3.2  Intrinsic versus induced value of money (metallism vs nominalism)

/45/ Quite often, the question of chartal money vs market-endogenous money is combined with the question of whether currency exists as a token for value, or whether it is thought to have 'intrinsic' value itself, i.e. material value.[1] However, 'chartal vs commodity money' and 'token vs intrinsic value' represent two different aspects and should analytically be kept apart. Money not only exists by state fiat but also by private commercial contract. Bankers prefer to bank on self-created token-units anyway.

/46/ In the times of Smith and later on Menger, up until around the late 19th century, commodity theory of money normally included metallism. It was imagined that through barter and trade some special reference goods with special material qualities emerged so as to facilitate market exchange, not just as units of account but as means of payment, preferably the precious metals silver, copper and gold, for their physical and practical properties.[2] In Mitchell-Innes' time, however – the decades around 1900 – the question of metallism and intrinsic value of money had become a hot topic. The reason is that, after about two and a half thousand years of unquestioned belief in precious metal as being the natural choice for money, it had increasingly become apparent that banknotes and credit money were about to replace bullion and coin. As always, some were early to recognise this, among them the monetary reformers of the time, while the majority were subsequent adopters and laggards. Even today there are some boastful latecomers who steadfastly adhere to the now historical metallist belief.

NCT and MMT agree that modern money does not have 'intrinsic' value. Money as a unit of account is a measuring standard for ascribing economic value (prices) to things, but does not incorporate such value itself. Equally, modern money as currency, as a general means of payment, carries purchasing power and thus fulfils a transactive, not a productive function. The purchasing power or exchange value is not in the currency itself but in the goods, services and financial claims an amount of money can buy. That which induces value into currency, or confers purchasing power on currency, is the entirety of available goods and services, in that these represent the valuable counterpart to an existing stock of money. In this sense the value of money is an 'induced value' (G. Auriti), mirrored in the interrelations of prices in the entire economy.

Mitchell-Innes and MMT argue that even in ancient and traditional economies, it was never the material value of the coins which made them a common means of payment. Coins of gold and silver are interpreted as tokens too. Evidence for this can be seen, for example, in the fact that the face value of coins could differ from the material's market value. Debasement of metal currencies occurred throughout the centuries. /47/ There were periods in Europe in the 1600–1700s when bank credit was rated at a higher course than government coin due to deliberate debasement of those coins, whether by the feudal seignieurs themselves or by treacherous tippers and seesawers.[3] Such phenomena are evidence that the 'intrinsic' link between the coins' precious-metal content and their purchasing power was rather loose – but cannot totally be denied, as Mitchell-Innes did. Throughout the history of precious-metal coins, 'money is almost always something hovering between a commodity and a debt-token' (Graeber).[4]

A case in point was the practice of decrying coins from time to time. One reason for this was that feudal seigniories – ecclesial and principalities, later also free towns – wanted to make money from reducing the metal value while keeping the face value. Another reason, however, was that from the late 12th century, the production of new silver did not keep pace with the demand for silver, which thus became more expensive. So the coins increased in value, and in order to keep their face value stable their silver content had to be somewhat reduced.

A bird's-eye view on the evolution of money may help to concede that throughout antique, medieval and early modern times, coin currency had both sides to it, i.e. it was a symbol for value as well as having material commodity value. Such an understanding is implicit in Simmel's voluminous Philosophy of Money from 1900. According to Simmel, in pre-modern times the material qualities of money (e.g. grain, salt, cattle, metals) were so much to the fore that the abstract, purely symbolic or informational side to it was not easily discerned in its own right. People of course realised depreciations of the currency or rising prices, respectively, but they hardly had a very long-term perspective on the development of coins from full precious metal to alloy tokens of irrelevant material value. Only with the spread of modern bank credit and paper money in the course of trade capitalism and industrial capitalism did the process of 'dematerialisation of money' towards finally representing a mere credit entry into an account become increasingly noticeable. The real post-metallists of early modernity and industrialisation were actually the bankers who progressively developed instruments for multiplying their monetary base of bullion and coin by making out transferable credit, bills and bonds, or issuing banknotes.

/48/ So Simmel's thesis on the social evolution of money as a means of payment follows the idea of a general trajectory from material to immaterial, from special good (already 'token', in fact) which is of material value itself, to a token which purely represents information on a quantity of purchasing power. In the process, the tokens underwent an evolution from reference staple goods to precious metals, then to paper notes and hand-written booking entries, up to digits on electromagnetic carriers. In the end, as Keynes observed in 1923, 'the gold standard is a barbarous relic'.[5] Currency thus reached the point at which Soddy could provide the bon mot that 'Money is the nothing you get for something before you can get anything'.[6]

The question of why money has purchasing power may no longer be controversial. Modern money is token fiat money. The value of money isn't in the money, but in the goods and services money can buy, valued or priced in terms of a currency unit. The value of money thus is induced.

Controversial, however, more than ever before, is the question of where the money comes from, i.e. who has the power to issue fiat money. As is apparent from the currency vs banking controversy, there is a power struggle in modern society over who should have the privilege of determining what is used as the tokens of the time – whether this ought to be determined by sovereign state fiat or by private banking interests. Modern money can, and should, freely be created 'out of thin air' as long as this remains within the growth potential of an economy operating at its capacity. But this does not yet answer the question of who has, and who ought to have, the prerogative of creating and controlling the money supply. In this regard there is an important difference between NCT and MMT.


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[1] Cf. Goodhart 1998 (metallist vs chartalist theory of money).

[2] Smith 1776, Book 1, Chapter 4: Of the Origin and Use of Money. Menger 1871, Kapitel 8, §1: Über das Wesen und den Ursprung des Geldes.

[3] Mitchell-Innes 1914 153ô53.

[4] Graeber 2012 75.

[5] Keynes 1923 172.

[6] Soddy 1934 24.