On the Institutional Theory of Money: Learning from J. R. Commons’ Institutional Economics

Abstract:

I collect and organize the essential elements of ITM (institutional theory of money) from Commons’ Institutional Economics (1934) and compare them with STM (sovereign theory of money), to make the book more accessible for Japanese researchers. After introduction, I examine how money is treated in Commons’ analysis of Capitalism. Then I examine Commons’ critical interpretation of Knapp's work, and compare ITM with STM (or Hypothesis of “debt of life”). Finally I consider two research theme related to ITM. The conclusions obtained from the above are as follows: (1) Commons inherited the basic idea of ITM (the whole of “releasable debts” and payment-means should be treated as an institution), from Knapp. Commons’ originality consists in his consideration of the historical variability of debts, and in his relativization of Knapp's “state theory” relative to selection of means of private payment. (2) Commons gives detailed explanation to the sequential structure (i.e., power—authority—sovereignty—believes and needs) that supports stability of the money as an institution. (3) In STM's works of social cohesion, study of debts is expanded to non-western and non-modern societies, and central bank moneys in our times. So I find such ITM genealogy as Knapp-Commons-STM.

Keywords::

• institutional theory of money
• sovereign theory of money
• John Commons
• Georg Knapp

JEL Classification Codes::

• B2
• E4
• P1

Notes

1 For the detailed examination of the theoretical contributions of Commons’ monetary economics included in the “Futurity” chapter, see Charles Whalen (1993) and Éric Tymoigne (2003). These studies focus on Commons’ contribution to the business cycle theory, whereas I focus on his unique consideration about the relations between the use of money and the structures of capitalist economy.

2 The Japanese edition of Commons (1934) was published in the form of three separate volumes by Nakanishiya publisher: Volume 1 was published in 2015, and Volume 2–3 in 2019.

3 Cited from Heine and Herr 2013, 344 (for an example for which this formula was used, see Akiyoshi Sakaguchi 2008, 25). When citing it, I changed some abbreviations. I use this formula, because I think that it is helpful to show the motion of capital schematically, and particularly that many Japanese economists are familiar with Marx's terminology the formula is based on. But, here I disregard the difference in Marx's and Commons’ position on the economic value.

4 Heine and Herr distinguish three paradigms of economics, according to the difference in the perspective on the market system: Classical (capitalist economy), Neoclassical (exchange economy) and Keynesian (monetary economy) (Heine and Herr 2013, 5). One of main subjects of the German Post-Keynesian (called in German: “Berliner Schule” or “monetär-Keynesianismus”)—including Heine and Herr—is to examine the differences of various theoretical paradigms, and they consider the equilibrium-analysis significant as far as it is useful to compare the paradigms.

5 The profit earned by the manager is assumed to be zero in the long run, according to Heine and Herr. In this case, the manager receives only the wage as a supervisor, and it is assumed that s/he earns the profit (entrepreneur gain) only in the demand-supply disproportion of the goods market in the short term. For more details, cf. Heine and Herr 2013, 343–344.

6 Such a premise of a kind of equilibrium is convenience to compare the paradigms of economics and doesn't exclude the disequilibrium-analysis of economy. Also cf. note 4.

7 M'–M' shows that some money has moved from creditor (esp. banker) to manager; M–M′shows that augmented money has moved from manager to creditor.

8 Under what condition can some debts (especially bank deposits) be used as money? One of the two conditions mentioned by Commons is the creation of the market that allows “debts used as money” to be negotiable, and the other is “that no time discount is applied to these debts” (Tymoigne 2003, 529). For Commons, only one debt that satisfies these conditions is the “banker's debt past due,” that is (demand) deposit. “This is so because, unlike securities, demand deposits contain no futurity” (529).

9 According to Commons (1950), each firm organization has sovereignty, and states were created from the development of firm organizations.

10 As a whole, Commons appreciated Knapp. At the same time he pointed out that “economic reflections” were insufficient in Knapp (Commons 1934, 470). So he also took other economists in consideration (chap. 3, sec. 3–4). In this article, Knapp's theory of payment community is treated as the basis of Commons’ economics.

11 A seller outgoes “the alienation of ownership of use-values” as cost in order to acquire money. A buyer outgoes “the alienation of ownership of the negotiable instrument, money”(Commons 1934, 278) as cost. Such costs are called “proprietary cost,” or “institutional cost.”

12 In contrast, today in many countries, a common money form—the central bank note established as “legal tender”—has come to be used in both public and private payment communities. For detail, see the following subsection.

13 For sanctions imposed through collective action to assure the functioning of deposit currency, Knapp focused on the legal sanction by the state, whereas Commons additionally attached importance to the economic sanction by custom (cf. Kitagawa 2017b, 283–285).

14 As far as this sentence is concerned, Commons seems to interpret the credit-based money as if it was replaced for the metal-based money (coin). But it has been known today that the credit-based money is much older than coins. For example, cf. clay tokens mentioned in note 16.

15 In Figure 2, only a unique feature of the modern society is drawn (the public finance by way of issuance of debts is disregarded). The means of ruler's expenditure and the means of tax-payment were mostly different in the pre-modern societies, whereas the means of government's expenditure and the means of tax-payment tend to be the same—money—in the modern societies, where the government based on the democratic sovereignty must earn its own legitimacy by contents of the expenditure. Thus, collecting tax is regarded as the formation of “debt” on the government side in the modern society. Théret sees a characteristic of the modern society in this new “creditor-debtor relation”: “This inversion of the sources of sovereignty has its immediate correlative in the reversal of the creditor-debtor relation constitutive of the debt of life” (Théret 1998, 262).

16 Recently, the historical fact that the clay token born in the bureaucratic system of ancient Mesopotamia was transmitted to uncivilized Greek and lead to the appearance of the money society is often referred to (cf. Martin 2013; also cf. Polanyi 1977).

17 In Dutraive and Théret (2013, 100,) “money as a prototype institution” is expressed by the “three states of money” (incorporé, objectivé, institutionalisé). Also cf. Théret 2008.

18 For the difference in concept of Commons and Dutraive/Théret about the sovereignty, see Kitagawa (2017a, 3–6). According to Kitagawa, Commons distinguishes political government (with physical power) and economic government (with economic power), and described only the former sovereign, while Dutraive/Théret calls Commons’ economic government “monetary sovereignty” or “economic sovereignty.”

19 Dutraive and Théret (2013, 100–101); also cf. Nakahara (2014, 67-68).

20 The treatment by political philosophers of money is examined in Théret (2014). According to Théret, John Locke recognized money itself as sovereign, whereas in the argument of J. G. Fichte money was an instrument for the purpose of safety of the nation. So he appreciates Fichte. And the inheritance of Fichte was inherited by A. H. Müller: “The ideas of Fichte and then Müller of the money became the pioneer of not only such theories of money as Simmel, Max Weber, Knapp, Keynes, Commons, but also the institutional theory of money today” (Théret 2014, 584).

Additional information

Notes on contributors

Akiyoshi Sakaguchi

Akiyoshi Sakaguchi is a Professor of Economics at Senshu University. This work was supported by JSPS KAKENHI, Grant Number 18K01530, and the Senshu University Long-term Overseas Researcher Program, 2018.