Money as a Social Construct – Talk Given by Mary Mellor


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Here’s a very good talk given by Mary Mellor in Jan 26th 2012 which provides a great overview of her book The Future of Money.

The first part of the talk deals with the limits of orthodox economic thinking and why it failed to foresee the disaster of the latest financial crisis, but she also outlines alternative views which challenge and fill in the gaps ignored by those with the unitary fixation of “economic man” and efficient market theory.

Her focus though is on the social construction of money and how the ability to create money has only recently been ceded to banks. The 90% of the world’s money supply created by banks through loans can only exist because it is backed by the state. But the privatization of the creation of the money supply has meant that the proper provisioning of society is ignored in the interests of profit seeking. Since the financial crisis began, however, the ability of the state to create money has been taken back by governments through quantitative easing, commonly referred to as the ability to print money. The problem has been that this new printed money was not directed to sustaining society’s needs but in order, the governments claimed, to get the banks to provide credit to consumers. The result was that because of the ongoing crisis they simply sat on it, with the benefits of the move accumulating to the wealthy.

The talk is about an hour long.

The following quote is taken from Chapter 1: What is Money?

For social theories of money the actual money-stuff that represents the accounting process is not important as long as people trust it. Whatever value money is given, it represents a credit or claim on the future production of society. Rather than being secured by some inherent value of the money-stuff itself, the social theory of money sees it as ‘a socially (including politically) constructed promise…money is always an abstract claim or credit’ (Ingham 2004:198). For Ingham ‘moneyness’ is provided by whatever is agreed as the ‘money of account’, that is the means of calculating the relative value of goods, services, debts or taxes. Holding money is a claim on society and all money is therefore a credit that can command resources based on whatever value it carries at any point in time (Wray 2004:234). The social view of money sees it as a system of credit-debt relations that is socially created and maintained. Money is a credit for those who holdit as it is a claim on future consumption or investment. At the same time it is a debt on those who have to provide the goodsor services demanded when the holders present their money.They must give up a service or a product for what is effectively a credit note:

‘All money is debt in so far as issuers promise to accept their own money for any debt payment by any bearer of money’ (Ingham 2004:198 [italics in the original]).

For money tofunction effectively, whoever circulates money tokens in societymust honour them by accepting them in payment, or guarantee them as a means of access to goods and services. While the money system can be seen as a network of claims and obligations, for money to be universally acceptable it has to be given social credibility through respected authorities or institutions. Socially constructed money can emerge in many contexts, but modern money was built from an intricate relationship between the emerging capitalist market and the state (Knapp 1924, Ingham 2004, Wray 2004, Smithin 2009).

While on the topic it is also worth listening to this podcast interview with L.Randall Wray, cited by Mellor in the quote above. Wray is the author of Understanding Modern Money, and the forthcoming Modern Money Theory which is based on the Modern Monetary Theory Primer, a series of posts he and others have written on modern money in the New Economic Perspectives blog.

The interview covers the origins of money, the nature of government debt and the problems with the Euro.

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Donagh is the editor of Irish Left Review. Contact Donagh through email:

3 Responses

  1. LeftAtTheCross

    August 28, 2012 9:01 am

    Interesting enough talk. I came away from it thinking there were some good points made but with the gut feeling I get from much green material that there still seems to be something substantial missing in the arguments made, although I’m hard pressed to put my finger on exactly what that is.

    One question though, about debt free money. I’m presuming that the economic system of the previously actually existing socialist states were based on debt free money, would that be an accurate statement? If so, is there any linkage made between what Mellor is proposing and the real world experience of the socialist monetary systems, in terms of lessons learned or synergies?

  2. Donagh Brennan

    August 28, 2012 12:43 pm

    I’m presuming that the economic system of the previously actually existing socialist states were based on debt free money, would that be an accurate statement? If so, is there any linkage made between what Mellor is proposing and the real world experience of the socialist monetary systems, in terms of lessons learned or synergies?

    I’m glad you asked. One of the advantages of Mellor’s analysis is that it clearly explains how real world capitalism works. So what Mellor is proposing is based on the system as it currently exists, but which capitalist states choose not to exercise at the moment. Debt-free money is often referred to as fiat money, that is money created directly by the state and injected into the money supply. Debt-based money creation is money that is created through private banks when they give people loans, which have an interest charged on them. A state with their own currency and a central bank has the ability to create money directly without charging interest. So the Socialist Monetary systems that you are referring to must include the USA which issued interest-free money between 1862 and 1971.

    The difference between a United States Note and a Federal Reserve Note is that a United States Note represented a “bill of credit” and was inserted by the Treasury directly into circulation free of interest. Federal Reserve Notes are backed by debt purchased by the Federal Reserve, and thus generate seigniorage, or interest, for the Federal Reserve System, which serves as a lending parent to the Treasury and the public.

    As the debt purchased by the Federal Reserve System to back its notes consists primarily of Treasury and Government-sponsored enterprise debt,[27] and because the seigniorage is largely remitted back to the Treasury as “interest on Federal Reserve Notes”, the economics to the Treasury are comparable to issuing United States Notes. This stands in contrast to National Bank Notes which allowed the issuing banks to privately retain the seigniorage as profit.

    Interestingly the Euro is also a fiat currency, but one which is mandated through the Maastrict rules to only issue money via the private banking system. You should read Karl Whelan on the ELA provision for Anglo Irish Bank, in which he outlines how the ECB creates money via national central banks. Although Whelan appears to be a monetarist in that he feels that a state creating money would lead to inflation.

    However, the ECBs unwillingness to act as lender of last resort has led to the completely mad situation where Ireland has to pay back with interest money borrowed from the Irish central bank that it created out of thin air, in order to repay money that was ‘borrowed’ to repay bondholders in full who were speculating on Anglo Irish bank bonds (and who had already hedged against not getting the money back). There’s stuff in the news today about the implicit threat in a letter to Lenihan from the ECB if Ireland tried to avoid a bailout and whether or not the Irish government should publish it.

    However the details of the letter are already known:

    The officials interpreted the letter from ECB president Jean-Claude Trichet to the then minister for finance Brian Lenihan on November 12th, 2010, as a threat to withdraw the emergency loans.

    However, they were more concerned that the ECB could charge a higher rate of interest on the loans and this would have been more damaging for the State. Government officials did not take the threat of the withdrawal of ELA loans as seriously as the possibility that the ECB could at “the stroke of a pen” increase the interest rate charged on those loans, said one well-placed source.

    So the ECB would take it upon itself to punish Ireland by increasing the rate, even though this was simply a policy decision, although it was really done to protect French, German and UK banks. Randal Wray had an interesting post on this back in June:

    The second, much greater, problem was that individual nations had become responsible for their own banking systems. But there was no hope that they’d be able to bail them out without sinking their governments. Again, this was by design of the Euro system: there was no Uncle Sam in Brussels to come to the rescue of the governments burdened by debt run-up by private banks that could easily be orders of magnitude greater than total government spending or taxing.

    One of the goals of integration was to free up labor and capital flows, removing barriers so that factors of production could cross borders. Indeed, that was a primary reason for adopting the single currency. Whether or not that was a good idea—and whether or not it worked—is another matter. What is important for our discussion today is that it enabled banks to buy assets and issue liabilities all over Euroland. And boy-oh-boy did they do that.

    The icing on the cake was the deregulation and desupervision of banking contained in the Basle Accords. That allowed banks to undertake the same sort of crazy schemes that Wall Street’s banks pursued.

    That is, of course, what got Irish banks into heaps of trouble as they ramped up lending across Europe, growing their liabilities to multiples of Irish GDP. Then, when their bets went bad, the Irish government had to bail them out, boosting fiscal deficits and government debt to uncharted territory.

    Again, this was a design feature of the EMU and the EU more generally: free the banks so that they can blow up, then blow up the government budgets as they try to rescue their banks. (It was not just Euro banks that did it of course; think Iceland and the UK.)

    In reality, of course, the Irish bail-out was really designed to save the banks of the center nations—not the periphery. Ireland fell on the sword in perhaps the greatest act of charity ever seen in the history of humanity as it protected German and French and English banks from losses on their lending to Irish banks. Unlike the potato famine, this catastrophe was entirely produced by the Irish government’s policy of taking on the bank debt.

  3. LeftAtTheCross

    August 29, 2012 10:42 am

    Thanks Donagh, not quite what I was asking but I appreciate that I need to bury myself in this more deeply to ba able to ask the right questions. So I’ll go listen to Wray’s podcast…