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Ecological Economics Session 1 - What is Money


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Presentation 1/4 from a short course on Ecological Economics by May Mellor, author of The Future of Money.

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Ecological Economics Session 1 - What is Money

  1. 1. Session 1: What is Money? Mary Mellor
  2. 2. Why Study Money?• Response to public and social expenditure: ‘Where is the money to come from?• Lack of mainstream economics attention to money issue and circulation• The Financial Crisis• Basic question: What is money?
  3. 3. What we need to know• How do we define what money is?• What form does it take?• Are there different types of money?• What role does money play in human societies?• How does money work?
  4. 4. What we need to know• How is money created and circulated?• Who owns and controls money?• Why do people trust money?• What does the crisis mean for money?• What is the future of money?
  5. 5. Core Issues• Money has to be issued and circulated – it doesn’t just appear in society• All money is part of a money system that is social and political as well as economic• States with own currency are not households• Banks dominate contemporary money systems• Money can be an instrument of economic democracy
  6. 6. Conventional Economic View• Originally economies bartered goods which was inconvenient• Needed a medium of exchange/measure of value/store of value• Some commodities could act as money because of their intrinsic value, durability, divisibility and portability• Examples are silver and gold
  7. 7. Conventional Economic View• Gold/silver ‘commodity money’ had problems of security and availability so used representative money (e.g. paper)• Commodity money held in reserve for final payment• All money systems need a source of intrinsic value on which to base their money (e.g. Gold Standard – Isaac Newton 1717)
  8. 8. Conventional Economic View• All forms of money are only a representation of the ‘real’ economy of market exchange which is self-regulating and maximises efficiency• Government regulation and expenditure should not distort the relationship between the function of money and the operations of the market
  9. 9. Social View of Money• No historical evidence of barter economies• Money has emerged in many contexts: injury payment, tribute, tithes, tax and trade• Accounting and banking is much older than coin (2-3,000 BCE as against 7th BCE)• Money has emerged in many forms – modern economics has been misled by gold/silver and by cash (notes and coin) –cultural relativism
  10. 10. With permission: tab2space on flickr
  11. 11. Differing Forms of Money• Native Americans are said to have exchanged Manhattan for strings of beads (wampum shells – made from clams)• Hieroglyphs, clay tablets• Cowrie shells• Temple Money• Tally Sticks
  12. 12. With permission joep de graaff flickr
  13. 13. Tally Sticks• ‘from time immemorial, scored or notched wooden sticks have been used..for..recording payments’ (Glyn Davies A History of Money 2002:148)• Used for state revenue in Britain until 1820s• Accumulated sticks burned down Parliament in 1834
  14. 14. Tally Sticks• Notched sticks split longways – creditor takes stock/stub and the debtor the counterfoil• State tally stick shows how much tax is owed• Stub/Stock can be ‘spent’ by the state and the new owner collects the tax – or uses the stub to pay their own tax• Could pay for goods by accepting a trader’s tally foil - paying their tax/debt for them
  15. 15. Tally Sticks• Tally sticks circulated widely• Discount houses opened up buying up stubs at less than face value – or replacing lower value foils with higher value ones• Tally sticks became as central to trade as coins and notes (cash)• 1698 Gold/silver coin = £11.6m: Tally sticks, bank notes, trade bills = £15.0m (Davies 2002)
  16. 16. Tally Sticks• Treasury/discount houses started to act like clearing houses squaring off payments between crown taxpayers and traders – meant little final payment was needed to settle balances• Eventually the Crown defaulted ruining many discount houses (issued more counterfoils (debts) than it could repay through taxation or stubs on which discount houses could collect)
  17. 17. Problems with‘commodity money’• Functioning economies preceded metal coin• Impact of precious metal coinage on western notions of money – ignoring other kinds of money• Conventional economics contradictory: money is only a ‘veil’ for ‘real’ economic exchange: money has to have some form of intrinsic value i.e. value in its own right
  18. 18. Limits of Coinage• Coin has rarely been made of a fixed amount of precious metal• Weight value of coin rarely matched the face value (not often defined)• Precious metal coins were minted in too large denominations for daily trade• Debased coinage historically more useful economically – within reason
  19. 19. Limits of Silver/Gold• Functioning of the economy is determined by the amount of gold/silver available• Drove colonialism, mercantilism and piracy• Gold/silver ruined the Spanish economy while cramping others• Value of precious metal is socially determined not intrinsic. Commodity value changes constantly – gets over-valued in times of crisis
  20. 20. Limits of the Gold Standard• Sterling value in gold ‘set’ by Isaac Newton• Gold standard had to be suspended when times were difficult• 1920s return to Gold Standard hampered economies• Finally abandoned by US in 1971 (when US had $12bn gold to match $70bn liabilities)• Gold/silver = wampum or stone money
  21. 21. Token View of Money• Money-stuff can take many forms from shells, playing cards to electronic records• Money forms are valued because people believe in them and accept them in payment• Money functions within a money system. This is a system of authority (fiat) or trust (social convention)• The face value of money (whatever form) is set by common agreement or an authority
  22. 22. Token View of Money• Gold/silver coins are only tokens - even though gold/silver can be sold as a commodity• Money only works if people trust it – that they will get goods and services in exchange for it• Therefore all money is a ‘credit’ for future expenditure – therefore a ‘debt’ on society• Money systems can collapse if trust is lost – they are social systems, not economic systems
  23. 23. Functions of Money• Medium of exchange: used to pay for goods and services• Means of measuring value: calculating what goods and services are worth• Means of storing value: i.e. it can be held and then spent at a future date• Which of these is the most important?
  24. 24. Functions of Money• ‘Commodity’ views of money see the medium of exchange and store of value as most important – money must transfer value safely over time. Therefore it should have value in its own right – sound money• Token/ social views argue that money is an accounting mechanism that establishes relative values and future economic claims – the money form itself is not important – it can be valuable or not – gold or clay
  25. 25. Where Does Money Come From?• For conventional economics money emerges as precious commodities become an accepted medium of exchange during trading• For token/social theorists of money – money emerges as a social convention in many forms but always has to be adopted/created/issued• Early coinage was issued by power holders for military or other expenditure purposes e.g. Alexander Great, Roman empire
  26. 26. Summary: Two Views of Money• Money emerges during trade. It evolves from precious metal to paper and other forms (e.g. electronic) but it must have a sound basis in economic structures (gold, land, energy etc.). I• Money emerges socially and the only sound base it needs is trust. This has to be established. Money is not intrinsic – it is socially created/ issued – no fixed value
  27. 27. Money : Stock or Flow?• Money as a limited pool for which people and organisations compete (e.g. state ‘crowding out’ the private sector). Money as a thing.• Money as a flow between people that rises and falls with the level and intensity of economic interactions. Money as a process• Apply to pensions: a ‘pot of money’ or a ‘social insurance/assurance’
  28. 28. State Money Issue• State authorities have issued money in many forms (coin, notes, tally sticks, electronic quantitative easing)• There is benefit (seigniorage) in being the issuer of new money – the issuer has first use but may generate future obligations (dollar)• There are limits to fiat power (authority) – people must trust the money or fear the issuer
  29. 29. State Money and Taxation• Why should people accept state money as payment for goods and services?• Because they need to access that money to pay their taxes• Taxes do not raise state money: they reclaim it• British colonies imposed taxes of up to 60% of money issue - note not 100%
  30. 30. Where are we now?• The state no longer issues money for direct expenditure• Most money is now electronic - notes and coin only 3%• Most money issue has been taken over by the banks – as debt• States have to raise money on the money markets (read banks, financial institutions)
  31. 31. Implications• State is seen as parasitic on the private ‘money creating’ sector - yet it has had to rescue it at great expense• Taxes and state expenditure are claimed to ‘crowd out’ private investment – yet most state expenditure ends up in the private sector• Very few people understand the role of banks and debt in money supply
  32. 32. Implications• State is treated like a household – having to ‘pay its way’ and balance its books• States are not households if they are money issuers (now through central banks)• Money is constantly destroyed in market economies and must be replaced (issued)• e.g. Ireland 50% collapse in property values
  33. 33. Bad Analogies make Bad Policies• Money systems have a very particular dynamic that requires deficit (unreclaimed money issued/spent)• States as money spender-issuers are not like households which can only earn money• States as money issuers are more like babysitting systems: they start with the debt- free issue of credits (tokens)• Example of local money systems
  34. 34. The ‘inflation’ illusion• If states ‘print money’ it leads to inflation• States/societies have issued money without inflation (from clay tablets, tally sticks to cash)• Money printing arguably follows inflation rather than leading it (e.g. Germany 30’s)• Any money system can create inflation. The recent banking system produced major financial asset inflation (boom and bust)
  35. 35. Bank issued money• 97% of new money now enters the economy as debt (mortgages, consumers, students, companies, governments) leading to credit booms and crunches• The money system has been privatised for private benefit• The private financial sector is undermining the efficacy of money itself
  36. 36. States step back in• Credit crunch has had to be solved by states (central banks) reclaiming their money issuing role – to save the financial system not the people (austerity)• Euro crisis because neo-liberal theory precludes money issue (QE)• UK, US, Switzerland issuing large amounts of money
  37. 37. Money in Crisis• The system is in crisis• How did this happen? (session 3)• Where do we go from here?• Bank credit money creation is producing a publically guaranteed national resource – money (session 2)
  38. 38. Money and Society• Money is an expression of a trust in the future provision of goods and services• Money is only as ‘sound’ as the provisioning capacity of society and its social distribution• Need to reclaim money as a public resource with democratically determined priorities• Possibility of a sufficiency/steady state economy (session 4)
  39. 39. Further Reading• Mary Mellor (2010) The Future of Money: From financial crisis to public resource (Pluto)• Mary Mellor (2010) Could the money system be the basis of a sufficiency economy? real- world economic review 54 www.paecon- net/PAEReview/issue54/Mellor54.pdf• Frances Hutchinson, Mary Mellor, Wendy Olsen (2002) The Politics of Money (Pluto)
  40. 40. Further Reading• Josh Ryan-Collins et al (2011) Where Does Money Come From? New Economics Foundation• (has a chapter of his future book on money)