The Economist On Money and the State

by | Aug 22, 2012

I couldn’t help being glad to see The Economist refer to Carl Menger’s theory of the origins of money just as I was about to explain that theory to my undergraduate classes. Nor did I at all mind having Menger’s ideas contrasted with those of another of my favorite economists, Charles Goodhart. I was, however, […]

I couldn’t help being glad to see The Economist refer to Carl Menger’s theory of the origins of money just as I was about to explain that theory to my undergraduate classes. Nor did I at all mind having Menger’s ideas contrasted with those of another of my favorite economists, Charles Goodhart. I was, however, sorry to see that venerable publication, whose first two editors, James Wilson and Walter Bagehot, were among the more important 19th-century proponents of free banking, embrace Professor Goodhart’s “Cartalist” theory of money, and do so on grounds that won’t stand up to critical scrutiny.

Menger, of course, famously argued that commodity money, far from having to be deliberately designed, can evolve spontaneously or, as The Economist puts it, “is a market-led response to barter costs.”

But while The Economist allows that Menger’s account offers “a good description of how informal monies, such as those used by prisoners, originate,” it claims that the theory comes up short when it comes to explaining the origins of the most convenient of all commodity monies: those consisting of precious metals. Why? Because metals only make for convenient money once they have been packaged into coins, and “history shows that minting developed not as a private-sector attempt to minimize the costs of trading, but as a government operation.” Consequently, the article continues, “another theory is needed, in which the state plays a bigger role.” Cartalism is one such theory, according to which money, and efficient money especially, is a creature of the state, which invented coins with the ulterior motive of enhancing its revenues by making taxes payable in them and by occasionally resorting to debasement.

But is it true that minting developed, and could only develop, as a government operation? Goodhart’s article is supposed to offer proof that this was so, by pointing to two instances in which the collapse or withdrawal of government coinage gave way, not to private coinage but to barter (in the former Roman empire) or to the use of a non-metallic money (rice in 10th-century Japan).

One needn’t be a logician to recognize the inherent shortcomings of such a “proof by example.” That the withdrawal of state-run mints has sometimes failed to prompt the establishment of private ones hardly establishes that private mints have never existed, much less that they never could exist. One may, on the other hand, disprove the claim that private mints have never existed by means of a single, contradictory example.

As a matter of fact, there have been numerous episodes of private coinage, including some very successful ones. What’s more, it is far from clear that the very first coins ever made–the famous electrum lumps of Lydia, in Asia Minor–were government products. On the contrary: according to Thomas Figueira, one of the leading experts on the subject today, “It is uncertain whether it was someone endowed with political authority acting on behalf of his community or an individual acting on his own behalf who conceived of the idea of coinage.” Indeed, no one is even sure what those early coins were for, or even whether they ought to be called “coins” at all, since they were uniform in weight alone, but varied considerably in their gold and silver blend.

Of course it’s hardly likely than any Tom, Dick, or Harry would have been able to have his markings treated as credible certifications of weight or purity or anything else. Whoever made the first coins had to be some sort of big shot, or its corporate equivalent. Being a tyrant might suffice; but that hardly means that it was essential. Nor does the fact that almost every coin produced since the obscure beginnings of coinage has come from a government mint mean that only governments were fit to coin money. It could instead mean that governments found the fiscal gains to be had by monopolizing coinage too good to pass up. That governments frequently took advantage of their coinage monopolies, not to mint good coins, but to mint lousy ones that they then compelled their citizens to accept, would seem to favor the latter hypothesis.

It ought to go without saying that there is no technological reason why coins couldn’t have been a private invention, or couldn’t have been privately manufactured at any time to the same standards, if not better ones, than their government-made counterparts . “A mint, Sir” Edmund Burke once reminded Parliament, “is a manufacture, and it is nothing else.” A factory, we would now say. And since when are governments very good at, let alone uniquely capable of, running factories? As for state-sponsored enterprises generally doing a better job of quality control than their private-sector counterparts, if you believe it I must see about coming up with a few tons of ca. 1958 Chinese steel to sell to you.

In fact, all of the most significant coinage-related inventions–the manual screw press and its steam-powered counterpart are only the most famous examples–came from the private sector, and most were taken up by governments only reluctantly and after (sometimes deadly) resistance from government mint authorities. How often, on the other hand, have government authorities themselves been responsible for technological breakthroughs? (No, Tang wasn’t invented by NASA.) Were it to come to a wager, I for one would much sooner keep a grip on my money than stake it on Croesus or Pheidon or any other ancient king.

But why speculate? In fact, Goodhart’s contrary suggestion notwithstanding, there have, as I’ve already noted, been occasions on which coinage was handled by the private sector, and in the best documented ones the coins that resulted were not only as good as but superior to those from the government’s own mints. That was certainly the case in the U.S. after the Appalachian and Californian gold discoveries, when private mints sprung up to supply convenient coining services to miners who would otherwise have had to send their gold to Philadelphia or (after 1835) to either Philadelphia or Charlotte for coining. The high quality of the private gold coins produced during these episodes is attested to, both by the extant coins themselves, and by the fact that the U.S. Mint, having failed to put the West Coast mints out of business merely by finally opening a San Fransisco branch, relied instead on coercion to do the trick.

Another instance of successful private coinage is one with which Professor Goodhart is now familiar, though he didn’t know of it in 1998, when he published the article to which The Economist refers. It is the episode of private token coinage in Great Britain that is the topic of my book, Good Money. Professor Goodhart did me the honor of writing that book’s introduction. And although he makes clear there that the story I tell did not at all cause him to abandon Cartalism, I am sure that he would agree that it proves that, in at least one instance, the state’s withdrawal from coining did in fact lead to private entrepreneurs rushing in to fill the void.

That private coiners didn’t always or even often rush in whenever governments failed to supply coins is itself hardly surprising in light of the fact that unauthorized coining, even of coins not meant to imitate official ones, has almost always been illegal, and has more often than not been a capital crime. So the absence of acknowledged private mints following both the fall of Rome in the 5th century and the Japanese government’s abandonment of copper coinage in the 10th might prove nothing more than that no one wanted, literally, to stick his neck out.

Might. Except for the fact that the claim that no private coinage took place in either of these instances doesn’t seem to be true. I do not merely mean that there was surreptitious private coining, that is, counterfeiting: despite the death penalty Japanese copper coins were aggressively counterfeited. I mean that after the Japanese government got out of the business of making coins–after having, that is, debased its coins until they were more-or-less worthless–legitimate privately minted substitutes, manufactured by local clans and wealthy merchants, did in fact take their place, along with Chinese coins and (yes) rice. That, at least, is what it says on the website of the Bank of Japan’s Currency Museum. Nor is it true that coinage simply gave way entirely to barter after Rome fell. No doubt it did so to some degree everywhere, and perhaps to a large degree in some places; but private coinage also took place, and did so notoriously in Merovingian Gaul, where thousands of local mints supplied coins modeled (sometimes crudely) on their Roman predecessors, and bearing the names of coiners very few of whom were known rulers. In short, it seems that, even as proofs by example go, those offered by The Economist are rather paltry.

Yet I suppose that we will never see the end of the myth that only governments are fit to coin money. Were bread a government monopoly long enough, Herbert Spencer once remarked, people would react with horror to the suggestion that it might instead be supplied, and supplied with better results, by the private sector. Spencer was probably right. I’m just glad I’ll never live to see The Economist prove it.

George Selgin is a Professor of Economics at the University of Georgia's Terry College of Business. He is a senior fellow at the Cato Institute. His writings also appear on His research covers a broad range of topics within the field of monetary economics, including monetary history, macroeconomic theory, and the history of monetary thought. He is the author of The Theory of Free Banking, Bank Deregulation and Monetary Order, and several other books. He holds a B.A. in economics and zoology from Drew University, and a Ph.D. in economics from New York University.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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