Why the debate on the nature of money matters
As the debate about the future of finance has yet to yield consensus on the way forward for policy, so more radical solutions are being openly discussed and advocated. This has stimulated a spreading debate on the very nature of money and banking. Geoffrey Ingham, a Life Fellow of Christ’s College, Cambridge, has brought the disciplines of both sociology and economics to bear on the topic. His work, the fruit of many years of reflection on these subjects, illuminates the fundamental questions we face as we seek to improve the working of capitalism and the monetary system.
According to Ingham, no social scientist in the past 50 years has added anything fundamentally new to our understanding of capitalism or the nature of money. He views his efforts as building on the founding fathers – notably Weber, Schumpeter and Keynes.
From Max Weber we learn of the key role of the state in creating the conditions in which early capitalism developed – Adam Smith’s account that it was the result of man’s natural disposition to barter was inadequate. State action was needed to remove traditional obstacles to domestic trade in land, capital and labour. Equally important was the formation of a mass consumer market – another “social product’. The struggle between the state and capitalist bourgeoisie resulted in an independent class of entrepeneurs and bankers who agreed to finance the state’s wars as long as these also advanced their interests. This produced a balance of power between the state and the bourgeoisie.
Schumpeter and Keynes fully grasped the centrality of money and credit. Money is viewed as a measure of abstract value – its unit of account role being primary. The key to the creation of money by banks is the promise of repayment. Money is credit – though not all credit is money. Capitalism’s dynamic growth is fuelled by the banks’ monetization of debt. It is in the money markets, which Schumpeter called the headquarters of capitalism, that the “merchants of debt” assess credit and determine who gets what. The state plays a critical role: to provide law and order and public goods, correct market failures, and manage financial crises. This growth of credit in turn is also indispensable to the creation of consumer wants. It is not enough to have people imbued with Weber’s Protestant Ethic – capitalism also needs a culture of consumerism.
A key function of money is to give confidence to potential lenders by offering a stable measure of value. It thus facilitates long-term debt contracts. These private debts are transformed into money by the banks and money markets. The mechanism is fragile. Money can vanish in debt deflation. Money, says Ingham, is a social relation, as it always involves the creation of debt. It overcomes the anarchy of variable exchange rates of any commodity. In his view Von Mises, Hayek and the Austrian School provide a more convincing argument for markets and money than classical economists – they grasped its essential role to provide information to market participants, and in the signalling role of prices.
Inequality is not some unwanted byproduct of capitalism; it is a fundamental condition. It gives rise to the struggle that lends capitalism its dynamism. There is continual struggle over the formulation of rules governing the creation and supply of money. We now witness the dominance of finance on an unprecedented scale.
Money is a joint venture between the state and the pivate sector
According to Ingham, the state and the economy constitute two spheres of power that need to be autonomous – they have quite distinct justifications and obey a different logic. He follows Weber in seeing capitalism as flourishing in the “interstices” between nation states. Detailed regulations and agreement on standards is necessary. Yet national rivalry make such regulation difficult. It is essential to have a global monetary standard, but competition between states makes it “almost impossible” to create a single world currency. Demand for hard currencies enhances the power of major creditors and their banks.
The global economy is not self-sustaining; money and markets are artificial constructions that need constant maintenance.
Economic globalization is not a natural phenomenon. It has been driven by the national interests first of the UK and then the US. It necessarily increases instability and inequality. We are currently witnessing a “battle of systems” between the Anglo-Saxon liberal type of capitalism and the command market economies more characteristic of countries such as France (and, one might add, new Asian powers).
This sociological perspective enables us to appreciate why both Keynesian and neo-liberal nostrums have been found wanting, as neither takes fully into account the social nature of the money; and how tensions arise between national monies and the demand for a global standard. It is all about politics and power. A great benefit of Empires (Roman, Austro-Hungarian, American) is that they take money out of the political arena (within their imperial borders). During the most successful periods, the state has been content to hold the ring in the ceaseless and necessary struggle between interests and classes.
It is this struggle that gives value to money.
This approach raises questions about solutions such as those advanced by Positive Money school, whereby the supply of money would in effect be nationalised.
In a recent collection of essays by scholars who have followed Ingham’s work (see below), Professor Victoria Chick persuasively argues that having franchised the supply of money to the banks, the state has a duty to monitor the quality of the product. Yet it has failed to do so in maintaining that it should not interfere in the activities of private enterprise banks, even those like RBS in which it owns an 85% stake (a stance that has become evidently absurd in the current row over bonus payments, all paid for out of a public subsidy). This, Chick says, is directly responsible for the situation in which profits are privatised and losses socialised. “This must stop”.
Ingham counters that, if too big to fail banking equally is the result of a struggle between social interests, it cannot be ended simply by applying “political will”:
“The mutual dependence of money-capital and the modern state is capitalism’s axial relation. Each side has an interest in the long-term survival of the other, but the relationship also exhibits continuous conflict over the best possible terms.” (page 315, Financial Crises)
The state outsources to banks the franchised right to realise profits by producing credit money as a store of value, and underwrites the deal. The most catastrophic dislocations of modern capitalism arise from this pivotal relationship. The production of stable money is the primary concern of all capitalist states.
That is why Ingham is sceptical whether the symbiotic ties between the state and the private sector in the production of money can be cut. In his view, such a policy recommendation begs all the big political questions.
What would be the optimal monetary arrangement? He concludes his latest essay by citing the conclusion to his earlier work on “The Nature of Money”:
“First, whatever claim is made to have found the best solution to the question of how, and how much, money is created, we can be certain that it is not the only one, and that it was arrived after an essentially political struggle for economic existence between two different interests. Second, without such a struggle money cannot have value”. (Nature, page 204, cited in Financial Crises, p 320)
Ingham’s definitions of money
“Money is itself a social relation; that is to say, money is a ‘claim’ or ‘credit’ that is constituted by social relations that exist independently of the production and exchange of commodities. Regardless of any form it might take, money is essentially a provisional ‘promise’ to pay, whose ‘moneyness’, as an institutional fact, is assigned by a description conferred by an abstract money of account” (Nature, p 12)
“In the most basic sense, the possessor of money is owed goods. But money also represents a claim or credit against the issuer – monarch, state, bank and so on. Money has to be ‘issued’. And something can only be issued as money if it is capable of cancelling any debt incurred by the issuer”.
“The origin of the power of money (lies) in the promise between the issuer and user of money – that is, in the issuer’s self-declared debt”. ”.“The claim or credit must also be enforceable”.(Nature, p 12)
To find the origin of money, we have to look “behind forms of money for the very idea of a measure of value (money of account).” (Nature, p 13)
“For money to be money, it has to be scarce, and an autonomous weapon in the battle for economic existence” (Nature, p 188)
Money is a “fragile, socially and politically constructed, institution.” (Capitalism, p 65)
“It is a defining characteristic of capitalism that private debts can be readily transformed into money” (Capitalism, p 68)
“The capitalist monetary system developed from the integration of private networks of mercantile trade credit-money with public currency – that is, state money” ( Capitalism, page 70).
“Technological innovation can be dynamic only if the risk is taken to finance it into an unknowable future. It is this risky temporal projection, based on the premise that debts will be repaid, that endows capitalism with its inextricably linked dynamism and fragility” (Capitalism, p 91).
“The Nature of Money”, 2004, Polity Press
“Capitalism”, 2008, Polity Press
“Financial Crises and the Nature of Capitalist Money: Mutual Developments from the Work of Geoffrey Ingham”, edited by Jocelyn Pixley and G.C Harcourt, Palgrave Macmillan, 2013