June 8, 2020
David M. P. Freund, University of Maryland
No doubt many readers here will be familiar with the role of the financial sector in shaping America’s peculiar history of racial inequality. Unequal access to money and credit has systematically disadvantaged people of color (an ever-shifting category) and created extraordinary privileges for people deemed to be “white.” Meanwhile, the institutions that produce and circulate wealth in the form of financial instruments have relied consistently upon racial exploitation to fuel economic growth, often blurring beyond recognition the line between public and private power. Money and debt have always been influential drivers of American development and we know that their allocation and uses have never been wholly colorblind.
But what kind of economic work, exactly, do modern financial instruments perform? What, practically speaking, do sovereign currencies, bank-issued deposits, and an array of credit forms make happen? And what does this question reveal about the history of race in America?
I ask because most scholarly accounts of American finance rely upon a story about money—a characterization of its history and functions—that cannot be documented. Writing on finance regularly trades in powerful fictions that erase money’s dependence upon federal authority and its essential, productive role in economic growth. Thus, while scholars have long demonstrated that the state has been an agent of racism, most have failed to fully reckon with money as an instrument of the state. And most downplay or ignore the fact that monetary issue by states and banks contracts for production: that the creation of money literally makes wealth-creation possible. Reckoning with these truths forces us to rethink the relationship between race, finance, and state power, for it shows that financial instruments and institutions do not simply reflect and reproduce existing racial hierarchies. Rather, the world of finance is essential to creating racial categories and racial difference.
A formidable obstacle to uncovering that history is the conventional wisdom about money: a neo-classical (“orthodox”) model that is factually incorrect, but nonetheless foundational to mainstream economics scholarship. It begins with an origin story still rehearsed in introductory economics textbooks: that money was invented by ancient civilizations to simplify barter-like networks of exchange, essentially the trading of things for other things. Orthodoxy then imagines all money forms as updates of those original, commodity-like tokens; money, even today, still “stands in” for things of value and so performs essential market functions, including the completion of payments. Finally, this narrative insists that credit forms appeared subsequent to money’s invention and only out of necessity, when people and then firms sought the convenience and efficiency of making temporal arrangements for completing purchases (so that they could “buy now,” with borrowed money, and “pay later.”) Banks could not begin lending money, the story goes, until others had first saved it. In the orthodox imagination, money and credit developed organically from market relationships and they have evolved, ever since, to meet the market’s changing needs.
This story is foundational, then, to maintaining orthodoxy’s sharp divide between the “real” and “financial” economies. The former is cast as a generative, wealth-creating sector in which people make and trade things, while the latter is a realm where money circulates to facilitate all of that production and exchange. In orthodoxy’s real sector, strategic use of the “factors of production”—land, capital goods, and labor—creates valuable material and intellectual products, like food, machines, software, and expertise. Then the financial sector includes the institutions and instruments with which people measure, store, and manage the value of their ownable, “real” assets. Finance greases the real sector’s wheels and so helps to unleash its wealth-generating potential. Critically, this means that financial instruments are not intrinsically wealth-creating, or “productive.” Standard macro holds that money is not essential to the growth process or, as A. C. Pigou famously wrote, that money is a “veil” over an economy that ultimately operates on barter principles. Unlike “real” assets such as arable land or factories, so-called “paper” assets are not factors of production.
And it is here that orthodoxy’s significance for our topic comes into view. For this understanding of finance limits, by definition, the public sector’s power to shape economic life. Specifically, it defines insurmountable constraints on a government’s ability to create wealth. Thus, it enforces an already powerful myth that public policy has played a minimal role in determining winners and losers in the American economy. Of course, the discriminatory impacts of government policy have been documented exhaustively, beginning with conquest and slavery and continuing to present-day mortgage banking, pay-day lending, and incarceration. But, insofar as finance is concerned, most of this work treats state actions—violence, taxing and spending, regulation and chartering, even public ownership of productive capacity—as interventions into a “private” economy and a world of “private” capital that can be separated, at least for purposes of economic analysis, from the public sphere. Accordingly, this work insists that the public purse can only be filled by drawing upon revenues (wealth) generated by the real economy. In the neo-classical imagination, governments can nudge the real sector towards certain productive ends but, short of owning and operating the means of production, they cannot generate new capital.
One final point warrants special emphasis: most scholars argue that the U.S. government faces these constraints as well, despite its monopoly power to issue the domestic money of account. Economic orthodoxy depicts all forms of public spending—including that by the U.S. Department of the Treasury—as a strategic reallocation of private capital. And it casts federal monetary policy as an effort to adjust the “quantity” of currency in circulation so as to meet and, if necessary, manage the market’s financial requirements. Supplying money does not by itself spur growth, in this telling, but instead ensures the smooth functioning of the “real” sector variables that drive the wealth-creation process. In the orthodox narrative, money is not productive and the federal state’s power is limited to managing its supply or, alternatively, redirecting private profits.
This monetary orthodoxy, while hegemonic, is not true. The documentary record makes that clear and guides the heterodox scholarship in economics, sociology, history, law, and anthropology that has long explored finance’s real-world history. The earliest money forms appeared not as commodity tokens that “stood in” for wealth but rather as credit forms or IOUs—as promises to pay—and the things considered “money,” today, are likewise monetized debt instruments (“credit-money”). The creation and circulation of such instruments does not merely reflect and serve the “real” economy. Instead, monetary issue establishes contractual relationships between creditors and debtors that organize—socially and legally—the production and exchange of goods. In other words, heterodoxy demonstrates that the creation of financial instruments is not cognate but essential to growth. Money is, in fact, economically “productive.” Finally, this work traces how the creation and circulation of money forms has always depended on sanction by the elites or sovereign authorities who issue them. Money’s value, at the point of issue, has been grounded not in specific “things” per se (like cattle or gold), but rather in a central authority’s willingness to accept it for the payment of obligations. Then the state’s sanction, in turn, enables these currencies to perform a wide range of market functions. What counts as money is an historical question of politics and states, not an incidental side effect of market exchange.
The documentary record tells a story that is heretical to the economics mainstream: namely, that sovereign power is essential to creating financial value and that issuing monetary instruments is integral to the wealth-making process. And for this reason, monetary heterodoxy has a lot to tell us about the federal role in producing racial categories and racial difference.
Consider, first, the seemingly mundane act of monetary issue—technically speaking, the creation of dollar-denominated currency—and the reach of federal monetary policy. Together the Fed and the U.S. Department of Treasury allocate and oversee the circulation of the so-called “monetary base,” or what economists call “high-powered money.” This is the total value of Federal Reserve Notes (FRNs) and corresponding Fed credits held as settlement balances by the system’s chartered banks. Meanwhile Congress and the Fed shape decisively banks’ ability to create “deposit” currency, which takes the form of electronic ledger entries in customers’ checking accounts and which makes up the lion’s share of the circulating money supply. The remainder of that supply is mostly “cash”—FRNs—held by the public rather than the banks. All told, federal authorities have considerable influence over the dollar-denominated currency created by the central bank and private banking institutions. In its role as a monetary sovereign, the U.S. government issues new money and empowers banks to issue even more.
A casual observer might conclude that this gives the state considerable leverage over macroeconomic outcomes, including the racial wealth gap. But remember that standard macro does not view monetary issue—the creation of financial assets—as essential to growth. And so it reads federal power and discretion in the monetary realm through a very different lens. Orthodoxy tasks the Fed with insulating financial markets against crises by ensuring that the banking system remains sufficiently liquid, providing a backstop for individual banks so that they, in turn, can intermediate between “savers” and “investors.” This intermediation—the story continues—then permits market actors to make the choices that unleash the economy’s productive capacity. Where does racial discrimination factor in to such a calculus? Note that money and credit alike, in this telling, are neutral instruments that simply measure, hold, and transfer existing wealth. Of course, people create wealth by engaging in racist practices (slavery, dispossession, Jim Crow, redlining) and this includes, meanwhile, the use of monetary instruments to do harm. But orthodoxy insists that money itself cannot discriminate. It argues, instead, that racist money-holders can and unfortunately do discriminate, using their financial assets as a weapon to unfairly wield their power.
The result is the erasure of federal culpability for a broad range of discriminatory market outcomes. As heterodox scholarship reveals, money creation by the state and by banks creates wealth by contracting for production. Financial transactions such as replenishing a bank’s reserve account or extending individual loans are engines of growth. And so the federal state shares responsibility for the results, be they equitable or destructive. Heterodoxy shows that money is created not simply to reward or compensate those who have earned wealth; that is, to “ascertain. . . who has claims on resources.” Rather, the creation of money is an institutional means of structuring property relationships—of sanctioning rights to production, ownership, and transfer. The state’s authority to issue money is not simply a regulatory but also a constitutive power. The institutions that create money—both federal authorities and the private entities granted this privilege—help to constitute racialized (as well as sexist, ageist, and ableist) economic and political orders and allocate real wealth accordingly.
Next, consider the narrower but no less influential arena of direct federal spending and fiscal policy. Orthodoxy describes U.S. Treasury spending as a reallocation of private and finite real resources that are first collected through taxation, fees, borrowing, and the like. Federal spending is imagined as interchangeable, from an accounting perspective, with spending by state, county, and municipal authorities. Yet money’s real-world history shows that spending by monetary sovereigns is sui generis: that they create new financial assets whose value is anchored in state power. When the U.S. Treasury spends, it is not redistributing private wealth but rather introducing new—and again productive—financial instruments into circulation. Indeed, a federal deficit is by definition a private sector surplus. And this insight demands that we revisit the legacies of federal spending, both domestically and abroad: on the military, infrastructure, housing, welfare and entitlement programs, employment, foreign aid, policing and incarceration, and other arenas. Spending by a money-issuing authority produces wealth. This means that the abuse of power perpetrated by discriminatory federal spending is not simply a state-sanctioned mal-distribution of existing, “real sector” resources. Instead, it represents the federal state’s active creation of economic opportunities and tangible wealth for some but not for others.
Finally, consider the federal role in creating what are commonly called credit forms, as distinct from fully liquid “monetary” instruments like cash or checking deposits. The U.S. government has long subsidized markets for consumer debt by insuring specific categories of loans issued by qualifying private banking institutions. Most famous, perhaps, are the programs created by the “GI Bill of Rights.” First passed in 1944 as the Serviceman’s Readjustment Act, iterations of the GI Bill have funded for decades generous insurance programs for small business, educational, and home-mortgage loans. Yet the opacity of these programs has obscured the depth of the federal contribution. Federal insurance (often called a “guarantee”) gives banks not simply the confidence but also the capacity to lend. It allows them to spend from their stock of settlement balances (FRNs) in return for a quick and profitable re-sale of a loan on the secondary market or, alternatively, a promise of repayment with interest from the borrower. At that point, whoever holds the debt then receives payments over the life of the loan, made with bank-issued deposit currency (the banking system’s IOUs). Those payments are in turn “cleared” between banks by the exchange of Fed settlement balances.
Both the material production and financial returns generated by these insured loans depend upon multiple levels of sovereign authority. The banking system that allocates credit-money—here the loan itself—is a creature of state authority, as discussed above. Meanwhile the federal guarantee commits the Treasury to protecting lenders against default. Such an offer is difficult to refuse, for if a lender’s gamble on a borrower doesn’t pay off they can still expect compensation, ultimately thanks to the U.S. government’s power and willingness to create financial assets. In the process, finally, the federal backstop supports robust “private” lending nationwide for real estate, consumer durables, construction, education, and the list goes on.
These lucrative markets would not take their current forms if not for decades of federal regulatory and financial support. Meanwhile lenders in these markets have regularly discriminated against racial minorities and other targeted populations, often with the blessing of federal authorities. The vast market for suburban development and homeownership after World War II, to cite a prominent example, would not exist without heavy lifting by the federal state. Beginning in the 1930s, U.S. officials invented and subsidized the use of a new mortgage instrument, created (and invested heavily in) the “secondary” mortgage market to keep their new experiment afloat, and even found it necessary to aggressively promote lending and borrowing, both to businesses and consumers. For decades, meanwhile, federal agencies condoned and often required racial exclusion in these markets. The segregation of American property markets—residential and commercial alike—by both race and wealth provides vivid proof that federal credit programs have not merely “reinforced” popular racism, but rather actively produced race-based material disparities.
The larger point is this: credit- and constitutional-theories of money tell us that financial instruments are factors of production and that their value is anchored in public power. Here is yet more evidence that the U.S. government and the financial institutions dependent upon its authority do not simply oversee or regulate markets but instead actively create them and by doing so create wealth. Racial disparities in the U.S.—in housing, employment, education, health, and wealth—are inseparable from the federal government’s power to marshal productive resources and give markets their form. As a monetary sovereign, the federal state literally structures the productive economy and so contributes directly to the creation of both opportunity and disadvantage.
 For an introduction to these subjects, sample the work of the roundtable participants and notable recent contributions to the scholarship, including: Keeanga-Yamahtta Taylor, Race for Profit: How Banks and the Real Estate Industry Undermined Black Homeownership (Chapel Hill, 2019); Jennifer Troustine, Segregation By Design: Local Politics and Inequality in American Cities (Cambridge, UK, 2018); Walter Johnson, The Broken Heart of America: St. Louis and the Violent History of the United States (New York, 2020); William A. Darrity, Jr. and A. Kristen Mullen, From Here to Equality: Reparations for Black Americans in the Twenty-First Century (Chapel Hill, 2020); and Rebecca Marchiel, After Redlining: The Urban Reinvestment Movement in the Era of Financial Deregulation (Chicago, 2020). Links to a number of influential writings on metropolitan segregation and inequality can be found in David M. P. Freund, “We Can’t Forget How Racist Institutions Shaped Homeownership in America,” Washington Post (April 28, 2016).
 “Money as a medium of exchange first came into human history in the form of commodities,” explains one standard text, and “anything that serves” this exchange function, today, performs the work of money. Paul A. Samuelson and William D. Nordhaus, Economics, 19th ed. (New York, 2010), 458-9.
 See, for example, Samuelson and Nordhaus, Economics, 453-465; Angela Redish, “Money and Coinage,” in The Oxford Encylopedia of Economic History, ed. by Joel Mokyr (online version, 2005); Don Patinkin, “Neutrality of Money,” in The New Palgrave Dictionary of Economics, ed. Steven N. Durlauf and Lawrence E. Blume, 2nd ed. (Basingstoke, UK, 2008); and David Laidler, Taking Money Seriously and Other Essays (New York, 1990), 1–23. To sample the longer intellectual arc of this tradition, see the works excerpted in David Laidler, ed., The Foundations of Monetary Economics (Cheltenham, UK, 2000). On the barter-origins myth, see L. Randall Wray, “Money and Inflation,” in A New Guide to Post Keynesian Economics, ed. Richard P. F Holt and Steven Pressman (London, 2001), 79–91 and note 5, below.
 A. C. Pigou, The Veil of Money (London, 1949). “If we strip exchange down to its barest essentials and peel off the obscuring layer of money,” wrote Paul Samuelson in an earlier edition of his foundational textbook, “we find that trade between individuals or nations largely boils down to barter.” Paul A. Samuelson, Economics (McGraw Hill, 9th edition, 1973), 55. Today, the revised (19th) edition describes the financial system as “the vital circulatory system that channels resources from savers to investors.” (Samuelson and Nordhaus, Economics, 453). And most economists agree with Joseph Stiglitz and Bruce Greenwald that money is “hardly essential,” but rather “a convenient way of keeping score” and “of ascertaining who has claims on resources.” Joseph Stiglitz and Bruce Greenwald, Towards a New Paradigm in Monetary Economics (Cambridge, 2003), 293-4. As Geoffrey Ingham writes, orthodoxy imagines money as “the unintended consequence of individual economic rationality.” Ingham, The Nature of Money (Cambridge, UK, 2004), 19.
 For introductions to the multi-disciplinary heterodox scholarship on these topics, see L. Randall Wray, Money and Credit in Capitalist Economies: The Endogenous Money Approach (Aldershot, UK, 1991); John Smithin, ed., What is Money? (London, 2000); Ingham, The Nature of Money, supra note 4; David Graeber, Debt: The First 5,000 Years (Brookyln, NY, 2011); Felix Martin, Money: The Unauthorized Biography—From Coinage to Cryptocurrencies (New York, 2013); the Law and Political Economy symposium on “Piercing the Monetary Veil”; and the contributions to “Banking: Intermediation or Money Creation” on this website.
 For simplicity’s sake, I’ll restrict this discussion to the era of the Federal Reserve, although the pre-Fed story is equally revealing.
 On banks and money creation, see the contributions to “Banking: Intermediation or Money Creation” and Robert C. Hockett and Saule T. Omarova, The Finance Franchise, 102 Cornell L. Rev. 1143 (2017).
 See note 4, above.
 See L. Randall Wray, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (New York, 2nd. Ed, 2015), esp. chp.3; and Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and The Birth of the People’s Economy (New York, 2020).
 Introductions include Kathleen J. Frydl, The GI Bill (Cambridge, 2009); Ira Katznelson, When Affirmative Action Was White: An Untold History of Racial Inequality in Twentieth-Century America (New York, 2005); and Suzanne Mettler, Soldiers to Citizens: The G.I. Bill and the Making of the Greatest Generation (New York, 2007). On GI Bill housing programs and their origins in federal selective credit policy, see David M. P. Freund, Colored Property: State Policy and White Racial Politics in Suburban America (Chicago, 2007).
 For an introduction to the extensive literature on urban and suburban development, see Taylor, Race for Profit, supra note 1; Nathan Connolly, A World More Concrete: Real Estate and the Remaking of Jim Crow South Florida (Chicago, 2016); George Lipsitz, How Racism Takes Place (Philadelphia, 2011); Beryl Satter, Family Properties: How the Struggle Over Race and Real Estate Transformed Chicago and Urban America (New York, 2010); and David M. P. Freund, Colored Property, especially chps. 3-5. On the history and reach of federal credit programs, see Sarah L. Quinn, American Bonds: How Credit Markets Shaped a Nation (Princeton, 2019) and Commission on Money and Credit, Money and Credit: Their Influence on Jobs, Prices, and Growth. (A Report of the Commission on Money and Credit, Englewood Cliffs, NJ, 1961).