Money Read Free Page B

this sounds familiar to the modern reader—even obvious—it should. After all, thinking of money as a commodity and monetary exchange as the swapping of goods for a tangible medium of exchange may have been intuitive in the days when coins were minted from precious metals. It may even have made sense when the law entitled the holder of a Federal Reserve or Bank of England note to present it on Constitution Avenue or Threadneedle Street and expect itsredemption for a specified quantity of gold. But those days are long gone. In today’s modern monetary regimes, there is no gold that backs our dollars, pounds, or euros—nor any legal right to redeem our banknotes for it. Modern banknotes are quite transparently nothing but tokens. What is more, most of the currency in our contemporary economies does not enjoy even the precarious physical existence of a banknote. The vast majority of our national money—around 90 per cent in the U.S., for example, and 97 per cent in the U.K.—has no physical existence at all. 21 It consists merely of our account balances at our banks. The only tangible apparatus employed in most monetary payments today is a plastic card and a keypad. It would be a brave theorist indeed who maintained that a pair of microchips and a Wi-Fi connection are a commodity medium of exchange.
    By a strange coincidence, John Maynard Keynes is not the only giant of twentieth-century economics to have saluted the inhabitants of Yap for their clear understanding of the nature of money. In 1991, the seventy-nine-year-old Milton Friedman—hardly Keynes’ ideological bedfellow—also came across Furness’ obscure book. He too extolled the fact that Yap had escaped from the conventional but unhealthy obsession with commodity coinage, and that by its indifference to its physical currency it acknowledged so transparently that money is not a commodity, but a system of credit and clearing. “For a century or more, the ‘civilized’ world regarded as a manifestation of its wealth metal dug from deep in the ground, refined at great labor, and transported great distances to be buried again in elaborate vaults deep under the ground,” he wrote. “Is the one practice really more rational than the other?” 22
    To win the praise of one of the two greatest monetary economists of the twentieth century may be regarded as chance; to win the praise of both deserves attention.
MONETARY VANDALISM: THE FATE OF THE EXCHEQUER TALLIES
    The economic worldview of Yap which both Keynes and Friedman applauded—of money as a special type of credit, of monetaryexchange as the clearing of credit accounts, and of currency as merely tokens of an underlying credit relationship—has not been without its own forceful historical proponents. Amongst those who have had to deal with the practical business of managing money—especially
in extremis
—the view of money as credit, rather than a commodity, has always had a strong following. One famous example is provided by the siege of Valletta by the Turks in 1565. As the Ottoman embargo dragged on, the supply of gold and silver began to run short, and the Knights of Malta were forced to mint coins using copper. The motto that they stamped on them in order to remind the population of the source of their value would have seemed perfectly sensible to the inhabitants of Yap:
Non Aes, sed Fides
—“Not the metal, but trust.” 23
    Nevertheless, it is undoubtedly the conventional view of money as a commodity, of monetary exchange as swapping goods for a medium of exchange, and of credit as the lending out of the money commodity, that has enjoyed the lion’s share of support from theorists and philosophers over the centuries, and thereby dominated economic thought—and, for much of the time, policy as well. But if it is so obvious that the conventional theory of money is wrong, why has such a distinguished canon of economists and philosophers believed it? And why does today’s economics profession by