So, what is money? It’s a social unit of account and in fact it is almost always a state money of account. In the United
States it’s the dollar and — Speak up? Really? I sounded loud to myself! — It’s a record of a debit or credit. The
dollar, our money unit, is like an inch or a foot or a pound, okay, or a litre. It’s a measuring unit. We then have money things that are denominated in our money unit. It’s a little bit confusing in the United States because we use the word dollar to
indicate both the measuring unit and the thing that’s being measured, a little piece of paper that’s green, okay? That has not always been the case in monetary history but in the United States it is true. We then have a hierarchy of these money things. My professor, Hyman Minsky, used to always say, “You know, anybody can create money”, and he meant money things. Then he would add, “The problem lies in getting it accepted”. The government’s money things are widely accepted. My money things are much less widely accepted. There is a hierarchy of these money things. The important thing is, almost always the money things will be denominated in the state’s money of account, dollars! I could issue money things denominated in Rays. Okay? But it’s much more common to
denominate them in the state’s money of account. What backs up our money? When I started teaching in the early eighties, I would ask my students and probably three-quarters of economics students would say, “Gold!”. Well it wasn’t true even then, okay? Today almost nobody is confused about this because we have Ron Paul running around saying, “We need to back our money with gold!”, right? So now they know that it’s not. I like to read what it says on the paper currencies. US dollar, “This note is legal tender for all debts, public and private”. So more sophisticated students would say, “Ah, it’s legal tender”. And it’s true. Many currencies have a statement like that. Canadian dollar, Australian dollar, UK pound. Get out the pound and look at it. It says, picture of the Queen… “I promise to pay the bearer on demand, the sum of five pounds” on a five pound note. So in other words if you take that five pound note to the Queen, she promises to pay you another five pound note. That’s all she promises. No gold, no legal tender. She promises to give you another one in exchange. Okay? So, and in Europe no legal tender laws So what backs these things up? So some even more sophisticated students say, “Fiat”. The government just says it’s worth a dollar. That’s gets a little bit closer to the truth but it sounds like there’s nothing that backs up the currency. You don’t want to look behind the dollar bill. There’s nothing there, right? Okay. the alternative view. The Modern Money view. Use of the currency and value of money are based on the power of the issuing authority, not on intrinsic value. That should be fairly obvious now. Okay, where most of our money things are just electronic entries on balance sheets. Even in the case of the
government that’s the way that it mostly spends not by issuing green paper money but
through an electronic entry. The state played the central role in the evolution of money — I think that Michael will talk about this — and from the beginning used, and in fact purposely created the monetary system to move resources to the public sector. That was the purpose of creating a monetary system. We find, as Charles Gerhardt says, that in almost every case we have one nation, one currency. Euroland is the first major experiment in breaking this link between nations and their currencies. It’s not going so well for them if you’re paying attention to what’s going on in Euroland. So separate currencies is not a coincidence. It’s tied up with sovereign power, political independence and fiscal authority. As a shorthand what we say is… Taxes drive money. Taxes are denominated in the state’s unit of account. The state spends its currency into existence. When you got that tally stick from the Crown, why on Earth would you sell your sheep to the Crown for a stick? Because you could use your half of the stick to pay your taxes. Now taxes are just one example of an
obligation that the authority can put on you. In the old days fees and fines were much more important than taxes. But today it’s mostly taxes that drive money but any form of an obligation that you owe the authorities will work to drive a currency.