Myths of Creating Money

Money Creation is a funny thing. It happens all the time, all around us, and has for centuries and yet  no seems able to convince everyone else that they know how it actually happens who is doing it and even if it is a good idea.

It is a vexed subject, particularly now, when people are afraid that the world’s central banks are creating masses of money, while the banks themselves counter-claim that most if it is sterilized and so shouldn’t be considered money creation at all, while others claim this is all just ‘currency’ creation which isn’t what they call ‘money-good’ and will lead to a disastrous tearing apart of currency worth from real value. If these various claims and counter-claims (and others I haven’t mentioned) sound a little muddled then you’re doing well, because they are muddled.

The problem is we are not hearing different views within a single argument. What we are hearing is people who hold radically incompatible world views  throwing rocks at each other as they march past each other in a fog. It’s what happens when people think they are arguing about a concept which they all understand, when in fact they all understand the basic idea in quite different ways.

Should we be dispirited? I don’t think we should. It is confusing, and claim and counter-claim do get shrill and people do accuse each other of heinous crimes, but at least it is making us aware.  Things our dear leaders would like us to simply take for granted and not think about, are now being thought about, talked about, argued about.

The Creation Myths of Money

Every religion, every ‘ism’, every arrangement of power has some sort of creation myth whose purpose is to make one particular arrangement of the world seem to be the  only logical and workable one.  The religions and ‘isms’ of economic power are no different.

Of course you could say, beneath the rival myths there will be evidence which will show one to be  true and the other false. Why talk about them both as myths? The reason is that myths have a power to shape our thoughts and generate strong feelings often in spite of evidence. People are drawn to a ‘myth’ even in the face of evidence which undermines it, because the myth lends ‘authority’ to some set of things the person wants to believe and have others believe.

Therefore I think it is wise to understand people’s myths even if you think they are factually wrong.

1) Barter – money created by The Many.

One myth imagines that money was first created out of barter. In the beginning there was the free trade of goods and services between individuals. I have two stone axes, you have two pots, lets exchange them. Money was created when people realized that rather than only being able to exchange when you ran across the person who wanted precisely what you had, you could exchange what  you had for a generic ‘token of value’. You could then re-exchange that ‘token of value’ at any time with anyone else for anything else.

The only problem is you want to be sure when you hand over your axe-head or pot, that the token you get in return really will be exchangeable. Ideally you want it to have some sort of intrinsic value of its own AND not to be something which people could easily just find or make in their shed. If it becomes easier to make the ‘tokens of value’ rather than actually make anything of ‘real value’, then you will get ‘the smartest men in the hut’ busy knocking out such tokens rather than doing anything of real productive value.

You can already see how in this myth there is a suspicion of token creators.

In this myth money is created by the productive efforts of people who actually make stuff. The need – their need, for money arises out of the ‘market’ with its distributed desire to ‘freely’ exchange goods and services. The creation of the tokens starts out and henceforth needs to be, tightly correlated to the number of goods and transactions.We’ll come back to how ‘the market’ can assess what number of tokens is the right number, later. But money is a creation of those in the market and serves them. Anyone else who uses it, for any other purpose, is parasitizing money for their own ends and needs.

Here you can see a roots of the free-market contention that tax is theft. Governments coming to the market and starting to make claims on something they didn’t create and isn’t theirs, siphoning off some of other people’s money just to pay themselves.

But before we get too deep into what flows from this particular myth, lets look at the main rival myth.

Kings and Governments – money created by The Powerful Few.

The other main myth is that money rose not from the many in the market, but was created by, and to serve the needs of, the few who held power. So the myth goes, as more complex kinds of societies arose so there were people in them who did essential but ‘non-productive’ jobs. People who commanded troops, or trained them, or carried messages, or wrote them down or added things up. Such people had nothing to barter , yet did increasingly ‘valuable’ jobs. So they were paid in tokens created for that express purpose.  Those who created them were the powerful people, who had such specialized workers working for them.

Once those tokens were created you can see how, like any powerful idea or technology, they could transform things they were not invented for. Just as the Internet has transformed all sorts of things for which it was not intended: Email being one, e-commerce another. Neither was envisaged by the two men who invented packet switching, which is the technology that underpins the Internet.

In this myth money was created centrally but quickly transformed trade turning it into what we have today. Money was therefore not created by people in the market but was quickly adopted by them for their own purposes. It turned out to be something which helped with trade and so they adopted it. They could recognize a useful thing when they saw it.  But it was and therefore still is a ‘service’ provided to them by a central power.

Now both of these myths feel good to those who support them and each feels dangerously counterfeit to those who do not. That is almost the nature of myth.

Is there any evidence at all?

It has been said by anthropologists that there isn’t really any evidence of this ‘golden age’ or state of monetary nature when tokens of gold or silver were created to facilitate primitive barter. And this is true. Coins are a late invention and most have the head of a king or ruler clearly stamped upon them.  On the other hand it is quite possible that those primitive tokens are around but we don’t recognize them. Perhaps lumps of amber or other ‘precious’ stone or pigment acted as tokens. Certainly in history we can find groups who have adopted and used tokens amongst themselves. Once upon a time British sailors used to carry little bags of  pepper corns as a readily acceptable form of ‘money’. Pepper was light, easily stored and everybody felt happy that it had a universally recognized value. So they used to use it as an unofficial currency.

Anthropologists have also, however, taken issue with the whole idea that barter was the original, ‘natural’ way human beings began to exchange. And there is certainly evidence from many cultures that when groups exchange it is not really as barter – ‘I give you this, if you give me that ‘ – but as a form of gift giving and obligation creation – ‘I give you this, so that you owe me and that obligation I have placed upon you makes me powerful and ties us together’. This is quite different from barter and coins won’t help it.

So one myth sees barter, spurring the invention of money, becoming trade, and this being the ‘natural’ state of humanity. Such an argument was put forward by Matt Ridley in his book The Origins of Virtue. Mr Ridley tried align this supposed state of Free-trade nature with Natural Selection itself arguing that  through the eons of primitive barter genes for ‘free trade’ and all that he argued are part of it – honesty and a desire for fairness and trust – were selected for and are therefore in our very nature. Only corrupted by bad social arrangements where the ‘Satan’ called ‘State’ comes along and perverts the right order of things. There is’t any actual evidence for any of this – not in biology anyway – and the shine went off his picture of the benefits of trade in its ‘natural’ free state when the bank on whose board he served – Northern Rock – was found to be bankrupt. Many, like me. felt the bankruptcy of the bank to be an apt metaphor for the bankruptcy of his ideas.

One of the problems with creation myths is that because they place such great store by who or what was first, that that ‘first’ state is then elevated to a special status of ‘natural’ or ‘as things should be’ and everything lese gets relegated to some suspicious ‘fallen’ or ‘tampered with’ state. But is it really that  important who or what was first? Does what we did first really indicate what is ‘natural’ let alone best? I don’t think it does. Bubonic plague is natural but it’s not good. Dying young is natural. Also not great.

It seems to me that we will never have a complete enough picture of all of the past to say definitely which myth is right. And perhaps it is not a question of one or the other. It is quite possible that both have taken place in history in different places at different times. So perhaps which was ‘first’ is not really the point.

The “We were first’ argument is more a rhetorical ploy each side has tried to use to claim advantage. People adhere to creation myths because they try to argue that what we did first is natural and natural is ‘in our genes’, or is ‘the way God intended it’ or is just better in some unspecified way. But people hang on to creation myths and continue to cite them as some sort of fact or common sense, because their chosen myth leads to the conclusions they want to get to.

Lets look again at the two myths and the opposed world views they lead to.

Opposing worlds

If money was/is created from the needs of people trading then they own it. Anyone else who uses it, is parasitizing their invention. Thus when a ruler or ruling class or state comes into existence  and decides it wants some of this money how does it get it? Does it make goods and services and sell them like anyone else? Well, maybe. But does it do it fairly? Or does it use its power – the power of soldiers or ruffians, or laws giving special monopolies or granting special licenses –  to put smaller competitors out of business?

Tax is necessary/Tax is theft.

Governments say we need some of this money-stuff to pay for the things we provide: Those people who train soldiers, the soldiers themselves, the people who write stuff down, deliver messages and count things. To get money they invent tax. But in the free market myth of money this is quite clearly a theft, or at the very least a muscling in.

Needless to say seen through the lens of the other myth, things look entirely different. If money was created by emperor or government then it is a service. As such it is not so unreasonable to expect some sort of payment or rent. Suddenly it looks like the traders benefiting from something provided by the state and tax becomes a net way of paying for state services of which the provision of money is but one.

Money or Value?

Set aside ancient history. who should create it now? Both governments and ‘the market’ create money. It is banks who do most of the creating through the granting of loans. It is a fact that the vast bulk of money is created by the banks though loans , not governments through printing or QE.

It is one thing to claim the invention and the right to control the creation of money, but it is another to claim  guardianship of the value that the money is transporting around. And this is one of today’s main battlegrounds because all agree there has to be some sort of correlation between the number of tokens of value and the the real actual value of goods and services.

One side would say how better to decide how much money to create than to let the ‘market’ which needs the money decide how much it needs.Why bring in a third party who will probably have their own agenda which will have nothing to do with the needs of the people in the markets and everything to do with maintaining the power of that third party – the government. Thus let the banks create the money when they extend a loan. The banks know how much is needed because we all come to them asking for it.

On the other hand who says the banks will create only the  amount which helps the wider market and not create the amount which benefits them disproportionately? Banks can create loans that  concentrate on inflating the worth of financial products and largely ignore the money needs of those in the rest of the market. And anyone in the industrial, especially small and medium sector can attest that this is exactly what has been going on. The bulk of the money supply of the last decades has been for the narrower financial market and those non-productive things finance likes to speculate upon – such as property. Property is not productive. But is can be lucrative if the money is there to fuel a speculative bubble around it.

So just as the free market myth can see a danger in Government creating money to benefit itself, so it is just as evident to those on the other side that the banks within the market can also create money more for their own benefit than anyone else’s.

You might think we could all see that there are valid concerns on both sides. But too often we don’t. Instead both sides of the financial and money creation argument focus on the short comings of the opposite side’s dangerous, heretical and false beliefs, while simultaneously glossing over similar problems with their own. And it’s a short step from there to convincing yourself that while your plan is an honest attempt to find a solution for all, those who take the other side of the argument do so only for ulterior and selfish reasons. Once you think that you need never listen to them at all.

In conclusion

Governments do become captured by an elite who use the power of government to advance their own interests and not for the purpose of governing. One aspect of this, particularly evident in the more imperial nations like the U.S. is that the governing elite will do things (like print and spend money) to make government more powerful at the expense of those being governed. But it is equally true that markets can also become captured by an elite who can distort their operation to enrich themselves in preference to anyone else.

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