At some point in our childhoods, we have all wondered why, when things get expensive, our national governments don’t simply print more money to purchase them? The nearest adult, probably a parent, responded with the simple explanation: inflation. If you print more money, the prices will rise with the supply of money.
Alongside familiar pillars of ideological hegemony such as the church, monarchy, and the state, the currency is excluded from inclusion perhaps because of its supranational and, simultaneously, instrumental character. For a non-specialist observer, unfamiliar with the opaque jargon and ideological machinations of the world of finance, the question “what is money?” becomes so daunting to answer that inevitably it is left to “the experts”. I wish to provide an explanation of money that is sufficiently accurate, intellectually accessible, and broad in scope so that we may shake off this fear of politicising money.
The Cross of Gold
What came first: debt or money? Our intuitive response to this question reveals the economic assumptions instilled into us. The correct answer, according to David Graeber, is debt. For coinage to become the medium of commerce, it was necessary to develop sufficiently accurate scales that could be used to denominate metal-based coinage into practical quantities for daily commerce. Even once formal currency began to be used for commodity exchange, its adoption was variable and historically contingent. Throughout much of the feudal era, the vast majority of society did not settle obligations with a currency but rather through goods or services in kind. The widespread adoption of currency was facilitated by the growth of the urban economies of Ancient Greece, Ancient Rome, Byzantium, and during feudalism in the free cities that pocketed the vast agricultural economy. Whenever economic depressions occurred, coinage retreated and payments in kind proliferated further.
Coinage had to be acceptable as a form of payment between societies and civilisations for trade of goods and services that were unavailable internally. This transnational acceptance of a unified metal payment system was facilitated by the spectacular conquests of Alexander the Great. He oversaw the standardisation of Persian royal bullion and injected it into the commercial networks of his vast empire, thus bringing a system of payment common in Athenian realms to much of the known world.
Precious metals maintained a psychological grip on civilisations longer than any religion or system of rule. Discovering easily mined reserves of gold or silver transformed the fates of imperial realms, yet their inevitable exhaustion signalled their imminent fall. Within three decades of the end of the Second World War, at a stroke, gold’s dominance was permanently consigned to history when Richard Nixon broke the dollar’s peg to gold. Had Augustus attempted such a policy at the height of Roman power, it would have caused a cataclysmic implosion of the Roman state. Why should Richard Nixon have been so fortunate?
This is the level at which we should approach the currency question as opposed to the more immediate, impenetrable, technically opaque policy debates conducted by economists, central bankers, and finance ministers. It may be attractive to speak endlessly about financial instruments, flows of capital, interest rates, sovereign debts, and much more for the bookish among us. However, to build mass support for a 21st century ecologically oriented, internationalist socialist project we have to cut across the technical minutiae to elucidate the function of money as an allocative force.
In that sense, currency is an imperfect translator. The convertibility of silver mined in Silesia and Sardinia for silk and ceramics produced in China. What is the essential utility of precious metal, mined with such great effort and at great human cost? What is difference in utility between a cup made of silver versus a cup made of porcelain? In a more modern sense, what is the difference in utility between a cup of gold versus a year of academic research? The inherent impossibility of such tasks in a given time, place, and historical context is thus simplified by the magical, fiat value encoded in money, whether backed by precious metal or pegged to the value of a dollar.
As capitalism became more international in scope, a complex system of confidence wagering developed where all major currencies in circulation had to demonstrate convertibility with precious metal – the gold standard. But this replicated the problems of more primitive times. What happens when everyone simultaneously wants to convert cash to gold? In essence, this meant that the world’s economy was held hostage to the amount of gold that could be mined, purified, and locked in a vault; a truly absurd way to conduct economic affairs when seen this way.
The truly intercontinental political and economic integration forced upon the world by the violent convulsions of the Second World War enabled the technical possibility of fiat currency. But the need for magical belief did not die with gold. Instead the burden of responsibility fell on the most potent symbol of security (in every sense of the word): the US dollar. The material source of this confidence, I would argue, is in the potency of the politico-military infrastructure erected by the United States after World War II.
The Church contended with the popular pressures of the Reformation. Absolute monarchs gave way to parliaments of societal elites who in turn succumbed to the demands for universal suffrage. In each case there was a serious clash between values and ideas leading to a transformation in the nature of each of these institutions. Monarchs, even where they exist today, first lost their status as divine appointees and then their political power. Parliaments steadily took the sovereign position of the monarchs they replaced and sought legitimacy through popular elections. But money has escaped unscathed from such drastic reformulations of purpose. Except for William Jennings Bryan’s famous attempt to adopt a bimetallic standard, to the best of my knowledge, changes to the currency system have never been the focus of political agitation.
There is no willingness in economics to centre humanistic aims in the allocation and application of money. The shift towards a system of floating, fiat currencies did not facilitate a shift towards a more agile way of valuing socially productive work and commodities, but rather a hyper-flexible system of leveraging that could expand as far as belief would allow i.e. market confidence. Where previously financial systems traced a tether to a discrete reserve of gold, now they only needed to command confidence, which could be drawn from various sources.
Chasing the “confidence fairy”, a term coined by economist Paul Krugman, was more central to governments following the 2008 crash than the very material needs of human development. But in the aftermath of the crash the bourgeoisie undertook a project to re-allocate resources and remodel power relations in society through the levers of money. In doing so they birthed the demons that haunt us today: the far-right, accelerating ecological collapse, war, and disease.
With this philosophical scaffolding we can begin to assess inflation as laypeople. Central banks across the world issued new currency in the trillions and reduced interest rates to near 0% in response to the 2008 Crash. Yet consumer price inflation stayed lamentably low. And so we may ask ourselves, where did the money go? Why is there inflation now, over a decade after the sharpest pulses of money were injected into the arteries of the world economy?
Arguably the most pressing case of inflation in the advanced economies of the Global North today is the unaffordability of housing. More generally, the value of assets – the purchasable entities that themselves are a source of money – have risen at an unprecedented pace over the period after the crash. By contrast, the prices of commodities in our daily lives have until very recently stayed relatively stable. This was not an accident.
Where on the one hand, wealth – in the form of non-liquid assets – became expensive, pulling up the draw bridge of “social mobility”, on the other a passive consent was manufactured through low inflation. Vast sums of currency did not “trickle down” into productive investments that could lead to a breakthrough into a new dynamism but instead entrenched an even more static economic settlement.
As a result, wealth inequality is today worse than inequality recorded in the period leading to the French Revolution of 1789. This alarmism ought to be seen in the right context. The value of wealth, in the form of assets that cannot readily be exchanged for cash, is inflated precisely because the post-Crash money issuing was largely allocated to purchasing the same limited pool of assets. Demand for these assets outstripped the supply of their creation, leading to inflation. But this is a paper tiger in the making, leaving entire financial systems at risk of collapse if the value of these assets is brought back to earth. All the credit that was then issued by central banks, lent out by intermediate institutions, incorporated into incomprehensible leveraging schemes, would evaporate – an economic implosion in the making.
This is one example that demonstrates that inflation is a consequence of varying sets of conditions that at their most immediate level manifest as an acute mismatch between demand and supply. But the mismatch itself is an effect, not a cause. Ultimately, it is not the oversupply of money that causes inflation, it is the choice of what that money is allocated for that is determinant. Similarly, the other hallmark of the post-Crash economy – the reduction in the value of human labour through deregulation and insecurity – is a result of the absolute unwillingness to allocate the liquidity injected into the world economy towards productive labour.
The most acute examples of this are in sectors where gender, race, and class intersect: custodial staff, care workers, nurses, fruit pickers, teachers etc. The inability of these categories of workers to purchase more, often in times of historically low unemployment, explains in part the low consumer price inflation of the post-Crash period. If the post-Crash stimulated had stimulated, for example, a green economic renaissance, workers would have been presented with an opportunity to bargain for better incomes. Furthermore, healthy levels of inflation around the 3% per annum mark may have been achieved with the increasing economic demand. But this did not happen precisely because there were no means of exerting popular sovereignty over the issuers of money.
The prevalence of money as a lubricant of commerce was achieved thousands of years ago in part through the violence of conquest. Though monetary practices have evolved over this period, we are yet to develop a popular understanding and purpose for money. But the nature of money is not nearly so esoteric as we imagine once we see it as an allocative force. It is up to the working class to remake the value system according to its own priorities in a world facing ecological collapse. Reformulating the concept of money under a framework of humanist goals will help us develop a modern eco-socialist political program that transcends the bureaucratic centralist shortcomings of 20th Century socialist planning. We must dare to envision a new money fit for a post-capitalist world.