The Money Veils

There are several veils surrounding money, some theoretical and philosophical, some practical and real. I started writing this essay after a friend (Douglas the MMT Trader ) suggested I listen to Perry Mehrling’s lectures on money and banking, which cover as reading material the collected works of Allyn Young.

After only a short browse through Mehrling’s book on the collected works of Allyn Young I discovered a few interesting things related to MMT that I thought worth blogging about.

I wanted to write them down before finishing the lectures and book, to see if I get my mind changed (which is always the aim of all my study, exciting when it happens). I am going to write ahistorically here, because I do not yet know all of Allyn Young’s work, so to me he is a fictional character that I am using as an avatar to write about the role of money in a macroeconomic system.

Money and Growth

One of the major themes of Allyn Young’s thought was his contribution to the economics professions understanding of how monetary systems are not a mere “veil over barter,” and that rather monetary operations and institutions are critical for helping and hindering real economic growth and prosperity.

So far this aligns with MMT thought.

But Young also seemed to implicitly understand that money forms were not truly the crucial thing, and that the performance of the monetary system was only a means to an end, that end being the fair and just distribution of real output. Settlement of obligations in other words.

This seems to align somewhat with neoclassical economics and the “money is a veil over barter” story, but only if by “barter” we generalize to “any trade in goods or social currency of debts, feuds and other obligations.”

((Which I think helps make it crystal clear the neoclassical ‘Adam Smith barter story’ is both incomplete and reactionary — because it either implies money is only about barter in goods, or in the generalized sense it implies people who have money are in ‘social credit’ and hence have rightfully by divine decree earned their position (as if theft, exploitation, corruption, and piracy were prevented by divine decree of the Invisible Hand).))

The proper nuance is that MMT is correct and neoclassicals are wrong, and the way Allyn Young would have arrived at this conclusion is because he seemed to understand the imposition of two opposing social forces,

1. that monetary operations are a crucial friction that if abused by the rich and powerful can be severe obstacles to justice, and
2. that the money form itself can function far better than a veil over barter, because it can facilitate trade and commerce.

The clear implication is that the role of a currency monopolist is to minimize (1) and maximize (2). That is, the government should (not that they do, just that they should) play a role in the monetary economy by suppressing the abuse of the money form by the most powerful, and facilitate trade so that money does become more of a mere veil.

MMT, I think, would agree. (By “MMT would think…” I mean all the MMT aware scholars and activists.) The MMT system itself does not think, so can not agree nor disagree with anything.

But you see the tension. MMT emphasises the role of money and banking in a way that Steve Keen's Goodwin-Minsky models vividly describe dynamically (against almost all neoclassical myths). But in the realm of political economy MMT de-emphasises the importance of holding the currency unit when (and only when) it comes to government policy considerations.

When you are the issuer of the currency you do not need to worry about running out of money. You neither “have money” nor do not have money, because to you, the issuer, money is the unit of your system of accounts. That is because currency is not a physical thing, not a commodity, it is a system of records of credits and debts. The state currency form is a tax credit.

The tax credit is an idea, the system is an idea, and each have physical manifestations. But the physical tokens and forms are almost irrelevant — recall the island tribe, the Yap Islanders, who used huge stone boulders, some of which remained sunk in the sea, as their tokens.

Private money forms are different, they are not tax credits, but they are still I.O.U’s of their issuers. The commonality shared by all forms of money is that they are records of credit and debt, in other words, I.O.U’s of their issuer.

Also in common is what currency issuers mostly worry about, which is how to drive demand for their otherwise worthless I.O.U’s. The naïve naturalists, anarchists, Austrian Schoolers, and neoclassicals do not want to grapple with this problem, they try to wish it away like the tooth fairy. But it is the only major problem a wannabe currency issuer faces. Warren Mosler wrote about how this fundamental problem is solved in the 7DIF , first using the case of a family: the parents issue their I.O.U and the children redeem it for extra playtime (or whatever) and earn the parents credits by doing household chores. Our relation to governments is very similar, in an abstract sense of course. The lesson is that demand for money is driven in some way by a powerful force. The parents in the family, the government in a nation, the King in a Kingdom who commands a loyal army, the priests running a temple authority community, or the council running a commune.

Allyn Young had a somewhat naïve understanding of these facts, and probably a related overly biased view about what constitutes justified private property rights, and so like a lot of economists who came out of the anti-marxist classical schools, he tends to shy away from recognizing the role of governments as the currency monopolists.

(Curiously though, most Marxists also shy away from recognizing government as the currency monopolist, for the opposite ideological reasons. I guess being on opposite sides of a class war can make people equally delusional.)

The sad thing about that last parenthetical remark is that neither marxists nor anti-marxists need to believe in the myth that money is a private creation of banks. It helps both their cases if they recognize the MMT reality. You will not win the class war by relying upon a myth, because the other side will always grab an advantage by abandoning the myth and going to reality-based war.

Misunderstanding energy

This is just a side note, but an important one, it perhaps concerns one other veil of money, but I am not sure I can justify it just yet as due to a money veil, but I will be giving this some later thought.

One problem Allyn Young had can be found in one of the legacies of his work, which is endogenous growth theory . This idea in mainstream economics is that the growth of an economy (and by implication prosperity) is mainly determined by factors operating within the economy, and is not overly dependent upon external factors.

This is a laughable theory, and it is one of the great embarrassments in economics that so many economists take it seriously.

But we can understand easily why. If we think all energy is free, then for sure, an economy can operate fairly fine endogenously. But as the Physiocrats, Quesnay and today Kate Raworth and Steve Keen and many other ecological economists understand, the role of energy in production cannot be ignored, and no economic system gets energy endogenously. Most of it comes from the Sun. That is, the Ricardo-Smith-Marx tradition of thinking of either land or labour as the only “source of surplus value” is utterly bone-headed wrong.

The caveat to this is that if you are able to factor out energy in your models, in some way, perhaps as the one unique external factor, then maybe you can do ok macroeconomic analysis using endogenous growth theory ideas.

But there is no way pure endogenous growth theory works. It is a joke.

Furthermore, Young’s supposed “big idea” was that contra-Quesnay, contra-Smith and contra-Marx, it is not land, or labour that is the “source of value” but rather “trade.” So Young was as naïve as all the rest, albeit a little more original. Young’s thesis on trade being the real source of “wealth” is, shall we say, interesting. It is a nuanced position. But trade is not possible without energy, so the physiocrats are still the foundation of economics. The higher layers of analysis just ignore this, and never had to worry, until today when energy demands are out-stripping the biosphere’s regenerative capacity, meaning no trade is going to help with this.

To apply Young’s thinking however, is not fruitless, because the “trade” in intellectual ideas is what will ultimately avoid ecological catastrophe. So I am prepared to give Allyn Young his due on getting something good thought-out that went more than a little bit beyond mainstream economic narrow-minded thought.

I could come back to this later and identify this as a fifth veil of money — the idea that money is so dominant in commerce and that sales drive profits is so critical to capitalism, that the role of energy as the one common dominant factor in all production, of any kind, from socialist to capitalist to feudalist, gets utterly ignored, or is it better to say “taken for granted so much that it is invisible”? Invisible perhaps to all but the oil cartels and electricity suppliers.

This last point — that energy is well understood to be the kingpin commodity that rules them all — is so well understood it is perhaps taken for granted except during an energy cartel price gouging event! But because it is so well understood as the dominant driver of global currency inflation events (when no currency is “safe” unless their governments comprehend MMT${}^\ast$) I think academic economists ignore the role of energy in production and focus excessively on price instead. I think this is a big blind spot of mainstream economics.

${}^\ast$MMT has perhaps the only proper understanding of how a foreign nation can combat oil monopoly price fixing, which is to let the inflation run until the energy cartels give up. Any government running a fiat currency can always re-gauge their currency to get the oil, and in the meantime invest in substitutes. This is a relative price adjustment story, not a hyperinflation story, unless the governments make it an inflation bogeyman story. By buying the oil they suffer pass-through inflation, but that’s irrelevant to maintaining fair domestic distribution, because that government just raises their minimum wage and welfare support. The number of zeroes they add on to their lowest denomination currency bills is just digits of information, no gold is at stake, no grandchildren will ever be held to ransom. All that matters is relative price, not the absolute value stamped on the currency or bank accounts. What then matters is how much work your nation needs to do to export goods to “pay for” the oil imports. That is always a relative value story, not a runaway inflation story. What also matters is the psychological pressures coming from the inflation fear-mongering, which is a real problem that MMT cannot directly help you with, except to inform you the problem is only in people’s imaginations${}^{\dagger}$, which is not trivial help! (Margaret Thatcher had exactly this psychological problem, when she complained the price of milk was twice that when she was a child! Somehow she did not comprehend the wages had gone up more than double, and all without putting any gold or Crown jewels at stake.)

${}^{\dagger}$I think it is fair to say only MMT people understand this. However, this is no inoculation against getting sh*t scared that saying this truth out loud can earn ridicule and condemnation. The truth is not always easy to tell, and can put the proverbial fear of god into those who dare speak.

It used to not be too much of a problem when human energy use was easily well within planetary ecosystem boundaries. But today that is no longer the case. So modern economists post 1980, or thereabouts, are morally obligated to update all their models to account for the crucial role of energy in production, and especially at the macroeconomic level where up until today it has been almost totally ignored. (In this wise I do not fault Allyn Young, since he was writing in a time when the planetary ecological stress boundaries were not understood, and seemed invisible.)

Anyway, I am not going to call the blindness to the role of energy in production one of the veils of money. But in hushed whispers I think it really is one of the veils of money, so would be the fifth on my list. The only reason for whispering here is that I am not exactly sure of the true historical story of how energy got ignored. If engineers and physicists had been the first economists, and not the philosophers of politics and morality, then I think energy would always have been critical in economics, but that was just not the way history unfolded.

The first veil

I am not going to say all this is some sort of metaphysical characterisation of the various veils, I’m just free-flow writing here, and this veil is the first one to pop out.

The veil is the way money is so heavily used in commercial trade that the true origins history gets obscured, the dominant use of money is thus a veil over the true history and origins.

The origins of money are well understood by archeologists and anthropologists, Knapp , Mitchell-Innes , Graeber , Hudson , Wray among others. The true history is that forms of temple, emperor or state authority currency, all arose from settlement of debts and thus were records of credit. Every debt had a corresponding credit.

For sure, double entry book-keeping was a much later invention, but before book-keeping people held these records of obligations well enough in their heads. Any record of such debt or credit is a form of money in the highly abstract sense, an I.O.U.

In a material sense monetary units properly came into existence when grain weights of rice or barley or wheat were used as an artifice or stand-in for those records. Of course paper records that were reliable could have been used, and before solving the forgery problem of paper records was discovered, tally sticks were pretty good currency records.

Note that none of this implies a currency unit was always the creation of the government state (which is narrow Chartalism ). Sometimes a means of settlement of debts (so a currency as a means of payment) can be created outside of a government, perhaps by a feudal lord, an oligarch, religious temple, or some other power or authority or collective.

The MMT story of money is still chartalist, but is generalized chartalism — which means it almost always practically takes some power or authority to run the currency unit payments system. They have to be either trusted, feared, or both.

On this topic, Margaret Atwood’s accounts in Payback: Debt and the Shadow Side of Wealth give a vivid history that would make any Zeitgeist Movement Philes wet their pants. (The Zeitgeist Movement folks are not all bad though, their motives are all good.)

Helping and Hindering

This duality in MMT exists in any institutionally arranged system, it is almost a tautology, because unless something is a deterministic machine designed and built to function perfectly, then the system it runs will have imperfections, some may help bias outcomes in a good way, some in a bad way.

For example, some of us joke that Dick Cheney was the most accomplished MMT policy maker in the past 25 years. Mostly for the bad.

John Maynard Keynes and J K Galbraith were the most accomplished MMT policy makers during World War II and Galbraith in the post-war era. Mostly for the good (at least by the account their sides won the war, and to the extent that success had anything to do with moving private production into the public sector for that period).

Successful war time efforts are examples of where there is one type of veil of money partially lifted. Everyone works for the war effort, and issuing enough currency is not even debated. The issuer always “finds” enough currency. They do so either by suspending the artifice of a gold standard, or they just implement pure fiat money operations without the gold standard veil forever after.

The gold standard is thus revealed (by wars) to be a veil. There never really was a gold money. The currency is always a tax credit, and the issuer tells you what it is worth. If they tell you it redeems for $\pi/100$ ounces of gold, then that’s the fiat price. What it can purchase then depends upon the relative price of gold to other goods, but who gets that purchasing power is still a choice of the currency issuer.

Like control of nuclear power and primitive fire, a powerful force or technology can always be used to commit atrocities. MMT is no exception. But the monetary system is ancient, has existed for over 5000 years, and is often a force for good when used wisely. It is not a free market or natural equilibrium that achieves good or terrible social outcomes, it is our wilful design, or negligence.

((That was another near tautology: if a pure free market was ever to exist, it would be by human conscious willful design. My thought on that is always that what most people desire is a fair market, not a free market. Freedom implies all sorts of bad things, through fallacies of composition: everyone is free to stand up in the seats at a football game or the opera, but they don’t, they constrain themselves for the ‘greater good.’ The greater good, and hence the constraint, is really more freedom not less, because we are now talking about different qualities of freedom. All freedoms are not equal in quality. Freedom absolutists are knuckleheads, to use a technical term.))

People will bitch and moan at us: “yeah, but who gets to say what counts as quality freedom?” The ideal answer is always the demos. The current realpolitk answer is the oligarchs. The point is, it is encumbent upon the collective demos to crack the realpolitik and corral governments towards the ideal, and to do so by claiming back their government from the oligarchs. The oligarchs do have ownership claims on today’s governments, but that is an unjust claim. All people must act to destroy that illegitimate claim. Understanding MMT gives people a clear understanding how — the oligarchs do not control the monetary system, the government does. The demos must therefore reclaim their government, it does not rightfully belong to the oligarchs.

The second veil

The second veil is the gold standard. The idea that because you need some token to make a payment the token (or the stuff it is made out of) itself is somehow “the money.”

As explained above, the gold standard does not make gold the currency. It makes gold the buffer stock. If the issuer runs out of gold the currency rapidly deflates, since the buffer stock becomes scarce. It is an insane unstable system. All mainstream economists agree with MMT that sustained moderate inflation is better than any deflation, but especially better than bursts of deflation (bank runs, the Cross of Gold, artificial austerity, and all that).

The third veil

The third veil of money is the way the idea occurs to unthinking people that ‘having money’ is seen as prestige and by default almost taken as implying the person with lots of money has earned it, and so is a ‘good person’ or has been ‘hard working’.

Sometimes this is true, veils are like that, they will often reveal a true silhouette.

Money as this veil obscures corruption and greed, and obscures the fact the poorest people are not deserving of being poor. Only MMT recognizes why this is true, because MMT understands the source of all unemployment in a monetary economy — and that source is not laziness or apathy.

MMT in this fashion follows in the tradition of W Edwards Deming, who pointed out to Japanese management (or any management experts who would listen) that they should not punish the lowest performing workers, because no matter how perfect their production system, with all workers top notch talents, there is always a lowest performer to be found. Being the lowest performer in a given period thus means next to nothing, it is an incontrovertible statistic. The system as a whole has to be judged, not the trivially existing least productive worker.

Deming said that if you have a poor performing worker who should “on paper” be an ok worker, something is more likely wrong with the system.

Money and Institutions

At the governmental level, and only at the governmental level, MMT tells us our already existing monetary and legal institutions make the state currency units mere scorepoints — as far as the government is concerned — and so to a government policy maker, their unit of account, the state currency (but only their state’s currency) is a mere veil over the business of banking and commerce regulation.

But this is absolutely critical awareness, and too many people on both the political “left” and the “right” fail to see this dual aspect to money, specifically state currency (not private money forms).

To caricature the political divides somewhat, I’d say,

• the lefties see money as “evil” (in some sense) but focus on the power of money and how this is unfairly distributed. They fail to recognise the full MMT picture because they do not see that the governments control the state currency system, so are not beholden to collecting taxes off rich people. (There are many other ways governments can ensure that there is no undue wealth inequality in society, e.g., to prevent unbridled capital accumulation in the first place).
• the right-wingers see money as essential, but only as a veil over barter, because they cannot bring themselves to see any essential role for a government in private commerce. They fail to recognize the full MMT picture because they do not understand what drives a monetary numeraire.

On the right-wingers for a second: we know that what drives demand for a fiat currency is imposition of liabilities of some kind or another, and it has never been any other way throughout all history. In fact one pretty good definition of “money” is that “money” is an I.O.U. — a promise of the issuer to redeem. That is equivalent to a record of credit and debt (the issuer is in debt, the receiver in credit, when the receiver of the I.O.U returns it to the issuer the debt is redeemed and the creditor is back to zero credit.)

Right-wingers fail to understand all past and present monetary systems because they cannot wrap their heads around this definition of “money.” To most right-wingers “money” is some physical substance, like gold, and so they hate this concept of a fiat currency which is nothing but scorepoints on secured ledger books.

One can go ahead and use the concept of a physical stuff like gold, as “the money”. But then you have to re-wire all your macroeconomic models, and to my knowledge no one has ever successfully done this. More critically, in practice, no nation has ever implemented such a commodity money system, though many right-wingers seem to think those systems have existed.

In eras of feudal rule, when empires had broken down, it is true that at some times gold coins or other metals, were used as a socially understood commodity currency, but the problem is that this relied upon mass social misconception. The metal coins always traded for goods according to the numeraire stamped on the coins. This was never held equal to the trade value of the actual metal (which was normally a lot less than the numeraire face value on the coins — because otherwise people would quickly learn to melt down the coins (often illegally) to sell them).

Actually, writing it that way I am not sure if it is correct to call it a mass social misconception. People living at the time had to understand the system, since they did not go around melting down the metal coins. Yet there was a misconception at some point, because most accounts eventually tell the story that “the metal was the currency”. So digging it up out of the ground or mining it was “banking”.

I often allow other philosophers and activists to have their own definitions, and so if a right-winger comes along and insists “money” is a commodity like gold, I would normally (if this were mapped to a science problem) let it go. But we cannot “let it go” when it comes to macroeconomics, because it makes a huge f-ing difference whether or not the state currency units we get tax liabilities imposed upon us in are real stuff or mere scorepoints.

You want it to be scorepoints.

Why? Because you do not want to motivate pirates. Because you want the regulator of this system to be able to actually implement some justice, to balance the economy so that increasing returns to wealth do not become an automatic destabiliser. Because you want inequality in wealth holdings to be surmountable. Because you want a way to eliminate nominal poverty. So you do not want their scorepoints to be artificially limited.

Imagine at a football game: your side scores a try or touchdown to win at the final second. Scorekeeper: sorry lads, I’ve run out of points… a minute ago.

This is all critical for justice. Even right-wingers like justice. So they aught to want a fiat currency system (points on the government scoreboard).

But sometimes there is just no getting through to the reactionary minds of conservatives, who seem to simply be genetically ill-disposed to all forms of government encroachment upon private markets.

This is highly ironic, because a market with goods for sale in a (semblance of democratic) state currency system does not exist without a government force (tax collector imposing the return of the liabilities). The trouble for right-wingers and libertarians is that if a state government does not exist, you only get something worse, which is a landlord imposing their own private liabilities upon you (“give me half your grain and sheep or I’ll burn your hut down.”)

The fourth veil

Because money is seen as an instrument of the most powerful, because having excess credit gives someone more purchasing power, this store-of-value function of state currency is a veil over the proper role of an ideal democratic state.

It is because people hate to see a Leviathan exerting power over the “little people” that a big government (big brother) is seen as anathema. This is however a veil over the reality that without government the “little people” (aka. the working class) are even more entirely screwed.

It is better to have the monopoly currency issuer protecting the working class than have the peasants and real workers fend for themselves in some libertarian anarcho-capitalist fantasy world.

The problem is our governments have never been protectors of the working class. All gains made by the working class have been by collectivist approaches exerting influence upon governments, at the chagrin of the people running the government.

The government is a crucial institution for worker emancipation. But workers cannot just sit back and wait for their rights to be granted. Human rights have to be exerted, have to be fought for, and have to be won on moral grounds well before they are won on material grounds.

The way Warren Mosler has put this is that: The Labour market is not a fair game. The role of a democratic government is to balance that playing field. Workers need more protection than the bosses.

When people adopt the view that money should be a private system, they are placing this veil over the rightful role of democratic government.

To Conclude?

I think there are other veils of money, but I’ll stop at these for now. I think they are the most important veils to understand.