How to Teach Money L. Randall Wray, Levy Institute, UMKC and CFEPS [email_address] www.levy.org www.cfeps.org AFIT Apr 2008
Two approaches to Money <ul><li>Dominant view: Metalist. M-theory; Monetarist </li></ul><ul><li>M itself not important; but linked to variables that matter; “real analysis” </li></ul><ul><li>M originates and evolves due to private sector attempts to reduce costs of exchange. </li></ul><ul><li>Barter spontaneously chose some MOE (sea shells, cows, rocks, landmarks, wives) </li></ul>
Commodity Money <ul><li>Value of M detd by intrinsic value; eventually settle on gold goldsmith discovers deposit multiplier </li></ul><ul><li>Discovered they could lower trans costs by allowing paper to circulate, but redeemed on demand. </li></ul>
Govt came along and screwed things up by issuing a fiat M w/o backing. Causes inflation. Too much money chasing too few goods
M-theory: international <ul><li>Since M is not related to the state, no need for each state to have its own M. Better to separate—remove ability of state to issue M. </li></ul><ul><li>Optimal Currency Area: if M evolved to reduce trans costs, no reason for separate currency. Euro; currency boards </li></ul>
Heterodox Approaches <ul><li>Marx, Keynes, Veblen: M-C-M’; MTP; Theory of business enterprise </li></ul><ul><li>Institutionalists: M is all bound up with power: to do good and bad; perhaps the most important institution in CapEcon </li></ul><ul><li>Post Keynesians: M and uncertainty; M and contracts; holding M </li></ul><ul><li>Chartalists: State M, bound up with sovereignty </li></ul><ul><li>Functional Finance: State M and Govt spending </li></ul><ul><li>TOGETHER: MODERN MONEY </li></ul>
Why do economists begin monetary analysis with a potted history? To focus attention on the essential characteristics, or nature, of money. We will never “know” the origins of money. First, the origins are lost “in the mists of time”—almost certainly in pre-historic time.
Second, money consists of complex social practices that include power and class relationships, socially constructed meaning, and abstract representations of social value—so it is not easy to identify those social practices that are “money”.
Origins and Nature of Money <ul><li>When we attempt to discover the origins of money, we are identifying institutionalized behaviors that appear similar to those today that we wish to identify as “money”. </li></ul><ul><li>Trying to “uncover” the origins of money is impossible or at least misguided unless it is placed within the context of a theoretical framework. </li></ul>
The typical barter story is consistent with a neoclassical, asocial, approach in which money is “natural” but “neutered”: -Social power and economic classes are purged from the analysis; -the market is exalted; -role of government is downplayed; -money is a “neutral veil” that obscures social relations. Whether barter story is “correct” is really not the issue Rather , it is useless for understanding the way money works today.
The heterodox alternative: -locates the origin of money in credit and debt relations -Must identify the social nature of the money unit of account in which credits&debts are measured, and the social processes that generate creditors and debtors -The store of value function could also be important, for one stores wealth in the form of others’ debts -The medium of exchange function and the market are de-emphasized; indeed, one could imagine credits and debits without markets and without a medium of exchange
Alternative: Chartalism or cartalism <ul><li>Use of currency and value of M are based on the power of the issuing authority, not on intrinsic value. </li></ul><ul><li>State played central role in evolution of M. </li></ul><ul><li>Separate currencies not a coincidence. Tied up with sovereign power, political independence, fiscal authority. </li></ul>
State or Chartalist Approach: Traces creation of a money of account to the penal system; wergild or payment of “fines” by transgressors to victims. -word for debt in most languages is synonymous with sin or guilt, reflecting these early reparations. -Until one paid the wergild fine, one was “liable”, or “indebted” to the victim. -We still think of a traffic fine as an “obligation” to pay, and speak of the criminal’s debt to society.
The debt/credit relation was involuntarily imposed and socially created to “pacify” the victim (our verb “to pay”). Wergild fines gradually converted to “obligations” that req’d payment of fines, fees, tribute, tithes, and taxes to an authority. Eventually the obligations were standardized in a unit of account money of account.
<ul><li>Authorities created price lists for items to be delivered in payment of taxes. </li></ul><ul><li>And finally the authority would “buy” items by issuing a money-thing that it would accept in payment of taxes. At this stage, money emerges as means of payment. </li></ul><ul><li>All this predates markets, indeed, sets up the necessary prerequisites for markets by </li></ul><ul><li>establishing prices; and </li></ul><ul><li>creating a need to “sell” to obtain “that which is necessary to pay taxes”. </li></ul><ul><li>So the heterodox story reverses the sequence: first taxes, then money, then prices, then markets and exchange. </li></ul>
The state money approach might appear to be inconsistent with the credit money approach but it is not: Even state money is credit money. For the government, a dollar is a promise to ‘satisfy’, a promise to ‘redeem,’ just as all other money is.
Whether the government’s IOU is printed on paper or on a gold coin, it is indebted just the same.
CONCLUSION: AN INTEGRATION OF THE CREDIT, STATE, AND ENDOGENOUS MONEY APPROACHES The state chooses the unit of account in which the various money things will be denominated. In all modern economies, it does this when it chooses the unit in which taxes will be denominated and names what is accepted in tax payments. Imposition of the tax liability is what makes these money things desirable in the first place. And those things will then become the (HPM) money-thing at the top of the “money pyramid” used for ultimate clearing.
CONCLUSIONS Ability to impose liabilities, name the unit of account, and issue the money used to pay taxes gives power to the authority to further the social good; allows society to organize social production. “Sovereignty” Much of the public production is undertaken by emitting state money through government purchase. Much private sector activity, in turn, takes the form of “monetary production”, or M-C-M’ as Marx put it, that is, to realize “more money”. This is mostly financed by credits and debits—that is, “private” money creation.
Because money is fundamental to these production processes, it cannot be neutral as it contributes to the creation and evolution of a “logic” to capitalism, largely “disembedding” the economy. At the same time, many of the social relations can be, and are, hidden behind a veil of money. This is most problematic with respect to misunderstanding about government budgets, where the monetary veil conceals the potential to use the monetary system in the public interest. Misunderstanding or mystification of the nature of money constrains government by the principles of “sound finance”.