A central insight of Christine Desan’s constitutional theory of money is that, unlike the Lockean view, it is not pre-political but is deeply undergirded by legal-institutional, and thus political, factors. By carefully explaining her stakeholder theory of money, discuss how paper money eventually came to be established from the free minting system in England. A good essay will deal with following issues:
The nature and significance of The Case of Mixed Money and The Case of the Bankers.
Despite the centrality of the state (public authorities) in the money creation process, in what ways does Desan show that her framework is not “top down” but that private citizens’ autonomous decisions with regard to holding money or loaning the Crown money are key issues built into the stakeholder theory?
How does Desan’s framework differ from the exogenous and endogenous money views?
Money and Contemporary Economy; beyond Endogenous and Exogenous Viewpoints of Money
INTRODUCTION
Money remains the most interesting and controversial subject of economics, as economists are still discussing and debating its qualities and how it affects the economy. There are two different schools of thoughts on how money affects the economy, Classical and Keynesian. They both have provided their cases based on history and evidence. The classical and neo-classical school of thought has the point of view that the nature and role of money, in an economic system, are exogenous. In the context of money, the term exogenous is very broad, and it is backed by a comprehensive theory. According to the exogenous view of money, money is only an instrument used for the transaction. It does not have the quality and capacity to affect real variables, such as employment, real wages, and output. In a typical economy, it is used only as a medium of exchange and therefore, in any economy, it is merely a bartering tool at its core. This term also suggests that money in an economy is determined by an exogenous factor, which is the Central Bank (Unlearning Economics).
The opposing theory is of endogenous money. According to this theory, money is considered as an instrument, which is required, and it also has an impact on so-called real variables or factors of economy, such as employment, output, and real wages; at least in short-run. It is the requirements of an economy, which causes the creation of money and in the short-term, it also impacts the economy (Keynesian point of view). Christine Desan goes ahead and discusses not only the origin of money, which endorses the theory of necessity, but also suggests that the very structure/design of money gives it the qualities, which influence not only the transactions but also the markets and economy. However, contemporary money has such characteristics associated with it, which forces to understand money from viewpoints beyond Endogenous and Exogenous money (Desan 9).
ORIGIN OF MONEY IN ENGLAND
From the study of the origin of money in England, we learn that the early form of the contemporary money was originated linked with the political authority. It suggests that early use of contemporary money was pure with the aim of political use; however, the effect was political-economy in function. For instance, the receipt or guarantee, which was issued by the political authority of the time, also had political-economic effect and acceptability, which allowed that early form of money to travel to a certain distance and to be used as a medium of exchange.
We also learn that as the issuance of these politically backed guarantees and receipts grew in numbers, so does their use. However, historians, who have worked on the origin of money, have also shown that not only these receipts were easily exchangeable with goods and services, but also they were safe, in comparison to carrying the other form of money at that time. As more and more of these receipts became available, their acceptance of the political-economic system also grew, which encouraged the political-economic system to engineer advanced forms of this money. It suggests two things, one of which is that power to create money or power to create and accept money is not just allocated to the authorities, but also to the society. It is evident from the history that not only authority must issue such receipts and guarantees, but also society or public must also accept these receipts and guarantees. Still, the state/authority has a greater role in the issuance and use of any money. Second, the democratic and dictatorial authorities can devise money, as per their requirements. A fitting example is of Imperial England, where it was the Sovereign that decided what form or nature of currency would be current. It can be understood by this commentary by William Blackstone quoted in the work The Case of Mixed Money (Benko).
With us in England, the king’s prerogative, so far as it relates to mere domestic commerce, will fall principally under the following articles:
First, the establishment of public marts, or places of buying and selling, such as markets and fairs, with the tolls thereunto belonging
Secondly, the regulation of weights and measures…
Thirdly, as money is the medium of commerce, it is the king’s right, as the arbiter of domestic commerce, to give it authority or make it current [that is, to declare it to be legal tender] (Wray).
In history, there are examples of societies (private parties) creating or devising money; however, in most cases, this medium of exchange was devised for a short span of time. For instance, when colonists substantially reduced or eliminated spices, which was a medium of exchange, the English Settlers used tax credits as money. Down the line, when the system improved and contemporary state started to improve, initial forms of money started to appear. However, we have discussed already that the capacity and attributes of money are still being discussed (Burn-Callander).
We also learn that money in its initial forms strongly influenced markets of pre and post-industrial eras and played a major part in the development of the capitalist system, which was expanding at that time and demanded a medium of exchange, which could facilitate its expansion and transaction in its markets. However, it is suggested that in fact, it was the money that initiated the capitalist system and its markets.
CONSTITUTIONAL APPROACH TO UNDERSTAND CONTEMPORARY MONEY
Almost all the modern economic theories are of the view that money has limited functions in an economy, which are 1) Unit of Account, 2) medium of Exchange and 3) Mode of Payment used in a particular society. However, all these theories, related to the constitutional approach of money, do not provide a comprehensive answer regarding its origin. It is mostly considered as a necessity at a certain moment, during the evolution of the economy. However, Christine Desean is of the view that act of engineering money was very intentional. Also, it is also acknowledged that engineering was very deliberate. Hence, this common argument that money is merely a unit of account is slightly flawed (Wray).
It is argued that the confidence in money, as a medium of exchange, gives it qualities, which allow it to do various tasks in an economy. During the origin or when money is being engineered, it is given such structure and attributes, which increase the confidence of society or economic system in it. This confidence in money, even as a unit of account, determines its reach and capacity to be exchanged as a common medium.
Another feature, which is explained by the constitutional approach, is the function of money as a mode of payment. It is argued that by design money is the mode of payment. It suggests that money must be uniformly accepted as an instrument to deliver financial obligations (payments). It must be accepted by both 1) administration and 2) public, as, without universal acceptance of money as a mode of payment, it would not be able to distribute goods and services in an economy cleanly. When money becomes the mode of payment, it can address this core and serious issue of the economy. Christine Desan and others argue that when a country prefers to do business in a particular currency, mainly because of set liabilities, it suggests that role of money is more than what is considered and it can be understood by the preference of money for particular economic activities.
Also, it is so evident that money is also a story of value, which suggests that it can be stored for later exchange. This attribute of money has sub-attributes, which are primarily dependent on economic factors and situations, such as inflation and deflation (Desan 16).
THE CREATION OF MONEY AND STAKEHOLDER THEORY
Christine Desan states that the endogenous view of money is more valid and relevant, in contrast to the exogenous theory of money. The creation of money, it is asserted by her, is a bottom-up process, rather than top-down process. For instance, when the seasonal consumption increases in an economy, it increases demand for money, which causes the creation of money. Also, the private decision to spend or hold the money directly affects the creation of money and the real factors of the economy. The stakeholder theory also shows the same point as it suggests that changes in bank reserves, which affect the issuance of the loan (creation of money), are adjusted to meet the demand for money. Therefore, the interest rates, especially long-term, are subject to demand and not the otherwise. It puts the banking system in the heart of the creation of money, which is facilitated by the interest rates of the short run.
It is clear from studies that issuance of loans is a profitability measure and private banks will continue to do so, as long as it is consistent with the capital. As banks, in the modern times are not limited by reserves or funding; therefore, the process of creating money has become extremely dangerous and an issue of the economy. From the Marxist point of view, the profit, which is linked to the issuance of money as a loan, by formal and informal financial entities, is transforming the economy into the financial economy or it is termed as the Financialization of the economy. Furthermore, the issuing of a loan to the central authority (public loan) creates both wealth and money, which creates issues of another sort (Desan 21).
In her work, Making Money: Coin, Currency, and Coming of Capitalism, Christine Desan has shown that the capacity of the banking sector, to create money in a capitalist economy, unchecked promotes the creation of problems. The contemporary banking sector is greedy and uncontrolled, which continues to create money until it becomes unsustainable for the system. However, it has also been shown that money is neither public nor private in a clear-cut sense. And, it gains effect through the action of one on the other (page 8). These actions take place in a public arena. They are subject to, and constitutional governance. Both theoretical and analytical frameworks, which have been formed by Christine, are different from endogenous and exogenous viewpoints. It is shown from this assertion of her that contemporary money is neither public nor private. It negates claims of both endogenous and exogenous money theories (Desan).
CONCLUSION
It is concluded that money can be understood from the viewpoint, which is different from endogenous and exogenous viewpoints. The framework, which has been devised by Christine Desan, makes us understand not only money, in its historical context, but also allows us to understand its function and capacity through its design. The creation of money is a bottom-up process, which is steered by greed (commercial) or profit. The private banking system plays a part in the creation of money, which is, in fact, profit-driven sector. The design of money defines its role, which is ambiguous at some stage; however, is very clear and apparent at most.
Work Cited
Benko, Ralph J. “The Case of the Mixed Money.” The Gold Standard Now.
The Gold Standard Now, 19 July 2012. Web.
18 January 2018. http://www.thegoldstandardnow.org/key-blogs/1404-coinage-and-sovereignty.
Burn-Callander, Rebecca. “The history of money: from barter to bitcoin.” The Telegraph. The Telegraph, 20 October 2014. Web. 14 January 2018. http://www.telegraph.co.uk/finance/businessclub/money/11174013/The-history-of-money-from-barter-to-bitcoin.html.
Desan, Christine A. “The Constitutional Approach to Money: Monetary Design and the Production of the Modern World.” Harvard Public Law Working Paper 16.5 (2015): 1-29. Document.
Desan, Christine. Making Money: Coin, Currency, and the Coming of Capitalism. Oxford University Press, 2014. Press.
Unlearning Economics. “Endogenous Versus Exogenous Money, One More Time.” Unlearning Economics. Unlearning Economics, 14 January 2018. Web. 14 January 2018. https://unlearningeconomics.wordpress.com/2012/09/22/endogenous-versus-exogenous-money-one-more-time/.
Wray, L Randall. Money and Credit in Capitalist Economies: The Endogenous Money Approach. Edward Elgar Press, 1990.
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