Money and Markets

Maria Cristina Marcuzzo, Alberto Giacomin

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134175031
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

This book brings together fourteen essays by leading authors in the field of economics to explore the relationship between money and markets throughout economic theory and history, providing readers with the key to understanding fundamental issues in monetary theory and other important debates in contemporary economics.

Addressing this popular and topical area in economic discussion and debate an impressive array of contributors, including Meghnad Desai, Charles Goodhart and John Davis examine the theory, policy and history of economics in the USA, Europe and Japan. The subjects covered include:

• the history of economic thought
• money and banking
• monetary economics
• poverty
• modern economic history.

This volume is essential reading for postdoctoral researchers and historians of economic thought across the globe.

1 Money and markets

Introduction

Alberto Giacomin and Maria Cristina Marcuzzo

Two alternative conceptions of money

In the history of economic thought the relationship between money and market has been interpreted from two contrasting points of view. On the one hand, money is seen as an instrument created by individuals to overcome the difficulties involved in barter, its basic function being as a medium of exchange, while the other view has it that money developed before the market and that its principal function is that of a standard of value. Evidently, therefore, in the former case the unit of account function is seen to have emerged from a practice (exchange of goods and services) based on the advantages to be had for individuals seeking to maximize their utility, while in the latter case money emerges as a rule adopted by members of the community (the political authorities promoting it and ensuring it be respected) which pre-dates the market.

These contrasting views date back as early as the times of Aristotle, who defined money, alternatively, as a commodity selected by agents to serve as a medium of exchange, and as a simple token created by the political authorities to be used as a means of payment. In his Politics (I, 1257a) he argues that money is the means created by agents for convenience in exchanges, and that the State intervenes only subsequently to facilitate measurement of the weight and assessment of the quality of the chosen commodity (Aristotle 1977: 38–42). In the Nicomachean Ethics (V, 5, 1133b), on the other hand, money is seen as a legal convention – a measure of value that enables the exchange of goods and thus collaboration between members of the polis. Money is a social convention, and performs its function by dint of a decision made by the political authorities (Aristotle 1982: 284–8).

Aristotle’s two theories represent a heritage that has been drawn upon throughout the history of pre-modern economic thought, and it was not until the eighteenth century that a significant change came about. It was then, with the dawn of political economy, that its theoreticians (Hume, Quesnay, Smith) levelled their critical fire at mercantilism as a convenient target to match themselves against. The thesis to be confuted was that true wealth lay in gold and silver: for the sake of the country’s prosperity, therefore, it was necessary to accumulate the precious metals. Actually, this was not the mercantilist idea; rather, it held that the accumulation of the precious metals by virtue of a positive balance of trade was but a consequence of the economic system’s capacity to produce wealth and generate employment. This idea was to be rediscovered and subjected to searching analysis by Keynes after a lapse of 150 years, as we shall see later on.

The idea that it was money that represented true wealth was not hard to confute. For the classical economists it sufficed to observe that wealth was a composite set of useful things, while money was but a means to facilitate exchange. What counted was not the wealth and power of the State but the wellbeing of the individual members of the community. The criticism advanced by the classical economists had great success, in the space of 50 years sweeping away the mercantilist doctrine, which remained confined to government practices ignored by the new theory. So classical political economy described in real terms the functioning of the market economies, drastically downsizing the role and importance of money.

One possible reason for this outcome is that money, like the State or income distribution, represented a formidable stumbling block for an economic science to be constructed on the model of Newtonian physics, eliciting those natural laws that govern the economic world. If only it were demonstrated that economic activity was subject to natural laws – not human, that is, and so immutable – all that governments could do would be to respect them and seek to remove the obstacles compromising their efficacy. This interpretation of the economic world offered support to the social groups emerging in the society of the ancien régime: entrepreneurs, bankers, ship-owners, insurers, property-owners and capitalists and, in general, all who looked to the development of production and trade to promote and consolidate their own positions in society. Asserting the existence of natural laws to which the production (and distribution) of wealth was subject meant denying the legitimacy of interventionist government policies, while at the same time calling for extension of the autonomy and freedom of initiative of the private agents operating in the economic field. It also required that the tools employed by the political authorities to regulate the market economy and keep it under control, such as taxes, income distribution and money, be blunted and relegated to a marginal role.

And the classical economists accordingly concentrated their attention on the private sector, confining within narrow limits the scope for action by the State, limited to providing the essential services for the functioning of the economic system, or, in short, defending property. Money was to be seen as a mere medium of exchange: a ‘neutral’ means that was not to interfere in the determination of prices but simply to ensure transparency for the ‘signals’ they transmit to the production and consumption decision-makers. Like the wheel or the steam engine, money was but a technical means to reduce production costs: in the specific case, to guarantee that productive specialization and the market prove advantageous. There is no need to invoke the social aspect of economic activity to account for its existence: it is enough to consider the exchange of goods and services between individuals pursuing self-interest, society being simply the sum of individuals collaborating among themselves through exchange.

In their contribution, Gunnar Heinsohn and Otto Steiger (Chapter 5) argue that only in a society that recognizes private property is there any point in the existence of money, created through the granting of credit whereby the debtor offers his property to guarantee repayment of the capital and payment of interest. This represents a ‘property premium’ due to the creditor for having accepted the constraint on his right to dispose of his property until the credit granted is repaid. There could be no propertied class if its members lacked the ability to win the consensus of the community or the means to assert their right to property with the use of force. Money assumes the form of a means designed by private citizens to obviate the temporary difficulties they may come up against in a society where the collective guarantees prove wanting and each individual has to cope with the necessities of life on his own strength. On the basis of this interpretation the market emerges as a consequence of money. It is precisely that ‘place’ where debtors sell their products to acquire the means to pay off the debts they have taken on with the due interest.

Heinz-Peter Spahn, on the other hand, interprets money in Chapter 10 as a means for social accounting – a substitute for the creditor’s trust in the debtor. This account opens the way to the interpretation of money as a certificate of debt by a third party who enjoys the confidence of the creditor: here the stress is placed not on the cost borne by the producers, but on the level of interest rate that is to be paid by the holder of money and that measures scarcity in relation to commodities.

Charles Goodhart (Chapter 2) also contests the idea that money came about to obviate the difficulties of barter, holding that it was introduced to ‘settle fundamental social relations’, such as a dowry, the bride-price, compensation for damage or assault, or taxes, as well, of course, as market relations in general. Money is a social institution that precedes the market, which could not function if there were not an authority providing law and order and ensuring the implementation of contracts.

Jérôme Blanc (Chapter 9) decries this idea in the thought of Jean Bodin, who considers money within the context of the question of sovereignty. For Bodin money is a phenomenon that transcends the private sphere and represents a constituent element of social organization. Thus full control over the issue and circulation of money is a matter for the ‘Prince’. Even he, however, finds his powers restricted by certain limitations, such as the prohibition to counterfeit or debase money. While attributing the ‘Prince’ with absolute sovereignty, Bodin holds that in money matters he is bound to his subjects in a pact requiring him to respect the fundamental characteristics of money.

In his contribution Jean Cartelier (Chapter 6) demonstrates that all attempts to advance a globally stable explanation of market equilibrium without starting from the assumption of the existence of money or introducing money into the utility function are doomed to failure. On the other hand, in the classical approach à la Cantillon the inclusion of money serves the purpose in that in essence prices represent the ratios between the value of money (held by the agents in advance) and excess supply of commodities. The difference consists in introducing money into the system from the very outset, or in other words recognizing that the system is able to determine the value of commodities inasmuch as the agents are in possession of money, that is a socially recognized means to acquire them from the producers.

Money in history

Historical evidence in support of the idea that money existed before the market is offered by the wergeld and the tally, two institutions that have come under the lens of anthropologists and historians of economics and law. ‘Wergeld’ is a term from old German referring to compensation for the murder of a member of the community or some offence against his person, family or patrimony. It is a practice we find documented in pre-classical Greece, and among the Celtic, Germanic, Scandinavian and Slav populations of the Dark Ages. Apparently the aim was to assuage the wrath of the injured party or his family and prevent the outbreak of feuds, seen as threatening the solidity of social structures. Both the offences and compensations were assessed through common practice, which ensured the force of a binding principle.

It has been observed that the English verb ‘to pay’(from the French payer), referring to settlement of a debt, derives from the Latin pacare, which means ‘to pacify’ and refers to the process of seeking an agreement with the injured party to prevent his revenge. According to Grierson (1977: 22), geld (a term cognate with the Old English gild, geld) indicates a unilateral payment (a fine, a tax, compensation or a feudal due), while werd recalls the English ‘worth’, from the root word wair (‘man’), like the Latin vir. Weorp or wairp are Old English terms indicating ‘price’, although, Grierson suggests (ibid.), the second of the two terms ‘may have included a more sinister element’, in that it referred specifically to the price of a slave. Thus the connection with the evaluation of goods, at first sight totally lacking, could be detected in the institution of slavery, much like that of the bride’s wealth. Both are attested with certainty in ancient Greece, as indeed in the barbarian societies of western Europe, and may have represented the medium by means of which the assessment of offences could be extended from person to patrimony, and thus to all goods of economic value. Grierson (ibid.) goes on to point out that in Greek poléin (‘to sell’) originally referred to the sale of a person as slave, while the term timé (‘price’) included in its connotation the sense of ‘compensation’, ‘satisfaction’ and derived from the same root as timoréin (‘to have revenge’).

A further point made in this respect (Wray 1998: 49) is that, supposing that it was in fact wergeld that lay behind the notion of debt and the search for a measure of value, the decisive factor determining its introduction was probably the need to establish the amount of levies. It is surely significant that in Mesopotamia, where the State first entered the scene, the standard of value was based on the unit of weight of the most common cereals, wheat and barley. This standard of value, or unit of account, is money in its primitive state, compatible, and – as the historical documentation shows, actually associated – with a wide range of objects serving as means of payment. A significant example is offered by the tally.

According to certain scholars (Innes 1913: 394 and 396; Davies 1994: 147–52), for many centuries the major means of payment in Europe was the tally, a stick of squared hazel-wood with notches cut into it to indicate how much the debt came to. The name of the debtor and date of the contract were written on either side of the stick, which was then cut in two lengthwise, thus splitting the notches into two parts, each with the name of the debtor and date of the contract. The cut in the stick stopped about an inch short of the end; the longer part, called the stock, was held by the creditor, while the shorter, called the stub, was left to the debtor. On payment the two parts of the stick were brought back together to verify the effective sum of the debt. In England the tally became increasingly important from the twelfth century, to peak in the period preceding the foundation of the Bank of England. This momentous event did not put an end to use of the tally, which continued for over a century up to its termination in 1834. The factors behind the spread of the tally were the ban on usury and the scarcity of currency. In the course of time the tally became a wooden bill by means of which it was possible not only to obtain credit harmless of the penalties laid down by the law, but also to settle any debts and acquire commodities of all sorts (Innes 1913: 396). It was rapidly adopted by the Treasury. The first step consisted in the assignment with which the Exchequer transferred the taxpayers’ debt to the sovereign’s creditors, handing over the stock. Next came the tallia dividenda, which were consigned to the court suppliers, and refunded on expiration by the Exchequer like modern-day state bonds. Finally, at a later stage, the tallies were issued in great quantities by the Treasury as advances on fiscal revenue, and holders could trade them for money on the market. Thus, as Davies points out (1994: 150), ‘a system of discounting tallies arose especially in London, operated in a number of recorded instances by officials working in the Exchequer’.

A function much like that of the tally was, according to Innes (1913: 395–6), served in Babylonia by clay tablets called shubati (‘receipt’) on which were recorded the quantity of goods sold – wheat, for example – the name of the issuer and that of the recipient, together with his seal and the name shubati. There were two ways to prevent counterfeiting: either the tablets could be deposited in a temple, or they could be sealed in a closed container that had to be broken like a money box to get at the tablets. In the latter case all the details recorded on the tablets were copied onto the container, except for the recipient’s name and seal. The container was broken only when payment was carried out, and the inscriptions could thus be compared. Unlike the tablets deposited in the temples, those sealed in containers could circulate like the tallies.

What the tallies and shubati tablets have in common is that they both certificated debts and served as means of payment, disappearing from circulation once the credit was offset by a debt of the same amount, as was the practice with letters of exchange in the medieval fairs. Some scholars argue that these records could not be considered money since the settlement of any remaining debt was, once compensation had been performed, probably concluded with money proper, or in other words minted gold and silver. Others point out that the shubati tablets were documented in Babylonia at least 2,500 years before the kings of Lydia minted the first metal coins around the second half of the seventh century BC. On the other hand, the metal currency that we are accustomed to consider real money seems to have come into existence as certification of the sovereign’s debt to the subjects whose goods and services he acquired – mercenary soldiers, for example, or suppliers liable to pay taxes (Grierson 1977: 10). It was no great problem for the political authorities to have their promises of payment accepted in exchange for goods and services since they were able to levy taxes and stated their readiness to accept their own promissory notes in payment. The use of costly supports such as gold and silver, which were rare metals and, in the absence of mines, usually came with war booties, is generally explained as a way of avoiding forgeries.

Supposing that the function of a means of payment was served from the very outset not by a commodity but by a certificate of debt issued by an agent enjoying the confidence of the public, then the introduction of money seems obviously not due so much to the agents’ intention to reduce the costs of exchanges as to the fact that the issuer claims credit of the community and so is able to levy taxes. Thus money takes the form of an institution transcending the purely economic sphere in that it guarantees the exchange of goods and services between governors and governed, and with it the very foundations of social order. Like every other institution, this, too, owes its existence to the decision of the groups holding power to establish it, and the ability of those representing these groups to exact the respect of the entire community.

Meghnad Desai (Chapter 15) associates a great twentieth-century poet’s diatribes against usury with a time-honoured tradition whose origins lie deep in Greek and Hebrew culture. Ezra Pound ascribed the unemployment of the 1930s to the scarcity of money for which the monopoly of the private banks was responsible. This, Pound held, was to be transferred to the State, which had the duty to make money available to all at zero interest rate. This highly censorious attitude to interest is also to be found in Aristotle and the Bible: not being a living organism, money cannot regenerate and bear interest; it is not a natural phenomenon but man-made, and so interest amounts to misappropriation of the wealth others have produced. According to Desai the prohibition of usury in the monotheistic religions may possibly be accounted for with the lack of surplus typical of societies settled in arid regions, like those where these religions were born.

Antoin Murphy (Chapter 11) traces the idea that money is essentially a means to settle debts to John Law, one of the first economists to have realized that money did not derive from exchange but preceded it. Moreover, in a market system money precedes production and conditions its levels. Hence Law’s extraordinary insight into the vast possibilities of economic development offered by the bank. Its capacity to create generally accepted means of payment places it at the very heart of the market system. It is in fact by granting credit that the bank is able to provide firms with the wherewithal to invest and boost the growth of the economic system.

However, it is to Adam Smith, as Alberto Giacomin (Chapter 12) argues, that we owe our appreciation of the importance of paper currency where he shows that, like any other capital good, money is subject to a ceaseless process of innovation seeking to reduce the costs involved in its use, and that gold and...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Illustrations
• Contributors
• Acknowledgements
• 1 Money and markets: Introduction
• Part I: Alternative representations of market and monetary relationships
• Part II: History of monetary ideas in the light of modern theory
• Part III: At the origin of monetary ideas
• Part IV: Neglected contributions to monetary theory and policy