FM on Money (6) State

The problem I have with Felix Martin is that he assumes a role for the state in money.

What matters is only that there are issuers whom the public considers creditworthy, and a wide belief that their obligations will accepted by third parties.

He claims that the sovereign is the only viable issuer of money, because only the sovereign can be trusted to always meet its obligations.

The sovereign’s credit worthiness rests on the strength of its authority and on the sovereign’s willingness to deploy it to accumulate credit from its subjects via taxation. More than its dominant size in the market, it is the sovereign’s dominant power outside the market that makes its IOUs effective as money. So long as the state is held to be legitimate, its money enjoys the trust no only on command or legal ground, but on ideological and even spiritual grounds (p.74).

This is a bit odd. We trust the money issued by a sovereign, because he has the power to tax us to back up his money if it fails.

The problem with this view is that the sovereign was not creditworthy. Kings were always fighting wars that they could not afford. They were always running up huge debts to fight stupid wars. When their debts got unbearable, they would default on them and the people who trusted them would lose out. Sovereigns were well known for defaulting on their debt, so it is unlikely that their debts would be trusted.