For both the podcast and a recent article on de-dollarization, I’ve been getting into some heavy duty political economy. One very valuable thread I’ve followed is sometimes called Indian Political Economy, or IPE. The tradition begins with Dadabhai Naoroji, who studied the way that the British Empire “drained” India. Naoroji’s best known book was the 1901 Poverty and un-British Rule in India, which is funny because in retrospect nothing is less un-British than draining India of all of its wealth (in several ways the book is a painful read, full of Naoroji trying to appeal to the better natures of the imperialists, but important as the beginning of a tradition!).
Today’s leading practitioners of IPE (unclear whether they’d identify as IPE since they’re really just P.E.s who happen to be from I and know a lot about I) include Utsa and Prabhat Patnaik, authors of such works as Capital and Imperialism and A Theory of Imperialism, both of which I used in the de-dollarization article. Utsa Patnaik’s research is where the figure of $45 trillion drained from India by Britain comes from. In Zak Cope’s book The Wealth of Some Nations, as well as research by Jason Hickel and his co-authors, you can read about the various mechanisms by which “drain” continues, to the tune of some $2 trillion per year, drained from the poor countries to the rich ones, year after year.
In the de-dollarization article there was a point that I wanted to make, that follows from IPE, which is the maintenance of the imperial currencies underlying the global economy – the gold standard in the British Empire and the dollar today – is based on the constant flow of free labor and commodities, of “drain” from the colonies (now neocolonies). If the Global South countries are able to carve out the ability to trade with one another without needing the dollar, as seems to be happening; and if the dollar isn’t replaced by another imperial currency regime, which it might not be... well, then the drain might also be coming to an end, which could be very good for the no-longer-drained countries who could then use those resources for some sensible combination of development and environmental protection.
None of which is really why I’m writing this post today. It’s instead to make a record of something I encountered in my research that didn’t fit into the article and doesn’t really fit anywhere, but is worth a short post of its own. Because in addition to using IPE, anyone trying to make sense of how money works in the economy will also encounter Modern Monetary Theory, or MMT. There is a very clearly written book by Stephanie Kelton called the Deficit Myth, but I was using a textbook called Modern Monetary Theory by Randall Wray. The point that MMTheorists make is that currencies are given force by taxes and are ultimately backed by states. This means governments don’t tax and spend, they create money and people accept and use the money because they know they can always use the money to pay their taxes.
Several consequences follow from this, the main one being that governments don’t need taxes or debt to create money. States are limited only by real resource and labor power constraints – the constraints of the real world. Debt ceiling debates, deficit scares, are all propaganda used for austerity politics. Inflation and deflation could both be managed by making sure the amount of currency issued matches the actual resources available in the economy.
This is all fine and a more realistic way of looking at money than the proponents of austerity. But Wray’s discussion of the history of money and of, for example, the gold standard, I don’t think holds up. Wray starts with a good point that accounting money preceds commodity (gold) money, meaning the earliest forms of money were actually debt marks in temple and palace records, and that gold came later. But then he asks, “what were coins and why did they contain precious metal? To be sure, we do not know.” Because coins and gold have been very important, Wray suggests that they became important for Athenian democrats who mocked the wealthy and powerful by using gold for something so sullied as coinage (pp. 156-157). I don’t think this is right, and I think the commitment to the point MMTheorists are making about the importance of state power in creating currency causes Wray to dismiss the whole role of gold in the imperial economy – as well as its historic role in imposing deflation and “drain”. Wray dismisses this all as a “monetary mess”: “The sovereign was always short of gold and silver,” which was “needed to conduct the foreign wars”, which made for a “nice vicious circle”. This “monetary mess”, Wray writes, “was resolved only very gradually with the rise of the modern nation state, a clear adoption of nominalism in coinage, and with abandonment of the long practiced phenomenon of including precious metal in coins.”
You all know I have many opinions about the British Empire. One opinion I do not hold is that it was full of idiots who created a “monetary mess”. They weren’t having a fit of absence of mind then and they aren’t doing so now. The gold standard then, and debt- and deficit-based global finance now, are shining examples of methods to drain wealth from the global south. The MMTheorists want to cut through the propaganda, which is fine. But to understand how the mechanisms work historically, why gold was – and remains – more than a “mess”, how the currency regime underlying the global economy is a tool for plundering the poor countries – for that, you’ll need IPE more than MMT.
Thanks for writing. Your article on de-dollarization was excellent. Your analysis seems to imply that the battle for world reserve currency is a zero sum game, a means by which one power bloc can extract wealth from the others. But, there is another contender in the form of a simple digital communications network.
Because money is a technology -- though an intensely political one -- it can be upgraded to a more serviceable form, retaining gold's theoretical neutrality while transcending its physical limitations, moving almost frictionlessly at high velocity across the internet. Today technology generates massive, unprecedented abundance, while our inflationary money enforces scarcity among the working class. It seems the incredible wealth now being created in conjunction with our exponentially improving technology will continue to centralize among global oligarchs. However, we could instead have a deflationary world reserve currency, or base layer of collateral, in the context of which governments could still create credit -- but within reason, and in the service of their populations. This would over time de facto redistribute capital around the world, from consumers to producers, capital to labor, and from predatory financiers to productive nations, corporations and individuals; and most importantly, via the mechanism of decentralized markets and distributed consensus, rather than by the pseudo-virtuous diktats of a tiny group of geriatric totalitarian unelected "stake holders".
Abundance is not our problem in the 21st century: it is our political economy that drags on our productivity and wastes untold swathes of capital. For many reasons, our current monetary system must (and therefore will) change, as you identify -- but to what? Unhinged MMT is disastrously arrogant, and the gold standard is hopelessly archaic. Please consider the possible third option: an open, neutral, censorship resistant, cheap (i.e. renewable, surplus) energy catalyzing, deflationary, globally liquid, absolutely scarce yet infinitely divisible, digital quantity, already extant and rapidly catching on to the direct benefit of working people and odiously indebted nations.
You will find there are many who support this monetary technology, and share your values and analysis. Where does it fit in your view? Thanks again for the content.
https://bitcoinmagazine.com/culture/imf-world-bank-repress-poor-countries
https://thepriceoftomorrow.com/
https://www.layeredmoney.com/