Where does money come from?
I can’t think of a more important or confusing question. When we run short of something in our daily lives we normally do something about it. Whether we are short of carrots, cars, computers or crayons we don’t have to think too hard about what to do. We go to the dealer, supermarket or art supply shop and get what we need.
The truth is that in this age of plenty we rarely run short of anything. We might lack one of these items as individuals. Not everyone has a car or computer. However, society rarely if ever runs out of anything. Our supermarkets are always stocked with food. A variety of stores provide just about anything we need. The one thing we are short of, as a society, is money. So why don’t we figure out where it comes from and do something about it?
Does that seem a strange quest to you? It is one I began on ten years ago when working as an information analyst for Australia’s leading general insurer. Twenty two floors up on the corner of King and George Street in Sydney, the capable people around me people who should have been able to help. This was the management reporting floor and all around me were accountants, auditors, actuaries and analysts . I started asking, “Where does money come from?”
Some said the mint. This explains the coins and notes in our pockets but that’s only a very small percentage of money in circulation. Where does the rest come from? Anyway, I wanted to understand the process that triggers the printing presses. Who decides and on what authority to mint money?
You can’t just decide it’s a good idea and get on with it. I had an auntie some years ago who decided she’d solve her own shortage of money problems by making some. Sadly, authorities frowned upon this activity and she had some time in gaol to reflect on more appropriate ways to express her entrepreneurial zeal.
Some of these money experts burbled about the gold standard. Others pointed to taxes. A few raised a vague notion of a Reserve Bank and borrowing. The results of my enquiries were both disappointing and strange. How could we not understand the origins of money?
The Barter Story
This mystery isn’t helped by the master narrative surrounding money: The Barter Story. I am sure you have heard it many times before. It runs something like this; a farmer had a chicken and a cobbler had a pair of boots. The farmer wanted the boots but the cobbler didn’t want the chicken despite it being a good one. Similar problems forced people to gather an inventory of items in the hope of making a felicitous exchange. Described as a “coincidence of wants”, this process was obviously too cumbersome for everyday use. The solution was obvious. Someone decided to invent money.
Yet, there remains a problem. Picky anthropologists have been trying to explain to economists for over one hundred years that they can’t find a society that works that way. You can’t find that barter story in history. Where barter appeared it was upon the breakdown of traditional society or in trade with enemies and strangers. There was often an elaborate system of ritual that surrounds the process when barter appeared. Without such ritual there was always the threat of force, the dispensing with niceties and taking what you wanted.
This is not a concern we normally face with friends and neighbours. And we don’t normally barter with them. Come to my Mum’s place and admire a figurine and she is likely to give it to you. This may create an obligation on you to return the favour somewhere in the future. Friendships and stronger social relations build on interactions like this.
The Market or the State
So why do we accept a story that is so obviously wrong? Probably, because to most people it is plausible. However, there is a strong incentive on the part of interested players in our society to have us embrace this myth. The barter story places the market at the centre of our lives as the creator of money. It promotes the idea that state or government is a secondary player and only enters the barter story to assist with minor administrative adjustments after the invention of money. This process is left deliberately vague. In this story, government plays a subordinate role in serving the market.
However, the truth is the creation of money in recorded history, going back to ancient Babylon, has always been an act of statecraft. At its centre, has always been some form of warlord, fiefdom or state that has implemented, adjusted and policed this money system for its purposes. Like today, this system supports the population in which it operates in a variety of ways. For example, a system of tax and obligation provides the benefit to society of liquidity and thus addresses the cobbler ‘s and the farmer’s problem. See Christine Desan under Links
The Age Of Agnotology
For completeness, banks too create money but they only do so under licence of government. Banks’ creation of money always involves a borrower and a lender. It is simply a a zero sum game. One person or organisation’s asset is the other’s liability. You don’t want to build public schools and hospitals this way. And the fact is you can’t build private ones either without significant public funding.
The Federal Government has all the money it needs to build anything. Any shortage can only be of resources not money. Nothing explains the relative authority of a sovereign government over the banking system more clearly than their relative behaviours at times of crisis. When banks went broke or stopped lending during the 2007/8 financial crisis, it was Federal Governments that bailed them out. It was an Australian Federal Government that guaranteed bank deposits.
Our lack of understanding has major implications for the way our society works. The constant cry that government is short of money is an excuse that evaporates on closer inspection. Our understanding faces numerous barriers. Any suggestion of government spending, is met with screams of “inflation”. Test it on your friends. Stories of hyperinflation in Weimar Republic, Zimbabwe and more recently Venezuela are raised by people who know the script
Yet, our government spends every day. People who raise these examples to caution against government spending have a poor understanding of history. The average person has to admit that they have no idea how much spending and in what circumstance would cause inflation. This is simply a trained response. Would $1 do it? $5?, $500?, $5000?, $5 billion or $5 trillion? What is the relationship of spending to productive capacity? (See Bill Mitchell on this point). Think of it as a strategy designed to keep us out of public policy debate. It works very well.
We live in an age of Agnotology: the study of culturally induced ignorance or doubt.
The purpose of this site is:
- to understand how our media keeps us in a state of ignorance ;
- to explore why our politicians allow this to continue and the consequences for our polity;
- to discuss and promote smarter solutions to our economic and political problems than the ones being offered.
I invite your comments, criticisms and observations. This is too important a subject to leave to experts, propagandists and system apologists.