Charles Goodhart Attacks Carl Menger – Origin of Money

For some reason Charles Goodhart thought it would be a good idea to take a shot at Carl Menger with regards to Menger’s explanation on the origins of money.

Charles Goodhart thought it would be a good idea to say Menger was wrong rather than taking the time to reassess his position and analyse why he himself was mistaken.

Here is the article that put me onto Charles Goodhart’s piece. Bloomberg also gave Charles Goodhart’s attack on Carl Menger some oxygen here.

The argument comes down to this.

Menger believes money came into existence to replace barter. Barter is an inconvenient way of trading as you have to find someone who wants what you have and also has what you want.

Menger puts forward that money was created to represent labour and property to make it easier to exchange labour and property  between parties.

Charles Goodhart says Carl Menger is wrong and that money was created by governments so governments could pay soldiers. In other words money was created by governments and used as a tool which enabled them to fight wars.

At this point you are probably speculating that Charles Goodhart must be some sort of Keynesian and is/was connected to the Bank of England at some point in his past. If so, you are correct.

Charles Goodhart was a member of the Bank of England’s Monetary Policy Committee no less, from 1997 to 2000.

While his honesty is commendable Goodhart does not comprehend any type of money other than that issued and controlled by a central authority.

Charles Goodhart’s attack on Carl Menger completely misses the fact that the first instance of money were not to represent some volume of precious metal.

The Bloomberg article illustrates this point perfectly

Goodhart writes that coins don’t follow Menger’s account at all. Normal people, after all, can’t judge the quality of hunks of metal the same way they can count cigarettes or shells.

Charles Goodhart seems not to understand that the first instances of money were not fiat and they were not finite, ie they were not gold backed currencies or a shell/cigarette backed currencies, to use Goodhart’s examples.

There is a third type of “money” which Goodhart seems to be totally unaware of. Unfortunately for Goodhart this third type of money is the real origin of money and I believe it is the money that Menger refers to.

The third type of money and the first example of money is tokens. Tokens issued by tradesmen/manufacturers or farmers as a promise to pay in the future in the form of whatever product they were producing.

This form of money was in widespread use from the 17th century to the early 19th century in England itself, a fact that Goodhart should be aware of.

This form of money is also the first ever recorded.

This physical problem led to the creation of tiny clay tokens formed into shapes representing various commodities. These tokens were swapped at market to make exchanges that were later fulfilled with actual deliveries. This proto-money is the first recorded use of a material abstraction to represent a real object in communication7

In summary Goodhart is correct when says money is created to fund wars. But as mentioned above, Goodhart is talking about money created by central banks and not money in the real sense.

Real money, ie money created to facilitate trade was in existence long before central banks and a dates back to 6-8000BC

Charles Goodhart piece has two fundamental flaws.

One, it attacks Carl Menger with a completely faulty argument

Two, Goodhart does not distinguish between money created by individuals and money created by central banks and without this distinction his argument is utterly meaningless. This is a shame because if Goodhart did specify what type of money he was talking about ie that money created by central banks then his piece really would be worth further study.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s