Banking And Finance

Banking, Finance, and Money: A Socioeconomics Approach

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riefly summarizes the orthodox a
pproach to banking, finance, and money,
and then points the way toward an alternativ
e based on socioeconomics. It argues that the
alternative approach is better f
itted to not only the historical
record, but also sheds more
light on the nature of money in modern
economies. In orthodoxy, money is something
that reduces transaction costs, simplifyi
ng “economic life” by lubricating the market
mechanism. Indeed, this is
the unifying theme in virtually
all orthodox approaches to
banking, finance, and money: banks, financ
ial instruments, and even money itself
originate to improve market efficiency. Howe
ver, the orthodox story of money’s origins
is rejected by most serious scholars outside
the field of economics as historically
inaccurate. Further, the orthodox sequence of
“commodity (gold) m
oney” to credit and
fiat money does not square with the hist
orical record. Finall
y, historians and
anthropologists have long dis
puted the notion that markets or
iginated spontaneously from
some primeval propensity, rather emphasizing th
e important role played by authorities in
creating and organizing markets.
By contrast, this paper locates the origin
of money in credit
and debt relations,
with the money of account emphasized as the
numeraire in which cr
edits and debts are
measured. Importantly, the money of account is
chosen by the state, and is enforced
through denominating tax liabilities in the st
ate’s own currency. What
is the significance
of this? It means that the state can take adva
ntage of its role in the monetary system to
mobilize resources in the public interest,
without worrying about
“availability of
finance.” The alternative view of money lead
s to quite different
conclusions regarding
monetary and fiscal policy, and it rejects ev
en long-run neutrality of money. It also
generates interesting insight
s on exchange rate regimes
and international payments
systems.
JEL Classifications: E12, E42, E52, E62, H6

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