The modern world without money is unimaginable. Most probably originating with literacy and numeracy, it is one of our most vital âsocial technologiesâ (Ingham, 2004). Obviously, money is essential for the vast number of increasingly global economic transactions that take place; but it is much more than the economistsâ medium of exchange. Money is the link between the present and possible futures. A confident expectation that next weekâs money will be the same as todayâs allows us to map and secure societyâs myriad social, economic, and political linkages, including our individual positions, plotted by income, taxes, debts, insurance, pensions, and so on. Without money to record, facilitate, and plan, it would be impossible to create and maintain large-scale societies. In Felix Martinâs apt analogy, money is the modern worldâs âoperating systemâ (Martin, 2013).
However, despite moneyâs pivotal role in modern life, it is notoriously puzzling and the subject of unresolved â often rancorous â intellectual and political disputes that can be traced at least as far back as Aristotle and Plato in Classical Greece and the third century BCE in China (von Glahn, 1996). Many of the innumerable tracts and treatises on money begin with lists of quotations to illustrate peopleâs bewilderment (see the fine selection in Kevin Jacksonâs The Oxford Book of Money [Jackson, 1995]). With characteristic whimsy, the great economist John Maynard Keynes (who knew a great deal about money) said that he was aware of only three people who understood it: one of his students; a professor at a foreign university; and a junior clerk at the Bank of England. The banker Baron Rothschild had made a similar observation a century earlier (quoted in Ingham, 2005, xi), adding that all three disagreed!
We shall see that one of the most puzzling and counterintuitive conceptions of money lies at the core of mainstream economics. We experience money as a powerful force; it âmakes the world go aroundâ â and sometimes almost âstopâ. Governments stand in awe of monetary instability, constantly monitoring rates of inflation and foreign exchange, and levels of state and personal debt. Central banks strive to assure us that they can deliver âsound moneyâ and stability; but â like their predecessors â they are constantly thwarted. Paradoxically, however, from the standpoint of mainstream economic theory, money is not very important. In mathematical models of the economy, money is a âneutralâ, or passive, element â a âconstantâ not a âvariableâ. Money is not an active force; it does no more than facilitate the process of production and exchange. Here, the sources of economic value are the ârealâ factors of production: raw material, energy, labour, and especially technology; money does no more than measure these values and enable their exchange. This conception, which can be traced to Aristotle, had become the established orthodoxy by the eighteenth century. David Hume could confidently declare in his tract âOf Moneyâ (1752) that âit is none of the wheels of trade. It is the oil which renders the motion of the wheels more smooth and easyâ (quoted in Jackson, 1995, 3). A little later, in The Wealth of Nations (1776), Adam Smith consolidated the place of âneutral moneyâ in what became known as âclassical economicsâ.
Joseph Schumpeterâs mid-twentieth-century identification of the differences between ârealâ and âmonetaryâ analysis and his summary of the latterâs assumptions has never been bettered:
Real analysis proceeds from the principle that all essential phenomena of economic life are capable of being described in terms of goods and services, of decisions about them, and of relations between them. Money enters into the picture only in the modest role of a technical device ⊠in order to facilitate transactionsâŠ. [S]o long as it functions normally, it does not affect the economic process, which behaves in the same way as it would in a barter economy: this is essentially what the concept of Neutral Money implies. Thus, money has been called a âgarbâ or âveilâ over the things that really matterâŠ. Not only can it be discarded whenever we are analyzing the fundamental features of the economic process but it must be discarded just as a veil must be drawn aside if we are to see the face behind it. Accordingly, money prices must give way to the ratios between the commodities that are the really important thing âbehindâ money prices. (Schumpeter 1994 [1954], 277, original emphasis)
This view remains at the core of modern mainstream macroeconomics, which argues that money does not influence ârealâ factors in the long run: that is, productive forces â especially advances in material technology â are ultimately the source of economic value. Therefore, â[f]or many purposes ⊠monetary neutrality is approximately correctâ (Mankiw and Taylor, 2008, 126, which is a representative text). However, there is an alternative view: âmonetary analysisâ follows a view of money which prevailed in the practical world of business before the classical economistsâ theoretical intervention (Hodgson, 2015). Here money is money-capital â a dynamic independent economic force. Money is not merely Humeâs âoilâ for economic âwheelsâ; it is, rather, the âsocial technologyâ without which the âclassicalâ economistsâ physical capital cannot be set in motion and developed. This distinction, between ârealâ analysis and âmonetaryâ analysis, is known as the âClassical Dichotomyâ.
Money itself cannot create value; but in capitalism the wheels are not set in motion and production is not consumed without the necessary prior creation of money for investment, production, and consumption (see Smithin, 1918). In the âclassicalâ view, the ârealâ economy is in fact an âunrealâ model of a pure exchange, or market, economy in which money is the medium for the exchange of commodities: that is, CommodityâMoneyâCommodity (CâMâC). Here, money enables individuals to gain utility: that is, satisfaction from the commodity. In âreal-worldâ capitalism, money is the goal of production â the realization of money-profit from the employment of money-capital and wage-labour: that is, Money (capital)âCommodityâMoney (profit) (MâCâM). As Marx and Keynes stressed, depressions and unemployment are not caused by the failure of ârealâ productive forces. These can lie idle for want of money for investment and consumption not only in the immediate short term but also in the long run. And as Keynes scathingly remarked, the âlong run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat againâ (Keynes, 1971 [1923], 65, original emphasis).
For economic orthodoxy, the proponents of monetary analysis were âcranksâ who were banished to an academic and intellectual âundergroundâ (Keynes, 1973 [1936], 3, 32, 355; Goodhart, 2009). But, for Keynes, they were âbrave hereticsâ whose analysis was revived and greatly elaborated in his The General Theory of Employment, Interest and Money (1936). A late nineteenth-century American âcrankâ, Alexander Del Mar â unknown to Keynes â has only recently come to light (Zarlenga, 2002). He anticipated Keynesâs general position on monetary theory and policy:
Money is a Measure ⊠the Unit of money is All Money within a given legal jurisdictionâŠ. The wheels of Industry are at this moment clogged, and what clogs them is that materialistic conception which mistakes a piece of metal for the measure of an ideal relation, a measure that resides not at all in the metal, but in the numerical relation of the piece to the set of pieces to which it is legally related, whether of metal, or paper, or both combined. (Del Mar, 1901, 8)
Keynes sought theoretically to convince his âclassicalâ orthodox mentors and colleagues that government expenditure, financed by money created in advance of tax revenue, could solve chronic unemployment in the 1930s. Money created by government spending would increase production and employment, which, in turn, would increase âeffective aggregate demandâ: that is, real âpurchasing powerâ. As opposed to the subjective âwantsâ and âpreferencesâ of orthodox economic theory, demand created by expenditure was both âeffectiveâ and âaggregateâ, inaugurating a positive cycle of growth and tax revenue to fund the original deficit. For a while during and after the Second World War, Keynesian versions of âmonetary analysisâ gained acceptance in theory and policy. However, as we shall see, the 1970s crises were held to have discredited Keynesian economics, leading to a revival of the old orthodoxy of âneutralâ money and the ârealâ economy.
The two kinds of economic analysis and their respective theories of money lie behind arguably this most contested question in the governance of capitalism. On the one hand, mainstream economics believes that the supply of money may have a short-run positive effect, but cannot and therefore should not exceed the economyâs productive capacity in the long run. Only ârealâ forces of production â technology, labour â create new value, and their input cannot be increased simply by injections of money. Consequently, if monetary expansion runs ahead of these ârealâ forces, inflation inevitably follows. On the other hand, the broadly Keynesian and heterodox tradition continues to argue that money is the vital productive resource â a âsocial technologyâ â that can be used to create non-inflationary economic growth and employment.
However, it is of the utmost importance that the theoretical dispute is not seen exclusively as an âacademicâ question; theories of money are also ideological. Our understanding of moneyâs nature â what it is and how it is produced â is intimately bound up with conflict over who should control its creation and, by implication, how it is used. Insisting that money is nothing more than a âneutralâ element in the economy implies that it can be safely removed from politics. If money were merely a passive instrument for measuring pre-existing values of commodities and enabling their exchange, then disputes over its use would be misguided. All we need to do is ensure that there is enough money for it to fulfil its functions and ensure the smooth operation of the economic system â which is precisely how the money question is most frequently posed. The retired Governor of the Bank of England, Mervyn King, wrote in his recent memoirs that â[in essence] ⊠the role of a central bank is extremely simple: to ensure that the right amount of money is created in both good and bad timesâ (King, 2017, xxi). The quantity of money should be calibrated to enable the consumption of what has been produced. Too little money will depress activity as goods cannot be bought; and too much money will do no more than inflate prices.
Here we encounter another of moneyâs many puzzles. From a theoretical standpoint, it might be a simple matter to supply the right amount of money, but in practice it is not. We shall see that the experiment with âmonetaristâ policy to control the money supply in the 1980s was beset by two related problems (see chapter 4). Confronted by the complexity of different forms of money in modern capitalism, the monetary authorities were unsure about what should count as money and how it should be counted. Notes and coins â cash â were an insignificant component of the money supply. But which of the other forms of money â bank accounts, deposits â and forms of credit â credit cards and private IOUs used in financial networks â should be included? Furthermore, many of the non-cash forms were beyond the control of the monetary authorities (see chapter 6).
Despite monetary authoritiesâ many obvious practical and technical problems in conducting âmonetary policyâ â essentially, attempting to control inflation â the long-run neutrality of money remains a core assumption of most mainstream economics. To believe otherwise â that money can be used as an independent creative force â is to suffer from the âmoney illusionâ. As we shall see, the âillusionâ is to think that money has powers beyond its function as a simple instrument that only measures existing value and enables economic exchange. However, the centuries-old persistence and intensity of the unresolved disputes tells us that money is not merely this technical device to be managed by economic experts. Rather, it is also a source of social power to get things done (âinfrastructural powerâ) and to control people (âdespotic powerâ) (Ingham, 2004, 4). The âmoney questionâ lies at the centre of all political struggles about the kind of society we want and how it might be achieved.
In the late nineteenth and early twentieth centuries, the longstanding intellectual, ideological, and political debates on money became embroiled in an acrimonious academic dispute about the most appropriate methods for the study of society, which ultimately led to the formation of the distinct disciplines of economics and sociology (Ingham, 2004). In 1878, exasperated by the endless wrangling, American economist Francis Amasa Walker decided on a deceptively simple solution (see Schumpeter, 1994 [...