Money, Banks and Finance in Economic Thought

A Taxonomy of Historical Monetary Theories

Greitens Jan, Baden-Württemberg Cooperative State University

Since the financial crisis, the existing monetary order has been increasingly questioned. Against this, it is valuable to revisit historical monetary theories and make them relevant to current debates. This paper uses the monetary functions as starting point of a taxonomy. Theories wherein the nature of money is based on its “store of value” function emphasize the commodity characteristic to explain its origin and value. These are metallistic theories, where money has a value independent from its function as money. Credit money only represents a commodity, as described by the Real Bills Doctrine. This stream of thought began with Oresmius and persists in restrictive monetary policies. Theories wherein the nature of money is determined by its “medium of exchange” function view the exchange of goods in a market as the origin of money. Money is the most marketable good, used for intermediary exchange due to the coincidence-of-need problem. Credit money must be covered by the money-good, e.g. gold. This view is characteristic for the Austrian School. Accordingly, crypto currencies are understood as artificially scarce money-goods. Theories wherein the nature of money is determined by its “standard of deferred payment” function are based on the legal arrangements for credit. Therefore, money is “a creature of law”. Private credit can be created (theoretically) unlimitedly by banks in an akatallactic way. This position is based on the “convention theory of money”, e.g. in Davanzati, and finds its clearest expression in Knapp, to whom MMT refers Theories wherein the nature of money is determined by its “unit of account” function view money as an abstract measure. Money is an instrument to control economic processes; it is a token on economic output. Credit money is created in a complex interaction, whose volume is determined by the income spent. Schumpeter referred to this approach as “katallactic nominalism.” Tooke and Wicksell are early supporters.

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Keywords: Taxonomy; Monetary Theory; Functions of Money

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