So, now I'm going to go back to this philosophical question. So, these, these are dollars here, what sort of a thing is a dollar? What sort of a thing is currency? What sort of a thing is money? As they say, there are two traditions. Chartalism and metallism. [SOUND] I take these words from Joseph Schumpeter. [SOUND] You might have heard of him. He's one of, he wrote [INAUDIBLE] toward the end of his life, this great book, History of Economic Thought treatise, and one of the, several of the chapters are about monetary theory, and he divides them into these categories, chartalism versus metalism. chartalism being the idea, what, when you, when you look at a piece of money, what are you looking at? Okay, you're looking at a, an emblem of the power of the state that issued that money. [SOUND] Okay. So the quintessential money is sort of fiat currency, in which the state just says, this is my money. King's money. Okay? Okay, that it has something to do with the state, the state stamp. one of the most, the quintessential chartalists is a, a guy named Knapp, a German, and the Germans are always rather, fond of talking about this sort of state power. and you can build a whole theory about that, based, based on that, fiat, fiat currency, fiat meaning I, I'm just through, through the state fiat, this is, this is what currency is. the other tradition is metalism, where they, they sort of, the essence of money is that it, is it sort of physical metallic value. so that, gold or silver, or something like that. Okay. Both of these traditions, allow there to be lots of credit, that is, to promise us to pay money, so everything we've said before in the class, is kind of consistent with either theory in a way. Because there, we've mostly been talking about the credit superstructure that's built on top of these monies. But these are pretty different points of view. Pretty different ideas. And you can see that, depending on, depending. This philosophical debate can get very. Very heated. So that, people who think this is the essence of money feel that it's somehow a robbery, okay, when, when states don't convert their money into gold or something. That there's, there's something just, basically unethical about that, or you're, you're, then money should be gold. It should be convertible into gold, and if it's not There's something wrong, and there's something insecure, it's un-anchored, at, where, it makes them anxious. Okay. and, and similarly, here there's some notion that, that the state is the ultimate authority, and whose, whose goal to tell the state what to do? You know, the state, the states should have the authority. And, so you see here, there's a kind of discipline versus elasticity thing going on here, as we see all the time in, in, in monetary economics. where the state says, I'm the authority, I can do whatever I want, okay, and, gold and, and the market, in a way, says, no, there's this disciplining factor. There's real value, there, there's gold. So in some sense, this is, this is a state-oriented money, and this is a private market-oriented money theory. I always find it interesting when you see two, well, you've seen this in this course before, when you see two traditions of monetary theory at loggerheads and warring, okay? and it doesn't seem ever to get resolved. Okay, you ask yourself, well, maybe there's a higher point of view, okay, in which both are right, or both have part of the picture, or something. Okay. So, or, or maybe this comes from somewhere in history. Okay. Well, both of those things are true. It comes from somewhere in history in the sense that way a long time ago, okay, there basically were, there was a parallel monetary system. Where there was local, domestic kings money. This stuff. That people used to trade, retail, okay, purchases. This was the, this was the money the people also paid their taxes in, to the king. Okay, And there was another money that was used in international trade, between countries, because of course the king can say, this is money, my face is on it, okay, and that might matter if he's my king, okay, but if he's not my king, what do I care? You know, It doesn't matter at all. Okay? But, if it's gold that underneath that stamp, gold is gold. You just weigh it. So, this is international money Wholesale money, wholesale trade, business money, international money. And if you look back at history, really, before the nations state, before the modern nation state as we, as we know it with, with legitimate democratic governments and welfare states and, and sophisticated tax systems or something. You see that there's, that these two sorts of monetary systems coincide. They, they, they live in the same country. Both monies are circulating. And there's an exchange rate between them, typically. my understanding of monetary theory in this regard is very much influenced by reading. So here's another, thick book for you to read in your summer vacation. this is volume two of the trilogy that Fernand Braudel wrote that volume two is called, The Wheels of Commerce. and it's, it's about the monetary, side of the economy from the 15th to the 18th century. mainly in Europe. And, he talks about the the wheels of trade at the lowest level and that's sort of this sort of thing. And then he talks about the wheels of trade at the highest level, and that's sort of this sort of thing. And of course it's, it's one market so these things are, are connected to one another. So, it's not surprising and in fact it's in, it's entirely to be expected that you would get two traditions in monetary theory, because they were always two kinds of money. and let's just write that up in balance sheets, so that we can refer to it, come back to it at the end. So, we're talking about the king's money, okay, versus international money. [SOUND]. Okay. Each of these is, is money at the top of its own hierarchy. So there's a whole credit super structure that's built on top of this, promises to pay. Okay, so there's kind of domestic credit. And there's international credit, or business credit, [SOUND] okay. And these were sort of separate systems. They touch every now and then, you know, business people, Business men, who are doing international trade, who are also selling retail okay, are in both of these worlds. Right, they're, they're moving back, back and forth. and kings in particular we'll come back to this okay, who want to fight foreign wars, okay are moving back and forth, in this, in this world, okay because if you need to pay your soldiers and they are in some foreign country. Your own currency doesn't do you, okay? You gotta get war material. You gotta get gold somewhere. So, so, there are reasons for these two, two systems to interact with one another. and that ultimately led to the modern system. The modern system, I'm going to argue at the end, is a hybrid of these, of these two. just as often, and we can't really see that hybrid until we look at it sort of historically, and institutionally, and see how did it, how did it come to be, how did it come to be so. Okay, so this is a, there's, there's dual, there's dual hierarchies. That's back in the 15th century. today there's multiple hierarchies. You know, each one of these currencies has its own domestic credit hierarchy built on it. and the international dollar has a whole international hierarchy of credit. built, built on it. The world funding markets are dollar funding markets.
