Does the state really validate my money? By Richard Adomako

Does the state really validate my money? By Richard Adomako

The sensational Schumpeter once pushed forward two general theories of the foundation of money: claim theories and commodity theories. Commodity theory claims that money is valued because the money item is itself a valued commodity – it is intrinsically valuable, like gold, silver, Mario and Luigi. Whereas claim theory, money is a token comprising financial instruments such as claims in bank deposits, bonds, credit, and debt. (Bryan and Rafferty, 2007).

Claim theory leads us through questions of how money is enforced? One way is through the state. The state acts as a guarantor of money tokens which, in themselves, are merely promises of convertibility into something of intrinsic value. This acts as a central theme as the state, having a monopoly on force, decree what can legitimately be used for the purposes of paying taxes determines what constitutes ‘money’, “for without acceptability by the state other ‘monies’ will not survive.” (Bryan and Rafferty, 2007). Therefore, we reach a logical conclusion where money does not need commodity backing and only needs the state to acceptance to be legitimacy.  

This line of thought is important as money can be viewed as state-decreed tokens of value and so not as a form of legitimate money, “but the exclusive form of legitimate money -  a position fundamental to Keynes.” (Bryan and Rafferty, 2007). As Bell adds:

“Only the state, through its power to make and enforce tax laws, can make promises that its constituents must accept if they are to avoid penalties. The general acceptability of both state and bank money derives from their usefulness in settling tax and other liabilities to the state. This ... enables them to circulate widely as means of payment and media of exchange. The debts [‘money’] of households and businesses are accepted because of their convertibility (at least potentially) into relatively more acceptable promises. These debts are not accepted at state payment offices and, thus, are not likely to become widely accepted means of payment.” (Bell 2001: 161)

But no, does it hold up in real life? Recently Narendra Modi (India’s PM) introduced a crackdown on black money.
“India, at the start of this year, began requiring retailers that received more than Rs 200,000 ($3,000) in cash from a customer to report details of the sale – and the buyer’s taxpayer identification number – to tax official.” (“India,” n.d.). This immediately led to Ethos watches, a luxury watches retail chain with 45 stores, to suffer a 60 drop in sales. Why? Well because 45% of the company’s sales were of Swiss timepieces worth more than Rs200,000. (“India,” n.d.). Statistically, India ranks low when comparing tax revenue as a percentage of GDP. The above example with Ethos watches is only one of many policies being implemented by Modi to crack down on cash earned through illegal activities, or earned legally but never declared to tax officials. This is interesting as India is a top 10 country for GDP. The example of India presents a possible counter to a claim theory of value in which the state isn’t entirely essential to giving money legitimacy.

 Sources

Bell, S., 2001. The role of the state and the hierarchy of money. Cambridge Journal of Economics 25, 149–163.

Bryan, D., Rafferty, M., 2007. Financial derivatives and the theory of money. Economy and Society 36, 134–158. doi:10.1080/03085140601089861

India: Narendra Modi’s bonfire of the rupees [WWW Document], n.d. . Financial Times. URL https://www.ft.com/content/0467b734-ac23-11e6-ba7d-76378e4fef24 (accessed 1.30.17).