Last time we looked at the Book The Code of Capital. The big idea of that book is that what constitutes capital – wealth generating assets – is the way they are encoded by laws. Law is what flips and asset from just another idea or piece of paper into something you can make money off of. And now theoretically anything can be coded as capital – even one’s own labor.
But law is intimately involved in more than just capital. It’s also behind what constitutes money.
We think of money as some neutral thing. But underneath it lies the same system of laws and regulations that creates capital. Certain types of money take precedence over others. Certain types of money have a higher claim on real resources, and those claims are determined by the state via law.
I’ve read about that idea before, but it was reinforced by this podcast with Rohan Grey, an attorney originally from Australia who writes about the money system. Here his is on the essential legal nature of how we order and design our economy and economic transactions:
[10:01] Rohan Grey: “I sometimes think of the scene in The Matrix where he’s kind of looking at everything and [seeing] the the green lines of code [behind everything].”
“Not that I would recommend anybody go to law school, but one of the things that is good about going to law school is that it trains you to see the legal ‘code’ behind almost every issue.”
“You know, you’re walking down the street and you see something, and go, ‘wow, that’s a lawsuit waiting to happen.’ Or you see someone putting up electrical wires, and you think, ‘I wonder who approved the local council ordinance for that to happen this way,’ or something.”
“So there’s just so many different things where, to borrow a line from the poet Rilke, ‘Don’t be confused by the surfaces; in the depths, everything is law.’
And so when you think about what money is, there’s a lot of times where people get hung up on either the physicality of it–whether it’s paper, or a coin, or a blip on a computer screen. They think money is the thing that they can point to, or the thing that they can hold.”
“There are other people who think that, very crudely speaking, money is what money does. If something is a store of value; if something is a medium of exchange, it is money.”
“Whereas, I think what we would say is that money is first and foremost a *relationship*. It’s a statement of social relations between people. And those social relations are structured by law and legal dynamics.”
“To give this an example or analogy, when people talk about what property is–property isn’t the thing…If I had a house, that wouldn’t be my property. My property would be the legal title to the house. And that wouldn’t mean that I suddenly owned the house. It would mean that I had a set of legal rights, and legal claims, against other people.”
“So when we talk about the property right to a house, the first thing that comes to your mind is a house. What we’re really thinking about is the relationship between me, and everyone else in the world, with respect to the house. It’s that web of invisible filaments between me and the state, between me and you, between me and other people who inhabit the house. That web is what the property right is, not the house itself.”
“So, to take that idea to money, it doesn’t matter whether we’re taking about a coin, or a paper note, or an account entry on a balance sheet, or a computer blip on a screen. The essence of money is the legal relationships that are structured between me and other people with respect to some sort of instrument, or some sort of monetary value.”
“And that relationship can be structured in different ways. It can be a form of private credit. So if I ‘owe you one,’ in the kind of broad favor sense, that might not be money. But if I owe you *one dollar*, and you know you can take me to court over that, and then you can take that IOU that I have for you…and give it to somebody else, and that person can take me to court, than that might be money. So something that started off as a sort of personal, informal favor, can become money once it gains certain legal properties.”
“Another kind of money–or the kind of money that the MMT story starts with and thinks is the most central to modern societies where most relationships go beyond the people that you know by name…the dominant form of money is the money that the state issues and says, ‘we will accept this for any legal debt that you owe to us, or to other people.'”
“So the way that MMT boils that down for the average person, is to say, ‘taxes drive the value of government money.’ Out of all the kinds of money that could be out there; out of all the kind of private credit relationships…the most important is the one that the state says will be acceptable for its own IOUs–its own debts to itself: taxes, court judgements, criminal fees and fines, [penalties]–that kind of money has the most wide acceptability because everybody knows that at some point they might incur legal damages. They might be sued. They might have to pay taxes. They might have to pay some sort of fee or fine. And if *they* don’t have to pay, someone else is going to have to pay, which means that if they accumulate some money, at the very least they’re going to be able to offload it to somebody else who needs it.”
…There’s only two things in life that are certain: death and legal liability risk. Even if you think you’re off-grid, even if you’re living in the Canadian wilderness and hunting bison with a bow and arrow…somebody could come along and get in an altercation with you, and the next thing you know you’re getting a court summons because they’ve sued you for hurting them…So it’s almost impossible to image a world where you’re not at risk. Even if you don’t have an *actual* bill from the government due tomorrow, you’re at risk of facing a bill from the government, even if you don’t have to pay taxes.
So that idea that at some point you might find the need to pay some sort of legally-denominated debt means that you–and anybody who is in a similar postion–is going to want to make sure you have access to some of the money that can pay that debt.
Which means that the best way to think about that money…is that it’s a tax credit, or that its a legal credit. And therefore, any instrument–whether it’s virtual or physical–that legally is recognized as being a tax credit, is going to have some degree of money[ness].
In Rohan’s telling, rather than money in the abstract, the fundamental social nature of money is taken into consideration. This is eliminated in standard economics curricula, which assumes everyone to be atomized strangers to everyone else, with no prior dealings.
We saw that even with “primitive money.” Earlier we looked at the essay “Primitive Money” by George Dalton. There we saw that “primitive” money isn’t used so much as a means of exchange for settling spot transactions between strangers, as it is in our culture. Rather, money is used as a means to discharge social obligations between people in a society.
Primitive money performs some of the functions of our own money, but rarely all; the conditions under which supplies are forthcoming are usually different; primitive money is used in some ways ours is not; our money is impersonal and commercial, while primitive money frequently has pedigree and personality, sacred uses, or moral and emotional connotations. Our governmental authorities control the quantity of money, but rarely is this so in primitive economies.
There are a couple of reasons why this is so. For one, there are very few “strangers” in traditional societies. For another, markets are not very important to society. They are tangential places of exchange, but they don’t order social relations, nor are hypothetically “self-adjusting” markets the sole means of resource distribution.
In our society, our social relationships tend to be structured primarily by money transactions in markets. There are exceptions of course—we still have families, after all. We can think of citizenship as another way to structure social relations between people.
But in traditional societies, social relationships are not structured around money. They are structured by other things—usually kinship. Money is simply one of the means of discharging one’s social obligations.
Some common social obligations are weddings and funerals. Bridewealth and dowries are a couple of examples. But delict and crime is another example, and one which which illustrates the social nature of money. In these cases, what constitutes payment will be determined by the authorities, and how much is required for the settlement of various offenses will also be determined by the relevant authorities. Ancient legal codes had a schedule of payments from one group to another based on the offense committed.
Relating to Rohan Grey’s argument above that the necessity of having a means of settlement with the authorities establishes the type of money that is most in demand, in many cultures what constitutes the acceptable means of settlement becomes the first type of money. In some cultures this is cattle; in others it might be shells, or metal coins, or whatever. Things than become priced in whatever that is, and a range of equivalencies are created (5 goats = 1 cow, etc.).
We’ve just abstracted so much that we’ve lost sight of this relationship.
If any means of settlement between two people or groups of people constitutes money, than we have an awful lot of different types of money. How do we differentiate them? The following are taken from a paper by Stephanie Bell entitled “The Hierarchy of Money.”
In [G. F.] Knapp’s treatment, all money represents a Chartal means of payment. That is, all money is a ‘ticket’ or ‘pay-token’, which gains validity by proclamation that it will be accepted as a means of payment. These ‘tickets’ or ‘tokens’ which individuals/institutions have proclaimed acceptable as a means of payment do not become money until they have been accepted by another individual/institution.
Going back to Keynes, then, a great number of ‘things’ will answer to the ‘description’ or ‘title’ of money. That is, every plane ticket, pre-paid phone card, movie ticket, subway token, etc. is a form of Chartal money. It will, therefore, be useful to narrow our focus and to proceed with a simplified discussion of ‘the hierarchy’.
This is where the concept of a hierarchy of money comes in. And that hierarchy is once again determined by laws and legal institutions.
..a money’s place within the hierarchy depends on the degree to which it is accepted by society…
…the ‘hierarchy of money’ can be thought of as a multi-tiered pyramid where the tiers represent promises with differing degrees of acceptability. At the apex is the most acceptable or ‘ultimate’ promise. But if all promises are denominated in the same unit of account, why are some deemed more socially acceptable than others? Whose promises will be the most acceptable? And why would anyone agree to hold the relatively less acceptable promises?
The paper than goes on the list the numerous relationships structured by debt, and where they sit on the tier of money. The bottom tier consists of the debts of firms and households. The top tier consists of the debts owed to the state. The reason why the state’s debts rank higher than others is because the means of settlement with the state do not have to be converted into anything else in order to be valid:
To get business and household debts accepted, they might be made convertible into the debt of someone higher in the pyramid and may also require interest payments to compensate for the risk associated with holding less liquid assets…Unlike households and firms, state promises and certain bank promises would be accepted even if they were not convertible into anything else…Likewise, the state’s promises do not depend on convertibility into anything else…Recall that As the ‘decisive’ money of the system, both the state’s promises and banks’ promises rank high among the monies of the hierarchy…the legal obligation to pay taxes and the state’s proclamation that it will accept its own currency at state pay-offices elevate the state’s liabilities to the top of the pyramid, rendering them the promises with the highest degree of acceptability.
In short, not all money is created equal. Although the government, banks, firms and households can create money denominated in the social unit of account, these monies are not considered equally acceptable. Only the state, through its power to make and enforce tax laws, can issue promises that its constituents must accept if they are to avoid penalties. The general acceptability of both state and bank money derives from their usefulness in settling tax and other liabilities to the state.
What makes the capitalist system unique is that the debts between individuals can be monetized—that is converted into the state’s ultimate means of settlement, thus expanding the money supply. Again, this is entirely a creature of law. As Pistor pointed out, the state’s money unit can be used to structure horizontal relationships between individuals, and not just vertical relationships between the citizens and the state:
The test of ‘moneyness’ depends on the satisfaction of both of two conditions. First, the claim or credit is denominated in an abstract money of account. Monetary space is a sovereign space in which economic transactions (debts and prices) are denominated in a money of account. Second, the degree of moneyness is determined by the position of the claim or credit in the hierarchy of acceptability. Money is that which constitutes the means of final payment throughout the entire space defined by the money of account. Pigou’s ‘money’ was ‘proper’ not simply because it was backed by gold, but because the state pronounced the abstract money of account and established its exchange rate with gold.
A further important consideration is the process by which money is produced. Credit relations between members of a giro for the book transfer and settlement of debt were, as Innes observed, extensively used as early as Babylonian banking. However, these credit relations did not involve the creation of new money. In contrast, the capitalist monetary system’s distinctiveness is that it contains a social mechanism by which privately contracted credit relations are routinely ‘monetised’ by the linkages between the state and its creditors, the central bank, and the banking system.
Capitalist ‘credit money’ was the result of the hybridisation of the private mercantile credit instruments (‘near money’ in today’s lexicon) with the sovereign’s coinage, or public credits. The essential element is the construction of myriad private credit relations into a hierarchy of payments headed by the central or public bank which enables lending to create new deposits of ‘money’ – that is the socially valid abstract value that constitutes the means of final payment.
Credit and State Theories of Money by L. Randall Wray et. al., pp. 214-215
This is actually quite important in understanding how money not just as an abstract thing, but a way of social ordering created and reinforced by the state. Thus, you cannot have a market economy without a very specific set of laws and legal institutions established by states. And since the state is intimately involved, it makes no sense to argue that the state should somehow “get out of the way” of the market relations it established in the first place through laws, as libertarians argue for.