Libra, MMT, and the Nature of Money

There are three stories of money, broadly speaking. The barter story is the most familiar. Long ago, traders found it’d be easier to conduct exchange using a finely divisible and intrinsically valuable medium, which could free them of the inconveniences of barter. Precious metals fit the bill. Money arises from exchange.

A less familiar story is that of credit money. Here you can imagine beginning with reciprocal exchange: you give me some twine today, I’ll make good on it with some bread next week, or have someone who owes me give you stuff. People eventually decided to settle their debts in a single unit of account. The trick was to land on a numerical scale, something in which to denominate debts. Coinage could come later. Money arises from mutual obligation.

The third story is the chartal story, recently repopularized by MMT theorists. Here money is a creature of the state. Tax authority gives the state the power to determine money’s worth. The standard thought experiment is this: imagine a state levying a tax on subjects otherwise disconnected from a monetary system; this forces people to go out and get money — ie, to work — or else. Thus arises the value of money, from state power.

You can drive yourself crazy trying to parse the historical record for which of these stories fits the facts. Keynes recalled sinking into a “Babylonian madness” in his pursuit of money’s origins in ancient civilizations (the Babylonian story, by the way, fits somewhere between #2 and #3). The historical question is, however, separate from the practical one. For contemporary purposes, the chief concern should be not which parable “really happened,” but which story or combination of stories highlights those elements of money most essential to its operation today. 

There’s insight to be had here in reactions to Libra, Facebook’s recent foray into monetary issuance. Libra is a proposed cryptocurrency/ETF/payments system devised by a coalition led by Facebook, which promises to make paying for things online easier and cheaper. People have their doubts, but that’s not what I’m interested in here. What is interesting is the way authorities have responded. Here’s the view from the French finance ministry:

On Friday, an official at France’s finance ministry said the country would not allow a private group to set up the equivalent of a national currency. “We will not allow private enterprises to give themselves the attributes of state sovereignty . . . the means of monetary sovereignty,” the official said, ahead of the G7 meeting where cryptocurrencies and cyber security are expected to be on the agenda.

The equation of monetary sovereignty with state sovereignty is a fine statement of the chartal view. If the essential fact of modern money is its connection to the state, then Libra is either a threat to state sovereignty, or it is a quest, perhaps misguided, to fundamentally redefine the parameters of money. (The French complaint is of course somewhat ironic, given that France surrendered its monetary sovereignty in 1993 by signing the treaty that created the euro.)

Trump got in his two cents as well: 

 

On one hand Trump seems to be expressing the same sort of unease about loss of monetary sovereignty as the French. But he pivots confusedly to banking regulation, as if Facebook would be free to issue currency if only it were a bank. Unfortunately for Facebook (and for JPMorgan), banks are also prohibited from issuing currency. Only the state can do that. Banks do more or less create dollars every time they issue a loan, each of which comes not from some store of dollars in a safe somewhere but arises rather as a digital entry on a balance sheet. But managing a currency is a very different operation.

It’s an open question whether Libra, as proposed, could be classed as the sort of currency defended by Trump and the French finance ministry, or if it’d be something else entirely. Libra proposes to derive its value from a basket of safe assets — strong currencies and sovereign debts — that would back up its outstanding issue on a one-to-one basis. This is why people have made comparisons to ETFs, financial vehicles whose value is derived from stocks or other assets owned by the firms that manages the ETFs. If this comparison fits, then Libra is less a currency than a type of extremely liquid investment asset. Considered as an ETF, Libra would be less a threat to monetary soveriegnty than to domestic financial regulations. 

But back to monetary parables. My view, like that of Keynes, is that the last 500 years of monetary history back up the chartal story of money as a fair parable to tell today, particularly alongside the credit story (the barter story less so). This reading might cast doubts on the monetary future of Libra. But since the world has never seen anything on the scale of Facebook, it’s too hasty in my opinion to simply dismiss Libra as a non-money doomed for failure. We just don’t know.

What we can say following Libra’s unveiling and the reactions to it is that the chartal story has deep relevance today. I wouldn’t say it’s the only money story that matters, but it does live somewhere in the minds of state actors — people who, if you asked them to explain money, would probably tell a story more along barter lines than chartal. 

But as people sympathetic to MMT like to say, whatever you think about MMT’s policy priorities and predictions, we already live in an MMT world.

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