Christine Desan’s new book intends to explain the “coming of capitalism” based on English historical events. The Harvard Law professor offers her interpretation of how money evolved from its more primitive forms to the embryonic establishment, in the 18th century, of the kind of monetary arrangements we have today.

This is monetary theory, with frequent recourse to examples from the history of England. The main thesis of Making Money: Coins, Currency, and the Coming of Capitalism is that “capitalism arrived when the English reinvented money at the end of the 17th century,” with the establishment of the Bank of England. The author intends to prove that the kind of open and pluralistic society we have today stems not from a spontaneous development of institutional arrangements, but from conscious design, specifically in the supply of money. If true, this thesis would be a powerful endorsement for other government interventions (especially with money and banking) and would weaken the argument that politicians should not meddle with the “system of natural liberty” (in the words of Adam Smith), that system itself being the result of intentionally designed interventions.

Professor Desan’s operative assumption is that it is a “myth that money emerges naturally from the trades of enterprising individuals or [that] their agreement on a common symbol of value supplies all the history that is necessary in the modern consensus (in economics about the origin of money).” As she attempts to “map money as an institutional practice,” she suggests that history shows that “money is contrived by a group to measure, collect and redistribute resources.” Because, in her account, the introduction of money requires deliberate and concerted human agency, a regime of commodity money was something in need of constant “management” by the public authorities, who were “forced” to constantly “calibrate” the value of their coinage.

It may be best to introduce several terms that are important to discussion of this subject. Friedrich Knapp’s “state theory of money” enters into Desan’s account—the idea that money is a creature of the state, and its advocates are sometimes called Chartalists because for them the value of money is created, defined, or named, by a chart. Also this can be referred to as “nominalism,” a term usually used in the context of the prerogative of the sovereign to change the value of money. Related is “seigniorage,” referring to any profit accrued by the sovereign due to his monopoly over coinage. An additional concept to know about is opposed to Chartalism/nominalism. This is the claim of Carl Menger and his followers, namely that money originated in society spontaneously. Some, but not all, in this camp see the value of money as defined predominantly by its metal content. (And that specific claim is called “metallism.”)

Desan’s thinking on the origin and evolution of money rests on legal history. One of the boldest claims in the book is that “while Continental jurists developed arguments assimilating coin to metal, English common law about debt would preserve monetary ‘nominalism.’ ” She alleges that this distinction—between a supposed metallism on the Continent while in England nominalism was the law of the land—is supported by legal texts in both England and Continental Europe. On the other hand, she acknowledges that English authorities did a better job than did Continental sovereigns in preventing the debasement of money, and that this was one reason the English were able to provide better money and a foundation for modern money. Whether her distinction can survive in the face of these stipulations will be taken up below.

For Desan, commercial society in England was the result of intentional design “at the center.” Although she tries to distance herself from Knapp’s state theory of money, she claims that money “arises when a stakeholder, acting for the group, uses its singular position to specify and entail value in a way that no individual or bargaining pair of individuals can do.” It is hard to see who her “stakeholder” acting for the group would be other than someone with sovereign power, that is, the government.

The book’s embrace of the state theory of money and its claim that a purported English nominalism had anything to do with monetary development in that country are troubling. It is perilous, in my view, to draw such strong conclusions from legal documents, as if the arrangements designed to give form to social realities were the cause of those realities. Perilous, too, to generalize from the limited period of time (the 11th century to the 18th century) and the limited geographic area (England) covered in Making Money. It is a narrow basis on which to sit such large conclusions—in fact, these limitations possibly explain Desan’s rejection of the theory of the spontaneous origin of money.

One of the most surprising passages in the book describes the introduction of banknotes by the Bank of England at the end of the 17th century. Banknotes are said to be a product “activated by legal rules, driven by institutions,” and yet there is no discussion of the economic rationale behind this innovation. The author can only express a kind of wonderment at the advent of “paper-wealth,” as Goethe called it: “even more alchemical is the evaporating importance of metal.” The brute fact that precious metals are costly, and so those who came along in every historical period did what they could to economize on their use, might have dispelled her wonderment. But somehow that fact is not taken into account.

Granted, the “Financial Revolution” (as the events around the creation of the Bank of England were labeled by P.G.M. Dickson, its leading historian) and the “settlement” between private bankers and the Crown culminating in the charting of the Bank of England (as pointed out by Geoffrey Ingham, an acute scholar who brought a new perspective to the interpretation of those events) were momentous. But they were simply the newest in a long trend: new ways to try to economize in specie due to the fact that precious metals were expensive.

The movement from an economy in which most daily transactions were made in coins (and the endogenous creation of money was severely limited by rudimentary forms of credit) to a system of bank credit with, say, 30 percent of reserves in metal, as was the case with the Bank of England in the early 18th century, was part of this trend. The legal scholar’s interest in the nuts and bolts of how that was formalized is understandable, but there was a pre-existing economic reality. Economic and political actors needed to find a solution to the scarcity of gold and silver like the creation of the Bank of England, and that was why they sought to reduce the amount of commodity necessary to fulfill the function of medium of exchange.

In the 19th century, after Peel’s Act of 1844, a two-layered system of bank reserves was institutionalized in the United Kingdom and the total level of reserves went down to something around 5 percent of the money supply. Then during the gold-exchange reserve system of the interwar period (1918 to 1939), reserves were less than 2 percent. With Bretton Woods, they were even less than that, and finally, after 1971, all the links between the money supply and commodity were severed. Incidentally, this evolutionary history would fit Desan’s account well, except that she prefers to see the political decisions and the institutional changes at each step of the way, to the exclusion of the economic realities driving them.

Now for the issue of public debt. The argument here is that the issuance of public debt redefined the relationship between individuals and the government. Thanks to the restored monarchy in England, says Desan, circulating bonds were introduced to the English that paid interest to the government’s creditors. This “endorsed the theory that individuals could help the public by pursuing their own interests.” This, in turn, made it possible for “liberal visions to take concrete shape.” It was supposedly an integral part of the “coming of capitalism.”

Well, public debt in the form of interest-paying bonds (Renten) able to circulate in secondary markets were in existence in the Low Countries since the 14th century.[1] In the 16th century, the Emperor Charles V financed a substantial part of his fiscal needs by selling his bankers annuities (Juros) to be paid from the Castilian revenues, for them to resell to their customers.[2] It was not the public debt contrived by the English monarchy and plutocrats that created capitalism, it was the imposition of limits to the absolute powers of government that created a credible commitment that the public debt would be repaid (as pointed out by North and Weingast, two scholars who drew the relevant conclusions concerning the Financial Revolution in England).

Neither Charles V in 16th century Spain, nor his Burgundian forefathers in 15th century Low Countries, nor the Valois before them, expected that investors would buy their annuities unless those investors were paid interest. What was markedly different in 18th century England was that, given the representation that the creditors of the Crown had in Parliament and the procedural avenues open to them to claim their rights (as highlighted by Desan by referring to the “Case of the Bankers”), the English government’s promise to repay its debt now became relatively more credible.

I concede that it would be difficult to prove that this single factor spurred the development of the commercial society of the English. A more reasonable interpretation would be to say that 1) the development of credit money through banknotes of the Bank of England had strong economic rationale that allowed the supply of currency economizing in gold and silver; 2) there was a credible commitment that the public loan in which the Bank of England invested its capital would be repaid; and 3) the dire situation of the public fisc—the king was, not to put too fine a point on it, broke—forced him to share the gains of his monetary prerogatives with those who held shares in the Bank of England, by allowing them to create inside money.

All of these developments, working together, may be more reasonably understood as part of the process that helped create a commercial society in that part of the world. It would read too much into specific political decisions taken in London at a specific time to say that the “innovation” of circulating bonds changed the prevailing mentality about the role of private benefits and social progress. This, however, is what is being posited.

To get a fuller view of how shaky this claim is, we might as well go back to the basics. Since very early on in human societies, individuals have tried to satisfy their needs through indirect rather than direct exchanges, and the instruments best suited for those indirect exchanges (of goods or claims to goods) are instruments with higher liquidity (“salability” for Menger)[3]—that is, goods that most likely will be accepted by other traders in exchange for their wares. It is the realization that different goods have different levels of “salability” that gives occasion to the spontaneous introduction of indirect exchanges among individuals.

A corollary of that is that it makes sense that the unit of account a particular group would start to use, would be something they are already using as a generally accepted medium of exchange. Although the logical necessity for a unit of account is distinct from the necessity for a generally accepted medium of exchange, it is not reasonable to think that individuals would have needed a “stakeholder” to tell them to start using for the former purpose something different from what they were already using for the latter.

While the first coins were introduced in the ancient Greek world around the 6th century BCE, indirect trade using bronze ingots as a medium has been well documented in history since at least the 14th century BCE, as the Uluburum shipwreck evidences, and the historical record abounds in proof of indirect exchange by primitive societies. Not to mention the fact that a millennium before the period covered by this investigation, a sophisticated monetary economy was brought to England by the Romans. So, it would be reasonable to say that the money of 11th century England—the beginning of Desan’s history—was already a “highly engineered project, not the happy by-product of spontaneous and decentralized decision.”

Money, understood as a generally accepted medium of exchange, because of its conspicuity became also a unit of account, and because of some of its intrinsic characteristics, became also a good store of value and instrument for deferred payments. None of this required the conscious act of a “stakeholder” or was part of a consciously engineered “project.” It was really more that money is, in the phrase of Adam Ferguson, “the result of human action, but not the execution of any human design.”

It stands to reason that a purely legal analysis that abstracts from the economic realities would lead to the conclusion that all institutional changes happened by the conscious decision of the legislator. But such is hardly the case, and the aforementioned topic of debasements of money may illuminate my point. The constant debasements in Continental Europe during the period Desan has studied—from the 11th to the 18th centuries—indicate that in fact the institutional arrangements on the Continent were much closer to nominalism than were their English counterparts. Ascribing nominalism to the English and crediting it with the creation of better money than Continental money seems to be, at best, a formalist imposition on the facts. It has nothing to do with the realities on the ground that spurred the revolutionary developments in monetary arrangements pointed out by our author.

Here is the genuine English advantage: an actual respect for the metal content of coin, as compared with, for example, France, in the period of Desan’s analysis. The English did not indulge as much in debasement of their coins and it is this relative restraint that made English coined money better money. Meanwhile on the Continent, the disregard for a genuine metallism is what made their monies relatively worse.

The book’s entire approach to economic theory is implicated here. To get a handle on this aspect, we might look to the author’s arresting statement that history reveals “the character of money” as part of the political constitution of the country. That character, in Desan’s mind, undermines the economist’s claims about money’s neutrality.

As we know, the way money is supplied has in fact a powerful effect on how economic activity is conducted in a given society, and in that regard, she’s correct that “money is not neutral.” But from that, it is a far cry to say that the economists’ claim “about money’s neutrality” is undermined. What economists have in mind is a theoretical point about the effects of changing the amount of exogenous money supplied to a given economy, which they have correctly concluded is neutral in the long run.

It is excusable that she sees a consensus among economists that there is no room for money in “the best models of the economy.” That is what models do. They are theorists’ tools that use symbols to stand in for things. Then, too, her belief that “macroeconomic textbooks adopted a fable about money’s origins that fit within a paragraph and monetary theorists defend the project of imagining money’s history in light of its form” makes a certain sense. But had it only been for taking to the letter what is just a heuristic device (modeling the economy by abstracting money) or not perceiving the subtlety of the claim about the spontaneous origin of money, our author would not have considered such an accomplishment the realization that “money was contrived” as a way to establish a more sophisticated social order than what would be possible otherwise. The reason someone “contrives” money is because there is a spontaneous order at play that creates the incentives inducing people to contrive it. It is this that helps the establishment of a more sophisticated social order.

A more cautious reading of Nicholas Oresme’s De Moneta (c. 1360) would have sufficed for Desan to appreciate how a sovereign power interacts with money—how, in special circumstances, the public authorities in the exercise of their self-imposed monopoly of coinage would have a role in “managing” a monetary system based on metallic coins, as was the case, for example, in France in the 14th century.

Let us posit, to illustrate this, a model of our own. A sovereign has minted a 99 percent pure silver coin weighing one ounce and hypothetically denominated as a “Sol.” There is slippage in this monetary standard with time, the wear and tear of use, and occasional clipping by unscrupulous users and falsification from abroad (other sovereigns coining their replicas of the “Sol” with, say, only 90 percent silver). These factors would result, let us say, in the circulation of “Soles” with 90 percent of their nominal content in pure silver.

Well, in a case like that, the acknowledgement by the sovereign that the coins in circulation have a lesser metal content than their nominal content, with all the inconveniences of that, would lead to two possible solutions: either a re-coinage restoring the previous purity and weight that had been lost, or a re-coinage accepting the new, lesser content of pure silver in the “Sol.” Either method of re-coinage would make it attractive again for people to bring bullion to the mint.

An attempt to explain all the different reasons and circumstances for changes in the monetary standard at the time of commodity money would take us far away from the real forces at work. To see the “management” of the relation between the coin’s stated metallic content and its actual content as at the center of the monetary prerogatives assumed by the sovereign powers in post-Medieval Europe is to miss the main reason for these constant re-coinages.

The real reason: the seigniorage gains resulting from debasement. If it were not for the sovereign’s desire to attract bullion to his mint and to keep the monopoly of coinage in his kingdom, it would not be necessary for any “public authority” to “manage” the coinage in order to offer money to the public. The central idea here is that there is a link between the zealous enforcement of monopoly over coinage and the profit that comes to the sovereign from that enforcement.

An actual case shows very well this umbilical relation between coinage and seigniorage. In 1790, Alexander Hamilton presented to the U.S. Congress his Report on the Subject of a Mint. In it, America’s first Treasury Secretary, arguing for the establishment of a mint, stated that

the [Spanish] dollar, originally contemplated in the money transactions of this country, by successive diminutions of its weight and fineness, has sustained a depreciation of 5 per cent. And yet the new dollar has a currency in all payments in place of the old, with scarcely any attention to the difference between them.

As we can see, Hamilton did not like the idea that the Spanish Crown was minting coins with a 5 percent lesser silver content than was the case before the War of Independence, and yet was buying merchandise in the United States at the same prices as before. Clearly, the problem is not that, in the absence of legal tender and an official mint, there would not be money. After all, there was no legal tender or official mint in the United States at that time, and the Spanish silver dollar had widespread use as currency. The problem, rather, was Spain’s gaining the seigniorage that Hamilton wanted for the U.S. government.

There is no room for that basic truth under the analysis presented here. It is simply the case that the public can be served with a proper supply of good money without the need for “management” by the authorities. The absence of legal tender laws or defined parities between gold and silver in the national currency (parallel units of account instead of bimetallism) will create the institutional framework necessary for the spontaneous provision of money—this is what happened in the colonies and later in the United States before the establishment of the mint.

By the same token, no one would say that a sovereign state that needs to provide for defense of the nation can or even should get along without monetary prerogatives. There are economic and moral reasons for the government to be able to regulate money and banking. But the sovereign must have a correct understanding of what money is, and what money is for, in order to exercise those prerogatives for the benefit of the community. In this regard, being unable to conceive of money as anything other than the product of legislation does not help much.

Another area in which Making Money disappoints is in its sources. Although its thesis has to do with the evolution of English monetary institutions, there is not a single mention of F.A. Hayek or his theory of the evolutionary nature of social institutions. For that matter, there is no reference to any Austrian economist but Carl Menger, whom the author quotes just to set in motion the “traditional” account of money’s origin that she plans to falsify. Not to even mention Hayek is doubly puzzling in that Hayek’s and Desan’s understandings of how institutions evolve have a lot in common.

The lack of reference to Mises, Bohn-Bawerk or any other Austrian economists, like Vera Smith, George Selgin, or Larry White just to name a few who have written on British monetary history, reveals a gap in the author’s command of the field. In the end, her research lacks some essential interlocutors who might have helped her to analyze with a more adequate theoretical toolbox the amazing historical research she performed.

In fact that research was prodigious, and so, while I have been critical of Making Money, let me close by acknowledging its valuable contribution to a better understanding of monetary phenomena. I consider Professor Desan as engaged in the same intellectual adventure as I am, a very difficult one, one in which we should be honest about but charitable toward one another’s work, since it is from this “conversation” that we may advance our common knowledge—even more so when we share much of our prescriptive conclusions.

Desan sees her work as supporting a healthy skepticism about fractional reserve banking and the privileges granted to private bankers to create inside money. I share that skepticism, although I am perhaps much more cautious in advocating termination of what, after all, is the only means by which a regime with externally supplied government money may match more or less automatically a constantly varying demand for money (that is, fractional reserve banking).

Current monetary arrangements do deserve the scrutiny Desan would put them under. I, too, see the structural cause of recurrent financial crises in these defective arrangements. The fact that the author, using a different analytical approach, has reached, from her descriptive project, what I judge to be sound political prescriptions, gives me one more reason to try to engage with her intellectual project and invite others to do the same.

[1] See C.J. Zuijderduijn, Medieval Capital Markets: Markets for Renten, State Formation and Private Investment in Holland, 1300-1550 (Brill, 2009), p. 272.

[2] See James D. Tracy, Emperor Charles V, Impresario of War: Campaign Strategy, International Finance, and Domestic Politics (Cambridge University Press, 2002), p. 98.

[3] As Antal E. Fekete has explained: “The scientific concept of marketability is due to Carl Menger (Absatzfähigkeit). He based it on the distinction between the bid and asked price. Menger pointed out that it is not possible to buy something in a market, then turn around and sell it at the same price . . . The difference is the spread . . . It is the behavior of the spread that determines marketability. According to the Principle of Declining Marginal Utility the bid price is a decreasing function of quantity.” http://www.professorfekete.com/articles.asp.