money of account.
Tuesday, September 21, 2010
My Little Rant
[Note: this was written in one sitting with very little editing or planning. I hope that it conveys my general disappointment at much historical and monetary analysis]
I am constantly shocked by the bad scholarship that so many academics produce. In my research of the world of money and specifically community currencies I keep coming across advocates of these currencies who are not basing their arguments on accurate historical research.
A classic misreading of history is that the creation of the Federal Reserve was about the consolidation of the moneyed interests of the USA. But, if you look closer it also has to do with the increased access to credit - something that was a massive problem throughout the 19th century in the USA. That is why President Wilson, who was deeply concerned about the monopolization of money and credit by bankers, called the creation of the Fed, the "democratization of credit". But why the focus on credit? Because at this time the idea that you could "create" money was anathema to all concepts of money - it represented government attempting to create value, something that was not permissible in the minds of most intellectuals. Money needed intrinsic value and was not the product of any actions of government. This thinking about money came to be fundamentally challenged by Keynes (though he built off a series of work done in the late 1800's) who highlighted the role of
money of account.
money of account.
The question becomes what is the difference between credit and money? To explore that answer you have to understand the role of "money of account". Read Keynes, or for a more modern analysis look at the work of Geoffery Ingham. Money is not about the form, though this seems to have some sort of impact on our societal experience of money, money is about the unit of measure that is the measure of money. An authority is needed to impose this unit of measure, and it does NOT emerge spontaneously through barter, but rather requires some sort of consolidation, standardization and enforcement - the State, for example. However it does not necessarily require the State, I think you could have some other sort of authority, but some agreement needs to be enforced and regulated for a currency to become money.
Money is the creation of society. The relative scarcity of money is a socially constructed reality and is actually necessary to reinforce a standard measure of value which forms the basis of money of account. What is important is understanding the implication of who puts the money into circulation - and the importance of this is because money is so much more than just a medium of exchange - money does not just "represent" or "lubricate" the real economy - it is something far more, something that is a fundamental element in our socio-political mindset.
My point is that due to the fact that terms like money, democracy, credit, banks and more have all changed and evolved to mean very different things at very different historical moments thus if you are going to quote some of the great minds of America, then the historical moment in which their speech occurred needs to be taken into account. The shifts in form of money are critical because they have helped highlight the role of the creator of money. They have done nothing to clarify how to create that standard of value, and often the question of how that value is created is ignored. Throughout the history of money in America, one thing has remained constant - the source of money and its value is something that is believed to be beyond the control of the government (and society). When we thought of money as gold we believed that money had to have an intrinsic value - and that this source of value had nothing to do with government. This of course completely ignored the fact that government would create a designated unit of account such as the $, and then say that so many grams of gold were worth a set amount of dollars. Nothing natural there! Today we give money its value via the marketplace - in the realm of free-floating exchange markets. Again, we have no power over the value of money as it is something left to the markets. This alienation of the source of money's purchasing power (which is what allows us to actualize its value) is what we struggle with. How do we give money the kind of purchasing power that enables everyone to have enough financial power to buy all the things that they need for survival, and prevent the destruction of the living ecosystem?
The claim by community currency (CC)advocates is that to achieve this all we need to do is allow communities the power to create their own currency. The fact that it is often referred to as a currency and not as money, betrays a gap or maybe even a conflation between money and currency. In fact, this is what is critical, money can operate without currency. The questions that need to be answered by the CC advocates is how do we maintain this local currency’s purchasing power? How do we create a unit of account? How do we account for the fungibility of the money, and the additional economic costs of multiple currencies with different units of account and fluctuating values? Is the democratization of money about its decentralization? Or, is it about centralizing it in the state, ending the role of banks? If we democratized money via decentralizing its creation, we run the risk of completely destroying our political-economy, because ultimately there will be no reliable currency available. Despite some highlighting the role of "free banking" in Scotland and the US in the 19th century it ignores the fact that all of what these banks created was still in the same money of account - issued as "dollars' of credit off a scarce monetary base - in addition these experiments never prevented economic crashes or banking crises.
Today’s debates over the democratization of money follow two broad threads - one that wants to place the creation of money more fully in the hands of the state, while another group wants to create a form of money that requires no state.
The important distinction to make is that money is more than just a medium of exchange. Anything may serve as a medium of exchange (see the story about pigs being the medium of exchange), but the “moneyness” of money comes from its abstract value and ability to cancel debts. The ability of money to do this is through the authority that reinforces the existence of a relationship between the currency and the money of account. An authority of some regard is needed so that this reliable currency can be used to cancel all debts that are covered within the sovereign space of the state.
Many community currency advocates ignore the role of the state in creating the authoritative money of account and fail to highlight how they might do this in a way that will help to continue the existence of their local capitalist economy. It is this part of the community currency argument that is often ignored - the ideas that they are expressing have no focus on challenging the basis of private property or the focus on the sale of labour as one’s main means to economic survival. If these elements are going to continue to exist, if you are going to continue to operate within a capitalist economy then you are always going to need access to capitalist money. The solution that will emerge on the local community level will do nothing to change this fact - what it may do is reduce the welfare responsibility of the state because of the increased access to means of exchange that in no way enable you to accumulate credit or wealth - unless you accumulate goods that are then transferable into the national money.
What does it mean to democratize money? I have struggled with this question for almost 2 years now and is part of my 15 years of political-economic research. I have studied what the American democracy has done. Demands for the democratization of money have been around for most of the past 200 years. The government's focus has been on maintaining a scarce supply of money – while boosting the supply of credit. This focus on credit has resulted in an elastic currency that feeds the side of money that is focused on fulfilling the purposes of exchange. The scarcity of currency has also allowed the government to maintain the abstract value represented by the money of account.
The question I now come to is what happens in an economy where there is no real distinction between money and credit? The works of Keynes, Wicksell, Innes, Smithin, Weber and Ingham are critical in this exploration. The idea that money is neutral needs to be dropped, that it is just the product of barter is false - an idea that is shared by most theorists including community currency advocates and Marx. Money and its creation has profound implications - and is a socio-political construct - with the aim of reinforcing particular economic functioning. However, a proposal to end this construct of money needs to account for this history and understand what the actual economic implications may be for the overall political-economy.
The American government has democratized money in a way that works with the dominant economy - the capitalist economy - this is the democratic responsibility of their government. However, if the government were to shift the way it creates money - perhaps ending the role of credit or interest - a new political understanding would need to be instituted. Money is part of a much bigger equation and the question of its democratization ultimately rests on our notion of democracy which ultimately rests on our notion of citizenship and the socio-economic benefits of this shift in ideas of citizenship (see the works of E.M. Wood).
Money is part of a greater revolution, but any assumption that it does not need some sort of authority for it to actually serve as money and not just a medium of exchange - which it cannot fulfil without being backed by an authoritative measure of value. We have to recognize that the democracy we have today is a democracy that has been designed to fulfil and meet the needs of a capitalist socio-economic structure.
Money is not the problem. Recognizing the way in which it is used to reinforce the existing economy is critical. But, the solutions that are proposed need to be grounded in history and in the recognition that money, the full functioning thereof, requires an authority of some nature to define and enable its abstract value.
I am not sure that we can create a moneyless society, now or in the future. For if we accept that money is actually based in the “money of account”, which is an abstract and somewhat arbitrary value used to settle debts, then it would be almost impossible to imagine this being replaced in the near future.
Money is important. But on its own it does not provide us with much information. We need to see it in the bigger picture. This is where the CC movement is interesting in that they are demanding a different type of democratization - but they are assuming at the same time that this different kind of money will somehow move the local economy to a different type of socio-political space and enable us to reduce the ravages of capitalism. I am quite skeptical of this.