Alternative approaches to money

Theoretical Inquiries in Law

Volumn 11, Issue 1, 2010, Pages

  Wray, L Randall ^a  

^a UNIVERSITY OF MISSOURI KANSAS CITY   (United States)

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[No Author keywords available]

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EID: 77649105832     PISSN: None     EISSN: 15653404     Source Type: Journal    
DOI: 10.2202/1565-3404.1235     Document Type: Article

References (93)

1. PAUL A. SAMUELSON & WILLIAM D. NORDHAUS, ECONOMICS 274-76 (9th ed. 1975).
2. MILTON FRIEDMAN, THE OPTIMUM QUANTITYOF MONEYAND OTHER ESSAYS (1969).
3. Peter G. Klein & George Selgin, Menger's Theory of Money: Some Experimental Evidence, in WHAT IS MONEY? 217 (John Smithin ed., 2000).
4. Bruce G. Carruthers & Sarah Babb, The Color of Money and the Nature of Value: Greenbacks and Gold in Post-Bellum America, 101 AM. J. SOC. 1556, 1558 (1996).
5. Quoted in id. at 1556.
6. GEORG SIMMEL, THE PHILOSOPHYOF MONEY 445 (David Frisby ed., Tom Bottomore & Davide Frisby trans., Routledge 3d ed. 2004) (1907);
7. see also Viviana A. Zelizer, The Social Meaning of Money: "Special Monies," 95 AM. J. SOC. 342, 344 (1989).
8. Carruthers & Babb, supra note 4, at 1559.
9. Alan Greenspan, Monetary Policy Report to Congress (July 20, 2005) (testimony before the Committee on Financial Services, U.S. House of Representatives, Washington D.C.), available at http://www. federalreserve.gov/ boarddocs/hh/2005/july/testimony.htm.
10. Karl Brunner, The Role of Money and Monetary Policy, 50 FED. RESERVE BANK ST. LOUIS REV. 9 (1968).
11. L. RANDALL WRAY, MONEY AND CREDIT IN CAPITALIST ECONOMIES: THE ENDOGENOUS MONEY APPROACH (1990);
12. Milton Friedman,Quantity Theory of Money, in4 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 3 (Murray Milgate et al. eds., 1987).
13. Robert E. Lucas, Expectations and the Neutrality of Money, 4 J. ECON. THEORY 103 (1972).
14. Franco Modigliani & Merton H. Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, 48 AM. ECON. REV. 261 (1958). In an efficient market, it does not matter if a firm sells stock or issues debt, nor does it matter what its dividend policy is. It is sometimes called the "capital structure irrelevance principle". It appears to support unlimited leveraging (since debt is equivalent to capital), thus, was invoked as justification for rising debt ratios in the recent financial markets boom.
15. For a summary, see Robert J. Gordon, What Is New-Keynesian Economics?, 28 J. ECON. LITERATURE 1115 (1990).
16. See N. Gregory Mankiw, Real Business Cycles: A New Keynesian Perspective, 3 J. ECON. PERSP. 79 (1989).
17. MICHAEL W OODFORD, INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY (2003).
18. Laurence H. Meyer, Does Money Matter? (Mar. 28, 2001) (The Homer Jones Memorial Lecture delivered at Washington University, St. Louis, Missouri), available at http://www.federalreserve.gov/boarddocs/speeches/2001 /20010328/default.htm.
19. L. Randall Wray, Lessons from the Subprime Meltdown, 51 CHALLENGE 40 (2008).
20. See Ben S. Bernanke, The Great Moderation (Feb. 20, 2004) (speech delivered at the Meetings of the Eastern Economics Association, Washington DC), available at www.federalreserve.gov/Boarddocs/Speeches/2004/ 20040220/default.htm.
21. FRANK H. HAHN, MONEY AND INFLATION 1 (1983).
22. See Dror Goldberg, The Tax-Foundation Theory of Fiat Money (unpublished manuscript), available at www.drorgoldberg.com/tax.pdf (last visited July 1, 2009).
23. WOODFORD, supra note 15.
24. HAHN, supra note 19.
25. Charles A.E. Goodhart, Money and Default, in KEYNES FOR THE TWENTY-FIRST CENTURY: THE CONTINUING RELEVANCE OF THE GENERAL THEORY 213, 213-14 (Mathew Forstater & L. Randall Wray eds., 2008).
26. Clearly, the history of the origins of money is contested. Economists tend to use a story about money's origins in order to shed light on its nature and are less concerned with historical accuracy. Still, if the orthodox story deviates considerably from the historical and anthropological record, it is possible that economists have mischaracterized the nature of money.
27. See GLYNN DAVIES, A HISTORY OF MONEY FROM ANCIENT TIMES TO THE PRESENT DAY (1994);
28. Geoffrey W. Gardiner, The Primacy of Trade Debts in the Development of Money, in CREDIT AND STATE THEORIES OF MONEY: THE CONTRIBUTIONS OF A. MITCHELL INNES 128 (L. Randall Wray ed., 2004);
29. GUNNAR HEINSOHN & OTTO STEIGER, PRIVATE PAROPERTY, DAEBTS AND INTEREST OR: THE ORIGIN OF MONEY AND THE RISE AND FALL OF MONETARY ECONOMICS (1983);
30. John Henry, The Social Origins of Money: The Case of Egypt, in CREDIT AND STATE THEORIES OF MONEY: THE CONTRIBUTIONS OF A. MITCHELL INNES, supra, at 79;
31. Michael Hudson, The Archaeology of Money: Debt Versus Barter Theories of Money's Origins, in CREDIT AND STATE THEORIES OF MONEY: THE CONTRIBUTIONS OF A. MITCHELL INNES, supra, at 99;
32. Geoffrey Ingham, "Babylonian Madness": On the Historical and Sociological Origins of Money, in WHAT IS MONEY?, supra note 3, at 16;
33. Geoffrey Ingham, The Emergence of Capitalist Credit Money, in CREDIT AND STATE THEORIES OF MONEY: THE CONTRIBUTIONS OF A. MITCHELL INNES, supra, at 173 [hereinafter Ingham, The Emergence of Capitalist Credit Money];
34. GEOFFREY INGHAM, THE NATURE OF MONEY (2004);
35. A. Mitchell Innes, What is Money?, 30 BANKING L.J. 377 (1913), reprinted in CREDIT AND STATE THEORIES OF MONEY: THE CONTRIBUTIONS OF A. MITCHELL INNES, supra, at 14 [hereinafter Innes, What is Money?];
36. THOMAS MADDOX, THE HISTORY AND ANTIQUITIES OF THE EXCHEQUER OF THE KINGS OF ENGLAND IN TWO PERIODS (Greenwood Press 2d ed. 1969) (1769);
37. Karl Polanyi, Aristotle Discovers the Economy, in TRADE AND MARKET IN THE EARLY EMPIRES 64 (Karl Polanyi, Conrad M. Arensberg & Harry W. Pearson eds., Henry Regnery Co. 1971) (1957);
38. Rudolph Robert, A Short History of Tallies, in STUDIES IN THE HISTORY OF ACCOUNTING 75 (A.C. Littleton & B.S. Yamey eds., 1956).
39. There is some evidence of barter-based "external" trade - between tribes, for example. While I am skeptical that these should be seen as markets, I do not make the claim that "gift-giving" involved only useless goods. Even modern "exchange" at Christmas could be seen as a form of barter-based "markets" if one wanted to stretch the metaphor sufficiently. Those who advance the barter approach to money need to provide evidence for internal barter-based trade and a market whose efficiency is enhanced by the spontaneous choice of one commodity to serve as medium of exchange.
40. See PHILIP GRIERSON, DARK AGE NUMISMATICS (1979) [hereinafter GRIERSON, DARK AGE NUMISMATICS]; PHILIP GRIERSON, THE ORIGINS OF MONEY (1977) [hereinafter GRIERSON, THE ORIGINS OF MONEY].
41. Polanyi, supra note 24; see also Christine Desan, Coin Reconsidered: The Political Alchemy of Commodity Money, 11 THEORETICAL INQUIRIES L. 361 (2010).
42. Orthodoxy has never been able to explain how individual utility maximizers settled on a single numeraire. See Gardiner, supra note 24;
43. Ingham, The Emergence of Capitalist Credit Money, supra note 24.
44. While the use of a single unit of account results in efficiencies, it is not clear what evolutionary processes would have generated the numeraire. See Klein & Selgin, supra note 3.
45. The market is supposed to produce relative prices, each denominated in the numeraire. However, this presupposes specialization of labor and/or resource ownership - but this pre-market specialization, itself, is hard to explain. See Stephanie A. Bell, John F. Henry & L. Randall Wray, A Chartalist Critique of John Locke's Theory of Property, Accumulation, and Money: Or Is It Moral to Trade Your Nuts for Gold?, 62 REV. SOC. ECON. 51 (2004). Once markets develop, specialization increases welfare; however, in their absence, specialization is risky, while diversification of skills and resources would be prudent.
46. Further, even if this can be finessed, no evolutionary process that would generate a single unit of account has been identified. See Klein & Selgin, supra note 3. It seems unlikely that either markets or a money of account could have evolved out of individual utility-maximizing behavior.
47. See generally Innes, What is Money?, supra note 24;
48. A. Mitchell Innes, The Credit Theory of Money, 31 BANKING L.J. 151 (1914), reprinted in CREDIT AND STATE THEORIES OF MONEY: THE CONTRIBUTIONS OF A. MITCHELL INNES, supra note 24, at 50 [hereinafter Innes, The Credit Theory of Money];
49. A. MITCHELL INNES, MAARTYRDOM IN OUR TIMES: TWO ESSAYS ON PRISONS AND PUNISHMENT (1932);
50. GRIERSON, THE ORIGINS OF MONEY, supra note 26;
51. L. RANDALL WRAY, UNDERSTANDING MODERN MONEY: THE KEY TO FULL EMPLOYMENT AND PRICE STABILITY (1998);
52. SIMMEL, supra note 6;
53. CREDIT AND STATE THEORIES OF MONEY: THE CONTRIBUTIONS OF A. MITCHELL INNES, supra note 24.
54. Henry,supra note 24.
55. Mark Peacock, State, Money, Catallaxy: Underlaboring for a Chartalist Theory of Money, 26 J. POST KEYNESIAN ECON. 205 (2004).
56. See GRIERSON, DAARK AGE NUMISMATICS, supra note 26;
57. GRIERSON, THE ORIGINS OF MONEY, supra note 26;
58. Henry, supra note 24.
59. See WRAY, supra note 10, at 7. As John M. Keynes argued in his research on ancient monies, "the fundamental weight standards of Western civilization have never been altered from the earliest beginnings up to the introduction of the metric system."
60. See 28 THE COLLECTED WRITINGS OF JOHN MAYNARD KEYNES 239 (Donald Moggridge ed., 1982);
61. see also WRAY, supra note 29, at 48;
62. Innes, What is Money?, supra note 24, at 386.
63. Hudson, supra note 24, at 111.
64. Keynes makes a strong case, arguing that the "state money" stage has existed for 4,000 years, at least. See 1 JOHN MAYNARD KEYNES, A TREATISE ON MONEY 4 (Harcourt, Brace & Co. 1976) (1930). While I believe he is correct, it is not necessary to make that case here.
65. There are exceptions. Even the U.S. Treasury accepted foreign coin in payment of duties and taxes until well into the nineteenth century; and many modern governments have issued debt denominated in foreign currency. These exceptions do not prove a rule; rather they are examples of imperfect sovereignty.
66. Indeed, while the Bank of England was founded to provide state finance (the crown's credibility was tarnished), most of the functions associated with central bank operations (such as lender of last resort interventions) merely followed the lead set by money-center London banks. See WRAY, supra note 10, at 45-54.
67. Innes, What is Money?, supra note 24; Innes, The Credit Theory of Money, supra note 29.
68. Innes, What is Money?, supra note 24, at 389.
69. Id. at 391.
70. Id. at 393.
71. GEORGE FRIEDRICH KNAPP, THE STATE THEORY OF MONEY (Augustus M. Kelly 1973) (1924).
72. See WRAY, supra note 29, at 74-96.
73. Innes,The Credit Theory of Money, supranote 29, at 161.
74. Id. at 161.
75. Id. at 152.
76. See also Abba P. Lerner, Functional Finance and the Federal Debt, 10 SOC. RES. 38 (1943) [hereinafter Lerner, Functional Finance and the Federal Debt];
77. Abba P. Lerner, Money as a Creature of the State, 37 AM. ECON. REV. 312 (1947);
78. Charles Goodhart, Credit and State Theories of Money: The Contributions of A. Mitchell Innes, 37 HIST. POL. ECON. 759 (2005) (book review);
79. Alain Parguez, A Monetary Theory of Public Finance - The New Fiscal Orthodoxy: From Plummeting Deficits to Planned Fiscal Surplusses, 32 INT'L J. POL. ECON. 80 (2002);
80. WRAY, supra note 29.
81. Other kinds of obligations, such as fees and fines, will also "drive" money in the sense that the authority can name what can be delivered to extinguish the obligation. It is also possible that private institutions could create a unit of account and means of payment to be used in private pay communities. While there is some historical evidence of private units of account, I would argue that they are relatively insignificant; all modern units of account are state moneys.
82. KNAPP, supra note 42, at 30.
83. Hudson, supra note 24; WRAY, supra note 29, at 39-73.
84. Here we are speaking of state money used internally, but there is no guarantee that the state's money will be accepted outside the nation's borders. I believe that part of the reason for the use of coined precious metal may be the necessity of making payments outside national borders. Here the orthodox belief that the value of a coin would be equal to its embodied precious metal value rings truest. Mercenaries fighting foreign wars would not accept coins at values much above gold content because they had to spend them in the enemy nation, and there was no certainty that the employing sovereign would prevail. By this logic, the value of a coin would decline toward its precious metal content the farther it moves from the sphere of influence of the issuer. Goodhart concurs with this hypothesis. See Goodhart, supra note 47.
85. Stephanie Bell, The Role of the State and the Hierarchy of Money, 25 CAMBRIDGE J. ECON. 149 (2001).
86. Innes, The Credit Theory of Money, supra note 29.
87. HYMAN P. M INSKY, STABILIZING AN UNSTABLE ECONOMY 228 (1986).
88. See Stephanie Bell, Do Taxes and Bonds Finance Government Spending?, 34 J. ECON. ISSUES 603 (2000);
89. Stephanie Bell & L. Randall Wray, Fiscal Effects on Reserves and the Independence of the Fed, 25 J. POSTKEYNESIAN ECON. 263 (2003).
90. Lerner, Functional Finance and the Federal Debt, supra note 47.
91. BASIL J. MOORE, HORIZONTALISTS AND VERTICALISTS: THE MACROECONOMICS OF CREDIT MONEY (1988).
92. MINSKY, supra note 54.
93. For an analysis of the 2007-2009 financial crisis based on Minsky's work see Anastasia Nesvetailova, The Crisis of Invented Money: Liquidity Illusion and the Global Credit Meltdown, 11 THEORETICAL INQUIRIES L. 125 (2010).