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My interest in the topic of the relation between money, finance, and state power stems from my experience of entering into adulthood in the United States in the aftermath of the 2007 financial crash, feeling intensely the socially disruptive effects (and affects) of this event, and coming to the conclusion that it might be in my interest to attempt to understand them.
Colin Drumm, The Difference that Money Makes: Sovereignty, Indecision and the Politics of Liquidity
Thus, from the jump, Drumm identifies the nexus of his inquiry as being firmly aligned with CasP’s, but his (and his dissertation’s) focus on “money as a thing” is something that, to my knowledge, CasP theory has largely ignored in preference for studying finance, the domain of capital.
As we know, CasP theory is premised, in part, on the observation that, “in the real world, the quantum of capital exists as finance, and only as finance,” but I would argue all capital begins as money, and Drumm’s work demonstrates that pre-capitalist money is of particular importance to understanding the state of capital as well as the nature of capital itself (and how it came to become power).
I previously discussed one of the more innovative ideas in the first chapter of Colin’s book. This time, I want to refer you to an innovation he introduces in Chapter Two: the idea of pre-capitalist money as an “option,” specifically as an “option to rebellion.”
NOTE: Drumm does not use the term “pre-modern” money. His focus is on medieval money in the form of coins made of gold or silver, but he draws a temporal border between money as it was before the establishment of the Bank of England in 1694, and as it became thereafter (“modern money”). Importantly, he views the formation of the Bank of England (and the creation of modern money) as a solution to a political crisis, and he argues that understanding that historical crisis is critical to understanding modern money in a way that Modern Monetary Theory (MMT) studiously ignores to everyone’s detriment. Drumm is no fan of MMT.
The term “option” as used by Drumm is a financial one, and if you accept his thesis that pre-modern money was an option, then money and finance were one and the same before 1694, a fact that had several consequences that Drumm explores at length.
Drumm’s conclusion that pre-modern money represented a financial (and political) option is based on the recognition that pre-modern coins minted of gold or silver had two different values: the currency (or nominal) value and the metal (or intrinsic) value. Within its country of circulation (the “inside” option or bid), the currency value of a minted coin always exceeded the metal value, i.e., a coin nominally worth a pound sterling always contained less than a pound sterling of silver because the sovereign (including his mint) charged a percentage for exchanging specie for currency. Different countries/sovereigns charged different exchange rates, giving rise to “spreads” between sovereigns (the “outside” option or ask). If a spread between sovereigns (inside and outside options) achieved a “breaking point” for either gold or silver coins, one sovereign could “attack” the other’s mint in a way that siphoned gold and/or silver to the attacker.
Why does any of this, as interesting as it is, matter? Because the fundamental nature of pre-modern money put the king and other elites in conflict with each other. Money was necessary to fund wars, but it was also necessary to create a national economy, i.e., a tax base. During war, medieval nations ran a deficit, but during peace, to prepare for the next war the king had to hoard the very source of wealth that was the basis of the economy: money. Taking silver and gold money out of circulation naturally depressed the economy (and pretty much explains why there is no reason we should even think about calculating GDP for pre-modern societies), but it also was done largely at the elites’ expense. This was true even during the era of “agrarian capitalism” that stretches into the early 16th century.
The simple truth is pre-modern money inhibited economic growth because its function as a medium of exchange competed with its function as a store of value, and the latter function always won because the harm caused by a lack of economic growth was born primarily by the commoners (or proletariat).
The question was, who should benefit from the stored value, the king, or the elites he was trying to tax? As Drumm argues, pre-modern money (money as finance/capital) gave the elites the option to rebel instead of paying money as taxes. And what a glorious thing the English Revolution of 1688 was.
So this brings us to modern money and how it broke with its predecessor, pre-modern money.
Drumm recognizes that we are asked to view modern money as if it were pre-modern money, that is, as a thing that “has the three functions of being a store of value, medium of exchange, and unit of account.” But he rejects this characterization of modern money:
Believing this requires an active suspension of attention to what there really is. It is clear even to a casual observer of 20th century monetary history that “money” has not served as a particularly good or reliable store of value given the numerous and sometimes infamous episodes of both abrupt and secular inflations which characterize the period. This seemingly clear falsification of the concept can, however, be ideologically recuperated by identifying this situation as an anomalous state of affairs which differs from how money “should be” according to its essential concept. In the liberal narrative, the failure of 20th century monetary systems to be a store of value is a symptom of the folly of populism and the inherent danger of any and all state power over money, while in Marxist narratives it is the result of a progressive abstraction of the monetary symbol from its material commodity substrate, taken to be gold. In both theories there is the sense that the past is a past of commodity money, in which money has a natural equilibrium due to its articulation with the real in the form of the metallic essence, while the present is the present of paper money which has “lost touch” with the real of Value and therefore has been stripped of its capacity to store it.
I would argue that the advent of modern money cleaved the function of storing value from the concept of “money” and assigned it to accounting (financial) records, i.e., to capital. While both money and capital reflect the same unit of account, currency, modern money serves as the medium of exchange for commodities, capital serves as the medium of exchange for financial (capital) assets, and only capital serves as a store of value. In this way, modern money allows wealth (power) to be accumulated as capital without removing money from circulation and harming the commodity market, what most think of as the “real” economy. Simultaneously, the accumulated wealth (capital) is used as the medium of exchange in the “fictitious” financial economy to control the real economy.
NOTE: the capital markets are just as Leibnitzian as the commodity markets, but in a way that is determined by the quantum of capital already possessed by participants, not by their liquidity preference (which affects annualized rates of return, not the opportunity to participate in differential accumulation).
Anyway, Drumm’s work seems important to both MMT and CasP, but for different reasons. MMT needs to reconsider whether the modern “normal” is worth keeping within the broader context of what else changed beyond the change in the nature of money . The money-capital duality enforces inequality and needs to be reconsidered, not embraced (hint: look at the history of taxation and the nature of what is taxed). Similarly, CasP needs to consider the interaction between money and capital, which are related but not the same. According to the rules of capitalism, the power of capital can be constrained through its relationship to money, but only if we fully understand that relationship.
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Hi Scot!
really delighted that you are reading my work and picking up on what matters about it.
i just want to point out one small correction: as I show in chapter 3, the negative economic effects of a scarcity of money is not just borne by the “commoners” as in proletariat, but also by the “commons” as in the non-landed mercantile interests in the city of london. perhaps in the revised version i should telegraph this more explicitly in chapter 2.
cheers!
C
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Colin, if you are still hanging around the forum: Congrats on the dissertation, and I am looking forward to reading it.
Conceptual divides in an economic theory can be messy in reality — so I feel the pain of working hard to make a clear separation between “pre-” and “post-“. This is a completely naive question: are we biased to imagine that only modern money cannot be a store of value? Cycles of inflation and deflation can (a) be volatile and (b) big enough that generations of people are in one wave of inflation.
If pre-modern money was a store of (precious metal) value, how should we interpret the high volatility of inflation in previous centuries? Are these reflections of volatility in the production of sterling and gold?
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I am skeptical about the construction of price level indices for these periods so i would want to get very into the weeds about how exactly the index has been constructed. what is the basket of goods and what is the source material?
In general, deep price history seems to have a two-phase attractor — there are periods of relative stability, and there are periods of “price revolution.” One tricky thing about studying price revolutions is whether we ought to measure prices in relation to silver or in relation to the unit of account — so in the sixteenth century, nominal prices are rising, but the silver content of the unit of account is also falling, and to fully understand what is going on we would need to disaggregate those things.
Price level history is really not my expertise although I do have some thoughts about it. The historical debate is between those who see price level changes as always driven by “real” variables such as demography, and those who see the effects as monetary. I suspect that both things probably happen. But things get complicated as in the case, for example, of the sixteenth century and the American treasure, where it probably the *bimetallic ratio* that matters more than simply the *quantity* of money, which is what moderns are accustomed to think about.
I’d be very interested in working with more data-oriented CasP researchers on this topic going forward. But we have to begin by having a materialist/institutional picture of the relevant monetary systems, which is what my work is about. My research presents a theory of the relationship between the mints and the exchanges that has not been previously fully understood.
So the question about the price level or Mehrling’s “fourth price of money” is somewhat unresolved in what I write in the dissertation…
“If pre-modern money was a store of (precious metal) value”
here I can tell you something more for certain, which is that the biggest issue was generally the hoarding of money. monetary interventions such as debasements are intended to draw hoarded coins out of hoards and to the mint. I write about this in the dissertation. modern money is fundamentally different from coinage in that coins are not fungible — if i have a good coin in my floorboards, there is nothing the king can do to remove silver from it other than tempting me to dig it up and bring it to the mint. not the case with modern reserve notes, which lack an “outside option” to melt and thus derive their value purely from the “inside option” of their legal tender status.
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Drumm writes: “monetary interventions such as debasements are intended to draw hoarded coins out of hoards and to the mint.”
This doesn’t make sense. Why on Earth would debasement of the circulating coin encourage one to exchange good coin for bad? During medieval times point with bulk silver could have to minted into coins for a fee. But if you already have coin there is no need to remint it.
I am no expert, but my understanding has always been that business between parties with a long-term relationship (neighbors, relatives, friends, trading partners) was largely conducted with credit (credit preceded coinage by millennia). Coin, when available, would be used for periodic settling of accounts. Coin would also be used for business with people with whom one had a short-term or adversarial relationship (e.g. travelers or soldiers at a tavern or dealings with the state such as paying taxes). So, monarchs producing diluted coins to meet military payrolls would find themselves getting these diluted coins back as taxes, that is, bad money drives out (of circulation) good money (Gresham’s Law). The good money might no longer circulate, but it could still be used to settle credit imbalances, so its withdrawal would not necessarily affect commerce.
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Hi Scot! really delighted that you are reading my work and picking up on what matters about it. i just want to point out one small correction: as I show in chapter 3, the negative economic effects of a scarcity of money is not just borne by the “commoners” as in proletariat, but also by the “commons” as in the non-landed mercantile interests in the city of london. perhaps in the revised version i should telegraph this more explicitly in chapter 2. cheers! C
Thanks. If I had thought things through, I would have realized that you were referring to the commercial interests, as well.
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Drumm writes: “monetary interventions such as debasements are intended to draw hoarded coins out of hoards and to the mint.” This doesn’t make sense. Why on Earth would debasement of the circulating coin encourage one to exchange good coin for bad? During medieval times point with bulk silver could have to minted into coins for a fee. But if you already have coin there is no need to remint it.
There’s a link to the dissertation above. Chapters 2 and 3 are the most relevant to your question.
My take is very simple. Not all subjects of a kingdom have an “outside option,” i.e., they don’t have the option to travel to another state and melt the coins down for a better price. So, they have only the “inside option,” the ability to spend the coins as currency within the state. For them, having more currency to exchange is better. Indeed, if money is hoarded instead of being circulated, the economy suffers.
And that’s the heart of it: money as store of value competed with money as a means of exchange, and as commercial interests and domestic trade rose to prominence while feudalism waned and capitalism awaited birth, finding a solution to a lack of sound money supply (as opposed to sound money) became of paramount importance. Modern money, i.e., fiat money, was the solution the English invented in 1694 with the establishment of the Bank of England.
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I agree with your second paragraph. By the late medieval period money of various denominations had come into use, and people in cities, at least, were using money regularly. But I am not sure I buy the idea that when money was in short supply, like in the 15th century, that the economy was depressed. For ordinary people times were quote good in the 15th century, or so I understand. Times were not so good for elites, for whom the chroniclers write, so an earlier generation of medieval scholars had characterized the 15th century as one of depression. The economy had shrunk of course, but so had the population to a greater degree.
If we look at an earlier time, we find things like Bolton “demonstrates that, while population growth from 1086 (Domesday Book) to 1300 at least doubled and may have tripled (from 2.0/2.5 million to 5.0/6.0 million), the money supply expanded by 27 to 40 fold:” A 13-fold growth in the amount of coinage per capita does not imply that nominal GDP per capita in England increased by that amount. At the beginning of that period a large share of economic activity was mediated through informal credit between people who know each other (economists often call this “barter” but it’s not, the credit may be measured in terms of coinage, but with coins lacking or of inconvenient denomination, an actual exchange of coins may not happen).
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Drumm writes: “monetary interventions such as debasements are intended to draw hoarded coins out of hoards and to the mint.”
This doesn’t make sense. Why on Earth would debasement of the circulating coin encourage one to exchange good coin for bad? During medieval times point with bulk silver could have to minted into coins for a fee. But if you already have coin there is no need to remint it.
I am no expert…”
The last bit is definitely correct 😛 This is a fundamentally basic point to understand about the history of debasement.
Debasements are enticements to dishoard coins for a very simple reason: by selling old, good coins to the mint for new, bad coins, the seller will receive a profit in domestic unit of account. Thus, if I owe a debt for a pound sterling, and I have 240 good old pennies, and the mint is offering to purchase those old pennies for 250 pence in new bad pennies, I may want to hit the window even though the 250 pence in new bad pennies have less silver than the 240 good old pence. That is because I can now pay my debt for a pound and have 10 pence left over. If I had paid the debt with the good pennies, I would have nothing. Now, it is possible that my counterparty may wish to accept my good old pennies at a premium, rather than be forced to accept the new bad pennies instead. But if he wishes to enforce payment against me in a court, I always have the option to pay the 240 bad pence instead of the good ones.
I hope you can now see why a debasement is an anti-hoarding monetary policy intervention. For more details, you can consult the dissertation.
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” my understanding has always been that business between parties with a long-term relationship (neighbors, relatives, friends, trading partners) was largely conducted with credit (credit preceded coinage by millennia). Coin, when available, would be used for periodic settling of accounts.”
so now you can see why a debasement is a unit of account devaluation for legally enforceable debts. the unit of account refers to a coin, and if the legal definition of that coin changes, so does the meaning of the unit of account.
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I am no expert, but my understanding has always been that business between parties with a long-term relationship (neighbors, relatives, friends, trading partners) was largely conducted with credit (credit preceded coinage by millennia). Coin, when available, would be used for periodic settling of accounts.
Consider reading Casualties of Credit by Carl Wennerlind.
On the one hand, Wennerlind confirms your understanding of how credit was employed in England prior to the creation of the Bank of England in 1694:
Despite attracting much needed specie from abroad, England was still suffering from a palpable lack of an adequate currency. Historian C. G. A. Clay describes how “demand was affected as it became increasingly difficult for most people either to buy or to sell, and for employers to pay Part of the problem, Clay notes, was that there “was no alternative to the silver coinage for everyday purposes: certainly the lack of confidence in any possible issuing authority made paper money inconceivable.” While it is certainly true that there was no widely circulating credit currency in England at the time, credit was far from absent. As historians Eric Kerridge and Craig Muldrew have respectively shown, merchants, tradesmen, shopkeepers, farmers, and laborers developed a number of credit mechanisms to alleviate the effects of the scarcity of money. Indeed, Muldrew claims that credit was so pervasive in early modern England that “almost all buying and selling involved credit of one form or another.” Although silver coins were still necessary for certain transactions, such as exchanges between strangers, for payments of rent, tithes, and taxes, as well as for certain overseas exchanges, nearly all people engaged in credit transactions on a regular, if not daily, In fact, Muldrew concludes that the deficiency of coin was so extreme that credit came to serve as the primary means of exchange, while the coinage system operated as the unit of account and final means of settlement.
England, like the rest of Europe, employed a wide array of credit instruments by the seventeenth century. Internationally, the long-serving serving bill of exchange facilitated both commercial transactions and loans, while personal sales credit was the most ubiquitous form of domestic credit.
On the other hand, Wennerlind explains the primary reason credit was used that way was because of the scarcity of the money supply due to hoarding and trade imbalances.
The aforementioned credit instruments provided much needed relief to the overburdened coinage system. Yet the London money market was still comparatively primitive, with bills, bonds, and pledges enjoying only limited negotiability. Legal obstacles, awkward denominations, and the lack of an impersonal exchange prevented the development of a widely circulating credit currency. If credit were to provide the solution to the scarcity of money problem, an altogether different type of credit instrument had to be developed.
The state also tried to improve its financial flexibility through the use of credit, but experienced only limited success. The amount of loanable funds available in the London money market was too small to satisfy the government’s needs and the term structure offered was too short to be of much use to the state.” The primary reason, however, why lenders were hesitant to extend loans to monarchs was the latter’s immunity from legal redress. The Tudors had therefore been forced to rely on loans from foreign merchants in Antwerp, at least up until the 1570s, after which the English Crown essentially stopped borrowing from abroad, focusing instead on the imposition of forced loans at home. While Elizabeth used this source of revenue sparingly, for example, to finance the war on the Spanish Armada, James and Charles exploited it more extensively. When the early Stuarts managed to borrow in the domestic tic money market, it was often through some measure of coercion or promises of favors. They targeted noblemen, well-connected individuals at court, and prominent government officials, such as Sir William Russell, Treasurer of the Navy, and Lionel Cranfield, Lord High Treasurer. The state also called on wealthy individuals, like the merchant-financier financier and unofficial paymaster Philip Burlamachi, syndicates of prominent merchants, and corporations, like the Merchant Adventurers and the Corporation of London, to extend large sums of money. Yet, despite the best efforts of the early Stuarts to raise money, they often fell short of their aspirations. And, even when they did manage to raise some money through credit, the instruments issued were not transferable and thus did not serve to augment the currency. Despite England’s relative success in attracting silver from abroad and developing credit mechanisms, the nation was still searching for a way to once and for all put an end to the troubles caused by its inadequate currency.
So, credit did not expand the domestic money supply, it just delayed final settlement. By contrast, debasing the currency did, although with potential consequences internationally.
The Bank of England solved the problem with the invention of fiat money in the form of credit-money, i.e., money that is created through the extension of credit.
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Credit is only a substitute for coin to the extent that the payments graph is symmetrical. the difference between money and credit is an index of the asymmetry in the graph of the monetary economy. the insufficiency of money in the medieval economy is not relative to “exchange” simply put, but relative to the need to finance clearinghouse drains
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