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On the Centrality of Redemption: Linking the State and Credit Theories of Money through a Financial Approach to Money

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  • Eric Tymoigne

Abstract

The paper presents a financial approach to monetary analysis that links the credit and state theories of money. A premise of the functional approach to money is that "money is what money does." In this approach, monetary and mercantile mechanics are conflated, which leads to the conclusion that unconvertible monetary instruments are worthless. The financial approach to money strictly separates the two mechanics and argues that major monetary disruptions occurred when the two were conflated. Monetary instruments have always been promissory notes. As such, their financial characteristics are central to their value and liquidity. One of the main financial requirements of any monetary instrument is that it be redeemable at any time. As long as this is the case, the fair value of an unconvertible monetary instrument is its face value. While the functional approach does not recognize the centrality of redemption, the paper shows that redemption plays a critical role in the state and credit views of money. Payments due to issuer and/or convertibility on demand are central to the possibility of par circulation. The paper shows that this has major implications for monetary analysis, both in terms of understanding monetary history and in terms of performing monetary analysis.

Suggested Citation

  • Eric Tymoigne, 2017. "On the Centrality of Redemption: Linking the State and Credit Theories of Money through a Financial Approach to Money," Economics Working Paper Archive wp_890, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_890
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    References listed on IDEAS

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    1. William N. Goetzmann, 2016. "Money Changes Everything: How Finance Made Civilization Possible," Economics Books, Princeton University Press, edition 1, number 10662, December.
    2. John F. Henry, 2004. "The Social Origins of Money: The Case of Egypt," Chapters,in: Credit and State Theories of Money, chapter 4 Edward Elgar Publishing.
    3. Starr, Ross M, 1974. "The Price of Money in a Pure Exchange Monetary Economy with Taxation," Econometrica, Econometric Society, vol. 42(1), pages 45-54, January.
    4. Bell, Stephanie, 2001. "The Role of the State and the Hierarchy of Money," Cambridge Journal of Economics, Oxford University Press, vol. 25(2), pages 149-163, March.
    5. Mark S. Peacock, 2006. "The origins of money in Ancient Greece: the political economy of coinage and exchange," Cambridge Journal of Economics, Oxford University Press, vol. 30(4), pages 637-650, July.
    6. Michel Aglietta & Pepita Ould Ahmed & Jean-François Ponsot, 2016. "La monnaie. Entre dettes et souveraineté," Post-Print halshs-01372330, HAL.
    7. Ingham, Geoffrey, 2004. "The nature of money," economic sociology_the european electronic newsletter, Max Planck Institute for the Study of Societies, vol. 5(2), pages 18-28.
    8. Goldberg, Dror, 2005. "Famous Myths of "Fiat Money"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 957-967, October.
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    More about this item

    Keywords

    Credit Theory of Money; State Theory of Money; Net Present Value; Monetary Systems;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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