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What Is Money?

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https://www.community-exchange.org/docs/what%20is%20money.htm

WHAT IS MONEY?

By A. MITCHELL INNES

From The Banking Law Journal, May 1913.

The fundamental theories on which the modern science of political economy is based are these:

That under primitive conditions men lived and live by barter;

That as life becomes more complex barter no longer suffices as a method of exchanging commodities, and by common consent one particular commodity is fixed on which is generally acceptable and which therefore, everyone will take in exchange for the things he produces or the services he renders and which each in turn can equally pass on to others in exchange for whatever he may want; That this commodity thus becomes a "medium of exchange and measure of value."

That a sale is the exchange of a commodity for this intermediate commodity which is called "money;"

That many different commodities have at various times and places served as this medium of exchange—cattle, iron, salt, shells, dried cod, tobacco, sugar, nails, etc.;

That gradually the metals, gold, silver, copper, and more especially the first two, came to be regarded as being by their inherent qualities more suitable for this purpose than any other commodities and these metals early became by common consent the only medium of exchange;

.........

The value of a credit depends not on the existence of any gold or silver or other property behind it, but solely on the "solvency" of the debtor, and that depends solely on whether, when the debt becomes due, he in his turn has sufficient credits on others to set off against his debts. If the debtor neither possesses nor can acquire credits which can be offset against his debts, then the possession of those debts is of no value to the creditors who own them. It is by selling, I repeat, and by selling alone—whether it be by the sale of property or the sale of the use of our talents or of our land—that we acquire the credits by which we liberate ourselves from debt, and it is by his selling power that a prudent banker estimates his client's value as a debtor. Debts due at a certain moment can only be cancelled by being offset against credits which become available at that moment; that is to say that a creditor cannot be compelled to accept in payment of a debt due to him an acknowledgment of indebtedness which he himself has given and which only falls due at a later time. Hence it follows that a man is only solvent if he has immediately available credits at least equal to the amount of his debts immediately due and presented for payment. If, therefore, the sum of his immediate debts exceeds the sum of his immediate credits, the real value of these debts to his creditors will fall to an amount which will make them equal to the amount of his credits. This is one of the most important principles of commerce. Another important point to remember is that when a seller has delivered the commodity bought and has accepted an acknowledgment of debt from the purchaser, the transaction is complete, the payment of the purchase is final; and the new relationship which arises between the seller and the purchaser, the creditor and the debtor, is distinct from the sale and purchase.

For many centuries, how many we do not know, the principal instrument of commerce was neither the coin nor the private token, but the tally, [ 5 ] (Lat. talea. Fr. taille. Ger. Kerbholz), a stick of squared hazel-wood, notched in a certain manner to indicate the amount of the purchase or, debt. The name of the debtor and the date of the transaction were written on two opposite sides of the stick, which was then split down the middle in such a way that the notches were cut in half, and the name and date appeared on both pieces of the tally. The split was stopped by a cross-cut about an inch from the base of the stick, so that one of the pieces was shorter than the other. One piece, called the "stock," [ 6 ] was issued to the seller or creditor, while the other, called the "stub" or "counter-stock," was kept by the buyer or debtor. Both halves were thus a complete record of the credit and debt and the debtor was protected by his stub from the fraudulent imitation of or tampering with his tally.

A small extract from a very long paper, the essential point of the whole piece is that modern economists have got it wrong about money and it's origins. The barter economy never existed, Adam Smith got it wrong and all modern text books have it wrong. But yet this myth continues about how money came into existence. I've not gone through the other threads which have been on HPC thoroughly but posted because I think the above link takes those previous threads in a new direction.

https://www.community-exchange.org/docs/The%20Credit%20Theoriy%20of%20Money.htm

The Credit Theory of Money

By A. Mitchell Innes

From The Banking Law Journal, Vol. 31 (1914), Dec./Jan., Pages 151-168.

[Editor's Note. – So much has been written on the subject of "money" that a scientific Writer like Mr. Innes is often misunderstood. Many economists and college professors have differed with the statements made in his first paper, but it seems that none were able to disprove his position. Following this number there will appear a symposium of criticisms and replies to the first paper, and we cordially invite criticisms and replica to this his second paper.]

The article which appeared in the May, 1913, number of this JOURNAL under the title "What is Money?" was a summary exposition of the Credit Theory of money, as opposed to the Metallic Theory which has hitherto been held by nearly all historians and has formed the basis of the teaching of practically all economists on the subject of money.

Up to the time of Adam Smith, not only was money identified with the precious metals, but it was popularly held that they formed the only real wealth; and though it must not be thought that the popular delusion was held by all serious thinkers, still, to Adam Smith belongs the credit of having finally and for all time established the principle that wealth does not reside in precious metals.

But when it came to the question of the nature of money, Adam Smith's vision failed him, as the contradictory nature of his statements attests. It could not have been otherwise. Even to-day accurate information as to the historical facts concerning money is none too accessible: in the day of Adam Smith, the material on which to found a correct theory of money was not available, even had he possessed the knowledge with which to use it. Steuart perceived that the monetary unit was not necessarily identified with coinage, Mun realized that gold and silver were not the basis of foreign trade, Boisguillebert had boldly asserted that paper fulfilled all the functions which were performed by silver. But apart from a few half-formed ideas such as these, there was nothing which could guide Adam Smith in the attempt to solve the problems of his part of his Inquiry, and, having convinced himself of the truth of his main contention that wealth was not gold and silver, he was faced with two alternatives. Either money was not gold and silver, or it was not wealth, and he inevitably chose the latter alternative. Herein, however, Adam Smith came into conflict not with a popular delusion but with the realities of life as learnt from the universal experience of mankind. If money is not wealth, in the common acceptation of the word as meaning that mysterious "purchasing power" which alone constitutes real riches, then the whole of human commerce is based on a fallacy. Smith's definition of money as being, not wealth, but the "wheel which circulates wealth," does not explain the facts which we see around us, the striving after money, the desire to accumulate money. If money were but a wheel, why should we try to accumulate wheels. Why should a million wheels be of more use than one, or, if we are to regard money as all one wheel, why should a huge wheel serve better than a small one, or at any rate a moderate one. The analogy is false.

Again another long paper, more at the link.

The key point is there is no anthropological evidence that any barter economy existed in antiquity and that credit existed before coin.

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Of course Bata existed...they made shoes for me and my mum and my mums mum.

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Of course, the idea that credit arose before money and that barter is a bit of a myth was the big revelation that came from David Graeber and his book: "Debt the First 5,000 Years".

Excellent read actually but I hadn't realised there was a 1914 paper to this effect. Good find.

This is a pdf of the book:

https://libcom.org/files/__Debt__The_First_5_000_Years.pdf

Did you really read this book??? The reason I found the above papers was by reading Graeber's book and looking at the references and locating the papers referenced. :P

I've only just started reading it but it's fascinating but I do see that modern politics and economic departments simply ignore history.

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http://socserv2.socsci.mcmaster.ca/econ/ugcm/3ll3/knapp/StateTheoryMoney.pdf

State Theory of Money by G.F. Knapp

http://p2pfoundation.net/State_Theory_of_Money

David Graeber:

"G.F. Knapp, whose State Theory of Money first appeared in 1905. If money is simply a unit of measure, it makes sense that emperors and kings should concern themselves with such matters. Emperors and kings are almost always concerned to established uniform systems of weights and measures throughout their kingdoms. It is also true, as Knapp observed, that once established, such systems tend to remain remarkably stable over time. During the reign of the actual Henry II (1154–1189), just about everyone in Western Europe was still keeping their accounts using the monetary system established by Charlemagne some 350 years earlier—that is, using pounds, shillings, and pence—despite the fact that some of these coins had never existed (Charlemagne never actually struck a silver pound), none of Charlemagne’s actual shillings and pence remained in circulation, and those coins that did circulate tended to vary enormously in size, weight, purity, and value.12 According to the Chartalists, this doesn’t really matter. What matters is that there is a uniform system for measuring credits and debts, and that this system remains stable over time. The case of Charlemagne’s currency is particularly dramatic because his actual empire dissolved quite quickly, but the monetary system he created continued to be used, for keeping accounts, within his former territories for more than 800 years. It was referred to, in the sixteenth century, quite explicitly as “imaginary money,” and derniers and livres were only completely abandoned, as units of account, around the time of the French Revolution.

From 5000 years of debt by Graeber.

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Of course, the idea that credit arose before money and that barter is a bit of a myth was the big revelation that came from David Graeber and his book: "Debt the First 5,000 Years".

Excellent read actually but I hadn't realised there was a 1914 paper to this effect. Good find.

This is a pdf of the book:

https://libcom.org/files/__Debt__The_First_5_000_Years.pdf

I don't see how credit can come before barter - how do you account a debt, without a unit with which to measure it?

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I don't see how credit can come before barter - how do you account a debt, without a unit with which to measure it?

Why? There is no evidence that the text book economic barter system ever existed. Barter only appears to happen in certain social circumstances mostly when you'll never see that individual again.

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Why? There is no evidence that the text book economic barter system ever existed. Barter only appears to happen in certain social circumstances mostly when you'll never see that individual again.

How do you measure what credit is due without representing it with items?

You can't owe me 10 of nothing.

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If you are swapping camels for wives, which one is the money?

Both? Neither?

If I promised you a camel for your wife, would that make both of them a unit of account for measuring the debt?

I have no disagreement with the idea that credit could have been born at the same time as agreeing on a standard commodity/benchmark. It is the idea that credit came first which is a bit baffling.

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A means of exchange........that as time goes on is becoming less and less trusted.....no trust=not money.

Edited by winkie

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all transactions are barter of commodities or promises of delivering commodities at a later date(credit). Money is the most liquid commodity, being the most desired. iow money has constant marginal utility, each additional unit is still as much in demand as the previous unit. When money is debased is ceases to be the most liquid commodity ,its marginal utility declines. At Hyperinflation the money is rejected, it cannot be bartered, there is no demand, the marginal utility is zero.

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I take it you had a bit of free time on your hands :)

And what percentage of your life have you dedicated to earning it?

I am always amazed that so many people spend their lives chasing something they do not understand.

If the OP spent a few hours chasing answers to the question that is the title of this thread, then hes a wiser man than 99% of humanity.

EDIT...He/She, Man/Woman where appropriate.

Edited by Roman Roady

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It is to do with swapping favours and gifts with an implied equivalence as a show of respect and hierarchy.

So the implied equivalent must be identified first?

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"According to the Chartalists, this doesn’t really matter. What matters is that there is a uniform system for measuring credits and debts, and that this system remains stable over time."

I dont think they beleive that any more.

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