3.3  The relation of money to credit and debt

/49/ MMT holds that money is credit and debt. This was outlined by Mitchell-Innes in 1913:
'Credit and credit alone is money. … Credit is simply the correlative of debt. What A owes to B is A's debt to B and B's credit on A. … The words 'credit' and 'debt' express a legal relationship between two parties, and they express the same legal relationship seen from two opposite sides'.[1]

In Soddy one can read that 'money is a credit-debt relation'.[2] One will appreciate the insight that money and the economy form a subsystem embedded in wider societal context and depending on social relations. Money and economic transactions are based on mutual relationships which are of a moral and legal nature as much as they are practical or productive.[3] No doubt this is essential. Particularly specific, though, it is not.

A statement like 'the nature of money is credit and debt' is catchy. One may agree, as long as one does not have to consider what it really means. 'Money is credit', or 'money is debt' – is this meant to be an intrinsic property of money? Arguably not. Does it mean that credit (claims) and debt (obligations) can be transferred and thus also be used as means of payment? Yes, this can be the case. According to what is known, such practices occurred throughout the centuries. Does 'money is credit and debt' generally assume that all means of payment are always and necessarily created by credit (loans) and thus represent debt? This would be an outright misrepresentation. Does it preclude the existence of debt-free money? It does not. Modern money can both be debt money (if issued through creation of primary bank credit) and debt-free money (if created by sovereign fiat and spent, not loaned, into circulation).

Ancient rulers wanted to have an ancestral chart originating in gods and goddesses. In a not entirely dissimilar way, modern social science sometimes wants to establish present realities as being compellingly determined by unbroken historical lineage. MMT's effort to base its mantra of 'money is credit' on historical evidence seems to be of this type. Over the centuries and millennia, however, monetary history has been diverse and complex. /50/ Directions for present and future monetary systems can hardly be derived from the historical beginnings of money in archaic societies. Even though a perspective of evolutionary systems dynamics assumes some fundamental path-dependencies, these always include degrees of freedom.

History and ethnological studies suggest that social relations include having some claims on others or having some obligations to others. In particular, claims and charges relating to the provision of goods or to labour duties within the kinship and the tribe seem to have existed since time immemorial, certainly in stone-age and early agricultural communities. In the formation of early states in archaic societies, with social hierarchy taking shape, such obligations and claims were extended and became more regularised and institutionalised. Against this background Mitchell-Innes and MMT, or Graeber more recently, established that debt and credit – measured and delivered in kind, later accounted for in goods-related units – existed historically prior to currency (coin); about 6,500 years ago (Mesopotamia, Egypt) compared to about 2,700 years ago for coin, although pre-coin tokens have existed since the fourth millennium BC.[4]

Documenting that in ancient societies, credit–debt relations existed prior to currencies debunks the founding myth of classical economics. But is it intended to be a general 'law of monetary succession'? What can be 'proven' with regard to modern money by referring to archaic and ancient practices of redeeming debt of various kinds? Hudson mentions five debt relations in ancient Mesopotamia: wergild-type debt to com­pensate victims of violence; reciprocal exchanges of gifts, which are always socially obliging in a sense; provision of food and other goods to religious guilds and brotherhoods; internal household transfers of temples and palaces; and, growing in importance over time, palace debts to handicrafts and merchants who contributed to the chains of provision of the rulers' extended household. Such debts were settled, as Hudson notes,

'not by payment on the spot but by running up debt balances. From gift exchange through to redistributive palace economies, such balances typically were cleared at harvest time, the New Year, the seasonal return of commercial voyages or similar periodic occasions'.[5]

/51/ It appears plausible that running up debt balances evolved into the emergence of general units of account – grain, for the most part, but also silver early on.

The next step of evolution then was 'revolutionary': the introduction of generally transferrable tokens, i.e. coins serving as currency. Coins of various denominations can represent a quantity of debt measured in a standard unit, and clear a specific debt when transferred at the corresponding amount. Currency could then be used as a generalised multi-purpose financial instrument, in payment of normal transactions or for accumulating (hoarding) capital and pre-financing large ventures, in effect facilitating what otherwise would have involved long-term bilateral or complicated multilateral contracting.

What does this tell us about 'the nature of money'? It tells the simple truth which everybody knows: that money is an instrument, a tool for handling claims and debts. Declarations inscribed on banknotes such as 'this note is legal tender for any debt' do not need further interpretation. As a unit of account, money serves as a standard of measurement, an instrument for ascribing economic value or prices, i.e. an instrument to quantify claims and debts. As a means of payment, as currency, it serves as a general medium to settle claims and debts of any kind. And as an instrument of capital formation it serves to build up financial claims and debts, or to acquire debt-free valuables. Money undoubtedly has emerged from and fulfils a role in social relations of claims and charges. The claims and debts, however, are not 'in' the money, but are constituted in a mutual relation between a claimant and a debtor. Money thus is not identical with claims and charges. Money is a social medium indeed. Language, for example, 'is' not communication, but is a tool for verbal communication. And just as institutional position gives legal powers to direct, the control and use of money gives financial powers to direct.

Against this background Walsh and Zarlenga critically comment on MMT's definition of money:

'MMT stretches and twists the meaning of words beyond normal usage. ... Money need not be something owed and due, it's what we use to pay something owed and due. ... Poor methodology and misuse of terms leads MMT to mis-define money as debt. ... But money and debt are two different things, that is why we have different words for them. We pay our debt with money.'[6]

/52/ This is no hairsplitting. It entails the basic monetary stipulation on whether one asserts an identity of credit and money, as banking doctrines do, or whether one maintains their being different and exacts a clear separation of money and credit powers, as currency teachings do, including NCT. Connected to this is the equally fundamental question of whether money is necessarily debt money, or whether money can be debt-free.

Mitchell-Innes and MMT search for answers to these questions in history. But however much one can learn from history, it does not offer a compelling answer to these questions. The very existence of currency and banking paradigms is evidence of degrees of freedom which allow for both answers. If monetary reformers want to reintroduce debt-free sovereign money, this cannot be sufficiently substantiated by pointing out that debt-free sovereign currency existed throughout most of occidental history. True as this is, it does not relieve us of having to make a choice on grounds of functional problem analysis and political preference.

On the whole, monetary and financial history is less straightforward than one might wish. What elicits from history looks more like this:
- Money as a unit of account was developed by ancient administrators.
- Currency seems to have been brought up by rulers of a realm as well as – and more than just once – by merchants, but also was then soon put and run under state control.
- Financial capital, notwithstanding resemblant antique precursors, seems to be a modern development that has been the business of merchants and bankers.

Why does a state theory of money insist on money being credit and debt, something one would expect in the first place from banking scholars rather than chartalists? In this respect MMT is a rather strange combination of currency and banking views and, with regard to the history of money, overgeneralised and over-simplified. Walsh and Zarlenga think that 'the misdefinition of money as debt is incompatible with the chartal (legal) nature of money /53/ that MMT espouses'.[7] In a way, yes. But the story is more complicated. Chartal money too can be debt money, e.g. if the entire money supply were provided through government or central-bank primary credit to banks. Similarly, fiat money is not necessarily money by sovereign fiat but can also be private money if the private agencies, i.e. banking or industrial corporations, are powerful enough to impose their will on national and international institutions.

The unusual combination of state theory and credit theory of money, of starting with a chartalist theory of money and ending up in banking doctrine, was fully present already in Mitchell-Innes’ time.[8] Contemporary economies, for sure, are based on bank credit and financial debt, to a much greater extent than trade and state finances in earlier centuries already were. In Mitchell-Innes' time, around 1900, the bank-credit theory of money was developed.[9] He adopted that new theory, as is clear from his references to Macleod and Withers. He then must have made a mistake similar to that of Menger and commodity theorists of money, i.e. projecting insights into contemporary realities back onto history.

What Mitchell-Innes and MMT miss, for example, is to take due account of the properties of currency in traditional society since the emergence of coin in the Aegean world and Rome. As soon as coins emerged, the rulers reserved for themselves the prerogative of coining the currency of the realm, or of having the coinage under legal or contractual control, thus benefiting from the genuine seigniorage which resulted from the difference between a coin's face value and its production costs. Sovereign coin was regularly spent into circulation free of interest and redemption, and thus debt-free, through the rulers’ expenditure on paying the military, suppliers, staff, dependent clients, etc. This does of course not preclude that rulers, apparently quite often, were not able to mint enough coin and had to go in debt with money lenders, or again run debt balances without taking up currency, or conduct raids into foreign territories.

In the occidental world after the Roman Empire, minting, where it continued to exist, had passed into the hands of private coiners (monetarii). /54/ Since about 750 AC, however, Pepin III and Charlemagne made issuance of coin the rulers' prerogative again, and it has remained so ever since. One motive was to catch up with Byzantium, whose precious-metal currency was the dominant model for both western and Islamic rulers.[10] Mitchell-Innes, in his attempt to show that 'money is credit and debt', and in considering 'credit prior to currency' as proof of this, wanted to somehow reinterpret the situation. He pointed to the fact that in western territories, coinage was in many hands rather than just one.[11] But this was part of the feudal tenure system. No private persons were allowed to put their stamp on coins except later on, in early modern times, when over-indebted seigniories suffered the embarrassment of having to temporarily subrogate coinage to private creditors, normally trading and banking houses.

It should be recognised that during most of the history of western civilisation, starting with Greece and Rome up until around the 1700s when current-account deposits and bank notes came into somewhat wider use, currency was spent into circulation, thus creating genuine seigniorage free of interest and redemption, i.e. debt-free money, in contrast to interest-borne seigniorage, which accrues from crediting (loaning) money to a debtor. With the transition from traditional to modern times and the emergence of a widely ramified banking industry as well as central banks, ever more of the money came into existence by way of primary credit; by a bank ledger entry, constituting a claim on the creditor's side, transferable as a demand deposit on the debtor's side, thus over time becoming non-cash money on current account – today in fact the preferred general means of payment, representing the lion's share of the entire stock of money in circulation.

Credit letters and bills of debt seem to have existed since antiquity. The question is if such letters and bills were common tools of finance, and if bills of debt were transferable and circulated like currency. In the middle ages such practices do not seem to have existed prior to normal currency, but developed over time, rather in parallel with and on the basis of coin. In this respect, classical views are not completely wrong. Far-distance trade and full-fledged markets, trading hubs such as Venice or merchant organisations /55/ like the Hanseatic League came into existence in the course of the high middle ages, in which the Crusades (~1100–1300) also played an important role.[12] In these times, silver coin was the major monetary base of the economy. In addition, tally sticks were used as a substitute for coin. The coins were minted and spent into circulation free of debt by various ecclesial and princely seigniories, or by the governing bodies of free towns. ('Free' meant directly subject to the emperor or king without overlords in-between).

In reflecting money in its relation to credit and debt, tally sticks are particularly interesting. It appears that historians have paid little attention to them, although they had long existed in different corners of the world as record keeping devices. At first they were used for counting, with for example the number of furs or animals represented by a number of notches in a bone. From early on they also served as a record of debt, most often for running a tab – for example, the bread bought at the bakery but not immediately paid for. In various countryside regions of Europe this was common practice until as far as around 1900.[13]

In the high middle ages tallies also became used as receipts of deposits, and they achieved a certain range of circulation as a means of payment.[14] Tallies were introduced as a substitute for coin because, in spite of opening up new silver deposits across Europe, the overall supply of silver resources remained scarce and silver deposits became exhausted over time, with silver thus ever more expensive. Part of the problem was the draining away of silver and gold for growing imports of oriental and far-east luxury goods.[15] The importance of tallies declined after around 1400, but they stayed in use at lower levels, petering out until the beginnings of industrialisation.

Tallies existed in many forms. The more important ones were made of pieces of polished wood of about 20´5 cm. Horizontal notches marked the quantity of money units: 1,000 units were the size of a handbreadth (palm), 100 were a fingerbreadth, 1 that of a corn. The stick was split lengthwise, /56/ whereby one part was shortened, the other part remaining the longer. The short end of the stick, called the foil or stub, was kept by the issuer of a tally who had taken in a deposit, or borrowed money, or received goods or services. The longer part, called the stock (hence the origin of stockholder), was given to the party who made a deposit, or lent money, or supplied goods or a service.[16] The notches, together with the grain of the wood, made sure that the two parts were the only ones to fit together. This was practical in times when most people were illiterate, although the issuer was noted on the reverse of the tally, often through a symbol or initials rather than the name written in full.

Beyond the common folk running simple tabs, tallies were issued by both merchants and feudal lords. The merchants used them to transact business, similar to later bills of exchange or cheques, especially at medieval fairs like those in Flanders or the Champagne. The fairs were also the main places for clearing of foils and stocks. Henry I of England introduced tally sticks as fiat currency when he took the throne in 1100. General acceptance of tallies was not compulsory—i.e. they were not legal tender in modern terms. The exchequer, though, who issued the tallies, had to accept them in payment of taxes. So the bigger part of the tax revenue consisted of stocks rather than coin.

Ecclesial and worldly authorities used tallies in payment of expenses for their court, or for infrastructures such as town walls. Some sources mention an agio which the issuer of a tally had to accept in certain cases. This can be interpreted as interest, or as an indication that tallies were less valuable than coin. Tallies also played a role in financing the building of cathedrals. Tallies, however, did not yet have the funding potential of modern bank credit and other debt instruments of mercantile trade. Raising larger armies and waging bigger wars, such as those from the 16–17th century, could hardly be managed on the basis of tally sticks.[17] 

The tallies extended the coin base and relied on it, not least for practical reasons. The tallies could not be 'sub-split'. A debt could be paid with a stock, or several stocks, if this was accepted. If the sum to be paid was not /57/ exactly the value of the stock, one got some change, or added some coin. In this sense tallies were convertible in coin, but there was no right to get them converted. It seems to have worked reasonably well, but it may not have been the elegant invention it is sometimes depicted as. Things became a bit less cumbersome when, around the 14–15th century, merchants were increasingly able to run current accounts with banks. Credits and debits, claims and liabilities, could thus be cleared through procedures of accountancy. The question now is whether a tally stick was currency, or a document of credit and debt. Apparently it was both. Mitchell-Innes, however, interprets tallies as a 'means of credit' and does not recognise them as a 'medium of exchange'.[18] But they actually served as means of payment, so they can be described as a hybrid. The originators issued the tally stock in payment of goods and services. One can regard a tally stock as an IOU similar to early notes. In connection with taxes or similar charges, it can be seen as a kind of tax credit. It was transferable and thus used as a medium of exchange. The issuer and foil holder accepted tally stocks in payment of claims he had on the respective stock holders. When, in this way, a tally stock came back to the appendant tally foil, or vice versa, the re-completed tally stick was taken out of circulation, unlike coin, which re-entered circulation if not hoarded or drained off to far-away places.

Tallies can be seen as a historical prototype of non-coin fiat money by 'crediting' suppliers, contractors, personnel etc. They do not fit, however, a modern banking notion of credit and debt. The tally stock was not normally interest-bearing. Nor was there a banking debt, i.e. a constraint to redeem, but rather two different claims or duties, respectively, complementing each other – for example a subject's claim to be paid for goods or labour delivered (the sovereign's duty), and the sovereign's claim to be paid levies (the subjects' duty). Levies did not have to be paid in tally stocks, but could equally be paid in coin. Among merchants, the tallies were like a wooden 'bill of exchange' without specified maturity.

 

- - - - 

[1] Mitchell-Innes 1913 pp.392ô30. See also 391, 393, 395–405, Wray 2012 pp269.  

[2] Soddy 1934 25.

[3] Graeber 2012 pp89.

[4] Mitchell-Innes 1913, Graeber 2012, Henry 2004, Hudson 2004.

[5] Hudson 2004 99–102.

[6] Walsh/Zarlenga 2012 2. Also cf. Zarlenga's critique of 'Innes' Credit Theory of Money' written in 2002.

[7] Walsh/Zarlenga 2012 8.                                                

[8] Mitchell-Innes 1913 pp405.

[9] See footnote 8 on p.6.

[10] Zarlenga 2002 pp109.

[11] Mitchell-Innes 1913 382ô22.

[12] Zarlenga 2002 pp131, North 1994 21–37.

[13] Ifrah 1981 112.

[14] Ifrah 1981 110–116, Apostolou/Crumbley 2008, Zarlenga 2002 pp264, Graeber 2012 48, pp268, 435, Mitchell-Innes 1913 pp37.

[15] Zarlenga 2002 pp131.

[16] Graeber 2012 pp48.

[17] North 1994 chapters 1–2.

[18] Mitchell-Innes 1913 394ô33.