We’ve seen how money has developed historically, and we’ve seen how modern monetary institutions have failed to manage money for the common good. Now it’s time to explore what a functional and lawful monetary institution, or set of institutions, would look like. But to do that, we need to understand a little more about what money is and what social roles it plays.
An institution is a regularized social practice that places constraints on human behavior and hence increases regularity in social affairs. Institutions are frequently likened to the rules of the game in a sporting contest. Take the same athletes and give them a different set of rules, and they will play a different game. Institutions are important because they help actors specify the tradeoffs they confront in behaving a certain way. Institutions also serve as a focal point for coordinating complex interactions.
So conceived, money definitely meets the requirements for being classified as an institution. In a market economy, money may be the commercial institution par excellence, because without money only the most rudimentary division of labor would be possible. This would be true even if other institutions existed to define and protect private property rights. Money is a rule for organizing commercial activity. It specifies the medium in which exchanges take place. If the language of commerce is quid pro quo, money is its grammar.
Money constrains human behavior by whittling down the range of potential mutually beneficial exchanges in a way that simplifies greatly the number of exchange ratios (i.e., prices) consumers and producers need to know. Money coordinates interactions by channeling entrepreneurial activity into avenues whose form, if not particulars, can be predicted. Whether a simple money-commodity, a product of financial intermediation, or a more exotic synthetic asset, money increases the extent of commercial interactions by both providing the necessary foundations for those interactions and suggesting avenues for further mutually beneficial interactions.
There is a moral element to money as an institution as well, and I would be remiss if I did not mention it. By creating an equal playing field, money itself represents an extension of the rule of law to commercial affairs, attesting to the equal rights of all people to associate on peaceful and mutually beneficial terms. The famous money speech from Ayn Rand’s Atlas Shrugged remains — pardon the pun — the gold standard for defending the morality of money. Whatever your views on Rand, her literary capabilities, or her philosophical merit, I hope you appreciate how beautifully this passage captures the moral character of a money-using society and a commercial society more generally.