Sunday, November 4, 2018

The credit theory of money

Over on the discussion board, Oliver and Antti suggest that I read two essays from Alfred Mitchell-Innes. Here are a few thoughts. 

A British diplomat, Mitchell-Innes was appointed financial advisor to King Chulalongkorn of Siam in the 1890s as well as serving in Cairo. He eventually ended up in the British Embassy in Washington where he penned his two essays on money. The first, What is Money, attracted the attention of John Maynard Keynes, while the second essay, The Credit Theory of Money—which was written in 1914—expounded on his views.

Both are interesting essays and worth your time. One of Mitchell-Innes's main points is that all money is credit. This may have been a controversial stance back in 1914, when people were still very much focused on metallic money, but I don't think anyone would find it terribly controversial today. If we look at the instruments that currently function as money, all of them are forms of credit, that is, they are obligations or "credits on a banker" as Mitchell-Innes puts it.

Having established his credit theory at the outset of his 1914 essay, Mitchell-Innes devotes much ink to patching up its weakest point: coins. Any critic will be quick to point out that the historical circulation of coins contradicts his claim that all money is credit. Coins, especially gold ones, were valued as commodities, not credit.

To protect his credit theory from this criticism, Mitchell-Innes downplays the role played by coins. So in What is Money he claims that for large chunks of history, the "principal instrument of commerce" wasn't the coin, but the medieval tally stick. These ingenious objects look like this:
While I certainly like the idea of tally sticks, to claim that they were the main way of engaging in hand-to-hand trade during medieval times doesn't seem likely. Long and awkwardly shaped, tally stick are not nearly as convenient as coins. It's hard to see why anyone would prefer them. Just like the sleek US$1 bill has driven the bulky $1 coin out of circulation, one would expect coins to push bulky tally sticks out of general usage.
Mitchell-Innes's second, and more radical, line of defence is to claim that coins themselves are a form of credit. "A government coin is a "promise to pay," just like a private bill or note," he says. Elsewhere he writes: "A coin is an instrument of credit or token of indebtedness identical in its nature with a tally or with any other form of money, by whomsoever issued."

This is a strange idea. Why would anyone issue a financial promise encoded on gold? For instance, imagine that I owe you some money. To give physical form to my debt, you ask me to write out an IOU which you will keep in your pocket. But why would I inscribe my promise on something expensive like a gold disc, especially when I could simply record it on a cheap and lightweight piece of paper? Larry White puts it better here:
"This account fails to explain, however, why governments chose bits of gold or silver as the material for these tokens, rather than something cheaper, say bits of iron or copper or paper impressed with sovereign emblems. In the market-evolutionary account, preciousness is advantageous in a medium of exchange by lowering the costs of transporting any given value. In a Cartalist pay-token account, preciousness is disadvantageous — it raises the costs of the fiscal operation — and therefore baffling. Issuing tokens made of something cheaper would accomplish the same end at lower cost to the sovereign."
Mitchell-Innes doesn't make much of an effort to explain why gold might have been selected as a medium for inscribing IOUs. But on the discussion board, Antti has a provocative theory. Credit is often collateralized, an asset being pledged by a borrower to a lender in order to reduce the risk of the loan. If a gold coin is a form of credit, then maybe the gold embodied in the coin is serving as collateral.

Think about it this way. While it would certainly be cheaper for me to record my IOU on paper, if I welch on my promise then the person who holds my IOU is left with nothing but a worthless note. But if I welch on an IOU that is encoded on a gold disc, at least the person who has my IOU is left with some gold (albeit of lower worth than the face value of the original IOU).

According to Antti's theory, a gold coin is therefore a more solid form of credit than a note, since it provides recourse in the form of precious metals collateral. If my credit is bad, the only way I may be able to get a loan is to issue gold IOUs, my paper ones being too risky for people to accept.

It's an interesting theory, but the problem with inscribing my IOUs on gold is that it is a terribly insecure way for me to conduct my business. Gold is highly malleable. Bite a gold coin between your canines and you'll leave a mark on its surface (trust me, I've done it). So if I pay you with my coin IOU, you could clip a tiny bit off the edge and keep it for yourself, passing the rest of the coin off at a store. That store owner could in turn pay it away to a supplier. Unaware that it has been clipped, the supplier returns the coin to me for redemption. I am obligated to accept the clipped coin at full value since it is my IOU. However, I've had a chunk of my collateral stolen somewhere along the transactions chain—and there's nothing I can do about it.

So putting one's gold collateral into circulation is an open invitation for thieves, which is why Antti's collateral theory of coins doesn't seem very realistic to me.


The idea that coins circulated at more than their precious metals content, or intrinsic value, can be found throughout Mitchell-Innes's two essays. He uses the existence of this premium as proof that the metal content of a coin is not relevant to its value, its credit value being the sole remaining explanation.

To some extent, I agree with Mitchell-Innes. Over the course of history coins have often circulated above their intrinsic value, and from time-to-time this premium has been due to their value as credit. The merchants' counterstamps below are great examples. By adding a stamp to a government coin, these merchants have elevated the coin's value from one cent to five or ten cents.

These three coins are straight out of Mitchell-Innes two essays. As I say in the tweet, counterstamped coins effectively functioned as an IOU of the merchant. For instance, take the five cent Cameron House token, on the right. This token was issued by a Pennsylvania-based hotel—Cameron House.  Its intrinsic value was one cent, but Cameron House's owner promised to take the coin back at five cents, presumably in payment for a room. The sole driver of the coin's value was the reliability of Cameron House's promise, the amount of metal in the token having no bearing whatsoever on its purchasing power.

While Cameron House's stamp turned metal into a much more valuable form of credit, not all stamps do this. Last week I wrote about coin regulators who regulated gold coins and shroffs who chopped coins. Both functioned as assayers, weighing a coin and determining its fineness. If the coin was up to standard, the regulator or shroff stamped their brand onto its face and pushed it back into circulation. Below is a chopmarked U.S. trade dollar:

Chopped 1880 U.S. trade dollar (source)

But unlike the Cameron House stamp, the regulation or chopping of coins didn't turn them into a credit of the regulator or shroff. The marks were simply indicators that the coin had been audited and had passed the test, and nothing more.

Both the Cameron House coin and the chopped U.S. trade dollar would have traded at a premium to the intrinsic value of the metal that each contained. But for different reasons. As I wrote above, the Cameron House coin was a form of credit, like a paper IOU, and thus its value derived from Cameron House's credit quality, not the material in the token. But not so the chopped U.S. trade dollar. Precious metals are always more useful in assayed form than as raw bullion. While it is simple to test the weight of a quantity of precious metals, it is much harder to verify its fineness. This is why chopmarks would have been helpful. Anyone coming into possession of the chopmarked coin could be sure that its fineness had been validated by an expert shroff. And thus it was more trustworthy than silver that had no chopmark. People would have been willing to pay a bit extra, a premium, for this guarantee.

Remember that a decline in the amount of metal in a five-cent Cameron House token would not have changed its purchasing power. With a chopmarked trade dollar, however, any reduction in its metal content flowed through directly to its exchange value. This is because a chopmarked dollar was nothing more than verified raw silver. And just as the value of raw gold or silver is determined by how many grams are being exchanged, the same goes for a chopmarked trade dollar.

And so whereas Mitchell-Innes has a single theory of money, we've arrived at two reasons for why coins might trade at a premium to intrinsic value, and why their purchasing power might change over time. The Cameron House theory, which also happens to be Mitchell-Innes's theory, and the chopmarked trade dollar theory, which is completely contrary to Mitchell-Innes's essays.


I've used private coinage for my examples, but these principles apply just as well to government coinage. Our modern government-issued coins are very similar to the Cameron House tokens. They are a type of IOU (as I wrote here). In the same way that trimming away 10% from the edge of a $5 note won't reduce that note's purchasing power one bit, clipping some of the metal off of a toonie (a $2 Canadian coin) won't alter its market value. The metal content of a modern coin is (almost always) irrelevant.

But whereas modern government coins operate on Cameron House principals, medieval government coins operated on the same principals as chopmarked traded dollars. In England, a merchant who wanted coins would bring raw gold or silver to a mint to be converted into coin. But the merchant had to pay the mint master a fee. The amount by which a coin's market value exceeded its intrinsic value depended on the size of the mint's fee.

Say it was possible for a merchant to purchase a certain amount of raw gold with gold coins, pay the fee to have the raw gold minted into coins, and end up with more coins than he started with. This would be a risk-free way to make money. Everyone would replicate this transaction—buying raw gold with coins and converting it back into coins—until the gap between the market price of a coin and the market price of an equivalent amount of gold had narrowed to the size of the fee. 

Premia on coins weren't always directly related to mintage fees. English mints usually operated on the principle of free coinage—anyone could bring their gold or silver to the mint to be turned into coin. But sometimes the mint would close to new business. Due to their usefulness and growing scarcity, gold coins would circulate at an ever larger premium to an equivalent amount of raw gold. Since merchants could no longer bring raw gold to the mint and thereby increase the supply of coins, there was no mechanism for reducing this premium.

So as you can see, whether the mint was open and coinage free, or whether it was closed, the premium had nothing to do with the coin's status as a form of credit. It was due to a combination of the superiority of gold in validated form and the availability of validated supply.

In sum, Mitchell-Innes is certainly right that coins have often been a form of credit. A stamp on a piece of metal often elevates it from being a mere commodity to a token of indebtedness. In which case we get Cameron House money. But as often as not, that stamp is little more than an assay mark, a guarantee of fineness. In which case we have chopmarked trade dollars. Both sorts of stamps put a premium on the coin, but for different reasons.

Coming up with grand theories of money is tempting, as Mitchell-Innes has done, but unfortunately these theories sometimes obscure the finer features of monetary instruments. At times, having twenty or thirty bespoke theories may be a better way to understand monetary phenomena than one grand one.


  1. Money has too many connotations to be defined.
    Interest charge are what drives the system,they are set to keep the loan and deposit queues stable, and when that happens, the distribution of liquidity and goods are coherent, meaning they have the same density everywhere pricing is happening. The interest charge mechanism mathematically makes the price ratios work. Yes, it is all about keeping an equilibrium such that two ratios are comparable, a mathematical trick and nothing more. When ratios are working, the bankers market making error is bounded, and pricing precision is equal, relatively, for all good.
    Mathematicians have a name for this, a quotient ring, an algebraic structure, is formed and quotients work in accounting. Division, bankers make long division work with prices. They provide the last amount of liquidity to close the contract between depositor and borrower, holding the round off error so ratios appear to work for their loan and deposit clients.

    1. I can go on.
      Wealth happens because time to completion is unknown, in general, the step to competion are a secret held by depositor and borrower, they don't tell the banker. o a borrower accepts the current interest charges, but completes the project ahead of time and generates a profit back to the banker sooner than expected. Go though the math and you see an actuarial loss, the round off error goes negative for those loans. Wealth is free and lost money given up by the banker. Go through the math and you see the amount of money lost is proportional to productivity gained and prices are stable. The opposite can happen also, the banker has a local probability function about seero for its market making error. Long term losses are by public notice, the banker can automatic a 2% loss, for example, and players will be betting around that trend. Most of nature works the same way, congestion management.

  2. I am surprised you only read Innes now given how extensive your knowledge of money issues is. There is a lot in this blog that deserves comments. I will limit myself to one aspect and note in passing that assaying by the Mint was common in Middle ages and the stamp was indeed in part a proof that the gold content was sound. I will also note that coins in the domestic economy did usually circulate at their face value (which was not necessarily their official price at the mint). Finally, most transactions were done via credit given the scarcity and high value of coins for petty transactions; coins would be used as one of the mechanics to settle debts arising from credit. Main comments follows (response was too large for a single comment, there is a 4096 characters limit)

    1. Thanks for hopping into the comments, Eric. I should have more time to respond tomorrow. - JP

  3. Why bother with precious metal at all and not just make coins out of the cheapest and most commonly available material(s) available? There are four reasons for this that I could find throughout the literature on medieval coins. One was that counterfeiting would have been encouraged because it was highly profitable; the material is commonly available and once turned into coins the material is much more valuable. In medieval times, production techniques for coins are not reliable enough to recognize clearly counterfeits so the alternative is to use a material that is difficult to find in the country and its surrounding (unless it can be easily monopolized by the issuer). Precious metal is one of such material, but cowry shells may do as well as a material to make monetary instruments.
    Another reason is that the King needed to make payments outside of his country where enforcing the official value of the domestic coinage is not possible. Payees would request “good money” from the king and so the King had to focus on metal content. For example, war abroad means paying for goods and services abroad, payment mercenaries, paying soldiers who live abroad and need a means a payment that will be accepted reliably by the local population. If the country in which the war plays out follows metalism or in influence by metalism then need to care about metal content.
    A third was more political. It was a means to control indirectly the spending of the King by other means than a balance of power and accountability mechanisms that were both lacking at times. The spending ability of the king, and so its power over other domestic lords, would be limited by the quantity of precious metal available given the weight and fineness of the coinage. If, like in England, parliament was powerful from the 14th century enough to challenge the ability of the King to lower weight and/or fineness of the coinage, the constrained imposed by the use of rare metals to make coins was all the stronger.
    Fourth, collateral if the creditworthiness of the king is low. This creditworthiness is measured by the expected ability to make others pay a due and the expected willingness of the king to accept his coins as payments of such a due. At different periods throughout medieval times (e.g. Merovingian kings), one or both did not apply and so the creditworthiness of the king was low. The face value, i.e. the price at which it could be redeemed to the king when paying the due, was low or even zero. In such case, kings resort to precious metal. The problem here is that the collateral can be accessed even if the king does not default, which led holders to find ways to profit when intrinsic value rose above face value. This in turn led to the king to revise the coinage by debasing it to save the coinage.
    So yes, making coins with precious metal was a challenge because it made holders fix their attention on the market value of the metal content, but kings always fought back by cutting hands, imprisoning, killing, fining, and ultimately debasing the coinage (the only effective way to put an end, for a little while, to the fixation on the metal content). We have a repeat of this going on with the US penny.
    PS: I have had to put a break on my study of monetary system this semester because of heaving teaching but I will come back to it. Three or more blog posts are on the horizon, including on the Guinea that I promised a long time ago but could not finish up. Now back to teaching…

    1. Hi Eric,

      "If the country in which the war plays out follows metalism or in influence by metalism then need to care about metal content."

      What do you mean by this? If a country 'follows metalism', presumably that means that means their coins operate on the principles of chopmarked trade dollar theory and not the Cameron House theory, right? Mitchell-Innes strikes the extreme view in his essay that all coins are Cameron house coins. I am only making the point that there are at least two types of coins, and presumably you don't disagree given your point about the existence of metalism (although I'm not sure which is why I asked for clarification).

      "Fourth, collateral if the creditworthiness of the king is low."

      Assuming you are right, how much gold or silver collateral was typically included in a coin? For instance, if the face value of the coin was 1 shilling, was it typically 40% collateralized? (i.e. did it include 0.4 shillings worth of silver?) 50%? 10%?

      It seems that this would be very easy to measure. We already know how many grains of silver a shilling contained. And finding the the market price for a grain of silver should be pretty easy. We can then calculate the market value of the silver contained in the shilling and compare this to the purchasing power of the shilling itself to determine the value of the collateral therein.

      Presumably credit worthy kings could get away with low rates of collateralization. Does the evidence show that they issued coins with lower gold and silver content relative to risky kings?

    2. 1-Metalism is the polar opposite to nominalism. In a metalist framework, legal scholars are of the opinion that the gold content (measured by the weight and purity of the coin) is the point of reference that ought to be used to settle debts. Assume someone borrows a 1oz pure gold coin with a face value of $2. While the debt contract is running, the coin is debased to 0.5oz pure gold. Metalists argue that the borrowers now owes two $2 0.5oz gold coins. Nominalists argue that the point of reference ought to be the nominal value borrowed, so $2 is owed; the quantity of metal is irrelevant in the settlement of debts. England followed roughly followed nominalism from the 13th century but had to care about metal content in part because continental Europe was operating on a metalist legal framework. Over the centuries, as legal scholars gained a better understanding of the difference between financial and non-financial transactions, nominalism gained the upper end.
      I analyze this history as a progressive rediscovery of the financial nature of coins. Lacking guidance from Roman times, post-dark age legal scholars (except in England) erroneously treated coins as mere bullions certified for metal content by the stamp of the mint. The insights of pre-dark age Italy, Greece (and China) had been lost. Couple that legal aspect with the political weakness of early medieval kings and one can understand why coins could be treated as mere certified bullions in exchanges (remember though that most transactions did not involve coins but mere credit).
      Coins are always financial instruments that is, in order for a monetary system to work properly (coins keep circulating, nominal contracts get paid, inflation and deflation are kept in check, etc.), coin issuers ought to impose and enforce a face value as best as they can and to downplay the importance of the material as much as possible. If the issuer cannot do so in his area of influence, his coins circulates at their bullion value or disappear, with all the problems that that generates.
      So I would not say that there are two theories of coins. There are just two aspects to their pricing. When the issuer as the legal and political framework in place to enforce financial mechanics in her area of influence, the face value dominates except in case of default. Coins are just paper notes made of metal; promises stamp on a hard surface. In the current monetary system in which the issuer has strong control over the monetary system, coins are a relic of the past; they are no longer necessary for monetary system to work properly.

      2-This could be an interesting research project. I would perform the analysis in nominal terms; market price of gold content relative to face value of coins. My prior here is that while some periods, especially in early time, might show a strong relation, the link will be weak later on. Not only did many other factors influence the quantity of metal, but also most kings and other money managers had a poor understanding of the financial mechanics necessary to create a stable monetary system.

      (Pardon the length of this reply...)

    3. Very interesting, Eric.

      You said: "Coins are always financial instruments that is, in order for a monetary system to work properly... coin issuers ought to impose and enforce a face value as best as they can and to downplay the importance of the material as much as possible. If the issuer cannot do so in his area of influence, his coins circulates at their bullion value or disappear, with all the problems that that generates."

      I'm starting to see a link between protectionism and maintaining a face value (or a domestic market price in case of JP's "chopmarked" coins) higher than bullion value. Is there one?

      Not only was it important to keep enough gold coins in domestic circulation to "grease the wheels of commerce" or to "preserve the nation's wealth", as I earlier suggested when I talked about the collateral role of gold. But by making as big portion as possible of the nation's (government+individuals) gold command a higher price domestically than internationally, a government could in fact reduce imports. The same gold coin would buy the same or larger quantity of more expensive domestic grain than it would buy cheaper foreign grain, so why bother importing grain. We have to remember that importing grain often meant exporting gold.

      Do you see what I mean?

    4. Yes. And of course all the misery created by the New World conquests had at its heart this search for gold.

    5. Eric,

      1. To put it short and sweet, in a metallist world all coins are weighed prior to consummating a deal. In a nominalist world they are counted. I certainly agree that England was a nominal standard.

      But even in a nominalist world, we can still have two kinds of coins. To buy a 25 cent chicken, a customer pays five Cameron house token. The shopkeeper doesn't bother weighing the coins because their value doesn't derive from their metal content. The quality of Cameron House's promise is what counts.

      Same with chopmarked coins. If the customer buys the chicken with silver dust, the shopkeeper will have to weight out 25 cents worth of silver. But if the customer pays with chopped silver coins, then the shopkeeper won't bother weighing them but will count them. Thanks to the assayer's mark, he can be sure that each coin contains a fixed amount of silver dust.

      Again, I'm only pushing back against Mitchell-Innes point that all coins are of the first sort.

      2- If the experiment showed that the value of the silver content of English shillings (and other coins) generally fell in a range of 10-60% of the market value of the silver that a shilling could purchase, then I think I'd be more willing to accept the collateralization theory. But if it tended to fall in a range of 80-100%, I'd see that as confirmation that English coinage operated on the same principles as chopmarked coins, i.e. they were not credit, but assayed silver dust.

    6. Interesting point, Eric. Perhaps the ancients switched from Sumerian clay coinage to metal coinage as the number of literate scribes rose, making the counterfeiting of clay coinage easier.

      Ancient Egypt, by contrast, didn't use coins because transactions were funneled through a central government bureaucracy which kept everyone's credit and debit records -- the government provided what were essentially banking services. This was done in a barter economy with no standard token of exchange. Lots of papyrus records though.

  4. First off, thanks for this post! Very much appreciated. I also like Eric Tymoigne's comments. I've not read enough history to join the discussion in depth, I can only comment from a logical perspective. But I think what is going on is that there are indeed various phenomena that, as you say, deserve their respective theories. But while you, JP, along with a majority of others, are happy to have all of those phenomena carry the name 'money', the credit crowd, whether concsiously or not, have decided that only only credit deserves that name. This makes sense to me in that credit can be traced back as a phenomenon that predates coinage, existed throughout the middle ages and is pretty much the only system in use today. So other phenomena can rightly be regarded as auxiliary. I also find Antti's theory of coinage as collateralised credit makes perfect sense in settings where authorities were looking for ways to expand their influence over territories or people that were far away (empires, colonies etc.).

    Whichever the case may be, what definitely should not happen is that logic that applies to one phenomonon / theory, is indiscriminately transcribed to another.

    1. No problem, Oliver.

      "But while you, JP, along with a majority of others, are happy to have all of those phenomena carry the name 'money', the credit crowd, whether concsiously or not, have decided that only only credit deserves that name."

      Dunno, doesn't sound like me. As I like to say, if we want to understand money, we should never use the word money. Then we just get into semantic debates.

      "This makes sense to me in that credit can be traced back as a phenomenon that predates coinage, existed throughout the middle ages and is pretty much the only system in use today. So other phenomena can rightly be regarded as auxiliary."

      That may be true, but I didn't make any claims about historical order in my post. My main point is that there have been at least two types of coins throughout history, whereas Mitchell-Innes says there are one.

    2. OK, sorry for throwing you in a money pot. I agree that using the word money is a slippery slope because it is used in many different ways. You do speak of moneyness, though. I deduced from that that all things with a degree of moneyness belong in a broad tent of money things.

      I agree with your last point.

    3. JP, I agree that it's best to avoid the word 'money'. Instead, we could talk about two distinctive concepts:

      1. Commodities, including precious metals
      2. 'Credit tokens' and 'credit balances' on a ledger (depending on the use of the word 'money', even 'credit entries', regardless of the balance, should be mentioned here)

      If you hold the former, you have a good.

      If you "hold" the latter, you don't have that good, but you might get it later.

      These two concepts are as far from each other as they could be, more or less. Frederick Soddy put it something like this: To hold money just means you are walking around without goods that belonged to you.

      A 'credit token' can be made of hazelwood, paper, polymer, base metals, precious metals, and so on (these credits can be 0,01-99 % collateralized by the material of the token, to follow that kind of thinking). Unlike credit balances which are abstract, a credit token is at the same time a good, and unlike credit balances but like commodities, credit tokens actually circulate among people. I dare to say that the source of all the confusion in monetary economics lies in this similarity between credit tokens and commodities.

      So there's no money. Just stuff and no stuff. Stuff and trust. Stuff and vaguely defined promises. And vaguely defined promises partly collateralized by stuff, thus reducing the trust component.

      Do you agree?

    4. JP, further, I'm sympathetic to your concern regarding two types of coins. I re-post my comment from the discussion board here:

      I think you're probably right in questioning anyone who suggests that all gold coins throughout history have been credit instruments / IOUs. Gold in bullion form, for example as a kilobar in Oliver's basement in Switzerland, is clearly a commodity, not a credit instrument, and very few would consider it money. Those gold bars have been closely inspected and they bear official markings as a proof of their purity and weight. That is not too far from certain gold coins you have mentioned? If so, then I'd conclude that those gold coins, despite of their appearance, cannot be money, just like a gold bar is not money. Both gold bars and these coins have been and are sometimes still traded. One might have even considered them 'media of exchange', but then again, many people consider Bitcoin a medium of exchange. (It's actually funny that news articles on Bitcoin are often accompanied by this picture or similar, as if just the coin form made something money.)

      I would like to suggest, partly following Eric Tymoigne's first comment above, that we could consider gold bullion as a 'commodity medium of settlement'. There's no doubt that central banks among themselves used it as such long into the 20th century, and such practices have been common among private banks earlier. Likewise, in societies spanning from the ancient world to Europe in the middle ages, debts that weren't in due course cleared during regular trading, could be settled by delivering some agreed commodity. It could be precious metals or it could be staples, and neither needed to be considered 'money' by the participants nor lend its name to a unit of account.

      If I'm right, it would be no wonder if people have often mixed these two concepts, and considered this 'commodity medium of settlement' money, especially as it no doubt has been circulating alongside credit instruments, ie. tokens, which in my opinion can rightly be called 'money'.

      What is not a matter of opinion is that these two things are different in kind, and so we should not call both 'money' and try to come up with a theory of money that encompasses both.

    5. Here's Frederick Soddy in another book (a direct quote this time):

      "Money... is the nothing you get for something before you can get anything."

      "From the point of view of the owner or possessor of it, money is the credit he has established in his favour with the community in which it passes current or is 'legal tender', by having given up in the past valuable goods and services for nothing, so as to obtain at his own convenience, in the future, equivalent value in turn for nothing."

      Source: The Role of Money (book pages 24-25)

      I think that's about right when we talk about 'fiat money' (another term we should not use, I know!).

      I apologize for not having been able to let go of the word 'money' in my comment above. When I say that something is not money, what I mean is that this something is different in kind from a credit instrument/token/balance. But I might be wrong, actually. (See my reply to Dinero below.)

    6. "Do you agree?"

      Yep, everything you say in your 7:59 AM comment makes sense to me.

    7. Antti: "If so, then I'd conclude that those gold coins, despite of their appearance, cannot be money, just like a gold bar is not money."

      There's that word money again: money. Aren't you just arguing over semantics? One of the oldest and least useful debates is about the definition of the word money, and the sorts of instruments that fall under that definition.

      Didn't we just agree at 7:59 that it's best to avoid the word 'money'?

    8. Aha, I just got around to reading this:

      "I apologize for not having been able to let go of the word 'money' in my comment above. When I say that something is not money, what I mean is that this something is different in kind from a credit instrument/token/balance."

    9. JP, let me try to step back and look at the big picture, now that we agree on so much.

      There should be no Theory of Money, but a Theory of Exchange. This theory of exchange should explain how people, either as individuals or as members of an institution, exchange goods and services with each other.

      In our Theory of Exchange, we will use language that doesn't include words 'money' or -- I'm sorry -- even 'moneyness' (not that we cannot discuss the latter in some way, by using other words).

      Roughly speaking, there are at least three main ways we can exchange goods in (I leave gifting away, as it's not really an exchange -- quid pro quo; most of the so called "gift economies" fall under option 3 below):

      1. Barter on the spot
      2. Delayed, bilateral barter
      3. Delayed, multilateral barter

      Options 2 and 3 involve uncertainty due to the delay. In those, there's credit and debt involved (I use those two words in the same way Mitchell-Innes did).

      How does this sound? I could start a new topic on the discussion board.

    10. Sure, I guess. When I buy socks with gold dust, is that category 1? What about a full-bodied gold coin? ...a Cameron House coin? ...a 100% backed gold certificate? ...a modern banknote?

    11. Good questions. It depends on how we define 'bilateral' and 'multilateral'. I think it would make most sense if I-owe-you's (IOUs), even if they circulate, were to fall into category 2, while they-owe-me's (TOMs; say, a LETS system) are in any case in category 3. If you're holding an IOU, then you're a creditor and the one who issued the IOU is a debtor. That makes it bilateral, even if you're not the person who first received the IOU from the issuer, after having sold him goods.

      This is about barter, so it is goods and services which are owed when I talk about IOUs. We are explaining how goods and services are exchanged.

      So, to answer your questions:

      Gold dust: category 1

      Full-bodied gold coin: category 1 (although one might find some reasons to place this into category 3; we can discuss it later)

      Cameron House coin: category 2 (Cameron House owed a service to the holder of the coin, it seems)

      100 % backed gold certificate: category 3, if the government/bank could renege on its promise to sell/give gold to the certificate's holder, so that the right of the holder to receive gold would not be legally enforceable -- in which case the gold certificate would function like paper currency; if the issuer could not renege, then I'd place this into category 2

      A modern banknote: category 3

    12. if the issuer could not renege, then I'd place this into category 2

      By saying that, aren't you saying that banks can be debtors? To the extent that the gold a bank holds is the property of the people behind the RHS of the balance sheet, does a promise to pay out in kind not still signify a multilateral debt?

    13. Oliver, banks can be debtors. I'm sure I've mentioned it before. If the bank holds real assets -- and especially if we agree that all kinds of debts/liabilities are recorded on the LHS of its B/S -- then those real assets are its liability, debt. This is crystal clear if we think of the bank as the people who run its day-to-day operations. The real assets belong to those holding credits in the bank's books, but none of these has any particular claim on them. The bank (management) is just taking care of the real assets that ultimately belong to someone else.

      But is it multilateral debt (that is, can we point to a specific creditor), that's another thing. Usually it is multilateral. But if you hold a credit note (gold certificate) which is issued by Bank A and the note says that Bank A will give you one ounce of gold if you bring the note to it, then that looks very much like an IOU to me. So much so that I'm willing to backtrack and say that actually a 100 % backed gold certificate could be category 2 by default, even if it can be converted into category 3 by a one-sided decision by the government or central bank (which announces it will close the "gold window").

      But this is complicated. You might now ask: Isn't any credit note that says the central bank will give its holder gold when he presents the note at the bank an IOU (bilateral debt) -- even in the case of less than 100 % backing ("fractional reserve")?

      I say no. Here's why. If that promise doesn't hold, and historically it hasn't, then we must conclude that the "promise" was a mere (retractable) offer to sell gold at a fixed price, now matter how it was presented. In that case the sale happens within a category 3 system.

    14. Well, a corporate bond / IOU makes a promise that may turn out to be untrue. So isn't that just a retractable offer to pass on company revenue, then? Or are you saying they're multilateral, too? As soon as they're recorded by a bank and officially tradable? What about corporate IOUs that are physically passed on from hand to hand? 2 or 3? Confusing :-).

    15. I repeat: This is about exchange of goods and services. Corporate bonds are in the realm of category 3 recordkeeping, and there on a second layer (what is owed is an amendment to the records -- a credit entry on a certain account); the issuer owes no goods to the creditor.

      But it might be that the division of delayed barter into cat 2 and cat 3 leads to unnecessary confusion. I'll think about it.

      Your logic doesn't hold water, though. My point was that if the issuer of a gold certificate can, without consulting the assumed creditor, decide that no gold will be delivered, and get away with it, then no gold was really owed. The point was not that a debtor might not be able to pay.

    16. Anyway, I think we are going so much off-topic that it might be best to continue on the discussion board (I'll start a new thread in the coming days).

      Here's one take-away from this discussion:

      If we don't exchange goods on the spot (barter), then credit and debt are involved. The argument about what is money is usually an argument about money being a (special kind of; "nth") good or not (monetarists usually say yes, credit theorists say no).

      Instead of continuing this endless debate, we have decided not to call anything money, but look at how goods are actually exchanged and try to come up with new language that best describes familiar phenomena.

      We (JP, you and I, at least) all agree that "fiat money" is a confused concept, because it considers as a good something that is clearly a credit. This is one of the things our new Theory of Exchange should correct.

      We should probably start by looking at actual sales of goods, and see what is going on. If the other party to the transaction is giving a good in return, and the intrinsic value of both goods seem to more or less match, then we are probably witnessing barter. Both parties are at the same time buyers and sellers.

      If this is not the case, so that one of the goods is generally recognized as inferior when it comes to intrinsic value, or, even more so, if there is no good at all delivered by one of parties, then we must be witnessing delayed barter.

  5. Oliver, I am with Antti on the collateral nature of gold. The dichotomy commodity/fiat money ought to be reframed as secured/unsecured monetary instruments, both operate on the same broad logic of financial instruments. Precious-metal coins are secured monetary instruments. A while back I published a paper title "A financial view of monetary system" that develops all this. if you want send bedtime reading...

  6. JP, you put my "theory" much better than I did at the forum -- happy to see you are able to read me between the lines. Thanks!

    You said: "However, I've had a chunk of my collateral stolen somewhere along the transactions chain—and there's nothing I can do about it."

    What you describe here was common, and the governments tried to stop people clipping the coins, for this reason. No? I think Mitchell-Innes also mentioned that there were often coins badly clipped, yet accepted at face value when presented at the tax office. The "collateral thief" wasn't the one who presented the coins as credits (some say "IOUs") at the tax office, so it wouldn't have been fair to not accept the tokens, no matter how annoying it was for the government to find out that some of the collateral was gone.

    So I don't understand how the collateral theft, which seems to have happened, made my "theory" (a hypothesis, perhaps) less realistic in your eyes.

    Your story about the coin regulators is interesting! Do you happen to know whether the chopped coins traded above their intrinsic value only in domestic commerce, or also internationally? My question applies as well to free minting period in Britain. Just an idea (not trying to tie this with the credit theory viewpoint): Among other reasons, could it have something to do with trying to ensure that the gold doesn't leave the nation? As we know, in certain situations a government could demand their citizens to turn in all the gold they had (United States comes to mind), so if the gold was held by the citizens, it still counted as "wealth of the nation", unlike when it was in the hands of foreigners.

    These are just some hurriedly written initial observations. Looking forward to continue the discussion later!

    1. "What you describe here was common, and the governments tried to stop people clipping the coins, for this reason. No?"

      The person who stamps a coin will have different reasons for stopping clippers depending if the coin is a Cameron House coin or a chopmarked trade dollar. If the coin is a Cameron House coin, the issuer might be upset that the clippers are making off with metal that belongs to him.

      With chopmarked trade dollars, the shroff who chopmarked the coin wouldn't have cared if clipping occurred. All a shroff did was assay the coin. The gold embodied in the coin wasn't the shroff's gold, so anyone who clipped it after he had chopped it wasn't doing any harm to the shroff.

      But if a shroff was also a public official, who as a condition of office was expected to uphold the quality of the currency, then he would certainly try to stop people from clipping the coins he had stamped. But *not* because the 'collateral' therein belonged to him, and he wanted to protect it. It didn't. He only wanted to stop the clipping because it was his duty as a public official.

      The Cameron House 5c tokens make sense to me because they were issued on cheap copper cents that were not likely to be clipped. It seems unlikely to me that Cameron House would have bought a gold coin and overstamped it with a higher value, since that token would have been clipped as it passed from hand to hand, with Cameron House directly suffering the consequences. Are there any examples of merchants tokens issued by overstamping a gold coin? I haven't seen any.

      "Do you happen to know whether the chopped coins traded above their intrinsic value only in domestic commerce, or also internationally?"

      Sorry, I don't.

  7. When it comes to the question of one theory vs. many, I'm with Oliver. There should be a grand theory of money. It should explain how today's money -- our banking system -- works, and show how that system is connected to the past. What I've done elsewhere (for example here) is to try to show how the current system can be traced back all the way to ancient "gift economies" and economies where trading was based more explicitly on credit (starting from clay tablets in Mesopotamia). One important part in this is showing how a unit of account most likely came to being, and how it eventually became an abstract, nominal quantity, despite its concrete name, so that a real sack of flour in ancient Egypt could be priced at, say, "three sacks-of-flour" (the latter being the abstract UoA; I've seen this example somewhere, but unfortunately haven't found the reference).

    I agree with JP in that this grand theory should not try to include and explain everything once called "money" (my son this morning called a ladybug 'a beetle'; he was actually right, but could have as well been wrong). Like in the case of Bitcoin, we must conclude that people don't fully understand and have never understood what money is, and so they have given that name to things which, despite of sharing some features, are different in kind. It would be like trying to include plastic flowers in the evolutionary theory of plants. Most of the economists who have tried to arrive at all-inclusive theories about money have ended up focusing on the 'medium of exchange' function of money. By doing so they lose nearly everything that is important. It's like focusing on the appearance of various flowers, plastic ones included, without ever understanding how flowers come to being, blossom and die, not to speak of their role in the wider ecosystem.

  8. In the commerce where precious metal coins circulate, the reason they are accepted is not generally because the vendor wants the metal, and so there is another way of describing coins with a similarity to a credit instrument with the debt replaced with an informal undertaking by the whole community of coin users. For coins to be useful in commerce, ie for there to be a community of coin use, there is people accepting them in exchange for goods and services at some undefined point in the future.

    1. Do you suggest that these coins, just like Rai stones on the island of Yap, could be some kind of "badges of honor", telling others that their owner has given up goods in favor of others, and so the society is in some way indebted to him?

      Anyway, there seems to be some truth to it. In the modern monetary system, the latter component, the debt part, is more explicit (because credit=debit). In a system where only the credit part is explicit, these credits, or badges of honor, are what economists call 'a bubble'. Credits (what most of us call 'money) in our modern monetary system are not a bubble, because they are matched by a deb(i)t somewhere else in the system.

    2. Yes that is right . The undertaking, although if it is not formally identified, it must be there for the system to work.

    3. Antti & Dinero, the "badges of honor" –argument seems interesting. What I particularly find intriguing is whether we can scale up the idea and apply it to systems in a modern complex context.

      So, if we start from the idea that a credit basically means someone has given up goods while not yet received any (a kind of deferred re-payment in goods). Now, at some accrual level it becomes impractical, or even impossible, for a single person to actually realize all credit in physical goods – e.g., you're a billionare with an income stream far greater than what you can spend meaningfully on goods. Yet accrual in terms of credit could still be ongoing precisely because it is not socially conceivable it is ever going to be fully realized in terms of physical goods by you – numbers don't take up space while you, as a billionare, would soon run out of estate should you have to realize all credit accrued to you. I'm assuming there's a socially determined limit for how much physical space you're allowed to have regardless of how "credit-rich" you become. Or, as an analogy, think of the political implications if all foreign holders of U.S. government debt decided they rather hold farmland in the U.S. than Treasury securities (at some point that would become politically untenable).

      So, in short: there's something "worthy" in credit as an abstraction that is socially lost should it become realized in the thing which originally gave rise to it: not much unlike how people perhaps would think you're a weird miser should you fill up your estate with goods you'll never be able to consume or use … yet if that accrual is in terms of credit you might very well go on increasing your social status in the community.

    4. Johan: You bring up an interesting point. I'm afraid this is not straightforward, though. But that doesn't make it less interesting.

      Yes, if you have goods lying around idle, you're wasting resources. Someone else might have use for those goods right now, and they might eventually become outdated in one way or another.

      In this sense holding credit, which means that you have given up goods for the benefit of others, is socially much more acceptable.

      But going back to "gift economies", isn't someone who just gives, and doesn't accept any "countergifts", and instead accumulates credits, often despised?

    5. Antti, I don't know enough about gift economies to give an informed answer.

      But I would say "not accepting countergifts" and "accumulation of credit" might conceptually belong to slightly different categories. But still, the main point being: there are also similarities between the two (even though they do not necessarily map 1:1). What sets them apart might have to do with institutional scaling.

      Credit could be conceived of as a kind of deferred payment, which also implies postponement of deciding whether to accept, or not, a countergift. In other words, you need to actively decline in order to keep such credit position intact in a gift economy. Whereas, accumulation of credit in institutionally complex systems implies you don't have to actively decline (and "make a social scene" about it). In fact, there might arise a "social scene" should you try to try to realize a large (accumulated) credit score all at once – say, you try to buy most of the bread when learning about a bad harvest. … Something like that?

    6. I would say "not accepting countergifts" and "accumulation of credit" might conceptually belong to slightly different categories.

      Maybe, but the result is the same. That which keeps the real value of any credit system stable is the constant flow of gifts and counter gifts. In theory, there need never be a great 'stock' of outstanding non-reciprocated gifts for the economy to work, nor is there any direct causal relation between any such stock and the flow of goods. But, if one does notice a growth in credits being 'hoarded' that also means someone must be holding on to larger than normal amounts of debt. To take your example, if there are lots of billionaires who cannot possibly spend all the money they have hoarded in one lifetime, there are probably also those who have accumulated debts they cannot possibly repay within a lifetime. Those two 'irrationalities' cancel out.

      You can argue that by allowing people to take on more debt (say by lowering lending rates) you cause them to save more than would otherwise be the case. That's pretty much the opposite of what lower rates are usually intended to do, namely to get people to spend more.

    7. Oliver, yes, accounting wise credits and debits cancel out. What I'm trying to convey is the idea that the social meaning/implications of credit scores might evolve as institutional complexity grows. Say, for example, in a very rudimentary gift economy credit might be realized in necessary goods. In such context extreme hording seems unlikely – at least it would be socially awkward. At the very least, a differentiation between necessary and symbolic (luxury) goods seems like an essential condition. Thus hording might become less of a social issue – or made possible? – as realization of accrued credit scores is tilted towards symbolic goods. Now, let's still ramp up the institutional complexity and consider a modern financial economy. Not only do we have necessary and luxury goods in which credit scores can be realized, we also have a large repertoire of financial assets as possible targets. In fact, there's a whole industry (the financial sector) where the impetus for working has to do with finding ever more "lucrative" targets for credit realization. So what does lucrative mean in this situation? Perhaps it means a "rate of return" … but a return of what exactly?

      Credit could still be defined as deferred payment, just like in a rudimentary gift economy. Yet in a modern financial economy, credit might also become more of an emergent phenomenon; your credit score improved, not necessarily because you gave away something, but because you made a good bet in the derivatives market). And perhaps it stays as an emergent phenomenon precisely because accrued credit scores are never intended to become realized in necessary goods – which is perhaps also why large asymmetries in debit-credit accumulation in some sector of the economy is made possible in the first place?

      I realize I'm still not quite clear about this issue, but hopefully you understand something about what I'm trying to express.

    8. I follow you, Johan. And I agree to a certain extent. I have a feeling there must always have been a desire to collect credits for their own sake. And maybe part of what makes people trust a monetary system is that they are allowed to do so? I don't see much moral pressure to spend credits. The burden is pretty much on debtors to pay down, if at all.

      So while the concept that money is all about getting one's hands on goods is correct in the sense that that is all that money is materially good for and also all that its 'value' can be measured in, it falls short in the sense that it doesn't cover all possible motivations for collecting credits in the first place. That is a cononundrum you inadvertedly stumble across once basic human needs are covered. And it works for goods as well as for credits. Why do we desire things we don't really need? Instead of buying things we don't need, why not just keep open the option of doing so in the future? Same thing, really.

      Otoh, for most of us mere mortals, money and other types of credit often serve the purpose of insurance for predictable or unpredictable future events. Saving for a rainy day, smoothing consumption over a lifetime etc..

      The line between having enough to cover one's immediate basic needs (ok, one needs to define basic needs), saving up a pension, insuring against all possible events, keeping up with the Joneses, starting the next Rockefeller dynasty or just partying oligarch style exemplifies the cenceptual differences between absolute and relative poverty / wealth. Or, to put it differently, if one insists on measuring poverty in absolute terms, one would have to apply the same measure for wealth, i.e. one should find no reason for anyone to amass credits or 'useless' assets. Quite obviously, that is not wholly true.

      Translating that into marginalist terms, a diminishing marginal utility of goods (in a materialist sense of serving basic human needs) does not translate into a diminishing marginal desire for credits. This, in turn, is reflected in hoarding but also for example in fantasy prices for luxury goods.

  9. Coins originated as credit. Visit the money museum at the Unversity of Philadelphia sometime. The early Sumerian coins are clay, with markings indicating what they can be redeemed for. (Initially, "John's cow"; later "one cow"; later "one cow's worth"; eventually "one arbitrary accounting unit", like modern money).

    It's not entirely clear to me when metal coins were introduced, but clay coins had been circulating a long time already. Metal coins may simply have been preferred because they were more *durable* (another reason to use coins rather than bills or electronic records).

    Precious metals might have been used later for their collateral value, but early coins are often whatever metal the civilization had access to.

  10. To what degree do you feel Innes is validated by the United States leaving the Gold Standard behind in 1971, even though the reasoning behind the decision might not be?