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Analyzing the Constitutional Theory of Money: Governance, Power, and Instability


At the heart of the constitutional theory of money is the argument that money is central to governance. This article explores the ways in which the core mechanism of the publicly undergirded monetary system, involving the incentivization and disciplining of private investors in the money creation process, creates its ‘fiscal value’ and generates both power struggles and possible instability in the unit of account. This twin dynamic of power and instability is intrinsic to a longue durée analysis of money. It is argued that since the current jural relations allocate money and power in particular ways, the basis is created for potential future political challenges to the status quo ante, thereby creating instability. Further, the article emphasizes the centrality of the indeterminacy criterion which is at the core of the critical legal studies (CLS) framework, and its intimate connection to Keynes's notion of uncertainty. The indeterminacy/uncertainty nexus is used to explore how currency stability is determined or undermined by expectations, power struggles, tax contestations, and broader policy frameworks. Finally, the article relates this monetary theory to the literature on state-led industrialization and shows how such a constitutional money theory of industrialization is an alternative to the New Institutionalist perspective which emphasizes the centrality of ‘clear and well-defined’ property and contracts in order to create an ‘efficient’ economy.

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1 See C. Rogers, Money, Interest and Capital: A Study in the Foundations of Monetary Theory (1989).

2 G.F. Knapp, The State Theory of Money (1924), 1. Cited in Kreitner, R., ‘Legal History of Money’, (2012) 8 The Annual Review of Law and Social Science 415, at 416. On endogenous money and the MMT view see L.R. Wray, ‘Modern Money Theory: The Basics’, New Economic Perspectives, 24 June 2014, available at (accessed 19 January 2018).

3 See also Kennedy, D., ‘The Stakes of Law, or Hale and Foucault!’, (1991) 25 Legal Studies Forum 327 ; Moudud, J.K., ‘Looking into the Black Box: Policy as a Contested Process’, in Lee, F.S. and Cronin, B. (eds.), Handbook of Research Methods and Applications in Heterodox Economics (2016), 400 .

4 Hohfeld, W.N., ‘Some Fundamental Legal Conceptions as Applied in Legal Reasoning’, (1913) 23 Yale Law Journal 16 .

5 See Kennedy, supra note 3, and Gordon, R.W., ‘Critical Legal Histories’, (1984) 1368 Yale Law School Faculty Scholarship Series 57 . For analyses of the longue durée framework see Lee, R.E. and Wallerstein, I. (eds.), The Longue Durée and World-Systems Analysis (2012).

6 See Hohfeld, supra note 4, at 24 (emphasis in original).

7 Ibid., at 36.

8 Corbin, A.L., ‘Jural Relations and Their Classification’, (1921) 30 Yale Law Journal 226, at 237–8 (emphasis in original).

9 Ibid., at 238.

10 For an elaboration of this proposition see Desan, C., ‘The Market as a Matter of Money: Denaturalizing Economic Currency in American Constitutional History’, (2005) 30 Law & Social Inquiry 1 .

11 See Kennedy, supra note 3.

12 C. Desan, ‘The Monetary Structure of Economic Activity’, (2016) unpublished paper, Harvard Law School.

13 See Desan, supra note 10, at 28.

14 Dollarization is usually a consequence of macroeconomic and/or political instability. See N. Duma, ‘Dollarization in Cambodia: Causes and Policy Implications’, (2011) IMF Working Paper WP/11/49; M. Mecagni et al., ‘Dollarization in sub-Saharan Africa: Experience and Lessons’, (2015) IMF. This issue is of relevance for countries notably in sub-Saharan Africa, but also in Latin America, and parts of South and East Asia.

15 L. Taylor, Varieties of Stabilization Experience: Towards Sensible Macroeconomics in the Third World (1988); L. Taylor, Reconstructing Macroeconomics (2004).

16 Herrero and Casey, ‘In Venezuela, Cooking With Firewood as Currency Collapses’, The New York Times, 2 September 2017, available at (accessed 19 January 2018); C. Obianwu, ‘Why the Central Bank is Legally Wrong on Dollarisation’, 2015, available at (accessed 19 January 2018); and for Salvatore, Mexico D., Dean, J.W., and Willett, T. D. (eds.), The Dollarization Debate (2003).

17 See Hohfeld, supra note 4.

18 See Desan, supra note 10, at 27–8 (emphasis added).

19 Samuels, W.J., ‘The Economy as a System of Power and Its Legal Bases: The Legal Economics of Robert Lee Hale’, (1973) 27 University of Miami Law Review 261, at 344 (emphasis added).

20 See Gordon, supra note 5, at 88.

21 See Desan, supra note 10, and C. Desan, Making Money: Coin, Currency, and Coming of Capitalism (2014).

22 The stakeholder model discussed here is adopted from Desan (2014), supra note 21. Desan coined the term ‘stakeholder’.

23 See below for the discussion of money that is specie-backed.

24 See Desan (2014), supra note 21, at 64 and 47.

25 For the American colonies see Grubb, F., ‘Is Paper Money Just Paper Money? Experimentation and Variation in the Paper Monies Issued by the American Colonies from 1690 to 1775’, (2016) 32 Research in Economic History 147 .

26 Desan, C., ‘The Constitutional Approach to Money: Monetary Design and the Production of the Modern World’, in Bandelj, N., Wherry, F.F., and Zelizer, V.A. (eds.), Money Talks (2017), 109, at 119.

27 Desan, C., ‘From Blood to Profit: Making Money in the Practice and Imagery of Early America’, (2008) 20 The Journal of Policy History 26, at 28.

28 See Desan (2014), supra note 21.

29 Calomiris, C.W., ‘Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental’, (1988) 48 Journal of Economic History 47 .

30 Hamilton, C., ‘Expectations and the “Stockholm School”’, (1979) 81 The Scandinavian Journal of Economics 434 .

31 Keynes distinguished uncertainty from risk where the former cannot be estimated in probabilistic terms. See J.M. Keynes, ‘The General Theory of Employment’, (1937) Quarterly Journal of Economics 51.

32 J.M. Keynes, The General Theory of Employment, Interest, and Money (1953), Ch. 12.

33 Ibid., at 154.

34 Ibid., at 162.

35 Kalecki, M., ‘Political Aspects of Full Employment’, (1943) 14 Political Quarterly 322 .

36 J.M. Keynes, The Collected Writings of John Maynard Keynes Vol 25. Activities 1940-1944: Shaping the Post-war World: The Clearing Union (1980), at 148. Cited in Crotty, J.R., ‘On Keynes and Capital Flight’, (1983) 21 Journal of Economic Literature 59, at 62.

37 Keynes argued, ‘[O]ur desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future . . . The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of the degree of our disquietude.’ From Keynes, J.M., ‘The General Theory of Employment’, (1937) 51 The Quarterly Journal of Economics 209, at 216.

38 Moore, M., ‘Between Coercion and Contract: Competing Narratives on Taxation and Governance’, in Bräutigam, D., Fjelstad, O.H., and Moore, M. (eds.), Taxation and State-Building in Developing Countries: Capacity and Consent (2008), 34 .

39 Ofonagoro, W.I., ‘From Traditional to British Currency in Southern Nigeria: Analysis of a Currency’, (1979) 39 The Journal of Economic History 623 .

40 See, e.g., N.A.O. Abdul-Rashid, ‘Stemming The Menace of Dollarization’, Economic Confidential, 20 April 2015, available at (accessed 19 January 2018). See also Obianwu, supra note 16.

41 This term was coined by Schumpeter. See I.M. Martin, A.K. Mehrotra, and M. Prasad, The New Fiscal Sociology: Taxation in Comparative and Historical Perspective (2009).

42 Kaldor, N., ‘Will Underdeveloped Countries Learn to Tax?’, (1963) 41 (2) Foreign Affairs 410, at 418 (emphasis added).

43 See Calomiris, supra note 29; Sargent, T.J., ‘The Ends of Four Big Inflations’, in Hall, R.E. (ed.), Inflation: Causes and Effects (1982), 41 .

44 See Crotty, supra note 36.

45 See Kalecki, supra note 35.

46 Hale, R.L., ‘Bargaining, Duress, and Economic Liberty’, (1943) 43 Columbia Law Review 603, at 628.

47 ‘[T]he reform of capitalist economy by socialist parties is difficult even when they are determined not to interfere with the property system. For the mere possibility that they might decide to do so undermines that type of confidence which in liberal economy is vital, namely, absolute confidence in the continuity of the titles to property’. From K. Polanyi, The Great Transformation (1944), at 234.

48 See Kalecki, supra note 35, at 3.

49 See Keynes, supra note 32; T. Veblen, The Theory of Business Enterprise (1978); W.C. Peterson and P.S. Estenson, Income, Employment, Economic Growth (1996).

50 Equal to the hourly wage rate per worker + materials (including depreciation) costs per worker divided by labour productivity.

51 For example, do strong tort laws prevent firms from flooding the market with a large number of low-quality and potentially harmful products? How do labour laws affect distributional struggles and thus unit labour costs? Are there import tariffs in place that expand the domestic market by restraining the sales of foreign firms? Do industrial policies promote export markets? Is the country embedded in a free trade zone, which subjects domestic firms to more efficient foreign firms and thus shrinks the former's market shares?

52 See Kennedy supra note 3. See, e.g., various chapters in R. Asher and R. Edsworth, Autowork (1995) regarding an application of Kennedy's argument to the UAW and the auto industry.

53 This was exactly the experience of the Mitterrand government in the early 1980s. See J. Birch, ‘The Many Lives of François Mitterrand’, Jacobin, 19 August 2015, available at (accessed 19 January 2018).

54 For references to the substantial international literature on business opposition to social democratic policies see Moudud, supra note 3.

55 The question of foreign debt's excessiveness clearly does not affect the US since most of its debt is in its own currency. See B. Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (2011) on this issue. Thus, the discussion on foreign debt in the current article pertains to all other countries, especially those in the Global South. For all these countries, trade deficits involve a loss of foreign exchange reserves and thus increased need for foreign borrowing. Finally, there is an established post-Keynesian literature which argues that a rising budget deficit will have a negative effect on the trade balance, i.e., trade balances constrain how high budget deficits can increase. See Moreno-Brid, J.C. and Pérez, E., ‘Balance-of-Payments-Constrained Growth in Central America: 1950-96’, (1999) 22 Journal of Post Keynesian Economics 131 ; W. Godley and M. Lavoie, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth (2007), Ch. 6.

56 Export promotion and protectionist policies would raise the foreign demand for domestically produced goods relative to the domestic demand for foreign goods. Other things being equal, this situation would appreciate the value of the domestic currency. Finally, note that capital inflows would also tend to appreciate the currency.

57 See, e.g., H. Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective (2002); A. Amsden, Asia's Next Giant (1989).

58 R. Wade, Governing the Market (1990); P. Evans, Embedded Autonomy: States and Industrial Transformation (1995); Trubek, D.M. et al. (eds.), Law and the New Developmental State: The Brazilian Experience in Latin American Context (2013).

59 See Desan, supra note 12, at 2.

60 Tarullo, D.K., ‘Beyond Normalcy in the Regulation of International Trade’, (1987) 100 Harvard Law Review 546 .

61 See Gordon, supra note 5, at 114.

62 Kennedy, D., ‘Three Globalizations of Law and Legal Thought: 1850-2000’, in Trubek, D.M. and Santos, A. (eds.), The New Law and Economics Development: A Critical Appraisal (2006), 19 .

63 M.J. Horwitz, The Transformation of American Law 1870-1960: The Crisis of Legal Orthodoxy (1992), Ch. 8.

64 L.R. Wray, Understanding Modern Money (1998); Wray, L. R., ‘Alternative Approaches to Money’, (2010) 11 Theoretical Inquiries in Law 29 ; Wray, L.R., ‘From the State Theory of Money to Modern Money’, in Fox, D. and Ernst, W. (eds.), Money in the Western Legal Tradition: Middle Ages to Bretton Woods (2016).

65 See Horwitz, supra note 63, at 240–2.

66 Jaffe, L.L., ‘The Illusion of the Ideal Administration’, (1973) 86 Harvard Law Review 1183, at 1187.

67 See Kennedy, supra note 3, at 336. In this quote Kennedy draws on insights from R.L. Hale, Freedom Through Law: Public Control of Private Governing Power (1952) pages 541–50; Kennedy, D., ‘Legal Formality’, (1973) 2 The Journal of Legal Studies 351, at 383–6; Samuels, W.J., ‘The Economy as a System of Power and Its Legal Bases: The Legal Economics of Robert Lee Hale’, (1973) 27 University of Miami Law Review 261, at 344–54.

68 See Kennedy, supra note 3, in particular at 335–7.

69 See Desan (2014) supra note 21, Ch. 1.

70 Ibid., at 64.

71 Ibid.

72 Ibid., see North and Weingast, infra note 116, at 59. See also Desan's discussion (ibid., at 127) regarding people's occasional desire to convert the domestic currency into bullion so as to send it abroad in order to be reconverted into a foreign currency. As she points out, sometimes this was done for arbitrage purposes.

73 See Chang, supra note 57.

74 See Desan (2014), supra note 21, at 96.

75 Ibid., at 271 and Ch. 3.

76 Desan, C., ‘Beyond Commodification: Contract and the Credit-Based World of Modern Capitalism’, in Hamilton, D.W. and Brophy, A.L. (eds.) Transformations in American Legal History: Laws, Ideology, and Markets. Essays in Honor of Morton J. Horwitz (2010), Vol. II, 111, at 113. Quoting the Supreme Court (Norman v. Baltimore & O.R. Co., 294 U.S. 240, 304 (1935)), Desan observes at 114 that ‘“the authority to impose requirements of uniformity and parity” is “an essential feature” of controlling a currency in “accord with the usage of sovereigns”’.

77 See Desan (2014), supra note 21, at 153 and 165.

78 Ibid., at 218 and 219.

79 Ibid., at 243.

80 Ibid., at 255

81 Ibid., at 261.

82 Ibid., at 264.

83 Ibid., at 281 and Ch. 7 more generally.

See G. Alexander, Commodity and Propriety: Competing Visions of Property in American Legal Thought 1776-1970 (1997) for parallel ideological processes occurring in the US with the growing commercialization of society.

84 See Desan (2014), supra note 21, at 281.

85 Ibid., at 269 and 270.

86 Ibid., Ch. 8.

87 See Desan, supra note 27; and M. Ricks, The Money Problem: Rethinking Financial Regulation (2016).

88 See Desan (2014), supra note 21, at 387.

89 ‘Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into the banker's, is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker's money; he is known to deal with it as his own; he makes what profit he can, which profit he retains to himself.’ (Foley v. Hill (1848) 2 HL 28, 38–9; 9 ER 1002, 1006–1007). Cited from Desan (2014), supra note 21, at 393 and 394.

90 Singer, J.W., ‘Property’, in Kairys, D. (ed.), The Politics of Law: a Progressive Critique (1998), 240 ; J.W. Singer, No Freedom without Regulation: the Hidden Lesson of the Subprime Crisis (2015).

91 See Desan (2014), supra note 21, at 368–9. For literature on state-led industrialization see supra notes 57 and 58.

92 Ibid., at 369. Officers of the BoE were associated with the Whig Party while the National Land Bank's promoters and supporters were Tories (ibid., at 368).

93 Ibid., at 369.

94 Ibid., at 329

95 Ibid., at 370.

96 Murphy, A.L., ‘Dealing with the Threat of Reform: The Bank of England in the 1780s’, in Brown, A.T., Burn, A., and Doherty, R. (eds.), Crisis in Economic and Social History: A Comparative Perspective (2015), 283, at 284; E.M. Kim, Business Business, Strong State: Collusion and Conflict in South Korean Development, 1960-1990, (1997).

97 M. J. Horwitz, The Transformation of American Law 1780-1860, (1977), at xiv.

98 Ibid., at xvi.

99 Ibid., at xiv.

100 E.M. Wood, Democracy Against Capitalism: Renewing Historical Materialism (2016).

101 See Gordon, supra note 5 .

102 Johnson, J., ‘The Money = Blood Metaphor, 1300 – 1800’, (1966) 21 The Journal of Finance 119 .

103 See Desan (2014), supra note 21.

104 L.R. Wray, Money and Credit in Capitalist Economies (1990). See also David Ricardo's chapter ‘On Foreign Trade’ in his On the Principles of Political Economy and Taxation (1817), in which he likened foreign trade to barter, with money finding its own level, available at (accessed 19 January 2018).

105 A.M. Shaikh, Capitalism: Competition, Conflict, Crises (2016); M. Smith, Thomas Tooke and the Monetary Thought of Classical Economics (2011); R.F. Harrod, International Economics (1957); Milberg, W., ‘Say's Law in the Open Economy: Keynes's Rejection of the Theory of Comparative Advantage’, in Dow, S. and Hillard, J. (eds.) Keynes, Uncertainty and the Global Economy: Beyond Keynes (2002), Vol. II, at 239.

106 See Shaikh, supra note 105.

107 See Desan (2014), supra note 21, at 418.

108 See Desan (2014), supra note 21, ‘Conclusion’.

109 Ibid., at 418.

110 See supra notes 57 and 58.

111 See supra note 60.

112 C. Schonhardt-Bailey, From the Corn Laws to Free Trade: Interests, Ideas, and Institutions in Historical Perspective (2006); P.S. Ho, Rethinking Trade and Commercial Policy Theories: Development Perspectives (2010).

113 See Desan (2014), supra note 21, at 328.

114 Ibid., at 418.

115 See supra notes 57 and 58.

116 North, D.C. and Weingast, B.R., ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England’, (1989) 49 The Journal of Economic History 803 .

117 For further elaborations along these lines see Oates, W.E., ‘An Essay on Fiscal Federalism’, (1999) 37 Journal of Economic Literature 1120 ; B.R. Weingast, ‘The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development’, (1995) Spring Journal of Law, Economics, and Organization 1.

118 See Desan (2014), supra note 21.

119 See Chang, supra note 57.

120 Kennedy, D., ‘Some Caution About Property Rights as a Recipe for Economic Development’, (2011) 1 Accounting, Economics, and Law 1 .

121 See Gordon, supra note 5, at 112.

122 See Desan (2014), supra note 21, at 292.

123 Ibid., Ch. 7.

124 E.E. Baptist, The Half Has Never Been Told: Slavery and the Making of American Capitalism (2014); S. Beckert, Empire of Cotton: A Global History (2015).

125 In each case the correlation coefficients linking the two variables exceed 0.8 and are highly statistically significant.

126 ‘Slavery is a legal relationship: It is precisely the slave's bundle of jural rights (or rather lack of them) and duties vis-à-vis others (he can't leave, he can't inherit, he has restricted rights of ownership, he can't insist on his family being together as a unit, etc.) that makes him a slave’. From Gordon, supra note 5, at 103 (emphasis in original).

127 Desan, C., ‘Money as a Legal Institution,’ in Fox, D. and Ernst, W. (eds.), Money in the Western Legal Tradition: Middle Ages to Bretton Woods (2016),18 at 30–1.

128 See Gordon, supra note 5, at 101.

129 Ibid., at 109.

130 See, e.g., D.A. Kysar, Regulating From Nowhere: Environmental Law and the Search for Objectivity (2010), and references cited therein.

131 E.P. Thompson, The Poverty of Theory and Other Essays (1978), 96 (emphasis in original).

132 E.P. Thompson,Whigs and Hunters: The Origin of the Black Act (1975); Brenner, R., ‘Agrarian Class Structure and Economic Development in Pre-industrial Europe’, (1976) 70 Past and Present 30 . See Gordon's (supra note 5) discussion of these authors.

133 On the political history of taxation in England see Cockfield, A.J. and Mayles, J., ‘The Influence of Historical Tax Law Developments on Anglo-American Laws and Politics’, (2013) 5 Columbia Journal of Tax Law 40 .

* Professor of Economics, Sarah Lawrence College, Bronxville, New York, USA []. I would like to thank Christine Desan for extensive discussions on monetary theory, Martha McCluskey on broader ones on legal theory, John Haskell for his enthusiastic encouragement of this project, Geoff Gordon for his insightful comments, and Jennifer Taub for her helpful advice on an earlier version of the paper. The usual disclaimers apply.

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