Modern Monetary Theory (MMT) and chartalism—the state theory of money, which is often invoked by MMTers—both look back to certain key writers. One such writer is A. Mitchell Innes who penned an article entitled “What Is Money?” in 1913 for The Banking Law Journal. A modern and active MMT voice, L. Randall Wray, says, “a relatively unknown 1913 article by Innes lays out the approach [chartalism] in a clear and concise manner.” Therefore, Innes is regarded as something of a chartalist pioneer and his article still serves as a foundational text for elucidating the theory. The main point of this present article will not aim to critique Innes’s work (though that is warranted), but Keynes’s handling of it.
Bold Historical Claims from MMTers
One of the typical lines argument from chartalists, especially MMT proponents, is to appeal to monetary history and attempt to discredit the Mengerian theory (though they often do not mention Menger) wherein goods in a barter economy, possessing certain qualities, come to be used for indirect exchange instead of just direct exchange, thus those goods eventually become media of exchange through voluntary transactions. At a certain point, those goods are not just valued for the ability to satisfy some direct want by consuming them but because they can also be used to exchange for other goods. The theory was developed further into the regression theory—solving the circularity problem of money’s value—by Mises and Rothbard. (For a step-by-step explanation of this theory, see the section of this article).
Whether or not the Menger-Mises monetary theory is true, it is usually mocked and ridiculed before being dismissed by MMT proponents. For example, take Wray’s comments—which includes strawmen—regarding the theory of barter leading to generally-accepted media of exchange,
We all know the traditional answers to these questions. Our homogenous-globule-of-desire forefathers were inconvenienced by barter until they spontaneously hit upon the idea of using tobacco, furs, huge rocks, landmarks, and wives as media of exchange. Over time, greater efficiency was obtained as homo economicus coined precious metals, and market efficiency was enhanced by free banks, which substituted paper money backed by previous metal reserves. All would have been fine and dandy except that evil governments came along, monopolizing the mints, creating central banks that debased the currency, and interfering with the invisible hand of the market. This finally resulted in abandonment of commodity money, substitution of a fiat money, and central bank-induced inflation. If only we could return to the Peter Pan and Lost Boys, Never-Never (Laissez-Faire) Land, free of Captain Hook and the Crocodile (Central Bank and the Government), with privately supplied free bank money greasing the mighty wheels of entrepreneurial commerce!
The problem is that the Never-Never land imagined by Paul Samuelsons and George Selgins simply never, ever, existed. There is no evidence of barter-based markets (outside trivial prisoner-of-war cases), and all the evidence about the origins of money points to state involvement. This is not to say that there have never been private monies, nor is it my intention to claim too much of a role for government in the evolution of the financial system. However, what I will argue here is that from the beginning, government played an important role in determining what would function as unit of account, which, as Keynes argued, is “what really counts”. (emphasis added)
Admittedly, the strawman theory that Wray describes never existed—that is one of the benefits of strawmen. However, the claim that history has no examples of barter leading to generally-accepted media of exchange on a voluntary basis and instead favors chartalism is dubious, to put it mildly. The history of the United States itself—MMT’s favorite exemplar of a monetary sovereign—provides fairly strong evidence of commodities becoming generally-accepted media of exchange on the free market prior to state interference. Tobacco is a noteworthy example.
The point of this digression is to note the dismissive tone toward alternative monetary theories, particularly in regard to history. This is key in Keynes’s handling of Innes. Speaking of tobacco and other commodity monies, Innes claimed,
Then again as regards the various colonial laws, making corn, tobacco, etc., receivable in payment of debt and taxes, these commodities were never a medium of exchange in the economic sense of a commodity, in terms of which the value of all other things is measured. They were to be taken at their market price in money. Nor is there, as far as I know, any warrant for the assumption usually made that the commodities thus made receivable were a general medium of exchange in any sense of the words….
There is not and there never has been, so far as I am aware, a law compelling a debtor to pay his debt in gold or silver, or in any other commodity; nor so far as I know, has there ever been a law compelling a creditor to receive payment of a debt in gold or silver bullion, and the instances in colonial days of legislation compelling creditors to accept payment in tobacco and other commodities were exceptional and due to the stress of peculiar circumstances. (emphasis added)
This is historically false. Hugh Vance in Colonial Currency Reprints, 1682-1751 (volume III), wrote of “money” in 1740, “Money is any Matter, whether Metal, Wood, Leather, Glass, Horn, Paper, Fruits, Shells, Kernels &c which hath Course as a Medium of Commerce” (emphasis in original). Elaborating further,
This is a good general Definition of Money; & agreable [sic] not only to the Usage of ancient Times, but even of the present. Look into our British Plantations, and you’ll see such Money still in Use. As, Tobacco in Virginia, Rice in South Carolina, and Sugars in the Islands; they are the chief Commodities, used as the general Money, Contracts are made for them. Salaries and Fees of Office paid in them, and sometimes they are made a lawful Tender at a yearly assigned Rate by publick Authority, even when [23] Silver was promised. (emphasis in original)
As we can see, from this evidence in the historical record of colonial America, the definition of money was those commodity goods which also exchanged as media of exchange. On the other hand, Innes believed that because of “the enormous growth of government initiative these [fiat government] tokens have come to have a circulation which no private tokens could enjoy.” Additionally, according to Innes, “it is clear that the precious metals could not have been a standard of value nor could they have been the medium of exchange.”
Keynes’s Review: Theory and History
In 1914, Keynes reviewed Innes’s “What Is Money?” (1913). Keynes’s assessment was that “the writer’s [Innes’s] strength is on the historical, not on the theoretical, side.” That would normally be fair enough. We cannot criticize a work too much for merely being stronger on history than on history or the other way around; it is the rare writer who is equally brilliant in both. Yet, note Keynes’s later criticism of the work,
This position Mr. Innes endeavours to establish by an historical inquiry, the value of which is, unfortunately, much diminished by an entire absence of any references to authorities. (emphasis added)
In other words, the historical aspect of Innes’s work—the alleged strength of the work over economic theory—was diminished by absence of any references to any historical authorities. How can a work be stronger in history without any historical sources cited? If that is the case, and Innes’s command of history was stronger than his economic theory, then his theory must be weak indeed.
In reality, Keynes likely just appreciated what Innes said and its ideological implications. In truth, Innes was weak on theory and history. However, Keynes concluded favorably,
It is difficult to check his assertions or to be certain that they do not contain some element of exaggeration. But the main historical conclusions which he seeks to drive home have, I think, much foundation, and have often been unduly neglected by writers excessively influenced by the “sound currency” dogmas of the mid-nineteenth century. Not only has it been held that only intrinsic-value money is “sound,” but an appeal to history of currency has often been supposed to show that intrinsic-value money is the ancient and primitive ideal, from which only the wicked have fallen away. Mr. Innes has gone some way towards showing that such a history [barter-exchange leading to media of exchange] is quite mythical. (emphasis added)
Apparently, without references to history, Keynes thought Innes’s conclusions had much historical foundation and simultaneously demonstrated the falsity of monies emerging from barter exchange. How he would know that is a mystery. What ultimately appealed to Keynes was that Innes’s theory provided an intellectual alternative more in line with what Keynes wanted to believe. Ideas are often not accepted because they are true or have the best evidence but because they effectively capture the imagination and provide apologetic vocabulary for views one already wants to hold. (That should be a warning to us all).
Similar to today, the strategy is often not to rigorously evaluate economic theory and history, but to make bold claims about the superiority of chartalism in theory and in the historical record, to denigrate Mengerian theories (often with straw-manning), to retreat to a softer modern version of neo-chartalism, and then declare that it doesn’t really matter because we are talking about modern money anyway. But if chartalism cannot explain the origin of money, it cannot explain money as such—only monetary policy within an already-existing system. In any case, it seems Innes could depend on Keynes for a credulous and ideological sympathetic audience.
