TY - JOUR
AU1 - Lawson, Tony
AB - Abstract Money is positioned bank debt. This is a thesis I have previously defended in this journal. In the current paper, I elaborate the thesis and provide further grounding for it, especially in the light of criticism by others. In so doing, I examine how positioned bank debt as money works and how, in one case at least, it originally emerged Money is usually recognised or identified as that which can be used by community participants both to discharge any existing debts held within the community and, at least where the money functions successfully, to make any purchases. In this sense we can say that the nominal or identifying features of money are its general debt discharging and purchasing powers. According to the conception of money I have defended elsewhere (Lawson, 2016A, 2018), there are two aspects to money’s nature that account for these nominal or identifying features. First, money has the property of being positioned as a specific component of a community’s system of payments and value accounting, a positioning associated with community-agreed sets of rights and obligations bearing on how the positioned item can be used. These rights and obligations, usually laid down in legal tender laws, are community specific and, in the first instance, bear on the discharging of existing debts. Currently in the UK, those participants holding this money or ‘legal tender’ have the right to use it to discharge any debt whilst their creditors have an obligation to accept it as cancelling a debt when offered. Second, a successfully functioning money has the property of being trusted as a stable store of liquidity. Only where this is so will participants be prepared to form new debt relations with others, meaning that money possesses purchasing power. I have further argued that the property of being trusted as a stable store of liquidity, essential if money is to possess purchasing power, will be grounded, at least in part, in a capacity of the kind of thing positioned as money to induce and sustain this trust. I maintain too, as a supportive substantive thesis, that this capacity will likely be possessed only where the kind of thing positioned as money is, prior to being so positioned, already positioned as an object of exchange value, and found to be a relatively liquid seemingly stable store of value. Amongst the kinds of things that have met this criterion and have in fact been positioned as money, I yet further suggest, are forms of credit/debt. This indeed is how money is constituted at present. Money, currently, takes the form of appropriately positioned state-backed bank debt, and cash is best thought of as an equally appropriately positioned IOU document or other item marking some of this debt (just as computer entries record other forms of bank debt).1 I stress that by credit and debt, here, I refer to an internal or mutually constitutive relation between two parties, a creditor and a debtor. This credit/debt (or debt/credit) relation is viewed as credit from the point of the creditor and as debt from the point of view of the debtor. It is a relation whereby the creditor has a right to satisfaction from the debtor, and the latter has an obligation to provide it. It will be convenient frequently to refer simply to either credit or debt, in what follows, but, in each case, I mean the noted relationship, albeit viewed from a particular (creditor or debtor) perspective. It follows, then, that by the term credit I do not mean (as some commentators do) the ability, or something with the ability, to discharge any debt. The latter is a nominal property of any money. Credit theorists may aim to show that only credit as I have defined it has this property, i.e. that only credit is money. But this is something that must be demonstrated.2 To define credit in terms of the ability to discharge any debt, trivially rendering all money as credit (in this derivative sense), is only likely to confuse. So, in claiming that currently the kind of thing positioned as money is bank debt, I refer to debt/credit relations as initially defined above, as constitutive relations holding between debtors and creditors, and specifically between banks and community participants. Mostly, I should add, this consists of commercial bank debt to the public, the latter amounting to about 93% of community-held bank debt. However, a small portion of it consists of central bank (for example the Bank of England) debt to the community.3 Each sort of debt has its own markers. In the case of central bank debt these take the form of items of cash (bank notes and coins); in the case of commercial bank debt they typically take the form of electronic entries in bank accounts. In both cases money is a debt, a promise to pay, identified by markers that in effect are IOU records.4 The foregoing is the basic conception elsewhere defended (Lawson, 2016A, 2018). No doubt the idea that typically unobservable bank debt is the stuff of money is counterintuitive to many, as will be the associated idea that cash is not actually money but a marker of it. Certainly, some have found such assessments to be difficult to accept, and various detailed challenges have been raised in ensuing critiques (e.g. Searle, 2017; Ingham, 2018). Given this resistance by others, I seek here further to ground these claims regarding money as currently of the form of positioned bank debt. This is not straightforward, given that the bank debt cannot be observed. Two ways of proceeding, though, appear feasible and warranted. One is to demonstrate that, historically speaking, modern money came about as a result of positioning a form of debt, and specifically bank debt, and, most importantly, that this debt was already widely trusted as a store of liquid value, this being a reason it became so positioned. The second is to indicate how debt positioned as money works, and indeed to demonstrate that current money transactions are consistent with (and perhaps only with) the conception of bank-debt qua money defended here. My basic strategy here, then, is to pursue these two tasks or challenges. However, it is convenient to do so by way of responding to relevant critical commentaries on the thesis that money, currently, is positioned bank debt, thrown up by observers. Specifically, I orientate the discussion to the criticisms offered by John Searle (2017). Doing so is useful in various ways. Any critique, if clear, helps identify the claims and arguments that most need elucidation and/or elaboration. Searle is certainly clear in his objections. He also expresses views that others seem to share. In addition, of course, he explicitly orients his concerns to the conception I defend. So, his questions and criticisms warrant a response from me, anyway, and this essay, then, represents such a response. Moreover, in this, as it happens, the essay also contributes to the ongoing wider project of seeking to discriminate between competing conceptions of social ontology, specifically between that advanced by Searle and the very different conception defended by myself and colleagues in Cambridge. For the conception of bank debt (positioned as money) that I defend, if correct, specifies a social entity or ‘object’. Searle’s ontology does not recognise social objects apart from collective agreed facts about physical objects. The very idea of a bank debt being positioned as money is, then, a challenge to his social ontology (no doubt motivating his critique). So, to address the criticisms raised by Searle is hopefully to contribute additionally to the ongoing project5 of relatively evaluating the contrasting social ontologies we respectively defend.6 Primarily, though, my concern is to further ground the social positioning theory of money elsewhere defended. I do so here through indicating that, and clarifying how, currently, positioning is indeed operative in the monetary domain with the kind of thing contingently positioned as money being bank debt. First, I address the question of how a monetary system based on bank debt works, and second, I address the question of how a form of debt became a relatively liquid seemingly reliable store of value before ever being positioned as money 1. How could (positioned) debt work as money? Before I set out my assessment of how in practice (positioned) bank debt works as money, let me first establish/recall that Searle does indeed reject both the thesis that money consists in positioned bank debt along with the associated claim that cash is merely a marker of this debt. Searle writes: Of course, it is open to him [Lawson] to use words in any way he likes, and if he wants to say it, he can say that the twenty-dollar bill is not money. That is fine, granted that he is prepared to tell us what money really is. His answer in this and in other such cases is that there is a creditor/debtor relation between me and the federal government. But the answer to that is that there is no such relation. The piece of paper in my hand is not a status indicator for real money, it is real money. (Searle, 2017, p. 1470) The picture that he [Lawson] has … is that when I own a twenty-dollar bill, what I have is an IOU issued by the government. But this seems to be, to put it mildly, most implausible. (Searle, 2017, p. 1468) On his [Lawson’s] view, the twenty-dollar bill … is not real money, it is an IOU issued by the government. But if it is an IOU, then I should be able to take it to the government and have it redeemed. This is an obvious objection. (Searle, 2017, p. 1469) In putting forward his view or objections, Searle poses a number of questions (addressed below) designed to cast doubt on my position. But most fundamentally Searle asks how it could possibly be that when a community member such as himself borrows money from a commercial bank (or from whatever the state-backed institution happens to be; Searle often refers to it misleadingly as the government), the latter becomes indebted to Searle. How, Searle asks rhetorically, is this ‘debt supposed to have been incurred? What did I, or the government, do whereby the government owes me’ money? (Searle, 2017, p. 1468) How, then, does Searle’s borrowing from the bank leave the bank in debt to Searle? This is a key question. It, and various additional related critical comments, are best addressed, I believe, through indicating, as I now do, how money qua bank debt actually works. 1.1. How could its lending to Searle leave the bank itself in his debt? Let me first be clear that in defending the notion that money is positioned bank debt, I am not, of course, suggesting that, prior to Searle requesting, or being granted, a loan, the bank had an amount of debt (to Searle) lying around that it subsequently positioned as money (in making the loan). Searle, though, seems to think this must be my position: Now, according to Lawson, when the banks create $800 which did not previously exist, they ‘position’ some previously existing value of $800 as money. That is a literally incredible view: in order to create $800, the $800 had to exist already. But what is this value of $800 that had to exist prior to the creation of the money? Well, he tells us it is a set of debt relations. In order that the bank can create $800 belonging to me, there already has to be a debt relation whereby the government owes $800 to me. Frankly, this seems worse than implausible, it seems out of the question. (Searle, 2017, p. 1468) This passage, and others like it,7 describe a scenario that is indeed out of the question. Two aspects of it are not right. The first relates to processes of positioning. I assume that one reason Searle so (mis)interprets me is he fails to recognise that all bank debts are instances of a kind, and a general rule applies to all such instances automatically, meaning each and every instance is positioned as money on being created. Let me elaborate. It is useful for a brief moment to put the issue of debt and money aside. I do argue that where an individual is a one off, then usually the individual can be positioned as some Y only via a process of positioning that is either unique to, or instigated anew for, any or each such individual. For example, this is how any individual is positioned as a professor or the president of the USA, or how a room in a home is positioned as, say, a study. Matters are very different, however, where the positioning is of a kind and so of all its members. If a community decides that the substance with chemical composition H2O is positioned as water, or that any child born of royalty is royal, then individual positioning processes are not required for each instance. All instances of the kind come into being as already positioned. In effect, the community has accepted a rule that determines that this is so. Searle himself provides us with the notion of a standing declaration, which is his name for a constitutive rule that is applied automatically to all instances of acceptance, so that ‘in individual cases … there need be no separate act of acceptance or recognition because the recognition is already implicit in the acceptance of the rule’ (Searle, 2010, p. 13). This is precisely the case here. A constitutive rule has in effect been accepted, or so I am arguing, declaring in effect that all instances of bank debt of a certain sort are money. That is, it once happened that a form of bank debt, being found to be a relatively stable store of liquidity that community participants sought and held, and even used to discharge some other debts, became, qua a kind of thing, in due course positioned as money. From there on in, all instances of this bank debt, whenever produced, were and are already instances of money, and this remains the case until the rule is changed. There is a sense, of course, in which this clarification or response merely shifts the focus of Searle’s puzzle or critical comment to an event that occurred further back in time. The question now is how it could ever have been the case historically that a specific form of debt first existed as a kind of thing that was a stable store of liquidity before being positioned at some stage as money. I turn specifically to this question in due course below (this, being a historical issue, warrants a relatively lengthy reply). It corresponds, of course, to the second of the two identified tasks or challenges I am proposing to undertake to help further ground the case that it is debt that is currently positioned as money. The point to stress for now, though, is that I do not, as Searle suggests, suppose that, on each occasion money is created, there is a ‘set of debt relations’ ‘that had to exist prior to the creation of the money’, lying around and waiting to be positioned as money. Since the initial positioning of bank debt qua a kind as money, all instances of bank debt are simply created as money. Furthermore, to turn to the second misunderstanding contained within Searle’s earlier noted passages, nor even am I supposing that this bank debt qua money is created or otherwise existing before it is loaned to Searle. For it comes into being just through the bank making a loan. In making the loan, the bank goes into debt to the loanee and this debt is in fact the very stuff of money that the bank simultaneously creates and loans out. The point that is essential to all of this is that when Searle takes out a loan from the bank, Searle and the bank enter a process wherein the two of them effectively exchange debts (of an equal amount). The difference is that Searle will pay interest on his debt to the bank, whilst the bank debt to Searle, unlike Searle’s debt to the bank, can be used by Searle as a means for making payments to any other participant in the community. One way to view this that may afford clarity is via considering what happens within a commercial bank’s balance sheets. Double-entry bookkeeping is involved where loans made count as both assets and as liabilities. If a commercial bank grants a loan of $1000 to Searle (to employ Searle’s own example), Searle is in debt to the bank to the tune of $1000, plus interest payments. For the commercial bank, this amount is entered under its assets column. Although the money lent out must be repaid, and so counts, as noted, as a bank asset, the latter asset is simultaneously matched by a liability of the bank to the tune of $1000. For bank profit consists of interest on the money lent out; it is not equal to the total sum of money created. Otherwise all money creation would amount to bank profit and banks would then be far better off even than they are. That new bank liability is the entry in Searle’s deposit account. Before Searle uses his loan from the bank, the entry marks the amount the bank owes him. So, this entry in Searle’s deposit account marks the commercial bank’s newly created debt available to Searle for transferring to others in making payments. When Searle uses some of it to make a payment, he is simply transferring this bank debt as money to another party; for this is just the stuff positioned in the community as money. Searle thus cancels a debt with some third-party X by passing his credit on the bank (the bank’s debt to him) to X, who is now in credit with the bank. The third party can of course use it likewise. Searle continues his critique by giving his interpretation of that which takes place when cash is withdrawn from an automatic teller machine: … suppose that I withdraw from an Automatic Teller Machine twenty dollars. And let us suppose that this is the source of the twenty-dollar bill I am now holding in my hand. Now, that twenty dollars reduces the amount of money that I have in my account to $980 and gives me a twenty-dollar bill. I can get the $20 because the loan created money which I now have in my account, and I redeem twenty dollars’ worth by taking the bill. [However, ...] Lawson thinks that there is an additional obligation that the government owes me something as a result of my possession of the twenty-dollar bill. But what exactly do they owe me, how was the debt incurred, and how exactly could they ever pay it? (Searle, 2017, p. 1469) It is not the government per se but, currently in countries like the UK at least, the central bank that is in debt to the holder (here Searle) of the cash. How does this come about? Searle still owes his commercial bank $1000 plus interest, of course, which is shown in the commercial bank’s accounts under assets. But the entry in that bank’s total liabilities is reduced by $20, as Searle correctly notes; and Searle now holds a $20 bill. But Searle holds this bill only because $20 worth of the original commercial bank debt to him has now been used by Searle to acquire an equivalent amount or value of central bank debt. In withdrawing cash, Searle is in effect using his commercial bank debt qua money to buy (from the commercial bank) central bank debt marked by cash. Both forms of debt (commercial and central bank debt) are positioned as money in the economy, and so it is the case, in effect, that one form is simply being exchanged for a near equivalent. They are almost equivalent just because 1) the commercial banks buy the central bank debt marked by these notes (from the central bank) at face value, and 2) central bank debt backed by cash can enter into the general community only by way of community participants first acquiring commercial bank debt. It is indeed the case, then, that the debt Searle now holds, marked by the $20 note, is that of the central bank to the community. Meanwhile, to match the reduction in its liabilities by $20, the commercial bank assets are reduced too by $20, just because the cash given out to Searle, a debt of the central bank held by the commercial bank, was to this point an asset for the commercial bank. So, the same amount, $20, is deducted from both the commercial bank’s asset and liabilities account. As I say, very little money in the modern economy is held in the form of central bank debt marked by cash (as noted, about 7%). But in case debt of a sort that is marked by cash is required by community members, the commercial banks must always hold an amount of it.8 So, bank debt is, in the fashion described, positioned as money. And I repeat, if bank debt is positioned as money, then, because it is unobservable, there equally clearly needs to be visible markers of it. These markers record the amount of bank debt involved and so are in effect IOU documents; they are IOUs from the commercial bank to the public in the case of electronic records, and IOUs from the central bank to the community in the case of cash.9 I believe the arguments and observations set out are sufficient to ground my case, and certainly answer Searle’s central question. Searle does offer some further related criticisms of the conception I defend. But all, I think, fail to withstand scrutiny. Indeed, all appear to presuppose that which he needs to establish. Let me briefly elaborate. First Searle writes: It is reductio ad absurdum of his [Lawson’s] position to say the twenty-dollar bill is not real money. His response to this objection is very revealing. He says, ‘If Searle wants the issuer of the debt to redeem it, this may be possible but this actually involves Searle giving up, rather than acquiring, real money. In this Searle will typically have to choose amongst the sorts of things that lie within the jurisdiction of the bank or state to provide. He can certainly use some of his bank credit to discharge his own debt to the state, the later perhaps taking the form of taxes due, fines to be paid, purchases of alternative more “risky” (less liquid) non-monetized forms of government debt and so on.’ I am not sure [… Lawson] fully realizes how inadequate this answer is, because it is a refutation of his position. His position is that the twenty-dollar bill is not money. But money is defined in terms of the sorts of functions that he just described. I can pay for and buy all of this stuff with it, and for that reason, it is money. (Searle, 2017, pp. 1469–70) There is no refutation here. Searle can indeed do all these things (the noted functions, however, do not define money, though clearly money must serve them), but by using bank debt. The latter being unobservable, it is the token identifier that carries the debt, as it were, when passed over in payment. It is common practice for documents and deeds to be used to identify rights and obligations of property ownership and such like. Clearly the existence of such documents does not imply the absence of, indeed their efficacy presupposes, such rights. Cash is simply performing a similar identifying role with regard to bank debt. This, anyway, is the position Searle must refute. In simply asserting that it is cash alone that serves these functions, Searle is presupposing what he needs to establish. Searle provides more criticism: Furthermore, it is legally money because it says on it that it is ‘legal tender for all debts public and private’ and that is a legally enforceable status function. The piece of paper that is the twenty-dollar bill already exists as money prior to any of these putative debt relations that he claims to be describing. (Searle, 2017, p. 1470) But what is the legal tender? In the UK at least, according to the Bank of England: Legal tender has a very narrow and technical meaning, which relates to settling debts. It means that if you are in debt to someone then you can’t be sued for non-payment if you offer full payment of your debts in legal tender.10 Our disagreement is over what it is that serves this debt-settling function when such an offer is made. Just as a symbol of value cannot be printed on an invisible item like a debt, and so must be placed on any marker, the same is true of any statement that legal tender is involved. To assert that it is cash rather than the bank debt qua money that has the capacity to discharge debts is again to assume what needs to be established. Would legal tender disappear in a cashless society? In practice, of course, many restaurants, stores, renting agencies and the like, though having happily accepted a situation where a customer is in their debt, do not accept cash payments to discharge it. I wonder, too, how many (not least high ‘earners’) would be prepared to accept monthly salaries paid in cash. But all will accept, and likely insist upon, an appropriate amount of bank debt being transferred to them in some manner. Such considerations, I suggest, reveal where the legal tender status really lies. The last passage by Searle repeats his disagreement, it does not establish his case. Searle further adds: Suppose that [Lawson] is wrong that some further fact about the piece of paper is needed, that there is a debt relation between me and the federal government. What difference does it make? None whatsoever. It still functions as money, it officially and legally has the status function of money and can in fact function as money and, therefore, it is money. That is, nothing is added to its powers by his description of the debt relation. (Searle, 2017, p. 1470) But this again is a line of reasoning that presupposes that which needs to be established. My claim is that it is bank debt positioned as money that serves money’s functions. This is a claim not just about the existence of bank debt but also how the functions of money get to be served. Searle in the foregoing passage is saying let us not concern ourselves about whether bank debt exists, because it would make no difference if it did; we are getting on fine without it. As I say, he is assuming what he needs to prove, that cash alone is not just able to, but already does, serve the functions of money. I am arguing that for something to work as money, it needs to be trusted as a stable liquid store of value, and very likely this requires something that was trusted as a store of relatively liquid value prior to, or independently of, its positioning. Searle is merely asserting the contrary to be true, that unbacked-up cash could be, and indeed is, enough. Of course, Searle is right that if unbacked-up paper was so accepted, and trusted, and everyone else expected everyone else to keep using it, then it could serve the functions of money and so be money. But I am contending that that situation is not one that pertains, and it is not a sufficient response to suggest that it must be, because if bank debt were involved, then by assumption it would make no difference.11 There remains, of course, the interesting question of whether the structures of capitalist society could be transformed in such a manner that forms of branded paper, with little or no intrinsic value, could be trusted enough in themselves to be capable of alone serving the functions of money (if appropriately positioned as money). Given the opportunities for such a system to be abused, not least as a result of temptations of governments to print ever-increasing quantities to solve problems facing them, especially just before elections, I very much doubt that sufficient trust and so stability could be achieved. However, if it were, this would not of course undermine the basic positional conception defended. For under such conditions the trusted or valued stuff positioned as money would no longer be bank debt but specific branded forms of paper. But I do doubt that such a scenario is achievable in a system based on money accumulation, contestation and conflict, in which trust (which is always required) is hard won. Of course, I am here merely speculating about such matters; I cannot do more. However, I might note that others have studied the question extensively, including those less critical of a system based on money accumulation, some of whom have considered the idea of money as a mere symbol to be a desirable scenario if achievable (see e.g. Simmel [2004]) and yet have mostly reached the conclusion that it is not, and that trust in the money requires that the money object be valued independently of being money.12 Of course, this in itself proves nothing. But it does suggest that if Searle is to convince us that cash itself could alone be accepted as money, he has a number of arguments to address. To this point I see no real challenge to the thesis that bank debt is money; indeed, I hope the claims of the earlier paper are seen now to be more convincing. So, I turn to the remaining second basic issue I earlier proposed to address, and the one that, we saw, is ultimately behind Searle’s line of criticism. The question now is how a form of debt could have come to be positioned as money in the first place. If, as I argue, a likely essential feature is that it was already trusted as a relatively liquid store of value, then how could this have been achieved? The fact is that historical paths have varied according to community. But I do recognise the claim that money is constituted as positioned bank debt might be more convincing to some if I give details of at least one case of how all this came to be. That is my purpose here. My focus for illustrative purposes will be on Britain. Let me then briefly give some summary detail about how the situation described came about. 2. How could debt be a reliable store of liquidity in the first place? All historical entry points are to an extent arbitrary; my goal is to go back at least as far as is necessary to establish the point in question. I in fact start by identifying a form of debt that, although serving widely as a store of liquid value, was not initially bank debt at all, but eventually became positioned as bank debt (before the latter was positioned as money). To cut a long story short, though hopefully with it remaining adequate to meet the noted objective, I return briefly to a time and place, the early seventeenth century Britain, where goldsmiths mostly worked on precious metals, and loaning gold out was a minor activity at most. At that time the Crown, nobles and the generally wealthy used gold for a variety of purposes but not least to finance their armies’ expenses, or to purchase foreign products. The goldsmiths, in virtue of continuously working with precious metals, as well as their activities involving their making loans of gold, had constructed deep and protected vaults. Noting this, the wealth owners started entrusting their gold to the goldsmiths for safekeeping. Soon enough everyone else put the coins and valuables there too. In taking possession of the gold, the goldsmiths gave a deposit receipt (or claim check) to the depositor, and charged a fee for storing it safely. The possessors of these receipts in the community soon found that so trusted were the vaults of the goldsmiths, that the receipts, marking in effect an obligation of the goldsmiths to return gold to the holder of the deposit receipt if requested, could often be passed to third parties and thereby used to discharge a debt in the wider community. That is, these receipts in effect marked a form of goldsmith’s debt considered redeemable in gold in the community at any time, and thereby were treated in numerous quarters as a reliable means of payment, and form of purchasing power. And passing to others the receipts and thereby the goldsmith’s debt was easier than transferring gold. This system of exchange, based on the receipts of goldsmiths continually changing hands, worked for as long as there was a limited number of sellers and buyers, and where the passage of the receipts was easy to follow. Eventually the goldsmiths discovered that nearly all the deposited gold remained permanently uncollected or even uninspected in the vaults. Rather, as noted, the discharging of debts, etc., was instead mostly carried out using the goldsmith’s debt as marked by these receipts. Moreover, would-be borrowers eventually requested loans (of gold) in the form not of gold per se but of goldsmiths’ promises to pay gold, as marked by receipts for deposits of gold. The loaning practice here can be viewed as a two-step process integrated as one. First, the community participant seeking a loan borrows some of the goldsmith’s gold. Second, this participant immediately asks the goldsmith to look after (or hold on to) this borrowed gold for safekeeping, whereupon the goldsmith instead hands over a receipt for it. This receipt is for gold just received and so marks a promise to pay it back, i.e. an acknowledgement of a debt. Of course, in this case the goldsmith and the borrower both go into debt—with or to each other. The difference, though, is that the goldsmith’s debt is widely trusted and used within the community more widely to discharge other debts, whilst debt of the individual borrowing from the goldsmith is not so trusted, and indeed comes at a cost. So here we find a quite credible situation emerging where that which is loaned out is itself a debt—a debt of the goldsmith, a debt of gold owed to the possessor of the deposit receipt (who is simultaneously in debt to the goldsmith, and to the tune of the amount borrowed plus interest). We do not, then, have a situation of the goldsmith providing a loan rather than incurring a debt, as Searle seemingly supposes must always be the case. Rather, in loaning out a debt backed by deposit receipts, the goldsmith does both; the loan to the community participant and the new debt of the goldsmith are the same thing viewed from different perspectives. Searle may well reply that the loaning of a debt makes sense in this case, but only because the bank debt is backed by gold. If so, he still needs to recognise that it is the goldsmith’s debt as a social entity that is being transferred around, a feature he is reluctant to admit into his social ontology. More to the point, however, the situation that all this debt was backed by gold was in due course to change. Loans not backed up by gold came to be used as a means of payment, etc., and eventually even positioned as money. How could this be? The next significant step was for the goldsmiths to realise that, with the depositor’s gold being rarely reclaimed or even inspected, the goldsmiths could lend out deposit receipts against gold belonging to depositors as though it was the goldsmiths’ own (at an interest—and which they had no legal right to do), and no one would notice the difference. When eventually the depositors did cotton on to these practices, they did not withdraw their gold. Rather, recognising that the gold was still lying safely in the vaults, they wanted a share of the interest payments. So, the goldsmiths borrowed at one interest rate and made loans at a higher one, bringing about the beginning of banking. Later there came a refinement of the noted practices that prefigures the situation of modern money. It is this move that ultimately underpins the later situation in which a form of debt can itself, without being redeemable in gold, serve as money. At the time, the seeking of loans was everywhere rising with expanding trade and other events. The goldsmiths realised that instead of lending out gold, either directly or via lending out debt backed by deposit receipts, they could just give out deposit receipts and so enter into debt for gold that they never actually possessed; they could lend out a debt that could be redeemed in gold, even where no gold had been received or deposited, and indeed did not exist. The reasoning behind this was that even if a new borrower later decided they needed gold after all (perhaps they were indebted to someone who would only accept gold), there was so much uncollected and uninspected gold in the vaults that giving out the required gold would make little difference to anything. Or at least this was the case so long as holders of goldsmith debt did not seek to redeem it all at the same time. So here we see the start of a situation in which, for the community as a whole, the value of loans circulating and serving as credits to discharge debts outpaced, soon significantly, the value of gold available to back them up. And this practice of using debt that is not backed by gold has essentially continued to this day; although by now it is legally undertaken, and without any backing at all, following many additions to the support conditions that I turn to below. But the mechanism of money creation should be clear. The feature in all this warranting an attitude of incredulity is not my description of the various practices but the fact that the practices described still go on. As it was with the goldsmiths’ practices, so it is with the loan made in Searle’s example. The bank provides a marker of a declaration of owing, in effect a receipt of a deposit, an acknowledgement of a debt, of a promise to pay. In the case of the goldsmiths, a deposit receipt for gold was handed out, marking a debt (as a loan) with no gold being handed in. The receipt was in effect a proof of a promise to pay, the acknowledgement of a debt. That, as noted, is how the modern commercial bank comes to be in debt to Searle. Instead of a deposit receipt, which even with the goldsmiths became a marker of a promise to pay, this promise or debt is positioned as money, Searle instead gets an entry added to his deposit account indicating an increase in the bank’s indebtedness. In return, Searle also owes the bank the amount of the loan plus interest, no doubt backed up by some collateral. 2.1. The great deceit Ultimately, the system is not sustainable, of course, and works through the majority of community participants supposing things to be other than they are. The dominant belief is apparently that the banks loan out money that others have deposited. Instead banks loan out their own debts to the community created on the spot. But this sort of mechanism has, as I say, been operative in some quarters ever since the goldsmiths started it all. After all, in the case of the goldsmiths, because they created the promises to pay marked by the receipts, they could make as many as they wanted; or rather, they could make them up to the value of the total loans sought by borrowers. Once in circulation, the receipts were indistinguishable from those given out to those community members actually depositing some gold. Thus, those transferring them assumed they were backed in the same way, which they were so long as only a few at a time tried to claim back any gold, and so trusted them. To mask the real process further, the notes given out were eventually no longer written as a receipt using the name of the person taking it. Rather, all names were omitted and replaced by the words ‘I promise to pay to the bearer’. And the promise thereby documented and marked was everywhere accepted on trust that it was backed up by gold, which, to repeat again, it was, so long as only a small fraction of the community ever wanted it at a point in time.13 In time, as I say, the value expressed by the deposit receipts, i.e. the value of the goldsmith’s debts, greatly exceeded that of the gold or other precious metals in the vaults. Of course, the goldsmiths always stored some gold as a precaution against a subset of depositors asking for it. So, in lending out gold receipts, goldsmiths chose always to keep a fraction of their total value in the form of gold in their vaults. In this way factional reserve banking effectively emerged. In the manner described, the goldsmiths in effect became collectively a private banking system that created a form of value that was widely accepted for discharging debts. The loans made, i.e. the goldsmith’s debts, were by now the banker’s creations of public credit, called eventually deposits. And through the making of these loans, the original receipts of the goldsmiths were replaced by documents recording simple promises to pay on demand. These credits/debts entered into circulation by means of checks/cheques issued on these credits. In terms of volume and significance, they eventually supplanted the legal money of the government. They were not yet positioned as money; they could not be accepted for everything, including e.g. the paying of taxes. But it was only a question of time. The point is that through the process of history, bank debt became money. At first it gained its value by being backed up by gold. Later, having long been trusted as a form of value, and with increasing structural steps taken to maintain trust in the monetary process as it evolved, bank debt itself became the form of money. Being invisible, however, it is necessary that a marker be used so that these forms of debt are identified. So, when Searle responds saying that if the ‘the twenty dollar bill … is an IOU issued by the government … then I should be able to take it to the government and have it redeemed’ (Searle, 2017, p. 1469), adding that ‘[t]his is an obvious objection’ [to Lawson’s account], we can now see that it is not an objection at all; this is just how perverse things are. When the goldsmiths started issuing receipts, without taking in gold, thereby making loans in the form of community-accepted and sought-after promises to pay, it was already the case that members of the community in total could not redeem these promises simultaneously; there was not enough gold to go around. Over time an ever-smaller fraction of the debt outstanding would have been redeemable in gold, until eventually, with supportive structural transformations undertaken by governments along the way (including their being accepted in payment of taxes, etc.), the bankers’ debts themselves were regarded as a stable liquid store of value, with all possibility of their being redeemed in terms of gold having disappeared. So, Searle, I submit, is wrong. Currently money is a positioned form of state-backed bank debt, and cash does serve to mark it. Searle is no doubt encouraged in his view by the fact that many, and perhaps the vast majority, of close commentators on the topic view cash as money. I suspect that this reflects a prejudice in favour of the immediately observable as much as anything; social theorists (unlike say physicists) seem reluctant to grant a reality or a materiality to that which cannot be observed. Very often, though, they slip into doing so, if only momentarily, just to remain coherent. Thus, in their excellent ‘Where does money come from’, although Ryan-Collins et al. (2011) mainly imply that cash is an alternative money form to bank debt, they also occasionally say things like ‘money is really nothing more than a promise to pay’ (p. 139). 2.2. From then to today It will perhaps seem incredible that such a system, based essentially on fraud and certainly on built-in incoherence and deceit of the public, could result in private bank debt being eventually positioned as money. It is especially puzzling, perhaps, to understand how such a scenario could be justified or supported by those in authority. However, it is important not to be too rationalistic or functionalist in seeking an explanation of historical developments. It is all too easy, and common in economics, to assume that the function served by something must count as its explanation; and specifically, that whatever comes to be accepted is the best that it could be from a global perspective, the result of some community-wide (or international) optimising process, and that is why it exists. Money, and indeed the whole monetary system, is a form of technology, a device that extends human capabilities. And the fortunes of technological devices are notoriously subject to the operation of processes of path dependence and lock-in. Technological history is replete with accounts of inventions or devices that were more useful in terms of the quality delivered than available alternatives but were cast aside or ignored in favour of certain alternatives, because the latter fitted better with environmental conditions, including human habits, existing know-how, familiar and/or trusted ways of proceeding and structures of power. An obvious and often-referenced example is the QWERTY keyboard. As the Cambridge Encyclopaedia of Language (Crystal, 1991) notes, the [QWERTYUIOP] design has attracted generations of criticism, on ergonomic grounds. Although most typists are right-handed this keyboard makes the left do 56% of the work. Of all movements for successive letters, 48% use only one hand instead of two—most noticeable when typing such words as addressed. Finger dexterity is not linked to letter frequency—for example, the two strongest fingers of the right hand are used for two of the least frequent letters, j and k (p. 192). And yet it prevails. It came into being in the 1860s when a particular design of typewriter exhibited various problems, including a tendency for the type bars to clash and jam if adjacent ones were struck in rapid succession. The inventor experimented with the ordering of letter keys in an effort to reduce the frequency of typebar clashes and other problems. The resulting arrangement is close to the one that remains prominent today. Why has it not changed since, where the factors explaining the original design have disappeared? There was no inevitability about it, merely a lot of contingent influences. These included the timing and orientation of developments in typewriter instruction, along with the advent of methods of `touch-typing’. Such accidents of timing led to skills being taught and acquired that were fashioned to the QWERTY arrangement. Given the numerous advantages of all the various components of typewriter use, training, instruction, and so forth being unified as a consistent system, along with the relatively high costs of rendering acquired individual skills obsolescent set against the falling costs of typewriter hardware, the influence of these skills was such that the QWERTY system became locked in.14 In short, there resulted a situation in which it became advantageous to adapt machines to people (with the relevant skills) rather than the contrary. And the business has so proceeded ever since (on all this, see Lawson [1997]). 2.3. The locking in of bank debt as a means of payment This brief sketch is typical of how technologies everywhere evolve, and the basic story of bank debt as a means of payment is little different in nature (see e.g. Triffin [1969]). For good reasons or bad, bank debt, being a trusted highly liquid store of value, was at some stage used to discharge debts, and this in turn conditioned a history wherein it eventually became positioned as legal tender and so money; and the wider system in total has evolved to support the general debt discharging and purchasing powers of this money, including engendering as much trust in it is feasible. Of course, legally speaking, when the noted practices emerged they were, as already noted, a form of fraud, as Marx amongst others stressed.15 But instead of punishing the goldsmiths, those in authority accepted the goldsmiths’ misleading practices, and sought themselves to benefit from their popularity. For it was found that they supported an expansion of trade. And at the time, the Crown and Parliament, being unable to raise sufficient funds from taxes or through minting silver coinage to pay for an ongoing Civil War along with wars with France, began borrowing from the goldsmiths too. In this way it came to pass that, as demand for the lending services of the goldsmiths by both the government and private individuals grew, any doubt about the legality of the practices was removed with the Promissory Notes Act of 1704, rendering legal the various noted practices that the goldsmiths had employed since the 1640s. At some stage prior to this, the government had started to raise money by issuing bonds, a form of debt financing. They were issued to rich merchants and the goldsmiths. Given a record of defaults by previous monarchs, as well as a raid on the mint, the goldsmiths, along with other creditors and Parliament, lobbied for a private bank with public privileges, to handle those monetary issues whose workability depended on trust. Soon after, in 1694, the Bank of England was born, gaining within three years a royal charter along with a right to take deposits, issue bank notes and discount promissory notes, meaning that the notes (that previously circulated only amongst goldsmiths and trader networks) could now be traded at the Bank of England at a discounted rate for state money. But control was sought. In the Bank Charter Act of 1833, Bank of England notes (backed by bank debt) were made legal tender, and the discount rate was increased in the hope of discouraging the issuance of notes by private banks. Further, the 1844 Bank Charter Act banned the creation of new banks with note-issuing powers. However, the Act exempted bank deposits from legally requiring 100% gold reserve banking; because these account balances were technically a promise by the bank to pay a depositor, they were not restricted in the manner that bank notes were. Soon enough, the country banks, unable to issue their own private bank notes, began to focus on deposit taking and the issuing of cheques or account statements. These could still be redeemed for Bank of England notes or gold. The result was that in England, unlike Scotland and Northern Ireland that still issued their own notes, the process of money creation by the banks became less obvious or visible. Britain effectively abandoned the gold standard in 1914 by unofficially ceasing to redeem bank notes with gold coins. But aiming to restore stability to the international financial system, countries sought to reinstate the gold standard following the war. The UK followed suit, but the public could exchange bank notes not for gold coins, but only bullion. However, in 1931, following financial upheaval and speculators increasingly seeking to convert bank notes to gold, the gold standard was again abandoned. Eventually strict credit controls were placed on banks, including by the Bank of England. But the period since the 1960s has seen gradual deregulation of banking and credit on a national and international level. The result is that today, the bulk of UK money is provided not by the state, the Bank of England, the Treasury or the Royal Mint, but by a small collection of private banks. In all this the state machinery and social structure were continually transformed to preserve trust in bank debt as a stable store of liquidity, a trust that was no doubt continually challenged by events along the way. I do not have space to trace the (contested) details (but see e.g. Triffin [1969]). The point, though, is that this is how the structures of society and governance have evolved, and this is where we are today. In conclusion, Searle is not wrong to interpret my account as incredible. But, I repeat, the feature that is perhaps astonishing is not my interpretation per se but the way the monetary system works. Indeed, the system itself is more absurd still. After all, each loan of bank debt is to be paid back with interest. That requires more bank debt qua money to be returned to the bank than was loaned out. To make this possible, more bank debt must normally be created. So, the amount of debt must keep increasing (or adjustments must occur somewhere) if the system is not to come crashing down. For debt in circulation to keep increasing, the amount of demands for loans must keep increasing. This, in turn, presupposes an unsustainable and environmentally damaging rate of economic growth. At the same time, if the government wants money it too must borrow, so that a portion of taxes are used to pay interest owed to the banks. Many do continue to wonder why the government does not change the system and find a way of creating money itself. The answer usually offered (amongst the few that consider these matters) is the temptation would be there for those in power to use the money to meet their debts and pledges and buy votes, etc., with the result that hard-won trust in money would soon dissipate. However that may be, we do then have, albeit in broad terms, an account, at least for one community, of how money has evolved that rests for its intelligibility on recognising that money is positioned state-backed bank debt, where the latter, when initially positioned as money, was already found to be a relatively liquid store of value. 3. Final comments I maintain the assessment, then, that money is (not cash but) positioned bank debt/credit. I find that it is sustainable in the face of critique, so that seemingly incompatible alternatives—especially Searle’s, that (reflecting his basic social ontology) cannot easily accommodate social objects—are rendered questionable. As a final comment, let me emphasise that the conception I have defended is not a credit theory of money as such, but rather a positioning theory of credit money. A credit theory of money, such as defended by Innes (1913, 1914), seeks to locate the powers of money in the nature of credit per se. Those powers, I argue, are not so located, but rather are grounded in the properties of money of being both appropriately (legally) positioned and also trusted throughout the community as a store of liquid value. I do suppose that the latter trust can be grounded, as at present, in a form of credit. But a form of credit is not credit per se, and, as noted elsewhere (Lawson, 2016A), the positioning of commodities can also work, and has in fact often done so. Bibliography Crystal , D . 1991 . Cambridge Encyclopaedia of Language , Cambridge , Cambridge University Press David , P. A . 1986 . Understanding the economics of QWERTY: the necessity of history , pp. 30 – 49 in Parker , W. N . (ed.), Economic History and Modern Economics , Oxford , Basil Blackwell Ingham , G . 2018 . A critique of Lawson’s ‘Social positioning and the nature of money’ , Cambridge Journal of Economics , vol. 42, no. 3, 837 – 50 Innes , A. M . 1913 . What is money ?, Banking Law Journal , 377 – 408 Innes , A. M . 1914 . The credit theory of money , Banking Law Journal , 151 – 68 Lawson , T . 1997 . Economics and Reality , London and New York , Routledge Google Scholar CrossRef Search ADS Lawson , T . 2012 . Ontology and the study of social reality: emergence, organisation, community, power, social relations, corporations, artefacts and money , Cambridge Journal of Economics , vol. 36 , no. 2 , 345 – 85 Google Scholar CrossRef Search ADS Lawson , T . 2016A . Social positioning and the nature of money , Cambridge Journal of Economics , vol. 40 , 961 – 96 Google Scholar CrossRef Search ADS Lawson , T . 2016B . Comparing conceptions of social ontology , Journal for the Theory of Social Behaviour , vol. 46 , no. 4 , 359 – 99 Google Scholar CrossRef Search ADS Lawson , T . 2016C . Some critical issues in social ontology: reply to John Searle , Journal for the Theory of Social Behaviour , vol. 46 , no. 4 , 426 – 37 Google Scholar CrossRef Search ADS Lawson , T . 2018 . The constitution and nature of money , Cambridge Journal of Economics , vol. 42, no. 3, 000 – 000 Marx , K . 1974 . Capital, Vol. III, A Critique of Political Economy, The Process of Capitalist Production as a Whole , Engels , F . (ed.), London , Lawrence and Wishart McLeay , M. , Radia , A. and Thomas , R . 2014 . Money in the modern economy: an introduction , Bank of England Quarterly Bulletin, Q , 4 – 13 Ryan-Collins , J. , Greenham , T. , Werner , R. and Jackson , A . 2011 . Where Does Money Come From? A Guide to the UK Money and Banking System , London , New Economics Foundation Searle , J. R . 2003 . The construction of social reality: an exchange (a debate with Barry Smith) , American Journal of Economics and Sociology , vol. 62 , no. 1 , 299 – 309 Searle , J. R . 2010 . Making the Social World: The Structure of Human Civilization , Oxford , Oxford University Press Google Scholar CrossRef Search ADS Searle , J . 2016 . The limits of emergence: reply to Tony Lawson , Journal for the Theory of Social Behaviour , vol. 46 , no. 4 , 400 –4 12 Google Scholar CrossRef Search ADS Searle , J . 2017 . Money: ontology and deception , Cambridge Journal of Economics , vol. 41 , 1453 – 70 Google Scholar CrossRef Search ADS Simmel , G . 2004 . The Philosophy of Money (3rd enlarged ed.) , Frisby , D . (ed.), Bottomore, T. and Frisby, D. (transl.), from a first draft by Kaethe Mengelberg, London and New York , Routledge Triffin , R . 1969 . The thrust of history in international monetary reform , Foreign Affairs , vol. 47 , no. 3 , 478 – 92 Google Scholar CrossRef Search ADS Footnotes 1 In an earlier paper (Lawson, 2012), I expressed the view that both the debt and its marker might be called money. Increasingly, however, I think the practice of calling them both money only leads to confusion. 2 And credit theorists such as Innes recognise this. Thus, using the term as I have defined it, Innes writes ‘as I shall try to show, credit and credit alone is money’ (2013, p. 392). 3 We might also include as money central bank reserves which are debts of central banks to commercial banks. Reserves are debts used by commercial banks in roughly the same manner that the general public uses commercial banks’ debt. It is because reserves are not available to the community as a whole that I do not consider them here as money proper. However, definitions aside, the analysis that follows does not change at all if they are included. 4 And the reserves that are debts of the central bank to commercial banks are also marked by IOUs in the form of electronic records. 5 For previous attempts and debate over such matters, see Lawson (2016B, 2016C); Searle (2016). 6 Let me briefly elaborate further. As noted, according to the Cambridge group, social ontology is legitimately concerned with social entities or ‘objects’. On this view a credit/debt relation is an example. According to Searle, in contrast, there are no such social entities or objects worth talking about beyond (‘institutional’) facts. For Searle, the very notion ‘of a social object seems to me at best misleading’ (2003, p. 302; I have addressed Searle’s arguments for this view directly in Lawson [2016B]). By ‘social’ Searle means dependent on collective intentionality, a form of collective acceptance or agreement. His social ontology reduces to (agreed) facts of the form ‘X counts as Y in C’. For example, ‘these notes and coins count as money in our community’. Here the referent of the X term is a physical object (or, in a very few special cases, does not exist at all, and functions associated with the Y term are somehow served merely through being represented) and being physical for Searle means being non-social. Modern money for Searle is cash in the form of notes and coins. These, for Searle, are the obvious physical objects on which to orient, given his social ontology. Clearly Searle cannot easily accept the assessment that money is positioned bank debt, for this would, in effect, constitute his acknowledging a referent of the X term that could only be interpreted as a social object, certainly not a physical one, requiring Searle to allow social objects into his ontology after all. So, by my here defending the case for bank debt as the stuff of money, against the criticisms brought by Searle, I do, as I say, not only reply to Searle’s earlier critique—and in so doing follow a clearly structured path for elaborating core concerns within the claim that debt is positioned as money—but also contribute to the project of discriminating between the two contrasting conceptions of social ontology in question. 7 Searle also writes: … the entity that is positioned to become money has to already be valuable before becoming money in order that it can become money. … What is the preexisting value according to Lawson, according to which, this twenty-dollar bill can be used as if it were money? Well, he says it is a set of debit/credit relations. (Searle, 2017, p. 1468) And also His [Lawson’s] general claim is that in order for anything to be ‘positioned’ as money, it has to have a preexisting value. The problem is that the creation of money out of nothing, when the bank loans me a thousand dollars, may well be a case of positioning, but there is no preexisting value which becomes the new $800. (Searle, 2017, p. 1469) 8 It is this that underpins Searle’s observations about reserve ratios, but it need not concern us here. 9 Although it proves nothing (for money ‘experts’ are hardly in agreement on these matters), it seems not irrelevant to note that the Bank of England has recently moved towards accepting the sort of view here being defended, explicitly distinguishing ‘currency (banknotes and coin)—an IOU from the central bank, mostly to consumers in the economy; and bank deposits—an IOU from commercial banks to consumers’ (McLeay et al., 2014, p. 7, emphasis in original). 10 See http://edu.bankofengland.co.uk/knowledgebank/what-is-legal-tender/, accessed 2 December 2017. 11 It is like a person believing that gravity does not exist because we cannot see it, saying to someone who thinks it is gravity that holds everything together, ‘suppose you are wrong, and there is no gravity, it makes no difference because we are managing fine without it, everything is holding together without gravity’. 12 In claiming to identify a tendency in history towards a situation wherein money is a mere symbol, Simmel is forced to conclude, however, that it cannot in fact ever be achieved: ‘The development of money is a striving towards the ideal of a pure symbol of economic value which is never attained’. (Simmel, 2004, p. 156) For an elaboration see Lawson (2018, footnote 21). 13 Further, the goldsmiths could even stipulate that the interest repayment on the receipts be in terms of gold. 14 Paul David elaborates notes how ‘the advent of `touch’ typing .... gave rise to three features of the evolving production system that were crucially important in causing QWERTY to become “locked in” as the dominant keyboard arrangement. These were technical interrelatedness, economies of scale and quasi-irreversibility of investment’ (David, 1986, p. 41). The term ‘technical interrelatedness’ indicates that those who purchased a ‘typewriter as an instrument of production’ needed to match this ‘hardware’ to the ‘“software” represented by the touch-typist’s memory of a particular arrangement of the keys’ (p. 41). Of course, the incentive to provide similar machine also existed for those wishing to provide instruction in typewriting machines, for they had to serve the needs and conditions elsewhere. The noted economies of scale were those ‘exploited by private business colleges that taught young men and women to touch-type through the use of instruction manuals’. Finally, the ‘quasi-irreversibility of investment’ refers to the durability of the tacit skills which typists developed on the basis of the QWERTY keyboard arrangement, and the costs of their being rendered obsolete and/or possibly of retraining for a different system. In David’s words: ‘The human capital formed in learning to touch-type is remarkably durable, for the skill resembles that of bicycle-riding or swimming in that once mastered it is long retained at some functional level and may be upgraded rapidly by practice. Moreover, once a specific touch-typing program has been “installed in memory” it becomes quite costly (in time taken for retraining and dealing with typing errors) to convert the afflicted typist to a different program’. Meanwhile, ongoing technological developments meant that the cost of converting keyboards from one system to another was falling. ‘Thus, as far as keyboard conversion costs are concerned, an important asymmetry had appeared between the software and the hardware components of the evolving typewriting system: the costs of typewriter software conversion were going up, whereas the costs of the typewriter hardware were coming down’ (David, 1986, pp. 44, 45). 15 For example, in Marx (1974), Capital, Volume III, Part V (‘Division of profit into interest and profit of enterprise: interest-bearing capital’), Chapter 29 (‘Component parts of bank capital’). © The Author(s) 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)
TI - Debt as Money
JF - Cambridge Journal of Economics
DO - 10.1093/cje/bey006
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