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「国家に債務obligationsを負う者（納税者-引用者）はそれを清算settleすることができる紙片を受容しようとするだろうし、債務を負っていない他のひとも、納税者がそれを受容することを知っているので、それらの紙片を受容するだろう。」ラーナー（1947,p.313)
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MONEY AS A CREATURE OF THE STATE
By ABBA P. LERNER
New School for Social Research
A favorite pastime at the London School of Economics, where I was first introduced to the subject of economics, was the cruel baiting
and tearing to pieces of Professor Knapp's State Theory of Money.
The chief performer in this sport was Professor Gregory who spent
several lectures at the beginning of his course on money in ridiculing
Knapp's notions that the value of money derives in some metaphysical
manner from the sovereign authority of the state. Gregory held with
the classics that the value of money derives from the scarcity of gold
and that this scarcity is impervious to declarations by government
officials.
Later in the course the state managed to creep back quietly and
unobtrusively through its power, via the banking system which it
could control, to mitigate the scarcity of gold by economizing in the
monetary demand for it. This was done by the substitution of currency
and bank credit for gold thus reducing the demand for gold in relation
to the supply. There was considerable development of the devices for
such economies. Fiduciary issues of currency in addition to that which
was backed 100 per cent by gold; fractional backing of currency which
stretched gold further; the development of the banking system with
the pyramiding of bank money on fractional currency reserves which
were in turn backed less than 100 per cent by gold; the use of foreign
exchange standards which permitted currency to be used instead of
gold as reserves for central banks; and so on through a long list cul-
minating with the temporary issue of "fiat" money, without proper
backing, to deal with crises involving an urgent need for liquidity.
But the lesson of the first lectures on Knapp was never entirely
forgotten. The money created or expanded by state action was made
to recognize its inferiority to gold. It was merely a substitute for gold.
Its value depended in the last resort on the gold backing or at least
on the ability of the authorities to keep their promises to redeem the
notes in good solid gold.
Since then we have been emancipated theoretically from the fetishism
of gold. Nearly everybody who defends the use of gold in modern
currency systems guards himself by saying that he is doing so only
in order to be kind to somebody else's unreasonable prejudices. It is
no longer a paradox to declare that the value of gold depends on the
possibility of getting dollars for it rather than the other way round. 313
And it is only from inferior textbooks that students are still getting the impression of some mysterious influence that gold exercises at a
distance on the value of the currency backed by it. Even for those
who have got no further from gold than to rest their emphasis on
the quantity of money, it seems hardly more essential to explain the
value of currency in terms of gold backing than to explain the value
of gold in terms of its being backed by some still more primitive form of
money, such as cattle or fish.
Money, as I have said in an article of that name in the Encyclopaedia
Brittanica, is what we use to pay for things. The basic condition for
its effectiveness is that it should be generally acceptable. Its trans-
formability into gold and the guarantee of this possibility of gold
backing (or any other kind of backing} are nothing but historical
accounts of how acceptability came to be established in certain cases.
These were possibly the only ways in which general acceptability
could be established prior to the development of the well-organized
sovereign national states of modern times. General acceptability had to
be transferred in some such way from something which had already
acquired it in the course of history. But if general acceptability could
be established in any other way these historical methods would no
longer be necessary or relevant,
This is just what has happened. The modern state can make any-
thing it chooses generally acceptable as money and thus establish its
value quite apart from any connection, even of the most formal kind,
with gold or with backing of any kind. It is true that a simple
declaration that such and such is money will not do, even if backed
by the most convincing constitutional evidence of the state's absolute
sovereignty. But if the state is willing to accept the proposed money
in payment of taxes and other obligations to itself the trick is done.
Everyone who has obligations to the state will be willing to accept
the pieces of paper with which he can settle the obligations, and all
other people will be willing to accept these pieces of paper because
they know that the taxpayers, etc., will accept them in turn.
On the
On the
other hand if the state should decline to accept some kind of money
in payment of obligations to itself, it is difficult to believe that it would
retain much of its general acceptability. Cigarette money and foreign
money can come into wide use only when the normal money and the
economy in general is in a state of chaos. What this means is that
economy in general is in a state of chaos. What this means is that
whatever may have been the history of gold, at the present time, in a
normally well-working economy, money is a creature of the state. Its
general acceptability, which is its all-important attribute, stands or
falls by its acceptability by the state. 314
But there is another and much more serious sense in which the state
is the responsible creator of money. The second most important problem
that modern civilization has to solve if it is to survive the totalitarian
threats to its existence is the prevention of severe inflations and depres-
sions. (The first problem is, of course, the establishment of world
peace before we slip into an atomic war by way of appeasement and/or
preparedness.)
Depression occurs only if the amount of money spent is insufficient.
Inflation occurs only if the amount of money spent is excessive. The
government-which is what the state means in practice-by virtue of
its power to create or destroy money by fiat and its power to take
money away from people by taxation, is in a position to keep the
rate of spending in the economy at the level required to fill its two
great responsibilities, the prevention of depression, and the maintenance
of the value of money.
Up till now governments have shirked these responsibilities, seeking
refuge in an alibi of helplessness. The extraordinary complacency both
of the government and of its critics in the face of the recent rise in
prices can be appreciated only if one imagines what would have been
the reaction to a government declaration that it was going to default
on say 30 per cent of its interest and repayments to hołders of war
bonds and other government obligations. An equal despoiling of patriotic subscribers to war loans through the price increasés does not
prevent the treasury from stil advertising government bonds as giving
back $4.00 for $3.00. Nobody seems to find this dishonest. And even
this denial of responsibility is as nothing compared with the way in
which nearly all states have nearly all the time permitted depressions
to begin, to grow, and to establish themselves without calling into play
their power to create the money demand which would have made the
depression impossible.
Before the tax collectors were strong enough to earn for the state
the title of creator of the money, the best the state could do was to tie
its currency to gold or silver which had a stability of their own that
antedated the appearance of the state. By that policy extreme inflations
were made impossible, and in a small country even small inflations
(relatively to other countries) would be checked by the disappearance
of the money in an outward flow of gold. By the same policy a limit
was set to depressions. For the world as a whole they could not go
below the point at which the available and fairly steady supply of
gold-money became so redundant on account of the small volume of
business (or possibly because of lower prices) that it spilled out into
increased spending by somebody who was supersatiated with liquidity.
For individual countries special conditions of foreign trading and lend-
ing might lead to much worse depressions, but on the other hand any
further depression beyond that determined by these special conditions would be quickly corrected by an inflow of gold-money from the
rest of the world. 316
The return to such methods now can only be proposed by exuberant
Republicans who have not yet given a second thought to their mean-
ing. The "margin of adjustment" involved in so crude a mechanism--
which stretches from the limits of price rises within a gold standard
to the level of depression that corresponds to zero net investment-
have become wider still. The United States can carry much more inflation than we have so far had without running out of gold, while
the level of unemployment that would be possible before a redundance
in the supply of hard money came to the rescue grows greater with
our growing productive competence and is now far beyond the limit
set by the political conditions for the maintenance of a free society.
No government will be able to sit back and wait for the degree of
unempłoyment which will result in the degree of price fall that will
create enough idle money to induce sufficient private investment to
start a movement back to prosperity. The New Deal and the war pros-
perity will have shown enough people that serious depression is dis-
pensable. Some form of functional finance will in fact be practiced by
whatever government we have. The only danger is that it will be too
little and too late.
Less well worked out is a technique of dealing with the other
responsibility of the creator of money-the responsibility for main-
taining its value. The key points here are not in the direct supply of
money, or even in the regulation of the level of spending. The key
points are in the determination of wage rates and in the determination
of rates of markup of selling prices over costs.
Wage determination by collective bargaining brought an improve-
ment over the condition of the unorganized worker bargaining with
a large employer in time of depression. With the abandonment of
severe depression as part of the technique of influencing the determina-
tion of wage rates, and with the growth of trade unions to national
and international size, the power of the trade unions has become too
great for the purpose of determining wages by collective bargaining.
Each union is forced to use its power to try to increase the share going
to its members even though its more intelligent leaders know that
what it gains is not from the employer, who can and will pass any
wage increase on in higher prices, but from the population as a whole-
which means in the main from other workers and their families. They
also know that the other trade unions will have to do the same so
that there is nothing left but a general inflation. For any particular
trade union to restrain itself in the scramble may merely mean that it is
left behind while the inflation continues, So that unless some alternative mechanism of wage determination is developed, a full employment
policy will mean inflation. The acceptance by the government of its
responsibility for preventing depression would seem to make it impos-
sible for it to carry out its second responsibility for maintaining the
value of money. 316
On the other hand it seems to be very likely that the Nathan report
is right in believing that after the restocking boom the maintenance
of adequate spending will be impossible without an increase in real
wages; that is, in the ratio of money wages to the prices of finished
goods. This is the same dilemma in a different form. Higher wages
relatively to prices are necessary for long-run prosperity but raising
wages will do no good because they will only lead to higher prices
and inflation.
The dilemma can be resolved only by the government going to work
on both money wage determination and on markup rates. Both are
problems of monopoly and as such are inevitably destructive of a free
economy. Markup rates must be reduced by antimonopoly measures
of the kind that the government was working on when interrupted by
the war. The most important help to the government in this will be
the policy of maintaining full employment which will make it profitable
for business to work with smaller markups. The effects can be speeded
up by the government making the benefits of the full employment more
immediately evident to producers by costlessly guaranteeing adequate
(or even unlimited) sales of standard goods at moderate prices, releas-
ing the energies and initiative of businessmen from the worries of
selling to the concentration on efficiency in production.
The trade union monopolies must be tackled by establishing an
artificial free market with compulsory arbitration for wage determina-
tion in which both the worker and the employer get a fair deal. Starting
from some initial set of wage rates, such as the prevailing rates, wages
in general can be raised by 1 per cent about every four months (on ac-
count of the secular growth in labor productivity) without the general
level of cost and prices having to rise. This would be the basic
money wage movement. In areas and industries where the level of
unemployment is more than twice the national average the wage
increase would not take place. Where the level of unemployment is less
than half the national average the wage would be increased 2 per cent
instead of 1 per cent.
This would have to be accompanied by measures to maximize the
mobility of labor, removing all restrictions on entry to any occupations.
The appearance of twice the national average of unemployment would
then be evidence that workers consider the existing conditions in the
area of industry more attractive than elsewhere, so that it would be
fair for the increase to be forgone. Workers who insisted on the in-
crease would in effect be claiming the retention of an advantage over
workers in general.
317
317
Less than half the average of unemployment would be evidence
that workers in general considered the conditions less attractive than
elsewhere. A refusal of employers to raise wages by the required 2 per
cent would then be seen as an attempt to maintain substandard con-
ditions. In the end there would emerge a set of wage rates which would
correspond to the workers' own estimates of the necessary compensation
for differences in net advantages.
I have no time to defend these proposals. They are only intended
as an indication of the direction in which solutions to these most press-
ing problems might be found. I will only make two remarks.
The side-stepping of collective bargaining will undoubtedly be de-
nounced as an attack on labor. It is important to note that it will
appear so only to those who in their thinking have completely sub-
stituted the labor unions for the workers, raising these instruments
for improving the economic welfare of labor to the status of ends
in themselves. We should remember that an end in itself is nearly
always a means for some end which one does not like to mention aloud,
such as the maintenance of the position, prestige, and salary of a
union bureaucrat.
The second remark is addressed to another professional group-
monetary theorists. I have gone quite a way from the traditional field
of monetary theory. I find that this is inevitable if we are to begin
to take seriously a slogan which we have been repeating for quite a
while now. The problem of money cannot be separated from the prob-
lems of economics generally just as the problems of economics cannot
be separated from the larger problems of human prosperity, peace,
and survival.
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