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Monetary Governance in Historical Perspective

Matthias Kaelberer
Department of Political Science
Iowa State University
503 Ross Hall
Ames, IA 50011-1204

Paper prepared for delivery at the Annual Meeting of the American Political Science
Association, Philadelphia, August 28-31, 2003

Monetary Governance in Historical Perspective

Most observers of current developments in the monetary landscape believe that we are
experiencing a revolutionary shift in the governance of money. They point to such developments
as the creation of the supra-national euro, dollarization in many less affluent countries, and the
development of non-governmental electronic money. According to this perspective, monetary
authority is gradually moving away from national policymaking to a complex network of supranational authorities and private financial players. This process is often referred to as
deterritorialization or more generally seen as part of the broader globalization trend.
How significant are these changes in the monetary landscape? Are they truly
revolutionary, forcing us to reconceptualize our thinking about money? Or are they evolutionary,
representing another logical step in the historical development of money? How does the current
transformation of money compare to previous changes? This paper investigates contemporary
processes in the monetary sphere from a broader macro-historical perspective. I argue that we
can compare contemporary processes to previous monetary transformations such as the
transition from a commodity-based money to fiat money, from private bank-issued to
government-issued money, or from coins to paper money. The popular distinction between a
territorial and a deterritorialized monetary landscape is exaggerated. It is the form of money that
is changing not its substance. Over the centuries, money has involved recurrent features and its
evolution has followed a distinct underlying pattern. The core thesis of my paper is that there is
much more continuity to the monetary landscape than the globalization thesis suggests. Changes
in monetary governance throughout the history of money have involved quite comparable
dynamics and underlying features.
My attempt to demonstrate continuity must not be confused with the argument that
monetary governance has not changed at all. Of course, change has been a recurring aspect of the
monetary realm. Monetary governance has varied over the course of history. For example,
different actors and institutions have been in control over issuing money: private banks, local

rulers, national governments, central bankers, finance ministry officials, foreign governments, or
supra-national institutions. Similarly, the rules governing money supply and monetary policy
have changed over time. Notwithstanding such historical variation, some basic factors behind
these transformations have remained fairly constant. For example, private actors and
governmental players have always competed in the realm of monetary governance. International
forces have always played a significant role in monetary governance. In fact, it is difficult to
describe any period in history as completely dominated by one particular type of actor or one
exclusive form of governance. While the role of national governments was particularly strong
from the late nineteenth into the mid twentieth century, even they did not exercise exclusive
control over their monetary space. Nor did private bankers rule Renaissance and early modern
financial capitalism without political interference. If anything, monetary governance has been a
realm of contest between different forces throughout history.
Overall, the goal of this paper is to provide a conceptual framework to assess the
historical evolution of money. The key to a more comprehensive understanding of money is to
move the analysis beyond an exclusively economic perspective. I hope to demonstrate the need
to give equal weight to non-economic aspects in analyzing the underlying dynamics of change in
monetary governance. Broadly speaking, the evolution of money is the result of the interaction of
three spheres of human life: the social, the political and the economic realm. All of them
constitute a certain aspect of money, but taken by themselves they represent only a partial reality
of the money phenomenon. The paper starts with a dimension of money that the political
economy literature often forgets: that of money as a social relation. On the basis of that
definition, the next section investigates the role of trust as the most crucial foundation of money.
Third, I will address the interaction between markets and states in shaping the evolution of
money. The conclusion will consider the inherent ambiguities in moneys evolution to ever
greater levels of abstraction.

Money as a Social Relation

Money is not purely economic but rather also social and political. Instead of relying
exclusively on the conventional functions of money as a medium of exchange, a store of value
and a unit of account, this paper starts with a more fundamental definition of money as a social
relation.1 Economists tend to overemphasize a definition of money as a medium of exchange.
The medium of exchange function, however, is much less basic to the essence of money than
aspects related to money as a social relation. In this section, I will first address a number of
conceptual issues before turning to some historical considerations about money as a social
Unlike material goods, money in whatever shape or form is quite meaningless if
restricted to one individual. Any exchange, of course, involves more than one person. Exchange
is, by definition, already social. However, monetized exchange involves even more than two
participants. Whereas barter can be conceived of in purely bilateral terms, a monetary exchange
is trilateral. In other words, money always refers to a third party. Money will change hands in
an exchange only if the actors believe that society will continue to accept money in future
exchanges. The key to monetized exchange as opposed to barter is the common relationship that
the exchange partners have to the group as a whole.
All historic forms of money, including such contemporary developments as the euro,
dollarization, and electronic money are produced as a social relation. Money is social and not
purely economic because it requires agreement among market participants that something such
as gold, a piece of paper or a computer blip has value in an exchange. Using money is to engage
in a social network with others who do the same. All monetary transformations, therefore,
involve some form of evolution in social relations as well. For example, the use of electronic

This section of the paper is strongly influenced by Georg Simmels (1900) Philosophy of Money. Simmels work
has seen a significant resurgence among economic sociologists; see, for example: Baker and Jimerson (1992),
Beilharz (1996), Dodd (1994), Ingham (1996) and (1998), Smelt (1980), Turner (1986).

forms of money requires a society that facilitates this abstract concept. Variations in the use of
the credit cards even among the most highly developed societies see, for example, the much
lower significance of credit cards in Germany than in the United States indicate that social
factors play a role in the acceptability of certain forms of money.2 Similarly, variations in the
adoption of the euro among the EU members have in part to do with the strength of European
identity in those countries.3
Money as a social relation means that the users of a particular form of money recognize
each other as a part of a community. There is no reason to assume that this monetary community
would have to overlap with a specific political entity, such as the nation state. Indeed, users of
credits cards may have more in common with other users of the same tools in other countries
than with their fellow nationals who are unable to own them say, for reasons of poverty. Again,
the key issue here is that the users of a particular form of money recognize each other as
participants in the same monetary space.
The social geography of money has, therefore, varied historically and by context. Clearly
the nation state has been an important player within that interlocking web of monetary spaces, at
least over the past one hundred years. Many analysts agree that the nation states influence over
monetary geography is now in decline.4 However, the nation state even during its heyday was
not the only relevant political unit for the monetary order. Many other players have continuously
competed with central state authorities including local rulers, foreign governments and
international institutions, private bankers and financial agents. There has never been a period of
self-contained national markets or self-contained governmental authorities. Money as a social
relation has always been and continues to be a complex, multilayered network of numerous
interactions between different players.

On the issue of credit cards see: Ritzer (1995).

See, for example: Risse, etal., (1999).
Cohen (1998) offers the most sophisticated exploration of the deterritorialization thesis; Helleiner (2003) presents
the most thorough treatment of the rise of the nation state as a key monetary actor.

The very contructedness of the nation state itself represents another important reason not
to overestimate its historical role in monetary governance. Both, money and the modern nation
state are part of a broader modernization process toward increasing levels of abstraction. The
nation state is already a major step beyond the immediacy of close, personal bonds; it is an
abstract entity. Similarly, money does not necessarily require a strong level of affective identity
with others who use the same money. Utilitarian calculus as well as contractual obligations
provide a sufficient basis for modern forms of money.
A different conceptual issue that exemplifies moneys existence as a social relation is its
role as credit. Money does not gain acceptance due to the inherent value of the money substance,
but rather because money represents credit, guaranteed by a socially constructed promise to
pay(Ingham, 2000: 22). In other words, money is a sign for the issuing agencys promise to
pay. Credit, however, is a social relation. Pre-modern markets often functioned on the basis of
credits and debts, long before coins or paper money became popular instruments of clearing
mutual obligations (Wray, 2000). In this sense, money evolved more as an indicator of debt than
as an explicit medium of exchange. Even in its modern form, money maintains its characteristics
as a credit relationship. Those holding money trust that they possess a claim on future goods and
services. Without such trust the promise to pay is worthless and economic agents will seek
substitutions. In other words, money needs to draw on normative support from society.
These theoretical considerations are supported by the historical evolution of money.
Most observers agree that money developed out of social and political practices not as a
spontaneous market solution to the inefficiencies of barter. I will address the more explicit
political origins in a later section. However, several social practices are worth mentioning here.
One source of money was the practice of bridal money, which functioned as a means to specify
value an early predecessor of the unit of account function of money. In other words, money
fulfils a social function: that of serving as a standard of reference.
Another aspect concerns the cultural connotation of the valuation process. All value
assessments are social processes. Even a completely commodity-based monetary system is

established on a cultural basis. The values of precious metals such as gold or silver are social
constructions. Gold, for example, is not a particularly useful metal for industrial production. Its
fungibility is rather limited. Its value merely comes from its use as jewelry and has meaning
within many religious beliefs and practices. Its closeness to the color of the sun has influenced
the religious associations of gods with gold and the use of gold in religious ceremonies.5 Again,
these assessments point to the constructed nature of the value of gold. Vice versa, the transfer of
gold from religious connotations into markets for exchange purposes highlights the significance
of trust for the monetary order: Gold was trustworthy because religious (and possibly political)
authority backed it up.
The points I have made so far are not be taken as an argument in favor of a voluntaristic
autonomy of society. Of course, money is in part a social construction.6 Human agents through
their interaction generate it. However, at the same time, money represents a structural force. The
monetary order shapes the behavior of actors. Much like language, which forces its rules on
those who want to engage in communication with others, money is, by and large, a given for
those who want to engage in exchange. A particular exchange may allow me to choose among a
few different forms of money say, coins, bills, a credit card or a check but the range of choice
is limited. For example, in most transactions we will be prohibited from using foreign currency
and paying by check may be problematic outside particular local areas. Cash transactions over
$10,000 have legal reporting requirements whereas electronic transfers do not.7 The evolution of
money is characterized by a perpetual tension between its liberating and constraining effects.
By itself, money as a social relation is also an incomplete perspective on money. It
cannot fully explain moneys evolution. Instead, one must investigate the role of state authority
in creating money and the role of markets in shaping monetary transformations. Before
addressing these two spheres of human existence, though, it is necessary to deal with the most

On the religious origins of money see: Laum (1924), Mauss (1970) and Smelt (1980).
On the theme of money as a social construction see: Deutschmann (1996).
For illustrations along those lines see: Weatherford (1997).

significant implication of the fact that money is a social relation namely the role of trust as the
primary foundation of money.

Money and Trust

A second enduring element of money since its inception is the fact that money is built on
trust.8 The key question that economists cannot answer is why anyone would actually exchange
goods and services for a piece of paper, a token coin or an electronic blip. Again, money appears
to be quite social and political rather than economic: market participants accept money in an
exchange based on the trust that others will do exactly the same. Money is an implicit guarantee
given by the respective community that a particular item is acceptable as a means to settle
accounts. This obliged the issuers of money throughout the centuries to establish trust among its
users. New forms of money, such as the euro or electronic currency, do not differ in this respect
from older forms of money, such as bills of exchange or copper tokens.
Barter constitutes a structurally different form of contact than monetized exchange.
Within barter, all that is necessary is a brief moment of contact between the exchanging parties.
Trust is personalized and confined to the immediate players involved. Monetized exchange, on
the other hand, is based on generalized trust embedded in social relations. While trust may not
necessarily last forever the abundant crises in the monetary system throughout the centuries
speak volumes about that trust needs to be of longer duration and be built on an intersubjective
basis. In key distinction again to barter, trust lies beyond the two individuals engaged in an
exchange. A third party is involved. We exchange money in an economic transaction not so
much because we personally trust our trading partner, although some trust of this kind needs to

On the theme of trust see in particular: Dodd (1994), Frankel (1977) and Mllering (2001).

be there as well9 but because we trust that the money exchanged in that process will continue to
be backed up by the community as a valid means to settle accounts.
Even a fully commodity-based system cannot avoid the trust issue. For example, if we
used unrefined precious metals as a medium of exchange we would need several mechanisms for
establishing trust. A first possibility is, of course, mere personal trust: I simply believe my
trading partner that I am receiving, say, gold of a particular quality in exchange for my goods or
services. Other forms of ascertaining the quality of a particular piece of precious metal are
expensive and time-consuming. One can easily grasp that a reliable sign or symbol, say the
insignia or imprint of an authorized agency, that validates a particular piece of metal would
vastly improve efficiency of the exchange. However, here we have already crossed the line
toward fiduciary money. The piece of metal is not of a particular value because of its content, but
because I trust the issuing agency. Even where private mints have minting privileges, some form
of public authority backed them. At a minimum, governments were de facto responsible for
setting minting standards and for providing security (Goodhart 1998).
Money is inherently future oriented. A key advantage of money over barter trade is that it
bridges present and future. Money is an important element in guaranteeing the continuity of
economic exchange. A market participant accepts money in the belief that he or she can use it
again sometime in the future. Money increases efficiency because it allows us to postpone a
purchase until the need arises, and because money multiplies the possibilities of different
exchanges. Money is superior to barter, because it gets rid of the double coincidence of wants
problem. Within barter, exchanges can happen only if my trading partner offers something to me
(say, a pig) in exchange for something else that I have and he or she needs (say, a coat).
Monetized exchange avoids this double coincidence of wants problem, because money can be
reused in later exchanges. Engaging in such future-oriented calculus entails, of course, the trust
of the individual that the promised value of this money is compatible to its future value. Todays

This does not necessarily imply personalized trust but rather mitigation through institutional means, such as the
legal system


value of money depends on what economic actors can do with it tomorrow; i.e. todays money is
tomorrows purchasing power.10 One conventional way of achieving that trust is the legal tender
doctrine, which requires the acceptance of currency at its nominal value. However, this trust
relationship must by definition remain uncertain.11
Inflation destroys trust and moneys role in linking present and future. If inflation is high,
those market participants capable of disassociating themselves from the present and delinking
present and future for example, through adopting foreign currency do distinctly better than
those who cannot. In essence, inflation represents the breaking of a contract between the people
and the issuing authority. It is, therefore, no surprise that periods of high inflation in the age of
government-issued money have often been accompanied by the breakdown of the basic legal
structure and public morale more generally. Within the monetary sphere, loss in trust leads to a
rejection of that currency and triggers three different sets of phenomena: currency substitution
through foreign currencies, the emergence of black markets (possibly with a return to a barter or
quasi-barter economy) and the attempt by new players to issue money (for example, local
governments become active in issuing emergency money to facilitate exchange in their local
economies). A complete breakdown in trust necessitates a complete restructuring or the founding
of a new monetary order.
It is difficult to define trust in clear analytical terms. Ultimately, it rests on a mixture of
knowledge and faith. For example, we know that some currencies have had histories of lower
inflation whereas others have had histories or higher inflation. Such knowledge may influence
our thinking as to whether to trust a particular currency. However, the facts themselves may
provide good reasons but are not a full proof by any means. Trust is a substitute for certainty

Another issue of trust that is clearly related to this aspect, but which I do not further investigate explicitly here, is
trust in the ability of the economy to provide the goods I want in the future.
The new financial derivatives, such as futures and options, are a telling contemporary development reflecting the
connection between money and trust. Essentially, they are means to express the future-oriented nature of money.
For an interesting analysis of financial derivatives see: Pryke and Allen (2000). Another noteworthy characteristic of
futures and options is their completely immaterial nature. In some sense they represent purely constructed thought
experiments of financial traders. Thus, they exemplify nicely the continued abstraction process in the monetary


under these conditions. Trust or distrust are the only feasible stance we can take toward uncertain
future outcomes. In other words, trust involves a leap of faith that goes beyond sheer
knowledge.12 The closeness of moneys origins to religious practices and political institutions
has been mechanisms to facilitate such faith but they have not been able to eliminate the
uncertainty element of trust completely.

Money and the Interaction of Markets and States

Money is both part of the relations between persons and simultaneously a thing detached
from persons. While the social relations perspective highlights important aspects of money, it is
also necessary to approach money as an objective item. The political and the economic
perspective do precisely that. In their most radical versions, both perspectives conceptualize
money as something outside of social relations.
One of the key and ultimately false debates about the evolution of money is whether
money is the spontaneous product of market exchanges or whether it is based on the power of
political authority. This long-standing debate popularly often described as Metallists vs.
Cartalists has seen several variations and incarnations over time.13 Both the emphasis on
markets as well as on states capture only a partial truth. Market-based and state-based theories
of money abstract from the social basis of money. Neither one of these positions fully depicts the
evolution of money. We must move beyond the metallists cartalists debate and recognize the
interaction between the political and economic sphere in the production of money and their
mutual interrelationship with the social sphere.
Originally, metallists maintained that the value of a currency reflected the underlying
intrinsic value of whatever backed the currency (say, precious metals or, in more modern


Mllering (2001) uses the term suspension to describe the mechanism of bracketing the unknowable. On the
issue of trust see also: Giddens (1991).
For an overview see: Goodhart (1998)


circumstances, the strength of the economy). The basic causal connection for metallists is that
money emerged as a market-based solution to the inefficiencies of a barter economy.14 Most
importantly, money is a commodity like anything else and as such it is subject to the laws of
competitive markets.
There are several explanatory problems in such a market-based approach. First, marketbased theories cannot explain the inherent hierarchical nature of monetary systems (both
domestically as well as internationally).15 Even if we consider monetary systems that feature
multiple media of exchange such as barter systems, the contemporary international monetary
system or partial free banking systems in previous centuries there has, in practice, always been
a tendency to have one means of final settlement or unit of account. This should strike market
theorists as odd. Why should a market presumably a guarantor for competition gravitate
toward hierarchy?
Presumably the first line of defense for market theorists would be the efficiency gains
realized by increasing concentration within the monetary sphere. The story line goes like this: the
introduction of money alleviates the inefficiency problems of barter exchange and further
concentration reduces the inefficiencies of having to deal with multiple monies. The more
currencies are around, the less the efficiency gains of money over barter. Each increase in the
number of currencies means an exponential growth in the number of exchange rates. Under these
conditions, it makes sense to simplify the monetary structure. Within nation states that has now
led to one monetary standard. Within the international monetary system, one single national
currency has often functioned as the global standard for the rest (in previous centuries such
currencies as the drachma and the pound sterling, and for the past half a century the dollar). In
other words, market theorists would see a hierarchical money structure as the more or less
unintended outcome of individual rationality.

The most visible name attached to this position is that of Carl Menger. Arguably, mainstream economists are
intuitively drawn to the metallist position. The most radical school of thought attached to this viewpoint today would
be the free banking community most significantly, Friedrich von Hayek and his followers.
On the hierarcharchical nature of monetary systems see: Cohen (1998), Smithin (2000).


This answer, however, has two main problems: it contains an ironic twist in the relevant
functions of money at stake here and its supposed rationality consists of an irrational act of faith.
First, the original market argument starts out with the assumption of money as a medium of
exchange. In the end, however, the efficiency gains really materialize if we talk about money as
a unit of account. Thus, we are thrown back to moneys social function as a standard of
reference. Second, the market-based argument simply returns us the old question of trust: why
would anyone exchange something valuable for items that seem useless from a purely economic
rationality standpoint? In other words, market theorists cannot even make the argument for
efficiency gains without implicitly assuming money to be a social relation based on mutual trust.
Thus, the step toward using money in itself is not economically rational. Rather it is a
leap of faith. Again, the inherent tendency of monetary systems toward hierarchy points to the
social dimension of money. While barter exchange can be characterized as a bilateral relation,
monetized exchange is, by definition, trilateral and the relationship between the three partners
is by no means equal. Moreover, the production of money itself does not obey the economic
laws of the market: individuals cannot produce their own private money in response to demand
and the supply of money is regulated. 16 One of the key problems for market theorists is the fact
that money is unlike any other economic commodity. Money is self-referential. It can be created
out of nothing and, therefore, requires collective rules for its creation and destruction.
While metallists are correct in pointing to the significance of markets in the evolution of
money, they tend to ignore the social basis of money. Markets and the logic of economic
exchange cannot explain why anyone would exchange goods and services for a precious metal, a
token, a piece of paper or an electronic blip. Similarly, metallists do not fully appreciate the
importance of the institutional structure necessary for trust most importantly in terms of a
functioning system of property rights.


For an elaboration of these points see: Ingham (2000).


The problem of trust does not disappear even in a fully commodity-based monetary
system. First of all, as mentioned earlier, the value of gold or silver is a social construction.
Secondly, even if we were to imagine a closed commodity-standard system, metallists tend to
underestimate the informational costs of identifying the true value of a currency (Goodhart,
1998). In the case of commodities, it would be time-consuming to assess the degree of fineness
or quality of a precious metal. Similarly, if we extend the metallist argument to a full-fledged
free banking monetary system, transaction costs for market participants would obviously
increase the more types of currencies would be in circulation.
Cartalists, on the other hand, argued for the role of the state in the evolution of money.
According to this line of thinking, certain items simply became money because of governmental
decree. Many aspects of the historical evolution of money support this point of view. The state
was involved in the creation of money from the beginning. Besides the already mentioned social
practices, the first uses of money grew out of societal and political institutions, such the wergild
the sanctioned payment of damages and compensation for injury and taxation.17 Wergild is
interesting here for number of reasons. First, it emerged explicitly with the intent to serve as a
measuring instrument (i.e. more closely related to the unit of account function than the medium
of exchange function of money). Rules specified exactly how much compensation needed to be
paid, say, for the loss of an arm or for death. Second, these rules were the result of public
decisions (governance) rather the result of a market price mechanism. Third, this type of
codification contributed to the consolidation of public authority as opposed to an anarchical
system of personalized justice. The prevention of blood feuds in turn provided tools for public
authority to grow and to establish the legal infrastructure that became important for the growth of
the money economy. Thus, money is not a spontaneous solution to the inefficiencies of barter
trade. Instead, it originated outside of market relations.


On the importance of wergeld and other social practices see: Simmel (1900): 355-394. See also: Wray (2000).


Another historically important tool for states to shape the development of money were
taxes.18 Governments specified what they accepted as a legitimate means to dispense of ones
liabilities to the state. In other words, the monetary function of the state evolves parallel to other
aspects of the role of government in standardization (Spruyt, 1994). The origin of money as a
measuring instrument for weight of commodities is still visible in various modern names of
currencies (pound, mark, lira, shekel), as those weights determined what quantities of specific
products were acceptable for settling someones debt to government. Effectively, by setting these
weight standards, the state announced an exchange rate. This announcement allowed for
measuring the value and price relations of different commodities. Again, moneys emergence as
a unit of account appears much more basic than the means of exchange function. It goes
without saying that the states coercive powers were a significant tool in enforcing this type of
standardization of the economy.
Similarly, the state has been a key agent in production of trust. In the process of
modernization, trust has become more and more institutionalized. It has moved from intimate
and personal relations to the public sphere and anonymous relations. Again, a barter situation can
be conceptualized on the basis of relatively short-term and personalized trust. With monetized
exchange, trust becomes more impersonal and the more the money economy develops the more
trust needs to be embedded in the institutional structure. Key to this role of the state in
establishing trust has been the development of a legal system in particular the development of
reliable property rights and the necessary infrastructure for economic exchanges.19
In modern times this development is, of course, intimately tied to the rise of the
constitutional nation state. However, even under pre-modern conditions, the state played a
significant role for the formation of trust. As mentioned earlier, a pure commodity standard
would not function efficiently without the states role in validating the value of a coin through
state insignia. The development of fiat money has changed the tools of state authority in money

For the role of taxes in the evolution of money see: Wray (2000).
On the significance of functioning property rights systems see: North and Thomas (1973).


creation, but not its structural role in creating trust. Now that the supply of money needs to be
regulated endogenously rather than exogenously as under a commodity standard the key tool
for state authority are interest rates. Under contemporary conditions, the production of money is
the attempt to control the price of debt through interest rates (Ingham, 2000: 31). In the
meantime, the institutionalization process of trust is moving toward the international level as
well. While efforts at the International Monetary Fund and the Bank of International Settlements
are good indicators of that, the best example is certainly European monetary union. The
provisions of the Maastricht Treaty for the independence of the European Central Bank (ECB)
and for the pursuit of low inflation form deliberate attempts to install an institutional structure
capable of facilitating a sufficient level of trust.20
Despite the significance of states in monetary governance, their role must not be
exaggerated. Societies and markets are other pivotal players in the governance of money. States
cannot ignore the constraints imposed on them by the necessity to create trust and the vagaries of
markets. Cartalists have often tended to overemphasize the role that insignia of sovereignty and
political force play in controlling the monetary sphere.21 However, market forces can constrain
even the most coercive governmental power. Governments are powerless, if they are not
supported by a relationship of trust. For example, Milosovics government could not force
Serbian citizens to use their national currency. The coercive capacity of the government was
unable to create sufficient trust among citizens, and social relations demonstrated their power to
evade the dictates of government in the monetary sphere. Money is not purely a means of power
in the hand of governments, but also has liberating potential.22
The key to understanding this situation lies in the relationship between the governments
ability to determine the nominal value of money, and the power of markets to shape its
substantive value. The irony is, of course, that neither governments nor markets reign absolute

For a detailed discussion of issues related to establishing trust for the ECB see: Germain (2000).
A good example of that tendency is Knapps own work.
Simmels analysis on this point is again superior to Knapps more one-sided cartalist approach. The last section of
this paper will address the inherent contradictions between liberating and constraining forces in the evolution of


and that the relationship between markets and states is in the end tied up in the social relation of
trust. Trust can go both ways and make the relationship between nominal and substantive value
of a currency unpredictable. We know, of course, many examples in which markets simply erode
a governments ability to influence the substantive value of a currency or to run autonomous
monetary policies. On the other end of spectrum, though, there are numerous examples of how
long governments can maintain the value of a currency under heavy market pressure. Even in
cases of high inflation, observers have occasionally been surprised by how long economic agents
have hung on to money whose substantive value was persistently eroded by market forces.
Again, market forces alone cannot explain the phenomenon. Continued trust in the issuing
agencies may lead to economically irrational behavior on the part of economic agents.
The ability of different players to exercise effective monetary governance has also been
heavily influenced by structural shifts in the distribution of power between various actors. Of
course, historical cases of international monetary hegemony and the standard-setting role of
global currencies are well known. The role of technology has been important in shaping
monetary governance as well. For example, technological change has repeatedly extended the
range of transactions between economic actors. To take a case in point, the extension of trade in
the late medieval and early modern period combined with the relative weakness of central
political authority (i.e. the decline of the Holy Roman Empire) shifted power in favor of private
bankers such as the Medici, the Peruzzi, or the Fugger and later to Dutch and British commercial
banks.23 The more economic exchanges moved away from localized affairs, the more they
required some form of standardization in the monetary sphere. Later, new printing and minting
methods provided national policymakers with the tools to exercise greater control over their
territories, and to succeed over other competitors in order to seize the monopoly in issuing
money during the nineteenth century (Helleiner 2003). New developments since the 1970s (such
as higher capital mobility and new computer-based technologies) have moved power away from

The Medici, of course, provide a very nice example for the fusion between social, political and economic power,
with several family members serving as bankers, government offials and in church offices, including several popes.


some political players (e.g. finance ministries) to other governmental institutions (e.g. central
banks) as well as private financial capital. Throughout the history of money, these types of
structural shifts have opened opportunities for different players to reshape the governance of

The Contradictions in the Evolution of Money

A recurrent phenomenon in the evolution of money has been the somewhat contradictory
consequences of that process. I will first address the inherent ambiguities of the continuing
abstraction process in the evolution of money. In later parts of this section, I will address three
pairs of contradictory consequences of moneys abstraction process: the simultaneous reduction
and increase in distance, the contrast between the advancement of individual fulfillment and the
growth of anonymous interdependence, and the unevenness in moneys liberating effect.
As the preceding sections of this paper elaborated, money is not a physical property but a
conceptual scheme. This fact has been consistent throughout monetary history. Even gold had
value only if others agreed. In other words, all money has in some sense always been virtual
(Ingham 1998). National money, largely adopted during the second half of the nineteenth
century, represents a step toward greater abstraction. Even though we are now familiar with the
concept of a nation and of national money, they embody significant movements away from more
immediate relations and identities. Nations as well as national money are abstract ideas.
Current changes merely illustrate this abstraction process more visibly. Of course, the
euro represents a move toward the association of money with an even more abstract supranational form of political organization. Dollarization is another example of a movement away
from national affiliation, and electronic money, of course, has no material characteristics left
whatsoever. A look at the imagery of euro bank notes illustrates the ambiguities of this process
very nicely. The euro bills feature architectural styles rather than the depictions of specific
buildings, places or individuals, which are so familiar in conventional coins and bills. In the past,


currency imagery, of course, was in part driven by the desire to reaffirm the values of the nation
and to imbue citizens with trust in the nations money. Ironically, the euro had to feature more
abstract imagery precisely in order to create greater levels of trust. Rather than depicting
concrete entities associated with individual nation states, the euro designers adopted conceptual
themes with which most EU member states and their citizens could identify. Overall, the euro is
indicative of a broader trend: the more abstract the form of money the broader the circle of
exchange. Electronic forms of money (including credit cards) represent a step even beyond the
euro in that direction. The more dematerialized money becomes the more it functions really as
The ambiguities of moneys evolution mirror in many ways the parallel modernization
process.24 On the one hand, for example, money has a liberating effect on people. Money was
crucial in the transformation of feudalism, commuting direct labor services into money payment.
Thus, money helped to loosen immediate ties e.g. family, primordial groups, traditional and
local communities. However, while personal freedom from patronage increases, it does so at the
price of increasing dependence on impersonal ties. Modern human beings are more dependent on
each other for their livelihoods than those that engaged in subsistence agriculture. Thus, greater
individual fulfillment is accompanied by a growth in anonymous interdependence. As Simmel
(1900: 298) argues: And even though we are much more dependent on the whole of society
through the complexity of our needs we are remarkably independent of every specific member
of this society.
Moreover, while money allows for greater individual choices, it simultaneously creates
greater rigidities. Human relations become dominated by utilitarian calculus and instrumental
considerations. Personal trust among those that engage in an economic exchange has to be
replaced by impersonal and institutional trust. In other words, money reflects the same iron
cage logic Max Weber identified for the modernization process in general: greater levels of


The subsequent analysis is again insprired by Simmel (1900).


personal freedom require increasing bureaucratization and must, therefore, exist in a persistent
tension to its opposite, namely a reduction in freedom.
While money has a unifying effect on some relationships, it helps to disintegrate others.
Money is key to engaging in more distant exchange relationships. The less monetized a society,
the more dependent the individual is on immediate ties for his or her survival. The more
monetized an economy, the greater the potential for individuals to realize survival and livelihood
through exchanges with more abstract entities. Even the most immediate ties can disintegrate in
the evolutionary process. For example, care for children, the sick or the older generations can
now be discharged through compensation schemes outside of the immediate family structure.
Nor do I need to get into contact with the shop owner around the corner or the salesperson in the
mall. Now I can engage in economic exchanges with individuals I do no meet personally at all,
simply mediated through the new communications technologies. In other words, while money
facilitates greater individual fulfillment within the larger society, it makes immediate
relationships more distant.
Similar points can be made about the changing relationship between money and the
broader societal and political environment. For example, money became a tool in constructing
new and more abstract forms of association among them the nation state itself. In other words,
money allows for the emergence of new relationships that would otherwise not exist. The
contemporary processes of monetary transformation the euro, dollarization and electronic
money are vivid expressions of this process.
However, the partially liberating effect associated with moneys evolution is uneven.
Money gives those that own greater amounts of it more chances for individual self-fulfillment.
For them it opens more opportunities for participation in wider exchange circles. The poor,
however, may suffer even greater exclusion from these life chances. The plight of those in the
cash ghettos25 is a telling example: while they must accept checks as a means of payment (and


For the term cash ghetto see: Weatherford (1997).


cannot simply ask, say, for cash), their economic situation may prevent them from owning an
efficient means to convert them into useable currency (i.e. a checking account). Instead, in order
to be able to join a monetized economy, they are faced with higher costs for participation
through check cashing stores than they would be in a purely cash-based society. The
marginalization of groups that do not have access to credit cards demonstrates that plastic and
electronic forms of money have similar distributional implications.26 It is noteworthy that this
particular effect is regressive: while national monetary union represented a major step toward the
inclusion of the poor in the monetary economy (Helleiner 2003), more recent changes seem to
have greater exclusionary consequences.


The objective of this paper was to demonstrate continuity beneath the current changes
that are taking place in the governance of money. I argued that the governance of money has
always involved the interaction of three spheres of human life: societies, markets and states. Of
course, that statement in itself is telling about the modern condition. Members of traditional
societies would not have found anything unusual about the interaction of these spheres since
they were not separate to begin with. Only with the modern disaggregation of these spheres
would a statement about the interaction of them somehow appear noteworthy. My argument
though underscores even further that continuity is part of the evolution of money. Money
predates the modernization process while simultaneously serving as one of the engines driving
modernization. Thus, money came out of social and religious practices, was backed up by
political authority and has served as a medium of exchange. Although these spheres of life have
separated over time, money has kept traces of its origins in all of them. While money powered
the development of capitalism and with it the separation of spheres of life it also still bridges the


For the social consequences of credit cards see: Ritzer (1995).


social-cultural, political and economic sphere. What has changed over time is the form of
money, not its essential characteristics.

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