Banking and Finance

“Banking, Finance, and Money: a Socio-economics Approach”
L. Randall Wray, Professor of Economics and Director of Research at Center for Full Employment and Price Stability, University of Missouri—Kansas City; and Senior Scholar, Levy Economics Institute at Bard College.

This paper will briefly summarize the orthodox approach to banking, finance, and money and then will point the way toward an alternative based on socio-economics. It will be argued that the alternative approach not only fits the historical record better, but also sheds more light on the nature of money in modern economies.

i) The state of orthodox thinking on the subject

For decades economics students were introduced to the topic of money and banking through a story about the evolution of money from the supposed earliest origins in barter and on to our present “fiat” money. For example, Paul Samuelson presents the “historical states of money” as follows:

Inconvenient as barter obviously is, it represents a great step forward from a state of self-sufficiency in which every man had to be a jack-of-all-trades and master of none…. Nevertheless, simple barter operates under grave disadvantages…. In all but the most primitive cultures, men do not directly exchange one good for another. Instead they sell one good for money, and then use money to buy the goods they wish…. Money does simplify economic life. If we were to reconstruct history along hypothetical, logical lines, we should naturally follow the age of barter by the age of commodity money. Historically, a great variety of commodities has served at one time or another as a medium of exchange: cattle, …, tobacco, leather and hides, furs, olive oil, beer or spirits, slaves or wives, copper iron, gold, silver, rings, diamonds, wampum beads or shells, huge rocks and landmarks, and cigarette butts. The age of commodity money gives way to the age of paper money…. Finally, along with the age of paper money, there is the age

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