Draft: Still being worked on – Mostly from a paper and I need to find the source
The production of credit-money in a banking system is a self-generating, relatively autonomous process in so far as the “bank can always grant further loans, since the larger amounts going out are then matched by larger amounts coming in
Essence of capitalism => elastic creation of money by means of readily transferable debt
Capitalist credit-money was the result of two related changes in the social relations of monetary production in medieval and early modern Europe
- Private media of exchange became detached from the existence of any particular commodities in exchange and transit, and were used as pure credit between traders => bills of exchange
- Bills became detachable from the particular individuals name in the creditor-debtor relation. Signifiers of debt became transferable to third parties, and could circulate as private money within commercial networks
- Eventually completely depersonalized
Promise to repay these national debts became the basis for public credit-money
The De-linking of the Money of Account and the Means of Payment
- After the fall of Roman Empire, the two basic functions of money as a unit of account and means of payment were unable to operate => the social and political system that was “accounted for” by the abstract money of account no longer existed
- The silver penny (Roman denarius) was the basic coin, but it was produced in a vast proliferation of different weights and fineness by the myriad jurisdictions
- Holy Roman Empire, Charlemagne (768 – 814) => imposed a money of account derived from the Roman system
- The money of account (based on pounds, shillings and pence) did not necessarily correspond to any of the actual minted coins in use
- The measure of value was a pure abstraction for monetary calculation
- “Imaginary money” was invariable
- Complicated monetary relation bc money of account and coinage were different
- Money of account, not their metallic content, determined the relative values of coined money
Under these circumstances, monetary policy involved manipulation of one or both of the 2 elements, the weight and fineness standard in an actual coin
- Monarchs gained extra seigniorage profit by reducing the metallic content of coins
- But monarchs also had an interest, on the other hand, in extending the issue of their own coins
- It was much easier to manipulate to impose and manipulate a sovereign money of account => to declare a value of existing coins in relation to an “imaginary” standard coin that need not be minted
- Depreciating (Crying down) => alternative to increasing the tax rate as a mean of increasing the monarchs purchasing power
The De-linking of the Money of Account and the Evolution of Capitalist Credit-Money
- The separation of moneys of account from means of payments and the free circulation of coins with multiple territorially determined values had 2 important implications for the development of modern capitalist banking and its distinctive forms of money
- Circulation of coins outside their jurisdiction of issue increased the need for moneychangers
- Particular circumstances of anarchic coinage and increasingly long-range trade provided the stimulus for the development of the bill of exchange into a form of transnational private money denominated in an agreed money of account
- Late 15th century, Pacioli listed 9 ways by which payment could be made
- Cash, credit, bill of exchange and assignment in a bank
- Money changing / deposit banking + use of credit instruments were the result of the geopolitical structure of medieval Europe
- 4 elements that culminated capitalist credit money
- (re-)emergence of banks of deposit in the late 13th century
- Formation of public banks
- Widespread use of the bill of exchange as a form of private money
- Gradual depersonalization and transferability of debt in the major European states during the 17th and early 18th centuries
- Major development => integration of the banker’s private bill money with the coinage of sovereign states to form the hybridized, or dual, system of credit-money and a metallic standard of value
“Primitive” (non-capitalistic) banks of deposit
- Early medieval bankers took deposits of cash for safe keeping, which eventually permitted the book clearance of transfers between their depositors => did not issue credit-money
- “Book” transfer and clearance between depositors as a means of payment
- Book money exists as a currency substitute
- The bankers could also use some of the deposits to make loans or invest in trade
- Both augment the stock of public currency => complex interpersonal credit relations orchestrated by the bank (16th-17th century Venice)
- Accepting deposits, book clearance of credit and the lending of coined money “merely transfers purchasing power from one person to another”
- Banking only begins when loans are made in bank credit
Early public banks
- 14th century, bankers converted currencies for the commune, sought out forged or forbidden coins and generally supervised the circulation of the coined currency => gov required records to be available for inspection
- Public banks were established at Barcelona in 1401 and at Valencia and Genoa in 1407
- Venice’s Banco della Piazza di Rialto (1587) also accepted bills of exchange payable to its depositors and converted the state’s debt into transferable bonds
- At this stage, the clearance of debts and credits in the banks’ giro of depositors effectively monetized the city-state debts
- The suppliers of goods and services to the city gov. were able to draw on their bank accounts before payment from the state had been received
The bill of exchange
- The transformation of the social relation of debt into the typically capitalist from of credit-money began when signifiers of debt became anonymously transferable to third parties => 2 periods
- 16th century, forms of private money such as bills of exchange were used in commerce, and existed alongside the plethora of diverse coinage of the states and principalities
- Late 17th century some states outside Latin Christianity integrated the monetary technique with public deposit banking and began to issue fiduciary money (fiat money)
- Bill of exchange, form private money => public currency
- Every coin had their own value
- Creation of a small network of bankers => used their own version of the Carolingian 1:20:240 money of account as the basis for their bills of exchange => used to finance trade
- Exchange by bill required 2 networks
- Traders
- Bankers
- Trader would draw a bill on a local banker => uses as a mean of payment for specific goods imported from outside the local economy => exporter of the goods presents the bill to his local representative of the banking network
- In their simplest form, the bills represented the value of the goods in transit
- The bankers were able to enrich themselves and promote the use of bills through a series of exchanges that involved the conversion of money of account into another => own interest rates were fixed and based on an abstract coin upon which the private bill money was based
- Bankers had to control the direction of both an outward flow and an inward return bills through their networks
- The bankers could control the direction of a bill through the moneys of account of the myriad jurisdictions in a way that was always profitable to them
- The bill of exchange system allowed an increase in trade without any increase of coinage in the different countries
The depersonalization of debt
- Exchange per arte (dry exchange)=> the creation of credit in the bill of exchange independently of the existence of any actual goods in transit
- Dissociation of pure credit from the real representation of goods
- Oral contracts => transferability of debt to the point where it served as a general impersonal means of payment was not possible
- The widespread use of the bill in dry exchange undoubtedly hastened the transition from oral to written contracts
- Opened up the possibility that the signifier of bilateral debt could be used in the settlement of a third-party debt
- Pure monetary instrument which consisted exclusively in a promise to pay denominated in an abstract money of account
- Further dissociation was effected => circulating money was separated from the precious metal manifestation that it had taken in previous 1,000 years
=> remained private money (not widely transferrable)
- This development occurred in Holland then England => outside of the sphere of influence of the exchange bankers
- End of 16th century => contracts were written on the back of a bill, and this was accepted as an order to pay => became depersonalized
- The exchange bankers’ networks weakened to the point of collapse in the aftermath of typical capitalist defaults and liquidity crises
- The French state reasserted sovereign control of its monetary system
- 1577, establishment of a uniform metallic standard that reconnected the money of account and means of payment and by the prohibition of the circulation of foreign coins
The Transformation of Credit into Currency
- How the metal coinage could be augmented
- Bank clearance of debt
- The creation of money in the form of claims against the public debt
- Exchange of bill per arte
- Exchange of bill per arte => not widely accepted
- Informal contracts by which the mercantile plutocracies of the Italian city-states lent to each other through the public banks were constantly jeopardized by the factional rivalry that was typical of this from of government
- The liquidity of bills of exchange was almost entirely restricted to banking and mercantile networks, and could not evolve into credit money currency
- Until private credit-money was incorporated into the fiscal system of states which commanded a secure jurisdiction and a legitimacy, it could be argued that it remained, in revolutionary terms, a dead-end
- The minting of coin was both a symbol and a real source of the monarch’s sovereignty
- paradoxically , the first step in the creation of stable monetary spaces that could sustain credit-money was the strengthening of metallic monetary sovereignty
- England => credit-money was first successfully established as public currency
- Its widespread use involved a loss of sovereign control – especially over the profits of seigniorage and the manipulation of the money of account
- From 14th to mid 17th century English kings banned the importation of foreign coins and the export of bullion, ordered exporters to supply their bullion to the mints, attempted to prohibit the bill of exchange, and generally sought to limit credit
- The controls on exchange and the domestic unit of account exercised by the English monarchy largely prevented the promiscuous circulation of coins and multiple moneys of account that took place in continental Europe
- Setting of four ounces of sterling silver as the invariant standard for the pound unit of account lasted until WW1 => stability
- The maintenance of the standard encouraged a steady supply of long-term creditors for the state, and in this way provided a secure basis for the eventual adoption and expansion of the credit-money system
- England in 2 steps:
- Creation of a single monetary space for a national coinage
- Introduction of credit-money into the system
Sovereign monetary space in England
- Henry VIII => to finance his costly wars
- “Great Debasement” (1544 – 1551), the silver content of the coinage was systematically reduced from 93% to 33%
- The debasement did discredit the monarchy and create insecurity by destroying confidence in money as a store of value => threatened political and social order
- During Elizabeth 1, England became a more coherent linguistic and cultural unit
- The emerging English nation-state became the basis for the impersonal trust that eventually enabled the forms of credit-money to become established outside the interpersonal banking and exchange networks in which they had been contained
- The late 16th century English state had established a form of money that was in al important aspects the same that which had disintegrated in Rome more than 1,000 years earlier
- The Bank of England was founded, and an enduring state credit-money was issued => only after political struggles
- “Dutch finance” => creation and monetization of national debt
- The circulation of mere promises in the form of deposits and stock held by the mercantile and affluent classes had proved to be unstable in Venice and was viewed with suspicion
- “Land is the bottom for banks”
- Mere promises to pay were, in fact, a new form of money in that they were not actually representative of any material value
- In England during the 17th century a “civic morality of trust” was developing that could sustain a wider credit-money economy outside the closed networks of the metropolitan mercantile and political elite
- New culture of credit based upon a currency of reputation was constructed
- Unrealistic trustworthiness, which could be claimed by acting in a reputable manner, replaced the obligations to honour agreements based on particularistic ties of family or kin
The dual monetary system: the hybridization of credit and coinage
- Charles II’s debt default in 1672 hastened the adoption of public banking as a mean of state finance
- However compared with state borrowing in the Italian and Dutch republics, English kings, like all monarchs, were disadvantaged by the very despotic power of their sovereignty => potential creditors were deterred by the monarch’s immunity from legal action for default
- => Culminated to the Glorious Revolution and the invitation to William of Orange to invade and claim the throne
- William was intentionally provided with insufficient revenues for normal expenditure => was forced to accept dependence on Parliament for additional funds
- With William’s approval and the expertise of his Dutch financial advisors, the government adopted long-term borrowing => funded by specific tax revenues
- The state’s creditors were drawn from London merchants, who backed a proposal for a Bank of England, in order to take the financial developments a step further. They provided £1.2m for the Bank’s stock, which was then loaned to the king and his government at 8% interest, which, in turn, was funded by hypothecated customs and excise revenue
- In addition the the interest, the bank received an annual management fee of £4,000 and a royal charter that granted it the right to take deposits, issue bank notes and discount bills of exchange => 1697 => a monopoly on banking and the right to issue further bank bills and notes to the total of newly subscribed capital
- The privately owned Bank of England transformed the sovereign’s personal debt into a public debt and, eventually in turn, into a public currency
- The state was financed by loans from a powerful creditor class that were channelled through a public bank => each had interest in the long-term survival of the other
- This fusion of the 2 moneys, which England’s political settlement and rejection of absolutist monetary sovereignty made possible, resolved 2 significant problems
- The private mones of the bill of exchange was lifted out from the private mercantile network and given a wider and more abstract monetary space based on impersonal trust and legitimacy
- Parliament sanctioned the collection of future revenue from taxation and excise duty, to service the interest on loans
- Monetary perspective => the most important long-term consequence => monopoly to deal in bills of exchange
- => fused private money and public currency
- The 2 main sources of capitalist credit-money that had originated in Italian banking were now combined for the first time in the operation of a single institution
- Public debt => state bonds
- Private debt => bills of exchange
- These forms of money were introduced into an existing sovereign monetary space defined by an integrated money of account and means of payment based on the metallic standard
- 1727 => the coinage was placed securely on a gold basis
- As credit-money became the most common means of transacting business, England also moved towards the creation of the strongest metallic currency in history
- English state’s integration of the two forms permitted a further development of credit-money
- Coins and notes and bills were eventually linked by a formal convertibility in which the latter were exchangeable for precious metal coins
- For most of the 18th and 19th centuries, the issue of notes based on the state’s promises was also given the added guarantee of convertibility into gold at a fixed rate
John Maynard Keynes: A treatise on money
The classification of Money
Money of account in which debts and price and general purchasing power are expressed -> primary concept of a theory of money
Debts: Contract for deferred payment
“Perhaps we may elucidate the distinction between money and money of account by saying that the money of account is the description or title and the money is the thing which answers to the description.” page 3
Show the example with the King of england from keynes. “A contract to pay ten years hence a weight of gold equal to the weight of the king of England is not the same thing as a contract to pay a weight of gold equal to the weight of the individual who is now King George. It is for the State to declare, when the times comes, who the king of England is.”
The state is the one that will set up this money of account
Knapp’s chartalism: The doctrine that money is peculiarly a creation of the state, that they control it
It is important to keep in mind that the money of account must be continuous. When the name is changed, the new unit must bear a definite relation to the old. The state will give a formula which defines the new money in terms of the old.
Money of account splits into two sides: offers of contracts, contracts and acknowledgement of debt, also called bank money, which is used by passing from one hand to another, with proper money (state money) to settle transactions
Representative money: next evolution of state money
The state may own money too, but can also declare that the debt itself is an acceptable discharge of a liability. A particular part of bank money is transformed in money proper which is called representative money.
The forms of money:
Now they are three categories
Fiat money and managed money are sub categories of representative money
“Commodity money is composed of actual units of a particular freely obtainable, non monopolised commodity which happens to have been chosen for the familiar purposes of money, but the supply of which is governed like that of any other commodity.”
Fiat money is representative (or token) money now generally made of paper except in the case of small denominations. It is created and issued by the state, but is not convertible by law into anything other than itself, and has no fixed value in terms of standard
Managed money is similar to fiat money, except that the state undertakes to manage the conditions of its issue in such a way that, by convertibly or otherwise, it shall have a determinate value in terms of an objective standard.
Managed money is kind of hybrid, cause the like commodity it has a standard value. It is similar to fiat money in the way that they are representative or paper money which has no value apart from the law and state.
Keynes, managed money is in sense, the most generalized form of money.
Current Money:
One fundamental elements in the theory of money is the total quantity of money of all kinds in the hands of the public
The typical modern banking system: there is the central bank and members banks. The total stock of state money is partly held by the public, the central bank and the member banks. The state money held by the central bank constitute its reserve against deposits. All the central bank money is held by the member banks. The central bank money plus the state money held by the member banks represents the reserve of the member banks, which they also hold against deposits. All of this combined creates the current money.
Coined money which has value higher than the commodity it is made off is major first step toward creation of representative money. Most commercial areas actually didn’t coined their money. The stamping of the piece of metal was just a piece of local vanity, patriotism or advertisement. Egypt didn’t coined before the Ptolemies, and china never coined silver until recent times. See more examples page 11
The first state reform of the standard of weight is from babylonia at the end of the third millenium BC. Even other standard like barleycorns or carats or cowries.
“Money, like certain other essential elements in civilization, is a far more ancient institution that we are taught to believe some few years ago”
There was no evidence that representative money for while. Sometimes coins had higher value than their commodity value but it was because convenience, prestige, safety, or just aesthetics.
“The true link between commodity money and representative money is to be found, perhaps, in commodity money, the supply of which is limited by absolute scarcity rather than by cost production, and the demand for which is wholly dependent upon the fact that it has been selected by law or convention as the material of money and not upon its intrinsic value in other uses”
The earliest beginning of bank money, are lost in antiquity. “For the use of bank money depends on nothing except the discovery that, in many cases the transference of debts themselves is just as serviceable for the settlement of transactions as is the transference of the money in terms of which they are expressed”
Bank money in the shape of bills of exchange -> not less useful and necessary than today especially for the purpose of settling transactions at a distance, owning to the cheapness of its cost of transmission as compared to the cost and risks of transporting money proper.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy