Political Currency

Chartalist history shows the fantasy of money and the market as outside the state to be a fraud

Midas, the king of Phrygia, was said to have been granted a wish by the god Dionysius. Everyone knows what happened next. Like many a wisher before and after, he made a choice he would regret, asking for the ability to turn anything he touched to gold. Grapes hardened to metal; water and wine congealed. Starving in the midst of vast wealth, he begged the god to take back his gift, and Dionysius allowed him to wash off his power in the river Pactolus, in Lydia, whose banks ever afterward were rich with ore. (Aristotle, a harsher mythographer, let Midas starve.)

To ancient Greeks living in a newly monetized society, it would have been no mere myth to suggest that the awesome power of money, the “universal equivalent” in Marx’s phrase, could convert grapes, wine, or even human beings into gold. Midas was a real king, and the Pactolus was not just any river—it was the source of electrum, an alloy of gold and silver from which the first coins were made. Midas’s wife, Damodice, was said by the Greeks to have invented coinage. What appears at first glance to be a cautionary tale about the lust for gold turns out to be a much more complicated fable about the creation of coined money by the state. Midas himself may have shed his gift, but his touch had already transformed the world.

Greek money has been much in the news lately, as the drachma, Greece’s ancient coin, seemed momentarily poised to make a reappearance. Like the 2008 financial crash that precipitated it, the Greek crisis has exposed the political stakes not just of money in the abstract but of the particular currencies, instruments, and practices in which it is embedded—the objects and customs that make it “real.”

In the wake of the financial crisis, an old school of monetary history, sometimes called chartalism, gained new momentum. Introduced by the German historian G.F. Knapp in 1905, chartalism suggests that received wisdom had the relationship between the market and the state backward: It is not that money, generated by the market, is appropriated by the state in order to finance public spending, but rather that the state, by accepting the money it mints as payment for taxes, gives it a guaranteed value that makes it useful for other kinds of transactions. The story of circulation always begins with the state.

The lesson chartalists draw from this reversal, explored in detail by a heterodox school of economics called Modern Monetary Theory, is that governments have far more scope for controlling the use and value of money than most economists—or more to the point, most politicians—realize. Challenging the politics of austerity, Modern Monetary Theorists argue that the state can run high deficits safely, since it creates the means of repaying them through its ability to print currency and to generate demand for it by taxation. Governments may not be able to create gold, but like the historical Midas, they can mint currency.

Histories written from a chartalist perspective have placed these ideas in a longer context, while contemporary struggles have given the monetary past a new fascination. Even as investigations of Viking blood money or Babylonian taxation showed how long-vanished states had created and managed money, they hinted that modern governments, too, might exert a firmer control over their currencies. David Graeber—chartalism’s most brilliant, if most idiosyncratic, contemporary luminary—became one of the intellectual forces behind Occupy Wall Street.

Compared to Graeber’s Debt, an account of systems of debt and credit that spans five millennia of global history, Christine Desan’s new book, Making Money: Coin, Currency, and the Coming of Capitalism, is modest in its ambitions. It covers only one millennium, from the eighth to the eighteenth century, and one country, England, describing a series of flash points in the history of the nation’s currency. From this comparatively restrained vantage point, Desan draws broad conclusions about the nature of money, following Marx in taking England as the “locus classicus” of capitalism. “Looking at the history of money,” she argues, “the market is a matter of constitutional design, a political and legal creation. It is a governance project all the way down, starting with its money.”

For Desan, early British money, backed by royal prerogative and jealously guarded by generations of kings, served as an essential tool of governance. This changed in the late seventeenth century, when the state issued interest-generating bonds and allowed banks to produce paper notes backed by gold. While everyone agreed that the state was still needed to denominate currency and enforce contracts, it began to seem like a mere arbiter of monetary activity rather than its vital source. No longer seen as a political instrument, money instead appeared to be a neutral medium reflecting the operations of the market.

It was John Locke, an influential participant in debates about monetary policy as well as a philosopher, who crystalized this view, Desan argues. In Locke’s enticingly simple fable, the origin of money preceded the existence of the state: It arose when primitive man chose to use precious metals to store and exchange value in place of perishable goods, making the accumulation of wealth possible. Updated and reimagined, inflected by the theories of Adam Smith and William Stanley Jevons, Locke’s story formed the nucleus of neoclassical economists’ fable of money’s origins, in which it arises to address the inconveniences of barter.

For chartalists, there are several problems with this account. To begin with, no evidence of any premonetary society structured by barter exists, whereas an increasing amount of anthropological research suggests that most societies throughout history have allocated goods through very different systems of distribution, such as gift exchange. Where barter is present at all, it typically arises after the invention of money rather than before it. More damningly—for little if anything in neoclassical economics rests on the historicity of the tale—it gets the nature of money wrong. In Desan’s version of the chartalist view, money arises out of taxation. A central authority with the power to collect and redistribute community property issues tokens representing a share of the general store of goods. Because this authority decides what contributions it will demand and what tokens it will accept, it has the unique power to confer a broader circulation on its own tokens – to create fiat money.

Money is a
political construct,
made possible
by a vast public infrastructure

Coins made out of precious metal, the dominant form of currency until the eighteenth century, serve as a touchstone for Desan’s theory. Chartalists, for whom money is at its core a political abstraction, tend to study more ethereal objects, such as the figures recording debts on ancient Mesopotamian tablets in which “money” appears as a pure unit of account without a corresponding physical medium, or in Knapp’s case, that “dubious form of ‘degenerate’ money,” the banknote. The commodity coin, by contrast, has seemed a better fit for the neoclassical model: If gold and silver are not quite the inherent sources of value they seem, they are, at least, naturally limited in supply, extracted and refined with difficulty, and consecrated as valuable by millennia of human custom apparently without state intervention.

For Desan, however, English commodity coins bear clear evidence of the authority of the state. This is because of England’s unusual approach to the basic problem that afflicted all European coinage throughout the middle ages: the depreciation of value. Coins were meant to circulate at their nominal worth—the face value set by the authority minting them. Yet as the coins wore down through ordinary use, or were trimmed by having metal shaved from their edges, a gap opened between the nominal value and the value of the metal content. A one shilling coin with a lower weight of metal might cease to circulate at its face value, while a shilling with a relatively high weight might trade above it, since it could be melted into bullion and exchanged on the international market, or saved as a store of value. The silver coins of the middle ages lost as much as two percent of their weight per decade, a process reflected in the histories of the pound, lira, and livre coins, which all contained an ever-dwindling fraction of the pound of silver their names promised. To make matters more complicated, coins could lose metal in production as well as in exchange: States regularly debased their own currency, alloying silver with less valuable metals in order to turn a quick profit, driving the two forms of value still further apart.

Marx saw the divergence between these two rival expressions of value as crucial, claiming in A Contribution to the Critique of Political Economy that “the entire history of the monetary system from the early middle ages until well into the eighteenth century is a history of such bilateral and antagonistic counterfeiting.”

Unlike in much of mainland Europe, where coins were as likely to exchange at their weights as at their face value, England insisted on—and, where possible, enforced—nominalism. Debts and taxes had to be paid according to the official value of coins, not their worth in metal, and England’s aggressive and only partially successful efforts to keep the two kinds of value close became a source of national pride. (Like many other sources of patriotic sentiment, it was achieved at the expense of the poor, who could not use England’s valuable coins in their daily transactions.) Royal control of minting prices, combined with the legal system’s reinforcement of its determinations, made the value of English commodity money, in Desan’s view, a question of politics rather than precious metals.

In the late seventeenth century, the character of England’s money changed as the result of a series of political choices, from Charles II’s decision to subsidize the costs of minting to the creation of the Bank of England, as Desan explains in a series of fascinating and original chapters on bonds, banknotes, and convertibility. In the process, the state’s central role in the production of money was screened from view.

It would remain hidden up to the present day. But though the government’s role is less visible now than in the middle ages, Desan concludes, it is no less real. Money is still a political construct, made possible by a vast public infrastructure. Regulation of the currencies and instruments in which it is embedded, including the banking system, should not be perceived as an incursion into the market, but rather as a natural and necessary function of public authority. Even after three centuries of capitalism, the state could still reclaim its control over the economy—it simply needs to recognize its own power.

Desan’s picture offers an appealing contrast to the neoliberal vision of an autonomous and brutally free market. But it can be maintained only by adopting a narrow understanding of both money and the state, offering coherence at the cost of explanatory power. Her narrative chapters present a considerably more complex picture. Though the monarchy had the prerogative to mint coin, the value and use of money in practice was determined by broader patterns of trade and production at both the national and international level. Coin could, after all, always be melted down and exported as bullion for the international market by merchants or hoarded as plate by the elite for use in the future (in the seventeenth century, both consistently greater outlets for silver than coining). The monarchy may have made monetary instruments—no trivial accomplishment, as Desan ably shows—but it could not single-handedly make money.

Even if the English state had been able to exert perfect control over the country’s money, there is little reason to believe it would have acted according to theories of governance, rather than pursuing policies that tended to benefit the elite class who served in its ranks. Arguments for the priority of political relations to market relations tend to imply a state that stands outside and above the economic structures of society, governing them but not governed by them. In reality, the forces shaping the English government, like the forces shaping its money, were closely though complexly connected to the country’s economic organization. The monarchy had little scope to act alone, and the elite families who cycled through Parliament, government offices, and local magistracies kept a close eye on their own interests and one another’s. The state they helped create owed its authority not to its detachment from systems of production and exchange but to its thorough entanglement with them.

Desan’s attempt to reveal the political character of money is important and timely. Now more than ever, it is impossible to regard money as a neutral medium devoid of political implications. But its politics must be conceived more broadly and deeply than chartalist theories allow. As the denouement to the Greek debt crisis showed, the politics of money can never be reduced to the decisions of a single state; it is conditioned and constrained by competing interests both nationally and internationally. The long history of English currency suggests that it always was.

Thanks to Alan Horn for his assistance.