St Paul's Institute

The Values of Money: No Longer a Noun

by The Revd Andrew Studdert-Kennedy

Posted: 16 Sep 2011

<< Part Seven: Financial Bubbles

The sports news on the Today Programme on Radio 4 is usually preceded by business news as a company announces its results or the markets open. Listeners hoping to hear about sport could be forgiven for thinking that the business news has simply overrun - for with dismaying frequency sports news, especially football's, is dominated by money. The most successful clubs are those with access to the most money.

Such an observation may appear rather 'home made', but nevertheless it illustrates something important about the way money works today; it seems to get everywhere.

During my exploration of finance and banking, conversations have rarely been about money itself but much more about its effects. This is an important distinction for it recognises that money is a dynamic force rather than the name for a particular set of objects. Coins and notes represent a tiny fraction (3%) of money in circulation; money moves and is active. It functions like a verb and not a noun. Just as it is the nature of a verb that it is active, so, too, does the 'grammar' of money mean that money can't stop. That's why it gets everywhere - including the sports news.

How did this come about? In essence money which started as a means of exchange has become an end in itself, it has become a commodity. Originally money's value was anchored in something outside itself - gold - and the amount of money in circulation was linked with the exchange of goods and services in the economy.

But the cessation of the Gold Standard together with the fractional reserve system of banking, that allows money to be created so that it no longer has an intrinsic connection with activity in the economy, means that money has lost its dual anchor. Furthermore, when money itself becomes a commodity we can never have enough, for it has become self-referential and taken on a life of its own.

Perhaps the most succinct discussion of the dynamic nature of money is found in the Church of England's Doctrine Commission Report Being Human, published in 2003. It includes this summary:

The way in which value is constructed is reversed. What once functioned primarily as a quantitative measure of the qualities and value of things in the world and of the work and worth of human beings now easily turns into the primary referent of their quality. That which money once valued is now increasingly valued only in relation to what has become the primary and apparently objective quality in relation to which all else is measured, and that is money.

Over 90% of transactions in the financial markets do not relate to productivity in the real world but represent speculation about the future value of currencies or commodities. Commodity markets provide a good illustration of money's dynamic force and the effects it has.

In the mid-1800s farmers started selling forward contracts to their customers under which they would agree to sell their crop at a certain point in the future at a guaranteed price. This helped farmers protect their income in the event of the market price of the crop falling between planting and harvest, while their customers were protected against unanticipated price rises. The future contract thus acted as an insurance policy for both parties, reducing the risks they might otherwise face and crucially allowing for longer term planning. Supplier and purchaser were both beneficiaries from such an arrangement.

However if the purchaser of the futures contract changed their mind and decided that they didn't want delivery of the crop, they could in turn sell the contract to another buyer. A relationship would thus become a transaction and that is what we have today in abundance. Futures contracts are bought and sold on a wide range of commodities but increasingly they are traded not by the producers and users of the products themselves but by banks, pension funds and others seeking to make a profit. Few of the market actors have any intention to take delivery of the underlying commodity; their sole interest is to profit from fluctuation in price. These financial instruments are known as Derivatives because they derive their value from an underlying asset. It is not just physical commodities that lie at the 'base' of such markets, but interest rates and stock market indices as well, whilst 'swaps' markets are similarly derivative contracts.

Critics point out that such arbitrage trading adds not a jot to the stock of wealth, but merely redistributes it in an arbitrary way; the gains of some being equal to the losses of others. Furthermore there is evidence to suggest that financial investors can move prices in the market even without a relationship to the commodity being sold.

On the other hand defenders maintain that such a market offers a legitimate financial service since it absorbs risk, helps bring money to the markets and also acts as an important signal to future performance. They also point out that if something really were socially useless (as critics suggest), then the markets would be the first to find this out!

The genesis for my sabbatical project was the wish for Christians to be able to engage in a conversation about the great financial issues of the day and to see what insights the Christian tradition might be able to offer. As can be seen from the pieces that I have written for the Institute, the exploration has necessitated learning a lot about the financial system itself before being in a position to make any observations from a Christian perspective. But it is to such observations that the next piece will turn.

This piece is part of a series by Revd Andrew Studdert-Kennedy exploring the role of the financial sector and how we might come to understand it better.

About this author

Revd. Andrew Studdert-Kennedy is Rural Dean and Team Rector of Marlborough.

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The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.