Where is politics in the money view?
The following was inspired by my attendance at a recent conference, Money as a Democratic Medium, where I gave a short talk.
The “Money View”, as regular readers of this blog will know, is my attempt to systematize a way of thinking that has a long history among practitioners, especially central bankers, but that has always remained a minority view among academics, and also to update that way of thinking in order to engage the central facts of our age, namely financial globalization and global financialization. Mostly I have been concerned to bring attention to the analytical importance of the settlement constraint, which Minsky called the survival constraint, and also to the centrality of the dealer function in determining asset prices of all kinds. This project has taken me deep into the institutional details of the present monetary and financial system, so deep that sometimes it may be hard for readers to keep in mind the big picture. That big picture is the subject of the present post.
Here in brief are three big-picture themes that I saw running through the entire conference, my vision admittedly shaped by the money view lens that I brought with me to the conversation. I state the themes as succinctly as I can, and then elaborate on each one.
- The monetary-financial system is inherently hybrid, both public and private, each dimension with its own source of power.
- The points at which these two dimensions meet are under persistent contestation, which is to say inherently political, and inherently in need of management.
- A central issue of contestation is elasticity versus discipline, elasticity for me and discipline for you, alchemy of banking and money funding for me, austerity and borrowing/payment for you.
I take these to be empirical features of the system, today but also throughout much of the past, though there is considerable variation over time and place, variation in the balance of public and private, and variation in the forms that contestation takes. Here is where we can locate the normative or aspirational aspect of various monetary reform projects. How can we get elasticity for the projects we favor, and discipline for the projects we oppose? Sometimes that will involve making common cause with a public authority, sometimes with a private agents, many times some kind of hybrid.
In my reading of history (Boyer-Xambeu, Braudel, Tilly), money has arisen from two different sources, one public and one private. The systems erected from these origins–in both cases more or less deliberate constructions by collectivities, albeit different collectivities–developed for a long time separately, but at a certain stage merged into the hybrid that we see today. Instead of king’s money and merchant’s money, with an exchange rate between them that fluctuates over time, we have state money and bank money that trade at par. From a money view perspective, the important thing is that both have their origin in a dependable positive cash flow, so that IOUs issued tend to return to the issuer as means of payment; that’s how credit becomes money.
Both issue money, but it is important to keep in mind the two underlying origins, and their separate logics–Tilly emphasizes coercion (taxes) by the state, and exploitation (profits) by the city, though perhaps democratic legitimacy for both is more relevant today?–because the boundary between the two is subject to persistent contestation, and the outcome of that contestation varies widely over time and place. What exactly is that contestation about? Two things.
First, the alchemy of banking. The elemental banking operation is a swap of IOUs, a non-tradeable IOU (loan) for a tradeable one (bank deposit). I say “alchemy” in order to draw attention to the way that the recipient of the loan is thereby given access to social resources without any prior earning or saving. We are talking here about new purchasing power that arises from nothing, or more precisely from a mere balance sheet operation. Suffice it to say that everyone would like access, even monopoly access, to this elemental magic. And in fact we do observe some extreme cases of monopoly in history. War finance quite typically involves a state monopoly, which can sometimes flip over to rather extreme private monopoly in peace time. But most of the time, and in most places, there is some intermediate balance between public and private, and balance also between various competing public uses, and between various competing private uses.
Second, money funding. The alchemy of banking is a source of elasticity, but the problem of ultimate funding is a source of discipline. The question is whether the new purchasing power stays in circulation, held willingly by wealth holders as part of their portfolio of assets of various kinds, or whether it returns to the issuer as payment for one of the issuer’s own financial assets. Concretely, think about mortgage finance. [What follows is a compressed version of a longer argument.] One way to fund a new mortgage loan is to securitize it, and use the security as collateral for issuing a money market instrument purchased by a money market mutual fund as the asset counterpart of its short-term par “deposit” liabilities. That’s money funding–the money comes into existence at the moment of the loan, and then stays in existence for the duration of the loan. But another way to fund a new mortgage loan is to securitize it, and sell the security to a pension fund which holds it as the counterpart of its long-term pension liabilities. That’s credit funding–the new money is returned to issuer, and the expected yield on the new credit has to satisfy the wealth holder. These are the two limiting cases, and in practice the typical case is mixed, part money and part credit. For present purposes, the important point is that everyone would like their credit to be funded preferentially by money issue, rather than having to bid for funds against other competing uses. This is the second dimension of contestation.
The central point is that everyone wants access to the alchemy of banking not only as a source of immediate payment but also as a source of permanent funding. But only in very special cases will wealthholders be willing to hold money claims sufficient to fund all credit issues. (Economic development sometimes presents such special cases, as emphasized by H.D. MacLeod among others.) In general, marginal borrowers will have to bid for funds, and everyone wants that marginal borrower to be someone else. Which raises the question, who gets access and who does not, and on what grounds? Here we come face to face with the question of legitimacy, and in particular the question of the legitimacy of central banks (as Tucker) which, as issuers of the ultimate means of payment, are the ultimate arbiters of the contested use of the alchemy of banking.
The system is hybrid, and so are modern central banks, which operate as both government banks and bankers’ banks. The present crisis of legitimacy comes from the dealer of last resort operations of the Fed and other central banks during the financial crisis (Mehrling), which essentially involved blessing tottering private money funding operations for securitized mortgages by taking them onto central bank balance sheets. The alchemy of commercial banking is one thing, always subject to the discipline of ultimate funding as we have seen, but the alchemy of central banking is even more powerful magic, especially so in times of crisis when wealthholders seek to shift their portfolios strongly out of credit and into money. Such a private portfolio shift would have been impossible without the willingness of the central bank to expand its own holdings of credit by expanding its own issue of money–acting like a dealer to absorb an imbalance in flow supply and demand for a particular asset. That’s how central banks put a floor on the crisis, so achieving a financial equilibrium without a firesale of credit assets.
The problem is that, in so doing, they seem to have created a kind of political disequilibrium by intervening so strongly on one side of a persistent contestation. It is this political disequilibrium that has given rise to calls for sovereign money, which we can understand as appeals to shift the balance of public-private hybridity. I have in mind here specifically MMT, Positive Money, and Vollgeld. In effect, all three appeal to central banks to give greater attention to their role as government banks, and less to their role as bankers’ banks, and seek further to enlist government on their side in doing so; what government would not want its debt to be afforded preferential money funding treatment? The whole point though is to get elasticity for the projects they favor, and discipline for the projects they oppose.
From a money view perspective, the most important point to emphasize is that the central bank is an inherently hybrid institution, and that central bank management is fundamentally about managing the hybridity of the larger system atop which it sits. Most recently, the Taylor Rule and inflation targeting emerged as an indirect, and politically acceptable, way of managing that hybridity, but the crisis has disrupted that settlement and left us looking for an alternative. As a wise man once said: “Money will not manage itself, and Lombard Street has a great deal of money to manage.”
Boyer-Xambeau, Marie-Therese, et al. Private Money and Public Currencies, The 16th Century Challenge. M.E. Sharpe, 1994.
Braudel, Fernand. The Wheels of Commerce. Vol 2 of Civilization and Capitalism, 15th-18th Century. University of California Press, 1992.
Mehrling, Perry. The New Lombard Street, How the Fed became the Dealer of Last Resort. Princeton, 2010.
Tilly, Charles. Coercion, Capital, and European States, AD 990-1992. Basil Blackwell, 1990.
Tucker, Paul. Unelected Power. The quest for legitimacy in central banking and the regulatory state. Princeton, 2018.