Are Shadow Moneys Money Proper? A Critical Discussion from the Perspective of the History of Monetary Theory

ABSTRACT

We address the issue of whether some financial instruments produced by financial innovation, like the so-called shadow moneys, can be regarded as proper money. This is done by examining some past contributions (by Menger, Jevons, Keynes and Hicks) on the nature of money and its fundamental properties. We argue that the most satisfactory contributions come from Hicks, who holds that the essential function of money is to be the economy’s standard of value. On these grounds, we conclude that shadow moneys cannot be regarded as money in a proper sense. Neither are they the economy’s standard of value nor are they a universally accepted means of payment. Their function as a liquid store of value is not sufficient for them to be qualified as money.

KEYWORDS:

• Functions of money
• credit
• financial innovation
• shadow money

JEL CLASSIFICATION:

• B10
• E40
• E44
• E50

Acknowledgements

We would like to thank the participants in Session 19 of the 18th STOREP Conference and two anonymous referees for their helpful comments and suggestions.

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1 In this narrative, money primarily is some useful commodity, adopting a view that Schumpeter defines as Theoretical Metallism, as opposed to Chartalism, which instead sees the state as the primary originator of money (Schumpeter 1954 [2006], p. 274).

2 As Giannini (2004, p. 52 ff.) underlines, money is a social institution that operates within the frame of payment technologies, which requires procedures and institutions to generate trust. Notably, the institutional architecture, the working rules and the tasks of central banks evolved to provide some anchoring to merely symbolic currencies.

3 Menger presented his theses on money in Chapter VIII of the Principles of Economics, first published in 1871, and later in the controversy on method he initiated with the scholars of the historical school (Menger 1871 [1994], 1883 [1985]). He summarized his evolutionary interpretation in the article ‘On the origin of money’ published in the Economic Journal (Menger 1892).

4 ‘But the notion that attributes to money as such the function of also transferring “values” from the present into the future must be designated as erroneous. Although metallic money, because of its durability and low cost of preservation, is doubtless suitable for this purpose also, it is nevertheless clear that other commodities are still better suited for it’ (Menger 1871 [1994], p. 279).

5 Textbooks, at a more or less advanced level, are telling examples as they emphasize the primacy of money as a means of exchange (see, for example, Handa 2000; Heijdra 2017; Walsh 2003).

6 The characteristics by which metallic moneys are the most convenient medium are the object of detailed exposition. Jevons expresses some surprise at the ‘strange phenomenon’ that in history ‘apparently valueless shells, bits of leather, or scraps of paper’ were accepted in exchange for ‘a costly commodity’ (Jevons 1875 [1893], p. 32).

7 Jevons always uses the expression ‘standard of value’ to indicate the standard for deferred payments.

8 In chapter XVI on representative money, he examines a few examples of the ancient use of token moneys and the introduction of paper money in China, examples that seem to question his previous reconstruction.

9 ‘Money itself, namely that by delivery of which debt contracts and price contracts are discharged, and in the shape of which a store of general purchasing power is held, derives its character from its relationship to the money of account, since the debts and prices must first have been expressed in terms of the latter’ (Keynes 1930 [1971], p. 3).

10 It is obviously impossible to enter here into a more detailed discussion of Keynes’s transition from A Treatise to The General Theory, a topic that has interested numerous economists and historians of economics. For useful reconstructions of the evolution of Keynes’s thought between his two works, see for example Moggridge (1992, pp. 551–571) and Skidelsky (1992, parts 2 and 3).

11 Later on, in the 1940s, when participating in the Bretton Woods debate, Keynes again returned to considering the role of money as standard of value and proposed the creation of the bancor, a universal currency to be adopted as the international unit of account and the means of payment in international trade. On Keynes’s involvement in the Bretton Woods debate, see Moggridge (1992, pp. 721–756), Skidelsky (2000, parts 2 and 3) and Rauchway (2015, pp. 183–245).

12 ‘It may be that in certain historic environments the possession of land has been characterised by a high liquidity-premium in the minds of owners of wealth; and since land resembles money in that its elasticities of production and substitution may be very low, it is conceivable that there have been occasions in history in which the desire to hold land has played the same role in keeping up the rate of interest at too high a level which money has played in recent times’ (Keynes 1936 [1973], p. 241).

13 See Hicks (1982, pp. 236–237) for a brief reconstruction of the evolution of his own contributions to the theory of money.

14 ‘It is not easy to see that there can be payment, of a debt expressed in money, unless money as standard has already been implied in the debt that is to be paid. So money as means of payment implies money as standard’ (Hicks 1989, p. 43).

15 Tobin (1996, p. 151) is also aware of the temptation to confuse the two notions:

It is tempting to identify numéraire prices as money prices. But the numéraire is just a mathematical normalization convenient for handling the fact that the supply-equals-demand equations for N commodities determine only the N−1 relative prices. Those relative prices are, by construction, independent of the scalar arbitrarily attached to the numéraire.

16 In this respect, some (Einaudi 1936; Quadrio Curzio and Scazzieri 2008) analyzed what they call ‘imaginary moneys’. This expression may also refer to some monetary unit designed by theorists or reformers, which is not the result of spontaneous historical evolution but, rather, a unit theoretically designed to become a shared symbol of wealth. Keynes’s bancor, for example, was an imaginary standard of account in international trade. His monetary reform was never implemented.

17 See, for example, Goodhart (1989, p. 26). Baumol (1952) and Tobin (1956) are well-known models of the demand for money as an inventory in relation to transactions in the real sector of the economy.

18 The demand for money to exploit opportunities corresponds to Keynes’s speculative motive, whereas the demand for money to face emergencies corresponds to Keynes’s precautionary motive. Hicks (1982, p. 261) observes: ‘I have generalised these concepts a little, and when they are generalised they do not look so very different.’

19 Hicks (1935, 1967, 1982) and (1989, pp. 55–79) are his essential works on the topic.

20 Hicks considers a case of high inflation and the possibility of holding highly liquid assets that yield an interest.

21 For more exhaustive analyses and descriptions of shadow banking, see, for example, Adrian and Ashcraft (2012), Pozsar et al. (2012), Caverzasi, Botta, and Capelli (2019), Ferguson (2019) Tooze (2019) and Michail (2021).

22 ‘The most important task of the traditional banking sector, i.e., the creation of money, is not part of the services that shadow banking provides. What shadow banking does is to facilitate money creation through the provision of funding to the traditional banking sector’ (Michail 2021, p. 190).

23 Some types of shadow money offer a par exchange on-demand with bank deposits; other types offer a par exchange in the near future.

24 Minsky (1986 [2008], p. 255) also points out the possibility that specific networks within the economy can use different ‘moneys’. The simultaneous existence of different private moneys or means of payment and the difficulties it creates have been examined by Tobin (1996, pp. 147–149).

25 Murau (2017) describes the actions of the public authority during the various waves of the crisis.