Credit and State Theories of Money: The Contributions of A. Mitchell Innes

"Innes and Hawtrey are the same historical period. Innes is the urtext for me. If this wasn’t a list of five, but a list of one, this is the one that would be on it. I can’t imagine trying to teach about money at any level of education without using Innes. His first essay is What is Money? And his answer is, money is credit, credit is money. It is very much that straightforward for Innes. He’s not an economist, and he’s not an academic. He was a diplomat and an international financial advisor (in our time he’d have been a consultant or an investment banker). And he’s writing in a banking journal that I don’t think anyone’s ever heard of. But his arguments are so piercing. He says, ‘Let’s look at the Adam Smith passage, the famous one about the brewer and the baker and about the emergence of money as commodity exchange.’ And he’s got this powerful outsider’s insight where he says, ‘Well, this whole story about how what we need is to pick the best commodity and designate that as money. And then we’ll all save up some of that commodity—and we know it’s going to be gold—but we will all save up some of that gold, so that when we have this lack of mutual coincidence of wants, when barter fails, we will use this gold to solve all of our problems. And Innes just says so forcefully, ‘What if I go down to the butcher, I get my order, the butcher hands it over. And I say, “great, I owe you. We’re done.” We don’t need this complex contrivance of a money commodity that we all hoard, when we can simply have credit.’ In my own work I have argued that inside of Innes’ argument is this really radical transformation of how we understand economic exchange. The history of economics has said that the core concept of economic exchange is that I have a commodity and you have a commodity and we decide to swap them. Innes’s insights can help us to develop a totally new conception. Fundamentally in money economies—and every capitalist economy is a money economy—the basic fact of economic exchange is not the swapping of these things that are the same kind (that is, two commodities), but the swapping of two things that are totally different kinds (that is, a commodity, and a credit). “His first essay is What is Money? And his answer is, money is credit, credit is money” A sweater is a commodity, and, as classical political economy argued, commodities are both use-values and exchange-values. If I offered to sell you my sweater, you know it could keep you warm (use-value), and both of us would try to determine its price, its monetary value (its exchange-value). Economics has always defined economic exchange , the bedrock of economic science, as the swapping of two commodities. But with Innes we see something totally different: economic exchange is the swapping of a commodity for a credit, and a credit is a completely different sort of thing. Whenever I say credit, I always also mean debt. They are the same thing. It’s always credit/debt, because they have to be connected. So if I hand you my sweater and we agree that you owe me a fiver, we now have credit/debt in the equation. The fiver is a debt for you, and it’s a credit for me. That’s the fundamental nature of money. There’s only ever this one sort of thing, which I call money-credit. But, of course, there are higher and lower forms of it. The five pounds that you owe me in an IOU is maybe not so great. If I took your IOU and tried to buy a pint at the pub, the bartender might turn me away. But five pounds that the Bank of England owes—because it’s an actual five pound note and it says ‘I promise to pay the bearer’—that’s something I can transfer. Higher forms of money-credit are easier to transfer; lower forms are harder. Innes helps to show us this entire framework. He spends a lot of time debunking all of the old myths by synthesising that anthropological and archeological literature I mentioned earlier. He looks at specific money practices and examples throughout European early modern and modern history, and proves that the whole idea of stable or sound money, this notion of commodity money—which we see again today with goldbugs, but that also undergirds some of the crypto imaginary works—this idea that what we need is money that’s really worth what it says it’s worth, that if we have a coin that says it’s worth a pound, it has to have enough gold or silver in it to be worth that— that’s never how minting has worked . It’s the exact opposite of that: if you want to use some sort of metal to mint money, then you want to make sure that the amount of metal valued as a commodity in your coin is worth less than the value of a coin stamped on the face. That’s how money works in practice. And if that gets messed up, because the value of silver shoots up, then your coins won’t work anymore. That is, they won’t work as money . I go into some detail in a piece of mine on the silver US quarter in the 1960s, where the price of silver starts going up. People started hoarding quarters—holding them as the silver commodity rather than circulating them as money. You fix that knot not by issuing quarters that have 25 cents of silver in them (i.e., sound money); you fix it by issuing quarters whose metallic value was worth three cents, because nobody wants to hoard quarters if they are worth three cents in metal, they want to use them as a token. The US government did just that at the time. That should be a relatively straightforward argument. But it actually takes a lot of work to undermine a lot of literature that says the opposite. Innes is the first to do so and he does it very powerfully. He goes through it in a lot of historical detail. And shows that coins aren’t about weight. Valuations aren’t about having the weights correspond to the nominal value. Devaluations are not about the government cheating us; they’re about changing the valuation, so the currency will still circulate, because market changes happen. And because there is a need for tax revenue. So all of that is in Innes in a fairly readable form, although it’s 100 years old. Innes also has these lines that are some of the best money quotes ever. ‘Credit and credit alone is money’. “The dollar and the pound and the euro are not things any more than a meter is a thing. You cannot have or hold ‘dollars’” Or, ‘The eye has never seen, nor the hand touched a dollar’. That’s a deeply conceptual claim, but it can be directly useful to contemporary cases. The dollar and the pound and the euro are not things any more than a meter is a thing. You cannot have or hold ‘dollars’. You can have and hold debts denominated in dollars. So in our earlier example, where I swapped you my sweater, we need to know the denomination of that debt (I just said it was a ‘fiver’). But even after we stipulate the denomination, you will not pay me by handing over ‘dollars’. You will pay me by transferring a debt someone else owes you, likely your bank. Here we can think about Russia today, trying to make bond payments to its bondholders that are denominated in US dollars. Russia wants to avoid defaulting, while the US and its allies not want Russia to default. You’ll read in the press today that Russia owes dollars and they will pay dollars, or that Russia has dollars and they will pay dollars. In one sense, we understand why that’s said, but it’s actually not accurate. What Russia has is credits on US banks, Russia has deposit accounts in dollars on US banks the same way I have a deposit account in US dollars on US banks. Theirs are much larger than mine, but it’s the same sort of account. And the US regulators have said to those banks that they may not transfer those credits if Russia authorizes them to transfer them to somewhere else. But if $1 was just a thing that Russia could hold, they could give it to whomever they wanted. But what Russia actually has is someone else’s debt; those US banks owe them . All of these basic ideas, which for me are the building platforms for how you would start to answer the question, ‘what is money?’ are all in Innes."