Abstract
The nature of money deserves more attention. Relegated to a veil and a mere medium of exchange, the subject of money has been long trivialized in economics. Exploration about the nature of money disturbs stories about harmonious market exchange and mysterious tendencies toward economic stability and full employment. For that reason perhaps many economists do not venture that often into such explorations. Mary Mellor does – while excavating the roots of the most recent global financial turmoil – focusing on the United Kingdom and the United States. Yet, her analysis is still chained to elements of a “sound finance” and commodity money paradigm, the very constructs that the author disputes in making her case for money as a public resource.
While it is geared toward a popular audience, the book should be read by all heterodox economists because it represents an effort to broaden the discussion of financial instability and economic analysis in general, as well as to imagine and work toward new possibilities for social provisioning. The book is part of an emerging literature on social provisioning as a framework for heterodox economic analysis, and is particularly valuable because of its contemporary context.
Broadening the analysis of money has yet to be fully embraced by heterodox economists (Todorova 2009). Mellor’s discussion of the financial crisis, financialization, neoliberalism, and the nature of money and capitalism is grounded in a broader definition of the economy as a social provisioning process, encompassing non-market activities and the environment. This is what distinguishes Mellor’s book from the recent avalanche of writings on the financial crisis.
The first chapter is set to provide the ground for the rest of the book by asking the fundamental and often neglected question “What is money?,” bringing forward debt as a fundamental element of the capitalist economy. The author defines the central problem as the lack of direct public influence in the direction of finance and thus economic activity, and raises the issue of social justice. “If new money can be created out of fresh air, like fresh air it should be seen as a resource available to everyone. From a social justice perspective such resources should be shared, or at least their availability should be open to democratic consideration” (27). Later on, the author also suggests that such a democratic control could be a means of achieving socio-economic change toward a more ecologically sustainable economy (57).
In the second chapter the problem is further specified as one of “privatization of money.” The chapter is particularly illustrative of the contradictions present in the book. The problem most evident here is that the author adopts two competing approaches to national currency emission. First, she emphasizes the social nature of money and argues that the notion of the intrinsic value of money through association with precious metals is misleading (28-33). At the same time, she embraces the so-called seigniorage approach to money. That view logically leads to the notion that the value of the currency depends on the value of the commodity from which it is coined. That is the commodity or “metalist” approach to money which is inconsistent with the debt-credit (or social) view of money (Wray 2003). Such uncritical mixing of these incompatible paradigms diminishes the coherence of the book’s analysis, as the author does not fully abandon the commodity money and consequently the sound finance paradigm.
The book presents various references that the reader would find interesting to follow. However, in this variety one can find the main flaw: the analysis is built on a mixture of literature on money that emerges out of incompatible paradigms. From the outset the reader will find references to the literature on money as a social debtor-creditor relation, as well as a critique of the prevalent barter story of the origins of money. Authors such as Mitchell Innes, G. F. Knapp, Geoffrey Ingham, L. R. Wray, and John Smithin, who have provided an alternative to the commodity view of money as well as the theoretical and policy consequences of that premise, find places in the chapter. Given that, I was perplexed when a crucial element of this literature was not incorporated in the book, or at least critically addressed by the author. The omission is not trivial, nor is it esoterically academic; it has a direct bearing on the subject of the book: the possibility of money as a public resource.
The literature on money as a debtor-creditor relation has provided the basis of the so-called “modern money theory,” also called neo-chartalism, which combines credit and state approaches to money and Abba Lerner’s functional finance. A central point of the approach is that issuance of government debt by a sovereign state with a flexible exchange rate is a voluntary, imposed rule rather than a financial necessity. Consequently, such a state is not financially constrained in the same way the private sector is, and it does not need to borrow or to tax in order to engage in government expenditures. There is no funding reason for the sovereign state to issue government debt or to tax. Bonds provide a safe interest bearing asset and taxes can be used to drain money if the economy is overheating, to steer economic activity, as well as to give value to the unit of account (Wray 1998). This is the part that Mellor omits from the referenced literature without an explanation.
The author accepts the endogenous nature of money but pictures the sovereign state as an entity no different than a private agent, and in fact as an institution financially dependent on the private sector. She wants to break from the asocial commodity view of money as a veil but clings to the notion that the sovereign state is financially constrained, borrowing and taxing for the purpose of financing government expenditures. This is evident throughout the book. For example, when discussing financialization Mellor is worried that the state has lost its ability to create its own money and to collect taxes, which according to her leads to the state needing to borrow from the private banking sector that now is in charge of creating money (53, 97-8). The missing point here is that while the private sector creates money by lending, it leverages state money. It is surprising that Mellor does not address this point but instead proceeds by building on remnants of “sound finance” theory. This omission misguides the author to define the problem as the government’s inability to raise sufficient income from taxes, which according to her leads to delegating the creation of money to the profit-oriented financial sector, and thus losing seigniorage. While the author correctly points to the endogenous nature of money creation and to the drawbacks of for-profit driven financing of economic activities, she misses an opportunity to make the connection to the myths surrounding state finance and fiscal and monetary policy. Consequently, the book does not fully escape the orthodox view on money, and does not present a coherent analysis of the modern monetary system.
This omission diminishes the power of the engaging and overall good analysis of financialization, speculation, and the financial crisis in the following chapters. The reader will find valuable insights about rising household debt and growing financial fragility. An example is a discussion about how inflation in the housing sector, driven by changing financial practices, was habitually and wrongly perceived as capital growth and as adding to household savings. Yet, statements such as “A major impact of the shift from issue of money as notes and coin to the privatized issue of money as debt is that the state no longer has direct access to money issue” (97) exemplify both the misconceptions discussed above and how they impinge on the contemporary analysis presented in the book. In order to explain financialization the author resorts in the end to the supposedly reduced state’s ability to issue money. The author does not make any distinction between actual financial ability of the sovereign state to run deficits and create money for public purpose and an ideology of sound finance that stems from the commodity view of money. Without such a distinction the book’s argument that public action and social solidarity, not the market, can bring economic security, seems incomplete.
The author proposes that money creation should not be part of profit-making activity but rather done interest free and by not-for-profit financial organizations subject to democratic control. She gives examples with cooperative and community finance based on “debt-free grants.” The author conflates interest-free and debt free, as she divorces debt from credit. This is puzzling because she speaks of adopting the social theory of money, which views money as debt and credit simultaneously. This is yet another example of how her adoption of the seigniorage rather than sovereignty approach to money goes against the social theory of money she wants to pursue. One remains wondering if anything about the author’s vision would change if she had incorporated all the elements of the social theory of money.
To break from the narrow valuation of economic activity and to establish social provisioning compatible with a “sufficiency economy” is Mellor’s dream, the key to which she so timely points out, is making money a public resource. For this purpose, however, we need some further explorations about the nature of money.