The dislocations of the recent financial crisis have led to a veritable out-pour of research by geographers on different spatial aspects of the monetary-financial system. While an increasing number of these contributions are focused on the economic geography of money and finance, monetary theory plays no more than a perfunctory role in this literature. In this presentation, I argue that successful theorizing of the geographies of financialization must move beyond the dominant Marxist view, most famously embodied in David Harvey’s system of three circuits of capital. Much of this work is mired in interpretational ambiguities about Marx’s position on Say’s Law regarding the circular flow model (which postulates Say’s Law) versus the model of monetary exchange (which denies Say’s Law).

1. Hamlet without the Prince? Economic
Geographies of Money and Finance
without Monetary Theory
David Bieri
Global Forum on Urban and Regional Resilience, Virginia Tech, Blacksburg, VA
Political Space Economy Lab, Ann Arbor, MI
AAG Meeting – Chicago
April 2015

2. Form follows financialisation
Source: Home Owners Loan Corporation (1935)

3. 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”); as “spatial brigde”
between Institutionalism, Schumpeter and Keynes
– Lösch’s spatial monetary theory is consistent with monetary aspects
of Post Keynesian Institutionalism (“towards a spatial money view”).

4. 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)

5. Geographies of money
• 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 & Hawtrey meet Lösch)

6. A tale of two hierarchies
• Hierarchy of cities: Cities as “organisations”, positioned
within a spatial order of economic production.
• Hierarchy of money: All money is credit money and credit is
always and everywhere fundamentally hierarchical in nature.
Credit allocation as a core function of modern states.
 Historical interaction between urban and monetary hierarchy
matters for distribution and evolution of economic activity
across space.
 Trajectory of spatial development and advancement of the
monetary-financial system as joint historical process
 Nexus of hierarchies matters for financial resilience.

7. Circular flows: The Classics
Source: Denis (1904)

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

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

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

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

12. Circular flows: Marxists
Source: Harvey (1985)

13. Circular flows: DGSE Orthodoxy
Source: Del Negro et al. (2013)

14. Money matters: Theories
Economic paradigm
Origins of
economic cycles
Real-monetary
sector
relationship
Nature of crises
Spatial
consequences
Classics Real sector Neutral Resources Not considered
Marxism Real sector Non-neutral
Over-
accumulation
Urbanization
(Post) Keynesianism Both sectors Non-neutral
Financial
instability
Not considered
Neoclassical (RBC) Real sector (Super)neutral
Exogenous
shocks
Not considered
Monetarism Monetary sector Non-neutral Inflation Not considered
“New” urban economics, new
economic geography
Real sector Neutral None Agglomeration
Source: Bieri (2014a)

15. Post Keynesian economics
• Principles of Post Keynesian economics
– Individuals face fundamental uncertainty about the future;
– There is a central role for 'animal spirits' in the determination of
investment decisions;
– Inflation is the result of unresolved distributional conflicts;
– Money is an endogenous creation of the private banking system;
– Financial markets are prone to periodic boom-bust cycles;
– Unemployment is determined by effective demand on the goods
markets;

16. Marxist political economy
• Marxian political economy
– Fundamental conflict between capital and labour on the basis of the
conception of the capitalist mode of production.
– Capitalist production is intrinsically unstable, with financial crises
sometimes the prelude to, and sometimes the result of, a crisis of
over-accumulation of capital.
– Mass unemployment as a key element of the 'cure' for these
problems.
– Marxist analysis looks to value form analysis to trace fundamental
developments in capitalism and emphasises the role of the state in
organizing the political and economic hegemony of capital

17. 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”

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

19. Rethinking the
geography of money

20. 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

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
Sources: Lösch (1949); Bieri (forthcoming)
Outsidemoney*
1. Highest-order money: Global money Currency: Gold; credit money: BIS†
Partialmoney,regionalmoney
2. High-order money: International money‡
Sterling, Reichsmark
3. Mid-order money: National money High-powered money (Currency,
central bank reserves) , occasional ly
equivalent regional money
Insidemoney
4. Lower-order money: Private credit money National commercial and retail banks,
regional and local (community) banks
5. Lowest-order money: Private money Private or fiscal debt obligations, in
particular commercial paper

25. Löschian economic geography – IV
• 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 shapes
economic space accordingly.

26. Money and the city:
Ideas, institutions and
events

27. Ideas, institutions and events
• Ideas about the “nature of money” determine monetary
analysis:
– Historical representation of economy as system of circular flows
evolves with social imaginary.
– Common dichotomy across different economic paradigms: “real
sector” (production and consumption) and “monetary sector” (money,
credit and banking).
– Nature of real-monetary nexus as key distinction between schools of
economic thought.
• Institutions represent the socio-economic arrangements that
rest on and are influenced by specific ideas.
• Historical events give rise to new theoretical insights/ideas, in
turn re-shaping institutions.

28. Ideas, institutions and events
• Two misconceptions about money.
– Banks act simply as intermediaries, lending out the deposits that
savers place with them (“loanable funds theory”)
– Central bank determines the quantity of loans and by controlling the
quantity of central bank money (“money multiplier approach).
• What happens in reality:
– Lending creates deposits — broad money determination at the
aggregate level. Bank deposits are mostly created by commercial
banks themselves.
– Banks face limits to lending (profitability and regulatory constraints).
– Money creation is also constrained by the behaviour of money
holders (households and businesses). Ultimate constraint on money
creation is monetary policy.

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