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The modern world without money is unimaginable. Most probably originating with literacy and numeracy, it is one of our most vital ‘social technologies’ (Ingham, 2004). Obviously, money is essential for the vast number of increasingly global economic transactions that take place; but it is much more than the economists’ medium of exchange. Money is the link between the present and possible futures. A confident expectation that next week’s money will be the same as today’s allows us to map and secure society’s myriad social, economic, and political linkages, including our individual positions, plotted by income, taxes, debts, insurance, pensions, and so on. Without money to record, facilitate, and plan, it would be impossible to create and maintain large-scale societies. In Felix Martin’s apt analogy, money is the modern world’s ‘operating system’ (Martin, 2013).

However, despite money’s pivotal role in modern life, it is notoriously puzzling and the subject of unresolved – often rancorous – intellectual and political disputes that can be traced at least as far back as Aristotle and Plato in Classical Greece and the third century BCE in China (von Glahn, 1996). Many of the innumerable tracts and treatises on money begin with lists of quotations to illustrate people’s bewilderment (see the fine selection in Kevin Jackson’s The Oxford Book of Money [Jackson, 1995]). With characteristic whimsy, the great economist John Maynard Keynes (who knew a great deal about money) said that he was aware of only three people who understood it: one of his students; a professor at a foreign university; and a junior clerk at the Bank of England. The banker Baron Rothschild had made a similar observation a century earlier (quoted in Ingham, 2005, xi), adding that all three disagreed!

We shall see that one of the most puzzling and counterintuitive conceptions of money lies at the core of mainstream economics. We experience money as a powerful force; it ‘makes the world go around’ – and sometimes almost ‘stop’. Governments stand in awe of monetary instability, constantly monitoring rates of inflation and foreign exchange, and levels of state and personal debt. Central banks strive to assure us that they can deliver ‘sound money’ and stability; but – like their predecessors – they are constantly thwarted. Paradoxically, however, from the standpoint of mainstream economic theory, money is not very important. In mathematical models of the economy, money is a ‘neutral’, or passive, element – a ‘constant’ not a ‘variable’. Money is not an active force; it does no more than facilitate the process of production and exchange. Here, the sources of economic value are the ‘real’ factors of production: raw material, energy, labour, and especially technology; money does no more than measure these values and enable their exchange. This conception, which can be traced to Aristotle, had become the established orthodoxy by the eighteenth century. David Hume could confidently declare in his tract ‘Of Money’ (1752) that ‘it is none of the wheels of trade. It is the oil which renders the motion of the wheels more smooth and easy’ (quoted in Jackson, 1995, 3). A little later, in The Wealth of Nations (1776), Adam Smith consolidated the place of ‘neutral money’ in what became known as ‘classical economics’.

Joseph Schumpeter’s mid-twentieth-century identification of the differences between ‘real’ and ‘monetary’ analysis and his summary of the latter’s assumptions has never been bettered:

Real analysis proceeds from the principle that all essential phenomena of economic life are capable of being described in terms of goods and services, of decisions about them, and of relations between them. Money enters into the picture only in the modest role of a technical device … in order to facilitate transactions…. [S]o long as it functions normally, it does not affect the economic process, which behaves in the same way as it would in a barter economy: this is essentially what the concept of Neutral Money implies. Thus, money has been called a ‘garb’ or ‘veil’ over the things that really matter…. Not only can it be discarded whenever we are analyzing the fundamental features of the economic process but it must be discarded just as a veil must be drawn aside if we are to see the face behind it. Accordingly, money prices must give way to the ratios between the commodities that are the really important thing ‘behind’ money prices. (Schumpeter 1994 [1954], 277, original emphasis)

This view remains at the core of modern mainstream macroeconomics, which argues that money does not influence ‘real’ factors in the long run: that is, productive forces – especially advances in material technology – are ultimately the source of economic value. Therefore, ‘[f]or many purposes … monetary neutrality is approximately correct’ (Mankiw and Taylor, 2008, 126, which is a representative text). However, there is an alternative view: ‘monetary analysis’ follows a view of money which prevailed in the practical world of business before the classical economists’ theoretical intervention (Hodgson, 2015). Here money is money-capital – a dynamic independent economic force. Money is not merely Hume’s ‘oil’ for economic ‘wheels’; it is, rather, the ‘social technology’ without which the ‘classical’ economists’ physical capital cannot be set in motion and developed. This distinction, between ‘real’ analysis and ‘monetary’ analysis, is known as the ‘Classical Dichotomy’.

Money itself cannot create value; but in capitalism the wheels are not set in motion and production is not consumed without the necessary prior creation of money for investment, production, and consumption (see Smithin, 1918). In the ‘classical’ view, the ‘real’ economy is in fact an ‘unreal’ model of a pure exchange, or market, economy in which money is the medium for the exchange of commodities: that is, Commodity–Money–Commodity (C–M–C). Here, money enables individuals to gain utility: that is, satisfaction from the commodity. In ‘real-world’ capitalism, money is the goal of production – the realization of money-profit from the employment of money-capital and wage-labour: that is, Money (capital)–Commodity–Money (profit) (M–C–M). As Marx and Keynes stressed, depressions and unemployment are not caused by the failure of ‘real’ productive forces. These can lie idle for want of money for investment and consumption not only in the immediate short term but also in the long run. And as Keynes scathingly remarked, the ‘long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again’ (Keynes, 1971 [1923], 65, original emphasis).

For economic orthodoxy, the proponents of monetary analysis were ‘cranks’ who were banished to an academic and intellectual ‘underground’ (Keynes, 1973 [1936], 3, 32, 355; Goodhart, 2009). But, for Keynes, they were ‘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 favoured following the British ‘gold standard’, in which currency comprised the issue of gold coins, such as the £1 sovereign, and the promise that all paper notes with a face value of £1 were ‘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 valuable commodities but not token credits. As we shall see, money’s functions require a different explanation.

Second, money is not only a ‘social technology’; it is also a source of power – ‘infrastructural’ and ‘despotic’ power. Obviously, the accumulation of money confers power; but the power to create money is of more fundamental importance. Money-creating power is an essential element of state sovereignty; yet we shall see that in modern capitalism this power is shared with the banking system. Here, the dual nature of money’s power as an ‘infrastructural’ public resource and a means of ‘despotic’ domination becomes apparent. We have noted that modern money can be produced by the creation of debt, which necessarily entails an inequality of power between creditors and debtors (Graeber, 2011; Hager 2016). A central theme of the book will follow the lead given by the great sociologist Max Weber, who interpreted modern capitalism as ‘the struggle for economic existence’, in which money is a ‘weapon’ wielded by conflicting interests to achieve their aims and strengthen their position as much as it is a public good for pursuing our collective welfare (Weber, 1978, 93).

Today, we are encouraged to believe that the questions of who creates money and for what ends and in what quantities are technical matters to be decided by experts; but they are political questions. As we have noted, the control of money creation lies behind major political struggles in the representative democracies. Those in favour of monetary expansion to finance employment and consumption – the broad Keynesian camp – are opposed by those who place the avoidance of inflation as the main priority of monetary policy. Furthermore, there is no single definitive rational means of deciding between them. Whichever route is taken depends on which school of economic theory and conception of money is chosen, which, in turn, is related to different interests in society: for example, debtors versus creditors; possessors of accumulated money wealth (rentiers) versus those dependent on the employment of their intellectual and physical labour – ‘Wall Street’ versus ‘Main Street’, as the question was posed during the Great Financial Crisis in 2008. Most academic theories of money – especially those held in most orthodox and mainstream schools of economics – fail entirely to address the question of money and power: that is, to register that money is a question of political economy.

The following chapter explores these astonishingly persistent intellectual disputes and their impact on the conflict over who should create money and control how it is used. Chapter 3 draws the theoretical discussion together in a summary of a social theory of money which is used to frame a brief account of Weimar Germany’s severe hyperinflationary crisis, where money’s social and political foundations are ‘unveiled’ (Orléan, 2008). Chapter 4 continues the twin themes – theories of money and struggle for its control – in an account of the development from the sixteenth century onwards in western Europe of the distinctive system of shared money creation in capitalism created ‘exogenously’ by states and ‘endogenously’ by private banks.

Chapters 5 and 6 examine how this dual monetary sovereignty and capitalism’s private contract law have resulted in complex and fragmented monetary systems comprising state-issued currency and bank credit money mediated by central banks; myriad ‘near’ moneys issued as IOUs by financial institutions; local community ‘complementary’ and ‘alternative’ currencies; and crypto-currencies such as Bitcoin. In chapter 7, we see that proposals for monetary reform raised by the Great Financial Crisis of 2008 remain informed by the unresolved intellectual disputes which mask and obfuscate the essentials of the money question: who should control its creation and how it is to be used. Some tentative observations are offered in the concluding chapter.