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Money and ‘Demonetisation’

The Fetish of Fiat

Like in the rest of contemporary capitalism, the Indian monetary system is based on state-backed credit money. Yet this hierarchical system of credit/social relations appears to us as a system of fiat money. This fetish of fiat money, analogous to Marx’s commodity fetish, is produced in the operation of credit system. The institutional and political arrangements of the Indian state amplify this inherent fetish. This conjuncture of elements produces a particularly robust fetish of fiat money in India, giving the Indian state more degrees of freedom over money than other states enjoy, a margin that the current government is now exploiting.


What can theories of money tell us about the “demonetisation” of the vast bulk of the currency at a stroke via the 8 November announcement? Which of these theories has a purchase on our present monetary crisis?

This crisis seems to have confirmed the idea that we live in a world of fiat money, whereby the state’s sovereign power is expressed as a declaration that otherwise worthless pieces of paper have economic value.

Whether or not we live in a world of fiat money comes down to the nature of state power over money. The cases of modern Zimbabwe and Weimar Germany show us that the state’s ability to produce value out of thin air by mere declaration finds a limit at some point. As the economist Hyman Minsky (1986: 79) claimed, anyone can issue money, the problem is to get it accepted.

If acceptability can be assured by the sheer imposition of sovereign will, we do indeed live in a world of fiat money. As the limit cases show, when sovereign will over the fundamental social relationship that is money is no longer accepted, sovereignty itself is questioned. Sovereignty and money seem to be coterminous.

Witness what we have seen since 8 November. It appears as if, in one grand gesture, the government has criminalised virtually all cash transactions in “specified notes” by withdrawing their “legal tender character” save those transactions that the government has announced as exceptions. By fiat, the government has rendered the majority of the money stock almost worthless. This is surely an awesome display of sovereignty defined as calling the exception (Schmitt 1985).

Despite the appearance of overwhelming state power over money, we will argue that “acceptability” remains at the heart of money. Modern money is a credit instrument, an IOU. A credit relationship is a two-sided affair that entails a borrower and a lender. Even when the borrower is a sovereign state, the very power of the state rests on its legitimacy. This legitimacy can rest on contractarian, populist, nationalist, or other terms, but it remains a social relationship that exceeds the mere force of will.

How then do we account for the appearance of overwhelming monetary fiat through this episode of demonetisation? We will argue that it is the specific arrangements of Indian political economy rather than the nature of money itself that makes the credit note, that is, money appear as if it were a mere token of state power.

Indian arrangements cover over the defining attribute of acceptability. Indian political economy generates a specific kind of monetary fetish, in Marx’s sense of the term of social relations between people taking the necessary form of appearance as social relations between things. In our monetary system, cash takes the form of appearance of a fiat token, thereby disguising the creditary relationships undergirding money. The Indian economy appears to be in the thrall of this fetish of fiat.

This fetish exists, arguably, because most Indian economic relations are run through the state. Indian economic relations are not mainly the horizontal ones of private contract law but substantially the vertical relationship of public law. Perhaps no institutional fact embodies this hypertrophy of the state in economic relationships as the banking system, totally dominated as it is by public sector undertakings.

Given the underdevelopment of banking and the “repression” of finance, we lack the dimension of legal horizontal innovations in credit structures that could respond to a crisis such as demonetisation. Most of our post-demonetisation innovations—and there are many ingenious ones—happen in the shadow economy.

The upshot is that the vertical relationship with the state still dominates the economic sphere, especially when it comes to money and banking. This leaves the economic Indian with two choices: submit to state power or illegally innovate around it.

While this crisis has seen both responses, neither is explained by an argument from fiat money. It is rather that the particular arrangements of Indian political economy fetishise economic relationships as governmental power. The dominance of the state in the institutional provision of money, commercial banking, further fetishises these relationships.

Indian money is still money, a credit note issued by a central bank. In most cases around the world, this creditary ontology is covered over by the operation of a hierarchical credit system and bathed in the halo of sovereign power. In India, the arrangement of its political economy amplifies the fetishism native to modern credit systems.

The amplitude of this fetishism is such that it appears as if we live in a world of fiat money. In India, acceptability of the state’s actions over money is ensured by means of a hyper-fetishism: the inherent fetish produced by the credit system plus the arrangements of Indian political economy. This surplus fetish gives the Indian state more degrees of freedom over the economy than other states enjoy, a margin that the current government is now exploiting.

Chartal Power

Legal tender laws stipulate that a particular monetary instrument will be accepted in discharge of a debt. Thus Section 26 of the Reserve Bank of India (RBI) Act of 1934 states that bank notes, which the RBI has the sole right to issue, have a “legal tender character.” In other words, the mere issuance of bank notes does not make them legal tender; the state has to bestow this character on the notes and, by a provision of the same section, can withdraw such a legal tender character of any given series of notes. This is what the government did on 8 November.

There is a well-established theory of money that goes by the name of Chartalism that outlines the nature of money as a creature of state power (Ingham 2004). Propounded by the German economist G F Knapp in the early 20th century, this theory was an articulation of the struggle over methods that came to define German economics and social sciences in that period. Being of the more historical persuasion, Knapp sought to counter the more analytic approaches to money that travelled under the banner of Metallism (1973).

According to the Metallists, who counted Aristotle and Marx among their number, money was a precipitate of multiple rounds of barter whereby one commodity dropped out of regular circulation and came to be the universal equivalent form of value for all other commodities. When other commodities had their value expressed in this money commodity, they were said to have a price. When we developed paper money, the paper merely substituted for a valuable commodity for ease of exchange. For this school of thought, which includes virtually all of classical and neoclassical economics, all economic activity amounts to a complicated form of barter.

The Chartalists pointed to both a logical and historical problem with this account (Goodhart 1998). First, having a money commodity presumes the existence of some agreed-upon unit of measurement of value before different commodities can be commensurable. Marx famously analogised value to weight as an abstract property of a physical object. But to measure weight, we need to agree what a unit of measurement is, whether that is a kilo or a pound.

Just so, for commodity money to function as money, we need to know what amount of the metal counts as a “rupee” before it can express the value of other commodities. The establishment of a unit of account is therefore logically prior to the establishment of any money, metallic or otherwise.

Standards of measurement have to be monopolistic by definition if they are to function as standards. A multiplicity of measurement standards is simply a contradiction in terms. Being a naturally monopolistic function, therefore, monetary measurement finds a natural home in an institution that has the power to impose standards on others in society. The state is such an institution.

But the Chartalists went further in arguing that there was very little historical evidence indeed of a money commodity emerging autochthonously and spontaneously from exchange. Indeed, all the archaeological and historical evidence seemed to suggest what the logical case implied, that the state was central not only in establishing and enforcing the unit of account in which monetary value was measured, but that the first things that answered to the description of money were tokens of state debt and payments as punishment for crimes.

For the Chartalists, the key relationship that underlies money is taxation. By definition, the state is owed a primordial debt by its constituents: subjects and citizens alike always already owe taxes to the state. This definitional debt gives the state a very definite form of power over money. The state can nominate the financial instrument that it will accept in settling a taxation debt owed to the state. Such an instrument will thereby be demanded by people because its possession can fulfil their taxation liabilities. This demand gives it value.

Now, if the state itself borrows from people in the form of an IOU, people will bend their economic activity in the direction of earning such IOUs because the state will naturally accept its own IOU in payment of people’s taxation liabilities. The state imposes a tax liability on people and then borrows against this liability by circulating these IOUs. This issuance of IOUs is nothing but government spending.

For the Chartalists, the state spends money into existence and taxes it out of existence. State IOUs have value because they are demanded by people in order to meet the primordial liability of taxation. Being the largest economic entity in any jurisdiction, the state’s liabilities come to be circulated as money.

According to this view, the state could issue a number of monetary instruments with forms differing from metal (commodity money) to tokens (fiat money) to credit (bank IOUs). The form the instrument takes is irrelevant from the point of view of its social ontology. For the Chartalists, money is an expression of the state’s ability to impose a tax liability on us all. It is state power, pure and simple.

The most recent iteration of this argument, neo-Chartalism, seeks to connect this social theory to the institutional realities of contemporary capitalism by focusing on how credit money issued by a central bank comes to be infused with sovereign power (Wray 2004). Yet the creditary nature of modern money is ultimately an institutional detail for them. The fundamental ground of money is state power expressed through taxation.

The Chartalists are very keen to point out that their theory of money does not at all depend on legal tender laws. Whether or not some instrument is nominated as a legal tender, it will be demanded if the state accepts it in payment of debts to the state. Laws designating specific instruments as a legal tender are neither necessary nor sufficient as a driver of money. Taxation drives money. Legal tender laws merely sanctify this fact.

Legal Tender and Economic Action

And yet legal tender laws are all that was changed in the government’s great demonetisation. The government order notes that

in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 ... the Central Government hereby declares that the specified bank notes shall cease to be legal tender with effect from the 9th November, 2016. (GoI 2016)

As we know, the government set out an ever-expanding series of exceptions outlining what the now-defunct tender could be used for. These were invariably government services of a critical nature such as pharmacies, hospitals, and gas stations, and rail/air travel. To reduce the load on farmers, seeds were eventually allowed to be purchased with old money. And also, taxes at every level of government could be paid with old money (RBI 2016).

Now we know that the “Net contribution of departmental undertakings” combining activities of the centre and the states is barely a percentage point of GDP (GoI 2015). So all these government services are barely enough to drive demand for the old notes and thereby keep an old-note economy afloat for the remainder of the year.

What about taxation? According to the Chartalist story, the instrument that the state decides it will accept for payment of taxes should function as money. Yet, notwithstanding concession, we still see lines outside banks to get new money.

What might be happening is that another force is dominating proceedings. The Prime Minister stated that,

The magnitude of cash in circulation is directly linked to the level of corruption...To break the grip of corruption and black money, we have decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is, 8th November 2016. This means that these notes will not be acceptable for transactions from midnight onwards. The five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. (Modi 2016)

With that statement, the government created an economic crisis from which we are yet to emerge. It shouted fire in a crowded theatre, creating a stampede to the exit. Needless to say, it is the poorest among us who were trampled.

By claiming that all cash was corrupt, all cash activities were criminal, that all cash amounts to “worthless pieces of paper,” the government weaponised legal tender laws to the extent that even accepting taxes in old money was insufficient to monetise them. The question we have then is, why should mere legal tender laws have such an effect on the acceptance of money in India? Chartalism seems to fail to account for Indian realities.

Imagine a shopkeeper who sees that the lines in the banks are long and reasonably calculates that, having until the end of the year to deposit his old money, he will continue to do business in old money, accepting payments in old money even after the 8 November announcement. If this had been the reaction to the Prime Minister’s announcement, we would have seen far fewer lines at banks.

Note that legal tender laws merely state that the instrument in question has the protection of law. As the Chartalists argue and as much of monetary history documents, various instruments can and have circulated as money without legal tender laws. Private monies have always existed alongside public money. The European Union’s legal tender laws make this distinction clear:

Although [privately issued money] are not official currencies and have no legal tender status, parties can agree to use them as private money and without prejudice to the official currency (euro or national currency) being the sole legal tender. In that way, these forms of private money can be considered as economic assets. Private money transactions and business related to them are subject to the general rules of commodity trade such as taxation law, business law, anti-money laundering law or others. However, they are not official currencies and they are not governed by monetary law. (European Commission 2013)

There have been several news reports of people and vendors accepting old money as payment, sometimes at a discounted price. In Vadodara, the Agriculture Produce Market Committee was reported to have accepted old notes (Sharmai 2016).

This makes a certain amount of economic sense. Old notes continue to have economic value until the end of the year, albeit diminishingly. The rate of depreciation must be set against the transaction costs of lining up for hours in the bank to get new money. Such a calculation would still yield a positive economic value for the old notes, as some concluded.

Yet these are exceptions. If private parties can still agree between them as to which asset will settle their transaction, and old notes continue to have some economic value, why did old notes not go from being publicly-backed money to privately-circulated-yet-white money?

Note further that the RBI governor, in the first major announcement from the central bank post-notebandi, stated that while the legal tender character of the “specified notes” might have been withdrawn, they remained the liabilities of the central bank “as of now.”1 Of course, to say otherwise might be tantamount to repudiating the central bank’s IOU, although the legal picture is far from clear. But to drive a wedge between legal tender and the liabilities of the central bank is an attempt to shore up the threatened central bank independence.

It also begs the question that, if the old notes continued to be central bank liabilities, why was this not clarified sooner? And why did we not see private contracting continue in these notes?

The reason why we did not see this reaction is that the government in effect criminalised all cash activity after its announcement, even if that activity was fully declared as taxable. Given that the vast majority of transactions in India, especially those day-to-day activities, are cash-based, the effect of criminalising at one go was predictably disabling.

This criminalisation of legal cash transactions is only possible and indeed credible because the default condition in India is the expansion of the state into the capillaries of private contract, rendering private law almost a nullity. It has little do to with fiat money as such.

Our shopkeeper might reasonably assume that even though his cash transactions are all above board, the accepting and recording of cash income post-announcement in old notes might invite the unwanted scrutiny of the taxman. His Prime Minister has already equivocated all cash with corruption. Our cash-based shopkeeper is guilty until proven innocent.

There is a deeper condition here that needs to be diagnosed. There is precious little space in India to make contractual innovations in the private sphere that do not invite the grasping hand of the flailing state. This of course is the standard liberal lament, one that makes liberalism something akin to a revolutionary doctrine in the present context.

Yet is it not from a liberal point of view that the overweening presence of the state is being diagnosed here? Rather, we are making the more prosaic observation that in India, all economic relations seem to run through the state? The domain of public law seems to have crowded out the domain of private law (Balganesh 2016).

When directed at horizontal relationships between private parties, legal tender laws are nothing but a subset of the laws of contract, private law. If an instrument has lost its legal tender character, this merely means that the state will not accept these notes in payment of taxes or services (notwithstanding stated exceptions). It ought not to mean that private parties cannot contract in an asset that this has economic value. These forms of contracting ought to remain protected by law. The use of a demonetised note, an asset with economic value, ought not to render the contract criminal or its proceeds illegal ipso facto.

The space to make this kind of argument in India is atrophied precisely because the space of private law is atrophied. Where European legal tender laws are clear to make space for private-money transactions, Indian codes are silent on this issue, especially in this time of monetary emergency. Indian practice definitely reflects this atrophy of the private economic domain.

Hence, the most widespread innovation in response to the crisis is also the oldest: I will pay you later. An ancient practice of non-negotiable, personalised credit that has not been commoditised, is the default response of the Indian economic actor. Because of the over-saturation of the private in the public, the main arena of innovation has been the expected one of inventing methods of circumventing the state.

These are the options before the economic Indian: submit to state power or invent illegal ways around it.

The Credit System

Money might be a credit note based on social relations, but social relations are hardly insubstantial. On the contrary, the socioeconomic relations on which money is built are so solid, so concrete that they are able to bear the functions of money in a complex economy. The state is central to this operation, but its role is calibrated in different ways depending on the political economy of a place.

Indeed, there are those who question the centrality of the state in money altogether. The banking school tradition sees money as evolving out of commerce through the gradual development of bills of exchange as a means of payment and settlement (Kindleberger 1984). Dealing habitually in deferred payments, merchants in early modern capitalism developed protocols for assessing the creditworthiness of various promises to pay, most notably the number of signature-endorsements on the bill from other prominent merchants.

At a certain stage of development of these protocols of creditworthiness, bills of high creditworthiness would themselves be used as money, as a means of settling payments and storing wealth. Merchants eventually hived off a distinct bill discounting function whereby they would take in bills of exchange before their maturity but at a discount from the face value in exchange for other bills or cash and then recoup the principle on maturity.

Bill discounting is the kernel of what we now call banking. When a bank makes a loan to a borrower, it accepts the borrower’s private “bill of exchange” based on their creditworthiness and furnishes them with a checking account, that is, higher-quality claims that, unlike the borrower’s personal IOU, can be used as a general means of payment. The bank’s IOU is of higher quality or creditworthiness because it has so arranged its balance sheet as to attract a substantial flow of liquidity to it whether in the form of deposits or interest on payments of other loans.

Our bank deposits are loans from the point of view of the bank. They are special types of loans that can be called back by the lender, we the depositors, at any moment. This any-time callability of our bank deposit gives us the impression that we have merely stored our money in the bank. In fact, when we make a deposit, we are engaging in a creditary relationship, lending the bank money in exchange for a promise that the bank stands ready to return our loan at any moment.

Here is the most primary level of the modern money fetish. A bank is not a cash warehouse or a communal mattress. It is a dealer in liquidity, borrowing in short-term liquid form, and lending out over longer periods in illiquid forms. For assuming this liquidity and maturity risk on its own balance sheet, the bank earns a profit called interest. By pooling together individual bits of liquidity and generating a socially-legible and acceptable IOU that functions as money, the bank is “transforming” individual liquidity into social liquidity.

Yet we do not observe this operation on the surface of capitalism, as it were, in the sphere of circulation. For Marx, the social division of labour and the separation of the sphere of circulation from the sphere of production creates the commodity fetish, namely, the necessary appearance of social relations between people as social relations between things. An analogous process occurs in banking.

This process happens by way of an equivocation in the depositor–bank relationship wherein a loan, a social relationship, is systematically inverted to appear as a thing, the depositing of physical cash in the bank. We do not take ourselves to be involved in a borrowing–lending relationship when we make a bank deposit. All we imagine is piles of cash sitting in banks, part of the pile belonging to us.

By themselves, banks are actually quite fragile creatures given the nature of their promise to depositors. They have committed to stand ready to return their deposit loan at any time, night or day, on demand. One way to make good on this promise is to simply have large stocks of cash on hand at all times. But this would not be banking but cash warehousing. It would also be a shocking waste of society’s liquid resources.

Again, we do not appreciate this fragility from the communal-mattress point of view because of the fetishised credit relationship. This is further camouflaged by banks going out of their way to cover over their fragility with the rhetoric of safety and stability.

Instead, banks keep only a small fraction of liquidity on hand at any time (“fractional reserve banking”) preferring to use its borrowed liquidity as leverage to extend their own balance sheet to those desirous of liquidity, namely, its loan customers.

Note that we are not saying that the bank borrows depositor money and lends it out again because that is not strictly true. Lending involves the creation of the bank’s own IOUs for its loan customer by way of a brand new checking account, not the recycling of existing deposits.

Yet because the two liabilities—existing deposits and new loan-created checking accounts—are indistinguishable, both being balance sheet entries, we again have a physicalist misreading of the bank’s loan operations as recycling some value substance rather than appreciating the social power of liquidity and maturity transformation that the bank’s balance sheet expresses.

Having engaged in the business of banking rather than cash warehousing, the bank can only make good on its promise to depositors in one way, and that is to ensure that it has not a sufficient stock of cash on hand but a potential inflow of cash should the need arise. That is, banks have borrowing and lending relationships with other banks in order to manage temporary deficits/surpluses of liquidity.

These refinancing arrangements are another layer of social relationships that banks themselves construct in order to produce a promise that is at once solid and liquid, solid in the sense of reliable and liquid in the sense of instantly available. The collection of promises that comprise our checking account with a bank are not the same thing as liquid money: they are merely balance sheet entries in a ledger. That we nearly equivocate these balance sheet entries with actual cash-in-hand is a testament to a particular kind of achievement: the transformation of a social relationship into the universal equivalent.

Fetishism in the Credit System

We have seen this transformation or socialisation at two levels: the level of the individual bank balance sheet pooling individual’s liquidity into bank IOUs, and one level up, as individual banks pooling together their collective liquidity needs in the interbank market for deficits/surplus cash.

Without a reliable source of refinance from other banks in the system, a lone bank would have to keep a much higher proportion of liquid cash stocks on hand in case depositors came calling. All its liquidity management would occur in the arrangement of the tenure of its loan book. But given various contingencies from the repayment of loans to the pattern of depositor behaviour, at any given time banks might have either more or less liquidity than is optimal. A lone bank more readily approximates a cash warehouse.

Rather than dealing with this situation only by building a large cash buffer, banks contract with each other in the interbank market to deal with these temporary fluctuations. This is a further socialisation of the liquidity relationship that enables banks to optimally use social liquidity even while assuring their depositors that their checking-account promises will be kept. If the bank faces a sudden demand for liquid cash from depositors and finds itself short, it can go into the interbank market and arrange for a temporary loan without turning its depositors away and violating the checking-account promise.

In order to facilitate interbank loans and even regular payments, banks found it expedient to form conglomerate banks where banks themselves were the depositors. Transfers between banks could thereby be reduced to mere ledger entries in their conglomerate banks. Set up to facilitate payments, these clearing banks ended up socialising bank liquidity to create yet another layer of the credit hierarchy, one that would be backed by substantial assets to anchor several chains of credit below.

Thus, when the banking system as a whole fell temporarily short of liquidity, the clearing house could issue a temporary loan against its substantial assets to the system by crediting the respective accounts of constituent banks. These clearing-bank emergency operations would become the seed from which the modern lender of last resort function of central banks would grow (Gorton 1985).

These clearing houses would of course develop into what we now call central banks. Central banks emerged from the fusion of two kinds of operations: banking for other bankers and banking for the state. As the government’s merchant banker, central banks placed government debt with market operators. The government itself would have its account with this bank, using its balance sheet as the interface between it and the credit system.

Through several rounds of profit-driven expansion and contraction, banks grew into social systems evolving hierarchical credit arrangements that pooled liquidity at ever-greater scales. The inherent fragility of banking—borrowing short and lending long in an uncertain world—combined with the crisis-prone nature of capitalism to create a credit system that posed a systemic risk to any nation that was not able to manage it.

One mode of management was to tie credit to some hard asset that lay outside the system of interlocking balance sheets, an asset that was not at the same time some other balance sheet’s liability. This of course was monetary gold.

A metallic monetary base did not mean that the nature of money was a metallic commodity. Commodity money was simply the anchor on the asset-side of interlocking and hierarchical balance sheets. These balance sheets issued IOUs that promised to pay gold, but it was these IOUs in the main that functioned as the money supply rather than gold. This was true from early modern capitalism all the way to the Bretton Woods system (Eichengreen 2011).

Being an outside asset, gold reserves acted as a kind of disciplinary mechanism on how far credit could be leveraged in the system. Because the amount of gold in the system was based on the arbitrary volume of metal that was dug out of the ground, its volume in no way corresponded to the actual liquidity needs of a living, breathing economy. Yet its discipline could be brutal precisely because it was finite, even as this brutality could be amplified by the political interest of a creditor class.

Once the “barbarous relic” of gold was supplanted at the apex of the credit system by government debt, the final nail had been driven through the money fetish as a commodity fetish.2 No longer could the vestigial presence of gold reassure us that our money was worth something after all. Without gold, and without an appreciation of the credit machine that kept the system running, we assumed we lived in a world where pure state fiat drove money. The fetish of fiat replaced that of the commodity.

What actually happened was more radical. Government debt is a promise to pay future tax receipts. It is the commodification of a sociopolitical relation, pure and simple. Yet this is a fairly thin method of commodification, missing as it does the predication of a complex social division of labour. The longer the supply chain of a particular commodity, the easier it is to fetishise the composite social relations. Yet with government debt, it is one step, which is why government bond traders are keen political observers.

Recall that fetishism for Marx is not some conspiratorial veiling of the operations of capital. It is a necessary attribute of a system defined by a complex division of labour where concrete labours relate to each other not directly but as different components of a widely-distributed and mutually-concealed supply chain. Concrete labours relate to each other abstractly through the commodity, but we read the commodity as a concrete thing rather than a “social hieroglyph.”

Just so, monetary fetishism is as necessary a component of contemporary capitalism, turning individual units of liquidity into socially-accepted IOUs at three levels. It turns individual IOUs into social money through the bank’s loan operations; it turns bank liquidity into higher-powered IOUs through interbank lending; and it concentrates all this socialisation of liquidity at the apex of the credit system in the central bank.

Once the logic of banking is fused with that of government debt, these IOUs are given a social predication, that is the entire economy itself via the intermediating balance sheets of the central bank and the state. The state is a leviathan, itself a synthetic fusing of individual wills into a social will. The monetary expression of this social fusion is the flow of taxation to the state.

If the logic of banking makes individual IOUs social, and the logic of the state makes individual wills social, the logic of the state–central bank combine makes individual liquidity social money. The institutional complex of the central bank and the fisc combine to fetishise these successive transformations so that it takes the necessary form of appearance of state fiat. Abstracting from this, we observe the operation of creditary relations, social relations as much as they are political relations, all the way down.

Conclusions: Monetary Fear

We do not live in a world of fiat money. Like the rest of contemporary capitalism, the Indian system is based on state-backed credit money. Yet this hierarchical system of credit/social relations appears to us as a system of fiat money. Taking advantage of this necessary appearance of fiat, the Indian government has struck monetary fear into the heart of every basic transaction in the universal cash nexus.

The argument from fiat does not account for monetary fear given the creditary nature of modern money. What needs to be accounted for is the necessary appearance of the fetish of fiat in India’s credit system. We have accounted for the fetish of fiat at two levels: historical and logical.

At the historical level, we highlighted particular features of the Indian political economy that amplified the inherent monetary fetish in a system of state-credit money. At the logical level, we outlined how any hierarchical credit system develops a series of transformations whereby individual IOUs are made social.

The first feature that contributes to the fetish of fiat is the hypertrophy of the state in Indian economic life through the crowding out of the space of private contracting. Added to the domination of the credit system by government-owned banks, the Indian credit system is saturated by the state, creating a stark choice in economic life: either submit to the monetary leviathan or go underground and innovate illegally.

These contingent, historical features of the Indian system only serve to amplify the inherent creation of the money fetish in a hierarchical credit system. We might not operate under a system of commodity money, but the complex division of labour of capitalism means that the commodity fetish still obtains: social relations between people still take the form of appearance as social relations between things.

As such, the money fetish also continues to obtain, but not as Marx argued, namely, as a species of the more general commodity fetish. This is because we do not live in Marx’s metallist world of commodity money; we live in Minsky’s world of hierarchical and inherently unstable credit systems. Monetary fetishism still applies, it being capitalism, but it is configured according to the logic of the credit system.

Since the credit system comprises a hierarchy that ends with state money, the monetary fetish of contemporary capitalism takes the form of appearance of the fetish of fiat money. Social relations of credit appear as the physical storing of cash. The transformation of individual liquidity into a social hieroglyph appears as recycling a value substance. State banking appears as state fiat.

Marx applied the power of abstraction to a complex social division labour to break through the commodity fetish inherent in capitalism and drive home the lesson that the world of commodities is our collective achievement. The point of breaking through the fetish of fiat money is similar. Modern money is a claim on the national product, a collective product. Because this claim is mediated through the state and its bank, its democratisation entails a particular kind of politics.

The credit system is merely a piece of social technology, a double-edged sword. While is it currently being used for fear, it can equally be wielded for hope.


1 Audio recording of RBI Press Conference,

2 This is Keynes’s term for the “Gold Standard.” Keynes was a neo-Chartalist.


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