Money Read Online Free PDF Page B

so were comfortable forming judgements as to their creditworthiness. But by 1970 Ireland was nevertheless a diverse and developed economy, so this could not always be the case. It was here that the Republic’s pubs and small shops came into their own, by serving as nodes in the system, collecting, endorsing, and clearing cheques like an ersatz banking system. “It appears,” concluded the Irish economist Antoin Murphy, with admirable circumspection, “that the managers of these retail outlets and public houses had a high degree of information about their customers—one does not after all serve drink to someone for years without discovering something of his liquid resources.” 39
THE HEART OF THE MATTER
    The case of the Irish bank closure provides an unusually useful opportunity to understand more clearly the nature of money. Like Furness’ report from Yap, it forces us to reconsider what is essential to the functioning of a monetary system. But because the Irishcase is so much closer in time and technology to our own, it is much more suitable for economic triangulation. The story of Yap showed that the conventional theory of the origins and nature of money is confused. The story of the Irish bank closure helps point the way to a more realistic alternative.
    The story of Yap stripped away a central, misleading preconception about the nature of money that had bedevilled economists for centuries: that what was essential was the currency, the commodity coinage, which functioned as a “medium of exchange.” It showed that in a primitive economy like Yap, just as in today’s system, currency is ephemeral and cosmetic: it is the underlying mechanism of credit accounts and clearing that is the essence of money. We were left with a very different picture of the nature and origins of money from the one painted by the conventional theory. At the centre of this alternative view of money—its primitive concept, if you like—is credit. Money is not a commodity medium of exchange, but a social technology composed of three fundamental elements. 40 The first is an abstract unit of value in which money is denominated. The second is a system of accounts, which keeps track of the individuals’ or the institutions’ credit or debt balances as they engage in trade with one another. The third is the possibility that the original creditor in a relationship can transfer their debtor’s obligation to a third party in settlement of some unrelated debt. 41
    This third element is vital. Whilst all money is credit, not all credit is money: and it is the possibility of transfer that makes the difference. An IOU which remains for ever a contract between just two parties is nothing more than a loan. It is credit, but it is not money. It is when that IOU can be passed on to a third party—when it is able to be “negotiated” or “endorsed,” in the financial jargon—that credit comes to life and starts to serve as money. Money, in other words, is not just credit—but
transferable
credit. As the nineteenth-century economist and lawyer Henry Dunning Macleod put it:
    These simple considerations at once shew the fundamental nature of a Currency. It is quite clear that its primary use is to measure and record debts, and to facilitate their transfer from one personto another; and whatever means be adopted for this purpose, whether it be gold, silver, paper, or anything else, is a currency. We may therefore lay down our fundamental Conception that Currency and Transferable Debt are convertible terms; whatever represents transferable debt of any sort is Currency; and whatever material the Currency may consist of, it represents Transferable Debt, and nothing else. 42
    As we shall see, this innovation of the transferability of debts was a critical development in the history of money. It is this, rather than the graduation from a mythical barter economy, which has historically revolutionised societies and economies. In fact, it is barely an