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Banking, Finance, and Money: A Socioeconomics Approach

  • L. Randall Wray

This paper briefly summarizes the orthodox approach to banking, finance, and money, and then points the way toward an alternative based on socioeconomics. It argues that the alternative approach is better fitted to not only the historical record, but also sheds more light on the nature of money in modern economies. In orthodoxy, money is something that reduces transaction costs, simplifying "economic life" by lubricating the market mechanism. Indeed, this is the unifying theme in virtually all orthodox approaches to banking, finance, and money: banks, financial instruments, and even money itself originate to improve market efficiency. However, the orthodox story of money's origins is rejected by most serious scholars outside the field of economics as historically inaccurate. Further, the orthodox sequence of "commodity (gold) money" to credit and fiat money does not square with the historical record. Finally, historians and anthropologists have long disputed the notion that markets originated spontaneously from some primeval propensity, rather emphasizing the important role played by authorities in creating and organizing markets. By contrast, this paper locates the origin of money in credit and debt relations, with the money of account emphasized as the numeraire in which credits and debts are measured. Importantly, the money of account is chosen by the state, and is enforced through denominating tax liabilities in the state’s own currency. What is the significance of this? It means that the state can take advantage of its role in the monetary system to mobilize resources in the public interest, without worrying about "availability of finance." The alternative view of money leads to quite different conclusions regarding monetary and fiscal policy, and it rejects even long-run neutrality of money. It also generates interesting insights on exchange rate regimes and international payments systems.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_459.

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Date of creation: Jul 2006
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Handle: RePEc:lev:wrkpap:wp_459
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  1. Karl Brunner, 1968. "The role of money and monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 8-24.
  2. N. Gregory Mankiw, 1989. "Real Business Cycles: A New Keynesian Perspective," NBER Working Papers 2882, National Bureau of Economic Research, Inc.
  3. ., 2004. "P," Chapters, in: An Eponymous Dictionary of Economics, chapter 16 Edward Elgar.
  4. Stephanie Bell & John Henry & L Randall Wray, 2004. "A Chartalist Critique of John Locke's Theory of Property, Accumulation, and Money: or, is it Moral to Trade Your Nuts for Gold?," Review of Social Economy, Taylor & Francis Journals, vol. 62(1), pages 51-65.
  5. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  6. Geoffrey W. Gardiner, 2004. "The Primacy of Trade Debts in the Development of Money," Chapters, in: Credit and State Theories of Money, chapter 6 Edward Elgar.
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