Reexploring Money and Its History: An Interview with Professor Christine Desan

Christine Desan is the Leo Gottlieb Professor of Law at Harvard Law School. She “teaches about the international monetary system, the constitutional law of money, constitutional history, political economy, and legal theory. She is the co-founder of Harvard’s Program on the Study of Capitalism, an interdisciplinary project that brings together classes, resources, research funds, and advising aimed at exploring that topic.”[1]

This interview was conducted on November 3, 2020. It has been edited for length and clarity.

Harvard Undergraduate Law Review: To begin, could you briefly outline your research and areas of expertise?

 Professor Christine Desan: I became interested in money as a legal institution several years ago, and that interest intersects with my work in legal history and in constitutional law. I have studied the way societies create and maintain monetary systems, thinking about those systems as institutions.

HULR: Much of your work challenges the view within economics about money being, for example, simply a way for the value of goods to be represented during interactions, and instead, as your biography states, “explores money as a legal and political project, one that configures the market it sets out to measure.”[2] Could you elaborate more on the assumptions and the reasoning that are underlining this view?

Desan: Let me talk for a minute about the way money is conventionally conceptualized. If you look at a macroeconomics textbook, the attention given to defining money is quite scant, and the assumption is often expressed that money is some kind of measure that arises from private exchange. We’re in a society where we’re exchanging wheat for fish and chicken for salt. It’s very hard to make those exchanges because if you’re bartering, the items you have might not be the items other people want, so you can’t trade easily. So, say many commentators, what happens is that something that’s easy to give and take rises to the top of the exchange, kind of like fat to the top of broth, and that becomes the item that’s used to measure other things. In the conventional story, silver and gold rise to the top of the exchange, and are used to measure other things. Then, the government then gets involved standardizing silver and gold, making coins out of those materials so people can use them easily. And if you think about that story, it’s a story about private activity in which the government’s role is one of an administrator. The market itself is represented by barter, by the underlying give and take of items, and the advent of money makes things easier but doesn’t fundamentally change anything about the market.

I was very interested in that story; it’s a very powerful story. When I looked historically at the ways societies organize themselves, two things became very clear. One is that it’s not just individuals that have a need for money; it’s also communities. When you look at how societies or communities actually function, the way they function always includes an element of public organization. Publics can’t organize themselves easily without a way to mobilize resources. So publics have an interest in what money is given and taken. That’s the first difference from the conventional story.

Then when I dug a little deeper, what I realized is that publics actually take the initiative again and again in creating the medium that’s used. Since we don’t have money — we’re imagining a world before money, because we want to see how money comes about — we have this world in which the public survives because everyone contributes to it: a communitarian kind of ethos. The problem for a public organized that way is that there will be different moments in which routine contributions by people are very inefficient. Imagine there’s a military attack on the border, or half the population gets sick, or we need to build a road. In that case, public authorities will have to draw on people who are either in the location where work is needed or have specialized skills. What happens in many societies in that case is that the authorities draft the work of people in advance. Those individuals have already made their routine contribution; they’re not due to make another contribution until the next month, say. Authorities will give out an IOU that says that when those people work early, they will receive a token that represents their advance work. So when it’s time for their next routine contribution, those people can simply give back the token. It’s a proxy for value; it represents their material contribution already given. Only one more step is necessary to make the token operate as money, and that is for you to allow the people (the advance workers) to give those tokens to others in the meantime before they’re due the following month. You’ve got a medium, token by token, and everyone knows what that token is worth: it’s worth one routine contribution to the government. When I looked historically at the evidence of different communities, it looked likely that that is what was happening, not the barter story.

HULR: So in this public story that you talked about, where do metals like silver and gold, specifically, come from? Because even with the early IOUs that you talked about, in many cases they’re still backed up by silver or gold. How do those factor into the story? Is there still a role for the barter system in the public story?

Desan: In the barter story, if that were right, then the account is that somehow silver and gold rise to the top — everyone converges on them to make exchange. In the publicly oriented story, the reason silver and gold are used as the content for the market is that it’s a way to regulate the markers. If you’re going to give out credits to people, we don’t want them to be multiplied endlessly. Silver and gold are useful not because they’re so common that they rise easily to the surface, but because they’re actually scarce and valuable and difficult to refine. The public monopolizes the ability to contrive a token that is hard to create and hard to reproduce, which means that people won’t be able to duplicate it easily. And for that matter, it won’t fall apart, either. All those things make silver and gold great for the material in which to make an IOU.

One more interesting point about silver and gold is that they act as collateral. If you make a token in silver and gold, you’re also including a content that’s valuable on its own terms. That will increase the legitimacy of your tokens. If you’re trying to establish a system that’s new and that people might not trust, and if your political authority is weak, it would make sense to create a token that includes collateral.

Finally, I’ll draw on the European example. Once you’ve got a token that’s made of a precious metal, then you can set up a system in which you actually allow people to come and buy additional coins by giving content that has value to the mint, and then the mint can increase the amount of coin in operation without the coin losing value. The silver and gold is a constraint on the amount of money production that the mint can make, but it is allowing people to expand the amount of money that the mint can make.

That gets kind of technical, but that turned out to be an important part of the European medieval world. People could come to the mint with bullion and buy coins with bullion, and that increased the money supply. So every society that we look at has a way for people to increase the money supply for their own purposes for the amount of activity that’s not government-driven exchange, but individual-to-individual exchange.

HULR: In your book Making Money: Coin, Currency, and the Coming of Capitalism, you focus on the example of England, and in particular the changes that happened after the formation of the Bank of England in the late 1600s.[3] Why did you decide to highlight the example of England in your book? What factors led to England being different in terms of its approach to money at that time?

Desan: History led me to the English example. I was trying to figure out how early Americans were thinking about money, and they kept looking across the Atlantic to the British example, so I went to the British example as well. And what happened in England was a revolutionary change in the way societies were making money. It’s probably not the only time this has happened, but it is the one that stuck in the modern experience. Because the old system relied on having a commodity as a collateral content, money was also in quite short supply, which meant that as the economy expanded, prices had to drop. That’s a difficult way to run an economy. 

The English were experimenting with different ideas, and they just stumbled upon an innovation: the English government appointed a group of investors, and they borrowed from the investors. But instead of borrowing in coins (which would be the usual technique), they allowed the investors to pay them in promises to pay, in banknotes. And the banknotes said, “This banknote promises the bearer a certain amount of silver and gold coin.” Nobody quite realized how different this would be from borrowing silver and gold coins. If you borrowed in paper, spent the paper, and then taxed in paper, and used it to pay back your loan from the investors, then all of a sudden you’ve got a whole other way to create money and to expand the money supply. Banknotes themselves, because the government is taxing them in and returning them to the bank, held value.

Just to leap forward for a moment — that money design goes viral. While other societies may have experimented with similar ideas, it was the British at that moment that succeeded in institutionalizing that design, in part by building up their tax systems to convince their citizens that banknotes were a legitimate kind of money. So this system goes viral over the 18th and 19th centuries. One country after another looks at what the British were able to accomplish by increasing the money supply this way and replicates it. My answer to the original research mystery was that this is what the Americans were looking at, and that’s what they did.

One can also add to this system a way for individuals to increase the money supply. Remember that in the medieval world, individuals could take bullion (silver and gold) and go buy coins. In the new world, we could allow banks to lend to individuals. For simplicity, let’s stick with the Bank of England. Out its front door, it’s lending to the government; out its back door, it can lend to individuals. So individuals come to the bank and say, “I’ll give you a long-term commitment to repay my loan if you, Bank of England, give me banknotes now.” It’s a phenomenal elaboration of the initial design, of the redesign, because now you have private individuals who go off with their Bank of England banknotes, and they can engage in economic activity with them. And if that economic activity generates productive returns, they can repay the Bank of England. But notice a big difference from the old system. In the old system, you had to have the bullion; you had to already have the capital in order to get the coin. Whereas in the new system, instead of needing silver and gold up front, you need a promise of productivity up front. The bank will give you the money up front in paper; you’ll go off and invest that money and carry out your project as an entrepreneur and then repay the bank. Much more money will enter circulation in the bank system than had been entering circulation under the old medieval coinage systems.

I think that this huge expansion of liquidity explains a lot and has been a neglected driver of economic change and the Industrial Revolution. It’s not just the Bank of England, but many commercial banks go into business and increase manyfold the amount of liquidity that people have.

HULR: On the point about access to liquidity, shifting forward to today’s world, as you said in your talk at “HLS Thinks Big 2017,”[4] you discussed expanding the use and availability of money: “We need lending for break-even purposes. Those who aim to break even, to make sustainable lives for themselves, to work for public purposes, not private profit — those people should have access to credit. So, what does this mean? It means inclusive banking, postal banking, cooperative banking, development banking, other initiatives that expand the way we distribute access to credit.”[5] In your ideal world, what would the banking system look like? Would there be a place for both commercial banks in addition to these other banking options that you mentioned? And how would they interact with each other?

Desan: The basic flaw with our system as constructed, which is exactly the part you picked out from that talk, is that the vast amount of money put into circulation is through the commercial banking system. And the question is, how could we rethink that, given the costs that now attach to maintaining the commercial banking system, and given the limitations on that method as a way of diffusing credit. I think that the escalating rates of inequality are due in some significant part to the fact that access to credit is rationed in our world by access to commercial banks and capital markets. There are all sorts of important aspects of social welfare that we should be supporting without looking for banks to make a profit.  

Public banking is one possibility. These would be banks that had the same privileges as commercial banks to create money, including support of the Federal Reserve, but could lend to citizens without requiring that those citizens repay at a profit the way that commercial banks do.

I think another possibility would be different forms of direct-issue spending. That money would be spent outside the financial system and would go directly to citizens. That would be another mechanism that would change our financial architecture.

There are also people who are thinking about whether citizens should have direct bank accounts at the Federal Reserve. That change would reduce the amount of reliance we have on commercial banks, and one could imagine the Fed expanding its role and lending directly to citizens. There’s a lot of work that we’d need to do there to think about what effect that would have; that would open up another channel for distributing credit to worthy individuals.

So, we have at least three different ideas: state and local public banks, accounts at the Fed, and direct issue spending to individuals that would put money into circulation without expanding the financial architecture at all; interesting ideas that would readjust the way our system is currently working.

HULR: Do you have any closing thoughts you would like to add?

Desan: I would love to see people thinking creatively about the design of the monetary system. If you think back to the barter story; it’s a black box. It makes money as a design invisible, because we just assume it’s something that came into circulation when people began to exchange with each other. If in fact you look at how money actually is created and maintained, you find a much more complicated system that’s been improvised and expanded, sometimes in accidental ways. If we could get many people like yourself and your classmates with creative new ideas thinking back about the effects of our current design, and looking at ways to redesign it, I think we could move to a much more just system.

References

[1] “Christine A. Desan,” Harvard Law School, accessed November 5, 2020, https://hls.harvard.edu/faculty/directory/10212/Desan/.

[2] “Christine A. Desan.”

[3] Christine Desan, Making Money: Coin, Currency, and the Coming of Capitalism (Oxford University Press, 2015), https://global.oup.com/academic/product/making-money-9780198709572?cc=us&lang=en&#.

[4] Christine Desan | HLS Thinks Big 2017, 2017, https://www.youtube.com/watch?v=vkBfdehthPI.

[5] Christine Desan | HLS Thinks Big 2017, 2017, https://www.youtube.com/watch?v=vkBfdehthPI.