Money (5 page)

This third element is vital. Whilst all money is credit, not all credit is money: and it is the possibility of transfer that makes the difference. An IOU which remains for ever a contract between just two parties is nothing more than a loan. It is credit, but it is not money. It is when that IOU can be passed on to a third party—when it is able to be “negotiated” or “endorsed,” in the financial jargon—that credit comes to life and starts to serve as money. Money, in other words, is not just credit—but
transferable
credit. As the nineteenth-century economist and lawyer Henry Dunning Macleod put it:

As we shall see, this innovation of the transferability of debts was a critical development in the history of money. It is this, rather than the graduation from a mythical barter economy, which has historically revolutionised societies and economies. In fact, it is barely an exaggeration—if we make allowance for the unmistakable overtone of Victorian melodrama—to say, as Macleod did:

The recognition of this third fundamental element of money is important. It explains what determines money’s value—and why money, even though it is nothing but credit, cannot just be created at will by anyone. For sellers to accept buyers’ IOUs in payment, they must be convinced of two things. They must have reason to believe that the debtor whose obligation they are about to accept will, if it comes to it, be able to satisfy their claim: they must believe, in other words, that the money’s issuer is creditworthy. This much would be enough to sustain the existence of bilateral credit. The test for money is more stringent. For credit to become money, sellers must also trust that third parties will be willing to accept the debtor’s IOU in payment as well. They must believe that it is, and will remain indefinitely, transferable—that the market for this money is liquid. Depending on how powerful are the reasons to believe these two things, it will be easier or harder for an issuer’s IOUs to circulate as money.

It is because of this third critical element of transferability that
money issued by governments, or by the banks which governments endorse and backstop, is thought to be special. Indeed, there is an influential school of thought—known as chartalism—which argues that governments and their agents are the only viable issuers of money.
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But the story of the Irish bank closure exposes this as another misleading preconception. The closure of the Irish banks showed that the system of credit creation and clearing need not be the officially sanctioned one. The official system—the banks—was suspended for the best part of seven months. But money did not disappear. Like the infamous
fei
that sank to the bottom of the sea, the associated banks suddenly vanished—and with them the official apparatus of credit accounts and clearing—and yet money continued to exist.

The Irish bank closure demonstrates that the official paraphernalia of banks and credit cards and solemnly printed notes with unforgeable insignia is not what is essential to money. All of this can disappear and yet money still remains: a system of credit and debt, ceaselessly expanding and contracting like a beating heart, sustaining the circulation of trade. What matters is only that there are issuers whom the public considers creditworthy, and a wide enough belief that their obligations will be accepted by third parties. For governments and banks to fulfil those two criteria is generally easy; whereas for companies, let alone individuals, it is generally hard. But as the Irish example goes to show, these rules of thumb do not apply universally. When the official monetary arrangements disintegrate, it is surprising how effective society is at improvising an alternative.

My friend the entrepreneur was looking distinctly unimpressed.

“Fine,” he said, “you may be right. Maybe on closer inspection my—I mean, Adam Smith’s—theory has a few holes in it. But I’ve got a question for you, then. So what? What difference does it make, in the real world, if I think of money as social technology rather than a thing? And why does it matter if it’s a social technology that doesn’t necessarily depend upon the state?”

These were fair questions, I answered. All I had been arguing for
ultimately, was a simple change of perspective. But simple changes of perspective can have dramatic consequences. My own powers of persuasion were wilting. So I turned to a favourite story of the great physicist Richard Feynman for help.

In one of his famous television lectures on physics, Feynman wanted to convey how, in science, a small change of perspective can sometimes produce a radically different view of the world—and how our preconceptions might make that change of perspective seem counter-intuitive.
⁴⁵
He gave the example of how the static electricity generated by using a plastic comb can be used to levitate a piece of paper. We never cease, he explained, to be entertained and amazed by this feat. The reason is that we are used to forces that we can see—for example our hand touching the comb itself, experiencing resistance, and therefore being able to grasp it and lift it up—and so we think only these forces are real. By contrast, forces that we can’t see—for example the action at a distance caused by the electromagnetic field attracting the paper to the comb—seem like magic. But in fact we have it exactly the wrong way round. It is the force that we cannot see—the electromagnetic field—which is the fundamental force. The invisible electromagnetic field lies behind both the apparently magical action at a distance of the static electricity and the familiar solidity of everything we can see.

It is just the same with money. As we have seen, the great temptation has always been to think that coins and other currency, being tangible and durable, are money—on top of which the magical, incorporeal apparatus of credit and debt is constructed. The reality is exactly the opposite. It is the social technology of transferable credit that is the fundamental force—the primitive monetary reality. The stone
fei
of Yap, the willow tally sticks of medieval England, the banknotes, cheques, scrip money, and private IOUs of countless episodes of monetary disorder throughout history, and the billions of bits of electronic data that the banking systems of today’s advanced economies use: they are all simply tokens to keep track of the underlying and ever-fluctuating balances of millions upon millions of credit and debt relationships.

The consequences of this change of perspective on money for our understanding of our economic reality are every bit as dramatic, in their sphere, as the consequences of the shift from the Newtonian to the quantum theoretic perspective have been for our understanding of our physical reality. The next chapter will begin to explain what they are.

In June 2012 a splendid new gallery devoted to the history of money was opened at the British Museum in London. The museum’s management had concluded that the previous Money Gallery had lost the public’s interest. Visitors just weren’t that engaged by row upon row of old coins and scholarly explanations of where they came from: a new approach was needed. The result is a triumph of design. Alongside a more limited but more fascinating collection of coins are all kinds of exotic objects that have been used as currency: cowrie shells from Arabia and Africa, seeds from the Solomon Islands, a fourteenth-century Chinese banknote—even a
fei
from Yap. But there are now also a host of other intriguing objects that bring money’s central role in human history to life, from a sixteenth-century maiolica donation box with which the pious citizens of Siena used to expiate God with Mammon, to a 1982 silkscreen homage to the U.S. dollar by Andy Warhol. There is, however, something strange about this magnificent new gallery. Its creation was generously sponsored by a bank; in fact, by what was then the largest bank in the world, the U.S. conglomerate Citibank. Banks are a pretty important part of the story of money, one would have thought. Yet there is no bank exhibited in the Money Gallery.

This is not because of some nefarious conspiracy to conceal the real workings of the financial system. It is because the gallery’s designers were well aware that nothing very informative would result from putting a bank inside a museum. A bank is just an office building, pretty much indistinguishable from any other office building—and it would tell you little about money to look at that. The problem is that money is not really a thing at all but a social technology: a set of ideas and practices which organise what we produce and consume, and the way we live together. When it comes to money itself—rather than the tokens that represent it, the account books where people record it, or the buildings such as banks in which people administer it—there is nothing physical to look at.

This has an important implication for us if we want to investigate money’s origins, nature, and influence on history and our own lives. The archaeological approach taken by the new Money Gallery at the British Museum is an important and interesting one in its own right. But if we really want to understand money, we need to embark on a different kind of archaeological expedition. Ours will be a mission to recover and analyse not bullion, coins, or the charred remains of tally sticks—or indeed any
thing
at all—but ideas, practices, and institutions; and, above all, the idea of abstract economic value, the practice of accounting, and the institution of decentralised transferability.

As with any excavation, the first question is where to dig. We have seen that if money is indeed the operating system on which we run our societies and economies, the challenge of getting an objective view is an imposing one. Locating a case in which the official monetary system took a holiday, as it did during the Irish bank strike, might have been easy enough; and through it we learned something about the extent to which money really depends upon the state. If we wish to delve more deeply, however, we need to achieve an altogether more radical triangulation: we need to explore a time and a place where money never existed. That may sound like a tall order—but as it happens, we are in luck. Not only do we possess a vivid and detailed description of the age immediately before the invention of money,
but that description happens to be contained in two of the greatest poems ever composed.

The
Iliad
and the
Odyssey
—the two epic poems that represent the earliest surviving products of Greek culture—are celebrated as the fountainheads of all subsequent European literature. But it is not for their literary merits alone that the Homeric epics are valued. The
Iliad
and the
Odyssey
also comprise a unique historical record of Greek society and culture during a period of which we otherwise know remarkably little. The great palace civilisations of Knossos and Mycenae that flourished in the second millennium
BC
left a wealth of archaeological evidence. To understand the city states of classical Greece that emerged from the mid-eighth century
BC
onwards, we can turn not only to their art and architecture but to their literature and philosophy. But in between these two periods is an era for which almost no evidence of any sort exists: the so-called Greek Dark Ages. When Mycenaean society suddenly collapsed in around 1200
BC
—probably as a result of assaults by invading enemies—virtually every vestige of the great civilisation disappeared within a single generation. The monumental palaces with their large populations, wealthy hinterlands, and cosmopolitan connections vanished. The Greek world reverted to a dispersed collection of isolated tribal communities: small, rustic, and illiterate. For the next four centuries almost our sole source for understanding the culture and society of the Greek Aegean is the tradition of oral poetry that culminated in the Homeric epics.

Fortunately, the canvas of these poems is vast. The
Iliad
is most famous for its evocative accounts of the carnage of war and the manly excesses of its heroes. A single account of an attack by a lone chieftain can run to over a thousand verses, most of them dedicated to vivid description of the gruesome ways in which he dispatches his enemies.
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But the variety of life depicted in the poems is much
broader than the heroic existence alone. In a famous passage of the
Iliad
describing the shield that the blacksmith-god Hephaestus fashions for Achilles, for example, we learn of Dark Age practice in fields ranging from agriculture to animal husbandry, and from marriage ritual to criminal litigation.
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The subject matter of the
Odyssey
is more wide-ranging still. The hero Odysseus, returning from Troy, criss-crosses the known world. He is seduced by witches and imprisoned by one-eyed giants. He consorts with shepherds whilst disguised as a vagrant and dines with kings at the grandest palaces of the age. After exhausting all possibilities on earth, he even descends to the Underworld where he encounters his erstwhile brothers-in-arms and commiserates with them on their dreary fate. Yet in all this astonishingly rich panorama of Dark Age society there is something that is conspicuously missing. There is no money.