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Chapter 23: Money
23 Money Geoffrey Ingham Introduction In the late nineteenth and early twentieth centuries, the question of the nature of money played a central role in the methodological dispute (Methodenstreit) during which modern academic economics was formed (Hodgson 2001). As Schumpeter observed at the time, ‘[t]ere are only two theories of money which deserve the name … the commodity theory and the claim theory. From their very nature they are incompatible’ (quoted in Ellis 1934, p. 3). With the economic theorists’ victory and subsequent hegemony, the commodity-exchange theory of money came to dominate the ‘orthodox mainstream’ conception of money (Smithin 1994; Goodhart 1998). There are two slightly different variants of the commodity theory. On the one hand, as in common sense, money is regarded as a ‘thing’ that ‘circulates’ with a ‘velocity’. Apart from other serious problems, this conception was anachronistic at the time of its classical statement in Fisher’s ‘quantity theory’ (1907). By then, virtually all signiﬁcant transactions were carried out by the book clearance of debits and credits in the banking giro, not by the circulation of ‘money-stuff’. Moreover, a hundred years on in the era of ‘e-money’, the analytical structure of ‘quantity theory’, continues to inform orthodox economics. On the other hand, it is also asserted that money is analytically unimportant, that money is no more than a ‘neutral veil’ over transactions in the ‘real economy’. Neoclassical economics’ most prestigious paradigm (general equilibrium theory) acknowledges that it has no place for money in its mathematical models (Hahn...
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