The Future of Money

From Financial Crisis to Public Resource

Mary Mellor

• Publisher: Pluto Press
• Year: 2010
• ISBN:
  9781783716685
• Topic: Economía
• Subtopic: Política económica

As the recent financial crisis has revealed, the state is central to the stability of the money system, while the chaotic privately-owned banks reap the benefits without shouldering the risks. This book argues that money is a public resource that has been hijacked by capitalism. Mary Mellor explores the history of money and modern banking, showing how finance capital has captured bank-created money to enhance speculative 'leveraged' profits as well as destroying collective approaches to economic life. Meanwhile, most individuals, and the public economy, have been mired in debt. To correct this obvious injustice, Mellor proposes a public and democratic future for money. Ways are put forward for structuring the money and banking system to provision societies on an equitable, ecologically sustainable 'sufficiency' basis. This fascinating study of money should be read by all economics students looking for an original analysis of the economy during the current crisis.

1

WHAT IS MONEY?

This is not a straightforward question. Money in its long history has been represented by many different things from precious metals, shells and beads to heavy, largely unmoveable stones. It has been made of substances that have value in themselves such as precious metals or represented by something that has no value in itself such as base metal coin or paper. Its operation has been represented in many ways from cuneiform tablets and tally sticks, to paper or electronic records. Conventional economics sees money as having a number of functions. It is a measure of value (a unit of account), a medium of exchange, a way of making deferred payments and a store of value. Money is seen as evolving with the market system. Barter is often assumed to be the original form of economic exchange with money emerging to solve the problem of finding suitable mutual exchanges. From this perspective, money is the product of pre-existing economic exchange.

The chosen commodity needed to be valuable, durable, divisible and portable. Precious metals such as gold and silver were obvious choices. As a result, gold has been particularly resonant for modern conceptions of money. Gold is seen as having an inherent or intrinsic value and was adopted as a basis for money value until comparatively recently. From this ‘metallist’ perspective, the value of money still relates back to gold or some commodity that has intrinsic value although, in practice, money can be represented in many forms, such as base metal coin, paper or electronic record. This view of money leads to the assumption that money can only function effectively if it is scarce and valuable. Douthwaite argues that this view, based on the historical scarcity of gold and silver, has distorted economic theory ever since. It has led to the false idea that money can only be based on a scarce, and therefore valued, resource (1999:33).

The claim that money originated in barter has also been challenged (Innes 1913/2004, Ingham 2004, Smithin 2009). Rather than tying the origins of money directly to the emergence of a market economy, a variety of early uses have been identified such as tribute, wergeld (injury payment) or temple money (offerings). Money has also appeared in many different types of society and in many different forms. The emphasis on street level portable money in western economic thinking may reflect the fact that in Europe coin emerged a thousand years before banking. However, in historical terms the banking function is thousands of years older still. It emerged in Ancient Egypt and Babylon which both had extensive banking functions based upon grain storage. The invention of money as coin is credited to the Lydians of Greek Asia Minor in the seventh century BCE who made coin out of electrum, a naturally occurring gold/silver alloy. Alexander the Great (356–323 BCE) minted coins to fund his military campaigns and expand his empire. The Romans also used coins widely and their value was set on the authority of Rome. After the fall of Rome the use of coin became more chaotic in Europe and was even abandoned in Britain. However by the seventh and eighth centuries coins were circulating through much of Asia, the Middle East and Europe. Some of these coins travelled long distances, particularly the denier, a silver coin (Spufford 1988:40). Even so, as Buchan notes, until the twelfth century gold and silver were as likely to be used for decoration as money. However, from the twelfth century onwards the balance between decorative uses and money shifted in the direction of money and religious artefacts were being melted down and minted into coin to fund the crusades (Buchan 1997:53).

Although coins have historically been associated with precious metal such as silver and gold, as Mitchell Innes pointed out as early as 1913, the amount of precious metal in coin has varied widely over time. Rarely has the value of the actual coin been the same as the value of the metal of which it is made (Innes 1913/2004). Given the varying amount of precious metal in coins, the only guarantee of the worth of the coin became the face or signature of the issuer, basically the authority behind the minting. Far from being a precious commodity that had become readily accepted through trade as the barter theorists thought, money as coin has generally been issued by fiat, that is, issued and guaranteed by an authority, such as a powerful leader, an office-holder or a religious organisation. In fact, as Davies has argued, when coins were too closely associated with scarce precious metal, economic activities became restricted. Economies flourished where coins were plentiful, such that ‘long run trends in depression and prosperity correlate extremely well with the precious metal famine and surplus of the Middle Ages’ (Davies 2002:646). Even debasing the coinage by reducing the precious metal content was not in itself a problem as the countries which experienced the greatest economic growth were those whose leaders had ‘indulged in the most severe debasement’ of their coinage (Davies 2002:647).

Making coin out of a precious metal confuses the role of money as a measure of value with the value of the coin itself. Since gold and silver have value as commodities, it would seem reasonable to imagine that their value is intrinsic to the coins themselves. However to say that silver and gold have intrinsic value is not the same as saying that a gold coin has a particular value, certainly not one that is constant over time. Gold can change value both as a commodity and as a coin in terms of purchasing power. Therefore gold/silver as a commodity does not ‘have’ a value. It is valued, but at any point in time the exact value will vary and will need to be designated in some other form of commodity or money, such as silver or dollars. As Rossi argues, money cannot be a commodity because its value would need to be established using another standard of value such that ‘infinite recursivity makes this measurement logically impossible’ (2007:13). Money value is therefore much less certain than even an arbitrary measure such as an inch. Once an inch is chosen as a unit of measurement it stays constant, whereas money as a unit of measurement can never be assumed to be constant no matter what it is made of. Money does not in itself embody a value, it measures relative values.

The historical popularity of scarce metal has obscured the fact that to say that something is worth a few shavings of silver, an electronic money sum, a number of gold coins, wampum beads or a Yap stone is all the same thing, that is, different ways of measuring value. The Yap stones of Yap in Micronesia are particularly interesting as they are large stones that can only be moved with great difficulty, if at all. Value does not imply anything about the material from which money is made. Gold and silver are therefore valued for themselves, but cannot act as a fixed measure of value, nor can they secure the value of a currency. Despite some contemporary arguments that money should be returned to a connection with precious metal (Lewis 2007:409), money is more helpfully seen not as a ‘thing’ but as a social form (Ingham 2004:80). Ingham sees the idea that there is some ‘invariant monetary standard’ as a ‘working fiction’ (2004:144). ‘Sound money’ is a product of society, not of nature. Money is something that people trust to maintain its value or be honoured in trade, while its actual value can vary. Effectively when we say people trust in money we mean they are trusting in the organisations, society and authorities that create and circulate it, other people, traders, the banks and the state. Money, whatever its form, is a social construction, not a natural form. It has no inherent value but it has vast social and political power (Hutchinson et al. 2002:211).

This insight has not always been clear in radical thought. Marx, for example, was close to the ideas of the commodity theorists on the origins of money. At the same time, he saw the money relation as a social relation. This makes confusing reading. Marx seems at times to say that money is based on valuable metal and at other times that money has no value (Mellor 2005:50). He adopts a commodity theory of money as ‘a single commodity set aside for that purpose’ (Marx 1867/1954:36). However that commodity must be socially identified: ‘a particular commodity cannot become the universal equivalent except by a social act… thus it becomes – money’ (Marx 1954:58); ‘money itself has no price’ (Marx 1954:67), and the even more confusing, ‘although gold and silver are not by nature money, money is by nature gold and silver’ (Marx 1954:61). This is mainly because Marx’s focus isn’t money itself, but the exploited labour embodied in the exchange process that is obscured by the money system: ‘When arose the illusions of the monetary system? To it gold and silver when serving as money did not represent a social relation between producers, but were natural objects with strange properties’ (Marx 1954:54). One result of Marx’s confusing statements and the focus on the labour theory of value is that the analysis of money has not been central to radical economic thought. In this sense, much radical and conventional economic theorising shares a common idea that money is only the representation of a ‘real economy’ of economic exchange and is therefore of no special interest within economic theorising.

As we have seen, coins confuse the analysis of money if they are made of something that has a separate value as a commodity. This is not the case with paper money. Paper itself cannot have any inherent value as a substance. Whatever it represents must be the basis of a social agreement. Like coin, paper money has a long history. It was first used in ninth-century China during the Hein Tsung period 806–821 and the paper money of the empire of Kubla Khan (1260–1294) was recognised from China to the Baltic. Within Europe paper-based exchange was vital to the growth of commercial markets. Trade was enabled through promissory notes (based on the personal trustworthiness of the issuer) and bills of exchange (linked to the sale of goods) issued by traders and goldsmiths. Paper money also avoided more risky forms of payment such as carrying gold or coin. The exchange of paper was supported by the development of double entry book-keeping that was widely used in trading cities such as Genoa by the mid-fourteenth century. The use of paper money and book-keeping systems enabled an expansion of trade that was free of the limitation of precious metal.

However this does not necessarily undermine the commodity theory of money. Paper money can be seen as merely representing, and being backed by, the original precious metal. The notion that there was a precious metal reserve ‘backing’ currencies was retained until the early 1970s through the attachment of currencies to a dollar value for gold. This did not claim that there was an inherent value in gold, but that currency values should be based on the nominal value of gold priced in dollars. However, any real backing of currencies by gold would be impossible in modern economies (or even many traditional economies) given its scarcity: ‘the very notion of a commodity money is an illusion’ (Parguez and Seccareccia 2000:106). The dollar maintained this fiction the longest and it was the strain on American gold reserves that led to the final abolition of any attachment to gold in the early 1970s. On coming to power in 1997 the UK Chancellor of the Exchequer, Gordon Brown, acknowledged the impracticality of gold as a currency reserve by selling half the country’s reserves and buying instead a range of currencies: dollars, yen and euros. The alternative to the ‘metallist’ or commodity theory of money is a theory that sees money as resting on a social and political base, a combination of social conventions, banking systems and state authority.

Money as a Social Phenomenon

The theory of the barter economy saw money as emerging organically out of the market. Ingham argues that this is logically impossible as the market could not exist without money and therefore ‘money is logically anterior and historically prior to market exchange’ (2004:25). Ingham makes this argument because he focuses on a different aspect of money from the barter theorists. The latter stress the importance of money as a medium of exchange, with the chosen valuable commodity taking the place of bartered goods. For Ingham, the most important aspect of money is its use as a notional or abstract measure of value which he sees as preceding coin by 2,000–3,000 years (Ingham 2004:12). Even barter would need to have a notional scale of values with which to measure a carrot against a cabbage. For Ingham, measuring value in economic exchange is much more important than the actual medium used to transfer value. This is why the large and immoveable Yap stone can act as money if people calculate value in relation to it. The British guinea (21 shillings, or 105p) existed as a measure of value for a long time after the coin ceased to exist.

Money as currency is therefore not valuable because of its metal or other physical content as the metallist commodity theory of money claims, rather, it is a token of value. The latter ‘Chartalist’ approach (Chartal is taken from the Latin for token) sees the value of money as resting on the power of the issuer, not the intrinsic worth of the money. From the social perspective, whatever form money takes, that form does not embody a real value in itself. It is a token representing a notional value that is universally accepted and can be readily transferred. Money’s value therefore is not ‘natural’, it is not determined by its metallic content or backing, nor does it emerge naturally from market relations. It is socially constructed. Whatever form it takes, what matters is that people agree to honour the value it represents. As Dodd argues, ‘money depends for its existence and circulation in society on a generalised level of trust in its abstract properties’ (1994:160).

For social theories of money the actual money-stuff that represents the accounting process is not important as long as people trust it. Whatever value money is given, it represents a credit or claim on the future production of society. Rather than being secured by some inherent value of the money-stuff itself, the social theory of money sees it as ‘a socially (including politically) constructed promise…money is always an abstract claim or credit’ (Ingham 2004:198). For Ingham ‘moneyness’ is provided by whatever is agreed as the ‘money of account’, that is the means of calculating the relative value of goods, services, debts or taxes. Holding money is a claim on society and all money is therefore a credit that can command resources based on whatever value it carries at any point in time (Wray 2004:234). The social view of money sees it as a system of credit-debt relations that is socially created and maintained. Money is a credit for those who hold it as it is a claim on future consumption or investment. At the same time it is a debt on those who have to provide the goods or services demanded when the holders present their money. They must give up a service or a product for what is effectively a credit note: ‘All money is debt in so far as issuers promise to accept their own money for any debt payment by any bearer of money’ (Ingham 2004:198 [italics in the original]). For money to function effectively, whoever circulates money tokens in society must honour them by accepting them in payment, or guarantee them as a means of access to goods and services.

While the money system can be seen as a network of claims and obligations, for money to be universally acceptable it has to be given social credibility through respected authorities or institutions. Socially constructed money can emerge in many contexts, but modern money was built from an intricate relationship between the emerging capitalist market and the state (Knapp 1924, Ingham 2004, Wray 2004, Smithin 2009). Power holders issued coin that had notional value and uncertain metal content, but even where gold and silver were in good supply, paper money formed the basis of many commercial transactions (Spufford 1988:259). Paper records of trades (bills of exchange) and credit (promissory notes or bonds) were used widely, particularly in the early north Italian trading cities (Ferguson 2008:41). The important shift came when this commercial paper became transferable, that is, when it did not just represent an agreement between people who knew and trusted each other, but could pass from hand to hand. Commercial paper became money when it was not tied to a particular credit-debt relationship of traders who knew each other, but could be used by any bearer for any purpose. For this to happen, money must achieve a high level of general trust, which rests on a stable social structure of authority such as well-established governments, traders or banks. As Zelizer has argued, ‘money was not the automatic, irrepressible outcome of…market economies…the creation of a centralized, homogenous uniform legal tender took enormous and sustained effort’ (Zelizer 1994:205). Smithin agrees that ‘the monetary order is socially constructed, rather than deriving automatically from the market’ (2009:70–1).

Modern banking, which brought together financial and political power, emerged in medieval Italy and led to the establishment of major banking dynasties such as the Medici. The early Italian banks issued loans far and wide, including to English kings (Ferguson 2008:41). Banks, named after the benches on which the goldsmiths sat on the Rialto bridge in Venice, were vital to developing modern money. Banks guaranteed payments by issuing their own paper money or ‘promise to pay’ in place of the commercial paper issued by traders or bonds (based on future revenues). Such paper notes from trusted bankers circulated like the coin issued by states. Notionally, behind the paper money were the reserves of precious metal held by the banker, but the real basis was a trust that all future payments would be made, that is, that everyone would honour their obligations so that the circulation of the trusted tokens could continue in perpetuity. As will be explained more fully in the next chapter, contemporary banking continues the link between commercial finance and state authority.

Money can only exist within a ‘monetary space’, that is, one where whatever is used as the ‘money of account’ in Ingham’s terms, is backed by an authority or a code of honour of some form (Ingham 2004:140). Money that achieves value through authority is described as fiat money. Fiat money is issued by authorities who have the political or social capacity to make demands upon others, as when monarchs issued coins. For Rossi, ‘fiat money is a form of credit that its issuer asks for, and obtains, from those agents giving up goods and services in exchange for it’ (2007:18). However, the power to issue fiat coins or notes is not unlimited, as their future value still has to be trusted by the population. The demands on goods and services made by the issuer cannot be more than the productive capacity of the population can stand. The money system therefore rests on a combination of authority, social trust and economic capacity (public or private).

The State and Money

Ingham argues that the state was central to the development of modern money. Until private credit money was incorporated into the fiscal system of states which provided a secure jurisdiction and legitimacy, it remained ‘in evolutionary terms, a dead-end’ (Ingham 2004:122). The state theory of money was set out by Georg Knapp in the early 1900s. Central to his ideas was a link between the issue and circulation of token money and state taxation. Rather than demanding goods and services directly, the state demands tax payment in a money that it designates. As Wray points out:

…what Knapp called the state money stage begins when the state chooses the unit of account and names the thing that it accepts in payment of obligation to itself – at the nominal value it assigns to the thing. The final step occurs when the state actually issues the money things it accepts. (2004:243)

In the case of coin, states have historically issued it as the ‘money thing’. The state then demands taxes which have to be paid in the money it has already issued and spent. The money is then returned via taxes to be issued again and again. The authority of the state rests ultimately on its ability to tax back, and therefore re-circulate, its money. An important benefit of issuing the ‘money thing’ is that states have the benefit of ‘seigniorage’, that is, the first use of the money issued less the cost of producing it (Huber and Robertson 2000:8). How this money is spent depends on the nature of the state: whether it is for war, palaces, cathedrals, irrigation systems or other more mundane goods and services. Seigniorage is a major benefit of the ownership and control of money.

An important stage in the development of modern money was when the two forms of money, trade-issued credit and fiat money, were brought together. This occurred when the state declared that not only was its own fiat-issued money legal tender, but also bank notes issued in the process of trade. Legal tender means that the state will accept a designated form of money in payment of taxes and the state also demands that everyone else has to honour that form of money when it is presented as payment for goods or debts. In the contemporary money system, state authorised money is seen as ‘high-powered money’ (Ingham 2004:202). High-powered money represents such a high level of trust th...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Acknowledgements
• Introduction
• 1. What is Money?
• 2. The Privatisation of Money
• 3. ‘People’s Capitalism’: Financialisation and Debt
• 4. Credit and Capitalism
• 5. The Financial Crisis of 2007–08
• 6. Lessons from the Crisis
• 7. Public Money and Sufficiency Provisioning
• Appendix: Acronyms and Abbreviations
• Bibliography
• Index