[For new readers: Graeber’s Debt focuses on the fact that there were/are not large-scale barter economies, which entirely misses the point of the barter story and belies a basic misunderstanding of the role of commodity exchange in a “money story” (related to units-of-account).]
I could have made the earlier Graeber/barter post clearer simply by pointing out that the very purpose of the “barter story” is precisely to explain why barter cannot lead to the kinds of population and social changes we know happened in ancient societies. That something else necessarily had to happen. You don’t look for barter to understand the “barter story,” you look for the early, simple commodity-exchange the “barter story” says must replace it for complex societies to emerge. And it’s ancient and everywhere.
- The “barter story” is not about barter. It is about the ABSENCE of barter…
- …that is, about how barter CANNOT be the basis for emerging complex societies; something else (i.e., commodity exchange) had to emerge for societies to organize in the way we know they did.
- Commodity-exchange emerged hand-in-hand with ancient agricultural intensification and population growth.
- (Aside: To then focus only on commodity/market exchange (for the next 10,000 years) is obviously nonsense; i.e., neoclassical economics is nonsense).
- Credit is an (the most?) ancient system of complex social organization with something money-like.
- …but credit-”money systems” must first have units of account; credit can be first; “credit-money” cannot be first.
- Commodity exchange is ancient and the most likely source of units of account; these can then form the basis for formal (“monetary”) credit-relations.
- State (chartal) theory is the most important understanding of “money” (social organizing systems) over time.
(A note on state tax-credit systems)
- “State” “money” could even have been earliest (early polities or temples setting units). It arises with the first imposition of tribute, tithes, scutage, fees, land fees, fines, wergeld, tariffs, and taxes, that is, liabilities imposed by a State or polity of some kind. (Note, however, that in-kind taxation and corvée labor were some of the very earliest “taxes” and may not have led to tax-credit “tokens” as easily).
- However, given the many millennia of agriculture and trade emerging parallel with social complexity and social practices (leading to hierarchical political/religious institutions, cities (“civilization”), and states, rather than the other way around✥), it is likely that customary commodity-exchange units pre-date even the earliest polities. (✥In other words, it is doubtful “States” pre-date initial agricultural and population growth; rather, very early agricultural and population growth led to cities and States.)
- As is known, I have long admired the writings of Jane Jacobs. Interestingly, she is known for precisely a theory that cities (and presumably their form of governance) arose before agriculture, and essentially “invented” agriculture (Jacobs, 1969; here is a 2016 discussion of the theory). That could potentially put a “state” unit emerging before even agriculture (and thus potentially a state-decreed unit-of-account before even a customary agricultural trade unit-of-account). Of course, this would assume the emergence of units had not occurred (and persisted) still earlier once again, that is, among pre-agricultural hunter gatherers.
Jacobs, Jane. 1969. The Economy of Cities. New York: Random House.
Reinhart and Rogoff’s discredited pro-austerity argument that domestic debt has a negative effect on growth is well known. Less well known—although perhaps an even clearer case of fear-mongering—is their implication that domestic debt puts countries at risk of domestic default if austerity is not imposed (“The Forgotten History of Domestic Debt”; e.g., RR state that their “domestic default” data is needed to “know the danger zone for [domestic] debt levels” (p. 4).
According to Reinhart and Rogoff the danger is both outright (de jure default) and de facto default from inflation and financial repression. However, like their discredited “growth” paper, the “default” argument is also based on the improper use of statistics.
* The point of noting spatial-autocorrelation is that it suggests that cases may not be statistically-independent cases and cannot be used in standard inferential or econometric methods. What might be called “event correlation” is more specific, i.e., knowing specifically that cases are not independent. Example: If an alien looked at a world map of social indicators from 1945, it might guess from spatial-autocorrelation that a single event happened in Europe that affected most European countries profoundly even if they knew nothing of Earth history. However, knowing the actual history of Earth events, we know that, for example, Japan should be included in that list of non-independent cases, something someone only looking for spatial-autocorrelation might miss. Knowing the true level of interconnectedness of events is more powerful than simple spatial correlation. Serial correlation is the non-independence of events across time. E.g., it is hard to consider the series of economic crises in Argentina as truly independent. There is likely some set of factors (political, historical, institutional, intellectual/educational/academic, structural) that come together to cause the repeated similar crises in Argentina or Brazil.
Problems with their de jure list: Pre-1971 monetary systems are fundamentally different from post-1971 systems and cannot be included in a dataset analyzing the latter. Using only relevant post-1971 cases reduces the de jure dataset from 68 to 43 cases. Six of the cases are for currency users, which are irrelevant for a dataset meant to understand modern currency issuers. This reduces the de jure dataset from 43 to 37 cases. Six more are for foreign-currency-denominated debt, making those countries de facto currency users and again not relevant to a study of domestic default, reducing the list from 37 to 31. For the entire list there is a high degree of unaccounted-for serial and spatial/event* correlation and non-independence of cases. Accounting for the non-independence of cases leaves a small number of cases such as Myanmar, Venezuela, and Zimbabwe. It is doubtful they are lessons of “debt” rather than of governance. The reader can be the judge of what lessons these cases offer to the rest of the world.
What appears to be their de facto list is also marked by serial correlation and non-independence of cases.
In reviewing their de jure data I noticed (on the website that includes the data for This Time Is Different) that within the excel sheets there is a worksheet that opens to the title “DOMESTIC DEBT: DEFAULT AND RESTRUCTURING, 1800-2012” (it appears on Table 7.2, 7.3, 7.4, as the fourth worksheet of each, link to excel file). It is somewhat different from their de jure list mentioned above; at first I thought it must be a list of the de facto cases they mention. However, there is some overlap with the de jure cases on the list and no explanation of what the list is that I can find (I emailed the authors but have yet to receive a response). But it does seem to list many (non-de jure) “hyperinflationary” episodes and episodes they define as “financial repression” as well as listing a number of cases qualified as “Not counted as a sovereign default,” all of which make me think it is a list of their “de facto” category. I include it here alongside the de jure cases as it seems to capture many of the de facto cases RR reference and is presumably what they base their inflation/financial repression arguments on. It lists 58 cases from 30 countries.
Accounting for this reduces that list from 58 to a handful of cases. Like the de jure list, the remaining cases have unique and severe internal problems, and many indeed are the same as from the de jure list. And again, the reader can be the judge of what lessons these remaining cases offer to the rest of the world. It is also doubtful they are lessons of “debt” rather than of governance.
Note: [bracketed] notes on all lists are mine; all “de facto” examples are in dark blue.
Also: Nersisyan and Wray 2010 and Bill Mitchell’s 2010 post already offer comprehensive critiques of Reinhart & Rogoff (and well before the 2013 paper demonstrating that RR’s “Growth in a Time of Debt” stats were bad). However, the continued influence of Reinhart and Rogoff’s defective research continues to be sufficiently widespread that highlighting further flaws in their work is merited.
Austerity in a Time of Plenty
“The forgotten history of domestic debt has important lessons for the present.”
Reinhart and Rogoff, 2014
“it remains to be seen whether all advanced countries have permanently ‘graduated’ from outright debt default”
Reinhart, Reinhart, and Rogoff, 2015
“it would be folly to assume that current favorable conditions will last forever, or to ignore the real risks faced by countries with high and rising [domestic] debt.”
Kenneth Rogoff, 2019
It is well known that the claim that public “debt” ratios impact growth—a claim told in an attempt to impose austerity in a time of plenty—is false. For currency-issuing countries there is no logical reason why the stock of savings in one’s currency (under the misnomer “debt”) should relate to yearly levels of economic activity in one’s country, and empirical data shows that indeed it does not.
Promulgators of the discredited debt-to-GDP ratio view (notably Carmen Reinhardt and Kenneth Rogoff) also influentially promote a related view, and for the same reason: That the stock of savings in a currency somehow puts a country at risk of “default,” high future taxation, financial repression, and inflation/hyperinflation. So we must fear domestic “debt” not only because of effects on growth, but also because “default” or “hyperinflation”—even in “advanced” countries—is looming if austerity is not imposed. They widely spread this implication in interviews and presentations (constantly mentioning default, “inflation trauma,” “painful restructuring” etc.).
In “The Forgotten History of Domestic Debt” (NBER 2008, revised 2010, published version 2011) they include a dataset of “68 cases” of de jure “domestic default.” (The updated 2010 NBER data is used here; the exact number of cases depends on how date ranges, serial “cases,” the “voluntary” cases of the UK and several other factors are counted).
RR count as “de jure”:
“1. A failure to meet a principal or interest payment on the due date (or within the specified grace period). (These episodes also include instances where rescheduled debt is ultimately extinguished on less favorable terms.) 2. The freezing of bank deposits and or forcible conversions of such deposits from dollars to local currency. 3. The abrogation of indexation clauses, as the United States did in the 1930s and as Argentina is doing at the time of this writing in 2008.” (2010, Appendix III, p. 42)
In the main text “de jure default” is defined as “ranging from forcible conversions, to lower coupon rates, to unilateral reduction of principal (sometimes in conjunction with a currency conversion), to suspensions of payments.” (2010, p. 12)
Reinhart and Rogoff also repeatedly suggest that there are many more cases of de facto default (these cases will be colored dark blue throughout), mostly defined as “choosing” (2010, p.2) inflation/hyperinflation and/or “imposing” “financial repression.” (pp. 13-14).
Irrelevance of pre-1971 cases in the “de jure” dataset
It wasn’t until 1971 that the centuries-long evolution of monetary systems of countries that had either previously borrowed external currencies, used currencies convertible to gold or silver, and/or pegs to foreign currencies finally moved to the standard for modern monetary systems: Self-issuing of currencies not tied to any commodity, pegged to any other currency, and with floating exchange rates.
†† This practice and the interest payment are purely vestigial practices in fully modern monetary systems, which can easily be left at nominal zero permanently; currency issuers have absolutely no need for bond sales for “funds,” nor do bonds have any useful effect on inflation (because 1. purchasers are eager savers by definition 2. bonds are highly liquid 3. interest on bonds relentlessly pumps high powered money into economies and 4. businesses price-in rate increases). When a bond is purchased, the saver has reserves held at the Central Bank account (by a bank) switched to what amounts to a savings account at the same Central Bank. When the bond is paid off, this process is simply reversed. It can always be reversed instantly and for any quantity, and this reserve/bond swap could be done away with permanently with no effects on inflation nor the spending capacity of a currency issuer.
In such a system it is not possible for a currency issuer to be illiquid or insolvent in their own currency. What is called “public debt” (regardless of whether the holders are foreign or domestic) in this system is merely the savings of currency units that are voluntarily converted to “bonds” (bonds/ bills/ notes/ gilts/ treasuries etc.) by savers simply because the country pays (also voluntarily) interest on “bonds.” This is a purely vestigial practice. The sale of bonds from currency-issuers merely transforms one already existing government token (reserves) into another government token (the bond).††
Pre-1971 pegged and convertible currencies can tell us nothing about the liquidity/solvency of countries with modern free-floating, non-convertible currency systems.
Of Reinhart and Rogoff’s ~68 “de jure domestic default” cases, only ~43 (as RR sometimes use wide date ranges as one case, e.g., Dominican Republic 1975–2001, and sometimes count a few years as multiple cases, e.g., Argentina 1982, 1989–90, 2002–2005, it makes exact counts difficult) are after 1971 and can possibly be of any relevance to modern countries.
However, let’s consider all 68 “de jure” cases for a moment.
Irrelevance of Currency Users (As Opposed to Currency Issuers)
Eight of Reinhart and Rogoff’s 68 cases are not for currency issuers at all but rather currency users (a ninth “case” is hard to classify: “United States (9 states) 1841–1842” which is in the “free banking” era, with a complex relationship between US-State banks, US-State bonds, the US dollar unit, and gold/silver). These eight cases have no place in a dataset purporting to show a danger of default for currency issuers.
The eight currency-user cases (plus one “US States” “case”):
- Cameroon 2004
- Gabon 1999–2005
- Antigua and Barbuda 1998–2005
- Grenada 2004–2005
- Dominica 2003–2005
- Panama 1988–1989
- US States (9) 1841–1842, [in the “Free banking” era 1837-1862; relationship of State-bank issue to the US dollar, gold/silver is complex].
- United States (“states and many local governments”) 1873–83 or 1884 [after the free banking era, but before the 1913 creation of the Federal Reserve]
One Canadian Dollar User
- Alberta, Canada April 1935
Taking these eight obviously irrelevant cases out of the dataset reduces the RR cases from 68 to 60 (It reduces the post-1971 list from ~42 to ~36).
Similarly, although a currency issuer with a free floating non-convertible currency can never be illiquid or insolvent in its own currency (no matter who holds the debt), it can with debt denominated in a foreign currency. It is necessary to separate foreign-denominated debts from domestic-currency-“debt” cases. Yet RR include six cases of dollar-denominated debt as “domestic defaults.” The cases are:
- Argentina 1982, 1989–90, 2002–2005
- Bolivia 1982
- Mexico 1982
- Peru 1985
Interest Rates & “Financial Repression” (relevant to the “de facto” list)
† This potential exists from whenever a country begins emitting its own currency unit that is valued only because it is the tax-unit (and legal tender for obligations such as fees, fines, and contracts) of that country, and with no limits whatsoever especially after 1971. Currency-issuers have no need for funding-related bonds/bills/notes/gilts and thus zero need to pay interest on bonds to make sure they sell. This is done for purely vestigial reasons. (Until 1971, especially in wartime, conversion of reserves to non-convertible bonds was potentially useful to prevent a “run” on conversion at high wartime spending levels; reserves were still promised to be convertible to gold internationally, whereas bonds were only promised to be converted to reserves. With no convertibility of reserves at all after 1971, bonds do not even serve this purpose anymore).
Before moving on, it is important to point out that post-1971 currency-issuing countries set their base interest rates wherever they want them, and do this by propping the base rate up above zero by either paying interest on bonds or on reserves (pre-1971 could do as well; sovereigns could annul any convertibility promise at will if causing problems with desired interest rates†). If a government does not sell bonds with an interest rate above zero, and does not pay interest on reserves, then the rate of return on saved currency will always fall to nominal zero.
The only way savers “earn” any interest whatsoever on savings of a government currency-unit—whether Treasury bonds or reserves—is through government intervention, propping rates up above zero. The idea that governments were “keeping rates artificially low” and calling this “financial repression” illustrates a fundamental lack of understanding of how modern monetary systems function.
None of the cases on the RR “de facto“ list that claim “financial repression” based on interest rates should be there. However, we’ll also proceed with that dataset for a moment.
Non-independence of cases
Losing Wars and Crazy Dictators: Not Recommended
Historically, when countries lose a war, they often have trouble re-establishing political stability/credibility, and the regime’s currency struggles to recover, attain, and/or maintain value (either domestic value or exchange rate value). The same difficulty occurs with civil war and revolution (and crazy dictators, for that matter). Indeed, the political stability of a regime seems to be the most important factor—by far—influencing the degree to which its currency has domestic value (i.e., the price level is stable). (Even more than the usually simultaneous factor of war or corruption destroying the productive capacity of a country; productivity loss can be of a scale to explain high inflation, but seldom of a level high enough to account for the almost total loss of domestic value of a currency).
Imagine you see 30 people flee from a restaurant. You would think, of course, that this constitutes 30 independent cases of “deciding to flee.” But if you discovered there was a large kitchen fire you might think of it as a single case: 1 “restaurant fire,” with all 30 “fleeings” being from that single cause. This captures the way RR fail to deal with the non-independence of their examples.
To extend the analogy: If you learned that many of the customers, upon seeing there was a kitchen fire, perished because instead of fleeing, they instead rushed into the kitchen and doused a large grease fire with water (a very foolhardy thing to do) making it much worse, you might be confused. But not if you learned that all those who had perished had graduated together from the infamous “Fall T. Óeires School of Firefighting.” Besides the non-independent cases first mentioned, this is what RR do with their later cases: the countries involved all share advisers that might as well have studied at good ole “Faulty Wires U.” That is to say, they have dangerously flawed misconceptions, acquired from Chicago, Harvard, MIT, etc., about how monetary systems function. Their advice is virtually guaranteed to turn a difficult situation (“less developed countries”) into a multiple fatalities situation (RR’s IMF “serial defaulters”).
As political stability is threatened or declines, the value of a currency declines. A new regime after a civil war, revolution, or losing a war has a hard time getting its currency accepted as valuable even by its own citizens, or sees the previous value collapse. This is, absurdly, called “hyperinflation,” as if price rises and “printing” somehow precede (and cause) the loss of value of the currency system. Price increases and “printing” (if the latter occurs) are always a sign of and response to a collapsing currency, which is in turn the result of a collapsed or collapsing government (often coincident with sharp declines in production).
The RR de facto list, defined in part by cases of “hyperinflation,” includes, as an example, these seven cases:
Greece 1941-1944 [occupied by Germany 1941-1944]
This illustrates the association of losing a war and “hyper” loss of value (i.e., collapse) of currency. Other countries on the RR list that were profoundly affected by WWII and economically unstable after it were Russia 1947 and China 1946-1948 (Russia was technically not a loser but probably suffered economic losses greater than any of the other “winners;” China technically was a “winner” but (re)entered into its own civil war, 1945-1949).
These “nine cases” are deeply connected by the single underlying event of World War II. It is hard to consider them as meaningfully independent cases.
Similarly, on the de jure list we find:
Austria December 1945
Germany June 20, 1948
Japan March 2, 1946–1952
Again, these cases are dubiously “independent.” We really have one global underlying cause leading to the almost total undermining of the political legitimacy of World War II losers (and unimaginable economic destruction, especially of the otherwise “winning” Russia).
Reinhardt and Rogoff give the same treatment to World War I and its aftermath (on the “de facto” list), ignoring the high degree of non-independence of the cases:
Argentina 1915 [WWI effect on its immense trade sector]
And even further back:
Mexico 1850 [Mexican American war (ended 1848)]
They also list as many “independent” cases nations affected by the Great Depression:
New Zealand 1933
United States 1933
The above examples were from the de facto list. The similar list of countries on the de jure list:
New Zealand 1933
United States 1933
United Kingdom 1932
Uruguay November 1, 1932 February, 1937
War, Revolution/civil war/regime change:
United States January 1790
Mexico November 30, 1850
Confederate States of America 1864-1865
Denmark January 1913
Russia December 1917–October 1918
China March 1921
Spain October 1936–April 1939
Angola 1976, 1992–2002
Sri Lanka 1996
Sierra Leone 1997–1998
Mongolia 1997–2000 [previously a Soviet satellite state]
Solomon Islands “1995”*–2004 [*default appears to actually be from 1999, IMF Country Report No. 04/258; civil war: 1999-2003]
(This leaves pre-1971 de jure cases of: The United Kingdom 1672 [Stop of the Exchequer], Argentina 1890, United Kingdom 1749, 1822, 1834, 1888–89 (“these restructurings appear to be mostly voluntary”), Peru 1850, Bolivia 1927, Russia 1957).
This leaves nine post-1971 potentially independent de jure cases:
|Myanmar 1984, 1987||Congo (Kinshasa) 1979
|Dominican Republic 1975–2001
El Salvador 1981–1996
Venezuela 1995–1997, 1998
It leaves the following de facto cases:
Nicaragua 2003, 2008
When we look at all of the Reinhart/Rogoff data taking into consideration the real events driving their data, it becomes clear they have merely listed the losers or most impacted from World War II, the losers/most impacted from World War I, countries that have had revolutions, civil wars, and crazy dictators, the Great Depression, and lastly those that have taken IMF advice and/or were advised by mainstream economists (often native but taught, in US/European universities, to take on foreign-currency-denominated debt, that pegs are useful, etc.).
RR haven’t given us a statistical case for associating domestic debt with default. They have given us empirical data that make emphatically clear that unstable political regimes cannot maintain the value of their currency, moved off pegs, moved off the gold standard, and suffered general monetary, institutional, and governance chaos and bad advice in a multitude of ways. None of these cases is relevant to modern politically stable countries with non-convertible, free floating currencies.
1) Modern currency-issuers cannot suffer from illiquidity or insolvency.
2) Hyperinflation is always a political (or war-related) and/or foreign-currency-denominated-debt phenomenon. Relatedly: There are no cases where government spending has induced high- or hyper- inflation in modern peacetime politically-stable countries; it is theoretically possible but does not happen in practice. In modern peacetime politically-stable countries, a decline in the value of a currency is always either supply-side related, preceded by a decline in political stability, or (less commonly) tax-cuts in a boom (political).
3) “Financial repression” as related to interest rates does not work the way Reinhart and Rogoff think it does, indeed it cannot work the way they think it does. They demonstrate a shocking level of incompetence with their interest-rate financial repression claim.
4) The idea that current resource use incurs future financial constraints so that “taxes will be higher” is a non sequitur. Real-resource decisions never put any financial burden, whether current or future, on a currency issuer. The stock of saved currency (under the misnomer “debt”) is residual to balancing the real resources of an economy. Government money is an organizing tool created by the public for the public, and can only be judged on its effectiveness at achieving public goals; the liability side of the tokens themselves are completely meaningless to a currency issuer.
Herndon, Thomas, Michael Ash, and Robert Pollin. 2013. “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.” University of Massachusetts, Amherst, Political Economy Research Unit (PERI). Working paper no. 322.
Mitchell, Bill. 2010. “Hyperbole and outright lies.” Monday, March 1, 2010.
Nersisyan, Yeva and L. Randall Wray. 2010. “Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff” Levy Institute of Bard College, Working Paper No. 603.
Reinhart, Carmen and Kenneth S. Rogoff . 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press. (Note Part III of this contains a version of their Domestic Debt paper, thus the review by Mitchell, and Nersisyan and Wray, cover both the “growth” arguments, notably before the revelation of the bad RR stats in 2013 by Herndon et. al., and those reviews cover the domestic debt arguments by RR I revisit here.)
Reinhart, Carmen and Kenneth S. Rogoff . 2010. “Growth in a Time of Debt” American Economic Review: Papers & Proceedings 100 (May 2010): 573–578.
Reinhart, Carmen and Kenneth S. Rogoff 2008/2010/2011. “The Forgotten History of Domestic Debt.” NBER 2008, revised NBER 2010. 2011 in The Economic Journal, Vol. 121, No. 552, Conference Papers (May 2011), pp.319-350.
Reinhart, Carmen, Vincent Reinhart, and Kenneth Rogoff. 2015. “Dealing with Debt” Journal of International Economics 96, Supplement 1 (July): S43-S55.
Rogoff, Kenneth. 2014. “What have we learned from Argentina’s debt default?” World Economic Forum.
Rogoff, Kenneth. 2019. “Modern Monetary Nonsense.” Project Syndicate.
Wall Street Journal article and the “Database of Sovereign Defaults” (Clint Ballinger)
and The Autocorrelation of Hyperinflation (about 7 events, not 58) (Clint Ballinger)
These maps illustrate 1) the robust (multiple measurements) correlation of weak states with the inability to maintain the domestic value of their tax-credit (currency) and 2) the high degree of correlation along lines of similar institutions, geographic/real resource constraints, colonial history, and IMF interference with poverty and post-1971 examples from Reinhart & Rogoff’s lists.
Fragile States Index, Fund for Peace
Political Stability and Absence of Violence/Terrorism, Government Effectiveness: Worldwide Governance Indicators (WGI), World Bank Group
Corruption Perceptions Index, Transparency International
Check out my new book “1000 Castaways: Fundamentals of Economics”
A renegade band of Modern Monetary Theorists has overturned mainstream economics in part by emphasizing that there is not one, but two systems of modern money, the “vertical” and the “horizontal.” They conclusively demonstrate how unifying our understanding of these is crucial for grasping modern economics.
“the key to understanding Modern Monetary Theory is this vertical-horizontal relationship”
1000 Castaways develops Mosler’s statement into a concise, book-length treatment that is accessible to all readers, starting from first principles and, step-by-step, leading the reader up to the complexities of the real world.
Our one thousand castaways develop, before our eyes, a “perfect” economy, and demonstrate how the horizontal and vertical systems of money naturally emerge from even more fundamental organizational needs of a large society.
1000 Castaways then contrasts the Island’s “economics” with real-world “economics,” in an enlightening illustration of the last few steps in our common economic understanding that we must take in order to run our modern economies in a way that maximizes wellbeing.
[For the record, I admire much of Graeber’s work (and much that he writes on debt itself), indeed citing him in my dissertation. My interest in his “myth of barter” argument partly stems from studying archaeology and the earliest accounting tokens under Denise Schmandt-Besserat while an undergraduate at UT Austin, who also supervised my senior paper (that was in part a source for Chapter One of Tom Standage’s A History of the World in 6 Glasses). Also, I do not see this post as contra views such as The Legal Construction of Value, but ulimately supplementary to them. Image above: Ethiopian “amole tchew,” blocks of salt bound with straw, since ancient times used as a means of payment.]
- The type of “barter” economists generally discuss✺ is properly known as commodity-exchange (as opposed to gift-exchange), yet Graeber misdirects the reader by focusing on the latter. [✺update: I should have explained that the “barter story” is about the absence of barter and the presence of commodity exchange; I clarify this point in a new short post].
- It is logically not possible, before the tax-credit became a viable base-unit for currencies, to have a credit-system of monetary exchange without first having a unit-of-account to measure that credit in; the unit-of-account could theoretically be a labor unit, but has more often—and repeatedly—been a uniform, divisible, widely valued, commonly used, storable, transportable good, often grain or salt. (This is in line with anthropological understanding of the emergence of regional customs in general, and particularly with the emergence of weights and measures. E.g., “It is interesting to note that in all ancient civilizations, the…smallest unit is usually a seed or a grain, and upon such small entities were constructed systems of measurement for units related to length and area, units of mass, and units related to the volume of dry materials.” Williams 2014, pp. 1-2). Of course there have been “credit relations” since there were two people; in this loose sense “credit” surely predates even a “commodity-money;” but a simple commodity-unit of exchange almost certainly predates anything close to what could be conceived of as negotiable “credit-money.”
- Only once does Graeber attempt to actually tell his “credit-money-first” story (2011, p. 46). Curiously, it is as simple as the barter story he criticizes for being too simple. More importantly, Graeber makes the following comment (2011, endnote 9, p. 397) on his own story (he makes the same observation only one other time in “Debt,” discussed below*): “Note that this does assume some means of calculating such values – that is, that money of account of some sort already exists. This might seem obvious, but remarkable numbers of anthropologists seem to have missed it.” This is odd, because it is precisely the generations of economists who have not “missed” “that money of account of some sort” necessarily predates credit-money (and understood that very early commodity-exchange is an activity from which such units could emerge) that Graeber is directing his “myth of barter” argument at. Graeber has recognized this in an endnote, yet simply proceeds as if he hadn’t recognized it. Similarly buried in an endnote (2011, endnote 5, p. 401), Graeber writes that Marx and Weber “were of the opinion that money had emerged from barter between societies, not within them. Karl Bucher (1904), and arguably Karl Polanyi (1968), held something close to this position” and “Insofar as we can talk about the ‘invention’ of money in its modern sense, presumably this would be the place to look, must have happened long before the use of writing, and hence the history is effectively lost to us.” This is rather a different claim than what Graeber leads the reader to believe in the main text of “Debt,” that “just about every aspect of the conventional story of the origins of money lay in rubble. Rarely has an historical theory been so absolutely and systematically refuted.” (Graeber, 2011, p. 40).†
- Graeber uses rhetorical misdirection by at times conflating coins (which came much later) with what would have initially been a commodity. (Example: “What we now call virtual money [credit-money] came first. Coins came much later, and their use spread only unevenly, never completely replacing credit systems.” (Graeber, 2011, p. 40). A commodity-exchange story does not depend on “coins” coming first, only on a unit-of-account coming first, often grain or salt.)
- Graeber uses misdirection with the argument that barter only happens after a society “learns” money, then loses money and replaces it with barter. It is not supported by ethnography that all barter stems from this “reversion” process, and it cannot have been true in the oldest, pre-state-money societies (for the reason in ‘2’ above: there cannot have been credit-money before a customary unit-of-account, as there would be no way to measure negotiable credit-units).
- Note: There is a salt mine in Azerbaijan dating from ~4,500 BC., a thousand years older than Graeber’s “shocking blow to the conventional version of economic history” (i.e., documentation of Sumerian temple administrators’ monetary units, ~3,500 BC). And there is another, in Europe (adding another potential area for relevant ancient commodity-exchange in addition to the pre-Sumerian Near East, China, and Indus Valley), that is still a thousand years older, a full 2,000 years before Graeber’s temple documentation. There has been beer brewing (suggesting the earliest beginnings of the uniquely high demand for barley beyond food, and the grain most associated with early accounting units) for a full seven and a half millennia before Graeber’s temples (yes, a full 13,000 years ago). In other words: There is plenty of potential for commodity trade in grain and salt (and other commodities) to have led to the gradual emergence of commodity-units before their adoption by later religious and political groups.
Understanding how early commodity-exchange led to the creation of a unit-of-account that could then form the basis for subsequent credit-money, State-money, and our modern hybrid of the two (vertical-horizontal currency systems) is not only important for the student to better understand how Graeber’s (non-gift-exchange) credit-money systems might develop, but highlights the crucial importance of the later invention of the tax-credit as a unit to replace a commodity unit (a process not fully complete on a permanent basis until the incredibly recent date of 1971, when all promises of conversion of the dollar to a commodity, gold, were finally permanently dropped). Any professor who teaches a direct line from commodity exchange to neoclassical economics does so because they want to, not because “the myth of barter made them do it.” Not addressing the unit-of-account commodity-exchange issue will leave a gap in a student’s understanding that subsequently makes explaining State- and credit-money less rather than more clear. To avoid neoliberal ideas and bad economics, we need the proper story of vertical and horizontal (State and credit) money to be the backbone of Macroeconomics. The role of very early commodity-exchange is likely one part of that story; avoiding it is a bad strategy for building a new, fact-based Macroeconomics with State and credit-money at the forefront.
The Myth of the “Myth of Barter” ‡
David Graeber, in “Debt: The First 5000 Years,” draws a line from barter stories related to the emergence of money to the modern neoclassical view that modern “Economies—’real economies’—are really vast barter systems.” (p. 44).
This connection, Graeber argues, has impoverished economic discourse and in turn society, as the “barter” story directly enabled economists from Adam Smith onwards to dismiss the role of government policy and social goods. It also meant that students of economics were taught neither credit- nor State-theories of money. (Both of which I argue are indeed essential for any correct macroeconomics).
This not only stunted the development of economics but, still worse, led to an atomistic view of society—the barren neoliberal view of society as being reduced to mere transactions, where it is “possible to imagine a world that is nothing more than a series of cold-blooded calculations…” (Graeber, 2011 p. 387. He is 100% correct that mainstream economics is catastrophically stunted regarding “money” and that neoliberal ideas both are pervasive and diminish our wellbeing).
So, the “barter story” of money is a very bad thing according to Graeber, and it seems he has convinced (or confirmed this for) many other heterodox economists, if they weren’t firmly convinced already (and many others, both academic and general readers).
Although an anthropologist himself, Graeber prominently cites (p. 29) another, writing: “The definitive anthropological work on barter, by Caroline Humphrey, of Cambridge, could not be more definitive in its conclusion.” He then quotes her (this quote, prominently cited by Graeber as noted, is still even more important as it is almost universally re-quoted—as “conclusive”—in reviews of “Debt” and discussions of barter):
“No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests there never has been such a thing.” (Humphrey, 1985, p. 48)
This seems pretty damning for a barter story of money.
At first pass, a casual reader might even take this sentence to suggest that barter itself doesn’t exist (if this interpretation sounds far-fetched, endnote 16 to that sentence reinforces precisely the idea that Graeber is alluding to: the very non-existence of barter; part of this is explained— and this is germane— by the fact that Humphrey is known as an advocate of a minority view “that barter transactions should be considered as a third category of exchange, distinct from either gift or commodity exchange, that should be studied in its own right.” (Heady, 2005, p. 270). Graeber conspicuously does not inform the reader of this.
Humphrey wrote again in 1992 (not cited by Graeber): “There are few if any whole economies of any sizable scale which are known to have operated by barter alone.” (Humphrey, 1992, p.6).
Even more damning.
Now, it is obvious that barter does exist, and indeed Graeber immediately writes “Now, this hardly means that barter does not exist…”
So what is going on here?
When read more carefully, a much narrower claim is being made by Graeber/Humphrey: Barter exists, of course. But there are not “pure” (Humphrey 1985) or “whole” (Humphrey 1992) barter economies, and there are not large (“sizable scale”) economies that relied only on barter (“barter alone”).
But the commodity-exchange story relating to the emergence of money never said there were those things. “Barter” need not have been the “pure”, “whole” means of exchange in “sizable scale” economies for it to have been some part of the story of the emergence of the very earliest means of exchange. Indeed, the very purpose of the “double coincidence of wants” story is to show that “pure” barter could not be the basis for “sizable scale” economies. That something more was needed.**
Commodity-Exchange and Gift-Exchange
In anthropology, “barter” is often viewed as a non-technical word (even referred to as the “treacherous term barter,” Dalton, 1982, p. 181), the more precise concepts being the ethnographic behavior surrounding exchange, long viewed by anthropologists as divided into commodity-exchange and gift-exchange. Commodity-exchange basically deals with what we would think of as market exchanges, when the participants are primarily interested in the goods themselves. Gift-exchanges involve changes along with exchanges in personal relations, which as you can imagine, becomes highly complicated, especially in tightly-knit communities of very different cultures around the world.
So, properly speaking, the “barter” story related to the beginnings of “money” that Graeber critiques are stories about commodity-exchange. Of course one could and some (in addition to Graeber ††) surely have thought of gift-exchange theories related to the emergence of money. But that is not the common story where participants merely want to overcome transaction costs and the double coincidence of wants that trade-in-kind entails, and end up using some common commodity as a “go between” commodity, a simple “commodity-money.”
However, Graeber (clearly knowledgeable of the long-running cleavage of “barter” within anthropology into commodity-exchange and gift-exchange meanings) introduces the commodity-exchange story, yet then immediately switches to detailed discussions of gift-exchange, with long digressions on gift and ritual exchange among the Nambikwara of Brazil and the Gunwinggu of Australia.
It is hard to not see this as handwaving, a sort of Gish gallop strategy that appears here and also at another critical logical juncture in Debt, in note [*] below. Although Graeber is presumably using “good” anthropology, it is simply not relevant anthropology to the question at hand: How did commonly accepted commodity units-of-account arise that formed the basis for subsequent measures of negotiable credit and tax imposition?
After Graeber recognizes there is barter he raises the objection that it is the way the story of barter is said to have played a role is overly simple, both in how it is told and, more to the point, in its depiction of society. “It just means that it’s almost never employed, as [Adam] Smith imagined, between fellow villagers. Ordinarily, it takes place between strangers, even enemies.” (2011, p. 29).
But would the “barter” parable have a difference in meaning of any significance to economics if we took a more complex story of “strangers, even enemies” trying to trade rather than a simple “fellow villagers deciding to trade” story?
Let’s look into the actual ethnography.
Humphrey’s primary ethnographic research for the paper Graeber cites as definitive was based on her research of the Lhomi of the Arun Valley in northern Nepal near the Tibetan border.
Of the Lhomi, Humphrey writes (1985, pp.54-55): “Before the virtual closure of the Tibetan border by the early 1970’s which followed the Chinese invasion, the Lhomi engaged in three kinds of barter.” These are:
1) “inter-village direct exchange of surplus foods, handicrafts and items gathered from the forests, e. g. maize for potatoes, wool for tobacco, wild garlic for rice, etc.”
2) “regular and large-scale barter of agricultural produce took place each year in exchange for the produce of the Tibetan livestock economy, butter, dried fats and meats, woven woollen clothes, ropes, sacks, rugs, and blankets of yak hair.”
3) “long-distance trade of salt, acquired by the nomads in Tibet, for grains (mainly rice) acquired by the Lhomi in the Nepalese middle hills. This salt-grain trade, supplemented by other valuable items on either side, such as medicinal herbs, musk, vegetable dyes, pashmina wool, paper, coral, turquoise, silver and gold, was not primarily for use but for onward trading.”
Let’s look at this last, the third type of commodity-exchange-barter that the Lhomi were engaged in:
“Tibetan salt was acquired in the border region for x amount of rice and then transported to the middle hills where it was bartered with Gurung, Rai, etc. farmers for y amount of rice. This rice was then taken north and bartered again for salt at a rate which would give the Lhomi an operational surplus for the next cycle…There is evidence…the salt-grain trade was conducted with established exchange rates”
So the Lhomi are using a commodity (salt) that is divisible, uniform, stores well, and has agreed upon value across larger areas (perhaps with “strangers, even enemies”) as a commodity-money.
That is the “myth” of barter, exactly. [That simple “barter” will not be central to even simple—much less larger—economies; a commodity “money” will emerge to reduce transaction costs].
It is, quite simply, not a myth.
Nor, does it seem, the Lhomi have “reverted” to this trade due to being previously monetized. This is their traditional mode of exchange.
The phrase Gaeber picked out of Humphrey 1985 simply does not have the meaning—despite all initial appearances to the contrary—that Graeber uses it for. Humphrey’s very own primary ethnographic research focus, the Lhomi, “bartered” in essentially the way the “myth of barter” says must happen. They use a commodity that is similarly valued throughout a region, and is uniform, divisible, stores easily, and is transportable as a simple commodity-money.
The example of the Lhomi is not rare. It is found throughout ethnographic studies, very often with grain, and it is found throughout ethnographic, anthropological, and archaeological records, including throughout Eurasia and the ancient Near East, the place where the earliest known monetary systems, that furthermore are in direct lineage to modern monetary systems, developed.
* Graeber also explicitly notes the problem on page 37: “There is just one major conceptual problem here—one the attentive reader might have noticed. Henry “owes Joshua one.” One what? How do you quantify a favor?…Doesn’t this imply that something like money, at least in the sense of a unit of accounts by which one can compare the value of different objects, already has to exist?”
But as with the diversion of the Nambikwara of Brazil and the Gunwinggu of Australia Graeber again relies on making the reader forget that the question has not been addressed. After the above quote he immediately brings up the observation that in gift-economies there are “spheres of exchange” whereby certain types of items only are traded for other items viewed as in the same class by that culture (e.g., if someone gifts you a necklace, your later return gift might have to be some type of jewelry). He then writes: “However, this doesn’t help us at all with the problem of the origin of money. Actually, it makes it infinitely worse. Why stockpile salt or gold or fish if they can only be exchanged for some things and not others?”
Graeber then makes the “reversion” argument: that barter only happens if first a society has “money” and subsequently loses it (e.g., prisoners who have known money but in its absence in prison trade cigarettes). More frequently, Graeber then says, is that credit-systems are adopted when some previous money system is lost (e.g., after the fall of the Roman Empire credit accounts that were denominated in imperial currency were relied on, even without actually having Roman coins). He discusses this point at some length, then concludes “just about every aspect of the conventional story of the origins of money lay in rubble. Rarely has an historical theory been so absolutely and systematically refuted.”
So to summarize, the chain of “reasoning” above is
- there is no way to measure, this is a problem (page 37)
- gift economies have “spheres of exchange”
- Spheres of exchange don’t “help us at all with the problem of the origin of money.”
- “there is good reason to believe that barter is not a particularly ancient phenomenon at all, but has only really become widespread in modern times.”
- “The more frequent solution is to adopt some sort of credit system.”
- “that credit systems of exactly this sort actually preceded the invention of coinage by thousands of years.”
- In Sumeria, temples developed the unit-of account of grain and silver.
- What markets there were mostly on credit. He notes some textbooks overly simple because tell stories of coin, and/or tell stories of “reverting to barter” when this is not informative.
Chapter ends. (Page 41)
So we have Sumerian temples and spheres of exchange and prisoners with cigarettes and Russia and Argentina and necklaces that can only exchange for other jewelry: It all sounds so erudite and the reader is led on an interesting, seemingly relevant journey. But the reader is led so far from the problem posed: that there had to be units to measure credit-money, that the fact this is never addressed goes unnoticed.
Yes, there is the discussion of temples setting units. As mentioned in the beginning of this post, it is not against the “legal” approach to value and that states have often made markets more than the other way around (but remember the significant theories of commerce influencing State formation, both early modern Nation-States [e.g., as by Stein Rokkan, Edward Whiting Fox, Jane Jacobs] and how this might have applied to ancient state formation [Guillermo Algaze]), and I am clearly in full agreement with chartalism. However, overall commodity-exchange has been an important part of the emergence of units-of-account. Almost the opposite of “Lord Keynes” in the next note, it is not the idea that barter dominated any place or period that needs to be understood, but rather that Graeber goes too far in giving readers the impression that anthropology and/or ethnography have somehow completely overturned any commodity-exchange story, when in fact the right balance is understanding the very early, very long-term role of commodity exchange in early monetary development, while fully appreciating the importance of later institutional influences, and of course most recently, of the modern State.
† “Lord Keynes,” a popular economics blogger, believes many critics have misunderstood Graeber’s argument, arguing that “What Graeber attacks is the idea that money-less communities come to have economies dominated by barter spot trades.” As we mentioned, that phrase itself twists the barter story, which is precisely about why communities will not be “dominated” by barter spot trades. Pace Lord Keynes, however, it is hard to read Graeber as arguing for anything less than a total rejection of anything like the barter story. Yes Graeber concedes barter “may” have been behind the “frequently cited examples” of cacao money of Mesoamerica or salt money of Ethiopia. But it seems Graeber notes these precisely because they are unavoidable, rather than because he is open to any aspect of a barter story. Noticing the few passages that mention bartered commodities probably speaks more to Lord Keynes’ admirable attention to detail rather than of Graeber actually trying anything less than banish the barter story altogether.
Overall Debt is replete with bombastic phrases such as the “fantasy world of barter” and the “story of the origins of money lay in rubble” and that [the barter story] has been “absolutely and systematically refuted.” The widely read The Atlantic piece on Graeber’s “myth of barter” argument starts “This historical world of barter sounds quite inconvenient. It also may be completely made up.” (Strauss 2016). Graeber sets out, and seems to have succeeded, to totally reject the idea of commodity money in the minds of his readers, not to teach them the nuance of its likely role.
I had originally thought to title this post “The Myth of the Myth of Barter” in part because it is humorously obvious, but in part to start a “myth of the myth” series along with my “The Myth of the Currency Hierarchy,” which was very nearly titled “The Myth of the Myth of Monetary Sovereignty” (in reply to Frances Coppola’s article “The Myth of Monetary Sovereignty”).
At any rate, Google eventually informed me that George Selgin had beat me to “The Myth of the Myth of Barter”, and, believe it or not, even “The Myth of the Myth of the Myth of Barter” was taken. “The Myth of the Myth of the Myth of the Myth of Barter” is a “myth” too many, so I ended up with the current title, which is more appropriate to what I have written anyway.
** A similar point is made by Julio Huato, that the very point of understanding the “double coincidence of wants” is that we won’t find many, or large, “barter economies.” The “myth of barter” argument “is like that of a chemist rejecting the idea that unstable radioactive isotopes of a certain chemical element exist and tend to evolve into stable isotopes because the former are only exceptionally found in nature, while the latter are common.” (Huato, 2015, in Selgin 2016)
†† Indeed, Alison Quiggin’s 1949 A Survey of Primitive Money: The Beginnings of Currency contains key ideas that appear in Graeber’s Debt (“Lord Keynes” usefully highlights these). Surprisingly, Quiggin only receives two mentions, both in endnotes, in Debt. (From the blog post just linked): “It is remarkable how the details of the modern anthropological critique of the economists’ view of the origin of money were already available in 1949.” Remarkable indeed. Six decades later and many of Alison Quiggin’s ideas—quite original in the 1940s—are presented, and widely accepted, as novel.
Maurer 2013: “But the state-credit theory, like the barter theory, is founded on a myth. The myth of primordial debt does not explain how that debt to society is converted into a specific sum of money or into a numerical accounting problem…”
“Graeber notes that so-called primitive currencies often fill this role—rather than to buy things, they are used to repair relations. Graeber tries to zero in on the problem of the quantification of debts in state-credit theories. He cannot find a satisfactory explanation. It is a frustrating part of the book, and I can easily see why other commentators have skipped over it, for it takes Graeber a while to get to the point. The difficulty is also that the historical detail Graeber provides on specific injuries requiring specific sums or numbers of milk cows is just fascinating—even if it is not too far off from ordinary market logic because it is ultimately about calculating equivalences. (Maurer, 2013, pp. 83-84)
Note this last sentence by Maurer, that Graeber’s example of milk cows is actually not unlike the barter story itself. Very similar to Maurer’s observation: Graeber presents an interesting account of an early transaction in c. 1275 BC Egypt (Graeber 2011, p. 218):
“In the 15th year of Ramses II [c. 1275 BC] a merchant offered the Egyptian lady Erenofre a Syrian slave girl whose price, no doubt after bargaining, was fixed at 4 Deben 1 kite [about 373 grams] of silver. Erenofre made up a collection of clothes and blankets to the value of 2 deben 2 r/3 kite-the details are set out in the record-and then borrowed a miscellany of objects from her neighbors-bronze vessels, a pot of honey, ten shirts, ten deben of copper ingots-till the price was made up.”
So here we have a price unit set in a weight of a commodity. Because she does not have the weight of silver, Erenofre must struggle to find clothes and blankets, bronze vessels, a pot of honey, ten shirts, and ten deben of copper ingots. Yes, Erenofre goes into debt relations to do so [and note of course the scribe shows no concern that the “price” concerns a human], but more to the point: Had Erenofre had the requisite commodity-money (373 grams of silver), she would not face the high transaction costs of finding clothes and blankets, bronze vessels, a pot of honey, ten shirts, and ten deben of copper ingots. The very existence of a price in grams of silver is precisely what has to be explained before a credit-money story can be told. This ancient Egyptian account is—barring the unfortunate “Syrian slave girl”—an ancient, apparently factual account remarkably similar to the classroom barter story, highlighting the problem of transaction costs where having a simple commodity-money overcomes the problem.
Many in the MMT community have been persuaded—regarding a “myth” of barter— by Graeber’s Debt. Yet a key part of his views are “not in paradigm” as some say, and based on the same mainstream misunderstanding of “money” and “debt” as everyone else. Graeber writes in the beginning of Debt:
“Sometimes, though, debt seems to mean the very opposite. Starting in the 198os, the United States…itself accrued debts that easily dwarfed those of the entire Third World combined…So what is the status of all this money continually being funnelled into the U.S. treasury? Are these loans? Or is it tribute?“
Plea to David Graeber: Please understand what the MMT people are telling you. Sovereign governments have people saving in their currency, including foreigners who have sold things to that country. That is all that that type of “debt” is. It has essentially nothing to do with anything else you write in Debt. Bonds are vestigial; there is no meaningful use for the word “debt” in the context of sovereigns with free floating currencies and no foreign denominated debt. There are many MMT sources for this understanding. I linked to my own version above, you may find it interesting or helpful (1000 Castaways: Fundamentals of Economics ).
Algaze, Guillermo, 2008. Ancient Mesopotamia at the Dawn of Civilization: The Evolution of an Urban Landscape. Chicago: University of Chicago Press.
Dalton, George, 1982. “Barter.” Journal of Economic Issues, Vol. 16, No. 1, pp. 181-190.
Graeber, David, 2011. Debt: The First 5,000 Years. Melville House.
Heady, Patrick, 2005. “Barter,” Ch. 16 in A Handbook of Economic Anthropology, Ed. James G. Carrier. Cheltenham, UK and Northampton, Massachusetts: Edward Elgar.
Huato, Julio, 2015. “Graeber’s Debt: When a Wealth of Facts Confronts a Poverty of Theory.” Science & Society: Vol. 79, pp. 318-325.
Humphrey, Caroline, 1985. “Barter and Economic Disintegration.” Man, New Series, Vol. 20, No. 1, pp. 48-72
Humphrey, Caroline and Stephen Hugh-Jones, 1992. “Introduction: Barter, exchange and value,” pp 1-20 in Barter, Exchange and Value: An Anthropological Approach. Caroline Humphrey and Stephen Hugh-Jones, eds. Cambridge: Cambridge University Press.
Liu, Li et. al. 2018. “Fermented beverage and food storage in 13,000 y-old stone mortars at Raqefet Cave, Israel.” Journal of Archaeological Science: Reports, Volume 21, Pages 783-793.
Maurer, Bill, 2013. “David Graeber’s Wunderkammer, Debt: The First 5,000 Years,” Anthropological Forum, 23:1, 79-93.
Quiggin, Alison Hingston, 1949. A Survey of Primitive Money: The Beginnings of Currency, London: Methuen.
Selgin, George, 2016. “The Myth of the Myth of Barter.” Alt-M blog.
Strauss, Ilana E. 2016, “The Myth of the Barter Economy,” The Atlantic.
Williams, Jeffrey Huw, 2014. “”Measurement in Antiquity,” Ch. 1, Defining and Measuring Nature. San Rafael, California: Morgan and Claypool.
“The key question isn’t the origin of money, but the origin of moneyness.” JP Koning
Imagine you are an experienced mechanic. One day your neighbour comes home with a newly purchased used car. It is running terribly – sputtering and running slowly with little power.
You look under the hood. It is a four cylinder car in good condition, and you notice that one of the spark plug cables is simply unconnected. The only thing that needs to be done to make the car run smoothly and with 100% power is to connect that spark plug so that all four cylinders fire.
This is the case with economics and the economy. There are a minority of economists, MMT and Post-Keynesian economists especially, who actually observe the real properties and understand the fundamentals of how the economy functions (as opposed to the scholastic mainstream economics founded on make-believe assumptions).
These economists are sometimes accused of being “normative” and reply that they are merely describing how economies actually function. Unproductive debate follows.
The misunderstanding is that sometimes describing is inevitably prescriptive, as with the car.
Once the actual mechanics of the economy are understand it is impossible to look at the way the economy is currently managed and not suggest increasing spending for public projects such as infrastructure, healthcare, and employment. There are idle resources alongside desired projects; there is no downside to employing them, and almost innumerable upsides.
Just as with the mechanic, there is no way to look at an otherwise well-running four cylinder car that is running needlessly on 3 cylinders and not mention “Errr,,,you know…it would run amazing if you simply connect that cable back, which I can do for free in 10 seconds.” (Which actually improves the functioning by far more than 25% since a non-functioning cylinder messes up the entire timing/function of the engine, it doesn’t just reduce the power proportionately).
Another way to say this: In this case there is in effect a “free lunch”. There is almost no effort involved in plugging the fourth cylinder in, but a massive gain that is currently being foregone for no reason. A similar way to say the same and actually talking about lunch: If someone left a very nice picnic spread on a hot summer day, and you salvage it before it rots, you do indeed have a free lunch, a lunch that would not have existed except for your (minimal) actions. It would have been permanently lost and you would have had to eat something else, but by simply not letting it go to waste you have a free lunch. We are letting a good bit of our economy “rot” for no reason. This is a permanent reduction of wellbeing for us and future generations.
MMT is hardly being “prescriptive” or “normative” when they point out the loose spark plug cables of our economy. There are gains to wellbeing that are relatively easily achievable now that have virtually no downsides.
MMT economists aren’t saying “you should convert that street car, put some big knobby tires on it, and start doing off road derbies!” That would be a normative change in lifestyle and design with many trade offs for wellbeing. But simply plugging the fourth spark plug cable is a pure gain.
This analogy can be extended to think about some recent criticisms of MMT and developing countries. MMT insights help any economy run optimally. What they cannot do is make the fundamentals of a country better. In other words, there can be old Ford Pintos, 4×4 Jeeps, and Ferraris all with loose spark plug cables. All of them have a pure benefit from having those cables noticed and reconnected. However, the cars themselves have fundamental differences in capabilities. It is silly to expect the advice to make the Ford Pinto run like the Ferrari. But both will run much better than they did previously.
Government bonds for funding are well understood to be an unnecessary, vestigial custom for currency-issuers.* There has been discussion of eliminating them as they serve no funding purpose.
An argument in favor of eliminating bonds is that they are the foundation for the widely held yet false belief that a “national debt” limits what public projects can be carried out. Eliminate bonds associated with “funding” and we achieve a more transparent, easy-to-understand system with no “national debt” for the media to discuss. This in turn enables the media and public to see the logic in optimizing spending up to the public’s own desired resource use for their own wellbeing (healthcare, education, a job guarantee) and in turn electing representatives who will do so.
Reasons often given for maintaining bond sales
The first objection to stopping bond sales is that bonds stop spending from being inflationary whereas direct spending would be inflationary. This is simply bad accounting.** That even “professionals” can fall for this highlights the need for making the system more understandable for the general public .
There are three further reasons commonly given for not eliminating government bond sales:
government bonds have come to be relied on in pension programs
it became customary to believe that their effects on interest rates are beneficial (stopping bond issuance would stop their “reserve drain” effect, causing base rates to fall permanently to 0 unless other government interest rate support policies were implemented, such interest on reserves, time deposits, or reverse repos)
the accounting for spending with and without bonds is the same, it is just more complex with bonds. Thus the political capital needed to have the system changed is not worth the effort. It is better to use that political capital on trying to get the public to understand spending for the public purpose under the existing system. (Most “MMT” economists follow this approach.) The political capital argument is also reinforced by (1) and (2); belief in both the utility of the pension fund purpose and interest rate effect of bonds each independently have immense support. Overcoming even one of these objections would be almost impossible, much less both of them at the same time.
So we soldier on with a byzantine system that allows the narrative that there is a “national debt” to impede us from spending more on healthcare, infrastructure, social security, pure research, and employment, and to dominate in the media and among the public. The public continue to vote for representatives (in all major parties) that promise to reduce a “national debt” and “balance the books” (even as I write, this popped up in The USA Today: “The national debt wasn’t a big issue this midterm election, but it’s still a big problem” .)
Decoupling Spending From Bond Sales
There is no structural reason that the debate has to be either to maintain the system as it is or eliminate bond sales altogether. We could separate bond sales from the spending process without eliminating them.*** (This has been pointed out before; I am merely reiterating the usefulness of doing so).
This would allow the merits of each reason for bonds to be judged independently. (spending, interest rate policy, vehicles for safe savings).
This would allow for the transparent spending procedure many have argued for (direct spending of tax-credits, whether from the treasury or central bank, it makes no difference; Overt Monetary Financing is a common term for one method). It becomes obvious there is no structural limit as tax-credits are merely ledger entries and have nothing to do with annuity issuance.
It would become straightforward to explain to the media and public that the only limit is the real resources that they themselves decide to dedicate to public projects (via their representatives), best measured and limited by the price index. The current Fed/Treasury system is so complex in the US that it is almost impossible to explain clearly even to advanced economics students, and is widely misunderstood even by professional economists. With this complexity comes opportunity for those who do not want spending for public purpose. The revised system would be understandable in televised debates, popular political barometers such as USA Today, etc. The inherent logic of functional finance would be much easier to get across to the public and subsequently acted on in Congress.
No debates necessary with the entrenched interests and customary beliefs of (1) and (2) above
“Bond” (actually annuity) sales could remain the same in quantity and quality as now.***
However, separating them from “funding” is in line with the reality that bond sales have no real connection to funding decisions; it more accurately reflects the real accounting decisions involved.
It makes clear that “bond” sales are just boring annuities for willing savers.
That they are voluntary and there are no “bond vigilantes.”
There are potentially long-run advantages for pensions as well. For example, Richard Murphy argues we have far too few safe assets that pay interest (UK context), that there should be more bonds sold. That debate can happen based purely on the merits of bonds for the pension system, uncoupled from debates on the budget. It becomes obvious that savers who buy annuities are just that – merely savers, funding nothing.
Once their role as primarily annuity and retirement vehicles is isolated, it also becomes evident that that system can be optimized. We could increase the amount or change the types of securities to better serve pensions, without becoming bogged down with discussions of funding. Eventually, it might be realized that using public bonds to back complex, often private pension plans isn’t the optimal system, but that can be an entirely separate, and future, debate. (Just one possible example: government tontines as discussed in The University of Pennsylvania Law Review, see here, here, and here as well).
Relatedly, there are many good reasons to believe that interest rate manipulation is not useful for improving the economy (e.g., here ****). But that debate can also be had entirely separately from the tax-credit spending system. My suspicion is that the low, steady interest rate structures that prove most beneficial to pension plans will prove to be the most beneficial for overall “interest rate policy” anyway.
Overall, there is no structural reason to bind together discussions of spending, government annuities, and interest rate support as we do in the current system.
Those who argue that eliminating bonds would take too much political capital may well be right. However, the primary benefit (public understanding of spending) is achievable merely by separating funding, annuity issuance, and interest rate policy. This is relatively easy to achieve politically as doing so would not need to bring about opposition based on pensions or those who believe interest rate policies are useful. Simply allow Overt Monetary Funding, still sell annuities, and, independent of funding, allow whatever interest rate support methods are deemed desirable. There is much to be gained from this and no obvious downside, regardless of one’s views on spending, pensions, or interest rate policy.
* It is also vestigial that savers have access to tax-credits as cash, but not on ledgers, and cannot save and transact via ledgers in tax-credits($, £ etc). They are needlessly forced to convert savings to bonds if they wish to personally save tax-credits safely on ledgers. This is vestigial and easily fixed. The US Treasury, for example, already keeps accounts for savings-bond holders and could do so for tax-credits; the IRS easily tracks all the tax-credits in the nation; private banks have of course easily kept track of private debt for centuries; and public postal banks have existed in various countries. There is no technical obstacle to easily allowing the public to save and transact in real tax-credits (as opposed only in bank credit-money units) via a (digital) ledger system.
** This is based on the same bad accounting that allows the belief that bonds fund spending. Currency-issuers always spend by crediting accounts; the changing of already saved government tax-credits by savers into government bonds does nothing to change the impact of government spending. The buyers are already eager savers, and bonds can be liquified easily anyway, or used as collateral.
*** For currency-issuers, all spending methods shake out to be the same. So it might be argued that allowing bond sales to be continued under another name and separate from spending achieves nothing. And that if interest is paid on bonds (or interest rates are supported by interest on reserves, reverse repos etc.) then there is still a “national debt”. However, separating bonds from any discussion of funding better reflects reality. If the government voluntarily chooses to pay savers an annuity, that is clearly different than what the public now perceives as a “national debt” to private banks, foreign countries, and/or future generations, which is clearly what impedes much of the public now from voting for representatives who will fund “do-able,” publicly desired, welfare-enhancing projects now.
**** A few more reasons often given for why interest rate policy is not effective:
- Changing saved tax-credits ($, £ etc) into treasuries/gilts doesn’t affect the ability to spend since bonds can be liquified easily or used as collateral (I.e., there is no inflation control effect).
- Interest rate effects are slower and less precise than fiscal automatic stabilizers
- Business investment is inelastic to interest rates (although housing and consumption is not)
- Interest rate policy is technocratic, by unelected officials, who further may have conflicts of interest
- Protecting true small savers is relatively easily achieved in other ways; institutional investors should make their money and protect it in the market, there is no justification for “protecting” their savings from inflation
- “Interest rate policy is used as an excuse to avoid the hard questions of taxing and spending; we shouldn’t let the government off the hook in making key decisions about economic policy”
Many of these issues are already laid out and usefully clarified by Brian Romanchuk and comments on Mosler, and by Neil Wilson and others, over at Bond Economics.
Forman, Johnathan Barry and Michael J. Sabin, 2015. “Tontine Pensions” University of Pennsylvania Law Review, Vol. 163: 755-831 .
(response to Coppola’s “The Myth of Monetary Sovereignty” and related discussions)
A) Properly understanding the macroeconomy allows countries to operate at their full real-resource potential, whatever that might be.
B) Understanding the macroeconomy does not change the real resource potential of countries. That is a more fundamental question concerning the improvement of the institutions and productive capacity of a nation.
Understanding monetary sovereignty helps with (A). Frankly, no one has achieved any clear solutions for (B).
(A) and (B) can be pursued simultaneously. They are in no way mutually exclusive.
Not working to achieve (A) in developed and semi-developed countries in no way follows from the lack of progress on (B) in the least-developed countries.
THE “HIERARCHY OF CURRENCIES” VIEW THAT “MONETARY SOVEREIGNTY IS LARGELY A MYTH”
Frances Coppola supports her view based on three points:
1) balance of payments crises have happened to countries with floating currencies; this is because they borrowed; but they had to borrow because they are resource poor
2) weak/thinly-traded currencies are volatile
3) countries with weak institutions/capital markets have “hot money” flows
Regarding (1): Balance of payments crises, of course, are only possible with a floating currency if there is foreign-denominated debt. Thus Coppola’s argument must immediately retreat to an argument that foreign-denominated debt is “inevitable” for developing countries, so they are in practice not monetarily sovereign.
At the international level (unlike the domestic level), the household analogy is true: If a country is unproductive and/or resource-poor, it can only sustainably take on foreign-currency-denominated debt that increases production, not debt for consumption. If it wants to import for consumption, the only sustainable way is with a current account surplus/reserves from export.** The constraint for developing countries is exports, not lack of monetary sovereignty. The proper economic focus on real resources, not finance, applies as always.
Leading scholars on financialization in developing countries, after much consideration, still manage to come to the exact same inescapable conclusion and policy prescription:
“Lending in hard currency should be available only to domestic borrowers with earnings in that currency, that is, exporters. Importers would have to find a way to obtain currencies, unless specific imports are deemed necessary for developing policy objectives.” (Bortz & Kaltenbrunner, 2018, p. 13) (and even these should be “for capacity-expansion objectives, ideally oriented to boost exports.”)
In other words, only import for consumption what you can pay for in the moment without becoming a foreign currency user (borrower).
The limit on these least-developed countries has nothing to do with monetary sovereignty and everything to do with the unresolved problem that the poorest countries are the ones that need more real resources yet have nothing to trade for them.
This is a real-resource issue. It is just plain silly to call it a monetary sovereignty issue.
Regarding 2) Weak currencies are volatile. True. (but…)
Regarding (3): Here we have a fundamental misunderstanding of monetary sovereignty from many sides.
Coppola rests her point on an Asian Development Bank paper that states “Emerging markets with naturally higher interest rates are swamped with hot money inflows.” (McKinnon and Liu 2013, abstract).
The dilemma Coppola and others highlight is that “hot flows,” due to higher interest rates, cause destabilizing inflows; yet developing countries can’t then respond by altering rates without causing further destabilizing swings. Relatedly, interest rates must be set high to “maintain demand” for their currencies but these higher interest rates cause private borrowers in the developing country to borrow in foreign currencies:
“the international currency hierarchy forces DEEs [developing and emerging economies] to adopt higher interest rates to maintain demand for their currencies. It is this policy, however, which encourages national agents to borrow in international markets, thereby increasing their foreign exchange exposure and adding to debt servicing outflows.” (Bortz & Kaltenbrunner, 2018, p. 14)
Coppola’s argument and the “hierarchy of currencies” and “hot money” literature is based to a large degree on the premise that developing countries must prop up their interest rates.
This is precisely what an understanding of monetary sovereignty shows to be false.
Monetary sovereigns run their economy by emitting domestic tax-credits, which are valued due to their sovereign (monopoly on force) ability to tax. The tax-credit unit in turn forms the unit-of-account for their private banking sector. These are the two fundamental traits of a monetary sovereign.
The idea that a currency-issuer must sell bonds at interest demonstrates a basic lack of understanding of how modern money works. If a currency-issuer “sells” bonds in exchange for their own tax-credit, then accounting-wise they have done nothing (swapping one government token for another government token temporarily, and voluntarily paying eager savers interest. This does not “stop inflation from spending” since the holders were eager savers anyway and sovereign bonds are highly liquid. Indeed, rates on bonds can contribute to inflation, not reduce it because 1) businesses price higher rates into prices and 2) the relentless injection of interest rate payments in high powered money into the economy has potentially large effects in the medium- to long-term).
Artificially propping up interest rates, in the belief that this must be done to sell bonds, is to not understand the capability of a modern monetary sovereign, regardless of their development level. (Vestigial bonds and their once-needed interest offering have in turn been encrusted by layers of epiphytic pro-interest arguments: saving against inflation, as a policy tool etc; all of these things are achieved more directly with no government interest-rate manipulation).
If rates are propped up in order to borrow, then the same real-resource constraints apply we have already discussed in (1). In other words, interest rate manipulation is no financial fix to any real-world constraint. There is no useful purpose served by artificially propped up interest rates above zero, nor does a monetary sovereign in any way need to pay interest on its tax-credits (via bonds) to “sell” them to manage its domestic economy.
The “hierarchy of currencies” concern for hot money issues is largely based on propped-up interest rates. Yet it is precisely a distinguishing feature of monetary sovereigns that they can run at zero interest. Forever.
This aspect of monetary sovereignty is still not widely understood. But that is an issue for another day.
Note: That it is interest rates driving the hierarchy is evident in the proposed solution: “Reform efforts should focus much more on international monetary harmonization that limits interest differentials” (McKinnon and Liu 2013,p. 11). Harmonizing at zero is the obvious natural choice.
**Countries indeed must roughly match imports with exports over time or inevitably suffer. Even if, like the US, you can export dollars like a commodity, doing so harms the long-term employment situation & manufacturing capacity of the country. Any useful discussion of international trade must deeply incorporate the role of trading in increasing vs decreasing returns industries to meaningfully discuss the full costs:benefits of exporting/importing.
Bortz, Pablo and Annina Kaltenbrunner (2018). “The International Dimension of Financialization in Developing and Emerging Economies.” Development and Change, 49: 375-393.
McKinnon, Ronald and Zhao Liu, (2013). “Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates.” Asian Development Bank, Working Paper Series on Regional Economic Integration.
[Update: See PPS at the end]
OK, not exactly a pirate.
But close enough for modern times.
Jacques S. Jaikaran, M.D. was (he passed away this year) a Caribbean émigré-cum-doctor (via Leeds, England)-cum-Houston, Texas bank-board member & plastic surgeon (losing his license for issues “involving moral turpitude”)-cum-author (“Debt Virus”)–cum-US prisoner for tax-evasion & fighting for renewed Independence for the “Republic of Texas” (he tried to arrange for the “Republic of Texas” to purchase a “four-story building, similar to a compound, included machine gun turrets, a bomb shelter and a surgical operating room.”)
Perhaps because Jaikaran was a Texas author, his book ended up on display at my Dallas County Community College in 1992, where I read this interesting & informative story [this passage is from Google books with two excerpts from a physical copy]:
Jaikaran also mentions currency issuance in Swanenkirchen, Bavaria and the Worgl Shilling ( https://wiki.p2pfoundation.net/Worgl_Shillings ).
He also includes a short history of the Channel Islands worth reading. The Wikipedia entry is similar, worth a read https://en.wikipedia.org/wiki/Guernsey.
Issues regarding sovereignty and currency issuance are clear.
The opening of Jaikaran’s chapter:
For the record, Jaikaran’s views include the usual Fed-as-conspiracy type and Goldsmith-type stuff, and he didn’t understand the role of taxes. Nevertheless, considering the availability of information in the 1980s/early 90s (no Bill Mitchell blogs, no Center of the Universe blog, etc) it is not a bad attempt at seeing where mainstream economics makes no sense regarding spending, monetary operations.
I have long argued that the types of people who sense the mainstream view of “money” is wrong, yet didn’t have the good fortune to stumble across MMT at an early stage and instead end up with “goldsmith”/fractional-reserve/”we can’t pay all the interest!” views, or anti-horizontal-money type views and/or (better) aligning with Positive Money, are at least on the right track. These views can be unified (some links in the comment section here). (“Rohan Grey’s ‘Banking Under Digital Fiat Currency’ Proposal – A Guest post by Richard Taylor”)
PS Need to add this: “As soon as the £180 was received each year, 180 States’ notes were burnt…At the end of ten years not one of the notes issued to pay for the [market] was left, no interest had been paid..& there was a steady income of £180”
This makes clear where taxes go – they shrink the balance sheet.
PPS I first heard this story through Jaikaran although it has been floating around in general. I checked for sources and (surprise surprise) found none for that chapter in Jaikaran’s book. I see now that he basically lifted it from another work – he seemed to have traveled to The Channel Islands so I thought maybe there was some original research in there…I think not though.
See “Guernsey’s monetary experiment” which includes this….
Preface, by James Glyn Ford…
“This pamphlet, “How Guernsey Beat the Bankers”, is a reprint of one issued in 1958 by the Social Credit Movement. It tells how the Guernsey States from 1819-1836 manipulated the issue of notes to allow a number of public works to be carried out — including both the construction of the Guernsey Market and the rebuilding of Elizabeth College — without increasing public debt. The details are contained within the pamphlet itself….”
ISBN 85694 239 1 Guernsey Historical Monograph No. 23 General Editor: J. Stevens Cox, F.S.A. HOW GUERNSEY BEAT THE BANKERS by EDWARD HOLLOWAY The story of how the Island of Guernsey created its own money, without cost to the taxpayer, and established a prosperous community free of debt. TOUCAN PRESS MOUNT DURAND, ST. PETER PORT, GUERNSEY, C.I. 1981 A NOTE ON THE WRITER, EDWARD HOLLOWAY
According to a CATO working paper (Hanke and Krus 2012), there have been 56 cases of hyperinflation. 58 if we include North Korea (they weren’t sure about the data quality) and Venezuela (which occurred after their paper).
There are several things I would like to point out that relate to recent twitter threads on hyperinflation but I will save for another day. However, I just thought it interesting to point out the very strong autocorrelation in these events. These cases are often discussed more or less singly, or by “type” (from war, regime change, supply shocks etc), and many lists are sparse, containing only a few well known events. The Hanke-Krus data is very complete, yet the list is constructed oddly – it is not in chronological, alphabetical, nor regional order. Re-arranging the Hanke-Krus list highlights something however: barring three outliers (France, 1795-1796, North Korea 2012, and Venezuela 2016-) there have actually been only five hyperinflation “events”, each associated with particular large, long-term global processes (involving war, decolonization, regime change, foreign denominated debt/currency pegs). The spatial and temporal clustering of these events is perhaps best expressed visually (Chile and Zimbabwe are temporal outliers within their cluster)
The re-arranged Hanke-Krus list:
I have some more comments on this list, the autocorrelation in these cases etc in a future post.
Recently released (2019): 1000 Castaways: Fundamentals of Economics, Ætiology Press.
“A renegade band of Modern Monetary Theorists has overturned mainstream economics in part by emphasizing that there is not one, but two systems of modern money, the “vertical” and the “horizontal.” They conclusively demonstrate how unifying our understanding of these is crucial for grasping modern economics.
“the key to understanding Modern Monetary Theory is this vertical-horizontal relationship”
1000 Castaways develops Mosler’s statement into a concise, book-length treatment that is accessible to all readers, starting from first principles and, step-by-step, leading the reader up to the complexities of the real world.
Our one thousand castaways develop, before our eyes, a “perfect” economy, and demonstrate how the horizontal and vertical systems of money naturally emerge from even more fundamental organizational needs of a large society.
1000 Castaways then contrasts the Island’s “economics” with real-world “economics,” in an enlightening illustration of the last few steps in our common economic understanding that we must take in order to run our modern economies in a way that maximizes wellbeing.”
March 31, 2019
April 4, 2019
Hello everyone- I am making a Kindle version of 1000 Castaways: Fundamentals of Economics FREE on Amazon for reviewers for a short time – but anyone here can take advantage of this and get their free copy.
It is free for the next 48 hours (all day Sunday & Monday, Pacific time USA). You guys can help out immensely by posting a review on Amazon – good or bad!! – if you feel it merits it. Thanks! (on the reviews, you will be considered a “verified purchaser” even though the price was “0” https://www.amazon.com/dp/B07PWRXTF2
Even if you don’t usually read ebooks, you can read/review this by using Amazons easy free kindle reader for desktops/laptops.
(This is how I am doing the ARC [Advance Reader Copy] for the forthcoming paperback rather than try to mail/print galley copies around the world etc.)
UK website https://www.amazon.co.uk/dp/B07PWRXTF2
Canadian website https://www.amazon.ca/dp/B07PWRXTF2
Australian website https://www.amazon.com.au/dp/B07PWRXTF2