chapter  8
22 Pages

Money as a creation of debt payment or a creature of the state

Introduction It is the payment of debts to both private parties and the government that is said to have prompted the state to initiate money. The emphasis here is mainly on the payment of debts as in tax levies. The state, by accepting the tax payments in a form of money, will sanction its use in the payment of debts among private individuals as well. By this action, that form of money will be accepted as a medium of exchange by all economic agents. It is the state that takes the first step. By accepting its own liabilities in the payments of tax levies the state turns them into legal tenders that will be accepted generally by everyone. The groundwork on this issue is laid by Plato in his two books. Both in the Republic and in the Law he makes a distinction between real money and a “symbol or token” money. The two forms of money, he argues, originated from two different sources. One of the two is created by the state. The form that is created by the state is token money. As the symbolic or token money lacks any intrinsic value its value is determined by the state. Since each state can create its own symbolic money, Plato argues, the state-created money can only be used in domestic transactions. Payments in international trade can be carried out by using real money. In his view, merchants from different countries do not trust the forms of money that have no intrinsic value. Plato’s ideas, in relation to state money, have served as a pretext for the German Historical School account of the origin of money. The Historical School’s interpretation is striking both in its clarity and presentation but the substance is not much different from that of Plato’s state money. Their Methodenstreit view is very comprehensive. This was meant to be an alternative theory of money. It was formulated to stand in stark contrast to the theory of the origin of money that had been proposed by the classical Anglo-Saxon school. A. Muller (1779-1829), the founder of the German Historical School, laid out the foundation of this theory. He made the state the segregate mother of money. Money was for him an expression of people’s trust in their state. He regarded the state and its people as two parts of the same entity. Money then is a materialization of the common will of people in state. It is the common will of people that is expressed through the state in the concrete economic reality. The most outstanding contributor to the state theory of

money was not the founding father of the school but another leading member of the school, Professor G. F. Knapp. Knapp laid out the key principles of the state theory of the origin of money in a classic and very influential work in the early decades of the twentieth century. For Knapp and his school money is a product of law. Since law is a derivation of the state and money in turn is a derivation of law it follows that money can be nothing else apart from a product of the state. Money ultimately is a state institution. The form in which money presents itself has nothing to do with what it does. That is why the units of money have no intrinsic value and are purely nominal and abstract. There is no precondition for the material from which the means of payments consist. The material from which money is made can change to a new substance with a new state proclamation. A state can not only change the substance in which money is presented but also its description, units of value and denomination at its discretion. Knapp believed that the material substance of money is irrelevant as much as the material substance of what can be used as a Chartal. The chemical composition of a material substance cannot tell us whether something is money or not. It is from statutes, acts and proclamations that we find out the difference between money and something else. Money becomes money due to a state proclamation. For this reason, Knapp argues, it then stands for a Chartal means of payments. Money and a Chartal share a common essence in this respect. They are both means of payments. A Chartal only differs from money since it can be issued by any private individual or institution and does not require the sanction of a state. The means of payments that a state sanctions to be paid with are money. The acceptance of the means of payment by the state is the critical ingredient here. A state designates a definite means of payments to be money by accepting it as payment due to itself. Keynes saw some truth in Knapp’s Chartalism and he too found the doctrine of money as a creation of the state to be a valid one. The state money, in his view, brought to an end the age of barter exchange (Keynes 1930: [vol. 1] 4). A number of Keynes’ followers have also echoed a similar sentiment about the state as the creator of money. Except for commodity money, Abba Lerner remarks, other forms of money are state money. He states all forms of contemporary money, produced under normal economic conditions, are state money. They are generally accepted means of payments because of the state acceptability in payment of its obligations. Likewise, both C. A. E. Goodhart (1989) and J. Tobin (1998) lay responsibility on the state as creator of modern fiat money. The general acceptability of state-issued fiat currency, they maintain, is due to the fact that the state levies taxes and accepts the state-issued fiat money in payment of its taxes and other obligations. Wray, a leading post-Keynesian economist, states that it is not the state as such that first created money. The state apparatus in itself is not the source of money. The origin of money arises from one of its requirements. The requirement the state machine necessitates for the rise of money is the requirement of tax payment. State machines and organizations need to be financed somehow. The monetary tax payments are the principal source that in turn need to be paid

by the state’s own liability (Wray 1998: 4). Money therefore originated from this requirement of the state in the early stages of the development of primitive states. As with all types of state theories of money the unit of account function of money is their point of departure. This is where Wray seeks his point of departure on money too. Money units in their earliest forms are said to have been in weight units. Wray links that to the practice of wergild and palaces as the institutions that initially created money. In both private and public arenas tax debts are claimed to have instigated money. In both cases the palaces standardized and enforced units of payment to enhance the efficiency of the payment of taxes. Consequently, the origin of money here is chiefly linked to debt contracts in general. But more specifically it is linked to tax debt. Tax payment is a requirement of any state that is levied in the form of a social measure of value, which is the legal tender issued by the state itself. Chapter 8 will therefore examine the state theory of the origin of money. It will identify and explain the key characteristics of the theory and looks at the works of the central figures behind this theory. This chapter commences by exploring the contents of the theory, in particular the aspect of the theory which states that money is a creature of the state. That is to say, it is a legal matter. The chapter will proceed by explaining the basis of the theory, in particular the common ground from which all variations of the theory have emanated. The common ground in this case is the unit of account function of money.