All Else Is Credit
What, actually, is money? And who creates it?
All Else Is Credit
On 1 May 1970, every bank in the Republic of Ireland closed its doors, and stayed closed for six and a half months. No branches opened, no cheques cleared, there was no way for anyone to verify how much anyone else actually held in an account. The money supply had simply been switched off.
Yet the economy did not stop. People kept writing cheques to each other, for everything, fully aware that no bank would see the paper for months. Publicans, in particular, became the informal clearing system of the Irish economy: they cashed cheques for customers they knew, took the paper on trust, and accumulated drawers full of IOUs that amounted, in aggregate, to an enormous private ledger of who owed what to whom.1 By the time the banks reopened that November, the value of cheques still in circulation and unsettled came to roughly three times Ireland’s GDP. Almost all of it cleared.
What kept the Irish economy running for six and a half months was not gold, not banknotes, and not even bank deposits in any functioning sense. It was a shared record of obligations, sustained entirely by trust among people who knew each other.
This fascinating episode brings us back to a question that has been discussed many times, and at great length, by economists and students alike: what exactly is money?
I. Money as Credit
The earliest evidence comes not from a marketplace but from a temple. The clay tablets of Sumer, from around 3000 BC, are overwhelmingly accounting records: debts owed to the temple, grain advanced to a worker, silver owed for a delivery of wool. Silver functioned as a unit of account, with a fixed price relative to grain and other staples, but for the most part silver did not change hands. What moved — what was actually recorded, copied, and referred to in disputes — was the tally of who owed what to the temple or palace administration.2 What moved was simply entries in a ledger – in other words, credit.
Coinage does not appear until roughly two thousand years later, around 700 BC. The oldest monetary system for which we have historical evidence was not based on coins, beads, seashells or anything physical at all, it was, in fact, even less physical than the money which we use today. It was a mere number in a ledger, attached to a name, recording a promise to deliver something later. Modern money has not moved away from some original, tangible form; if anything, it has returned to where it started.
II. The Myth of Barter
The conventional account of monetary history begins with barter. Exchange was inconvenient under barter — the man with surplus grain had no guarantee of finding someone who both wanted grain and happened to have what he needed in return — and coinage was invented to solve this problem. Adam Smith told a version of this story, and it has been repeated to schoolchildren and students ever since.
But no society answering to this description has ever been found. The Cambridge anthropologist Caroline Humphrey put the point as plainly as it can be put: “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money. All available ethnography suggests that there never has been such a thing.”3 What anthropologists find instead, repeatedly, is credit: a running tally of obligations within a community, denominated in whatever local unit of account happens to exist, and settled later.
The clearest demonstration of how quickly credit displaces barter comes from an unlikely source. R.A. Radford, an economist held in a German POW camp during the Second World War, later wrote up what he observed among the prisoners. Trade began, naturally enough, as barter — a tin of jam exchanged for a bar of chocolate, but it did not last. Within days, cigarettes had become money: prices across the camp were quoted in cigarettes, the cigarette price level rose and fell with the supply of Red Cross parcels, and an attempt to introduce a paper currency failed outright.4 A few hundred bored men with nothing but tinned rations reached for a monetary system almost immediately, because direct barter barely functions even under the simplest, most controlled conditions.
No farmer ever exchanged a sheep for a pile of shoes from the cobbler. The farmer took a pair of shoes, the cobbler kept a tally, and the two of them squared the account later, in kind, in coin, or in some other favour entirely. The tally was the money – pure abstract, immaterial credit.
III. Coin Fills a Niche
Coinage, once it appears, fills a specific need rather than replacing what came before. It served soldiers, who needed to be paid somewhere where they had no reputation and no standing credit. It served merchants trading with strangers whom they will never deal with again, and foreign counterparties for whom a local reputation meant nothing. It is, in short, the instrument of choice when there is no relationship to fall back on.
For the overwhelming majority of transactions, coin was not used. The villager bought bread on credit at the baker’s and settled at quarter-day. The blacksmith ran an account with the farmer that might run for months. Coin sat in the background, useful for large or one-off transactions, while the actual substance of daily commerce remained what it had always been: a web of running accounts between people who expected to deal with each other again.5 Gold and silver were present throughout this period — as a store of value, as a unit of account, as the thing held in reserve for settlement with strangers — but they were rarely what changed hands when a baker sold bread to a neighbour.
IV. The Tally Stick
The claim that money is, and has always been, credit is illustrated by the tally sticks that were used by England’s medieval Exchequer for over seven hundred years.
A tally stick was a length of willow, notched to represent a sum owed, then split lengthwise into two pieces — one retained by the creditor, one given to the debtor. The notches ran across the split, so the two halves could only ever be matched to each other, which made forgery close to impossible. From the early 1100s, under Henry I, these sticks were used to record taxes owed to the Crown. Critically, they did not simply sit in storage as a record of a settled account. They circulated. A tally stick representing a debt to the Crown could be sold on, used to discharge a debt to a third party, and passed from hand to hand — functioning as a negotiable instrument centuries before banknotes existed.6
The system remained in use until 1826. In 1834, the accumulated stock of obsolete tally sticks — representing roughly six centuries of the nation’s financial records — was ordered burned in the furnaces beneath the House of Lords. The fire got out of hand and destroyed the old Palace of Westminster, Britain’s parliament was burned down by its own money.
V. The Note, the Cheque and the Retreat of Gold
When goldsmiths and early bankers began issuing paper in the seventeenth century, the underlying pattern was already familiar, even if the form was new. A banknote was not, despite appearances, a certificate confirming that a specific quantity of gold sat waiting in a vault. It functioned as something else entirely: a transferable promise, formatted to resemble a claim on metal.7 As cheques and current accounts spread through the eighteenth and nineteenth centuries, the same logic scaled up across the entire economy. Credit, recorded in ledgers and transferred between them, became the ordinary mechanism by which money moved, while gold and even physical notes receded into the background — held in reserve for settlement between banks, or produced as reassurance when reassurance was required.
This is what makes the Irish strike of 1970 less an anomaly than a controlled experiment. When the apparatus of settlement was withdrawn entirely, for six and a half months, the economy did not seize up. The ledgers — informal, handwritten, kept in pubs — carried on doing what ledgers had always done. Nothing broke, because nothing essential had been removed.
VI. “Gold Is Money. Everything Else Is Credit.”
In December 1912, J.P. Morgan testified before the Pujo Committee, the congressional inquiry into the concentration of financial power on Wall Street — an inquiry in which Morgan himself was the principal subject. Asked about the basis of credit, he is recorded as saying something close to: “Gold is money. Everything else is credit.”8
The line is true, and it is also a sleight of hand. Gold has, for most of recorded history, functioned as a store of value rather than a medium of exchange — which is precisely the distinction this account has been building toward. But consider who is saying it, and in what context. Morgan’s own bank was a credit institution in the purest sense: an empire built on Morgan’s personal ability to assess, underwrite, and vouch for the creditworthiness of others. He held nowhere near enough gold to account for the scale of what his house was worth. A man whose entire business was credit was telling Congress that the only real money was the one thing his own business did not run on.
The incentive behind this is not difficult to identify. If money is gold, banks are simply warehouses — places that store and move something that exists independently of them, and whose role is therefore mechanical and largely beyond political concern. If money is credit, banks are the institutions that create it, allocate it, and charge for it — and the obvious next questions are who gave them that role, and on what terms. One framing invites scrutiny of the banking system, the other shuts down that line of enquiry.
This was not merely a rhetorical position. It was, to a significant degree, built into the institutions that would go on to train every subsequent generation of economists. In the same period, men including Morgan and Rockefeller funded university chairs and entire economics departments — Morgan’s contributions to Columbia channelled through his associate Seth Low — with university leadership selecting economists whose work was, at minimum, unlikely to embarrass the people funding the buildings.9
The immediate target, as Mason Gaffney and Fred Harrison document in The Corruption of Economics, was as much Henry George’s popular argument for taxing unearned land income as it was any inquiry into banking. But the effect on the study of money was the same regardless of intent: an economics discipline constructed, from its academic foundations, around the idea that money is a neutral “veil over barter,” that banks are mere intermediaries, and that the creation of credit is a case of “nothing to see here, move along now.” JP Morgan’s testimony and his universities were, in the end, the same subterfuge made twice.
VII. The Tax Nobody Votes For
If money is, at root, credit, and if banks are the institutions licensed to create it, then every loan a bank issues is the creation of something out of nothing, lent out at interest.10 This is not a fee for lending money that already existed — it is a charge levied on the act of transacting itself, collected by whoever controls the ledger. Economists have a term for this: seigniorage. If we have to collectively borrow money into existence in order to do business with each other, then interest on that debt represents a tax on the entire economy, on every single transaction that we do, levied by private banks, and which no electorate has ever approved.
The scale of this becomes clearer once the destination of most new credit is considered. Housing is the largest store of wealth in any developed economy, and most people need to take on debt in order to purchase a home. They buy that home with credit created out of thin air, at the push of a button — credit that did not exist the minute before the mortgage was signed. The institutions creating that credit are, in effect, levying their charge against the nation’s largest pool of wealth every time a property changes hands: not a one-off fee, but a twenty-five or thirty-year stream of interest, on every mortgage, on every home, rolling over indefinitely to the next buyer and the next loan.
This is the second tax, and like the first, it depends on the public not quite grasping what money is. A population that understood, correctly, that banks create the credit they lend — rather than channelling the savings of others — might reasonably ask why that power should sit with private banks, run for private profit, secured against the roof over their heads. The economics departments that J.P. Morgan’s money built was never going to encourage that question, on the contrary, it was constructed to ensure that it was never asked.
VIII. Credit All the Way Down
Look again at the number on a bank statement. It is not gold, and it is not, in any meaningful sense, paper. It is an entry in a database, maintained by a private institution, that the rest of the economy has agreed to treat as real.
It is, in every respect that matters, the same instrument as a notation on a Sumerian clay tablet, a notch on a split willow stick in the medieval Exchequer, a goldsmith’s handwritten receipt, or a cheque changing hands in a Dublin pub in the summer of 1970. A record of who is owed what, by whom, vouched for by someone willing to stand behind it.
Gold was never money in the sense the word implies. It was the prop produced to stop the question being asked, and once that prop is removed, the interesting question is no longer what money is. It has always been credit. The question becomes who is licensed to create it, what they charge for that licence, and why that arrangement has gone unexamined for so long.
Banks profit from the exorbitant privilege of being able to create money (credit) out of thin air, lend it to us in order that we can transact with each other, and have us spend the rest of our lives working in order to pay that debt back. This system is not a law of nature — the universe did not decree that banks, and only banks, can create money. This system is a human invention, an accident of history, a tool that was convenient at the time. It is also the source of lifetime debt, debtors’ prisons, asset bubbles, booms and busts, billionaire bankers and impoverished workers. Perhaps it is time to consider if there is a better system, one that does not subordinate the entire economy and the nation’s wealth to the profit and loss account of banks.
Short answer: yes, there is.
Notes
1 The 1970 Irish bank strike ran from 1 May to mid-October/17 November 1970 (around six and a half months), following a shorter period of restricted hours beforehand. By the time banks reopened, uncleared cheques in circulation were estimated at roughly three times Irish GDP; the overwhelming majority were honoured. Pubs and shops acted as informal clearing houses, cashing cheques on the strength of personal knowledge of regular customers.
2 This account follows Michael Hudson’s work on the archaeology of debt: the earliest Mesopotamian “money” was silver used as a unit of account in temple and palace bookkeeping, with coinage not appearing until roughly two thousand years later (from around 700 BC).
3 Caroline Humphrey, “Barter and Economic Disintegration,” Man, vol. 20 (1985), p. 48.
4 R.A. Radford, “The Economic Organisation of a P.O.W. Camp,” Economica, November 1945. This episode is sometimes cited as evidence of a functioning barter economy; it shows the opposite, since barter was tried, found inadequate, and abandoned within days in favour of a cigarette currency.
5 This is the argument of Craig Muldrew’s The Economy of Obligation (1998), which documents the dense webs of local credit underpinning everyday transactions in early modern England, with coin playing a far smaller role in ordinary life than the textbook account suggests.
6 English Exchequer tally sticks were used from around 1100 to 1826, and circulated as negotiable instruments — used to pay taxes and pass between holders much as banknotes would later. The 1834 burning of the accumulated stock in the furnaces beneath the House of Lords started the fire that destroyed the old Palace of Westminster.
7 For the fuller account of goldsmith bankers, promissory notes, and the founding of the Bank of England, see “The Goldsmith’s Fiction.”
8 J.P. Morgan, testimony to the Pujo Committee, 19 December 1912. The most precise wording on record is closer to “Money is gold, and nothing else” — the “everything else is credit” phrasing is the commonly circulated version and conveys the same point, but the exact wording is disputed.
9 See Mason Gaffney and Fred Harrison, The Corruption of Economics (1994), on the funding of university economics chairs by figures including Morgan (via Seth Low at Columbia) and Rockefeller, and the marginalisation of Henry George’s land-tax arguments that followed.
10 This is the Bank of England’s own description of how modern banking works (“Money Creation in the Modern Economy,” Quarterly Bulletin, 2014): loans create deposits; banks do not simply lend out pre-existing deposits.