Credit money, fiat money, and currency pyramids: Reflections on the financial crisis and sovereign debt

This on-line version is the pre-copyedited, preprint version. The published version can be found here:

‘Credit money, fiat money and currency pyramids: reflections on financial crisis and sovereign debt’, in G. Harcourt and J. Pixley, eds, Financial Crises and the Nature of Capitalist Money, Basingstoke: Palgrave-Macmillan, 248-72, 2013.

This is the final draft of a contribution to a Festschrift for the Cambridge University economic sociologist, Geoffrey Ingham. It was constrained by a word-length limit (8000 words). In a subsequent iteration without these constraints, I would explore in more detail the contradictions among the forms and functions of money and their articulation to currency pyramids.

One issue in the debate over the origins and dynamics of the North Atlantic Financial Crisis (or NAFC) and its wider but uneven contagion effects is the significance of financialization. While this is sometimes discussed in terms of a conflict between the ‘real economy’ and the financial economy (for example, Main Street versus Wall Street, Industry versus the City), this is misleading because the real economy in capitalism inevitably depends on monetary and financial intermediation. The opposition, if it exists, must arise elsewhere. One approach reinterprets this conflict directly in terms of the economic and political sociology of different fractions of capital, their social bases, material and ideal interests, and relation to political society and the state. This approach is explicit in Geoff Ingham’s 1984 study of the City of London and industrial capital in Britain. Another approach addresses the conflict indirectly in terms of the changing articulation of the forms, functions, and hierarchies of money and how they operate both separately and together in (dis)connecting the circuits of capital in the world market. This articulation operates behind the backs of economic agents, potentially disrupting the best-laid plans of different fractions, with different outcomes in different periods. This is implicit in Geoff Ingham’s work on money as a social relation, its changing role in financing state activities and entrepreneurial innovation, its role in power struggles and economic conflicts, and the role of credit-money in the recent crisis (Ingham 2004, 2011).

An interesting question is whether these approaches can be combined and what concepts are needed for an effective synthesis. Against the grain of Ingham’s analyses in both respects, I argue that a return to Marx’s critique of political economy can tell us more about this opposition and its implications for crisis than he believes (for example, Ingham 2004: 61-3; 2008: 24, 52, 54, 229n). This is partly because, against most readings of his work, Marx supported neither the Currency nor the Banking schools of monetary theory (although he was closer to the latter) but developed an original approach grounded in his critique of political economy, especially the distinction between money and capital (Arnon 2011: 309-29; Clarke 1994: 104-105; Krätke 2012: 19). I also show that Marx anticipated recent shifts in the forms and functions of money, especially the role of interest-bearing capital and related forms of fictitious capital in integrating the world market, thereby generalizing and intensifying capital’s contradictions (Marx 1967b, 1972). And I argue that these shifts had a key role in creating and aggravating the NAFC.

Weber on Modes of Orientation to Profit-Making

Before examining Marx, I consider Max Weber’s typology of profit-orientations. Pace Ingham (2008: 24-34),[1] Weber’s analysis of capitalism is not limited to the conditions for the maximum formal rationality of capitalist accounting. He identified six ideal-typical modes of orientation to profit-making (Weber 1922, 1923). There are two ‘rational’ modes: (1) rational calculation of opportunities for profit on the market from trade in free markets and the rational organization of capitalist production; and (2) capitalist speculationandfinance. Weber adds (3) traditional commercial capitalism, based on traditional types of trade or money deals; and, significantly, three modes of political capitalism, based respectively on (4) predatory political profits, (5) profit on the market from force and domination, and (6) profit from unusual deals with political authority. Marx’s critique of political economy focused for sound theoretical reasons on rational capitalism and tackled political capitalism, if at all, mainly in historical and conjunctural analyses. Yet all modes remain relevant to differential accumulation, that is, the capacity of individual capitals to grow by securing above-average returns on their investment (Bichler and Nitzan 2004), and, a fortiori, to the movement of total social capital in the world market. Indeed, the continuing significance of political capitalisms as well as financial speculation should be obvious, for example, from the NAFC (Jessop 2013a; see also Ingham 2011: 235-37).

Starting from the diversity of profit-orientations indicates the importance of a broader historical account of the nature, genesis, and evolution of money – one that does not confine it to the nature of the money commodity (if any) or to money’s role in free trade in markets and the rational organization of production. Ingham has made a major contribution here through his sociological survey of the debate on money as a social relation, drawing especially on Knapp’s chartalism (Knapp 1924) and Keynes’s emphasis on money of account (measure of value) (Keynes 1930). Given his concern with the overall moneyness of money (its status as credit or claim on goods priced in the money of account), however, Ingham pays less attention to the specific features of money and credit relations in the capitalist mode of production (CMP). This claim may seem surprising given his historical sociology of Britain’s divided capitalism, his monograph on capitalism, his interest in the creation and vital role of capitalist credit-money, and his account of debtor-creditor conflicts in capitalism. Yet I aim to show that (1) Ingham has blind spots regarding Marxism in general, Marxist analyses of money and credit in particular, and, notably, Marxist accounts of the class powers and antagonisms inherent in the money form itself as opposed to their contingent expression in actual or potential economic and political conflicts among banking or financial capital, other capitalist fractions, and other classes or social groups – blind spots that are by no means confined to Ingham; (2) chartalism fails to capture the specificity of the state’s role in money and credit relations in capitalism (as noted, for example, by Ingham 2008: 66, 70, 75) and, even in the neo-chartalist, post-Keynesian version presented by Ingham, it is weak on the challenges posed by the contradictions in the system of world money;[2] and (3) he ignores critical issues posed by money as capital as well as capital as property and neglects, until the first signs of the North Atlantic Financial Crisis, the growing role of fictitious capital (or speculative ‘financial engineering’) in differential accumulation and the dynamics of the total social capital (Ingham 2008: 148, 166-70, 173, 208). I argue that money’s transformation into capital poses different kinds of question from those raised by the historical nature of money and these must be addressed to explain the current crisis.

Hyun-Woong Park provides a useful bridge to this historically specific Marxian theory of money (one reconstruction of which is given below) when he compares it with the ahistorical (or transhistorical) nature of chartalist theory (preferred by Ingham):

In the former [Marx], the state is introduced at the stage of transition from commodity money system to non-commodity money system, i.e. the state authority as the substitute for the original foundation of money’s acceptability; in the latter [Chartalism], on the contrary, the state constitutes the origin and foundation of money from the outset. … Therefore the state is conceptualized as a neutral agent existing autonomous[ly] from the economic sector to which it merely imposes tax liabilities from without (Bell 2001: 155).[3] Contrarily, in Marx’s theory … the state comes into the picture as a decisive moment which provides a set of conditions for satisfying the monetary requirements arising from the capitalist dynamics. That is, the state is a crucial part of the capitalist system. (Park 2010: 8)

Marx on Money and Capital

Compared to those trapped in the ‘Babylonian madness’ generated by an obsessive concern with the origins of money, Marx studied its history mainly to establish a benchmark to assess the historical specificity of the forms and functions of money and credit relations in the CMP. While several monetary categories are long-established (for example, money, credit, usury), they are all transformed by capitalist development (Marx 1967a: 112, 527; 1967c: 325-37; 1972: 468-70, 485-92). Marx began his analysis of money in Capital I with its role as a medium of exchange in simple circulation (as the counterpart to commodities in a C-M-C transaction) and then added more functions. It seems that Ingham’s critique of Marx’s money theory is based mainly on the chapters on money in simple circulation in A Contribution to the Critique of Political Economy (1970) and Capital I (1967a), which also explore some of the functions of the money-form in the same context (see Ingham 2004: 67-8). In neither case, however, had Marx yet introduced the concept of capital. When he does so, even the functions of money identified in these early chapters are modified by the analysis of the distinctive features of money as functioning capital (see Table 1). In Capital I and later volumes he also introduced concepts to analyse the complete (and far more complex) process of the circulation of money, the metamorphosis of capital in the circuit of profit-producing (or industrial) capital, different forms of capital and fictitious capital, forms of competition, and the turnover times of capital(s) in a fully-developed CMP. The crucial extensions concerned how credit (in its different forms) modifies the circuits of capital. Specifically, it reduces the need for productive capital to hold reserves, lowers the socially necessary turnover time of capital, and changes the temporal structure of the circuits of capital. Marx takes the analysis even further by introducing fictitious money (credit money), commodity-dealing, money-dealing, interest-bearing, and share-dealing capital, the intermediary role of banks in the circuits of capital, and fictitious capital (Marx 1967c: 267-322). Overall, Marx shows that credit relations (especially bank deposits) increasingly replace money as the fundamental category for analysing the contradictory unity of total social capital (cf. Ingham 2004: 107-43).

As Marx moves from the functions of the money-form in simple commodity circulation (where he assumes that money is also a real commodity) to the forms and functions of money in a fully-developed CMP, he makes three crucial conceptual moves. First, he unfolds its forms and their relation to credit, seeking to show that, in a fully-developed capitalist economy, money must take the form of increasingly complex forms of credit. Second, he distinguishes (1) real commodities, real money, and real capital from (2) fictitious commodities, fictitious money, and fictitious capital. And, third, he distinguishes money as functioning capital from money as property. Unsurprisingly, given the logical-historical method adopted by Marx, these categories are interconnected both conceptually and in their historical movement.

In this regard money is a representation of value (and/or credit-debt relations) and it can also function as capital, either as the most general expression of capital in the abstract vis-à-vis specific forms of capital and/or as a money commodity (for example, gold) or, again as a fictitious commodity, tradable against other commodities (including other national monies in currency markets). We should note here, against Ingham (2004: 61-2, 200-203; 2008: 18), that, when writing about value, Marx did not deploy an embodied labour theory of value but a value theory of labour-power, that is, an account of what occurs when labour-power is treated as if it were a commodity (Elson 1979; Lebowitz 2003; Pepperell 2010; Postone 1993). Likewise, while Marx initially assumed that money was a real commodity (that is, the money commodity was produced in a capitalist labour process), this assumption was relaxed as he explored other forms and functions of money. Indeed, he argued that capitalism depended on abandoning gold in domestic circulation (1967c: 517; Ingham overlooks this development, for example, 2011: 268).

In particular, for Marx, when money is transformed into functioning capital, it mediates the core social relation of capitalism: between capital and wage labour. For Ingham, however:

[a]rguably the most structurally fundamental struggle in capitalism is not that berween productive capital and labour, but rather between debtor (producers and consumers of goods) and creditor (producers and controllers of money)classes and centred on two rates of interest, the long and the short’ (2004: 150; see also 82, 132-33, 202).

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Source: Own compilation (based in part on Marx 1967a, 1969, 1970, 1972)

Moreover, for Ingham, citing Schumpeter, the typical capitalist (as opposed to manager) is an entrepreneur, who must contract debt in order to fulfil her function as the innovative driving force of the dynamism that distinguishes capitalism from both pre-capitalist and socialist modes of production (Ingham 2003, 2004, 2011). For Marx, however, money as capital expresses the capitalists’ power to organize and control labour-power in production, which is a dual process that involves valorization as well as the appropriation and transformation of nature. The emergence of money as functioning capital reinforces the transition from social production based on householding and/or authoritative redistribution and/or simple exchange relations (Polanyi 1957) into a capitalist economy in which private and public credit and banking relations increasingly replace real and/or paper money as the basis of accumulation (Marx 1967a-c, 1969; see also Ingham 2004, 2008). This takes us beyond credit-money advanced for consumption (usury) or the financing of state activities (public debt) to the functioning of credit-money as capital. Theoretically, this underlines the need for analytical categories specific to the circulation of money as capital and its various forms (Table 2). Further conceptual elaboration is required by the rise of fictitious capital and its status as property rather than functioning capital, that is, capital employed directly in production or circulation (Ingham’s distinction between money, capital, and finance does not capture this, for example, 2008: 148).

This leads Marx to stress the duality of money as both a real commodity and a fictitious commodity and its dual foundation in the social relations of commodity production and in social relations of trust. In short, he is interested in the tensions, opposition, and potential contradictions that are inherent in the duality of money as it develops in the CMP (even before he considers the overdetermination by other factors, forces, and processes related to developments in finance and the ‘real economy’).

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Source: Own compilation based on Marx

First, as a real commodity, money emerges spontaneously from the logic of commodity circulation and, in this context, its value is determined by the socially necessary labour time involved in its production (Marx 1967a: 99-100; see also Stemmet 1996) and its price is overdetermined by demand for the money commodity and the dynamic of differential rent (Marx 1967b; 1969). Over time, however, real money  (for example, gold or silver coins)  becomes  less  important  as the universal equivalent (regaining its importance temporarily in periods of war, catastrophe, and crisis) as paper money, clearing arrangements, trade credit, and so on displace it. Hence the metallic substance of real money becomes little more than the commodity capital of its specialized producers to be exchanged against other commodities through the medium of a non-commodity money (MMC). The money commodity may continue as part of the money capital of banks, central banks, or states (MMH) and, in the form of bullion, plays a key role, alongside central bank monies (notably international reserve currencies, with or without real monetary backing) in the functioning of world money (WM).Second, in contrast with bullion or other forms of commodity money, different quantities of credit and fiat money do not meaningfully embody different amounts of labour-time and, a fortiori, contain no value. Their acceptability as money depends instead on relations of trust based on accepted banking principles and/or state guarantees (Krätke 2005; Ingham 2004: 00; 2008: 72-4). In particular, as Park (2010: 8) notes, state authority replaces the value space as the foundation of money’s acceptability. The state makes public money acceptable because it can be used to pay taxes (Marx anticipated this chartalist theme in comments on the role of the state in defining the unit of account, the national debt, the modern system of taxation, and international credit as important factors in the rise of the CMP and even more important in its fully-developed form) (1967a: 528-32; see also Krätke 1985; Ingham 2008: 76). Yet its role in detaching money from a metallic base is ‘fundamentally constrained and limited by the inherent requirement for maintaining the quantity [and circulation] of [non-commodity] money at a level that corresponds to the dynamics of capital accumulation.’ (Park 2010: 17) Where the state ensures this, value-less paper can circulate. Nonetheless these forms do represent/reflect value (that is, claims on social wealth insofar as this takes the form of an immense accumulation of commodities) (Marx 1967a; also Ingham 2004).

In short, the dual nature of money poses the question of the respective roles of money as a real commodity and as a fictitious commodity in performing the functions of money as money and as capital. Marx analyses metallic and non-metallic money as complementary counterparts, ‘united through the inherent contradiction between the need of capital to expand indefinitely and the need for money to be universalizable exchange value, i.e. bound to real value production and its realization in trade.’ (Krul 2010: 5) For example, Marx shows that the self-valorization of capital (its expanded reproduction) would be limited where the supply of metallic money does not keep pace with the actual (let alone potential) production of commodities. This prompts the development of credit and fiat monies, detaching the supply of money from its metallic base. Private banks played a key role in credit creation (central banks emerged later) and the state has a similar role for fiat money. Thus credit money and fiat money are not equivalent even if they have some of the same functions. Indeed, Marx’s analysis depends on the distinctiveness of the forms and functions of money and hence the scope for contradictions, dilemmas, and crises to develop on this basis (Krul 2010: 15; see also Amato and Fantacci 2011: 38-42).

Most forms of money (and, by extension, fictitious capital, such as interest-bearing capital but also, currently, derivatives of various kinds) are not real commodities, real money, or real capital. As such they lack intrinsic value. As Carchedi (2011) notes:

the basic object of … transactions [in interest-bearing capital] is a representation of debt rather than of value. It engages in transformations from a representation of value (for example, money) into a representation of debt (bonds, derivatives, etc), from a representation of debt into a different form of representation of debt (from mortgages into mortgage-backed securities), or from a representation of debt into a representation of value (the sale of a mortgage). These representations of debt are called by Marx fictitious capital.

Yet most forms of money do have a price (or prices) expressed in the mystified, mystifying forms of interest rates and exchange rates and of capitalized discounted future earnings. These may be illusory, insane categories but they do have real effects on the movement and relations among forms of money, credit, and capital and, hence, on the distribution of social wealth. Paradoxically, as de Brunhoff observes: ‘this irrational price is also a factor in the rationalization of individual capitalist practices’ (1998: 182). This is because ‘[i]t serves industrial and mercantile capitalists as a prerequisite and a factor in the calculation of their operation.’ (Marx 1967c: 368). Interest-bearing capital is themost fetish-like form of money because interest makes it appear that capital, not labour-power, creates surplus value, rather than interest being taken from the value created in production. Class conflict is obliterated because the rate of profit now forms an antithesis not with wage labour but with the rate of interest (Marx 1967c: 370-90).

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Source: Own compilation, partly based on Marx

Further, fictitious capital not only plays no role in valorization but is also ‘dangerous’ (Meacci 1998) when its expansion becomes dissociated from the real production and realization of value that occurs through the metamorphosis of productive capital. This dissociation can occur in the short- to medium-term when private credit expansion is directed to speculation and Ponzi finance, shadow banking expands, there is increasing reliance on leverage unrelated to the real movement of value, and prudential state controls are weak or absent. But the real movement of capital will sooner or later re-impose itself.

The hierarchy of money forms facilitates the displacement and deferral of contradictions in the capital relation in general and in money forms and functions in particular. We see this in central banks’ role as lender of last resort in national contexts (for example, Ingham 2008: 42) and in the role of state fiat money in bailing out private banks and guaranteeing central bank debt (thanks to state’s taxing capacities and, where relevant, money-issuing powers). That there are limits to such displacement-deferral mechanisms has been demonstrated once again in the NAFC in the growing disproportions among (1) the explosion of fictitious money and fictitious capital; (2) the expansion of the ‘real’ economy on which these fictitious forms are claims; and (3) state capacities to issue fiat money and tax their populations to absorb ‘toxic’ debt, which is the (im)polite name for what Marx termed ‘excess credit’,[4] rather than using other capacities to prevent its development or ensure its devalorization. It is these disproportions that, coupled with the power of financial capital to shape national, European, and supranational state policy, that have transformed a crisis of ‘excess credit’ into a crisis of public and sovereign debt. This crisis has provided, in its turn, the fisco-financial and ideological basis for a reinvigorated neo-liberal assault on the (welfare) state in the name of austerity.

More generally, although credit and fiat money enable capital to escape the limit imposed by commodity money on expanding production, it re-emerges at a world level. For, there is no world state or legal authority to set a price numéraire as a unit of account or commensuration and to authorize fiat money to ensure the acceptability of non-commodity money (Krul 2010; Park 2010). This is already implicit in Marx’s discussion of world money (gold or bullion) and his comments on the flight to gold when other forms of money – including fiat money backed by even the previously most creditworthy state – lose credibility (Ingham 2011: 252).

Assuming that bullion or a gold standard cannot be substituted as the basis of universal exchange value in the world market, we can depict the argument so far in terms of a hierarchy of money forms (Table 3). Crucial here is that both the base and the summit of the hierarchy comprise a physical commodity – respectively, commodity money and bullion. Further, while other forms of money had to develop so that the limits to capitalist expansion set by commodity money could be broken, this limit can re-emerge at the level of the world market in times of global crisis.

But this logic may not hold if some monetary functions in the world market can be secured without a world state. We can explore this through the notion of a currency pyramid. Michel Aglietta identified a tension between the inherent plurality (pluralité) of national currencies and the necessary uniqueness (unicité) of world money. Since the full range of money functions could not be secured through bullion and, absent a world state that could lend credibility to a true world money, a partial, provisional, and unstable solution could be to adopt as world money the currency of the hegemonic or dominant state, where one exists (Aglietta 1987). This may be viable in situations where the hegemonic currency is convertible with gold (for example, the Bretton Woods gold-dollar standard) but is vulnerable to Triffin’s dilemma. This is the problem faced by reserve currency issues in pursuing domestic monetary policy goals and meeting other countries’ demand for reserve currency (Triffin 1961).

Parallel reasoning led Susan Strange to a more nuanced account of the currency pyramid in which the circulation of national currencies and their potential as world money had different social bases. She defined this pyramid in terms of the balance of market forces and state power in shaping the role of currencies in national, regional, or world markets (Strange 1971a, 1971b; Table 4). However, while Strange argued that market forces selected the top currency, its issuing state also sustains it through its state capacities, including hard and soft power abroad as well as domestic measures to maintain the competitiveness of domestic and/or overseas investments (see Gowan 1999 on the Wall Street-Washington-Dollar Nexus). In practice, of course, currencies can combine features of the first three forms, depending on geo-economic and geo-political factors and forces. For example, while the USD is both a top and master currency, the Euro is both a master currency (linked to German mercantilism) and a negotiated currency (linked to a subset of European member states and tied to a political project) (see Lapavitsas 2012).

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 Source: Own compilation, based in part on Strange (1971a, 1971b)

The currency pyramid is significant in terms of the asymmetrical organization of the world market, whether the latter is seen in terms of a logic of territorial expansion or in terms of the logic of a space of flows. Different currencies are differently situated in this regard. In the absence of a world money (or, at least, in the case of bullion, a world money that exists in sufficient quantity to perform the functions of money on a world scale) and in the absence of a world state (or, at least, an imperial state secure in its global hegemony), the top currency plays a crucial but contradictory role in the integration of the world market, especially when the top currency is central to the development of finance-dominated accumulation (and hence an important factor of crisis-generation) and also serves as a safe haven in the flight to quality as the crisis breaks out and intensifies. The crisis in the Eurozone and the absence of conditions for an effective challenge from the Yen or Renminbi as alternative top currencies mean that the USD remains the pre-eminent form of ’world money’ even as it is also implicated in the generation of the financial crisis.

A Brief but Necessary Excursus on Derivatives

There is one final step in the analysis, which also represents a return to the forms and functions of money, before I turn to the monetary and financial crisis. This is to discuss derivatives (see also Ingham 2008: 163-74, where they are discussed under the rubric of financial risk management and speculation; and 2011, 236-7, 255, 259, where, pace Marx, their ‘dysfunctional’ character is given more attention). Just as there are inherent constraints on the state’s ability to create fiat money before monetary crises emerge, so there are limits to banks’ ability to continue to create credit before monetary and credit crises arise. This can be seen in the development of securitization and, especially, the rise of derivatives and their massive expansion. For, as Marx anticipated (not only in his remarks on the world market but also in his remarks on fictitious capital and the contradiction between capital as value in motion and capital as property), this generalizes and intensifies competition in relation to means of production, money capital, specific capitals as units of competition, and social capital. Derivatives are the most generalized form of this capacity and, based on the calculation of value at risk (VAR), they have a growing role in the commensuration of all investment opportunities and every single risk in the world market (Bryan and Rafferty 2006). In extending and deepening the basis for hedging and financial speculation, derivatives have a key role in the tendential completion of the world market in transforming future income streams (profit, dividend, or interest) into tradable assets and also change the dynamics of competition on a world scale (Table 5).

Noting the arguments of Marx and Engels in The German Ideology (1979) on the limits to world market integration, we could say that derivatives as forms of financial innovation integrated production on a world scale. For they tend to:

  • overcome the frictions of national boundaries,
  • open national economies to foreign competition,
  • help to overcome the clumsiness of production,
  • enhance the role of finance in promoting competition

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Source: Own compilation based largely on Bryan and Rafferty (2006)

In addition, derivatives take the fetish-like character of fictitious capital to new heights because they have even less relation than interest-bearing capital to the movement of real values. Indeed these forms of fictitious capital provide the basis for new fictitious commodities (derivatives treated as commodities), new forms of fictitious money (based on securitization), new forms of fictitious banking capital (for example, more or less rarefied CDOs), and new forms of share capital (for example, credit derivatives product companies, special investment vehicles). These developments are consistent with Marx’s unfolding, but never completed, analysis of fictitious commodities, fictitious money, and fictitious capital (cf. Krätke 2012). But they take them to more rarefied, insane, and irrational heights (think CDO3 and, indeed, so-called CDO^n). Underpinning these developments is, as McNally notes:

the attempt to create something called abstract risk that can be measured and sold. This is what derivative markets do, they buy and sell risk exposures. … The assumption built into it is something inherent in the value abstraction – the idea that all these risks are commensurable and equitable. This is what exploded, as it had to, because it carries all the inherent contradictions of the value form – the contradictions between the concrete actual processes of social organisation of life activities within capitalism and the value form. (McNally 2011: 115)

Before this explosion, however, and, indeed, afterwards, these developments also modify the forms of competition. Derivatives reinforce the separation between the general movement of capital based on valorization and the fluctuation of money prices and profit and, in this way, facilitate financialization and the rise of finance-dominated accumulation. The disembedding of financial capital and the extension of neo-liberalism tend to make financialization the primary basis of differential accumulation and to produce finance-dominated accumulation regime in which ‘profit making occurs increasingly through financial channels rather than through trade and commodity production’ (Krippner 2005: 174; Jessop 2013b). The logic of financialization (wherever it occurs) transforms the role of finance from its conventionally-defined, if always crisis-prone, intermediary function in the circuit of capital to a more dominant role oriented to rent extraction through financial arbitrage and innovation. It is through the expansion of derivatives, initially for risk management (but, following Haldane, 2012, creating opportunities thereby for financial speculation and risk-taking), that the contradictions of the value form find new or intensified expressions. This reflects the paradoxical role of derivatives in risk management, crisis-transmission, and crisis-management in the sense that, as many have recently observed, the micro-level security offered through securitization creates macro-level insecurity (for example, Amato and Fantacci 2011).

Monetary and Financial Crisis   

The changes in the circuits of financial capital noted above have important repercussions on competition within and across all circuits of capital, due to the effects of leverage, fictitious profits, and the diversion of money capital from the circuits of ‘boring’ productive capital and, indeed, ‘boring banking’ into speculative and Ponzi finance. This weakens the primacy of production in the overall logic of capital accumulation and eventually runs up against the limits of a parasitic, rather than intermediary, role. It thereby increases the scope for the credit system to intensify cyclical perturbations and crises, triggering ‘violent eruptions’, especially when financial speculation predominates over the concerns of the real owners of capital (Marx 1967c: 476-518).

This discussion of the hierarchy of money forms, the parallel notion of currency pyramids, and the massive development of derivatives reinforces the argument, which is common to Marx and Ingham, among others, that money (like capital and the state, with which money is closely connected) is a social relation. This point holds not only in general terms but also for specific institutional mediations such as the hierarchy of banks, issues of monetary, budgetary, and fiscal policy, state forms and hierarchies (for example, master currencies), and so on.

To the extent that the functions of money are rooted in commodity money, it is fluctuations in real movements in value creation and in realized profits at different stages in the circuit of industrial and commercial capital that produce monetary crises. Relative and/or absolute over-accumulation are the key endogenous factors of crisis in this context. Matters change when commodity money is marginalized relative to the expansion of credit and fiat monies. Here there is more scope for money itself to be an element of crisis as the expansion of credit and fiat monies can become uncoupled from the real movement of value (cf. Ingham 2011: 114). Indeed, in some cases fluctuations in profits of enterprise that trigger industrial and commercial crises may lead industrial and commercial capital to engage in financial speculation in the search for profit.

More generally, commenting on the crisis of 1866, Marx noted:

a monetary crisis … may appear independently of the rest, and only affects industry and commerce by its backwash. The pivot of these crises is to be found in money capital, and their immediate sphere of impact is therefore banking, the stock exchange and finance. (Marx 1967a: 236, n.50)

Because the direct feedback mechanism between productive capital and changes in fictitious capital is broken as financialization and derivative markets expand, price movements begin to reflect movements in the circuit of fictitious capital more than changes in the underlying production system (Perelman 1977). In these conditions, ‘[a]ll connection with the actual expansion process of capital is thus completely lost, and the conception of capital as something with automatic self-expansion properties is thereby strengthened.’ (Marx 1967c: 466; cf. 828) While confidence in the money-form is retained, the credit system tends to create asset bubbles and to fuel self-feeding speculation. This in turn can divert capital from productive investment into short-term speculation oriented towards fluctuations in the prices of fictitious capital rather than movements in the real (but always-already monetary) economy (Marx 1967c: 508-17) – with increasing volatility and, for those able to exploit volatility, opportunities for super-profits based on hedging, shorting, front-running, and so on.

Different degrees of liquidity, flexibility, and fungibility mean that capitals vary in their ability to respond to such pressures and competition. International finance capital controls the most liquid, abstract, and generalized resource and has become the most integrated fraction of capital. This is reflected in the systemic power and importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, nationally and internationally (Epstein 2005: 3). This does not mean that finance (let alone the economy more generally) can escape its overall dependence on the continued valorization of productive capital and the activities of other functional systems or, of course, escape from crisis-tendencies rooted in the contradictions and dilemmas of capital accumulation. Attempts to escape particular constraints and particular attempts at control can occur through finance’s own internal operations in time (discounting, insurance, risk management, futures, derivatives, hedge funds, and so on) or space (capital flight, relocation, outsourcing abroad, claims to extra-territoriality, and so on). But the constraints of valorization sooner or later reassert themselves. This can be seen in the current liquidity, credit, and financial crises and their repercussions in the wider economy as crises serve once more to forcibly re-impose the unity of the circuits of capital at the expense of hyper-extended credit markets. This occurs when an exogenous or endogenous shock causes a flight from private credit to the safety of real money and/or the excessive expansion of fiat money leads to declining trust in the national currency and/or state debt (Marx 1967c: 516; cf. Krul 2010). This indicates the need for a monetary theory of the role of money in the capitalist mode of production that recognizes the complexity of money, credit, and debt in capitalism at different stages in its development and at different points in the circulation of capital as functioning capital and as property (Marx 1967a-b; and 1969).

This is reflected in debates over which function of money needs to predominate in the current crisis: MMC (quantitative easing) to facilitate economic recovery or MMV (but without gold as a reference point) to discipline capitals and government (McNally 2011: 116). The state’s role is clearly critical here since it is involved both in preserving the function of MMC and in imposing austerity policies to preserve MMV. Absent a world state, we see contagion and domino effects as states seek to preserve the functions of money in their territories (national and/or regional) at the expense of others rather than through coordinated international action.

The role of the currency pyramid is crucial here because it re-introduces the world market as the horizon of capital accumulation, highlights the role of the state, and indicates how integration of the world market might generalize contradictions in asymmetrical ways. This is seen in three significant tendencies: (1) the flight to safety during crises into the top currency – even if its issuer is one source of the crisis; (2) the capacity to engage in financial Keynesianism through the political manipulation of asset bubbles with global dimensions and repercussions – seen most recently in the global effects of US quantitative easing; and (3) the capacity of the issuer of the top currency not only to benefit from seigniorage but also to impose the costs of adjustment onto the issuers of other currencies. The latter is reflected in the well-known statement that ‘the dollar may be our currency, but it is your problem’.

Specifically, if crisis-tendencies are intensified and generalized via the money form, then crisis-tendencies in the top currency will, ceteris paribus, have greater impact than crisis-tendencies in a master currency (for example, sterling in the period of the sterling bloc), let alone a negotiated or political currency (such as the Euro). Nonetheless, even if the Euro has not become a top currency, the ecological significance of crises in the Eurozone considered in productive terms (for example, continuing recession or transition to epic recession) may have effects other than through currency transmission.

Concluding Remarks

In his comments on the financial crisis that first became visible in 2007, Geoff Ingham confirms what Marx had already theorized 140 years earlier: that the provision of money (liquidity) and the expansion of credit-debt relations are essential to the expanded reproduction of capital. The development of new forms of what Marx termed fictitious capital and Ingham refers to as ‘new ways of making profits from purely speculative financial transactions’ (including securitization) exacerbated these crisis-tendencies. When these ‘delicate elements’ are ruptured, complex financial assets become illiquid, banks hoard reserves, a flight to safety occurs, and the resulting credit crunch disrupts and retards the ‘real’ economy of production and consumption (Ingham 2011: 230). To prevent the imminent collapse of global finance (and hence of capitalism), states created and distributed massive amounts of new fiat money to fulfil their role as lender of last resort, guaranteeing liquidity, and through quantitative easing and the purchase of illiquid (toxic) financial assets also socialized losses to become the ‘market maker of last resort’. In short, ‘private global financial markets are underpinned by public money’ (Ingham 2011: 252).

Ingham’s chronicle of the crisis is, inevitably, largely descriptive and, when he ventures explanations, draws on his earlier account of the centrality of credit money to the functioning of capitalism. Missing in this analysis is a proper appreciation of Marx’s innovative work on money, credit, and fictitious capital and, even more significantly, his analysis of the profound contradictions in the capital relation created by the tension between real commodities, real money, and real capital and their fictitious counterparts as the latter assume ever more fantastical and irrational forms. These contradictions and their realization at different scales up to and including the world market need to be theorized in their manifold connections. Ingham’s account of money reinvents some (but not all) of Marx’s critical insights in this regard and adds some important new sociological insights. However, while his analysis of the NAFC has some similarities with one that could be developed along Marxian lines (see, for example, Carneiro et al., 2012; Lapavitsas 2012; McNally 2011; Rasmus 2010), the richer and more complex set of concepts developed by Marx would enable us to explain further features of the crisis as a crisis of a world market organized under the dominance of the capital relation and, in particular, in the shadow of a finance-dominated accumulation regime. In addition to considering changes in the circuits of profit-producing (or industrial) capital, this would also involve greater attention to the tensions between ‘real’ and ‘fictitious’ money and capital and, in regard to the current crisis, to the relation between national currencies and world money, including the scope for contradictions and crises inherent in an unstable currency pyramid. For it is in the emergent logic of the world market that the whole system comes together.


Research for this piece was aided by an Economic and Social Research Council professorial fellowship (RES-051-27-0303). Useful comments came from the editors, Michael Krätke, Hugo Radice, and Beat Weber. All errors are mine.


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[1] This claim is apparently contradicted ex ante in Ingham’s earlier arguments about the importance of Weber’s contributions to the history of money (2004: 66-8).

[2] Apart from his general references to the gold standard (or its suspension), a possible exception is Ingham’s recognition of the conflicts between domestic economic management and international monetary markets (2004: 223n).

[3] Park’s account of chartalism reflects Knapp’s view that money emerges to calculate and settle debts and that the state confers validity on money tokens by accepting them to settle tax debts (Knapp 1924). Ingham is more of a neo-chartalist: while his history of money notes the importance of the state in validating money, his account of capitalist credit-money stresses the historic, path-changing intersection of private credit and state debt (see, especially, 2008: 70). This fits with his ambition to reconnect and partially synthesize economic and political analysis in a wide-ranging sociological account of: (1) the social construction of trust in money as abstract value understood as transferrable debt; (2) the fisco-financial as well as money-issuing and authorizing activities of the state; and (3) the power-political conflicts between creditors and debtors, especially as reflected in struggles around real interest rates. Nonetheless, in emphasizing the historical specificity of capitalist credit-money and the vital role of the state in its creation and validation from the mercantilist era onwards, it is possible that Ingham might accept Park’s overall argument without endorsing its Marxist conclusions (Ingham 1999, 2004, 2008).

[4] As an acute observer of the contemporary scene, as well as a theorist of money, credit, and fictitious capital, Marx was well aware of the phenomena that Ingham describes in terms of financial asset bubbles (Ingham 2008: 151). He also discussed share-dealing capital and promoter’s profits from what nowadays are called IPOs (cf. Ingham 2008: 153, 155).

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