Money and Credit E-Book

Bruce G. Carruthers

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: PESS - Polity Economy and Society Series
• Sprache: Englisch

Seitenzahl: 374

Veröffentlichungsjahr: 2013

Beschreibung

This book offers a fresh and uniquely sociological perspective on money and credit. As basic economic institutions, money and credit are easy to overlook when they work well. When they malfunction, as they did in the new millennium’s global financial crisis, their importance becomes obvious and demands further investigation.

Bruce Carruthers and Laura Ariovich examine the social dimensions of money and credit at both the individual and corporate levels, from the development of personal credit and a consumer society, to the role of government in the creation of money. In clear prose, they illustrate how the overall future of the economy is governed by the financial system and the flow of capital into, and out of, firms operating in particular industrial sectors, as well as the social meanings money itself acquires and the ways people distinguish between “dirty” and “clean” money.

This accessible and engaging book will be essential reading for upper-level students of economic sociology, and those interested in how the bills, coins and plastic in our pockets shape the world we live in.

Leseprobe

Money and Credit

Money and Credit

A Sociological Approach

Bruce G. Carruthers

and

Laura Ariovich

polity

Copyright © Bruce G. Carruthers and Laura Ariovich 2010

The right of Bruce G. Carruthers and Laura Ariovich to be identified as Authors of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.

First published in 2010 by Polity Press

Polity Press

65 Bridge Street

Cambridge CB2 1UR, UK

Polity Press

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Malden, MA 02148, USA

All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

ISBN-13: 978-0-7456-5534-5

A catalogue record for this book is available from the British Library.

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Every effort has been made to trace all copyright holders, but if any have been inadvertently overlooked the publisher will be pleased to include any necessary credits in any subsequent reprint or edition.

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Contents

List of Figures

Acknowledgments

1 Introduction

2 A Brief History of Money

3 The Social Meaning of Money

4 Credit and the Modern Consumer Society

5 Credit and the Modern Corporate Economy

6 Conclusion

Notes

References

Index

Figures

2.1     Number and assets of state-chartered banks, 1834–1896

2.2     In-flow of world foreign direct investment, 1970–2007

4.1     U.S. consumption expenditures, 1869–1986

4.2     U.S. homeownership rates, 1890–1997

4.3     U.S. homeownership rates by race, 1900–1997

5.1     Total debt of partnerships and proprietorships, 1992–2006

5.2     International banking assets, 1978–2007

5.3     In-flow of world foreign direct investment, 1980–2005

5.4     In-flow of world foreign direct investment, 1980–2007

Acknowledgments

For able assistance with the preparation of this book, we would like to thank Ana Patricia Mancini, from the University of Buenos Aires, and Jeong-Chul Kim, from Northwestern University. We also give thanks to Sarah Babb for her thoughtful reading of the manuscript, and to an anonymous reviewer for helpful comments. Finally, we appreciate the support of Erik Kjeldgaard.

1

Introduction

The events of 2007 and 2008 demonstrated that modern financial systems, built on solid foundations of credit and supported by massive amounts of capital, can nevertheless be surprisingly fragile. A number of the biggest financial institutions in leading international centers like London and New York City came perilously close to complete collapse. Some institutions simply failed (Lehman Brothers), some had to be rescued through acquisition by another institution (viz., JPMorgan Chase’s purchase of Bear Stearns, or Bank of America’s purchase of Merrill Lynch), some were simply nationalized (Northern Rock in Britain), and others survived because the British or U.S. governments directly injected huge sums of money (e.g., Britain’s bailout of the Royal Bank of Scotland, or the case of AIG in the U.S.). Assets on balance sheets which in 2006 had been highly rated by the credit rating agencies (Moody’s, and Standard & Poor’s) and which seemed so solid suddenly became suspect, and even “toxic.” Banks, which are in the lending business, stopped lending, even to each other. As reported in the Wall Street Journal (January 26, 2009, p. A1), big U.S. banks were doing less lending, even after they had received billions in government funding intended to encourage more lending. Liquidity had disappeared.

In retrospect, some of the practices that led up to today’s crisis seem obviously unsound. So-called “subprime mortgages” were intended for riskier borrowers whose financial status and credit history did not qualify them for regular home mortgages. Helping people to buy their own homes is a commendable goal, but given the greater risks involved with subprime lending, a couple of adjustments might have seemed prudent: determining with certainty the borrower’s income and ability to service the loan; insisting on a larger down-payment, and so on. In fact, the U.S. subprime mortgage market grew dramatically between 2000 and 2007 but was filled with strange practices like NINA loans (short for “no income, no assets”) and “liar’s loans” (also known as “no doc” or “low doc” loans because there was little or no documentation), where the lender simply took at face value the borrower’s claims about their income. If someone said they earned $100,000 annually, then that was good enough for the lender. Subprime loans were then “securitized,” that is, bundled together into large pools and then sold off to investors. Increasingly, mortgage loan originators no longer “held” the loans they originated, and with securitization, the originator would suffer little if the loans went sour. A strange variety of exotic financial instruments were then built out of these securitized mortgage loans: CDOs, CMOs, MBSs, SIVs, and so on. The classic movie It’s a Wonderful Life (directed by Frank Capra and starring Jimmy Stewart) presented a memorable picture of mortgage lending that is largely irrelevant today: financial institutions no longer just take deposits from local customers and then lend the money locally, holding thirty-year mortgages in their portfolios until the loan is fully repaid. But if “liar’s loans” are bad ideas in retrospect, at the time they were made they seemed attractive to many borrowers and lenders. How could appearances have been so deceiving? How could things have deteriorated so quickly?

People have been stunned by the severity of the crisis and the speed with which it hit the economy, but many find it hard to reconcile the fact that even as banks, investment banks, and other financial institutions were performing poorly, their top managers were being enriched personally. The discrepancy between organizational performance and CEO compensation has produced outrage among ordinary citizens whose tax dollars have been used to bail out many financial institutions. Among scholars, it has raised again the issue of corporate governance and how to ensure that management serves shareholder interests (Bebchuk and Fried 2004). During the 1990s, many economists and management consultants argued that the solution to the problem of corporate governance lay in the compensation system for CEOs: stock options and performance-based bonuses would supposedly ensure that the interests of top management were aligned with those of shareholders. Sadly, we have learned that it isn’t that simple.

Today’s crisis is among the worst in a recent series of impressive American financial debacles. Within recent memory, the savings-and-loan crisis of the 1980s, the collapse of Long Term Capital Management (a hedge fund whose partners included two Nobel Prize-winning financial economists), and the Enron bankruptcy would surely be among the best known. Although each episode had its own unique features, they were all very costly to taxpayers, shareholders, investors, and employees, and demonstrated that creditworthiness, the appearance of unimpeachable economic solidity, is ephemeral. Credit is a fickle thing, and economic value can seemingly turn into worthless vapor overnight.

If economic value is trickier than we thought (or at least much less stable), it does seem pretty obvious how to go about measuring it. As with other measurement problems, one begins with a unit of measure. To measure length, people use a ruler to indicate feet, inches, or meters. In this instance, we use some monetary unit to measure value: dollars and cents, pounds, euros, yen, pesos, shekels, dinars, won, francs, baht, and so on. Then, once the appropriate metric is selected (dollars in the U.S., euros in Germany, etc.), the value of something is indicated by its market price. An object is worth what it costs to purchase it, measured in money.

This simple recipe for measuring value seems straightforward, but it conceals a lot of complications. To begin, some extremely valuable things don’t have a price because they are not bought or sold. Sacred objects, heirlooms, and other “priceless” objects have meaning and value that cannot be calculated in monetary terms. And if you attempt to attach such a value, someone is bound to become very, very upset (try getting a parent to say how much a child is worth, in dollars and cents).

Sometimes the monetary sum that is attached to an object or relationship is essentially made up, negotiated, or stipulated. Although it looks like a price, it doesn’t reflect an actual arm’s length market transaction. Examples of this would include the “transfer prices” that large corporations use to account for their own internal transactions, or the sum that a court of law sets as compensation in a wrongful death lawsuit, or the monetary gift that parents make to their married children to help them purchase their first home, or the wergeld (“blood money”) paid to avoid a feud or vendetta. In today’s financial crisis, it also seems that some of the monetary values attached to bank assets were “made up” in the sense that their true value is quite mysterious and that giving them a specific dollar value creates a misleading appearance of accuracy. It is these assets of indeterminate value that are now deemed so “toxic” and which weigh down bank balance sheets.

Monetary prices are sometimes seen from the perspective of “fairness”: it isn’t just that prices are low or high depending on “natural” market forces, for in addition they are sometimes perceived as fair or unfair. For example, employees compare themselves to their peers to see if their compensation seems fair; they also compare their raises with those of their superiors (so if a corporate CEO gets a 100% increase while employees get only 5% raises, the employees may feel that they have been treated unfairly). Certainly many taxpayers have been outraged by the large bonuses paid to American investment bankers whose firms have lost billions of dollars (and required massive public bailouts). The enrichment of incompetence seems just wrong. A retailer who takes advantage of a temporary shortage by jacking up his prices will be accused of “price gouging” and suffer from ill-will and bad publicity. Similarly, buyers who take advantage of desperate sellers by offering very low prices (so-called “fire sale prices”) may also be accused of unfairness.

Finally, people put money into different categories and then treat it differently (even though it is “just money”). Behavioral economists call this process “mental accounting” (Thaler 1999). Even though $10,000 of earned income is indistinguishable from $10,000 won through a lottery, people perceive the winnings as special money and use it very differently than their ordinary earnings. Or suppose that someone’s monetary compensation for work comes in two parts: salary and bonus. The bonus portion is “extra” and deemed “special,” even though strictly speaking the money is indistinguishable. Money generated from an illicit activity is considered “dirty money,” and people treat it in a distinctive manner. Within traditional families, money earned by wives was regarded as somehow “less valuable” than the money earned by the husband. Such differences remind us that money has symbolic as well as material value (Mickel and Barron 2008).

The uneven availability of credit and the unequal distribution of money (as income or wealth) are important political issues in the contemporary U.S. Why do some workers earn less than others? Has economic inequality increased? And so on. But money per se is not particularly controversial. Ordinary people treat money like a fact of nature: it just is. However, this taken-for-granted status wasn’t always the case. In fact, the value of money was a very salient issue in American politics after the Civil War and before World War I. William Jennings Bryan’s famous “Cross of Gold” speech, decrying the gold standard, resonated with many American voters even though he lost to William McKinley in the presidential election of 1896. For several decades after the Civil War, Americans argued over the gold standard, and whether the U.S. money supply should be based on gold, or on silver and gold, or on fiat money. Greenbackers argued with bullionists, “soft money” advocates took issue with their “hard money” opponents, and “free silver” supporters weighed in as well. The debate raged until the U.S. came down firmly on the side of the gold standard in 1900.

Money is no longer a “hot button” political issue, but credit and finance have returned to the U.S. political agenda because of the current financial crisis. And finance has remained a religious issue for some, particularly the devout adherents of the world religions that came out of the Middle East. Christianity, Judaism, and Islam all prohibited usury, or the payment of interest for a loan. Over the centuries, that prohibition has been relaxed or circumvented in Western countries, but it remains active in the Arab Middle East. Given how much money has flowed into Islamic countries over the last several decades (because of oil exports), Islamic banking has become quite an active financial arena.

Even though ordinary people mostly take money for granted, their latent feelings can surface when money is threatened. One appreciates just how deeply people care about their own currency by recalling the controversies in Europe over the replacement of various national currencies (the beloved franc, guilder, pound, and lira) by the euro. It may have made perfect economic sense to create a single currency for Europe, but a national currency remains a powerful political symbol that some Europeans were reluctant to relinquish. It is also clear, from the historical record, that periods of hyperinflation (when the value of currency declines precipitously) can devastate a market economy and lead to political turmoil (e.g., Zimbabwe in 2008, Yugoslavia in the early 1990s, Hungary right after World War II, Germany in the early 1920s). Money isn’t an apolitical matter, even though monetary politics come visibly to the surface only once in a while.

What is Money?

Money is a generalized, legitimate claim on value (Carruthers 2005: 355). This means that: (1) money grants access to valuable things – people can use it to acquire goods and services – money is a form of power; (2) the access that money makes possible is legitimate (i.e., it seems proper to acquire things by purchasing them, unlike the illegitimate ways in which people sometimes acquire things, such as theft or plunder); and (3) money is a generalized claim (it can be used generally to obtain all kinds of goods and services). Geoffrey Ingham, a sociologist who has studied money a good deal, simply states that money is “a social relation” (Ingham 2004: 12). In particular, money is constituted through the social relations between creditors and debtors (Ingham 2004: 72; 2008: 69, 74). Economists prefer to give a more functional definition in which money is what money does: it functions as a store of value, medium of exchange, and unit of account. Money is used to store value over time (perhaps in a vault or a mattress), it can be used in market exchange, and it is applied in various settings as a unit of measurement.

Under any of these definitions, it is clear that many things can serve as money. And indeed, across different eras and societies, many things have served as money, including pieces of paper, precious metals like gold and silver, not-so-precious metals like copper and brass, vodka, stringed beads, cigarettes, private debts, accounting entries, and so on. This is one reason why money is such an interesting topic: mostly we take it for granted as a self-evident feature of everyday life, and yet because it can vary in such weird ways, it warrants closer scrutiny. How is it possible that all these things can serve as money?

The substance of money has certainly changed over time. Early forms of money consisted of tangible objects of value: gold and silver in Western Europe, cowry shells in sub-Saharan Africa. Later on, representational forms began to function as money. Paper notes were invented first in China and later used in Western Europe (Goody 2004: 107). As fully developed by banks issuing convertible notes in a fractional reserve system, paper money represented tangible objects of value because the note holder could, in principle, go to the issuing bank and redeem the note for its equivalent in gold bullion. The paper note represented the gold in the bank vault, even if the note holder never actually took the gold out of the vault. Today, most people’s money is in the form of a checking or savings account, and if they need cash, they simply visit an ATM (or if they are feeling old-fashioned, go to a bank teller). This means that rather than having any kind of physical object, whether representational or not, the money people possess mostly consists of electronic accounting entries maintained in their bank’s computer system. Money has been physically reduced. Payment of $1 billion is a mighty chore if it means hauling sacks of gold, and it is still a physical challenge when moving stacks of $100 bills (over ten tons of currency), but it is trivial if all that needs to be done is to enter some key strokes on a computer. Money has become disembodied and virtual, and can now move around the globe in large amounts and at the speed of light.

Money and Credit

Ordinarily, money is used to buy things, and so money and market exchange are closely connected. But money and credit are equally close. For example, even when people don’t have cash, they can still proceed with a purchase on credit. Either the seller extends credit directly to the buyer, or some third party lends money to the buyer so that they can buy the goods (as we will see in chapter 4, credit is an important marketing tool for sellers). In the first case, the seller lets the buyer take possession of the good, but the buyer promises to pay the money owed within a certain time period (perhaps thirty days, or ninety days, or a year). Deferred payment is a very common form of credit. In the second case, a lender gives a sum of money to a borrower (who promises to repay within a certain time, depending on the terms of the loan) and the borrower then uses that money to make a purchase (e.g., a bank lends money to an individual so they can buy a home). In either case, credit involves a promise. And the willingness of lenders to extend credit depends on the credibility of the borrower’s promise. Does the lender trust the borrower?

One of the most interesting economic changes over the last two centuries concerns this simple question: when do lenders trust borrowers? The vitality of the economy rests on the answer because so many transactions now depend on credit. In fact, we live in a “credit economy.” If lenders do not trust borrowers, then lending ceases and the wheels of commerce grind to a halt. But trust is a tricky matter because lenders who trust no-one never lend, and lenders who trust everyone lose their money. So the goal for lenders is to trust the trustworthy, and distrust the untrustworthy. And it can be very difficult to tell the difference between these two groups, especially when borrowers, whether they are trustworthy or not, try to appear trustworthy to lenders.

Lenders have evaluated the trustworthiness of borrowers in different ways. For most of history, this evaluation fundamentally depended upon networks of social relationships. People who were part of the same social circle, or who were members of the same community or kinship group, knew a lot about each other and so were better able to trust one another. They could also more easily sanction someone who betrayed that trust. Seldom did people lend to strangers. So, as we will see in later chapters, U.S. banks in the early nineteenth century often loaned money to people who were “connected” to the bank in one way or another: borrowers were friends of someone on the board of directors, or related to someone on the board, or had a similar connection. Direct knowledge of a person, or knowledge of their reputation within a community, allowed lenders to assess the personal character of the borrower and decide if that person were trustworthy enough. Historians have acknowledged the importance of social ties for access to credit in the past (Earle 1989; Hancock 1995; Lamoreaux 1994; Muldrew 1998), but today social connections still make a difference for business lending (Uzzi 1999). On the personal side, if someone today needs serious help, they are most likely to get a loan from a family member (Furnham and Argyle 1998: 190).

Starting in the middle of the nineteenth century, however, evaluations of trustworthiness began to change. The shift started in the wholesale sector and concerned trade credit. As the U.S. economy became a truly national economy, dry-goods suppliers based in New York City were increasingly shipping their wares to other parts of the country, without having much, or even any, personal knowledge of their customers. Suppliers typically shipped goods to their customers and received payment in one or two months’ time, and so in effect they extended credit over that period. So suppliers had to figure out who was trustworthy. If they extended credit to everyone who wanted it, they would lose money, but if they gave credit to no-one, they wouldn’t have any customers. And as trade expanded out of the immediate geographical region (in part thanks to an improving transportation system), suppliers couldn’t rely on their social networks to help them. But help was on the way in the form of credit rating agencies, which gathered information about businesses all over the country, kept detailed files, constructed credit assessments, and then sold their assessments to customers who wanted to know whom they could trust.

Credit rating agencies, the precursors of today’s Dun & Bradstreet, grew rapidly and by the end of the nineteenth century were rating over a million firms nationwide. They even expanded overseas. The information they developed for assessing creditworthiness was impressive enough to be used at the end of the nineteenth century by commercial banks, as they established their own credit departments, and insurance companies, as they estimated the risks associated with credit insurance. When the bond rating agencies (the predecessors of today’s Moody’s and Standard & Poor’s) began to rate railway bonds, and later corporate bonds, in the early twentieth century, they adopted the same basic idea. And later in the twentieth century, firms began to issue credit scores for individual consumers (consider the now ubiquitous FICO score1). As anyone who has applied for credit knows, these scores are highly consequential. In fact, they are so important that some firms will help consumers “repair” their damaged credit scores (for a fee, of course). Without a high FICO score, it is more difficult and expensive for an individual to borrow. Insurance companies have even started to use FICO scores to price the products they sell to consumers (a low FICO score can mean higher automobile insurance premiums). In many different ways, creditors at all levels have shifted away from using social networks and personal connections when they assess the creditworthiness of debtors, and increasingly rely on impersonal, quantitative evaluations generated on the basis of large-scale data sets.

The methods and institutions developed in the Anglo-American world to allocate credit faced new challenges when other parts of the world adopted market economies. Guseva (2008) shows how the credit card industry has grown in post-communist Russia. A number of the techniques successfully used to encourage the widespread adoption of credit cards in the U.S. during the 1960s simply do not work, and so card companies have had to figure out other ways to determine who in the new Russia is creditworthy. Transplanting financial institutions from one country to another is not a trivial task, even when the basic problem (whom can you trust?) is essentially the same.

Another very important historical change concerns financial and monetary regulation. Governments have always played a central role in the creation of money, from issuance of gold coins at the royal mint to printing Federal Reserve bank notes. Governments often helped to establish financial markets, like stock exchanges, when they had to borrow on a large scale (Carruthers 1996; Ferguson 2001). Government has also played a changing role in the regulation of commercial banks, investment banks, credit unions, savings-and-loans, and other financial institutions, and in oversight of financial contracts (to protect borrowers from usurious or predatory lenders, to ensure that pension funds and insurance companies invest prudently, etc.). The level of public scrutiny over the financial system has waxed and waned, and hasn’t gone in any one simple direction. Even when the financial sector goes through a period of sustained deregulation (such as happened in the U.S. during the 1980s and 1990s), the state still plays a role. And since economic crisis often motivates further change in regulation, it seems likely that before the U.S. has fully recovered from the current recession, there will be some federal re-regulation of the financial sector. After all, the Great Depression of the 1930s resulted in a lot of new public regulation and oversight in the form of the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), the Federal Savings and Loan Insurance Corporation (FSLIC), and the Federal Housing Administration (FHA). Many of these institutional innovations were the centerpieces of public policy intended to support particular kinds of credit. Indeed, it is important to remember that the aim of many regulatory interventions was not to extinguish or curtail market activity – quite the contrary – the aim was to encourage it. For instance, the goal of “Fannie Mae” (the Federal National Mortgage Association, founded in 1938) was to increase mortgage lending so people could purchase homes – a process that was encouraged by regulation.

Ideas about Money

One of the interesting things about money as a social institution is that because it is so old (if one starts from its original form as coinage in the seventh century B.C.), a lot of very smart people have had the chance to think about money, what it is, and what it means. Some of their ideas have been extremely influential. The philosopher Aristotle, for example, thought about money in ancient Greece but still had a huge impact during the Middle Ages when Western scholars rediscovered his writings at roughly the same time as the European economy was becoming monetarized again (Kaye 1998; Spufford 2003). Aristotle’s concept of money helped to justify and bolster the Church’s prohibition of usury because he deemed interest on a loan to be unnatural: “For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. That is why of all modes of getting wealth this is the most unnatural” (Aristotle 1984: 1997). For many centuries, bankers and other lenders had to work around religious and secular rules about usury.

Adam Smith’s ideas about money were pretty straightforward. For him, in the late eighteenth century, money was the “great wheel of circulation” (Smith 1976: 309) and its primary purpose was to facilitate market exchange. As the division of labor advanced, specialization allowed people to increase productivity, but they had to exchange goods with each other in order to obtain all they needed or wanted. Yet, barter doesn’t work unless each person has exactly what the other one wants. So people invented money (according to Smith), and based it on a commodity that had certain attractive features: precious metal is easily divisible and retains its value. That way, instead of having to find a partner for barter, people could simply exchange their goods for money. And money’s value and uniformity become even more reliable when a political authority provided a seal of approval (Smith 1976: 26–9). This meant that kings, princes, and emperors would issue from their mint standardized pieces of precious metal, stamped with a seal to certify the weight and purity (and hence value) of the coin. Unfortunately, sovereigns have often been tempted, said Smith, to dilute the purity of their coinage in order to raise their own revenues. This led to price inflation as the value of money diminished. As to the source of value that underlay commodity money, Smith was a proponent of the “labor theory of value,” according to which the value of a commodity (in this case, gold or silver) was determined by the amount of labor necessary to produce it.

Writing in the early decades of the twentieth century during the era of the international gold standard, the sociologist Max Weber put collective expectations at the center of his discussion of money. People will accept something as a medium of exchange if they believe that others will also accept it as such (Weber 1978: 75). In other words, what really sustains money’s effectiveness in market exchange are people’s beliefs about other people’s beliefs: if everyone thinks everyone else will accept money, then everyone will accept money. These beliefs can be bolstered through legal sanctions, as when the law gives money the status of “legal tender,” and makes it eligible for the payment of taxes. Beliefs can also be reinforced if the medium has independent value (because, for example, monetary tokens are made out of precious metal). But Weber’s key idea is that money functions when people have congruent expectations, and that although use of gold and silver can help coordinate such expectations, they are not strictly necessary. People can form similarly congruent expectations about salt, or paper, or shells, or any of the other media that have functioned as money. One primary way to boost those expectations is for the state to allow citizens to use a particular medium to meet their tax obligations. Indeed, according to one argument (the Chartalist approach), imposing taxes is how governments create money in the first place (Wray 1998).

The consequences of using money are also clear to Weber: money enhances calculability and rationality. By attaching precise quantitative values to objects and outcomes, economic decision-making became an exercise in calculation (Weber 1978: 81, 86). And using methods like double-entry bookkeeping, firms could determine exactly how well (or poorly) their past decisions had turned out. Weber’s insights about the significance of quantification have been explored further by sociologists interested in how cost–benefit analysis affects public policy decision-making (Espeland 1998; Espeland and Stevens 1998). Starting in the early twentieth century, decision-makers in two U.S. government bureaus, the Army Corps of Engineers and the Bureau of Reclamation in the Department of the Interior, began to make decisions about civil engineering projects using a formal method in which all the costs and all the benefits associated with a policy option were deliberately estimated, in dollar terms, and then options that maximized net benefits were chosen (Porter 1995). What makes cost–benefit analysis particularly challenging is the fact that many policy outcomes do not have market prices. They are frequently hard to value with any precision. In some cases, cost–benefit methods have been stymied by sacred objects whose value cannot be properly rendered in monetary terms (e.g., how to calculate the “cost” of a dam that will flood the ancestral lands of a Native American tribe). Despite such obstacles, cost–benefit analysis has become a mainstay of federal policymaking in the U.S.

Beyond cost–benefit analysis, it is clear that money adds a quantitative dimension to social life. Where money intrudes, precise calculation becomes a possibility. Sometimes that calculability is welcome, as when people sit down and construct a detailed family budget so they can cut their household spending and get through economic tough times, or see if college for their children is still affordable. But sometimes calculability is inappropriate. For example, in our society, people who purchase an item to give as a birthday gift are careful to remove the price tag, even when it is obvious that the gift was purchased; it is problematic to suggest to the recipient that, to the giver, they are “worth” exactly the cost of the gift. In other social settings, however, the explicit precision of money is tolerable, as in the “dollar dance” ritual that sometimes happens at weddings (male guests make a monetary contribution to the newly married couple by “paying” for the honor of dancing with the bride, and female guests do the same to dance with the groom). This practice is common among the Mexican and South Asian immigrant communities in the U.S. today.

One of the recurrent ideas about money is its association with social transformation. Sometimes money is considered only a symptom of change, but often it is regarded as an independent force that acts on society, and even endangers it. This fear certainly animated medieval scholars when they thought about the corrupting influence of money, and tried to reconcile an increasingly monetarized economy with the immorality of profit-seeking and usury (Kaye 1998: 39; Le Goff 1988). The introduction of money seemed to threaten to overturn existing social relations and reorder society. Many centuries later a similar idea formed part of Karl Marx’s critique of capitalist society. Under capitalism, the imperative to maximize profits was so strong, and the hegemony of the marketplace so overwhelming, that human interaction became dominated by the one-dimensional “cash nexus” (Ingham 2008: 65; Marx 1978: 475). Religious sentiment, familial affection, status recognition, and feudal honor alike were swamped by individual self-interest. Weber also recognized money’s central role in the rationalization of economic life. Since he regarded rationalization with considerable ambivalence, this was not altogether a good thing. This connection between money and rationalization was further explored by Georg Simmel, a contemporary of Weber, who devoted an entire volume to the study of money (Simmel 1978).

In addition to being considered by a mixture of philosophers, economists, and sociologists, the transformative potential of money has on occasion been wielded deliberately and practically. European colonial authorities in nineteenth-century sub-Saharan Africa were eager to obtain a labor force for the extractive industry they were trying to establish (e.g., gold, copper, and diamond mines). It was almost impossible to get European workers to move to the tropics for such dangerous jobs, so the authorities coerced the indigenous African population by imposing a tax payable in cash only. Subsistence farmers and nomadic people didn’t have ready access to cash, and the colonial government wouldn’t accept in-kind payment, so people had to earn the cash as wage laborers (Falola 1995; Shipton 1989). Money, in the form of mandatory taxes, was used to turn native Africans into mineworkers. Looking to the future, some environmental policy proposals currently under consideration involve attaching monetary values to the environmental impacts of various economic activities. The imposition of “carbon taxes,” for example, would make some types of production more expensive and hence, it is argued, would discourage them, leading to a decline in overall carbon emissions.

More than other scholars, anthropologists have confronted the full variety of money. Economists and sociologists are mostly familiar with modern money, and historians have learned about money in the Western historical tradition, but anthropologists have studied societies where money looks very different. This has forced them to confront some of the assumptions we ordinarily make about money. For example, contemporary money can be used to purchase anything that is available for sale: money is generalized purchasing power. The anthropologist Paul Bohannan, by contrast, studied the Tiv, an ethno-linguistic group based in what is now Nigeria, and learned about separate “spheres of exchange” in Tiv society (Bohannan 1955). Exchanges occurred within spheres but not between them, and this kind of separation made it impossible for anything to fulfill the role of generalized money. Bohannan’s finding is not just a piece of anthropological exotica, however, for it calls our attention to the way in which exchanges (and the money that facilitates them) are also restricted in contemporary society. Indeed, anthropologist Jane Guyer (1995: 2) reminds us that just as so-called “primitive money” was more complicated than people originally thought, “modern” money isn’t always so modern. Although formally and legally modern money is uniform and generalized, in many ways people work to restrict and constrain its generalizability.

Recent sociological interest in money was boosted by Viviana Zelizer, whose 1994 book helped to rejuvenate the topic by challenging the image of money as an instrument of unilateral social change. In her study of nineteenth-and twentieth-century American households, she noted how much families took modern money and “socialized” it: giving money social meaning and introducing significant distinctions where legally there were none. Some of these social meanings articulated closely with gender roles within the family, so that mothers – who were not the traditional breadwinners within the family – would have their own special “pin money.” In a number of different ways, people gave meaning to money by creating categories and distinctions. They turned general money into special money, and informally created their own spheres of exchange.

Institutions and Networks

To study money and credit is to explore a landscape dotted with institutions, organizations, and networks. Individual persons also inhabit this landscape, to be sure, but it would be a mistake to view money and credit as only involving individuals who made autonomous decisions. Both money and credit are deeply social. The relevant institutions and organizations include lenders (banks, credit unions, insurance companies, and pawnshops), borrowers (corporations, universities), regulators, and monetary authorities (e.g., mints, treasury departments, central banks, financial regulatory agencies); they are both formal and informal (e.g., rotating credit associations), and operate at both the national and international levels (e.g., the International Monetary Fund and World Bank). Institutions agglomerate and organize the actions of individuals, shaping what persons see and do, but also acting on their own behalf and deploying their own resources (Campbell 2004: 1). Institutions have a durability and logic of their own. The emergence and growth of the corporate form during the nineteenth century meant that modern economies have now become dominated by large, private organizations. The growth of the state similarly meant that governance and regulatory oversight involves large public organizations. For money and credit, the legal system is a uniquely important institution. Most lending and borrowing takes place through a legal contract between debtor and creditor. Creditors do not simply take debtors’ verbal assurances at face value, but insist on a binding formal agreement, enforceable by law. Debt contracts stipulate the basic terms of the loan (amount, payment schedule, interest rate, penalties), but they can also attach a variety of strings (known as “covenants”) to the money the lender extends to the borrower. These may specify, for example, that the loan can only be used for particular purposes, that the borrower cannot take on additional debts, that repayment of the loan will be accelerated if the borrower gets into financial trouble, or that some asset of the debtor will serve as collateral for the loan. Legal rules can also make debts “negotiable” (as in “negotiable securities”), which can give them money-like qualities. Without a reliable legal system to enforce loan contracts, many lenders would be extremely reluctant to lend. The law also matters since the “legal tender” quality bestowed on money is quite obviously a legal status. Particular pieces of paper with strange images and symbols printed on them have the status of money because the law says they do. And these pieces of paper can be used to satisfy all debts, public and private.

Networks concern the pattern of connections among individuals and institutions. People, for instance, do not live their lives as isolated monads. Rather, they are embedded in ongoing networks of relationships. Some social networks are pre-determined (e.g., people inherit a kinship network by virtue of the family they are born into), while others are formed through constrained choices (people select new friends, but their choices are shaped by where they live and work) or no choice at all (college students often become friends with the roommate the housing office assigned to them). Social networks shape what people do, how they perceive their own identities and interests, what resources and information they have access to, the obligations they are encumbered with, and so on. Among other things, MacKenzie’s (2006) fascinating study of the invention and spread of option pricing models illustrates the importance of networks for the operation of modern financial markets. Sassen (2005) also reminds us that global financial markets are usually located in very small and particular places (lower Manhattan in New York City, or the City in London) and hence involve many overlapping social networks and communities.

There are many features of networks that are worth studying: density, structure, centrality (Wasserman and Faust 1994). Similarly, the character of the ties that knit together networks is also important: whether they are weak ties or strong ties, formal or informal, direct or indirect. For instance, weak ties are often most useful for gathering information, whereas strong ties frequently provide tangible resources. Some distinctive network structures have been found in a wide variety of settings (e.g., the “small worlds” networks discussed by Watts 1999). The main point to remember, however, is that networks affect lending and borrowing.

Organizations are themselves embedded in networks. Organizations transact with each other, form cooperative alliances, become members in groups, buy, sell, and merge with each other, and exchange personnel. One of the most studied organizational networks is formed by board interlocks, links between corporations that are established when an individual sits on two boards of directors (Mizruchi 1996). For example, if a bank president also sits on the board of a manufacturing firm, the bank and the firm have a board interlock. Mintz and Schwartz (1985) examined the network of board interlocks for U.S. firms in the mid-1960s and found that a small number of large banks occupied the center of the network. They concluded that, by virtue of their position in the corporate network, financial institutions played an especially important role in shaping the choices of non-financial firms. Other scholars have noted that corporate innovations diffuse through the networks that interlocks constitute (e.g., the “poison pill” defense, see Davis 1991), and that firms use their networks when deciding whom to partner with in strategic alliances (Gulati 1998). The connectedness of corporate boards, and their sensitivity to what each other is doing, may be one reason why we often witness corporate behavior that seems to reflect a “herd mentality.” But what drives such behavior are social networks, not collective mental states.

The flow of personnel between organizations is yet another way in which distinctive and consequential networks are formed (Etzion and Davis 2008). Bandelj (2008) shows how social networks influenced the flow of foreign direct investment (FDI)2 into the post-socialist countries of Eastern and Central Europe. A firm’s prior experience and connections with a country often served as a foundation for additional investment, and even indirect connections had an effect. In the chapters below, we will see that organizations, institutions, and networks matter in a variety of ways. They are threads that run throughout the history and development of money and credit.

Outline of the Book

Money and credit are huge topics, and the complexities of today’s monetary systems and financial crises would take volumes to analyze. So of necessity we will be selective in what we discuss. In chapter 2, we consider the history of money. Money has evolved over time in ways that give insight into its origins, limits, purposes, and consequences. Monetary history, it turns out, is also political, diplomatic, social, and economic history, and reaches from the personal level to the national and then to the international level. The “globalized” economy of the late nineteenth century, for example, was underpinned by the international gold standard, and after World War II institutions like the International Monetary Fund and the World Bank were established to help rebuild international trade and investment. But there are also examples of informal currencies that local communities devise for a variety of reasons (e.g., “Ithaca dollars”), including the failure of the state to establish a national currency (as was the case for Russia during the 1990s). In chapter 3, we discuss the social meaning of money and underscore that it is not simply an economic device used for exchange and measurement. People use money in a variety of ways that also give it social significance. These uses and meanings vary from society to society, and from group to group, but the symbolic power of money is undeniable. It is important to appreciate that sometimes money isn’t just about purchasing power, it is primarily about status, or social power, or social values.

In chapter 4 we switch from money to credit, and examine credit for individuals. We live in a consumer society, and much personal consumption is done increasingly on credit: rather than save first so we can spend later, we borrow to spend now, and repay later. Credit substitutes for money as a type of purchasing power. The U.S. household saving rate has been in decline for many decades, going from about 10% in 1980 to less than 1% in 2006 (Dynan