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Money: 5,000 Years of Debt and Power

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Money: 5,000 Years of Debt and Power is a featured book on our 10 Years Since the Financial Crisis Reading List.

As the financial crisis reached its climax in September 2008, the most important figure on the planet was Federal Reserve chairman Ben Bernanke. The whole financial system was collapsing, with little to stop it. When a senator asked Bernanke what would happen if the central bank did not carry out its rescue package, he replied, “If we don’t do this, we may not have an economy on Monday.”

What saved finance, and the Western economy, was fiscal and monetary stimulus – an influx of money, created ad hoc. It was a strategy that raised questions about the unexamined nature of money itself, an object suddenly revealed as something other than a neutral signifier of value. Through its grip on finance and the debt system, money confers sovereign power on the economy. If confidence in money is not maintained, crises follow. Looking over the last 5,000 years, Michel Aglietta explores the development of money and its close connection to sovereign power. Money employs the tools of anthropology, history and political economy in order to analyse how political structures and monetary systems have transformed one another. We can thus grasp the different eras of monetary regulation and the crises capitalism has endured throughout its history. 

Here we present an excerpt from the Introduction.

In mid-September 2008, the financial crisis that had been sweeping across the Western world for more than a year reached its climax. The whole of the Western financial system was collapsing, with nothing to hold back the tide. At this critical moment, the most important figure on the planet was Ben Bernanke, chairman of the Federal Reserve. The dramatic decisions were taken over the weekend, when the financial markets were closed. This was itself symptomatic of the sudden loss of confidence in these markets. When a senator asked Bernanke what would happen if the central bank did not carry out its rescue package, he replied, ‘lf we don’t do this, we may not have an economy on Monday.’ Finance and the Western economy were saved by money.

This reality contradicts the liberal doxaof financial efficiency. Following a quarter-century of financial liberalisation, this ideology today sweeps all before it. Of course, the knowledge that it provided was unable to foresee the global financial crisis. At its theoretical core, it ruled out the very possibility that any systemic crisis could develop. But, graver still, it was unable to learn from what had happened and to reform itself accordingly. The financial lobby was saved by the central banks. After that, the regulatory authorities, acting under G20 auspices, did timidly attempt to impose a few mini-reforms to avoid a repetition of what had just occurred. Yet the international financial lobby knows nothing of gratitude. It shamelessly sought to torpedo the new regulations, or to find some other way around them. The corrupt financial practices that had built up with the real estate speculation bubble would in fact take on much greater proportions after the crisis. These practices were facilitated by the collusion of the major international banks, who manipulated prices on the world’s two most important money markets: on the one hand, the LIBOR, or benchmark interest rate between banks, and on the other hand the dollar exchange market. Those responsible for these attacks on law and morality were immune from any criminal responsibility.

Yet, more seriously for the advancement of our understanding, the academic world that spreads the good word of finance has remained unperturbed in the face of the cataclysm. Finance is still assumed to be efficient. This ‘truth’ is taught in the departments of finance of all the major universities and business schools, with a haughty disregard for any doubts that the financial cataclysm must surely have aroused in any researcher enamoured of scientific methods. Alas! The dogma of the efficiency of finance has triumphed in economic policy. So, in Europe, where the inability to contain the Greek crisis has caused a protracted economic quagmire, so-called ‘orthodox’ economic policies blame the labour market for the continent’s inability to return to the path of growth. This imperfect labour market, which in fact has nothing to do with the crisis, is held to be the cause of all our post-crisis ills. Finance, for its part, is once again imagined to be blameless.

Worse still, it is now barely possible to pursue an academic career without wedding yourself to this same credo. This is particularly the case in France. There, a warning from a single economist – one decorated with a Nobel prize, it is true – was enough to make the government abandon its decision to diversify the field by creating a department designed to put economics back into society.

This intellectual poison is a serious matter indeed, in an era in which our inability to rediscover the course of progress can be felt everywhere. This is particularly the case in finance. Indeed, as was announced in a press conference on 21 September 2015 by the governor of the Bank of England, Mark Carney – who knows what he is talking about, London being home to the world’s largest financial trading floor – the rhetoric of the financial lobby and the financial theory that supports and justifies it rests on three lies.

The first lie is that if finance is entirely free, globalised and unregulated, it will develop instruments to insure against risks (derivative products), rendering impossible the spread and intensification of the blaze. After two decades of stable inflation and financial liberalisation, the financial community, the media, and the political establishment loved to proclaim that systemic crisis had now become impossible (‘this time it’s different’). But the impossible did happen. This owed not to some external mega-event but rather to the fact that speculation had eroded from within any sense of reason and any barrier to the appeal of greed. This first lie is also the basis for the other two.

The second, then, is the claim that financial markets spontaneously find their own equilibrium. This lie concedes that the markets can be thrown off their equilibrium by shocks. But it is also imagined that these shocks are external to the markets’ own logic. Market actors are wise enough to note any divergences; it is in their interest to act in a way that reduces breaches. After all, such actors have an apparently infallible compass: namely, knowledge of the ‘fundamental’ values of the financial securities traded on the markets, which is to say the ‘true’ long-term values of companies. This same compass allowed Milton Friedman to claim that the only speculation that can be successful is that which restores equilibrium: speculation that brings a return to the fundamental value whenever the market price departs from it. Yet, ever since the birth of market finance in the thirteenth century, the whole history of finance has been punctuated by bubbles of speculation that end up bursting and causing the debts that financed them to implode. With the return to financial liberalisation in the 1980s, the most devastating crises have been real estate crises. Indeed, real estate assets are the biggest single element of private wealth, and financing these assets requires taking on debts. Real estate is founded on ground rent, which is income from a non-produced asset – the soil. For this reason, it has no equilibrium price, and thus no fundamental value. The same is true of all non-reproducible natural resources. The competition to appropriate these resources brings only a rise in rent, whose sole limit is buyers’ monetary capacities. The financial dynamics of the real estate sector are moved, therefore, by the logic of momentum – by the spiral of interacting rises in credit and prices – and not by the return to some predetermined equilibrium price. Eventually, there will come a point at which such momentum is reversed. Yet given that both the climax and timing of this turning point are radically unpredictable, the actors who feed the bubble in real estate values have an interest in holding onto their positions indefinitely. This only ends when their fictitious and self-generated values implode, followed by a state of ‘every man for himself ’.

The third lie is that financial markets are moral. This lie claims that the markets’ functioning is itself transparent, whatever the ethics of individual market actors. The markets’ functioning should bring any deviant practices out into the open, so that the social interest will always be safeguarded. It follows, according to this ideology, that the only thing able to perturb the markets in a lasting way is inflation, since inflation is created by the state. This claim would be laughable if it were not so tragic. The biggest financial crises, including the one whose effects we are still shouldering today, have taken place during periods of low inflation, which have encouraged financial risk-taking. We have already mentioned the large-scale, organised corruption that has come to light since the crisis. These corrupt practices contravene the notion that the market disciplines its actors. For the markets to work in society’s interests, what is needed is an institutional framework that is itself a public good: one imposed by political will, and which is intrinsically linked to money.

Putting Money Back at the Heart of the Economy

Once we have acknowledged these three financial lies, we must, at a minimum, take a rather more critical approach. Yet such an approach must also delve into the fundamentals of what is known as economic science, or in other words, the theory of value. For it provides the foundations in which each of the three lies takes root. These foundations are not innocent, for they contribute to an intellectual project that has been ongoing for more than three centuries – and one, moreover, that was originally known as the ‘natural order’. This project consists in the total separation of economics from the rest of society. The so-called economic science that drives this project has no link with the disciplines known as the social sciences. It is a theory of pure economics whose unifying concept is that of the market. And it displays one essential characteristic: it downplays the significance of money.

The fundamental theorems of financial efficiency are theorems of an economy without money. Money is either ignored entirely or it is grafted onto a predetermined system of efficient prices said to guide economic actions. In the second case, money is assumed to be neutral. While some would add that it is only really neutral in the long term, as we see in Part I, this caveat changes nothing about the essential proposition of the theory of value: the market totally and exclusively coordinates economic exchange. This coordination owes nothing to social relations and nothing to the political arena. And yet, debates on the nature of money and its role in the overall movement of the economy date back to the origins of modern economic thinking in the sixteenth century. The opposition between a notion of money as a particular commodity – as a simple appendage in an economy coordinated by the market – and money as an institutional system that binds the economy together traverses economic thinking. This book seeks to give full expression to this second tradition, which allows us to insert economics into its properly social context.

As members of society, we daily experience the interconnection of the economic and the social, especially through the haunting omnipresence of money. We can only be astonished, then, when a theory that purports to explain social behaviour simply neglects the question of money. But we must dig deeper. Money is an essentially political animal. It is not by chance that a theory that exalts the market as the exclusive principle of economic coordination excludes money. Indeed, it is precisely through this exclusion that it can establish the ideology of a ‘pure’ economy separate from the political sphere. Conversely, if we consider the economy as a subset of social relations, then we need a political economy founded on money. Here, money is the mode of coordination of economic acts. However, the manner in which this coordination operates does not make equilibrium the alpha and omega of economic understanding. On the contrary, we have to think of economics in terms of resilience, fields of viability, crises, and forks in the road. Coordination by money makes crises possible as an endogenous characteristic of its own regulation. This coordination refutes the three lies about finance. It makes it impossible for economic theory to deny its political element, because money is itself political. The question is thus posed: why is money seen as legitimate, in the practices of those who use it? What is the source of confidence in money?

Money is a featured book on our 10 Years Since the Financial Crisis Readling List.