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There have been many proposals for new forms of money and numerous examples of practical changes on a small scale, such as local currencies. But there has been remarkably little consideration of the way that the money in common use has actually changed. Yet the money in everyday use changes constantly. Cheques and banknotes are dropping out of use. Phone money is becoming more common. This is just the latest stage of a gradual process of change which has completely changed the nature of money from the commodity money used in the 18th century to the money we use today.
The unique contribution of this paper is to describe how money today differs from the commodity money used in the 18th century. The money used today would have been unrecognisable and technically impossible in the 18th century. Archaeology and sociology contribute to developing a more complete understanding of money. The paper describes how and why the money in common use has changed in the last three centuries.
Money today is largely created by banks. Its value depends on the credibility of nation states. The 2007/8 global financial crisis demonstrated that nation states are the ultimate guarantor of banks. In contrast, 18th century money, which largely influences monetary theory, depended on the value of precious metal. As money is now a liability of individual nation states and is no longer based on a universal commodity, the role of states in the market has radically changed.
The changing nature of money means that much of current monetary theory is obsolete. Modern economics professors would not consider wearing a powdered wig, like Adam Smith (as shown on the U.K. £10 note). Yet modern economists use18th century monetary theory without considering whether money today may be different from the gold coins used by Adam Smith.
Obsolete monetary theory has contributed to an increasing frequency of financial crises, the global financial crisis of 2007/8 and the Euro-crisis. As nation-states are the ultimate guarantors of money today, they need to take a greater role in creating and managing the money supply.
The paper reaches the conclusion that nation states should manage the money supply. Generally they should increase the money supply by creating money and spending it into existence. State money creation should still be restrained. Sometimes states may need to reduce the money supply by running a surplus. On average, states should run a small deficit to increase the money supply.
