounds.20 None of these advantages imply that sovereigns cannot default, of course: they most certainly can, and in spectacular fashion. Nor is it to say that the sovereign’s is always the most creditworthy balance sheet in the land. But they do suggest why the sovereign is unique.

  So the fact that it is the sovereign’s money that typically circulates seems to be perfectly natural. It is the necessary condition of money in the real world. But using the official, national money to settle private transactions brings its own dilemmas. In fact, on closer consideration, it is not immediately clear that this conventional solution is any less utopian than the universal private monetary networks of the monetary cranks. The problem is that although the sovereign may indeed be the closest thing there is to a concrete manifestation of society, it is not society. What if the interests of the two diverge? What if the sovereign were to use its near-monopoly on money for its own gain—for example by overissuing money in order to fund spending simply to secure its popularity or re-election? What if it were to manipulate the system so that it produced not the marvellous combination of freedom and stability promised by money, but something else altogether? Hard-nosed realism may dictate that sovereigns issue money—but, as the First Continental Congress demonstrated, that only begs the question of who one would like to be sovereign. Or even—to side with the Monetary Maquis—whether one wouldn’t be better off without any of the available sovereigns at all.

  The monetary thought of the ancient Greeks was ambiguous on these practical, political questions. Its concerns, as we shall see, were in other, even more fundamental, areas. Plato’s only practical recommendation for monetary policy was to operate two inconvertible currencies, one for domestic transactions, and the other with which to settle foreign trade and official payments—the better to prevent the import of foreign luxuries to his austere communal paradise.21 But he did not address the question of who should issue and govern these moneys. Since his Republic was by definition a utopian community, the question hardly arose. Within the ideal state, control of money by the Philosopher-Kings just as of anything else, went without question. Even Aristotle devoted little time to the politics of money. Perhaps in Athens the body politic was so small and so cohesive—at the time of Aristotle it probably numbered no more than 35,000 male citizens—that the possibility of a significant divergence between the interests of public officials and the society from which they were drawn was simply not compelling.22 Whatever the reason, Greek monetary thought did not broach the topic.

  At the same time that Aristotle’s famous Lyceum was flourishing in Athens, however, another great scholarly academy was being founded five thousand miles away in a country where the identity of ruler and ruled was anything but taken for granted. The doctrines developed there were to provide quite a different understanding of money, and an unequivocal answer to the question of who should control it.

  “PEACE AND ORDER IN THE SUBCELESTIAL REALM”

  The fourth century BC was the height of what is called the “Warring States” period in China. The central authority of the ancient Zhou dynasty had long since collapsed, and its former vassal states had been embroiled in seemingly endless war to reunify the Chinese lands since the eighth century BC. They had not made much progress. After nearly four and a half centuries of sedition and warfare, the memory of a peaceful and united China remained as distant as ever. Numerous smaller territories had been swallowed up by larger neighbours, but by the fourth century the lords of the four most powerful states—Qin, Jin, Chu, and Qi—remained locked in interminable combat, constantly scheming to protect their power and defeat their peers. None was any closer to victory, or therefore to peace. It was in an effort to break this stalemate that in the middle of the fourth century BC, Duke Huan of Qi conceived a remarkably modern idea.

  Traditional Chinese thought—the philosophy of Confucius and Mozi—was concerned predominantly with ethics: its contributions to the science of government were essentially elaborations of its moral teachings. If the ruler acted justly, and his officials acted efficiently, then the state would be a just and efficient one. In the chaotic situation at the time, this minimalist political theory offered Duke Huan little practical help. He therefore invited the best thinkers of the age to join a new academy in his capital, Linzi. These scholars would be accorded a high rank and granted generous funding. Their onl
y obligation would be to advise the ruler of Qi on how best to govern his country and defeat his enemies. It was a prototype of the modern policy think tank—and the idea proved a prodigious success. In its heyday in the late fourth and early third centuries BC, the Jixia academy had a faculty of seventy-six professors and several thousand students, and became the most famous centre of learning in China. Moreover, it was responsible for a significant reformation of Chinese thought. No longer was moral philosophy the sole focus. New schools were born with an explicitly more worldly aim: to explain in detail how a ruler might most effectively organise his state to ensure its survival and eventual domination. Amongst the tools that scholars of the Jixia academy considered most important to this task was the institution of money.

  The monetary theories developed at the Jixia academy were collected in the work known as the Guanzi. They were to attain near-canonical status in Chinese economic thought for the next two thousand years. Though composed at almost exactly the same time as Aristotle’s works on money, they take a starkly different approach. Aristotle had founded the conventional Western theory of money when he had written in his Politics that “for the purposes of barter men made a mutual compact to give and accept some substance of such a sort as, being itself a useful commodity, was useful to handle in use for everyday life, iron for instance, silver and other metals …”23 The scholars of the Guanzi took an entirely different view. Money, they wrote, is a tool of the sovereign—part of his machinery of government: “[t]he former kings used money to preserve wealth and goods and thereby regulate the productive activities of the people, whereupon they brought peace and order to the Subcelestial Realm.”24