Chapotraphouse

For a long time, especially during the gold standard era and the Bretton Woods era, economists had bought into the barter myth perpetuated by Adam Smith that money was invented as a medium of exchange because people used to trade through barter.

I highly recommend reading David Graeber’s Debt: the First 5,000 Years which was based on Michael Hudson’s research, or at the very least, read this excellent Hudson article: Palatial Credit: Origins of Money and Interest, which very much refuted the barter theory:

The Commodity or Barter Theory depicts money as emerging simply as a commodity preferred by Neolithic producers, traders and wealthy savers when bartering crops and handicrafts amongst themselves. In this origin myth bullion became the measure of value and means of payment without palace or temple oversight, thanks to the fact that individuals could save and lend out at interest. So money doubled as capital – provided by individuals, not public agencies.

Differing views regarding the origins of money have different policy implications. Viewing money as a commodity chosen by individuals for their own use and saving implies that it is natural for banks to mediate money creation. Banking interests favor this scenario of how money might have originated without governments playing any role. The political message is that they – backed by wealthy bondholders and depositors – should have monetary power to decide whether or not to fund governments, whose spending should be financed by borrowing, not by fiat money creation. As a reaction against the 19th and early 20th centuries’ rising trend of public regulation and money creation, this school describes money’s value as based on its bullion content or convertibility, or on bank deposits and other financial assets.

Governing authorities are missing from this “hard money” view, which its proponents have grounded in an aetiological scenario of prehistoric individuals bartering commodities among themselves. The policy implication is that it is irresponsible for governments to create their own money.

As Hudson pointed out in the article, money had always existed as a form of debt since the early civilizations, and debt is simply a form of promise.

As human civilization transitioned from primitive hunter-gatherer society into agricultural society, planning for the future was crucial. You need time for the crops to grow, so how do you even “pay” for goods before the harvests?

When Babylonians went to the local alehouse, they did not pay by carrying grain around in their pockets. They ran up a tab to be settled at harvest time on the threshing floor. The ale women who ran these “pubs” would then pay most of this grain to the palace for consignments advanced to them during the crop year. These payments were financial in character, not on-the-spot barter-type exchange.

As a means of payment, the early use of monetized grain and silver was mainly to settle such debts. This monetization was not physical; it was administrative and fiscal. The paradigmatic payments involved the palace or temples, which regulated the weights, measures and purity standards necessary for money to be accepted. Their accountants that developed money as an administrative tool for forward planning and resource allocation, and for transactions with the rest of the economy to collect land rent and assign values to trade consignments, which were paid in silver at the end of each seafaring or caravan cycle.

The widespread use of gold had to do with the Crusades, when medieval kingdoms did not have the means to assert their legal authorities as the currency issuer, and since they hired mercenaries who operate outside the boundaries of their legal authority, gold was instead used as a substitute form of payment.

By the 19th and early 20th century, the monetary system of most countries operated under the gold standard (and later Bretton Woods from 1944-1971).

Even though governments had at times abandoned the gold standard and turned to fiat currency, especially during war and crisis, for example the greenbacks during the American Civil War, all of these were deployed as temporary measures.

Stalin was the first to decouple the “internal” or “domestic” ruble from gold (there is also a “clearing” or “external” ruble that the USSR used for external trade that was still somewhat tied to gold, but it’s irrelevant for the discussion here):

What ensures the stability of the Soviet currency? Certainly, not only the gold reserves. The stability of the Soviet currency is ensured, first and foremost, by the enormous quantity of commodities in state hands, released into circulation at stable prices. Which economist can deny that such security, existing only in the USSR, is a more effective guarantee of currency stability than any gold reserve? Will economists in capitalist countries ever understand that they have completely lost their grip on the theory of gold reserves as the 'sole' guarantee of currency stability?

Stalin at the Plenum of the Central Committee of the All-Union Communist Party (Bolshevik), 1933

As I wrote in the previous comment, the Soviet “internal/domestic” rubles existed in two forms: non-cash (for investment/business transaction) and cash (the “money” that people use to pay for goods and services). The non-cash ruble isn’t exactly the “money” that people think of today (a commodity/medium of exchange for barter), but rather a form of debt (think credit or score, i.e. numbers) that the government (the legal authority) issues to allow for settlement between state agencies and business entities. This circuit is detached from the “money” that flows into the hands of the working people, and because they were insulated from the consumption loop, its impact on causing inflation is minimal.

On the other hand, the cash ruble was issued based on productive capacity and availability of goods and products, and because the volume was controlled by the state, it could easily ensure that people have access to the available goods without driving up the inflation.

Now, on to MMT, the genius of MMT is the introduction of a price anchor, using government-backed jobs guarantee to prevent wage-price spiral, a mechanism that solved the problem the Keynesians ran into in the 1970s causing the inflation to spiral.

With the government setting the minimum wages through jobs guarantee (because nobody would work for a private firm that pays less than the government guaranteed job), it also controls the prices of goods and services (which are priced relative to wages). Of course, there is also supply side inflation which can be caused by shortage of imported goods, international sanctions, logistics interruptions but we’re focusing on the goods and services that are produced and consumed domestically here.

Moreover, through jobs guarantee, the mechanism also ensured that when workers are laid off by private firms, it automatically offsets the loss of income that could dampen consumption, because the workers can be immediately re-hired through the government jobs guarantee program, ensuring that their income is not lost.

Most important of all, jobs guarantee anchors wages to prices, and give leverage to the workers over the capitalists. If private firms refuse to pay better wages or provide better benefits, the workers will not have to worry about losing their jobs because they can always be hired through the jobs guarantee program, and this gives them plenty of bargaining chips. And because the wage floor is set by the government, it will also not lead to a wage-price spiral.

Pay attention and compare to the Stalin’s dual circuit monetary system here - even though the forms of implementation are different, both rely on the government setting the wages (as opposed to government setting the prices), and this required an understanding the money really is just a form of debt, not a commodity/medium of exchange as perpetuated by Smith’s barter theory.

Hope this helps.