In a previous post, I discussed the two leading schools of thought on the origins of money. The spontaneous order theorists argue money emerges from a process of exchange. The chartalists argue money arises due to the coercive imposition of debt obligations (political power). Which school is right?

As Will Luther and I argue in a scholarly paper, these schools frequently talk past each other.  The chartalists point to specific details of history, while the emergent order theorists abstract from this to construct a social scientific narrative. Elements of both accounts — cooperation and conflict, voluntary exchange and coercive imposition — are useful in understanding money as it came to be. But at the end of the day, we still have to do social science. That is, we need to explain how a crucial institution, money, arose despite the fact that nobody planned or foresaw it. In this conception, chartalist history is often quite good and useful; chartalist theory, not so much.

Let’s review what chartalists get right. Historically, we see many examples of strong groups imposing debt obligations on weak groups. These obligations are discharged by paying a specific good, such as cattle. It’s also true that few ancient societies practiced what we think of as barter: spot transactions where goods are exchanged directly for other goods. Instead, many ancient peoples developed complicated systems of gift exchange and credit payments, which helped them get the goods they wished to consume, given that money was not yet an option, because it did not yet exist.

The problem lies in the next step of chartalist reasoning. “Money is a creature of political power” does not follow from, “Historically, debt preceded money, and debt backed by political power acquired exchange value.” Chartalists forget that to do social science, we need to apply the laws of human action to the behavior of all players in the social game. Chartalists implicitly treat the state (the strong group) as something ‘just given’, and look at the strategy of only those who have to pay taxes or tribute to the state. In reality, the state is just another player in the social game. Admittedly, it can play by different rules. But this doesn’t make them external to the social process to be explained. A good analogy is chess. If non-state actors are pawns, state actors are rooks. They have additional ‘movements’ available to them, but they are still on the board, constrained by the conventions of chess.

Debt discharge to the sovereign is almost certainly an important element of the ‘money demand function,’ i.e., why people want to hold money. But the spontaneous order story goes a step further back: why is there a money demand function in the first place? In other words, we are not asking what factors contribute to an individual’s decision to hold a specific amount of money.  Chartalist explanations can answer that question well enough. But the real issue is, what factors contribute to an individual’s decision to use money, at all? The spontaneous order theory can answer this, but the chartalist theory cannot.

Furthermore, we note that strong groups have imposed obligations on weak groups in the form of many, many different goods depending on time and place. But over time, a relatively small number of goods became money. Eventually, the precious metals — gold and silver, and occasionally metals such as copper as well — almost universally became money. What explains this? It certainly is not the ‘intrinsic’ value of the metal. That kind of an explanation is impermissible to social science. Instead we must make recourse again to Menger’s concept of saleability. The precious metals are highly saleable: one ounce of silver is the same as any other; silver is relatively low cost to store and transport; and ounces of silver can be combined or divided easily without destroying or otherwise damaging it. Thus we can easily understand, using spontaneous order theory, why non-state actors would want to exchange their goods for silver, and why state actors would want to demand to be paid in silver: silver is readily saleable, making it easier for actors to use it to get what they ultimately want.

Doing good social science requires us to understand the difference between theory and history.  We cannot make sense of the complexities of history without a theory to interpret human behavior, and we have no real understanding of actually existing human experience unless we use theory to do history. Chartalists mistakenly believe their history is itself theory, which is why they misunderstand the spontaneous order argument. Money is Mengerian, provided we recognize the state is a player in the social game, too.