Chapter 5. Aristotle against Plato.

An biased viewpoint of the history of currency has made the Aristotelian vision of currency (third merchandise with intrinsic value) predominant over the Platonic vision (abstract monetary sign with which to make a rule of three).

Inevitably, we must refer to a little history in order to try to understand where the muddle comes from. The books on the history of economic thought usually put Aristotle and Plato as the beginning of the polemic on currency.

Plato suggested that currency should be an arbitrary «symbol» to help exchanges. He was against using gold and silver because, in his opinion, the value of currency should be independent from the material with which money was made.

Aristotle, consciously opposing Plato's theory, gave birth to the following reasoning: the existence of a non-communal society implies the exchange of goods and services; this exchange at the beginning takes the shape of a barter; but the person who wants what another has, perhaps does not possess what this other person wants; it will then be necessary to accept in exchange something we do not want, in order to obtain what we want by means of another barter; this fact will then induce people to choose a merchandise as a means of exchange; metals are usually chosen because of their features of homogeneity, divisibility, transportability and relative stability of value. This metallist vision has been predominant until recently, in spite of the serious contradictions to which reality has submitted to it.

In short, in the West these are the two positions with which many variations have been tried without reaching an understanding. Some times the theories have complemented each other, and some times they have been in contradiction with the monetary practice. The history of currency and its theories is full of confusion and crises.

Schumpeter himself, in his impressive work on the history of economic analysis¹, admits that «whatever may be its shortcomings, this theory (Aristotle's), though never unchallenged, prevailed substantially to the end of the nineteenth century and even beyond. It is the basis of the bulk of all analytic work in the field of money.» It has had such a strong influence that, nowadays, ordinary citizens still think that the paper money being issued corresponds to an amount of gold which is kept in the vaults of the central bank, and in general they ignore the creation of money by the banks.

Present-day monetary theories acknowledge and accept the changes which have taken place in the progressive abstraction of currency, but in spite of the fact that many of them describe a monetary theory completely detached from the metallist theory, generally speaking they are still blocked as far as the imagination of a different monetary system is concerned. The monetary system becomes then the result of the agreements reached by the economic powers, and the result of the failures of the world monetary authorities. These authorities always tempted to drag the weight of metals in face of the «magic» of a currency which is detached from everything, which the bank system has created and which they cannot control.

Therefore, the result is the theoretical and practical predominance of the Aristotelian vision -metallism- which has been effective until quite recently. «Theoretical metallism, usually though not always associated with practical metallism, held its own throughout the 17th and 18th centuries, and prevailed victoriously in the «classical situation» that emerged in the last quarter of the latter. Adam Smith substantially ratified it. And for more than a century to comr it was almost universally accepted (by nobody more implicitly than by Marx) so much so, in fact, that the majority of economists came to suspect not only unsoundness of reasoning but something very like obliquity of purpose behind every expression of antimetallist views²».

«There was also, however, an antimetallist tradition, weaker no doubt but equally ancient, at least if we choose to trace it to Plato³».

One of the most daring attempts both in the theoretical and in the practical field, was the one carried out by John Law in France in the first years of the 18th century. «He worked out the economics of his project with a brilliance and, yes, profundity, which places him in the front rank of monetary theorists of all times. And this is all that matters for us. Since it is plain, however, that his analysis has been condemned, for about two centuries, on the strenght of the failure of his Banque Royale (...) and the Compagnie des Indes, which it absorbed, failed because the colonial ventures combined in the latter did not, for the time being, prove to be the sorce of anything but losses. If these ventures had been successful, Law's grandiose attempt to control and reform the economic life of a great nation from the financial angle -for this is what his plan eventually amounted to- would have looked very different to his contemporaries and to historians⁴». Law underlines that the virtues of paper money consist of the fact that its amount can be reduced to a rational administration. «Silver that serves as money no other use than to buy goods, it might just as well be replaced by a cheaper material, in the limit, by one that has no commodity value at all, such as printed paper, for 'Money is not the Value for which Goods are exchanged, but the Value by which they are exchanged.» «This, then, seems to have been the work that gave birth to the idea of Managed Currency (which implies the administration of currency and of credit as a means of directing the economic process), which was subsequently lost to the large majority of ecoomists until it forced itself upon them after 1919.» «A great plan was behind all this, in fact well advanced on the road to success: the plan of controlling, reforming, and leading on to new levels the whole of the national economy of France⁵».

This is an example of the weight of the inertia of the paradigms which make up, lead and control our vision of reality. When in 1919 paper money started to be accepted, and the need for its convertibility into gold was overcome, it was already late. The extension of current accounts and of cheques, with the corresponding expansion of credit and the invention of bank money, started to make the use of paper money inadequate, as it was no longer able «to reduce its amount to a rational administration», according to Law. Today, with the massive introduction of credit cards, the cash in the hands of the public is further reduced and therefore the ability to create bank deposits is increased, so that bank-notes and coins are used less and less.

Notes:

¹Joseph A. Schumpeter (1954), «History of Economic Analysis», Oxford University Press, New York, 1963, p. 63.
²Ib., p. 289-290
³Ib., p. 293.
⁴Ib., p. 295.
⁵Ib., p.322.