The third stage of monetary development occurred within the banking sector; specifically, the development of banks as depository institutions. During (and previous to) medieval times, goldsmiths, money sharks, tax collectors - anyone involved in commerce who had access to a strongbox to secure money - all began to function as primitive banks in the form of depository institutions. Banks, as depository institutions, only switch the deposits held on account in their 'boxes'. Savers, who have accumulated money, wish to see their money grow; not eaten away by debasement (inflation), so they are eager to lend it to ventures that show a promising return. Banks, in this model, act as marketplaces, bringing lenders and borrowers together, and matching loanable funds with investment opportunities - thereby lowering transactions costs.17 Furthermore, borrowers are hypothesised to be willing to borrow at a higher interest rate than lenders are willing to loan out funds. For example, borrowers are willing to pay seven percent interest to borrow money, whereas lenders are willing to accept four percent for the use of their deposits. This interest rate differential reflects the 'time preferences' of the parties involved: borrowers are willing to pay more for future consumption today than lenders are willing to accept to delay today's consumption until tomorrow. The key point to note is that lenders had to be reimbursed for their 'opportunity cost', defined as the next best rate of return on some other investment opportunity. Finally, banks, for the service they perform, collect the difference between these two rates as a fee for their service. Pick up any introductory or intermediate undergraduate text, and this is precisely the example that is used to describe the modern banking sector.
It is unfortunate that a banking model descriptive of the third stage of monetary history is used to describe the banking sector in subsequent stages of monetary accumulation. Students of the market economy graduate from their education with an ignorant conception of how the banking sector works, where money comes from, how it is created, and who gets to issue it. It is unfortunate because the banking sector is still seen by many analysts in terms of its deposit-switching functions. As Susan Strange has argued, even analysts as astute as Marx were largely ignorant of the banking process; and, when historical actors such as Lenin attempted to initiate a revolution of the modes of production they did not attempt to change the financial structure of the banking sector.18 Marx, according to Strange, thought that in order to conduct investment, one had to accumulate a surplus from last year to create new investment. This misconception, I submit, stemmed from Marx's understanding of finance in terms of the third stage of monetary development. Strange highlights the role that money creation plays in the production process: namely, that money can be created without accumulation.
Be Sure to Continue to Page 5 of "E Pluribus Unum: Dollar Hegemony and Money Creation in IPE".
