Numéraire
Volume the Sixteenth · of the table of twenty-six
The Institutions · Group IV · № 16 · Mo

The Money

what we agree to trust

The money is the third of the institutions, and the strangest of them: the thing whose only value is the confidence that others will accept it next. The contract made a promise binding, and so let exchange reach across time; the money makes that promise countable, and so gives the market its measure and its medium. For consider the question that founds the subject, and that the volume sets at its center: why will a stranger take a paper note — intrinsically worthless, a scrap of printed cotton — in exchange for real goods, for bread or labor or a day of his life? The answer cannot be that the note is valuable, for it is not; it can only be that he expects the next person to take it too, and the next, and the next — so that money holds its worth on nothing but a self-fulfilling belief, the confidence of each that all the others will accept it. Money is what we agree to trust. Its twelve plates follow this trust from the barter it replaced, through the measure it provides and the lending that creates it and the panic that can destroy it, to a discovery that joins this volume to the last: that money, the thing we take to be the most solid and final of all economic objects, the very opposite of a mere promise, is in fact a promise — the contract's IOU made so universal, so trusted, so transferable that it circulates as a thing. Money is trust made spendable; and like all trust, it can evaporate.

in print · № XVI · 12 of 12 plates
← The complete table of volumes

The argument of the volume

Begin with the world before money, and the friction that money exists to remove. In a barter economy, every exchange requires a double coincidence of wants: to trade, I must find someone who has what I want and wants what I have — a baker who needs my shoes, when I want his bread. Such coincidences are rare, and the search for them is the great cost of a world without money. Money dissolves the difficulty by breaking every trade in two: I sell my shoes to anyone, for money, and buy bread from anyone, with money, and the baker and I need never want each other's goods at all. Money is the universally accepted thing, the medium that everyone will take — and that is its first and defining function, to be the one good that need never be wanted for itself, only for what it will fetch. But this raises at once the question that haunts the whole subject: why is money accepted? Why will anyone take it, if not to consume it? The shoes are wanted for the feet, the bread for the belly; but the coin is wanted only to be passed on. What makes the universally accepted thing universally accepted?

The answer, the volume will argue, is confidence — and confidence alone. A stranger takes the note not because it is worth anything in itself, but because he is confident the next stranger will take it from him; and that one because he expects the same; so that money circulates on a belief that sustains itself, each accepting it because all accept it. This is why money can be made of intrinsically worthless paper, or of nothing at all but a line in a ledger: its substance does not matter, only the confidence that it will be accepted next. And it reveals what money, at bottom, is. For a thing accepted not for itself but as a claim on the goods of others, a token passed on in the expectation that others will honor it, is nothing but a promise — an IOU, a credit, a debt that circulates. The bank deposit is the bank's promise to pay; the cash is the state's; every form of money is somebody's obligation, made into a thing you can hold and spend. Money is the contract's promise, universalized: the IOU made so standard and so trusted that it passes from hand to hand as a thing, though it remains, in truth, a debt.

From this nature — money as a circulating, trusted promise — the volume's findings follow. Because money is a promise, it can be created by anyone whose promise others will accept, and so most money is made not by the state but by banks, conjured into being when they lend, the loan writing a new deposit that is new money. Because money is the measure of all value, the numéraire in which every price is quoted and every contract written, its own value — the worth of the measuring rod itself — is set by its quantity, and floods of it dilute the measure into inflation. And because money rests on nothing but confidence, it is fragile: let the confidence falter, and the run on the bank or the flight from the currency follows, the promise doubted and so dishonored, slowly and then all at once. Money is trust made transferable — created by the trusted, measuring all value, and dying when trust dies. And the trust, in the end, does not float free. Why the state's intrinsically worthless paper is accepted at all has, beneath the answer of confidence, a harder answer that a plate takes up on its own: that the state, by levying a tax payable in nothing but its own money, manufactures a universal need for it, so that the paper's worth springs not from any gold behind it but from the power to tax before it. That power, and the power to rule that enforces it, are the two institutions this family has still to examine — so that the universal promise rests, at its base, on the state.

The argument remains open. What follows is an attempt to fix its exact edges.

The twelve plates of this volume

  1. i The Barterin print Menger; the double coincidence of wants, and how money emerges as the one good everyone will take. Read the plate →
  2. ii The Sovereignin print Knapp; money as the creature of the state, given its worth by the taxes that must be paid in it. Read the plate →
  3. iii The Yardstickin print Fisher; money as the measure of all value, and the quantity that sets the measure's own worth — and its inflation. Read the plate →
  4. iv The Loanin print Wicksell; how money is created by the act of lending, conjured as a deposit, so that money and debt are one. Read the plate →
  5. v The Runin print Diamond and Dybvig; the promise to pay on demand, and the panic that proves it empty when confidence fails. Read the plate →
  6. vi The Veilin print the classical dichotomy; whether money moves the real economy or only the prices that name it. Read the plate →
  7. vii The Debasementin print inflation, hyperinflation, and Gresham's law; how the measure of all value is itself destroyed. Read the plate →
  8. viii The Ledgerin print the deepest turn: money as a promise made universal, a debt that circulates — trust we can spend — resting in the end on the state. Read the plate →
  9. ix The Goldin print commodity money and the gold standard; whether money must be anchored to a thing of worth or may float on confidence. Read the plate →
  10. x The Governorin print the central bank and monetary policy; the management of money, and the interest rate as its price. Read the plate →
  11. xi The Coinin print the cryptocurrency and the digital ledger; the attempt to make money without a state, or any issuer at all. Read the plate →
  12. xii The Liquidin print liquidity, and the spectrum of moneyness; what makes one promise spend like cash and another sit like a debt. Read the plate →

In closing

This volume took up the third of the institutions: the money, the thing whose only value is the confidence that others will accept it next — what we agree to trust. The contract made a promise binding, and so let exchange reach across time; the money makes the promise countable, and so gives the market the measure and the medium without which the price could not be quoted nor the bargain struck.

The volume traced the money from the barter it replaced to the trust it rests upon. Menger showed how money emerges from barter, the most saleable good becoming the one thing everyone will take, to spare us the double coincidence of wants. Fisher showed money as the measure of all value, the numéraire in which every price is named — and the quantity theory by which the measure's own worth is set, so that too much money dilutes it into inflation. Wicksell showed how money is created: not minted by the state but conjured by the bank, the loan writing a new deposit that is new money, so that money and debt rise and fall as one. And Diamond and Dybvig showed the fragility beneath it all: the bank's promise to pay on demand is good only while not all demand at once, and the run that follows a loss of confidence is the promise being doubted, and so dishonored — slowly, and then all at once.

And then the volume found, beneath the thing, the promise. Money seems the most solid and final of economic objects, the very opposite of a mere promise — the thing that settles debts, not a debt itself. But every form of money is somebody's obligation: the deposit is the bank's promise, the cash the state's, and even the coin a token of claims on the goods of others. Money is the contract's promise made universal — the IOU grown so standard and so trusted that it circulates as a thing, accepted by each because accepted by all. It is trust made spendable: created by those whose promises are believed, serving as the measure of all value, and dying when belief dies, in the run or the hyperinflation. And the trust does not float free. The tower of promises that is money rests, at its base, not on confidence alone but on the state's power — its power to tax, which (as the chartalist plate set out) compels the holding of its money and so lends the worthless paper its worth, and its power to rule, which gives that money force. With the money the table has its measure and its medium; but the tax that underwrites it and the rule that enforces it remain, the last two members of this family, to which it now turns.

If money is only what we agree to trust, and its solidity an illusion sustained by the confidence of each that all the rest will accept it, then the question is not what money is made of, but what holds the agreement together — and what happens when it dissolves. A promise believed is money; a promise doubted is paper. What will the stranger take tomorrow?