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Alfred Mitchell-Innes and the Credit Theory of Money
Alfred Mitchell-Innes (1864-1950) was a British diplomat and author.
Among others, he served as financial advisor to the King of Siam
(1896-1899) and was Under-Secretary of State for Finance in Egypt
(1899-1908) wikipedia entry
Credit Theory of money
In 1913, while posted in Washington DC, Mitchell-Innes published an essay in The Banking Law Journal entitled What is Money? That paper seemes to have attracted some attention at the time, and J. M. Keynes wrote a review of it in The Economic Journal
(in which, by the way, he calls the credit theory a "familiar fallacy"
not even worth discussing, but has kinder words for Innes's historical
research). In 1914, Mitchel-Innes published a second paper, The Credit Theory of Money, which clarifies some of the ideas of the first paper and provides responses to various critics.
In his essays, Innes debunks the metallic theory of money and the
idea that barter preceded money, shows that money existed long before
coins were introduced and simply states: "credit and credit alone is money."
Note that the texts of both essays and of Keynes's review are
published on this site (cf links under "@sibling files") and are also
reprinted in a recently published book "Money, Credit Conversion and the
legacy of Mitchell-Innes" - more details here.
Mitchell-Innes forgotten and (partly) rediscovered
Despite the fact that Keynes's Treatise of Money seems to
contain some of Mitchell-Innes's ideas, Keynes apparently never cites
him his works. The work of Innes lay mostly forgotten until the mid
1990s (Wray 1 page 3).
The two essays were reprinted in 2004, together with several articles
on the nature of money, in a book edited by L. Randall Wray 1.
There, Wray writes: "I believe the 1913 and 1914 articles by Innes
stand as the best pair of articles on the nature of money written in the
twentieth century" (page 223)
In his bestselling Debt, the first 5,000 years2, published in 2011, David Graeber writes:
"By the early decades of the twentieth century, all the pieces were
in place to rewrite the history of money. The groundwork was laid by
After noting that
" .. our standard account of monetary history is precisely backwards.
We did not begin with money, and then eventually develop credit
systems. It happened precisely the other way around. What we call
virtual money came first."
"It's not that any economist has ever refuted Mitchell-Innes. They
simply ignored him. Textbooks did not change their story - even if all
the evidence made clear that the story was simply wrong."
More than a century after Innes published his essays, it is
impossible not to notice that even economics graduates from prestigious
Universities often know little about the history of money, and that the
belief that barter preceded money is still extremely widespread.
A thoroughly modern approach
Mitchell-Innes's theory is not complete because it does not deal with
interest rates. His articles can (rightly) be criticised for lack of
Overall, however, his theory rings true. It is consistent and
forcefully stated. More than a century after their publication,
Mitchel-Innes's ideas remain thoroughly modern and entirely relevant to
modern monetary theory.
Apart from debunking the story that money originated from barter,
Mitchell-Innes showed that money preceded coins, that the physical form
of money is of no importance, that the metal content of coins was
irrelevant through most of history3,
that the metallic standard was a modern invention not known in
Antiquity or the Middle Ages, that "commerce ... has never had anything
to do with the precious metals, and if every piece of gold and silver
now in the world were to disappear, it would go on just as before and no
other effect would be produced than the loss of so much valuable
He saw that by hoarding gold and maintaining a gold standard, central
banks were in fact keeping gold at an inflated price, resulting in
excessive issuance of money and declining currency.
He sensed, without being able to prove it conclusively, that in
modern times the excessive issuance of government money results in a
general depreciaition of money.
He wrote that "future ages will laugh at their forefathers of the
nineteenth and twentieth centuries, who gravely bought gold to imprison
in dungeons in the belief that they were thereby obeying a high economic
law and increasing the wealth and prosperity of the world."
He understood that "just like any private individual, the government
pays by giving acknowledgments of indebtedness" and that government
money acquires value by taxation.
Writing about government money, he rejects the idea that "the more
coins there are in circulation, the more 'money' there is, and therefore
the richer we are" and writes:
"The fact, however, is that the more government money there is in circulation, the poorer we are."
He saw that "the clearing houses of old were the great periodical
fairs", that the monetary unit is purely imaginary, saw the distinction
between monetary unit and money and noted how, even when the king
altered the value of his coins, this did not affect prices.
He stated that legal tender laws are not of material importance, and
can indeed have unintended negative consequences in the form of banking
panics. He did not agree with the widespread belief that there is "some
peculiar virtue in a central bank" and wrote as follows about bank
reserves: "In fact, and this cannot be too clearly and emphatically
stated, these reserves of lawful money4 have ... no more importance than any other of the bank assets."
Writings on criminal justice
Mitchell-Innes also had a long-lasting interest in the criminal
justice system. In his essay 'Love and The Law: a study of Oriental
justice', published in 1913, he compared the Western and Eastern
approaches to justice, focusing in particular on the lack of compassion
of the Western system. He formulated a version of Gresham's law of
currency as applied to law : "the merciless drive out the merciful".