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ABSTRACT
Recent social theories of money have challenged economic conceptions of it as first and foremost a medium of exchange. Writers such as Geoffrey Ingham and David Graeber have revived the chartalist position that money is essentially a creature of the state, whose primary function is to measure value or debt. In this paper, I argue that this is a wrong turning. I first clarify the conceptual underpinnings of Ingham’s treatment of money as an ‘institutional fact’, a concept drawn from Searle. I clarify the sense in which this argument establishes that the state ‘creates’ money – and show that this sense is quite limited. It is a theory of how something comes to be accepted as money, rather than a theory of why there is money in the first place, and it gives no account of money’s value. Finally, I sketch an alternative way of looking at the relationship between states and money. This recognises that modern states have been shaped in part by strategies with regard to monetary management, with state actors engaging strategically in a system they only partially constitute – so that states are ‘creatures of money’ as much as the reverse.
KEYWORDS:
Disclosure statement
No potential conflict of interest was reported by the author.
Notes on contributor
Michael Beggs is a Lecturer in Political Economy at the University of Sydney and the author of Inflation and the Making of Australian Monetary Policy, 1945–85 (Palgrave, 2015).
Notes
1 The archetypal exposition is Smith’s tale of the brewer and the baker, who wanted some cuts from the butcher, but found him already adequately supplied with beer and bread (Smith Citation1999: 126–7).
2 It could be argued that there are in fact two strands in this tradition – a ‘state theory of money’, with Knapp's (Citation1924) book as the classic statement, and a ‘credit theory of money’ inaugurated by Innes (Citation1913, Citation1914). But in practice, the state and credit theories have always involved different emphases within the same basic story, and blend into a single tradition developed mainly among sociologists, anthropologists and post-Keynesian economists. See, for example, the blended state-credit treatments by sociologist Ingham (Citation2004: 38–58), anthropologist Graeber (Citation2011: 46–52) and post-Keynesian Wray (Citation1998: 23–9, 39–54). The tradition has neoclassical sympathisers, however, such as Goodhart (Citation1989, Citation1998), and sociological critics, such as Ganssmann (Citation2012).
3 Ingham (Citation2004, 21–2) blames the modern quantity theory on naive anachronism: economists’ ‘model of money supply was, in effect, an empirical generalisation of a naturally constrained supply of a metallic monetary base provided by a central authority (the mint) that was outside the market’. But the gold standard was by no means a natural fit with the quantity theory, if this is taken to mean the view that causality flows from the quantity of money to the price level. As Green (Citation1992) and Arnon (Citation2011) show, among classical political economists, the relationship between the quantity theory and metallism (theoretical and practical) was quite ambivalent, since the money supply cannot be considered exogenous if production of the money-commodity and international specie movement respond to monetary phenomena, and because credit-money develops on the commodity base. For Irving Fisher, who formulated the classic modern version of the quantity equation, the gold standard was problematic precisely because of its instability with respect to the quantity of money and, therefore, the price level (Fisher Citation1912: 319–48).
4 Graeber (Citation2011: 23) acknowledges that economists generally do not present the emergence-from-barter story ‘as something that actually happened, but as a purely imaginary exercise’. But then he bases his critique on historical and anthropological evidence that there never was any such stage of barter, which seems to miss the point if this were not what economists were arguing in the first place.
5 I have used square brackets to indicate Ingham’s own citations of Searle.
6 Searle’s framework has had an impact on monetary sociology beyond its obvious appeal to nominalists such as Ingham. Ganssmann (Citation2012: 23–9) adopts Searle’s ontology as a basis for his own analysis, but is a firm critic of chartalism/nominalism.
7 That is, propositions that ‘can be known to be true independently of anybody’s feelings or attitudes’ (Searle Citation2010, 18).
8 Ganssmann (Citation2012: 1) uses this as the epigraph for his excellent book.
9 Similarly, Marx objects to Hodgskin’s view that money was no real concern of political economy because it is only a technology – ‘only the instrument for carrying on buying and selling’ – to which Marx responds, ‘but, if you please, what do you understand by buying and selling?’ (Marx Citation1904, 55).
10 Chartalists also have an answer to the question neglected by Kiyotaki and Wright’s (Citation1989: 941–7) modern Mengerian attempt to deal with fiat money: if one’s willingness to accept something as money depends on confidence that others are willing to accept it, how does the confidence get off the ground in the first place? The chartalist answer is the proclamation of legal tender, and/or the insistence of receiving tax in the form of fiat money. But this answer raises further questions – as pointed out by Ganssmann (Citation2012: 142):
[Mengerians] face the underlying theoretical problem of collective action as a presupposition of money straightforwardly, whereas Neo-chartalists run into this problem only once they do not take the state as a – most likely benevolent – agent as given: In either case, explaining money involves indicating how agents solve a collective action problem … Neo-chartalists seem to circumvent this problem by referring to the state (or some state-like authority) imposing the collective intention to ‘count X as Y in C’. However, this merely shifts the theoretical problem from the level of spontaneously acting individuals to the level of a collective agent assumed not only to be given, but equipped with the knowledge to anticipate the benefits of something like money and with the power to coerce its subjects into using it. In short, neo-chartalists run into the same type of explanatory problem as Mengerians, but they run into it as a general problem in the explanation of the state, whereas Mengerians run into it in the specific form of explaining the spontaneous emergence of a means of exchange as the rudimentary form of money.
11 Weber’s relationship to Knapp is ambivalent. He acknowledges a deep debt while remaining sharply critical on crucial points, as discussed here and in the next section. ‘The Staatliche Theorie des Geldes of G. F. Knapp is the most imposing work in the field and in its way solves the formal problem brilliantly. It is, however, as will be seen below, incomplete for substantive monetary problems’ (Weber Citation1978, 77–8). Later: ‘In spite of the fact that it is otherwise absolutely correct and brilliantly executed, hence of permanently fundamental importance, it is at this point that the incompleteness of G. F. Knapp’s Staatliche Theorie des Geldes becomes evident’ (Weber Citation1978: 169). Nevertheless: ‘It is evident that this whole treatment of money consists only in a kind of discussion with Knapp’s magnificent book’ (Weber Citation1978: 184).
12 Authority and law would be necessary conditions for any form of extensive commodity exchange, monetary or not, as well as for many other aspects of modern capitalist society. But no-one suggests a ‘state theory of exchange’ follows from this. There is a distinction between being a condition for something and determining its form – the jump from the first claim to the second is a hallmark of a strong form of chartalism.
13 Roth and Wittich translate Weber’s ‘Geltung’ as ‘validity’ rather than ‘value’ (Weber Citation1978). But Henderson and Parsons’ translation as ‘value’ seems more natural (Weber Citation1947).
14 The precise meaning of these terms is open to interpretation. In the Roth-Wittich edition of Economy and Society, ‘substantive validity’ is defined as ‘the probability that medium of exchange will be accepted at a given rate for specific other goods’ (Weber Citation1978: 76). Henderson and Parsons translate the term as ‘purchasing power’, which seems to make sense of the idea as it is used by Weber later, even if it is not a literal translation (Weber Citation1947). ‘Formal validity’ or ‘formal value’ is less clear, defined initially as ‘the use itself’ (Weber Citation1978: 76). But later it seems to be used in Keynes’s sense of the relationship between money-thing and money-of-account. This seems the clearest explanation of both terms:
The exchange possibility of money against other goods, which rests on its valuation in relation to marketable goods, will be called its ‘substantive’ validity, as opposed to its formal, legal validity as a means of payment and the frequently existing legal compulsion for its formal use as a means of exchange. (Weber Citation1978: 169)
15 This need not imply spot transactions, that is, with money and goods/services changing hands simultaneously. As Hicks (Citation1989, 41–2) points out, spot transactions are the norm only for small exchanges. In other cases, payment comes either before or after delivery, so there is a credit/debt relationship in the meantime. But in these cases, money-itself still changes hands, and pricing (in money-of-account) anticipates the eventual transfer (of money-itself).
16 Money actually need not be involved in the initial establishment of a debt: two parties might exchange liabilities, as, for example, with an interest rate swap.
17 In modern times, much effort goes into ensuring that ‘editing the dictionary’ is as little disruptive as possible to the meaning of existing contracts and to pricing. This may be relatively trivial, as with the 1966 decimalisation of Australian currency, where a legal measure was enough to ensure that a dollar ‘counted as’ 10 shillings in existing contracts. Or it may be complex and involve a wider range of administrative measures, as with the adoption of the euro: it was established as a unit of account three years before euros circulated as ‘money itself’, and member countries fixed their currencies to the unit in preparation.
18 For example, the value of ‘dollars’ in the form of deposits at a particular bank, and ‘dollars’ in the form of official banknotes. Banks are responsible for making a market in their own liabilities at par, and it is generally catastrophic for the bank if it breaks par even slightly, since its ability to maintain it depends on depositors’ faith. The lender-of-last-resort function of modern central banks helps commercial banks to manage this, so it is among the ‘prices of money’ policy-makers care about without being able to maintain it by decree. It is nowadays usually so successful in doing so that we are hardly aware of the possibility, but there was a reminder when during the 2008 crisis the Reserve Primary Money Market Fund ‘broke the buck’ (to 97 cents on the dollar) and sparked a run on money market funds, whose shares are deposit-like and can normally be redeemed at par. Not being a commercial bank, its liquidity was not backstopped by the Federal Reserve, though the event quickly motivated authorities to extend liquidity support to money market funds.
19 Graeber’s (Citation2011) history of the ‘first 5,000 years’ of debt is very sparse on the period between Adam Smith and the 1970s – which arguably left an important trace on modern money. Ingham (Citation2004) is an exception here – his book does trace the history of money through the emergence and development of capitalism.
20 This was recognised by Knapp, at least, who spent much of the State Theory of Money on ‘monetary relations with foreign countries’ (Citation1924: 216–303).