‘brave heretics’ whose analysis was revived and greatly elaborated in his The General Theory of Employment, Interest and Money (1936). A late nineteenth-century American ‘crank’, Alexander Del Mar – unknown to Keynes – has only recently come to light (Zarlenga, 2002). He anticipated Keynes’s general position on monetary theory and policy:
Money is a Measure … the Unit of money is All Money within a given legal jurisdiction…. The wheels of Industry are at this moment clogged, and what clogs them is that materialistic conception which mistakes a piece of metal for the measure of an ideal relation, a measure that resides not at all in the metal, but in the numerical relation of the piece to the set of pieces to which it is legally related, whether of metal, or paper, or both combined. (Del Mar, 1901, 8)
Keynes sought theoretically to convince his ‘classical’ orthodox mentors and colleagues that government expenditure, financed by money created in advance of tax revenue, could solve chronic unemployment in the 1930s. Money created by government spending would increase production and employment, which, in turn, would increase ‘effective aggregate demand’: that is, real ‘purchasing power’. As opposed to the subjective ‘wants’ and ‘preferences’ of orthodox economic theory, demand created by expenditure was both ‘effective’ and ‘aggregate’, inaugurating a positive cycle of growth and tax revenue to fund the original deficit. For a while during and after the Second World War, Keynesian versions of ‘monetary analysis’ gained acceptance in theory and policy. However, as we shall see, the 1970s crises were held to have discredited Keynesian economics, leading to a revival of the old orthodoxy of ‘neutral’ money and the ‘real’ economy.
The two kinds of economic analysis and their respective theories of money lie behind arguably this most contested question in the governance of capitalism. On the one hand, mainstream economics believes that the supply of money may have a short-run positive effect, but cannot and therefore should not exceed the economy’s productive capacity in the long run. Only ‘real’ forces of production – technology, labour – create new value, and their input cannot be increased simply by injections of money. Consequently, if monetary expansion runs ahead of these ‘real’ forces, inflation inevitably follows. On the other hand, the broadly Keynesian and heterodox tradition continues to argue that money is the vital productive resource – a ‘social technology’ – that can be used to create non-inflationary economic growth and employment.
However, it is of the utmost importance that the theoretical dispute is not seen exclusively as an ‘academic’ question; theories of money are also ideological. Our understanding of money’s nature – what it is and how it is produced – is intimately bound up with conflict over who should control its creation and, by implication, how it is used. Insisting that money is nothing more than a ‘neutral’ element in the economy implies that it can be safely removed from politics. If money were merely a passive instrument for measuring pre-existing values of commodities and enabling their exchange, then disputes over its use would be misguided. All we need to do is ensure that there is enough money for it to fulfil its functions and ensure the smooth operation of the economic system – which is precisely how the money question is most frequently posed. The retired Governor of the Bank of England, Mervyn King, wrote in his recent memoirs that “[in essence] … the role of a central bank is extremely simple: to ensure that the right amount of money is created in both good and bad times” (King, 2017, xxi). The quantity of money should be calibrated to enable the consumption of what has been produced. Too little money will depress activity as goods cannot be bought; and too much money will do no more than inflate prices.
Here we encounter another of money’s many puzzles. From a theoretical standpoint, it might be a simple matter to supply the right amount of money, but in practice it is not. We shall see that the experiment with ‘monetarist’ policy to control the money supply in the 1980s was beset by two related problems (see chapter 4). Confronted by the complexity of different forms of money in modern capitalism, the monetary authorities were unsure about what should count as money and how it should be counted. Notes and coins – cash – were an insignificant component of the money supply. But which of the other forms of money – bank accounts, deposits – and forms of credit – credit cards and private IOUs used in financial networks – should be included? Furthermore, many of the non-cash forms were beyond the control of the monetary authorities (see chapter 6).
Despite monetary authorities’ many obvious practical and technical problems in conducting ‘monetary policy’ – essentially, attempting to control inflation – the long-run neutrality of money remains a core assumption of most mainstream economics. To believe otherwise – that money can be used as an independent creative force – is to suffer from the ‘money illusion’. As we shall see, the ‘illusion’ is to think that money has powers beyond its function as a simple instrument that only measures existing value and enables economic exchange. However, the centuries-old persistence and intensity of the unresolved disputes tells us that money is not merely this technical device to be managed by economic experts. Rather, it is also a source of social power to get things done (‘infrastructural power’) and to control people (‘despotic power’) (Ingham, 2004, 4). The ‘money question’ lies at the centre of all political struggles about the kind of society we want and how it might be achieved.
In the late nineteenth and early twentieth centuries, the longstanding intellectual, ideological, and political debates on money became embroiled in an acrimonious academic dispute about the most appropriate methods for the study of society, which ultimately led to the formation of the distinct disciplines of economics and sociology (Ingham, 2004). In 1878, exasperated by the endless wrangling, American economist Francis Amasa Walker decided on a deceptively simple solution (see Schumpeter, 1994 [1954], 1086): ‘money is what money does’, which he described in terms of four functions:
1 money of account/measure of value: a numerical measure of value and for economic calculation; pricing offers of goods and debt contracts; recording income and wealth;
2 a means of payment: for settling all debts that are denominated in the same money of account;
3 a medium of exchange: something that can be exchanged for all other commodities;
4 a store of value: a repository of purchasing and debt settling power, enabling deferment of consumption and investment or simply saving ‘for a rainy day’.
This list is still found almost without exception in today’s textbooks. Its longevity gives the impression that the money question has been settled, but this is far from the case. Although it is obvious that money does these things, matters are not quite as simple as Walker had hoped. His solution masked the difficulties and confusions that had caused his and many others’ exasperation. Schumpeter correctly saw that the main reason for the unresolved disagreements was that the commodity and claim (credit) theories of money, including their respective ‘real’ and ‘monetary’ analyses, were by their very nature ‘incompatible’ (Schumpeter, 1917, 649). We should add that he also saw that the two theories were often inconsistent and contradictory, obscuring their differences and making ‘views on money as difficult to describe as shifting clouds’ (Schumpeter, 1994 [1954], 289). These theories are examined in the following chapter; here we need only note the basic differences.
In the simplest terms, the main points of contention reflect two longstanding general intellectual positions: materialism and naturalism versus nominalism and social constructionism. On the one hand, did money, as a medium of exchange, originate in barter as the intrinsically valuable material commodity that could be exchanged for all others? For example, during the debate on the reform of the monetary system in the late nineteenth century, the US Monetary Commission in 1877 concluded that value ‘inheres in the quality of the material thing, and not in mental estimation’ (quoted in Carruthers and Babb, 1996, 550). The Commission
