The Social Institution of Money

Geoffrey Ingham. The Sage Handbook of Sociology. Editor: Craig Calhoun, Chris Rojek, Bryan Turner. Sage Publication. 2005.


Money is one of the modern world’s essential ‘social technologies.’ Sociology, however, which is claimed to be the distinctive intellectual framework for understanding modernity,’ seems to have ignored money because it is not ‘sociological enough’ (Collins, 1979). A recent revival of interest in the subject only serves to highlight the longer-term neglect (Dodd, 1994; Zelizer, 1994; Leyshon and Thrift, 1997; Ingham, 1996, 1999, 2000a,b, 2001, 2002; Hart, 2000). Aside from reiterating the obvious importance of ‘trust,’ sociology has not addressed the problem of the actual social production of money as an institution. Rather, sociology is concerned with very general descriptions of the consequences of money for ‘modern’ society (Giddens, 1990), its ‘social meanings’ (Zelizer, 1994) and, more indirectly, with the Marxist problem of ‘finance capital.’ This one-sided treatment would not matter if economics provided an adequate explanation of money’s existence and functions, but it does not (Ingham, 1996).

Mainstream economics contains what appear to be contradictory conceptions of money. On the one hand, as in common sense, money is a quantifiable commodity that ‘circulates’ with a ‘velocity.’ In fact, this notion was already anachronistic at the time of its classical statement in Fisher’s ‘quantity theory’ (1907). By the early twentieth century, almost all capitalist transactions were carried out by a stroke of the pen in the book clearing of debits and credits in the banking giro, not by the circulation of ‘money-stuff.’ None the less, a hundred years on, in the era of so-called ‘virtual’ e-money, the analytical structure of ‘quantity theory’ continues to inform orthodox economics (Smithin, 2000; Issing, 2001). On the other hand, neoclassical economic ‘high theory asserts that money is relatively unimportant.’ Money is no more than a ‘neutral veil’ over transactions in the ‘real economy.’ Neoclassical economics’ most prestigious paradigm (general equilibrium theory) acknowledges that it has no place for money in its mathematical models (Hahn, 1982: 1).

This state of affairs is a result of the division of intellectual labour between economics and sociology that followed the methodological dispute (Methodenstreit) in the social sciences at the beginning of the twentieth century (Hodgson, 2001). Money was placed under the jurisdiction of economics; but it is the conception of money held by economic ‘theorists’ that accounts for the inadequate understanding of money in both disciplines. Sociology should reclaim the analysis of money. Not only is money socially produced, it is actually constituted by structures of social relations (Ingham, 1996,2000a).

During the Methodenstreit, an alternative to the economic commodity-exchange theory of money was advanced by the broad ‘Historical School’ and influenced contemporary sociological and heterodox economic thinking. Here, money is neither a ‘commodity’ nor mere ‘neutral veil’; rather, it is a ‘claim’ or a ‘promise’ of payment—that is, a social relation. Banished from mainstream economics and, as a result of economic theory’s hegemony, neglected by modern sociology, this analysis almost was lost to mainstream social science. It is claimed that Marxism avoided these errors (Fine and Lapavitsas, 2000), but this analysis has also been weakened by a conception of money as a ‘mask’ or ‘veil’ over an underlying ‘reality’ (Ingham, 2001).

Differences between the two conceptions are evident in the emphases that they give to money’s ‘functions.’ By the late nineteenth century, the question of what money is had given way, in economic analysis, to an evasive functionalist definition, which remains the standard textbook approach. Money is what money does, and it is said to do three things. It is (1) a measure of value (unit, or money of account); (2) a medium of exchange and means of payment; (3) a store of value. From this deceptively simple starting point problems soon become apparent. Do all the functions have to be performed? Are they all of equal importance? If not, which is definitive? Mainstream economics has focused on money as a medium of exchange; the other functions are assumed to follow from it. The ‘historical’ alternative stresses the importance of money of account as an abstract measure of value, which is stored and transported through time. The issues concern the nature of the relationship between the realm of commodities and the realm of money. Are they one or two realms? Is money any more than an expression of the realm of commodities? Can it have a value outside this realm?

Money in Economics

Economic Orthodoxy: Money in the ‘Real Economy’

Modelling itself on the natural sciences, economics sought to establish deductive generalizations based on the axioms of individual rational choice maximization of utility and the associated equilibrium model of the perfectly competitive market (Machlup, 1978). The ideal type of the ‘economy’ comprises exchange ratios between commodities (object-object relations) expressed in money prices, established by individual acts of utility calculation (individual-object relations). These object-object and agent-object relations constitute what is known as the ‘real’ or ‘natural’ economy. Agent-agent or social relationsform no part of the model (Weber, 1978: 63-4; Ganssmann, 1988).

The ‘real’ economy is essentially a model of a simple ‘natural’ (moneyless) barter economy (for the classic description, see Schumpeter, 1994 [1954]: 277; NB its Aristotelian origins). It describes exchange ratios between commodities, determined by individual calculations of their utilities in bilateral barter exchanges. The key assertion is that barter transforms myriad exchange ratios into a single price for a uniform good. Money is introduced into the model as a commodity that acts as a medium of exchange to facilitate the process—for example, cigarettes in prison. Money is only a medium of exchange. As a commodity, the medium of exchange can have an exchange ratio with other commodities. Or as a symbol, it can directly represent ‘real’ commodities. It is in this sense that money is a ‘neutral veil’ that has no efficacy other than to overcome the ‘inconveniences of barter’ which, in the late-nineteenth-century formulation, result from the absence of a ‘double coincidence of wants’ (see Ingham, 2000a). Money is more efficient than barter, but analytically they are structurally identical.

Menger’s (1892) rational choice analysis of the evolution of money remains the basis for all neoclassical explanations of money’s existence (Dowd, 2000; Klein and Selgin, 2000). Money is the unintended consequence of individual economic rationality. In order to maximize their barter options, it is argued, traders hold stocks of the most tradable commodities which, consequently, become media of exchange—beans, iron tools, etc. Coinage is explained with the further conjecture that precious metals have additional advantageous properties—such as durability, divisibility, portability etc. Metal is weighed and minted into uniform pieces and the commodity becomes money. In short, orthodox economic accounts of money are commodity-exchange theories. Both money’s ‘historical’ origins and its ‘logical’ conditions of existence are explained as the outcome of a natural process of economic exchange (Ingham, 2000a).

The ‘dematerialization’ of money broke this explanatory link between individual rationality and system benefits. Paradoxically, for Menger, ‘institutions such as money make for the common interest, and yet… conflict with the nearest and immediate interests of contracting individuals.’ Why should the ‘individual be ready to exchange his goods for little metal disks apparently useless as such, or for documents representing the latter?’ (quoted in Jones, 1976: 757). Today, neoclassical economics tries to resolve the problem by showing that holding (non-commodity) money reduces transaction costs for the individual (Dowd, 2000; Klein and Selgin, 2000), but only succeeds in exposing the logical circularity of neoclassical economics’ methodological individualism. It can establish only that it is ‘advantageous for any given agent to mediate his transactions by money provided that all other agents do likewise’ (Hahn, 1987: 26). Of course, it is not so much a question of whether it is advantageous to use money if others do, but rather that agents cannot use money unless others do likewise. To state the sociologically obvious: the advantages of money for the individual presuppose the existence of money as an institution.

There are other problems. First, the ‘barter → commodity → money’ transition is not supported by the historical record (Ingham, 2000a; Wray, 2000). Second, the model of the natural barter economy with its ‘neutral veil’ of money is singularly inappropriate for the capitalist monetary system. In the Commodity → Money → Commodity (C-M-C1) sequence of the ‘real’ economy, money exists only as a medium for the gaining of utility through the exchange of commodities. The financing of production does not take place in the model. In the early twentieth century, attempts were made to explain the fact of bank credit, within the framework of ‘real’ analysis. For example, Wicksell’s ‘natural’ rate of interest is a measure of the ‘natural’ propensities and productivity in the ‘real’ economy and not, for example, the power of bankers to set a ‘money rate.’ The ‘natural rate of interest’ is an extension of the ‘neutral veil’ concept insofar as money, in the last instance, can only reflect or express the ‘real.’ In contrast, as we shall see, Weber and Keynes saw that capitalism involves a Money → Commodity → Money sequence (M-C-M1) in which the money side is relatively autonomous. The act of bank lending creates money-capital to finance the future production of commodities (on Keynes, see Smithin, 1994:2). The bank loan—that is, the capitalist’s debt—pays wages which are spent as money.

After the mid-twentieth-century’s Keynesian interlude, orthodox economic theory was restored in Friedman’s ‘monetarism,’ and further problems soon became apparent (Smithin, 1994). In ‘monetarism,’ money is a ‘thing’ whose supply is quantifiable and controllable. (Ceteris paribus, an increase in the supply of money will increase prices.) However, it soon became apparent that it was not clear what should be counted as money- notes, coins, current bank accounts, savings accounts etc. The issue is complex, but the concept of money as a quantifiable and controllable ‘stock’ produced policy incoherence in the continuous proliferation of measures of money- M0, M1,… M10 and so on. Moreover, by the 1990s, monetary aggregates increased as inflation fell, in contradiction of the theory.

However, the fundamental problem in economic orthodoxy, from which all the other difficulties stem, is the misunderstanding and neglect of money of account. Medium of exchange is the key function and it is assumed that all the others follow from it. The ‘natural’ market produces a transactions-cost efficient medium of exchange that becomes the standard of value and numerical money of account. Coins evolved from weighing pieces of precious metal that were cut from bars and, after standardization, counted. However, there are a priori and empirical grounds for reversing the sequence. Money of account is logically anterior and historically prior to the market (Keynes, 1930; Hicks, 1989; Hoover, 1996; Ingham, 1996, 2000a,b; Orléan, 1998; Wray, 2000).

Without further assumptions, it is difficult to envisage how a money of account could emerge from myriad bilateral barter exchange ratios based upon subjective preferences. One hundred goods could yield 4950 exchange rates (Davies, 1994: 15). How could discrete barter exchange ratios of, say, 3 chickens to 1 duck, or 6 ducks to 1 chicken, and so on, produce a single unit of account? The conventional economic answer that a ‘duck standard’ emerges ‘spontaneously’ involves a circular argument. A single ‘duck standard’ cannot be the equilibrium price of ducks established by supply and demand because, in the absence of a money of account, ducks would continue to have multiple and variable exchange values. A genuine ‘market’ which produces a single price for ducks requires a money of account—that is, a stable yardstick for measuring value. As opposed to the commodity duck, the monetary duck in any duck standard would be an abstract duck. If the process of exchange could not have produced the abstract concept of money of account, how did it originate? The question is actually at the very heart of a problem that distinguishes economics from sociology. Can an inter-subjective scale of value (money of account) emerge from myriad subjective preferences? Posed in this way, the question of money is at the centre of the general question in Talcott Parsons’s sociological critique of economic theory—although it has not been seen in this light. From its starting point of individual subjective preferences, utilitarian theory cannot explain social order (Parsons, 1937).

Economic Heterodoxy: Money as Abstract Value and Token Credit

Heterodox monetary analysis has two sources. On the one hand, it can be traced to analyses of the credit-money that appeared in Western Europe in the sixteenth century. The new forms of money were not simply credit in the sense of deferred payment; rather, these ‘credits’ were ‘money,’ in that mere ‘promises to pay’ (IOUs), issued outside the sovereign mints, began to circulate as means of payment. Only later were they backed by metal in a hybrid bank credit/gold standard. The general use of transferable debt is specific to capitalism. ‘Depersonalized’ and hence transferable debt is used as means of payment to a third party: As IOU held by B is used to pay C (Ingham, 1999). After over two thousand years during which coin and money were synonymous, this new money-form posed intellectual puzzles (Sherman, 1997). Some of the answers gave rise to an analysis of money that departed from the Aristotelian theories of commodity money to which all orthodox economic theories may be traced. They led to the idea that all money was constituted by social relations of credit and debt (Ingham, 2000a: 23).

A second source of heterodox analysis accompanied the construction of the nineteenth-century German state. Money’s role in taxation and as the expression of national integrity and power were emphasized (Schumpeter, 1994 [1954]). Knapp’s State Theory of Money (1973 [1924]) challenged economic explanations of money’s properties in terms of the exchange value of its commodity form. By declaring what it will accept for the discharge of tax debt, denominated in its own unit of account, the state creates and establishes the ‘validity’ of money. Private bank notes become money when they are denominated in the state’s money of account and accepted as payment of tax debts owed to the state and reissued in payment to the state’s creditors (Knapp, 1973 [1924]: 95, 143, 196). Money consists in a reciprocal relationship: states issue ‘credits’ to pay for their goods and services which, in turn, must be acquired for payment of taxes. New money cannot be created without the creation of a complementary debt (Gardiner, 1993). Money is a social relation, not a thing.

Money is a ‘token’ that ‘bears’ units of abstract value. ‘State theory’ is also known as ‘chartalism’ (from charta, the Latin for token) and sometimes as monetary ‘nominalism’ (Ellis, 1934). Regardless of its specific form, money is, generically, a credit—that is, it is a claim on goods. ‘State theory’ was anathema to the early-twentieth-century proponents of the commodity-exchange theory of value—that value canonly be established in exchange determined by the forces of supply and demand. In objecting that states could not establish the purchasing power of money, the economic theorists misunderstood Knapp. In fact, his argument helps to resolve commodity theory’s difficulty in trying to identify the ‘moneyness’ by its utility or exchange value alone. Economic theory cannot uniquely specify money—that is, distinguish money from other commodities. Following Knapp, money becomes a commodity with an exchange value only after it has been constituted as money by a social and political process. States establish the validity of money by the proclamation of the nominal unit of abstract value and the acceptation of the tokens that correspond to it.

Together with early English ‘credit theory,’ ‘state theory’ influenced Keynes’s A Treatise on Money (1930). During his ‘Babylonian madness’ in the 1920s, Keynes studied the German Historical School’s work on ancient Near Eastern money. During the third and second millennia BC, their economies were organized with a money of account, but payments were made in commodities, labour service, silver by weight etc. (Ingham, 2000a). ‘Money’ existed for several thousand years before the first use of coinage around 700 BC: ‘Money of Account, namely that in which Debts and Prices and General Purchasing Power are expressed is the primary concept of a Theory of Money.’ Forms of money such as coins ‘can only exist in relation to a Money of Account’ (Keynes, 1930: 3; emphasis added). In other words, the quality of ‘moneyness’ is conferred by the abstract measure of value that is imposed by the state when it writes the monetary ‘dictionary’ (Keynes, 1930:4-5, 11-15).

Keynes also identified ‘Acknowledgements of Debt’ as forms of money (Keynes, 1930: 6-9). The chapter ‘The “Creation” of Bank Money’ provides a description of the creation of new deposits of money by the act of lending in a way that is relatively independent of the level of incoming deposits of savings: ‘There is no limit to the amount of bank-money that banks can safely create provided that they move forward in step’ (emphasis in original). Bank chairmen believe that ‘outside forces,’ over which they have no control, determine their decisions. ‘[Y]et the “outside forces” may be nothing but himself and his fellow chairmen, and certainly not his depositors’ (Keynes, 1930: 26-7). The analysis points to the socially constructed reality of the norms of banking practice. Bank money is the result of the act of lending—that is to say, the social relation of debt constitutes money.

Keynes’s analysis is continued in the heterodox post-Keynesian theory of ‘endogenous’ money (Wray, 1990; Smithin, 1994; Rochon, 1999). French and Italian ‘monetary circuit’ analysis also has Keynesian roots (Parguez and Seccareccia, 2000). The idea that all money is debt is also found in the work of French interdisciplinary social scientists (Aglietta and Orléan, 1998). Other post-Keynesians have returned to Keynes’s inspiration in Knapp to build a distinctive ‘neo-chartalist school’ (Wray, 1998; Bell, 2000, 2001).

Money in Sociological Theory

Both economic traditions have influenced sociology, but orthodoxy has had much the greater impact. (Social anthropology has been similarly affected, see Hart, 2000). Weber and Simmel were influenced by the heterodox ‘Historical School,’ but it is precisely these parts of their work that have been seriously neglected.

Money as a Symbolic Medium

Parsons’s early work played a part in confirming the terms of the division of intellectual labour between economics and sociology. They are distinct, but complementary as he was assured of ‘the essential soundness, from a sociological view, of the main core tradition in economics’ (Parsons, 1991 [1953]). From a sociological standpoint, money is a symbolic generalized medium of communication and interaction (Parsons and Smelser, 1956; Dodd, 1994). It facilitates the integration of the functionally differentiated parts of the social system—in an analogous way to integration through prices in economic theory. But as a ‘symbol’ money is ‘neutral’ insofar as it does not affect the underlying constitution of either the ‘real’ economy or social system. Parsons followed economics’ axiom that value is only realizable in exchange and that money is only a symbol of value—that is, money, as symbolic medium, is without value (Ganssmann, 1988: 308). Like its economic parent, this notion does not grasp the obvious fact of money as a store of abstract value that maybe appropriated. Furthermore, Parsonian sociology not only failed to take into account that domination derives from the possession of money, but also that it derives from control of the actual process of money’s production by states and banks. Apart from a description of money’s integrative functions, all other questions could be left to economics.

This general orientation has persisted in sociology. Habermas, Luhmann and Giddens, for example, have all followed this concept of money as a ‘symbolic token’ or ‘media of interchange [sic]’ (Giddens, 1990:22; see Dodd’s(1994) secondary analysis of Habermas and Luhmann). Money promotes ‘systemic complexity’ and the ‘time space distanciation’ of modernity; but its existence is taken for granted. The importance of ‘trust’ is repeated, but this has ‘as much explanatory value as saying that credit comes from credere’ (Ganssmann, 1988). Explaining money involves the historical explanation of a specific form of ‘social technology’ that accounts for abstract value and transports it through time. To be sure, money has the consequences that Giddens and others outline; but only if the social relations of its production remain intact. In the absence of this analysis, sociology implies a functionalist explanation of money’s existence that parallels the teleological theorems to be found in mainstream economics. Like economics, much modern sociology has lost sight of the obvious. Money is not merely a symbolic token that integrates ‘disembedded’ social systems (Giddens, 1990); it is also value in itself. Control of money’s production is a pivotal social institution.

Marx and Marxist Analysis

Parsons’s dismissal of Marx as a minor classical economist is a gross exaggeration, but it contains a grain of truth. The labour theory of value committed Marx, and his successors, to a version of the commodity theory of money, with all its attendant errors. To this extent, Marx’s general theory of money was mistaken. Most importantly, this attachment to the labour theory of value of commodity money prevented Marx from realizing that his theory of capital as a social relation applied also to money. In particular, he did not fully understand capitalist credit money (Cutler et al., 1978: 24-6). Later Marxist and sociological analyses of ‘finance capital’ have perpetuated the misunderstanding. (on Hilferding’s errors, see Henwood, 1997.)

Like Adam Smith, Marx held that ‘[g]old confronts other commodities as money only because it previously confronted them as a commodity … It acts as a universal measure of value, and only through performing this function does gold … become money’ (Marx, 1976: 162, 188). Precious metal can become a measure of value because mining and minting embody labour which can be expressed in ‘the quantity of any other commodity in which the same amount of labour-time is congealed’ (p. 186). Forms of ‘credit’ are derivative: bank notes and bills of exchange are money insofar as they directly represent both precious metals and/or commodities in exchange.

But Marx’s distinctive departure from classical economics is to show that monetary relationships do not merely represent a natural economic reality, but also mask the latter’s underlying reality of the social relations of production. These constitute the reality that appears in a monetized alienated form. For Marx there are two ‘veils.’ Behind money lie ‘real’ economic forces, as they do in somewhat different manner in the orthodox economics. In turn, behind these economic forces lie the ‘real’ social relations, which also appear as monetary relations. Tearing away these monetary ‘masks’ or ‘veils’ will demystify capitalism and its money, which will become ‘visible and dazzling to our eyes’ (p. 187).

This kind of reasoning is why Marx is considered as a classical sociologist; but it also implies that money can be analytically ‘bracketed.’ Notwithstanding the two ‘veils,’ Marx’s analytical position is similar to classical economics. Emphasis on the social relations of production of commodities and the labour theory of value prevented Marx (and almost all his contemporaries) from recognizing the relative autonomy of the production of abstract value in the form of credit-money, or the more radical position that all money is token credit. Marx dismissed as ‘professorial twaddle’ Roscher’s complaint that economists ‘do not bear sufficiently in mind the peculiarities that distinguish money from other commodities’ (n. 13, p. 187). In company with all commodity theorists, Marx failed to consider money as abstract value, defined by a money of account and sustained by its own social relations of production.

At times, Marx appeared to have grasped that capitalist credit-money can be created autonomously outside the sphere of the production and circulation of commodities; but, then it plays an essentially dysfunctional role. Bank credit could expand beyond ‘its necessary proportions’ and become ‘the most potent means of driving capitalist production beyond its own limits, and this has become one of the most effective vehicles of crises and swindle’ (Marx, 1981: 735-9). Marx was conventional in this view that credit instruments—bills of exchange, promissory notes etc.—were, or rather should be in a rationally organized system, no more than functional substitutes for hard cash.

The anachronistic and misleading commodity-exchange theory of money is evident in Hilferding’s Finance Capital (1981 [1910]), which despite the apparent critique, was entirely consistent with orthodox economic theory of the time. He dismissed Knapp’s ‘state theory’ for ‘eschewing all economic explanation.’ Rather, ‘money … originates in the exchange process and requires no other condition’ (Hilferding, 1981 [1910]: 36; see also 376). Credit creation is anchored in the ‘real’ economy of production and, therefore ‘the quantity of credit money is limited by the level of production and circulation’ (pp. 64-5). Banks aid the capitalist process by garnering the bourgeoisie’s ‘idle capital’ together with the ‘idle money of all other classes for use in production’ (p. 90). All this is perfectly true. But, as Schumpeter and Keynes argued, the differentia specifica of capitalism lies in banks’ ‘endogenous’ creation of new deposits of credit-money ex nihilo—or, more accurately, out of the social relation of debt. This lending isnew money and not merely the collection of pre-existing ‘little pools’ into larger reservoirs (Schumpeter, 1994 [1954]: 1113). In failing to see this essentially capitalist process, Hilferding and generations of Marxists and sociologists have actually underestimated the power of ‘finance capital’!

Like orthodox economics, the Marxist analysis of money has been disabled by the search for the value of money in the commodity (Fine and Lapavitsas, 2000; and see the critique in Ingham, 2001). It has been unable to consider the proposition that all money consists in symbolic ‘tokens’ of abstract value that signify, and are constituted by, social relations of credit-debt. From a sociological standpoint, these social relations must be considered as the ‘reality’ of money. We may now turn to those aspects of Simmel’s and Weber’s work into which these and other ‘Historical School’ arguments were incorporated.

Simmel and Weber on Money

The Philosophy of Money

Unfortunately, sociology has taken Simmel at his misleading word that The Philosophy of Money is not really about money, but rather about how money expresses the essence of modern life (Dodd, 1994: 175). The modern spirit of discontinuous, fragmented, increasingly abstract impersonal relations finds its most perfect expression in money: ‘The more the life of society becomes dominated by monetary relationships, the more the relativistic character of existence finds its expression in conscious life’ (Simmel, 1978 [1907]: 512). This form of ‘sociation’ generates individuality, personal freedom and intellectualism (Dodd, 1994; Turner, 1999). However, in addition to the analysis of the effects of money, The Philosophy of Money contains important, but fragmented, accounts of money’s origins, its essential qualities and how these are produced. Two aspects of The Philosophy of Money have received less attention than they deserve: the analysis of money as abstract value, and as a form of ‘sociation’in itself, that is to say, as constituted by social relations.

Simmel rejects all economic theory, including Marxism, which locates money’s value in the specific substance or content of the ‘money stuff.’ Rather, money is the pure form of abstract value. The value of money does not derive from either the costs of its production, or supply and demand, or labour-value. Rather, ‘[m]oney is the representative of abstract value’ (p. 120). Money is ‘the value of things without the things themselves’ (p. 121). Money is the abstraction of the ‘distilled exchangeability of objects … the relation between things, a relation that persists in spite of the changes in the things themselves’ (p. 124; emphasis in original). Simmel’s critique of commodity theories of money is developed with a dismissal of the implication that measures must have the same quality as the object to be measured—measures of length are long and, therefore, a measure of value must be valuable (p. 131). Some measures of length are long; but as Simmel argued, this is because measure and measured object share the same quality of length. ‘To establish a proportion between two quantities, not by direct comparison, but in terms of the fact that each of them relates to a third quantity and that these relations are equal or unequal’ is one of society’s great accomplishments (p. 146). Thus, following the ‘nominalists’ of the ‘Historical School,’ Simmel asserts the logical primacy of the abstraction of money of account. Money is ‘one of those normative ideas that obey the norms that they themselves represent’ (p. 122) (see Orléan, 1998: money is autoréférentielle; see also Searle, 1995).

Writing at the apogee of the gold standard, Simmel conceded that ‘[m]oney performs its services best when it is not simply money, that is when it does not merely represent the value of things in pure abstraction’ (p. 165). But he does not lose sight of his essential and prescient point: ‘It is not technically feasible,’ Simmel continues, ‘to accomplish what is technically correct,’ namely to transform the money function into a pure token money, and to detach it completely from every substantial value that limits the quantity of money, even though the actual development of money suggests that this will be the final outcome (p. 165; emphasis added). With the breaking of the link between gold and the dollar in 1971, commodity money ceased to exist.

In contrast to orthodox economics, Simmel understands that exchange by money is structurally different from barter. Money is a form of ‘sociation’ and not a ‘thing’: ‘When barter is replaced by money transactions a third factor is introduced between the two parties … the direct line of contact between them … moves to the relationship which each of them … has with the economic community that accepts the money.’ Simmel then endorses the credit theory of money: ‘[t]his is the core of the truth in the theory that money is only a claim upon society’ (p. 177). Indeed, ‘[metallic money, which is usually regarded as the absolute opposite of credit money, contains in fact two presuppositions of credit which are particularly intertwined’ (p. 178). First, the metallic substance cannot be normally tested in cash transactions and is, rather, verified by the secondary characteristics stamped on coins by the issuing authority. Second, people must trust that the tokens of value will retain their value. This may be based on objective probabilities; but this ‘kind of trust is only a weak form of inductive knowledge’ (p. 179). There can never be sufficient information for it to be the only basis for holding money. Additionally, money requires an element of ‘supra-theoretical belief’ or ‘social-psychological quasi-religious faith’ (p. 179). ‘Money is the purest reification of means, a concrete instrument which is absolutely identical with its abstract concept; it is a pure instrument’ (p. 211). And the qualities of this pure abstract value reside in ‘social organisation and … supra-subjective norms’ (p. 210).

Modern sociology’s exclusive emphasis on ‘trust’ tends to trivialize Simmel’s analysis. Like Weber, he saw that the development of modern states and non-metallic, ‘dematerialized’ money were intimately connected. Modern states built themselves, in large part on the basis of credible metallic standards and coinage. Money led to the dissolution of the personalized bonds of feudal relations and the‘enforcement of money transactions meant an extension of royal power into areas in which private and personal modes of exchange had existed’ (p. 185; emphasis added). However, in a dialectical process, the ‘value of money is based on a guarantee represented by the central political power, which eventually replaces the significance of the metal’ (p. 184). In this historical process, coercion, as always, preceded any ‘trust’ in the establishment of a currency. Modern sociological analysis tends to forget that monetary sovereignty was established to a large extent by extreme physical coercion—such as branding on the forehead with coins, and execution for counterfeiting.

However, having rejected essentialist theories of intrinsic precious metallic value and the classical labour theory of value, Simmel is left with the very same problem that the Austrian ‘subjectivists’ had to face—how can myriad individual preferences produce a scale of inter-subjective value. ‘Money as abstract value expresses nothing but the relativity of things that constitute value’ (p. 121); but at the same time, it transcends the relativity of exchangeable values and ‘as the stable pole, contrasts with the eternal movements, fluctuations of the objects with all others’ (p. 121; emphasis added). But how does it do it?

Simmel answers the question with a historical analysis of money’s transformation from substance to pure abstractionIt is full of insights gleaned from the Historical School, but is no more than a description of the process of becoming the non-material abstraction he correctly identified as money. Moreover, it is confused. He failed to see that, if all money is credit, Hildebrand’s barter → commodity → money → credit evolution is a contradiction.

Two fundamental questions remained unanswered in The Philosophy of Money. First, what are the origins of the concept of money as value? Simmel agrees with the Austrian economists that money expresses exchangeability, but sees that it cannot have been the result of the process of exchange. Rather, it ‘can have developed only out of previously existing values …’ (p. 119; emphasis added). But which might these have been? Simmel left no more than scattered clues. Second, how is the abstract value of modern dematerialized money established and maintained? Precious metal is a means of maintaining confidence, but in an ‘ideal world’ money would be no more than ‘its essential function,’ as a symbol of abstract value. Here, Simmel reverts to a thoroughly positivist economic conception of money: ‘[M]oney would then reach a neutral position which would be as little affected by the fluctuations in commodities as is the yardstick by the different lengths that it measures’ (p. 191; emphasis added). In other words, Simmel accepts economists’ ‘ideal world’ in which the value of commodities is the result of the interplay of subjective preferences, mediated by the neutral symbol of money. But this ‘ideal world’ is not explained; it does not have a social structure. We need to turn to Weber for a sociological formulation in which the value of money expresses the social conflict that lies behind subjective preferences.

Weber on Money

The enormous secondary sociological literature on Weber’s analysis of capitalism scarcely refers to his analysis of money. The chapters on money and banking in General Economic History have been almost completely ignored (Weber, 1981 [1927]). Emphasis on religion has led to a distorted view of his work: for example, the underdevelopment of capitalism in China was not so much the result of a religious ethic as the fact that its money was ‘scarcely as developed as Ptolemaic Egypt’ (Weber, 1951: 3). This neglect is more puzzling in light of his lavish praise for Knapp’s The State Theory of Money (1973 [1924]). One would have expected scholars to have followed Weber’s lead in exploring the ‘permanently fundamental importance’ of this ‘magnificent work’ (Weber, 1978: 184, 169; also 78-9).

Money expands market, or ‘indirect,’ exchange by which it is ‘possible to obtain goods which are separated from those offered in exchange for them in space, in time, in respect of the persons involved, and, what is very important, in respect to the quantity in each side of the transaction’ (p. 80). The most important element is not the existence of a commodity-money as a medium of exchange, but the possibility of monetary calculation—‘assigning money values to all goods and services’ (p. 81). Money of account—the ‘continuity of the nominal unit of money, even though the monetary material may have changed’—makes this calculation possible. It is as an abstraction that ‘the individual values the nominal unit of money as a certain proportional part of his income, and not as a chartal piece of metal or note’ (p. 168). Following Knapp, Weber refers to the state’s definition of money in terms of a unit of account for the legal payment of debts, as its formal validity (p. 169).

Weber upheld Knapp’s distinction between the ‘valuableness’ and ‘value’ (p. 193; see also 78-9). But, in addition to money’s ‘formal validity’ (‘valuableness’), there must also exist the ‘probability that it will be at some future time acceptable in exchange for specified or unspecified goods in price relationships which are capable of approximate estimate’ (p. 169). In this emendation of ‘state theory,’ Weber followed economic orthodoxy, and his critique of Knapp’s analysis of inflation is based, to some extent, upon the commodity and quantity theories of money (p. 192, see also 180-4). Weber deplored the kind of disciplinary segregation that eventually came about after the Methodenstreit, but he believed that the analysis of the price of goods—including the purchasing power of money—was more properly part of economics (p. 79). None the less, he was unable to resist, mainly in footnotes, making incisive comments on the nature of economic theorizing. Economy and Society contains the germs of a sociological recasting of a ‘substantive theory of money’ (p. 190) which implies a further departure from orthodox economic thought.

Typically, Weber confronts both economic orthodoxy and its socialist critics (pp. 78-80, 107-9). Prices, which in conventional theory are the result of the interplay of supply and demand, are seen as the ‘product of conflicts of interest (that) result from power constellations’ in ‘the struggle for economic existence.’ Consequently, money is not economic theory’s ‘neutral veil’ draped over exchange ratios of commodities. Rather, money ‘is primarily a weapon in this struggle, and prices are expressions of this struggle; they are instruments in this struggle only as estimated quantifications of relative chances in this struggle’ (p. 108).

The market may be a power struggle, but Weber offers no comfort to the socialists, who, following Marx, wished to remedy the inequality by issuing vouchers for an agreed ‘quantity of socially useful labour.’ But, in order to produce rational calculability, money has to be a weapon in the struggle for economic existence between ‘the play of interests oriented only to profitability’ (p. 183). The exchange of a socially agreed quantity of labour for specific goods would ‘follow the rules of barter’ (p. 80), and could not produce a measure of abstract value. Weber agreed with the Austrian theoretical economists in the ‘socialist calculation’ debate that money can never be a ‘harmless “voucher”’ as its valuation is ‘always in very complex ways dependent on its scarcity’ (p. 79). Any equilibrium or price stability in an equation of quantities of money and goods, in particular the interest rate, will be the expression of a predictable balance of power. Conversely, in this admittedly incomplete formulation, price instability in general is as much the result of the ‘economic struggle for existence’ as it is the product of an overabundance (inflation) or scarcity (deflation) of money. In short, socialism could not produce rational monetary calculation. Bureaucratic administration could never produce the ‘“right” volume or the “right” type of money’ because state bureaucracies are ‘primarily oriented to the creation of purchasing power for certain interest groups’ (including the state itself)—which would cause inflation (p. 183).

Simmel and Weber saw clearly the merits of the ‘nominalist,’ ‘state’ and ‘credit’ theories of money. These provide a foundation for a more comprehensive sociological theory of money as a social institution.

Fundamentals of a Sociology of Money

Attention should focus on three questions. What is money? How is money produced? How does money obtain, retain, or lose its value?

What is Money?

Economic theory’s focus on money as an actual medium of exchange entails a ‘category error’ in which specific forms of money have been mistaken for the generic quality of ‘moneyness.’ This has resulted in long-standing confusion over closely related issues—for example, the distinction between money and credit, the so-called ‘dematerialization’ of money, the advent of virtual postmodern’ money (Leyshon and Thrift, 1997), and electronic money and the ‘end of money.’ (For a discussion of these and related issues, see Ingham, 2002.) The unique specification of money is as a measure of abstract value and ameans of storing and transporting this abstract value.

Monetary exchange consists in the calculation and exchange and transfer of debits and credits according to a money of account. Money cannot be created without the simultaneous creation of debt. For money to be money, it presupposes the existence of a debt measured in money of account elsewhere in the social system. The holder of money is owed goods.

[M] oney is only a claim upon society … The liquidation of every private obligation by money means that the community now assumes this obligation to the creditor … [M] etallic money is also a promise to pay and … differs from the cheque with respect to the size of the group which vouches for its being accepted. The common relationship that the owner of money and the seller have to a social group—the claim of the former to a service and the trust of the latter that this claim will be honoured—provides the sociological constellation in which money transactions, as distinct from barter are accomplished. (Simmel, 1978 [1907]: 177, 174-9)

Money is circulating debt, but perhaps the traditional metaphor of a ‘circulation’ is inappropriate. Rather, vast dense networks of overlapping and interconnected bilateral credit-debit relationships constitute money. This is more obvious in the case of the ‘clearing’ of debits and credits in a bank giro, where money-stuff does not actually flow from one account to another. But it applies equally to coins and notes, which might be referred to as ‘portable debt’ (Gardiner, 1993: 224). The essential point is that the debt is either transferable (bank giro) or portable (coin) because it is denominated in money of account. Money is constituted by the continuation of relations of credit-debit. In Marc Bloch’s counterintuitive observation, money would disappear if all debts were paid (Bloch, 1954).

This conceptualization becomes clearer with consideration of the multiplicity and dissociation of money ‘things’ in relation to the abstraction of money. The measure (money of account), means of payment for the unilateral discharge of debt and any media of exchange need not be integrated in single form, as in coinage: Cash, plastic cards, cheques, magnetic traces in computer disks, and so on. The point is clearly expressed in a study of money and national identity in early capitalism:

By the 1830s, then, Britons could at different times and places have understood gold sovereigns, banknotes, or bills of exchange as the privileged local representatives of the pound … the pound as an abstraction was constituted precisely by its capacity to assume these heterogeneous forms, since its existence as a national currency was determined by the mediations between them. (Rowlinson, 1999: 64-5)

How is Money Produced?

Different modes of the production of money may be identified. These consist in social relations between issuers, issuer and users, and the technological means available for the storage and transportation of abstract value—from clay tablets, to coins, to pen and paper, to magnetic traces and so on. However, the fundamental question concerns the ‘origins’ of money of account; that is to say, the abstract ‘idea’of money.’

Money of account 

‘Unless the commodities used for exchange bear some relation to a fixed standard, we are dealing with barter [because] … the parties in barter-exchange are comparing their individual needs, not values in the abstract’ (Grierson, 1977: 16-19; emphasis added). For example, the tobacco used as a medium of exchange in seventeenth-century Virginia only became money when its value was fixed at three shillings a pound (Grierson, 1977: 17). The standard of value, determined by weight (the exchange value of money-stuff), is not the important issue. Rather, ‘countability’ transforms the ‘commodity’ (qua convenient medium of exchange) into money.’ This might be ‘countable-useful’ (slaves, cattle, furs) or ‘countable-ornamental’ (teeth, beads, shells) (Grierson, 1977: 33; see also Hoover, 1996).As an alternative to the theory that a measure of abstract value could emerge from subjective preferences in barter, Grierson argues that it originated in a very early social institution for the settlement of disputes, later examples of which are known as wergeld (Grierson, 1977: 19). Wergeld (worthpayment) sanctioned payment of damages and compensation for injury and insult according to a fixed scale of tariffs.

The conditions under which these laws were put together would appear to satisfy, much better than the market mechanism, the prerequisites for the establishment of a monetary system. The tariffs for damages were established in public assemblies, and … [s]ince what is laid down consists of evaluations of injuries, not evaluation of commodities, the conceptual difficulty of devising a common measure for appraising unrelated objects is avoided. (Grierson, 1977: 20-1)

This analysis lends itself to a Durkheimian interpretation in which money of account/measure of value is seen as a ‘collective representation’ of fundamental elements of societal structure (Ingham, 1996). If religion, or the sacred, originates in the worship of society, money originally expressed society’s conception of its own worth. The punitive and compensatory tariffs expressed both the utilitarian and moral components of society. Wergeld symbolically represents society’s two faces in prescribing recompense for both injury and insult. On the one hand, it accounted for the functional worth of the contribution of social roles to societal welfare by assigning a tariff to the loss or impairment of their individual incumbents; for example, young men of fighting age were worth more than old women and so on. On the other hand, such schemes of functional or utilitarian worth were embedded in norms and values that directly reflected the hierarchical status order of society. Compensation for the loss of a Russian nobleman’s moustache, for example, was four times greater than for the loss of a finger (Grierson, 1977: 20). Wergeld was the codification of the social values without which the assessment of functional contribution would have remained anomic and open to settlement only by constant recourse to socially and economically debilitating blood feuds.

Standards of value 

Once the concept of abstract monetary accounting (unit of account) was available to society, the next step was the development of a standard of value based on commodities, as occurred in the ancient Near Eastern empires in the period from 3000 to 1000 BC (Goldsmith, 1987; Polanyi, 1957). The Babylonian shekel was originally fixed at 1 gur (1.2 hectolitres of barley) and later at a more manageable 8.3 grams of silver. However, these societies were command economies with only very small trade sectors. The overwhelming majority of payments were rents and taxes to religious and secular authorities. There was no coinage and payment was made in commodities, labour services, or silver by weight (shekel, mina, talent) (Goldsmith, 1987). The state not only fixed the standard, but also the prices of taxes, rents, and so on. Money had its logical origins in money of account and its historical foundation in the ‘chartal’ money of early bureaucratic empires. It was not the spontaneous product of the market.


Coinage, which integrated all the attributes (unit of account, means of exchange/payment, store of value) in the form of money-stuff, came 2000 years later in Lydia and Greece around 600 BC (Davies, 1994). Centralized monarchical states and developments in metallurgy made it possible to embody money of account, standard/store of value and means of payment/exchange in a single object. It is probable that the disintegration of the larger bureaucratic empires into smaller states was important in the development of coinage. Small unstable states were dependent on mercenary soldiers whom they paid in lumps of precious metal. As campaigning soldiers spent their lumps, they greatly expanded the scale and scope of market exchange. Coinage reached its apogee in the Roman Empire and ‘[i]ts “sound money” was accepted over an area larger than any other before or after the nineteenth century’ (Goldsmith, 1987: 36). Taxation was the fundamental money relation and ‘there is no reason to suppose that [coinage] was ever issued by Rome for any other purpose than to enable the state to make payments … Once issued coinage was demanded back by the state in payment of taxes’ (Crawford, 1970: 46).Four aspects of coinage should be noted in relation to the commodity theory of money. First, the precious metal coins used for payment of taxes were almost invariably too large for daily use. This medium of exchange function was performed by base metal tokens. For example, Rome had the gold aureus and silver denarius, supplemented by the sestertius of copper, zinc and tin (Goldsmith, 1987: 36). Second, coins frequently were not struck with a numerical signifier of their relationship to the money of account. (Further, only the silver penny of Charlemagne’s abstract money of account of pounds, shillings and pence was ever minted.) Monetary policy, usually from fiscal motives, involved, on the one hand, ‘crying up’ or ‘crying down’ the coinage—that is to say, changing its value in relation to the abstract money of account. On the other hand, it was important to ensure that bullion and nominal values of the precious metal did not diverge to the point where the coins went out of circulation to be melted down (Gresham’s Law). Third, the ‘token’ character of coins is apparent in that debasement of the coinage, by reduction of its metallic content, had very little effect on its purchasing power over considerable periods of time (Einaudi, 1953 [1936]; Innes, 1913; Wray, 2000; and see Goldsmith, 1987: 37 for a discussion of Roman debasement). Fourth, as prices had already begun to rise sharply decades before the discovery of South American silver, it seems improbable that its importation was the cause of seventeenth-century inflation (Fischer, 1996).

Capitalist credit-money 

Until late-sixteenth-century Europe, credit networks were restricted to small mercantile sectors and only very rarely developed fully into ‘private’ money (Boyer Xambeu et al, 1994). The issue of money remained the sovereign’s jealously guarded prerogative. In capitalism, however, monetary sovereignty is shared between the state and the private banking system. The history of the hybridization of precious metallic standard coinage and bank credit-money which persisted until the twentieth century cannot be dealt with here. However, emphasis on the importance of the form of capitalist credit-money entails an amendment of the consensus on the centrality of capital-labour (class) relations of production and the role of religion in the rise of capitalism (see Ingham, 1999).Early modern banking involving ‘the development of the law and practice of negotiable paper and of “created” deposits afford the best indication we have for dating the rise of capitalism’ (Schumpeter, 1994 [1954]: 78). Money was freed from the physical constraints of territory and geology and could become an autonomous force of production (Schumpeter, 1994 [1954]: 318). But, this development should not be explained in terms of the functional need for a more ‘efficient’ money in an economy whose dynamic lay elsewhere in ‘real’ factors such as technology, the division of labour, or capital-labour social relations of production (Ingham, 1999). Modern forms of credit-money were the result of particular geopolitical conditions and social structural changes in the reawakening of Europe after the collapse of the Roman Empire and its coinage system.

With the fall of Rome, the integration of money and account and means of payment in the form of coins disappeared (Davies, 1994). When minting of coins (moneta reale) resumed in the myriad political jurisdictions of fragmented medieval Europe, they were integrated by Charlemagne’s abstract moneta immaginaria (money of account) (Einaudi, 1953 [1936]: 230). The Christian ecumene of the Holy Roman Empire was too weak to impose a centralized minted coinage, but it was able to provide the normative basis for a common money of account. This dissociation of the two elements of money was of critical importance in providing the conditions for the emergence of merchants’ private bank money, which was based on the bill of exchange (Bloch, 1954). These bills were denominated in the moneta immaginaria and existed in an unstable relationship with myriad coinages. Eventually, the bills of exchange became detached from the commodities in transit that they actually represented and, resting only on the banker’s promise to pay, became autonomous means of payment. In this way, after a long struggle, money ceased to be the monopoly prerogative of the sovereign (Boyer-Xambeu et al, 1994).

With regard to ‘state theory,’ it should be noted that the merchants’ private bank-credit money only became widely accepted when the states joined the bank giros (Wray, 1990). The fusion of state and bank credit money developed first in the Italian city-states during the fifteenth and sixteenth centuries, then spread to Holland and, most decisively, to England, with the formation of the Bank of England in 1694. The widespread use of debt as a means of payment outside the networks of traders required the state to establish the legal depersonalization and negotiability of debt by which the simple credit of the personal IOU, recorded in unit of account, could become credit money (Carruthers and Babb, 1996; Ingham, 1999). All subsequent developments have been extensions and refinements of this evolutionary leap in monetary practice.

Modern money is constituted and sustained by two fundamental and reciprocal debtor-creditor relations. First, to pay for their goods and services, modern states issue money, which is required, in turn, to pay taxes. Second, the national debt, held by the state’s creditors, comprises a base of ‘high powered’ money, held in the banking system, from which new money can be ‘endogenously’ created (Wray, 1990; Smithin, 1994; Ingham, 2000b). Other forms of private or ‘near’ money exist in capitalist networks and local exchange trading schemes (see Ingham, 2002), but they remain subordinate to state money. However, it is argued that the Internet may yet bring about the purely private ‘market’ money, or even the ‘neutral veil’ described in economic theory.

Globalization and the ‘end of money’ 

Although it is not yet fully explored sociologically, the question of money and, moreover, the two conceptions of money, lie at the heart of the ‘globalization’ debate. Communication and information technology, it is contended, is eroding the power of nation-states from two directions—globally from the ‘outside’ and also locally from the ‘inside.’ The advance of transnational capitalism and global e-commerce has been paralleled by the revival of local and ‘informal’ economies. Both developments make use, in part, of new forms of money, based on communication and information technology (CIT). It is widely thought that these could successfully challenge the state’s monopoly and control of monetary production.Two aspects of this debate should be distinguished. First, CIT is literally transforming money. After its material forms of metal and paper, money is now widely thought to be becoming ‘virtual’ as in, for example, the electronic transmission of payments in the banking system, or in ‘electronic purses.’ Changes in the mode of monetary transmission may have important implications, particularly over the security of the payments system that constitutes the money (OECD, 2002); but confusion over ‘dematerialized’ money persists. On the one hand, as all money is abstract value it is ‘virtual.’ On the other, allforms of money have a ‘materiality.’ ‘Book money’ in sixteenth-century Italian banks was just as ‘virtual’ when it was transported through time and space by the stroke of the pen and today’s e-money leaves magnetic traces.

It is suggested that CIT makes it easier to create authentically alternative new forms of money that might erode or even displace state money. The development of the global’ and the ‘local’ both imply the ‘denationalization’ or ‘deterritorialization’ of money (Cohen, 2001). A number of developments on both ‘levels’ are referred to. At the globalized upper level of capitalism, for example, large transnational corporations might issue their own ‘scrip’ as media of exchange on Internet transactions. In more extreme vein, others argue that Internet barter-credit transactions might even bring about the ‘end of money’ and the redundancy of central banks (see references in Ingham, 2002). At the other end of the scale, the informal sectors of many modern economies have developed into local exchange trading systems (LETS) with their own local media of exchange. As the very sovereignty of the state is based upon the twin monopolies of money and coercive force, there are many possible consequences of such a leakage of money from its control. ‘Denationalized’ and ‘localized’ money could evade monetary regulation and the reach of the tax authorities with obvious consequences for macro-economic management and social welfare programmes. The potential of e-money also plays a part in liberal and social communitarian hopes for the Internet as a force for human emancipation from the state (Hart, 2000).

The extent to which CIT has and could produce alternative or complementary money has been exaggerated. Moreover, e-money has not grown as expected and with the bursting of the ‘dotcom’ bubble, most have failed. Much of the conjecture and almost all the hyperbole of the early work on e-money was the result of its conceptualization of money exclusively in terms of the function of medium of exchange. The debates are strikingly similar in their confusion to those that arose with the acceleration of the transition from metal to paper during the nineteenth century.

Circuits of economic exchange obviously have been able create their own media of exchange that are based, to some extent, on interpersonal trust and confidence. But if the base for the confidence has no foundation beyond the economic exchanges themselves, then the media of exchange will remain what anthropologists refer to as ‘limited purpose money.’ The Internet is seen by some as the means for a limitless extension of such networks (Hart, 2000). However, the creation of viable monetary space requires social and political relations that exist independently of any networks of exchange transactions. The extension of monetary relations across time and space requires impersonal trust and legitimacy. Historically, this has been the work of states. Monetary space is circumscribed by the authoritative money of account that defines the abstract value that constitutes the legal means of payment for the unilateral settlement of debt. Narrowly, economic relations cannot form the basis for monetary space that enables the extension of these relations across time and space. The Internet extends the technical capacity to expand the economic exchanges to an almost infinite extent, but it cannot provide the monetary space that would enable this to happen.

The Value of Money

Conventionally, the question of the value of money is considered to be exclusively an economic question. With the failure of ‘monetarism,’ however, it is recognized within economics that economic theory has difficulty in explaining this most basic of questions (Issing, 2001). Sociologically, two aspects are important: the social bases of inflation/deflation, and the ideological construction and projection of the value of money.

The social bases of inflation/deflation

The orthodox quantity theory of money remains, in principle, the underlying basis for orthodox economic monetary analysis. The value of money is a function of the ratio between quantities of money and goods: M (money) X V (velocity of circulation) = P (prices) X T (number of transactions). The equation is a logical identity, but it has always been assumed that causation runs from left to right; but it makes at least equal sense to reverse it. That is to say, for example, in the ‘struggle for economic existence,’ agents attempt to monetize their positions of power by raising their prices, which are met by the ‘endogenous’ creation of credit money in the banking system. Monetary policy involves the attempt to restrict this process by central bank interest rate policy. This is, of course, increasingly recognized within economic analysis, but the social and political process involved is not theorized. This idea that inflation results from escalating claims has a long pedigree in Keynesian ‘cost push’ theory (Fischer, 1996: 232-34). The ‘labour standard’ replaced the ‘gold standard,’ until the neoliberal measures of the late twentieth century (Hicks, 1989). During the hyperinflation of the 1970s, a promising sociology of inflation was developed (Hirsch and Goldthorpe, 1978), but it waned with its subject matter.

Growing deflationary pressures in the early twenty-first century demand a similar sociological response. For example, the ‘economic’ puzzle of Japan’s protracted recession and deflation since 1990 demands a complementary sociological analysis. Space precludes a thorough analysis and I will refer to only one aspect. With deflation, rational Japanese restrain consumption, as economic analysis suggests, in the expectation of continued falling prices. They fall into Keynes’s ‘liquidity trap.’ Only borrowing and spending can cure the ‘debt deflation.’ However, the recession has also created a level of insecurity that is a direct consequence of the social structure of the Japanese economy. In the postwar reconstruction, the provision of social welfare and security—especially lifelong employment—was assigned to the Japanese conglomerate corporations (keiretsu) and not so much to the state as in the West. Eventually, the recession eroded the willingness and ability of the keiretsu to continue this role. Regardless of the important political dimensions of Japan’s impasse, chronic insecurity resists all conventional economic policy measures to inflate the economy. As Keynes argued in the 1930s, security is sought in money as a store of value which perversely exacerbates the economic recession.

Changes in the balance of power between capital and labour obviously affect inflation/deflation, but arguably the pivotal relation is between creditors and debtors. Fundamentally, capitalism is based on the creation of debt to finance production and consumption. The capitalist’s role is defined in terms of its debtor status (Schumpeter, 1934: 101-3). On the other hand, creditors need to safeguard their position by the minimization of risk through default or the erosion of the value of the debt through inflation. The supply and demand of credit-money creation is mediated by the norms of credit-worthiness and morality of indebtedness. Credit is ‘rationed’ according to socially constructed criteria, and the normative framing of bankruptcy attempts to distinguish between rogues and genuine losers in the competitive process. For example, successful capitalist economies have largely abandoned the moral condemnation of debt and bankruptcy. On the other hand, it is likely that the stigma it continues to carry in Japan is one of the factors that has inhibited the ‘writing off’ of the mountain of debt that grinds the economy to a deflationary halt. Sociology has scarcely ventured into this field.

Finally, it is clear that the actual social process of credit-money creation and value stabilization is an independent source of inequality. Existing levels are intensified through ‘Matthew Effects’ (Ingham, 2000b). For example, those that ‘hath’ are a lower credit risk and gain more favourable interest rates, whilst those at the other end of the scale that ‘hath not’ are unable to gain access to the banking system and fall prey to ‘loan sharks.’ Once again the question is one of the construction of a status hierarchy of the quality of ‘promises to pay.’

The ideological construction of abstract value

Capitalism is characterized by a constant tension between the expansion of value through the creation of debt and the disintegration of the standard of value through inflation. This is a socially constructed non-mechanical relation and institutions are required to keep the two forces in balance. ‘The overriding problem is to find some means to maintain the working fiction of a monetary invariant through time, so that debt contracts (the ultimate locus of value creation …) may be written in terms of the unit at different dates’ (Mirowski, 1991: 579). The effectiveness of money as the continuity of stable abstract value through time depends on a commitment to a course of action that is based on trust that others will continue to accept our money. But, as I have stressed, this trust needs to be explained. The problem cannot be pursued beyond brief comments on impersonal trust and the ideological construction of money.

Monetary space is a form of impersonal trust (Schapiro, 1987). In the face of radical uncertainty, self-fulfilling long-term trust is rooted in social and political legitimacy whereby potentially untrustworthy ‘strangers’ are able to participate personally in impersonal complex multilateral economic relationships. However, the market is not in the business of trust building and the history of successful money is the history of successful states (Goodhart, 1998). Conversely, chronically unsuccessful states fail to produce adequate money precisely because they are unable to forge and sustain the two main monetary relations with their citizens on politically acceptable terms—taxation and government debt. The recent histories of Argentina, Russia and Afghanistan provide compelling evidence for this generalization.

Social conventions based on no more than either an equilibrium of competing interests or consensual agreement are fragile (Douglas, 1986). Enduring social institutions require a stronger foundation. ‘There needs to be an analogy by which the formal structure of a crucial set of social relations is found in the physical world, or in the supernatural world, or in eternity, anywhere, so long as it is not seen as a socially contrived arrangement’ (Douglas, 1986:48). If successfully enacted, ideological naturalization conceals the social production and malleability of institutions. Until the twentieth century, the ideological naturalization of money was achieved, and its social construction concealed, by the commodity form of money in the gold standard (see Carruthers and Babb, 1996). With the abandonment of gold, however, the fiction of a universal, immutable, natural monetary standard became increasingly difficult to sustain. None the less, the rhetoric of a ‘natural’ economic process persists in the theory that underpins monetary policy.

The production of a ‘working fiction’ of stable money now consists of (1) the attempt to control the price of debt through interest rates and (2) the monitoring of the degree to which this monetary policy is deemed to be managed in accord with orthodox economic theory. Expert economists in independent central banks assess whether economic activity might force interest rates and employment above their ‘natural’ levels (Issing, 2001). Economic theory plays a rhetorical role in the formation of expectations that define the situation and, consequently, influence the future value of money. Central banks establish their ‘monetary credentials,’ according to this rhetoric, and through the buying and selling of currencies the global money markets deliver their verdicts on the credibility of the ‘working fictions.’ The process has become increasingly formalized through the use of the hierarchies of credibility of sovereign debt produced by credit-rating agencies such as Standard and Poor and Moody’s.

Permanent monetary stability in a capitalist economy can only be considered to be a theoretical possibility if orthodox economic theory’s assumptions of neutrality and a natural tendency towards long-run economic equilibrium are accepted. But neither is helpful in explaining money as a social institution. All monetary systems, if they are to produce market prices and produce and store abstract value, are necessarily precarious and unstable. In Weber’s formulation, the possibility of the rationality of monetary calculation lies in the substantively non-rational foundations of the ‘struggle for economic existence’ (see also Holton and Turner, 1989).

Money—as constituted by ‘real’ social relations—is an autonomous and active element in economic life that has double-edged or contradictory effects. In the classic Keynes formulation, it is the means of creating expanded value in the form of commodities; but it is also the means of their destruction (Schumpeter, 1934 [1912]; Minsky, 1986). This attribution of real force and efficacy to money does not entail a metaphysical ‘nominalism’ or a form of ‘money illusion.’ This is so only if the economy is taken to comprise nothing of importance other than commodities and their ‘real’ relations. Rather, money is an expression of human society’s capacity for self-transformation. Arguably, this most powerful of ‘social technologies’ is one over which we have, inevitably, a most insecure grasp. Money is the clearest expression of the pure social construction of risk, and as such it deserves a more thorough sociological treatment.