Monday, September 10, 2012
Nathan Tankus — The Euro as Idealist Project or: How I Learned to Stop Worrying and Love Pragmatic Elites
Nice post by Nathan. Something you need to know historically that Nathan doesn't mention is that the US federal government initially financed itself largely with revenue from tariffs rather than taxation, which was left to the states.
Naked Capitalism
The Euro as Idealist Project or: How I Learned to Stop Worrying and Love Pragmatic Elites
Nathan Tankus, a member of Occupy Wall Street Alternative Banking working group. He is also deeply involved in the heterodox economics community and plans to have a PhD in economics before the decade is done. Cross posted with View From the Metropole.
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40 comments:
Thanks Tom, yes I didn't mention it here. Why the Tariff was capable of doing that is a bit complicated and beyond the scope of the article. Also, since a Tariff is a subset of taxes, I felt for the purposes of the article I could leave it there. It should be noted that the first major fiscal policy of the United states after the constitution was attempting to tax whiskey, which succeeded in driving many small country farmers into foreclosure and making them workers. William Hogeland's book The Whiskey Rebellion is good and quite detailed on this point.
I didn't think it was an oversight, Nathan. It's just a point that many people don't realize.
Most people don't get that like emerging economies today, when the US was an emerging economy, it was export-driven and wanted to protect its fragile domestic industries.
Conservatives now want to return to the "simplicity" of the past but the US now the world's premier power. Conditions are completely different on one hand, and conditions then were also different from what they imagine now.
I've cited Hogeland on the Whiskey Rebellion here several tines, especially wrt to Hamilton's victory over Jefferson et all on federal power and institutions. The response to the Whiskey Rebellion was really more about putting down incipient populism than enforcing tax policy.
Let's also make sure that folks know that these people back then were caught up in metal love... and looked at weight measures of gold and silver as "money".
See Hamilton's imo more or less sexually laced description of these metals in Federalist 12 as evidence: "By multipying the means of gratification, by promoting the introduction and circulation of the precious metals, those darling objects of human avarice and enterprise, it serves to vivify and invigorate the channels of industry, and to make them flow with greater activity and copiousness."
Weird-o-rama.
Nathan you write: "but looking at Europe now, one can’t help but feel that many back then (especially the elites) understood money better and were much better pragmatists."
Del Mar described the word "money" as a metonym which imo is a good way to approach this word so you want to be careful there with the semantics...
http://en.wikipedia.org/wiki/Metonymy
"Money" as a metonym represents a broad group of arrangements or perhaps options that humans have used over time as a medium to facilitate exchange.
So we dont want to get locked into saying something like "money is _____ " as if there is a singular focused definition of "money".
The word "money" should always be used in context as the metonym that it is.
As far as these tariffs, we can see Hamilton here in Fed 12 thought of "money" as these metals at that time, and that through commerce, these metals would somehow magically be coerced out of the ground in the mines of Europe and find themselves in the US Treasury: "In some parts of this territory are to be found the best gold and silver mines in Europe. And yet, from the want of the fostering influence of commerce, that monarch can boast but slender revenues. He has several times been compelled to owe obligations to the pecuniary succors of other nations for the preservation of his essential interests, and is unable, upon the strength of his own resources, to sustain a long or continued war."
So for Hamilton the game plan was:
1. "Money" is precious metals
2. These metals are in the ground in Europe and in European Treasuries
3. We need to get these metals for our US Treasury
4. We therefore will facilitate commerce
5. We will tax this commerce to obtain the European gold and silver
6. We will then have the "money" to be able to wage war and operate govt...
Pretty primitive.
If you compare this to what our Greek and Roman ancestors were doing with their 'nomisma' system over 2,000 years before Hamilton, as documented by Aristotle, you may be convinced that it is NOT our early US so called "founding fathers" who understood "money" better than our morons today, but rather our ancestors who founded western civilization over 2,000 years age who REALLY knew how to operate these systems....
rsp,
And this is interesting:
"In short, Smith proposed that money develops to reduce the cost of transactions between people. It’s an interesting theory but, as David Graeber has described at some length in his book Debt: The First 5000 Years, , it’s one with no historical foundation."
No historic foundation? That's interesting because here is Aristotle writing in 'Ethics':
"By virtue of voluntary convention nomisma has become the medium of exchange. We call it nomisma, because its efficacy is due not to nature but to nomos (law), and because it is always in our power to control it." — Aristotle, " Ethica."
Is this not evidence that humans created 'nomisma' VOLUNTARILY as a MEDIUM OF EXCHANGE?
Is Aristotle just making all of this up? It's a 'fairy tale'???
A lack of acknowledgement of this 'nomisma' system that Aristotle writes about here is a VERY serious omission in the mainstream view on the "history of money" imo...
rsp,
Matt, Aristotle is a philosopher or theorist presenting his own theory on the origin of money. The fact that he was writing in the past is not in itself empirical evidence for the truth of his theory.
So Dan,
Youre saying Ari here is writing conjecture?
Then how did these laws (nomos) come about?
ie If humans did not write them?
Ari says this system was established thru law, laws have to be written, who wrote these laws then if the Greeks did not?
rsp,
"By virtue of voluntary convention nomisma has become the medium of exchange"
Am I right in thinking that 'nomisma' was the currency in which payments to the state had to be made? If so, that's not quite 'voluntary', though the population's subsequent use of 'nomisma' in trade amongst themselves would count as 'voluntary'.
Dan,
'nomisma' is not a metonym.
Ari is not writing about a nebulous concept like people write today about "money", but rather a very specific system that they voluntarily designed and implemented thru law to establish a medium of exchange that was not based on nature (metal/commodity), he says so right here plain as day.
The Greeks had other words like chrematia, argurion, chalkon, chruson, etc... that referred to things outside of the system of nomisma.... looks like these words referred to metals used in exchange in other (perhaps lesser) civilizations...
rsp,
"Am I right in thinking that 'nomisma' was the currency in which payments to the state had to be made? If so, that's not quite 'voluntary',"
If there was a tax (and youre right imo it looks like they did) It was established thru LAW tho y.
So they had a legal consensus.
You're not going "Bob Roddis" on us now are you?? ;)
rsp,
Matt,
to have a well-functioning flexible currency system, you need a well-organised state that is trustworthy and capable of competently managing the currency (not spending too much, collecting taxes etc).
Flexible currencies can collapse when governments lose control of them either through poor management or in extreme situations such as war.
Gold was seen as a reliable medium for currency as it was very limited in supply. This meant that the competence, trustworthiness and stability of governments was less significant. Once a gold coin had been issued, you knew that there was a limit to how far or fast the subsequent supply of coins could grow.
Basically gold was a bit like the inflation targets of central banks today - it gave credibility to and confidence in the currency issuer.
As such, if you could accumulate a lot of gold through trade, you could strengthen the credibility of your own currency.
Similarly, today developing countries try to accumulate strong currencies through trade, and thereby strengthen their own currencies.
Democracy is better than rule by so-called "natural law" or "divine right". But abiding by democratically-created laws is not a voluntary choice, it is an obligation.
Matt, whether or not it is conjecture or based on historical documents or oral traditions to which Aristotle had access, Aristotle is just one of many scholars who have given accounts of the nature and origin of money. His theories should be approached critically, and evaluated in the light of all available historical, archaeological, anthropological and sociological evidence.
"Aristotle had access"
He had access to their laws Dan, all he had to do was read them... and he was probably there when they were written and perhaps participated in that...
Dan he is NOT giving us his conjecture on "the nature and origin on money", he is telling us what they DID ....
rsp
Dan,
These people were NOT morons...
rsp,
Dan,
They had no "invisible hand" back then... it's absurd.
rsp,
y,
"Similarly, today developing countries try to accumulate strong currencies through trade, and thereby strengthen their own currencies."
Those in the east have to a great extent substituted for a love of metal with a love of USD balances that is for sure... it looks like it is a form of "tribute"...
But it looks like it is incorrect to think that these nations hoard USDs to strengthen their currencies.
For instance Japan has been accumulating USD NFAs (selling Yen/buying USDs) in an effort to WEAKEN the Yen.
See this spreadsheet:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
So there is probably at least some nuance around this issue..
rsp,
My understanding is that "nomos" in ancient Greek is used not just to refer to the results of legislated positive law, but also to all sorts of conventions, customs and norms - everything people recognized as a rule created by human beings, and not the result of nature. So when Aristotle says that money exists by nomos, he might just mean that its existence and value are a product of human conventions.
Also, Aristotle was writing at least 300 years after the introduction of coinage in Ancient Greece - or at least the metal coinage that exists in the archaeological record.
I think Matt's right that "money" is a broad and fluid term. There are lots of possible systems that people might used to organize production, distribution, rationing, exchange, labor, interstate commerce and tribute, and the modern monetary system might have roots in a diverse collection of historical systems which were fused into our present system. I think it might be a bit of a blind alley to look for some definite origin of money in one particular kind of system.
Matt: See Hamilton's imo more or less sexually laced description of these metals in Federalist 12 as evidence: "By multipying the means of gratification, by promoting the introduction and circulation of the precious metals, those darling objects of human avarice and enterprise, it serves to vivify and invigorate the channels of industry, and to make them flow with greater activity and copiousness." Weird-o-rama.
Yeah, this is Jeremy Bentham's utility theory upon which modern economics is based. Aristotle had already dispatched it as puerile as did John Stuart Mill in Bentham's time.
As far as Hamilton's game plan for the US goes, it was not his, of course. He just understood the mercantilism of the time.
Matt No historic foundation? That's interesting because here is Aristotle writing in 'Ethics':
Aristotle is already late on the scene. Credit money based on trust and reciprocity arose many millennia before. BTW, trust and reciprocity are the basis of society even in pre-human organized groups. What became what we call call "credit" was an outcome of an evolutionary development that was ages in the making.
y said...Democracy is better than rule by so-called "natural law" or "divine right". But abiding by democratically-created laws is not a voluntary choice, it is an obligation.
That's what "rule of law, not rule of men" means. Laws are rules and these rules government society, rather than custom, convention, religious injunction and tradition, or political dictat.
I should add to the above that rule of law chosen by the people either directly or though elected representative is "self-determination," which is the basis of political freedom.
We need to be aware that Aristotle was not particularly interested in developing a theory of money. His interest was in political theory. The Greek city-state was called a polis in Greek. Aristotle considered man a zoon politikon. See below for the meaning of zoon politikon.
The notion of man as a social animal may have originated with Aristotle:
"Hence it is evident that the state is a creation of nature and that man by nature is a political animal [zoon politikon]."
-Politics, I
The adjective that Aristotle used to describe man in Greek is 'politikos' which is where we get the English word political. For this reason, 'politikos' is often translated as political, however the actual Greek meaning was a little deeper. 'Politikos' came from the Greek word 'polis' meaning city-state. To be 'politikos' was to be a member of the 'polis' or a citizen. Being a citizen, while certainly implying participation in various political responsibilities, was more about being a part of society; contributing to the good of the whole. In this way, the meaning of 'politikos' more resembles the English word social than political. source
See also Homo Economicus and Zoon Politikon: Behavioral Game Theory and Political Behavior Samuel Bowles and Herbert Gintis, October 26, 2004
Dan KMy understanding is that "nomos" in ancient Greek is used not just to refer to the results of legislated positive law, but also to all sorts of conventions, customs and norms - everything people recognized as a rule created by human beings, and not the result of nature.
Right, even today there is positive law and common law. The British Constitution remains uncodified. The US Constitution is a document but its meaning is largely in judicial precedent that gets extrapolated into the future and even reversed on rare occasion. For example, SCOTUS could find the debt ceiling unconstitutional, which would totally change the game.
Tom,
" this is Jeremy Bentham's utility theory upon which modern economics is based."
I'm having trouble seeing the connection between what I view as Hamilton's imo let's leave it at 'irrationality' for metals and the word "utility" from Bentham....
Did Bentham also exhibit 'zealousness' , shall we say, for the metals? Or is there another angle I'm missing between this weird behavior and "utility"?
I'm coming up blank here...
rsp,
Matt, it's the "gratification" stuff you found weird-o. That's the basis of Bentham's pleasure-pain calculus in terms of which utility is measured.
Tom,
This all is apparently even more deranged than even I thought possible before.... un f-ing believable...
rsp,
As long as other people are willing to accept gold in exchange for goods, there is nothing irrational about valuing it for that reason. Gold has been used widely for international trade throughout the centuries.
The only thing that is irrational is in thinking that there is something special about the exchange value of gold that makes it more "real" than other kinds of money.
I don't get what is all that weird about Hamilton's paragraph. All he is doing is praising the benefits of commerce. The "means of gratification" are just the large varieties of commodities to which he alludes in the paragraph. Everyone in Hamilton's time was aware of a trend of growing prosperity in the European nations and their colonies. Many of them believed that the influxes of gold from New World mines had something to do with the growth in European trade and with the increased pace of industry inside each country. This was something that both mercantilist writers and anti-mercantilist writers had sought to explain.
Matt, Bentham only emphasized the quantity of utility in terms of pleasure and pain. J. S. Mill emphasized the quality.
It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides. — J. S. Mill
This distinction is lost on neoclassical economics, which emphasizes maximization of utility in terms of quantities. Steve Keen rips them a new one on this in Debunking Economics IIRC. Quality? Meh.
The only thing that is irrational is in thinking that there is something special about the exchange value of gold that makes it more "real" than other kinds of money.
Gold as such is never money. If it is used as such in exchange it is a commodity, and the transaction is barter.
A gold coin is no different as money from any other coin. It's value is not the gold it contains, it is the face value.
Of course, when the composition of a coin exceeds the face value, then the coin is hoarded and disappears from use as money iaw Gresham's law. Copper pennies are now gone and most have been converted to numismatic value or melted down for sale into the copper market.
"Gold as such is never money. If it is used as such in exchange it is a commodity, and the transaction is barter."
I don't think that is historically accurate Tom, although it is a hard thing to measure. Gold was frequently used in international exchange, and exchanged at values that don't seem to be closely related to gold's industrial use - i.e. its commodity value. To determine whether bullion is being used among some trading partners as a form of money, I think the thing that has to be studied is the proportion of trades that involve either bullion or IOUs for bullion, and also the proportion of that bullion that is being consumed or invested as a means of production. The fact that neither item in an exchange is fiat money does not mean it is automatically a barter exchange that doesn't involve some other form of money. If lots of gold bullion is changing hands, and very little of it is being used to make wires, jewelry, overlay, etc., then I think you have to say that the gold is being used as an exchange medium, not a barter item.
It's definitely true that specie metal coins - gold, silver or whatever - can be just another form of state money whose material constitution is irrelevant. And these coins can be traded and exchanged internationally just as are other state monies today. But not all uses of gold for international trade have been as the material of fiat coins.
As I think Randy and others have written, there is no hard line between things that are money and things that aren't. There are degrees of "moneyness".
Matt, I wouldn't say that Japan is a 'developing' country.
Dan,
isn't that a bit like saying that the wood in a tally stick is money?
Dan,
To me, it's a human embarrassment to set up our systems so that human exchange cannot be accomplished without the intermediation of usually the 3 metals from column 11 of the Periodic Table of the Elements which all have their outer most electron d-bands full. To me anyway, this is irrational and stupid...
Who or what is in control here? The forces represented by the metal????
Is this really necessary? To me the ancient Greeks showed that indeed this was not necessary with the invention of their nomisma... which I interpret as an overt act by the Greeks to claim absolute human authority over our human relationships and repudiate the authority behind the metal or any other part of nature.
It's like the other week where Yahoo! had this human interest story of how this poor woman out in Santa Monica needed a stem cell treatment because she was suffering from kidney failure and was going to die.... so she was out in the middle of the road begging for USD balances and then the $1B "beanie babie" king of California pulled up in his car and turned around and I guess was moved to give her $20K of his balances so she could get her treatment....
Was this reeeaally necessary?
Do you see what I mean, why do we have to go thru beanie babie sales in order to get this poor woman some treatment when the real healthcare services are just sitting there ready to go??
Whether you have to go thru a metal from the ground or thru a beanie babie king bank account, why put in this intermediate step?
This to me anyway, is embarrassing and stupid.
Think like Hamilton here, you have a woman who needs stem cells and in your nation you have spent huge amounts of time and human energy developing her treatments but noooooo, helping this woman is not motivation, noooooo, we need to have some sort of pervert sex fantasy about metals before we can be motivated to help her????
Whaaaaaaat???? That is not how my mind works anyways....
The humans occupying our current positions of authority are morons disgraced to a point lower than whale shit...
rsp,
Dan, when you fix the rate of exchange of currency and gold, then gold becomes the "numeraire." The numeraire is the criterion by which what serves as token money is converted to a fixed value. All other prices fluctuate in relation to that fixed value. Anything could serve as the numeraire, gold, silver, a measure of some grain like wheat, oil, a measure of energy such as a BTU, a unit of labor, etc. Whatever serves as the numeraire is money-like, enough it may not actually be exchange in transaction itself but only tokens of it.
When gold was used in international trade most recently it was not itself traded, i.e, shipped from one country to another. It was moved from one cubicle to another in the underground vault at the NYFRB.
Similarly, on a gold exchange standard, gold serves an the reserve. These are money-like functions.Also similarly, tsys and gilts are not commodities (something produced for sale), nor are they "money" in the sense of a medium of exchange. They are money-like.
y, I don't think so. When people use bullion for exchange, they weren't exchanging it in the form of a credit instrument.
Tom, I'm not just talking about numeraires and the unit of account. Bullion was actually used as a medium of exchange.
As you mention, often bullion itself was not exchanged, but was used as a reserve and IOUs for the gold were exchanged. Ultimately, that evolved into an official gold standard, where the money used in circulation was a legally convertible claim on a portion of gold reserves. In other words, gold then played a role similar to the role played by US dollar reserves in the present system - which is one form money takes in the present system.
So gold has been used as both circulating exchange money and a reserve money to back the circulating money. There is no good reason for this. There is no reason people have to use one medium of exchange rather than any other form. Electronic dollars that don't have to be mined up out of the ground at great cost work just fine. I'm just saying that gold has, in fact, been used in various ways as money, independently of its use as the material out of which fiat tax-based money was sometimes coined.
Dan K, exchanging bullion was always pretty limited other than in foreign trade. When bullion coins where used, they were based on trust in that it was generally not possible to assay every piece in every transaction and cheating on weight and composition was rampant. This was likely also a problem with bullion that was not coined in foreign trade, too. The notion that bullion was "safe" is nonsense. History doesn't bear that out. Even where adulteration was a capital offense it still went on.
The other point to make about using bullion and bullion coinage, or anything we would would call "money" that is not credit, is that hard money was very scarce. Most people didn't use money on a regular basis as we do now.
Credit was a necessity for exchange. Having money was not a feature of life other than for the privileged until the rise of the bourgeoisie or "middle class," became divided into the upper and lower middle class (haute and petite bourgeoisie).
Dan: Ultimately, that evolved into an official gold standard, where the money used in circulation was a legally convertible claim on a portion of gold reserves.
No, it was a legally convertible claim which could be cancelled against claims directed the other way.
States volitionally converted these claims into quantities of gold. And when they needed to, they suspended the gold-convertibility, but of course not the far more important accounting convertibility. To acquire these quantities, they had to sell their intrinsically valuable fiat money for the worthless commodity gold. Gold was a currency-backed commodity for a very long time. So it created a millennia long bubble.
Y:isn't that a bit like saying that the wood in a tally stick is money?
Dan Kervick: y, I don't think so. When people use bullion for exchange, they weren't exchanging it in the form of a credit instrument.
Absolutely right, y. If the wood for acceptable tally sticks were so rare it constrained tally stick production, it could become a valuable commodity, even if not "exchanged in the form of a credit instrument". But solely because of the social convention about acceptable tally sticks.
Dan: I'm just saying that gold has, in fact, been used in various ways as money, independently of its use as the material out of which fiat tax-based money was sometimes coined. Independently of that & gold / silver standard bubbles & very ancient usage of silver as a numeraire? Never.
Treasuries & gilts are infinitely closer to being money that gold ever could be. Thinking of them as NFA, working with them as MMT does is to consider them money (unready money?) for practically all purposes.
Moneyishness here is basically determined by the issuer. Maturity is rather secondary.
Thinking that gold could be money is a category mistake. It's confusing the wedding ring, or the gold it is made from, with the marriage.
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