Geoffrey Ingham and “The Money Trap”

Two key aspects or functions of money:

1. As a convenient medium of exchange – can be anything; but that’s not enough, as exchange rates between multiple media of exchange would be variable and result in anarchy

2. As a unit of account – this is primary, as Keynes taught – and explains why Keynes was so interested in Babylonian currency:
“Money proper in the full sense of the term can only exist in relation to a money of account. 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 the description” (‘A Treatise of Money’, 1930, italics in original)

Economic theory has generally maintained that the aspect of money as a unit of account will ‘emerge spontaneously’ or naturally; Geoffrey Ingham  concedes this may have happened but money as a measure of value has never achieved stability without the imprimatur of the State.

Ingham looks to Max Weber’s concept of money, which was linked to his critique of socialism. In this Weber anticipated the Austrian critique – planners can never have enough information to organise production or distribution. Markets are the worst system except for all the others. It is social conflict that gives value to money. Value arises from the supply of and demand for resources: control of resources is the key. The Positive Money school wants money to be decided by the Great and Good – a committee. This is socialism: wrong in theory and foolish in practice. It is all to do with struggle – it’s in the struggle that value is found.

What is the difference between a means of exchange and a means of payment? How does a monetary standard develop? Carl Menger (1840-1921), the founder of the Austrian School, and Friedrich Knapp (1842-1926), the founder of Chartalism, quarrelled about this. For Menger it emerges spontaneously; for Knapp is was down to the State. Keynes said in effect that you need parties to sit down and agree on a definition of abstract value. Key question: who gets to choose the definition of money? He talked about “money as it ought to be” – he was dreaming of money being neutral:

The authority that decides on a common measure of value need not be a state. Ingham would agree that such networks can exist but what lifts money into an impersonal realm is a successful state.

Ingham resists endorsing any proposals to reform money. Crises are part of the adjustment process – how the system changes to reflect changing power relationships. Reform proposals are irrelevant as we don’t know how the balance between the state and private sector – the partnership – is being changed by the crisis. He again goes back to Weber: there are preconditions for the emergence of money. It depends on legitimate authority. For that you need the State to have a monopoly of the use of force and legitimacy. How did the Queen’s head come to be on Bank of England notes? Not without a struggle. It took hundreds of years for promissory notes to become bank notes. Debtors had to be forced to honour their promises. Debtor’s prisons were part of this. A great deal of violence was involved.

Implications for the proposals in The Money Trap

In my view, Geoffrey Ingham’s analysis supports one key theme of my book and challenges others:

1. A global monetary standard: The contemporary international monetary system with multiple exchange rates threatens rapid economic decline – as China suffered historically from the absence, for much of its history, of a unified currency with an agreed unit of account. Enormous transactions costs are incurred when there is no agreed money of account in a given territory. It prevents the growth of banking. Bureaucrats never have enough information to control the economy. The world economy is only starting to suffer the costs of our inability to agree on a common money of account.

GI reminds us that, as Weber insisted, capitalism depends on standardisation of all kinds of measures. In 16th century England there were 30 different definitions of an acre. Capitalism is about precise calculation, not making money. But there are many pre-conditions needed to allow such precise calculations to be performed. The distinctive feature of capitalism is the constant scanning of horizons by entrepeneurs to estimate prospective rates of return on an investment compared with the costs of borrowing money.

One condition is an agreed measure of value. That means, developed financial markets and banking are incompatible with floating exchange rates. To have the benefit from freedom of capital movements – for capital to flow to its most productive uses – you need a unified currency area. This has been a great benefit of empires. We have to find a modern replacement.

2. Role of state power: Ingham’s emphasis on the power of the sovereign state in enforcing its definition of money suggests such a global currency area is not feasible on a global scale because of the lack of a political counterpart – a global government. Barry Eichengreen, the US scholar, has often made the same point to dismiss reform proposals. Yet we can agree on standardisation in other fields – for international purposes. Just as English has become de facto the universal language of commerce, through network effects, why cannot the monetary unit?  The authority need not be a sovereign state – it can be a voluntary association of trades and investors with their own rules and disciplinary procedures. The key here is to separate the definition of the monetary standard from the production of money to that standard. The definition must be enforced by state poweer (international treaty). It need not involve a social conflict. All parties benefit. Production of money to the agreed standard can be left to competitive market.

3. The definition of the unit of account: I suggest, following Wolfram Engels (citations in my  book), that this be based on the market portfolio, the totality of valuations of all claims to real assets traded on global stock exchanges – i.e. a diversified equity basket. Political agreement would be needed on such a “real” anchor, but there no good reason why this should not be feasible. In this way everybody holding money would have a claim on the world’s productive resources. I think such a reform would be in accord with Ingham’s stress on money as a joingt venture between the state and the private sector.  The State would  define the monetary standard; private banks would produce it.

THE NOMINAL VALUE OF SUCH AN INDEX OF STOCK VALUES WOUL D BE HELD CONSTANT.  MONEY WOULD BE RE-CONNECTED  TO THE REAL ECONOMY. THE CONTRADICTIONS OF CAPITALISM THAT HAVE VEXED THINKERS FROM MARX TO INGHAM WOULD BE SUPERSEDED.