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8 - National Money versus Shadow Banking: Contradictions of a Public–Private Credit System
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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- 14 September 2023
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- 04 January 2024, pp 153-171
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Summary
National money is a credit instrument issued by the state's bank, the central bank: money has everywhere been nationalised. However, in rich nations, the institutions that actually issue day-to-day credit remain private, for-profit banks. This contingent nesting of private banking within national money creates hybrid and potentially contradictory phenomena as public credit and private interest clash. This hybrid hierarchy is contingent, expressing a local political settlement. A conflict between private profit and public good is baked into such hybrid systems, the political settlement modulating the antagonists.
This chapter outlines some of the dynamics and contradictions of a hybrid credit system in the abstract and then illustrates how this logic has played out in the development of the post-war American system. In America, hybridity and marketisation combine to amplify the inherent instability of credit. While banks share the exorbitant privilege of ‘issuing money’, they are disciplined by the par constraint. Qualitative differences in public–private robustness are papered over by central-bank control mechanisms: bank regulation, deposit insurance, LOLR and bailouts.
The political settlement determines whether the central bank sets these mechanisms for elasticity or discipline. We read the development of American shadow banking as an instantiation of neoliberalism, the prevailing political settlement. Shadow banking developed through a contingent conjuncture of long-term marketisation processes, first of liabilities (c. 1960) and then assets (c. 1980). This confluence metastasised private money markets which dangerously amplified the inherent instability of the hybrid system.
There is nothing ‘essential’ about this hybrid nature of modern money and its attendant institutions (pace Mehrling, 2013). Hybridity between public and private banking is a contingent historical and political fact. It only appears essential, arguably because this particular formation, having grown up with capitalism itself in early modern Europe (Ingham, 2004), is now globally hegemonic and therefore naturalised. India and China, between them half the world's population, have nationalised both money and banking. These systems have their own specific set of contradictions. They are themselves hybrids of political and economic mutualisation, a form of hybridity that is in fact essential and compatible with different formal ownership structures (see Chapter 1).
All credit systems are inherently unstable, but the profit motive amplifies instability because it incentivises banks into ‘procyclical’ behaviour, making both booms and busts bigger than they would otherwise be. Yet money is also inherently hierarchical.
Preface
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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- 14 September 2023
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- 04 January 2024, pp xi-xii
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Summary
This book is both a collection and a synthesis. While some of the case-study chapters started as responses to the global financial crisis of 2007–2008, the bulk of the theoretical section was written to synthesise the lessons learned from the cases and to connect them with all three major schools of monetary thought. The test of this synthesis, like all theories, is its generality: how many monetary contexts can it speak to?
The work synthesises elements from all three schools of monetary thought. Social theory is best seen as a resource from which we can select various elements from various theories to assemble our own social–theoretic machines fit to tackle our particular questions. Loyal adherence to a particular school therefore can end up damaging the work of social theory. As complex compounds assembled in particular contexts for particular questions, social theories are quite modular. Each element can in principle be recombined with elements from other theories. Theories are not infinitely recombinable, of course, and we will constantly argue over which elements are foundational, which are dispensable, which necessarily hang together and which are separable. But such arguments already concede the inherent modularity of theory.
The theoretical synthesis we attempt here combines elements from the Banking, State and Currency Schools with lessons from classical political economy and old institutional economics. The Banking School understands money as credit, as means of payment for settling debts public and private. It carries an implicit institutionalism because it recognises the futural orientation of all economic life: only institutions can help us collectively manage the uncertain future; institutionalism and futurity go hand in hand.
But the Banking School lacks an adequate account of hierarchy in money—why some monies are better than others—taking refuge in the nominal power of the law. This is the domain of the State School, which identifies the state as being central to money but does so by raising the state's nominal power to such a height that it ironically eclipses politics itself. This book seeks to improve upon the State School's understanding of money by placing it with a political understanding of the ontology of all social institutions including the state, an understanding inspired by Roberto Unger though it has many referents.
Finally, the book urgently insists on the materiality of money.
2 - The Money Fetish: Making Promises into Things
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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- 14 September 2023
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- 04 January 2024, pp 25-40
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Summary
In the last chapter, we saw that credit is not epiphenomenal but constitutive of political and economic life. The economist's fiction of a barter economy ‘veiled’ by money leads to a thing-based monetary science of quantities, velocities and value from scarcity. But a monetary economy is ontologically distinct, a social entity that requires a social science.
Yet the economist's intuition is not entirely misguided: money does in fact behave like a thing with value, a commodity. The question is how it does that, and why different money-things have different values.
Money is the outcome of an institutional process by which creditary promises acquire the attributes of things, commodities with value. This of course recalls Marx's idea of the commodity fetish whereby social relations between people take the necessary form of appearance of relations between things because the social element, ‘value’, being abstract cannot be perceived as such. With money, this process occurs through a particular kind of institutionalisation, ‘mutualisation’, a ubiquitous socio-economic relation which is at the core of the social technology of banking—namely the business of dealing in credit. The relation with bank money especially is obscured; given its form of mutualisation, we never encounter it as such.
The magic of credit, and the outcome of mutualisation, is the functional thingification of promises: promises remain promises, but they can move about the world like value-bearing things. So successful is this process that common sense takes money to be a fiat-thing, a token rather than a credit-promise. Mutualisation is the variable process of making promises operate as things. Erroneous as an account of money's essence, ‘fiat’ nevertheless refracts the institutionalised source of money's power.
One of the main ways in which a money fetish is created in the credit system comes from hierarchy itself. One level's credit (inside money) is simultaneously another's money (outside money), and outside-ness confers thing-ness. We consider this first before outlining four further elements of fetishism: ‘lending to the bank’ appearing as ‘depositing’, system-wide flows of liquidity appearing as localised stocks of cash, and credit creation appearing as dishoarding cash. Finally, we consider how the ‘exchange rate’ of 1 between bank money and central-bank money, the par constraint, amplifies the money fetish. We conclude by discussing the irony of the cryptocurrency enterprise attempting to copy the fetishised projection of the credit system by trying and failing to make bare tokens work as money.
Part II
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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Bibliography
- Anush Kapadia, Indian Institute of Technology, Bombay
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4 - Mystical Kernel within the Rational: The Banking School's Residual Chartalism
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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… practically, and for the purposes of their daily life, [bankers] have no need to think, and never do think, on theories of currency.
—Bagehot (1920 [1873])Why, according to the Banking School, is central-bank money better than bank money? What is its account of the hierarchy of money? This chapter will illustrate that the answer is paradoxically Chartalist, albeit in a residual manner. ‘Outside money’ is rendered by several stalwarts of the Banking School as ‘fiat’, defined by legal tender laws and/or monopoly grants to an issuing bank. A political theory of money, by contrast, bases the superior quality of central-bank money in its robust (political) mutualisation at scale.
The Banking School oddly agrees with Chartalism that legal tender laws drive hierarchy in money. We interpret this as being anchored in the former's argument that a qualitatively superior, ‘outside’ instrument is required to settle debts. For the Banking School, the law is not the ultimate source of the distinction between money and credit because the logic of debt settlement itself implies such a distinction. ‘Promises precede deliveries’ (Hicks, 1989), so transactions inherently proliferate chains of credit that only a qualitatively better ‘money’ can stop. The logic of hierarchy is inherent in debt which, in turn, is inherent in the economy itself.
This generates unstable dynamics that again requires hierarchy to manage. Ralph Hawtrey identified a constitutive tension between value and liquidity. Transactions proliferate credit, but the ‘inherent instability of credit’ pulls against a stable value of money. This incoherence can be managed ‘on banking principles’ – that is, through the hierarchy, by modulating banks’ survival constraint.
Reading the Banking School somewhat against its own grain, we can also see the more political elements of money—namely how political settlements are expressed in the configuration of the credit system (Bagehot, 1920 [1873]) and how money is linked to value (Hawtrey, 1919).
For a tradition of thought that emerged in eighteenth-century Britain out of real banking practice, this school of thought naturally considers the fact of outside or Chartal money as only the very beginning of the story (Arnon, 2011). For the Banking School, the credit system has its own sui generis dynamics built out of interlocking claims on outside money—dynamics that must be understood in all their interactive complexity if the system is to be managed.
12 - Democratic Sovereignty Makes Money
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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Democratic sovereignty embeds national money securely in a national economy over a long time horizon. Yet, ironically, it also severely limits the tools of monetary management. Democracy's post-war rise destroyed the central bank's ability to sharply raise interest rates to stem a credit bubble as this would crash the economy (Polanyi, 2001 [1944]; Eichengreen, 1998). Without this commitment to crash the economy, global money markets became so destabilising that they had to be contained; post-war controls on global capital flows were the flipside of democracy (Ruggie, 1982).
The deregulation of the neoliberal era signalled a reversal, but democracy endured albeit weakened. ‘Privatised Keynesianism’ and a welfarist ‘politics of the governed’ in the Global North and the Global South, respectively, were required to keep a tentative social peace (Chatterjee, 2004; Crouch, 2011). Democracy still limited price-based control, but now deregulation dismantled non-price control, resulting in a substantial amplification of the inherent instability of credit. Money's inherent hierarchy was weaponised and therefore delegitimated. Instability and inequality eventually shattered the neoliberal peace, giving rise to our populist present.
Democracy therefore gives money durable scale while simultaneously limiting the set of feasible institutional arrangements. We conclude by suggesting that a democratic response to both the impairment and delegitimation of monetary governance would be to nationalise banking behind capital controls while, following Keynes, globalising ‘ideas, knowledge, science, hospitality, travel’. Democracy means nationalising banks and controlling capital flows. It does not mean narrow, exclusionary nationalism.
Collectives standing behind their money have a political choice: how do we configure a system that is inherently hybrid, hierarchical and unstable? What are our goals for this system? Do we want to maximise growth for the time being at the cost of inequality? How much instability do we tolerate in the service of this growth? How much pollution and intergenerational inequality are we willing to endure?
None of these are mechanically available, of course, but we can set the system in a direction with appropriate margins of safety. If these sound like questions for ‘fiscal policy’, it is because we are used to inhabiting a dichotomy set up by a political move to depoliticise ‘monetary policy’ as solely a technical exercise rather than an expression of politics through the design of monetary technicalities. Money is just government debt that does not mature and pays no interest. Just like government debt, it is a bet on a collective's future.
Part I
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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List of Abbreviations
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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Frontmatter
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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List of Figures and Tables
- Anush Kapadia, Indian Institute of Technology, Bombay
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9 - A World without: World Money
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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- 14 September 2023
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- 04 January 2024, pp 172-187
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Summary
Instead of the Federal Open-Market Committee … we need an Atlantic Open- Market Committee.
—Kindleberger (2000 [1967])The US credit system saw banks break out of public-minded control mechanisms; the inherent instability of credit was thereby amplified and crisis ensued. Control mechanisms have evolved precisely to configure the collective's exposure to the inherent instability of the credit system. Without them, the system is incomplete, unstable and tends to be undemocratic.
Yet at the global level, we have precisely such an incomplete, public–private-like hybrid system but without the attendant public element. The global system is therefore even more subject to capture and instability. The US’ national-economy–central-bank complex acts as a ‘private bank’ in the world economy but without a corresponding global central bank given the absence of a world state. There are therefore no global mechanisms to control global credit. Central banks issuing their own liabilities are to the global economy what Citibank issuing its own money would be to a national economy. The last attempt to erect such a private money system detached from central-bank control, namely American shadow banking, ended in disaster. Yet this is the very nature of the global credit system.
Non-state global institutions, either global markets or the IMF, fail at issuing world money because they lack robust mutualisation at scale. We therefore have a dilemma: if a sovereign provides world money, it is difficult to discipline, seeding global risk. If a non-sovereign provides world money, it will not be credible: only (some) sovereigns can do this. Following Charles Kindleberger, we argue that the international community needs to invent forms of global, non-state political mutualisation that could underwrite the rough equivalent of domestic control mechanisms, contain the ‘private bank’ that is the American Fed and contain the global system's contradictions. Permanent swap lines between core central banks already point in that direction, but they are mere fire engines at this point, lacking countercyclical pressure on the Fed.
How do we provide the global public good of monetary governance without a world state? There is no ‘world money’, no single instrument whose reserve asset is the entire world economy because without a world state, there is no fiscal means to tap into the entire world economy in one go. We have instead a small set of national monies tethered to substantial national economies functioning as global means of payment.
Acknowledgements
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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Index
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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1 - Money Anchored to the Future
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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Summary
Money is institutionalised social power, the power of people working together, implicitly or explicitly, in a division of labour to produce a collective output. Money is the result of an institutional process which encapsulates the power of productive collective action in a flexible, tradable instrument. Yet it takes an entire system of hierarchically concatenated institutions to transform a collective's powers of production into a highly liquid instrument. This book outlines the nature of that system. It discusses this process in theory (Part I) before moving on to a series of cases to illustrate how variations in the politics of collective action lead to variable monetary quality (Part II).
Why does something so seemingly insubstantial—a promise, a paper note, a digital ledger entry—have real value? This is perhaps the central mystery of money. Anecdotally, we know that many people still think money is backed by gold (or ought to be), something confirmed by emerging scholarship (for example, Kraemer et al., 2020). In order to fully account for money, we cannot dismiss such perceptions as mere error or false consciousness. Social theory has to explain how a credit instrument, a promise, can durably and systematically function like a real commodity. What is it about the money system that enables promises to function like valuable things? Why are some monies better than others? Why are money systems always hierarchical?
We propose a political theory of money as an answer. Social theorists have of course long argued that money is a social relation, but that still begs the question of why some social relations generate better, more widely acceptable money than others. To answer this question, we need a theory of types of social relations that map onto variable monetary robustness. We also need a theory of the social function of money because what counts as a ‘better money’ itself presupposes a particular historical social formation. The functional requirements of money change with the dominant social formation. As such, the prevailing form of money in any epoch tells us a great deal about how we have chosen to live and work together. The kind of money we have emerges from the kind of society we have.
As money has grown even more abstract, rich nations have become hyper-financialised, and inequality has grown to the point of breaking down the very legitimacy of states.
Contents
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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7 - Coherence: Why Money Is Not Value
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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The entire system is like an archetypical Escher print, where stairs and pillars mutually buttress an elaborate interconnected edifice, but no part of the edifice ever touches the ground.
—Mirowski (1990, p. 717)Production, consumption, and trade, are nothing more than flows of money in and out and between different economic units. The most real thing is money, but money is nothing more than a form of debt, which is to say a commitment to pay money at some time in the future. The whole system is therefore fundamentally circular and self-referential. There is nothing underneath, as it were, holding it up.
—Mehrling (1999, p. 138)Forms of money represent an abstract conception of value which is measured by itself—that is to say, a tautological but efficacious social construct.
—Ingham (2018, p. 844)There have only ever been various monies of differing quality. Our contemporary world is now a world of national monies tied to bank money backstage. Money's variability is part of its ontology. A theory of money has to account for this variation: why do some monies have more value than others? This question points to the material power of money, but not necessarily only through the question of how much of the world of goods and services a particular money can command.
Our theory of money takes the material dimension of money to be irreducible, but it does so via the financial or contractual route rather than the purchasing power or exchange route. This is not to say that the command of wealth is not a key driver of money's ‘substantive value’, to use Weber's term; it obviously is. Yet money remains a liability that promises to pay what is on the asset side of the issuing balance sheet. If credit or debt is part of money's very ontology, then so too is this asset or liability structure that contractually anchors money's value in the material dimension. The nature and extent of this anchoring vary with the form of mutualisation of the issuing balance sheet, economic or political, but both forms point to something external to the credit–debt relationship. There is something holding up money after all.
Nominalists (such as Simmel and Ingham) read money as a tautological social construct—value itself.
10 - Proof of Institutions: Cryptocurrencies as Digital Fiat Money
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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Can we design money without hierarchy, instability and state power? Tech utopians have tried with Bitcoin. Their failure arguably proves that these are indeed fundamental elements of money. Hierarchy emerges willy-nilly in Bitcoin and other cryptocurrencies: ‘central planner’ software architects write the code; ‘mining’ is monopolised; exchanges issue crypto-backed IOUs like banks. Bitcoin could function as a token ‘outside money’ in principle, but its rigidity would be over-disciplining, emulating the anti-democratic gold standard. Bitcoiners’ hostility towards credit is understandable given the political capture of credit systems, but it perhaps ought to be directed at this capture rather than the institution itself. Their techno-libertarianism misses the upside of the political nature of credit money, which allows citizens to relax their collective survival constraint.
Credit is a fundamental part of human sociality because economic life is a going concern, pointing relentlessly to the future. Money as credit is one method by which collectives, political and economic, undertake future-oriented action. Money as a digital fiat token cannot perform this coordinating task in principle, no matter how well engineered, because of its finitude, inflexibility and centrality, especially under conditions of capitalism plus democracy. If flexibility were engineered in, then cryptocurrencies would simply have recreated credit money in a new avatar.
Cryptocurrencies cannot function as money because they have as their target a limited notion of money and a thin idea of the work of social institutions. Designers of cryptocurrencies seek to replace human institutions with ingenious cryptographic functions. In identifying the enemy as fiat money, cryptocurrencies are simply solving the wrong problem. Yet in their failure, they prove the robustness of creditary institutions.
Despite their operational failure, cryptocurrencies succeed in highlighting the fact that money is always designed in accordance with some underlying politics. They thereby implicitly point to the possibility of more democratically designed money systems.
Monetary systems are inherently hierarchical and therefore highly susceptible to political capture. The solution to capture is institutional balance and accountability precisely because alternatives founded on decentralisation are not robust as the failure of cryptos as money illustrates. Indeed, such a decentralisation might be pernicious in its political and economic outcomes.
The technical fact of hierarchy in money condemns the polity to subjecting hierarchy to democratic discipline. There is no pathway that precludes hierarchy: accountable or unaccountable hierarchies are our only options (see Chapter 12).
11 - Europe and Democratic Funding
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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- 14 September 2023
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- 04 January 2024, pp 204-218
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Robust mutualisation at scale drives hierarchy in money; political mutualisation is more robust than economic; capitalism plus democracy requires a hybrid of both to operate.
The national state just happens to be the most robust mode of political mutualisation at present; others could emerge. The EU can be read as an experiment in a different type of political mutualisation outside the standard, federated state. Its crisis response arguably tells us something about the dimensions of all functional political mutualisations as regards money.
Responding to the credit crisis, the EU muddled through to innovate non-market, institutional sources of state finance that de-marketised government debt, limited the ability of credit markets to be sovereign counterparties and preserved state space to stabilised economies. These were secured by a de facto European fiscal compact at least at the margin. Some kind of fiscal compact and a substantial de-marketisation of sovereign debt appear to constitute institutional minima for effective robust political mutualisation, whatever institutional form they take.
Finance is constructed by law, but what, if any, are the logical bounds of the constructive power of law as regards finance? If political mutualisation is critical to functional money, what dimensions must this mutualisation have? Earlier we concluded that the mutualisation of economic contract is weaker than that of a political contract; while the former can expand to greater scale in good times, it dissolves in stressed states of the world (Pistor, 2013). Hence, states which mutualise citizen balance sheets over the largest economies have the best money. Mutualisation at scale therefore represents the logical limit of the plasticity of law in money.
The EU is an interesting intermediate case between pure economic and pure political mutualisation—a case of complex and uneven political mutualisation under conditions of its particular political settlement between national sovereigns. Intermediate cases often tell us a lot about pure ideal types. The EU's failure of crisis management was in large part a result of the infirmities introduced into its monetary institutions by its fragile political settlement. As with our other cases, the EU's failures in crisis management are instructive as they show the link between the nature of the mutualisation of a community and the money it issues.
3 - Bending, Not Breaking: Monetary Sovereignty and the Survival Constraint
- Anush Kapadia, Indian Institute of Technology, Bombay
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- A Political Theory of Money
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This chapter explains the nature and limits of monetary power using Minsky's idea of the survival constraint. This is the idea that all agents, including the state, need ‘cash’ to survive. The constraint binds more or less depending on the acceptability of a unit's liabilities. Banks accept borrower liabilities if they deem them solvent; citizens accept a state's liabilities, bonds and money, if they deem it legitimate. Political mutualisation drives super-acceptability, giving the state's bank disproportionate market power rather than untrammelled coercive power (‘fiat’). This enables the state's bank to bend the survival constraint much further than other domestic private entities.
(Neo-)Chartalism misreads this as pure coercive power. Since illegitimate coercion ceases to be state action and becomes a ‘crime’, state coercion is limited by legitimacy in principle. Put differently, brute coercion is less effective than legitimate violence, so a ‘state’ engaged mainly in brute coercion will be less effectively mutualised and therefore issue a poorer form of money.
Monetary power is the ability to modulate the survival constraint of other units, imparting elasticity or exerting discipline on a credit system. For the state and its bank, acceptability qua legitimacy forms one of its outer limits.
Capitalism is a cash nexus: we all need whatever is cojuncturally defined as ‘cash’ to fulfil our basic material needs. Minsky's ‘survival constraint’ is a Banking School rendition of this axiom. Most of us sell our labour power in order to avail ourselves of cash, which represents an ‘outside asset’ to us. By whatever method—earning, selling, borrowing—we must arrange our personal balance sheets to ensure that cash-in is greater than cash-out. This is what Minsky called the ‘survival constraint’: an economic unit cannot survive without positive cash flow; often it has to incur debts to get it.
Given that the state is itself embedded in capitalist relations of production, we will demonstrate how the survival constraint applies to the state itself albeit within much wider bounds. Political mutualisation at scale enables the state to bend the survival constraint further than any other domestic entity. The robustness and scale of a particular political mutualisation effort determine where the state sits in the international hierarchy of money.
The very logic of credit requires acceptance; this is another expression of the survival constraint. Chartalists assume away the problem of acceptance applied to the state because they have an inadequate conception of sovereignty.