‘convertible’: that is, exchangeable in an officially declared weight of gold. (Present-day British paper currency carries the anachronistic pledge ‘I promise to pay the bearer on demand the sum of [x] pounds’: that is, the sum in gold at a rate declared by the Bank of England; see chapter 4.) By the end of the nineteenth century, an increasing number of countries adopted the gold standard, which linked their currency’s exchange rates to the common standard and facilitated participation in the international trading system based in London.
On the other hand, a minority rejected the view of the US Commission and held that money was precisely a ‘mental estimation’: that is, a socially and politically constructed abstract value (Del Mar, 1901). Soon after, in a critique of the dominant materialist conception of commodity money at the zenith of the gold standard era, Alfred Mitchell Innes concurred, declaring that “[t]he eye has never seen, nor the hand touched a dollar. All that we can touch or see is a promise to pay or satisfy a debt due for an amount called a dollar [which is] intangible, immaterial, abstract” (Mitchell Innes, 1914, 358). The dollar debt was settled by a token credit: that is, a means of payment which constituted a claim on goods offered for sale in a dollar monetary system. The existence of a debt gives money its value. As Georg Simmel explained, around the same time, in his sociological classic The Philosophy of Money, ‘[M]oney is only a claim upon society … the owner of money possesses such a claim and by transferring it to whoever performs the service, he directs him to an anonymous producer who, on the basis of his membership of the community, offers the required service in exchange for the money’ (Simmel, 1978 [1907], 177–8).
Furthermore, ‘claim’ (or ‘credit’) theory and ‘commodity-exchange’ offered diametrically opposed analyses of banking. ‘Commodity-exchange’ theorists saw bankers as intermediaries collecting small pools of money from savers and lending it from the accumulated reservoirs to borrowers. Nothing was added to the supply of money; banks enabled it to be used more efficiently (see Schumpeter, 1994 [1954], 1110–17). However, it was obvious that something more mysterious was at work in banking. How could savers and borrowers still have use of the same fixed and finite quantity of money? As we will see in chapters 3 and 4, claim (or credit) theory was more closely associated with the view that ‘the banker is not so much primarily a middleman in the commodity “purchasing power” as a producer of this commodity’ (Schumpeter, 1934, 74, emphasis added). We shall see in chapter 4 that capitalist banking originated in early modern Europe and other commercially developed regions from use of ‘bills of exchange’ and other acknowledgements of debt (IOUs) issued by merchants as means of payment within their trading networks. Gradually, these evolved into interdependent banking giros: that is, networks in which the banks borrowed from each other and extended loans to clients – especially to the emerging states. Unlike money-lending, where loans depleted the stock of coined money, the bankers’ loans comprised newly created credit money based on trust and confidence in their business. A deposit would be created in the borrower’s account by a stroke of the banker’s pen from which the borrower could draw banknotes (IOUs) in payment to third parties. Their acceptance was based on the issuing bank’s promise to accept them in payment of any debt owed. In their double-entry bookkeeping, the loan (deposit in the borrower’s account) was the bank’s asset (debt owed by the borrower) balanced by the borrower’s liability (debt owed to the bank). Banks also borrowed from each other in the giro to balance their books. In this way, money could be produced by the expansion of debt and the promise of repayment as represented in double-entry bookkeeping, which, in turn, represents the social relation of credit and debt. In modern economics, this is referred to as ‘endogenous’ money creation as opposed to the ‘exogenous’ production of currency outside the market by governments and central banks.
Walker merely sidestepped the ‘incompatibility’ by smuggling the two antithetical conceptions of money into the list as different ‘functions’ of the same thing: money. After a century in textbooks, it is now widely assumed – if even given a second thought – that the differences between medium of exchange and means of payment and money and credit are semantic. Are they not different terms for the same thing? Surely, common sense dictates that handing over a coin for goods is simultaneously exchange and payment. This imagery of physical – minted or printed – money persists in the era of ‘virtual’ money transmitted through cyberspace. We shall see that digital money causes much common sense and academic confusion. Bitcoins, for example, are represented by the image of precisely what they are not: a material ‘coin’. What will be the consequences if digital money replaces cash? If money is a medium of exchange, what is ‘exchanged’ when a card is ‘swiped’ across a terminal as a means of payment? Doesn’t this rather involve the use of a token ‘credit’, carried or transmitted by the card – which is retained – to cancel a debt incurred briefly by the purchaser?
Finally, defining money by its functions raises further questions: does something have to perform all the functions to be money? In other words, is ‘moneyness’ constituted by all the functions? For example, there are better stores of value than money. If not all the functions are necessary to confer ‘moneyness’, do any take primacy? In commodity theory, money is essentially a medium of exchange on which all other functions depend. We shall see in the following chapter that two of the functions in Walker’s list – medium of exchange and means of payment – are integral parts of two radically different theories of money. On the one hand, intrinsically valuable material commodities can become widely used media of exchange in bilateral trades: that is, bartered. On the other hand, means of payment refers to a token of credit that can settle a debt incurred by the purchase of something because the value of both credit and debt is denominated in the same money of account. The numismatist Philip Grierson illustrates the difference between medium of exchange and means of payment, which he takes to be ‘money’, with the example of fur trappers in eighteenth-century Virginia who carried twists of tobacco to be exchanged for food and lodging on their journeys. The ratio of tobacco and food and lodging varied considerably in different exchanges and the tobacco only became ‘money’ when its value was denominated in a money of account: that is, at 5 shillings an ounce (Grierson, 1977).
We shall see in the following chapter that the two theories – ‘commodity-exchange’ and ‘credit theory’ – contain irreconcilable explanations of how the denomination of nominal face value of money – money of account/measure of value – originates. In this regard, Keynes was intrigued by the fact that circa 4000 BCE, Babylon did not have a circulating currency of material ‘things’, but used a nominal money of account to measure the value of stocks of commodities and to denominate contracts and wages. The first known circulation of material forms of coined commodity money came some 3,000 years later in Lydia around 700 BCE. One of the questions to be explored in the following chapters is whether ‘moneyness’ – that is, the specific and distinctive quality of money – is conferred nominally by its designation in the money of account or materially by the precious metals’ ‘intrinsic’ value or the pre-existing value of commodities in the ‘real’ economy. The era of precious metal money has gone; none the less, we shall see that the opposition between ‘nominalist’ and ‘materialist’ theories continues to lie behind academic disputes on the nature of money.
A preoccupation with narrow economic functions diverts attention from a range of important questions for which the two theories also provide further ‘incompatible’ answers. First, how can money perform its functions? Orthodox economics infers that the rational individual uses money for the self-evident advantages of the functions in Walker’s list. However, these functions are only fulfilled if everyone else simultaneously sees the advantage, but this cannot be explained in terms of individual rationality. It may be rational to hold the things that fulfil the functions if they are intrinsically
