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Alfred Mitchell-Innes and the Credit Theory of Money
Alfred Mitchell-Innes (1864-1950) was a British diplomat and author. Among others, he served as financial advisor to the King of Siam (1896-1899) and was Under-Secretary of State for Finance in Egypt (1899-1908) wikipedia entry
Credit Theory of money
In 1913, while posted in Washington DC, Mitchell-Innes published an essay in The Banking Law Journal entitled What is Money? That paper seemes to have attracted some attention at the time, and J. M. Keynes wrote a review of it in The Economic Journal (in which, by the way, he calls the credit theory a "familiar fallacy" not even worth discussing, but has kinder words for Innes's historical research). In 1914, Mitchel-Innes published a second paper, The Credit Theory of Money, which clarifies some of the ideas of the first paper and provides responses to various critics.
In his essays, Innes debunks the metallic theory of money and the idea that barter preceded money, shows that money existed long before coins were introduced and simply states: "credit and credit alone is money."
Note that the texts of both essays and of Keynes's review are published on this site (cf links under "@sibling files") and are also reprinted in a recently published book "Money, Credit Conversion and the legacy of Mitchell-Innes" - more details here.
Mitchell-Innes forgotten and (partly) rediscovered
Despite the fact that Keynes's Treatise of Money seems to contain some of Mitchell-Innes's ideas, Keynes apparently never cites him his works. The work of Innes lay mostly forgotten until the mid 1990s (Wray 1 page 3).
The two essays were reprinted in 2004, together with several articles on the nature of money, in a book edited by L. Randall Wray 1. There, Wray writes: "I believe the 1913 and 1914 articles by Innes stand as the best pair of articles on the nature of money written in the twentieth century" (page 223)
In his bestselling Debt, the first 5,000 years2, published in 2011, David Graeber writes:
"By the early decades of the twentieth century, all the pieces were in place to rewrite the history of money. The groundwork was laid by Mitchell-Innes."
After noting that
" .. our standard account of monetary history is precisely backwards. We did not begin with money, and then eventually develop credit systems. It happened precisely the other way around. What we call virtual money came first."
"It's not that any economist has ever refuted Mitchell-Innes. They simply ignored him. Textbooks did not change their story - even if all the evidence made clear that the story was simply wrong."
More than a century after Innes published his essays, it is impossible not to notice that even economics graduates from prestigious Universities often know little about the history of money, and that the belief that barter preceded money is still extremely widespread.
A thoroughly modern approach
Mitchell-Innes's theory is not complete because it does not deal with interest rates. His articles can (rightly) be criticised for lack of references.
Overall, however, his theory rings true. It is consistent and forcefully stated. More than a century after their publication, Mitchel-Innes's ideas remain thoroughly modern and entirely relevant to modern monetary theory.
Apart from debunking the story that money originated from barter, Mitchell-Innes showed that money preceded coins, that the physical form of money is of no importance, that the metal content of coins was irrelevant through most of history3, that the metallic standard was a modern invention not known in Antiquity or the Middle Ages, that "commerce ... has never had anything to do with the precious metals, and if every piece of gold and silver now in the world were to disappear, it would go on just as before and no other effect would be produced than the loss of so much valuable property."
He saw that by hoarding gold and maintaining a gold standard, central banks were in fact keeping gold at an inflated price, resulting in excessive issuance of money and declining currency.
He sensed, without being able to prove it conclusively, that in modern times the excessive issuance of government money results in a general depreciaition of money.
He wrote that "future ages will laugh at their forefathers of the nineteenth and twentieth centuries, who gravely bought gold to imprison in dungeons in the belief that they were thereby obeying a high economic law and increasing the wealth and prosperity of the world."
He understood that "just like any private individual, the government pays by giving acknowledgments of indebtedness" and that government money acquires value by taxation.
Writing about government money, he rejects the idea that "the more coins there are in circulation, the more 'money' there is, and therefore the richer we are" and writes:
"The fact, however, is that the more government money there is in circulation, the poorer we are."
He saw that "the clearing houses of old were the great periodical fairs", that the monetary unit is purely imaginary, saw the distinction between monetary unit and money and noted how, even when the king altered the value of his coins, this did not affect prices.
He stated that legal tender laws are not of material importance, and can indeed have unintended negative consequences in the form of banking panics. He did not agree with the widespread belief that there is "some peculiar virtue in a central bank" and wrote as follows about bank reserves: "In fact, and this cannot be too clearly and emphatically stated, these reserves of lawful money4 have ... no more importance than any other of the bank assets."
Writings on criminal justice
Mitchell-Innes also had a long-lasting interest in the criminal justice system. In his essay 'Love and The Law: a study of Oriental justice', published in 1913, he compared the Western and Eastern approaches to justice, focusing in particular on the lack of compassion of the Western system. He formulated a version of Gresham's law of currency as applied to law : "the merciless drive out the merciful".