This document summarizes David Bieri's paper on the spatial non-neutrality of money and its role in Löschian economic geography. Some of the key points made in the summary are: 1) The paper argues that the spatial aspects of the non-neutrality of money have been overlooked in Post Keynesian monetary theory and economic geography. 2) It discusses how August Lösch's spatial economic theory incorporated monetary aspects but this has been ignored. 3) The document aims to spatialize Post Keynesian monetary theory by drawing on Lösch's work and showing how money and credit are hierarchical spatially as well as influencing spatial development.

1. The Spatial Non-Neutrality of
Money and its Role in Löschian
Economic Geography
David Bieri
Political Space Economy Lab, University of Michigan
12th International Post Keynesian Conference
September 2014

2. Motivation
• Nature of relationship between monetary and real sector as
key distinction between schools of economic thought.
• Spatial consequences of money generally not
considered.
• Three broad contributions:
– Spatial aspects of the non-neutrality of money matter for Post
Keynesian monetary theory (additional help in the “escape from the
confusion of the Quantity Theory”).
– Monetary content of August Lösch’s spatial system is overlooked in
economic geography (“NEG” and “EG proper”).
– Lösch’s spatial monetary theory is consistent with monetary
aspects of Post Keynesian Institutionalism (“towards a spatial
money view”).

3. The fluttering veil
“It is well that the people of the nation do not understand our banking and
monetary system, for if they did, I believe there would be a revolution by
tomorrow morning.”
Henry Ford (1922)

4. The fluttering veil
Source: Del Negro et al. (2013)

5. The fluttering veil
Source: Pozsar et al.
(2013)

6. “Frontier finance” hypothesis
Dynamics of the land-capital nexus
are instrumental to a joint history of
urban and financial development:
• Co-movement of capital flows and
changes in the urban functional
hierarchy
• Inextricable linkage between the
process of financialisation and urban
form
• Flow of mortgage credit, land-use
change and the morphological
transformation over the cycle of the
Housing Boom and Housing Bust

7. “Frontier finance” hypothesis
Source: Bunge (1971)

8. Circular flows: Neoclassical
Synthesis Sources: LSE (1951), Punch
(1954)

9. Post Keynesian monetary
theory
• Non-neutrality of money – “Money matters”
– “Money production economy”, capitalism as system of finance,
denies barter illusion of pure exchange economy
– Money not simply a pure numéraire, importance of money contracts
with “price stickiness” a natural outcome
– Monetary equilibrium: No exogenous shocks in credit economy, low
elasticity of production and substitution, relevance of Schumpeter’s
distinction between “Real Analysis” and “Monetary Analysis”
• Endogenous money
– Kaldor-Moore radically endogenous money dissolves LP theory
(horizontalist vs. structuralists  Goodhart, 1989)
– “Political endogeneity” of money, but IR with “policy or institutional
exogeneity”

10. Treatment of money in regional
analysis
relative wages relative rents
Employment,
earnings
Urban labour market
Cost-of-living
Real estate, housing
market
Amenities
Geography,
environment, local
public goods,
infrastructure, culture
real income
expenditure
Regional
employment
share
Migration, job
creation, firm
formation
Monetary sector
Money supply, credit
intermediation,
liquidity preference,
interest rates,
exchange rates

11. Treatment of money in regional
analysis
relative wages relative rents
Employment,
earnings
Urban labour market
Cost-of-living
Real estate, housing
market
Amenities
Geography,
environment, local
public goods,
infrastructure, culture
real income
expenditure
Regional
employment
share
Migration, job
creation, firm
formation
Monetary sector
Money supply, credit
intermediation,
liquidity preference,
interest rates,
exchange rates
Inflation
price level of labour and current output
Interest rates
price level of capital
assets

12. Treatment of money in regional
analysis
• Mainstream urban and regional economics is fully
“neoclassical” (including NEG or “geographical
economics”)
• Economic geography is steeped Marxian political economy
(largely without M–C –M’ or MELT)
• A case of “Hamlet without the Prince”? Mostly, but there
are important exceptions:
– Regional differentials in the cost of credit (Lösch, 1954)
– Keynesian theory of regional financial markets (Dow, 1986)
– A Post Keynesian perspective on the relation between banking and
regional development (Chick and Dow, 1988)

13. Geographies of money – I
• Little “monetary content” of contemporary economic
geography, despite active research on financialisation
• Marxian and other classical approaches focus on
accumulation
– Spatial re-switching of capital (Harvey’s “spatial fix”)
– Sheppard and Barnes’ (1990) The Capitalist Space Economy:
Geographical Analysis after Ricardo, Marx and Sraffa
• Re-theorise “real-financial linkages” by spatialising the Post
Keynesian approach to monetary theory
– Circular cumulative (spatial) causation and financial instability, not
accumulation (Kalecki & Kaldor meet Minsky)
– Inherent hierarchy of money matters for the hierarchy of spatial
development (Knapp meets Lösch)

14. August Lösch (1906—1945)
• Studied under W. Eucken, A. Spiethoff
and mostly J. A. Schumpeter
• Formative Rockefeller Fellowship in
US, key observations on spatial nature
of prices
• “Economics of Location” (1940, 1954):
– Standard theory as special case of
space economy
– Economy organised around three
poles: Human activity, production
process and location choice
– Space as disequilibrating variable

15. PK Institutionalism and MMT
Joseph A. Schumpeter
(1883–1950)
John M.
Keynes (1883–
1946)
August
Lösch
(1906–1945)
Hyman P.
Minsky (1919 –
1996)
John R. Commons
(1862–1945)
Wesley C. Mitchell
(1874–1948)
Alvin H.
Hansen (1887–
1975)
Morris A. Copeland
(1896–1989)
Post Keynesian Institutionalism:
“Flow of “Spatial Non-Neutrality of Money”
funds”
“Financial
instability”
“Spatial price
waves, hierarchy
of money”
Edgar M. Hoover,
Jr. (1907–?)
Walter Isard
(1919–2010)
Wassily W.
Leontief (1906–
1999)
Harvard, early
1950s
Kiel Institut für
Weltwirtschaft
, late 1920s
U. Michigan,
1930s

16. Schumpeter’s monetary theory
“Event today, textbooks on Money, Currency and Banking are
more likely than not to begin with an analysis of a state of
things in which legal tender “money” is the only means of
paying and lending ... it may be more useful […] to look upon
capitalist finance as a clearings system that cancels claims
and debts and carries forward the differences – so that
“money” payments come in only as a special case without
any particularly fundamental importance.
In other words: practically and analytically, a credit theory of
money is possibly preferable to a monetary theory of credit.”
– Schumpeter (1954, p.717)

17. Schumpeter’s monetary theory
• Long gestation period with many trials and misadventures
– Das Wesen und der Hauptinhalt der theoretischen
Nationalökonomie (1908), attempts to overcome fissures of the
“Methodenstreit”
– Das Wesen des Geldes (1970)
• Standard approaches to monetary theory are missing:
– Determinants of money demand, money supply
– Money and real sector interaction, monetary policy
• Walrasian GE beginnings abandoned, later emphasis on
“institution of money”:
– Sociology of money, institutions for social accounting, Money
creation by banks
– Nature of money, theory of price level, theory of money process and
functions of the money market

18. German anticipation of the
Keynesian revolution?
• Hahn’s (1930) Theorie des Bankkredits and Lautenbach’s
(1931) “Kreditmechanik” and Föhl’s (1937) Geldschöpfung
und Wirtschaftskreislauf as pre-Keynes Keynesian flow of
funds theories
– Endogenous credit money
– Credit creation with limited effect on money creation
– Moderated crowding-out effect of credit creation
• Stützel’s (1958) Volkswirtschaftliche Saldenmechanik
(balance of payments mechanics) as pre-cursor to Post
Keynesian stock-flow consistent (SFC) modelling?
– Importance to the “survival contraint” (cf. Minsky)
• Guarding against the “Manichaean tendencies” of
economics (Kindleberger, 1999)

19. Circular flows: Proto-Keynesians
Source: Wagemann (1930)

20. Circular flows: Proto-Keynesians
Source: Föhl (1937)

21. Löschian economic geography – I
Source: Lösch (1954)

22. Löschian economic geography – II
• Fragments of a spatial monetary theory (“Die Lehre vom
Transfer – neu gefaßt” 1941;“Theorie der Währung” 1949)
• Monetary-financial arrangements matter for spatial
development
– Importance of capital flows throughout the urban hierarchy
– Spatial relationship between financial and institutional functions
(e.g. differential spatial dependence of IR and FRB discount rate)
– Functional and institutional variation as influential pathway for real-financial
linkages (e.g. regional version of “transfer problem”).
• Money and credit are fundamentally hierarchical in nature
– All money is credit money in a hybrid system with public and private
money (“inside” vs “outside” money)
– Spatial system is not only hierarchical in finance, but also
hierarchical in power.

23. Löschian Economic Geography –
III
Source: Lösch (1940)

24. A tale of two hierarchies
Source: Lösch (1949)

25. A tale of two hierarchies
Source: Kircher (1962)

26. Regional flow of funds
Source: Labasse (1974)

27. Regional flow of funds
Source: Isard (1960)

28. Circular flows: Regional
perspectives
Source: Kircher (1962)

29. Towards a spatial “money
view”?
• Spatialisation of the hierarchies of money:
– Gold, currency, deposits and securities
– Balance sheets, market makers: Central bank, banks (small and
big), dealers and money funds
– Prices: Exchange rate, par, interest rate
• Spatial hierarchy of money is dynamic across the
economic cycle, expanding and contracting in quality
and quantity (cf. Mehrling 2012)

30. Circular flows: Institutionalists
Source: Copeland (1952)

31. Copeland’s money flows as electricity
• Integration of “real” and “monetary” sectors, based on real
world accounts generated by different sectors.
• Replacing hydraulic model of money supply (stock of
water, flows through pipes, or held in reservoirs by banks)
with model of money as electricity.
– Borrowing sectors acquire funds, lending sectors acquire assets in
form of promises to pay
– No (strict) conceptual separation between supply of and demand
for money
– Crediting of an account simultaneous generates debit to another
account (“ […] just as is the switching on of an electrical appliance
and the draw upon electrical capacity” [Mayhew, 2011])
• Consistent with endogenous money

32. PK Institutionalism and MMT
• Dillard’s work (1980, 1987) on “money as an institution of
capitalism” as starting point (Marx, Veblen, Mitchell,
Copeland, Keynes and Minsky).
• Some consensus that emergent PKI consensus includes
shared approach to MMT (Whalen, 2013; Nesiba, 2013)
• Monetary content of Löschian economic geography as
spatial “brigde” between Institutionalism, Schumpeter and
Keynes.

33. Geographies of money – II
• The trajectory of spatial development and the
advancement of the monetary-financial system is a joint
historical process.
• Money and credit are always and everywhere
fundamentally hierarchical in finance and power; all money
is credit money.
– Spatial circuits characterized by a rapid evolution in bank
complexity and the growing importance of “murky finance” (shadow
banking).
– Hybrid system that is part public (“outside money”, a net asset to
the private sector) and part private (“inside money”).
– Money and finance are non-neutral with regard to space, principally
because the institutional arrangements of financial regulation
matter for how the spatial economy evolves. The flow of funds

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