The Nature of Money

Geoffrey Ingham

• Publisher: Polity
• Year: 2013
• Print ISBN: 9780745609973, 9780745609966
• eBook ISBN: 9780745638034
• Edition: 1
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

In this important new book, Geoffrey Ingham draws on neglected traditions in the social sciences to develop a theory of the 'social relation' of money.

• Genuinely multidisciplinary approach, based on a thorough knowledge of theories of money in the social sciences
  
• An original development of the neglected heterodox theories of money
  
• New histories of the origins and development of forms of money and their social relations of production in different monetary systems
  
• A radical interpretation of capitalism as a particular type of monetary system and the first sociological outline of the institutional structure of the social production of capitalist money
  
• A radical critique of recent writing on global e-money, the so-called 'end of money', and new monetary spaces such as the euro.

Part I
Concepts and Theories

Introduction

Gladstone, speaking in a parliamentary debate on Sir Robert Peel’s Bank Act of 1844 and 1845, observed that even love has not turned more men into fools than has meditation on the nature of money.

Marx 1970: 64

I know of only three people who really understand money. A professor at another university; one of my students; and a rather junior clerk at the Bank of England.

Attributed to Keynes, quoted in Lietaer 2001: 33

Money’s Puzzles and Paradoxes

Money is one of our essential social technologies; along with writing and number, it was a foundation for the world’s first large-scale societies in the ancient Near East during the third millennium BC, and today it literally does make the globalized world ‘go round’. Money plays this indispensable role by performing the familiar list of functions of the economic textbook.¹ It is a medium of exchange, store of value, means of unilateral payment (settlement), and measure of value (unit of account).² Each is fundamental for the continuance of routine life in the modern world.

In the first place, as Adam Smith and the classical economists made clear, a medium of exchange makes for the efficient operation of the division of labour and exchange of products that creates the ‘wealth of nations’. This indirect multilateral exchange is a means of ’translating the work of the farmer into the work of the barber ... [money] is action at a distance’ (McLuhan 1964: 10). Secondly, and perhaps most remarkably, money is able to store abstract value, as pure purchasing power, for longer periods than is necessary for any particular exchanges. The consequences of this property define the freedom and flexibility of the modern world. As Simmel explained, a feudal lord could demand specifically a quantity of honey and poultry from his serfs and thereby directly determine their labour. ‘But the moment he imposes merely a money levy the peasant is free, insofar as he can decide whether to keep bees or cattle or anything else’ (Simmel 1978 [1907]: 285–6). With money, decisions can be deferred, revised, reactivated, cancelled; it is ‘frozen desire’ (Buchan 1997). But, ‘[a]ll of these consequences are dependent on what is, in principle, the most important fact of all, the possibility of monetary calculation’ (Weber 1978: 80–1). This third attribute of money, as a measure of value (money of account), enables the calculation of actual and potential costs and benefits, profits and losses, debts, prices. In short, money is the basis for the progressive rationalization of social life – a process that began, as we shall see, in those empires of ancient Mesopotamia.

However, money should not be seen simply as a useful instrument; it has a dual nature. Money does not merely have functions – that is to say, beneficial consequences for individuals and the social and economic system. In Mann’s (1986) terminology, money is not only ‘infrastructural’ power, it is also ‘despotic’ power. In other words, money expands human society’s capacity to get things done, but this power can be appropriated by particular interests. This is not simply a question of the possession and/or control of quantities of money – the power of wealth. Rather, as we shall see, the actual process of the production of money in its different forms is inherently a source of power. For example, modern capitalist money is bank credit-money that is produced on the basis of credit ratings that reinforce and increase existing levels of inequality by imposing differential interest rates. In the most general terms, as Weber contended, money is a weapon in the struggle for economic existence. Moreover, the dual elements in the nature of money can also be contradictory, in that particular interests’ advantages may undermine the public benefits. This is a familiar theme in the ultra-liberal economic critique of the government’s debt-financed spending that gives it an interest in inducing inflation to reduce the real value of the debt. These issues will be explored throughout the book.

Only a very little probing into these well-known observations reveals long-standing puzzles and paradoxes. Perhaps the greatest paradox is that such a commonplace as money should give rise to so much bewilderment, controversy and, it must be said, error. It is not well understood. Arguably, one of the most brilliant conceptual thinkers in economics in the twentieth century struggled unsuccessfully for forty years to finish his ‘money book’. Midway through my own difficulties, I was dismayed to discover that Joseph Schumpeter, according to one of his close Harvard colleagues, was never able to get ‘his ideas on money straightened out to his own satisfaction’ (quoted in Earley 1994: 342).³ I know what he meant.

Let us start to reveal the puzzles that lie behind everyday familiarity with money by looking more closely at the textbook list of functions. Leaving aside for the moment economic analysis’s misleading implication that the functions explain the existence and nature of money, the presence of multiple attributes in the list raises two questions. Do all the functions have to be performed before ‘moneyness’ is established? If not, which are the definitive functions? In short, how is money to be uniquely specified? For 2,000 years or so, money was identified by the integration of the four functions in the form of coin (and later in notes directly representing coin) – that is, ‘money proper’ in the late nineteenth-century Cambridge economists’ lexicon. The value of the coin (or note) was either the embodiment or direct representation of a valuable commodity. As we shall see, this common-sense designation of money, as a tangible object, persists, and has led to widespread confusions – for example, that electronic money heralds the ‘end of money’. But a closer inspection of the coinage era reveals that matters are not quite so simple. For much of this long period, coins were not stamped or inscribed with any numerical value – that is, they did not bear any unit of account. This meant that the coin’s nominal ‘monetary’ value and bullion value could and did vary considerably. The sovereign usually assigned the nominal values of coins in accordance with a declared money of account. In medieval Europe, for example, changes in the value of money were mainly the result of the alteration of the nominal unit of account by the king in relation to an ‘imaginary’ standard of value – ‘crying’ the coinage up or down, not the alteration of its precious metallic content. Furthermore, many units of money of account – such as the ‘pound’ of pounds, shillings and pence – were never minted as coin (Einaudi 1953 [1936]). Similarly, guineas continued as a money of account – that is, for pricing goods and debt contracts – for centuries after the coins had ceased to circulate.

‘Cash’ – portable things that we take to be money – is still used in 85 per cent of all transactions, but now amounts to only 1 per cent of the total value of monetary transactions (The Guardian, 17 April 2000). In other words, actual media of exchange are now a relatively insignificant element of most monetary systems; but consciousness of money is still formed to a significant extent by the small-scale transactions. The euro’s introduction in the form of notes and coins is dated from 2002, but it had existed as a means of setting prices, contracting debts, and as a means of payment for over a year before it was embodied in these media of exchange. As we shall see, these considerations do not exhaust the logical and conceptual problems of the list of money’s attributes and functions. In short, the question is: where is the quality of ‘moneyness’ located?

There are, in very general terms, two quite different answers to this question. As Schumpeter observed, there are ‘only two theories of money which deserve the name ... the commodity theory and the claim theory. From their very nature they are incompatible’ (Schumpeter, quoted in Ellis 1934: 3). Most orthodox economic theory focuses on the concept of money essentially as a medium of exchange. This has three meanings that are not always carefully distinguished. Money is either itself an exchangeable commodity (for example, gold coin), or it is a direct symbol of such a commodity (convertible note), or it may be the symbolic representation (numeraire) of a commodity standard – cow, barrel of oil, value of a ‘basket’ of commodities.⁴ In this view, money is seen as the universal commodity, in that it is exchangeable for all others. It should be noted that in this conception ‘moneyness’ is somewhat tautologically ‘exchangeability’ – that is, the most ‘liquid’ commodity. It is at least strongly implied that all other qualities and functions in the conventional list – that is, money of account, means of payment, store of value – follow from, or can be subsumed under, medium of exchange. In sharp contrast, a heterodox ‘nominalist’ argument maintains that money ‘in the full sense of the term can only exist in relation to Money of Account’ (Keynes 1930: 3). (As we shall see, this nominalism is closely linked to the notion that money consists in ‘claims’ and ‘credits’, not merely tradable objects or their symbols.) In this conception, an abstract money of account is logically anterior to money’s forms and functions; it provides all the most important advantages that are attributed to money in general and a medium of exchange in particular. Money of account makes possible prices and debt contracts, which are all that are required for extensive multilateral exchange to take place. Money accounting, with or without an actual ‘money stuff’ (in the anthropologists’ lexicon), is the means of translating the work of the barber into that of the farmer and of producing action at both spatial and temporal distance. In this conception money is abstract – but an abstraction from what?

The crux of the matter, as we shall see, is whether a uniform value standard of the medium of exchange can be established without the prior existence of an abstract measure (money of account). In the orthodox economic account, a scale for the measurement of value (money of account) arises spontaneously from Adam Smith’s primeval ‘truck barter and exchange’. The most exchangeable commodity becomes money which is then counted to make a measure of value, or money of account. However, this raises a fundamentally important problem that will be explored later. Could myriad barter exchanges based on individual subjective preferences produce an agreed scale of values? Can the ‘idea’ of money – that is, as a measure of value – be derived, as Jevons, the late nineteenth-century economist, famously argued, from individually rational solutions to the ‘inconveniences’ of barter? How are inter-subjective hierarchies of value produced from subjective preferences? Posed in this way, the question of money becomes one of the fundamental questions of sociological and economic theory.⁵

The most startling paradox, which provided the original impetus for this study, is the fact that the mainstream, or orthodox, tradition of modern economics does not attach much theoretical importance to money (see Smithin 2003 for an overview of this mainstream tradition). Two assumptions in orthodox economics account for this counter-intuitive position; both are fundamentally mistaken. First, as we have noted, it is maintained that money is a commodity. Obviously, since the demise of precious metal currencies and/or standards of value, it is no longer argued that money need consist of a material with an intrinsic exchange-value. But for modern economic theory, money is a commodity in the sense that it can be understood, like any other commodity, by means of the orthodox methodology of microeconomics – ‘supply and demand’, ‘marginal utility’ and so on. The analytical structure of the modern orthodox economic analysis of money is derived fundamentally from the original Aristotelian commodity theory in which money is conceptualized as a ‘thing’ that acts as a medium of exchange because it possesses value (see chapter 1 for an outline of Aristotle’s theory). In this conception, although ‘cash’ is now reduced to insignificance, there can, nevertheless, be a ‘stock’, or ‘quantity’ of ‘things’ that ‘circulate’ or ‘flow’ with varying ‘velocity’. But, as we shall see, these metaphors are as misleading as the underlying theory on which they are based. As Schumpeter quipped, the velocity of money may be so great that it finds itself in two places at the same time (Schumpeter 1994 [1954]: 320). Even in this orthodox view, money has to be, at the very least, a rather special commodity. For example, apart from the many other considerations that we shall encounter, the production of the supply of money is always subject to rigorous control, and is not permitted to respond freely to demand. (The severity of the punishments meted out to counterfeiters is testimony to the rigour.) The scarcity of money is always the result of very carefully constructed social and politic...

Table of contents

• Cover
• Table of Contents
• Title
• Copyright
• Preface
• Part I: Concepts and Theories
• Part: II History and Analysis
• Concluding Remarks
• Notes
• References
• Index
• End User License Agreement