The functionalist approach to money

The approach to money based on the functions it performs is a theoretical construction that is legitimately criticized for its inability to identify the nature of money as well as the complex interactions it maintains with the market. However, it has a certain heuristic scope.

The functionalist approach to money: what heuristic scope?

The dematerialization of money

This model explains in a simple way how an asset can be selected to be assigned the status of money when, better than others, it fulfills the assigned functions. It then ceases to have only an intrinsic value and is assigned a conventional value (for example, a precious metal which is used to mint coins) thanks to which the technical constraints imposed by barter are removed.

This analysis also has the advantage of providing a simple and attractive reading grid to explain the evolution of forms
money throughout history.

Indeed, it seems at first logical approach to suppose that ancient or traditional societies chose the real asset which seemed to them to best satisfy the monetary functions in order to transform it into money (one speaks in this connection of commodity money or paleo-money). currency): salt in Abyssinia, specific shells in Oceania, tea leaves in southern Asia, dried fish in Newfoundland, sugar in the East Indies, pieces of linen (Guineas) in certain regions of Africa, etc.

The functionalist model subsequently gives credence to the thesis of the “dematerialization of money”. It seems easy to admit that during the long history of humanity, commodity money has been gradually replaced by metal money, given the intrinsic characteristics of metals (and in particular precious metals) thanks to which the monetary functions are effectively fulfilled better.

History thus provides many examples of metallic currencies that have occupied a central place in human societies: the golden stater of King Croesus in the 6th century BC. AD; the Golden Solidus of Emperor Constantine in Rome at the beginning of the 4th century AD. J.-C., which had an exceptional longevity by remaining the gold currency of the Byzantine Empire until the 11th century; the silver denarius from the Carolingian period in France; or the louis d’or of Louis XIII.

Finally, the modern period is characterized by types of currencies which have freed themselves from precious metals, passing through the stage of paper money or modern fiduciary money, until taking a completely dematerialized form, scriptural money, in particular in its current electronic form, being the emblematic example.

The primacy of the trade intermediary function

The functionalist model highlights the fact that the economic system must give priority to the function of trade intermediary over the other two functions to define money. Indeed, the primary characteristic of money is to be considered as the means of payment to which society as a whole attributes a general liberating power.

The functions of unit of account and store of value appear to be secondary insofar as they can be properly satisfied by assets that are not money. Monetary history provides many examples where certain commodities were calibrated in a unit of account different from the instrument that was otherwise used to settle transactions.

Under the Ancien Régime in France, for example, calibration was carried out in pounds (most often counted in “sous”: 20 sous being equal to one pound), while payment for transactions was carried out in many local currencies (particularly due to the
dispersion of political power linked to feudalism, there is no general means of payment that is accepted throughout the kingdom).

Similarly, evidence of goods that were used as a standard of value have been found in ancient civilizations: heads of cattle in Egypt but also in Greece and ancient Rome, while drawings of ears of barley were depicted with the overt purpose of calibrating the value of wealth on clay tablets in Uruk, Sumerian civilization 3000 BC. J.-C.

However, in all these cases, they were not assets fulfilling the trade settlement function.

Finally, let us take the example of contemporary Great Britain. Until the 1960s, some goods, especially those with a high market price, were expressed in guineas, while payment was of course made in pounds sterling.

Ultimately, the functionalist model teaches that the unit-of-account function is not a sufficient condition to transform a real asset into money.

How to articulate the functions of money between them?

There is a contradiction between the function of trade intermediary and that of store of value. This contradiction manifests itself in two ways: on the one hand according to the degree of scarcity of the asset which takes on the status of money and, on the other hand, according to its degree of liquidity.

When the monetary asset is insufficiently abundant in the economy, agents may no longer use it as an intermediary of exchanges, but instead keep it for its function as a store of value.

For example, when the monetary system is bimetallic (two precious metals are used such as gold and silver) and both currencies are legal tender, i.e. the agents are bound, because of the law, to accept them as means of payment, there is then produced a mechanism of eviction of the currency considered as the “strongest”, that is to say, which best fulfills the function of store of value (this one is hoarded), while the “weakest” is used as a means of payment (intermediary function of exchanges): this is Gresham’s law according to which “bad money drives out good”.

In France, for example, the law of 17 Germinal of the year XI (March 20, 1803) established a bimetallist regime. A fixed and legal exchange rate between gold and silver is set up: one gram of gold being equal to 15.5 grams of silver. Each franc is then convertible into 0.32258 grams of gold and therefore into 5 grams of silver.

Like any bimetallic currency, the gold-silver parity is difficult to respect, on the one hand, because of the need for the Banque de France to “produce” francs in gold and silver and, on the other hand, because of the fluctuations mining production of the two metals. If silver becomes more abundant due to the discovery of new deposits, this makes gold rare in relative terms and increases its value.

As soon as the market value of gold increases, agents have an interest in no longer using it for their exchanges: the asset “gold” fulfills the function of store of value better than that of intermediary of exchanges, it does not is no longer used as currency.

The incompatibility between the function of intermediary of exchanges and that of store of value is also apparent when one takes into consideration the degree of liquidity of the monetary asset.

Indeed, we explained above that a monetary asset fulfills the function of an intermediary of exchanges all the better if it is more liquid.

Conversely, an asset with a lower degree of liquidity (an interest-bearing bank account or a financial asset, for example) is led to better satisfy the store of value function due to the payment of the interest associated with it. On the other hand, it is less liquid.

The functions of money as ideal-types

The functionalist model shows that the three functions making it possible to define money must be considered as ideal types from which one can account for numerous empirical situations.

Conceptually, money is an asset that simultaneously fulfills its three functions. Empirically, it is difficult to identify assets that equally fulfill these three conditions.

Agents thus arbitrate: they have an interest in holding very liquid assets if they wish to primarily satisfy the function of trade intermediary and, conversely, illiquid assets if they primarily wish to satisfy that of reserve. valuable.

This incompatibility results in a difficulty as to the definition and measurement of the money supply. This is the total amount of money circulating in the economy at any given time. It is therefore necessary to conventionally stop the assets which are considered as monetary and those which are not.

Throughout history, economic systems have always favored a definition of money oriented towards the function of an intermediary of exchanges: an asset becomes money when it can be used directly as a means of payment for to settle all transactions and to extinguish all debts within a given territory, i.e. within the payment community. Money is thus characterized by its ability to present an absolute degree of liquidity.

The store of value function is, for its part, considered secondary, in particular because it can also be satisfied by non-monetary assets.

The Functionalist Approach: The Nature of Money Evaded

An instrumental definition of money

In the functionalist model, money is considered as a tool, a technical instrument which makes it possible to simplify exchanges.

This approach is based on a central hypothesis which has remained implicit for a long time, particularly in the classical and neoclassical tradition: human societies are always supposed to be organized around commercial exchange, this being postulated as universal and money has been created a posteriori, with the aim of facilitating the functioning of the market economy.

A linear conception of the history of money

From this approach follows a linear conception of history as to the forms that money has been able to take: commodity money first, then metallic money which is an “improved” form of commodity money insofar as the an asset that serves as a monetary support also has a use value in addition to its monetary value (gold, like shells, has an intrinsic value before being money!), then fiduciary money and finally scriptural money.

This evolution of the forms of money is perceived as one of the components of a “civilizational process” which leads men from the “primitive state” towards modernity. However, this conception is not exempt from an evolutionary drift: commodity money is considered less “evolved” than metallic money (precious metals have intrinsic characteristics that make them more suitable for fulfilling monetary functions) while, Subsequently, “dematerialized” money (electronic money and Internet payments, ie scriptural money circulating electronically) symbolizes the modernity of contemporary monetary systems.

This hypothesis, according to which money was created to facilitate market exchanges which would have preceded it and which could have functioned without it, has been largely invalidated by numerous and convergent works produced by economists (from Karl Marx to Michel Aglietta, for example) but also historians and anthropologists.

We now know that human societies that rely, even partially, on market coordination are always and simultaneously based on money.

To put it another way, given the state of scientific knowledge available today, it is accepted that a society coordinated by the market and devoid of money never existed. It is in this respect that we can affirm that the functionalist model is based on the “fable of barter”.

If thinking about market relations in the absence of money undoubtedly makes it possible to understand, implicitly, the services it provides, this model has no empirical value or historical depth, which considerably limits its scope.

This postulate of the primacy of market relations over money and of the real economy over the monetary economy also leads the functionalist approach to evade the essence of the question of the nature of money insofar as it raises, a priori, a list of services that an asset must fulfill to “become” money. The nature of money is therefore itself postulated and is not the subject of any proper analysis.

To posit that an asset can become money, even if it is under certain conditions, is to consider that money is not different by nature from other assets, that it is initially a commodity like the others and that from this fact the real economy is first compared to the monetary economy. It is these two postulates (primacy of market relations over money, primacy of the real economy over the monetary economy) that the institutionalist approach radically calls into question.

conclusion

The functionalist model shows that money fulfills three functions: unit of account, intermediary of exchanges and store of value. It is the most liquid asset in an economy: it is the only asset that has general discharging power.

By focusing on “what money does”, the functionalist model sidesteps the question of the nature of money. Contrary to the “fable of barter”, there is no market economy without money. Money was not instituted to facilitate commercial exchanges, it is money that makes the market possible.

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