This is the first post in a planned series on Money, Banking, and Macroeconomics. Woohoo! Recently, mainstream economists opposed the nomination of Judy Shelton, a “hard currency” economist, to the Federal Reserve Board. On the other hand, mainstream economists also oppose the growing influence of “soft currency” economists such as Stephanie Kelton who is a Modern Monetary Theory (MMT) advocate. MMT is popular among Democratic Socialists like Bernie Sanders and AOC. Yes, I chose Judy Shelton and Stephanie Kelton as the opposing representative economists because it would be confusing. The study of Money, Banking, and Macroeconomics is confusing, so it seemed fitting.
In small chunks, this series will provide my initial assessment of (MMT). What is money? At a minimum, money is the means of payment, also known as the medium of exchange. Money may also serve other purposes such as a store of value and standard of account. What better way to explore debates on hard currency and soft currency than an exhibit of stone money?
Stone Age Currency: Sophisticated Money
The Smithsonian Museum of Natural History exhibits a giant stone circle from Yap, an island in the Pacific. The stone, called a rai, is taller than I am and is much too heavy and unwieldy for a person to carry around. (See picture). Can not imagine putting one on a raft or in a canoe and shipping it among Pacific islands. Yet, people across the Pacific used these giant stones as a medium of exchange. Exhibiters say that a rai would be used for the transfer of ownership of land and certain other transactions and ceremonies, and a parallel medium was used for other transactions. Although the rai system may seem primitive, it is actually quite sophisticated with many lessons for monetary economics.
Lesson 1: Greater Fools – Almost any token can serve as a medium of exchange for as long as sellers believe they can unload the token on someone else. A seller need not have a use for the medium as long as there is a greater fool willing to accept it for desirable. Characteristics often cited for a commodity evolving naturally to this function include something that is easily divisible, durable, easily transportable, and difficult to counterfeit. What! A giant stone rai does not seem to fit the bill, at least at first blush.
Lesson 2: Only Need a Ledger – Do we really need to carry around a rai? Or silver shavings? Or wampum shells? Or metal badges stamped to assure their weight (coins)? Badges? We don’t need no stinking badges! We only need a ledger. Someone needs to keep track of who owns how much of the medium of exchange. Maybe write it down in a ledger, or keep track with colored beads in pottery representing each person (I made up the beads/pottery example). The point is, transporting a rai is unimportant if someone just keeps track of transfers of ownership. If you think about it, your bank account is just a line in a giant ledger. The use of “Dollar” coins dropped out of use for many transactions with the rise of checks, long before the rise of debit cards.
Apocryphal Story: That Guy – An economic historian of money tells a rai story in Money Mischief. In general, the giant stones were not physically transported; islanders just kept track of who owned them. But every society has “that guy.” Someone insisted that a buyer ship him his stone. A storm came and sunk the that particular rai to the bottom of the ocean. Since everyone agreed on the transaction, and on the existence of the stone, the “ledger’ was adjusted just as if the rai had been transported. Even if this story is fanciful, its lesson is real. Once there is a ledger, there need not be any actual commodity medium of exchange.
MMT Proposition 1: Tax obligations create a medium of exchange – Some MMT economists such as L. Randall Wray object to the ‘greater fool’ story of the evolution of commodity money. He believes money evolved from tax obligations. An authority that has the power to compel tax payment necessarily has the power to create money. Some people will have to pay the taxes; therefore, even people who don’t have to pay the taxes can count on someone who does have to pay the taxes being willing to accept the announced token as a medium of exchange. Among the evidence, Wray and others point to archaeological and historical evidence linking tax obligations and the development of writing systems.
MMT Proposition 2: Government IOUs are Necessarily Redeemable – Wray and others assert that if there is an authority with unlimited ability to compel tax payments then government cannot go bankrupt. If government accepts its own IOUs in payment for taxes, then any apparent surplus in IOUs can be redeemed. A corollary of this view is that government causes inflation through its demand for real resources – displacing non-governmental uses – not by printing too much money. Excess money can be soaked up through higher taxes.
Question: Was a Giant Stone the Chicken or Egg? Wray emphasizes the history, law, and accounting of money. He emphasizes the assertion that government spending precedes money, with the obligations themselves serving as the credible medium of exchange. Which came first, the spending or the money? If economist Wray is correct, then the giant stone rai in the South Pacific were government spending prior to money. But does it really matter? The seas are 150 feet higher than when humans built monumental structures like Gobekli Tepe in modern Turkey. Would a finding by underwater archaeologists that showed commodity money preceded taxes negate MMT’s insights, or the reverse confirm them?
Complications – MMT scholars do add more sophistication to this overly simplistic story. What if there are multiple tax authorities over the same people? What if people in one taxable location want to exchange with people in a separate taxable location (exchange rates)? What if there are Constitutional restrictions on the ability to tax? What if the tax authority cannot set the rate at which obligations can be redeemed?
Preview: Sovereign Money – My next ‘soft currency’ post will be on MMT conception of what they call sovereign money, and what they say is not.
Correction – The Turkish archaeological site originally referred to Catalhoyuk, which dates back to 7k BCE. It has been corrected to read Gobekli Tepe, which dates back to 10k-8k BCE. Point remains the same.