Econ 101: "It ain't what you don't know that gets you into trouble
It's what you know for sure that just ain't so.". Mark Twain
Background
First off, let me explain who I am and why I started this substack.
I’m a lay person (not an economist, not a banker, not a finance person) who developed a keen interest in economics, monetary systems, banking, and finance after an anthropologist (David Graeber) helped me realize that the MMT (Modern Monetary Theory) people aren’t crazy.
And that a lot of “fundamental truths” I knew about economics and money, are simply not true.
For starters, currency issuing governments don’t actually borrow the currency they issue. And considering that they issue it, why would they?
Once I understood how little I understood, I started learning.
In this introductory post, I’ll take you back to my initial (although incomplete) understanding, and tell you how it happened.
Currency issuers? Currency users?
MMT scholars distinguish between Currency Issuers and Currency Users.
I’ve heard some say that “tax and spend” is backwards, because in order to tax money out of an economy it must first be spent into the economy. So it’s actually “spend and tax”.
But I didn’t understand what any of that meant. They were not only just words, they were meaningless words.
The origin of money: anthropologists vs economists
Until David Graeber told a story about how societies transitioned from not using money to using money back in antiquity.
This story consists of a few different parts, and are found in his book Debt: The First 5,000 Years1.
For what it’s worth, I first heard the story in a YouTube video of a talk about his book which he gave for Talks at Google.
I bought and read the book only after watching the video.
That video is at the bottom of this post in case anyone wants to watch it.
Part #1: Before money tokens were invented, communities simply kept track of who owed what to who.
In The Wealth of Nations, Adam Smith stated that the double coincidence of wants prevented people from conducting barter transactions2. For example, if in a certain community a pig was worth ten chickens, and one party had a pig but the other party had only five chickens, that barter exchange could not happen.
Anthropologists tell us the exchange happened. The one person provided the pig, and the other person provided five chickens and an IOU for five chickens worth of value.
Prior to the invention of money tokens, commerce was conducted with debt obligations. What we might call ledgers, however crude they were by modern standards.
Part #2: This worked because people didn’t travel.
You knew your neighbor was good for their debt because neither of you were going anywhere. People lived their lives in the same village with the same people. As a result, debts were honored.
Part #3: Villages coalesced into kingdoms, which had borders. There were neighboring kingdoms and disagreements between kings.
This led to the development of armies. People who would travel to the border and kill people on behalf of their King.
Part #4: But these travellers were not known to the villagers.
So when a soldier wanted something from anyone, the system of tracking debt obligations as the core of the commerce system broke down.
The soldiers were strangers and would not be sticking around to make good on their debts.
Part #5: The King needed his subjects to provision his army.
The answer is the co-invention of money and taxes.
A tax obligation was imposed on all subjects, and money was paid to the soldiers.
Now, in order to obtain money with which to pay their taxes, the Kings subjects need some money. Which the soldiers have. Now they’re happy to provide soldiers with goods and services.
They literally needed the money.
My epiphany moment
When David Graeber told this story, it was an epiphany moment for me.
Currency issuers and currency users. Got it.
Spend and tax. Got it.
And once you see it you can’t unsee it.
This started as a hobby
After realizing how little I, and most people, know about what money is, where it comes from, and how it works, I wanted to learn more.
So I started learning more. It started as a hobby.
And became somewhat of an obsession
Or so a few people have told me.
But since very few things are more important that how a societies money system is organized, it’s worth obsessing over.
I’m keeping a “resources” list
At some point someone asked me where I learned some things I know, so I created and keep up to date a list of resources.
It’s books I’ve read, podcasts I listen to, video lectures I’ve watched, economists and finance people I pay attention to, and papers I’ve read.
Here is a link to that resource list in case anyone is interested: Resources.
What am I going to write about?
Various topics which will include, but go beyond…
Why national debts keep growing
How banks create almost all the money we use
What credit expansion banking is and how it works
How credit expansion banking creates boom and bust cycles
Debt is neither good nor bad, what matters is what we use it for
How does the US government borrow the currency it issues?
Inflation is bad, deflation is worse.
When we say “free markets” what do we mean?
What inflation and quantum mechanics have in common
How failure is an essential component of economic prosperity
Economic equilibrium is a core idea of neoclassical economics, but is it real?
What structured finance is and why the aggregation of debt into securitized tranches was a fantastic idea that allowed us to seriously de-risk making loans, until we made a stupid change to the rules which turned them into Frankenstein’s monster.
Why it is that our poor skills at rating the riskiness of credit (due to that little rule change mentioned above) when combined with structured finance can wreck havoc on entire economies, as it did in 2008.
And more.
I hope you find it interesting.
And here is the video that started my “voyage of discovery”
Graeber, D. (2014). Debt, updated and expanded: The First 5,000 Years. Melville House. Chapter 3 (Primordial Debts), section State and Credit Theories of Money.
Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. Chapter 4 "(Of the Origin and Use of Money").