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The Impact and Malleability of Money Design


Christine Desan is Leo Gottlieb Professor of Law at Harvard Law School and the co-founder of Harvard’s Program on the Study of Capitalism.

This post is part of a symposium on Mehrsa Baradaran’s The Color of Money. Read the complete symposium here.


9780674970953Mehrsa Baradaran’s book teaches us that money has a color, an arresting proposition to fans and foes of capitalism alike. As she points out, economic orthodoxy posits that the transactional medium is itself a formal instrument: money expresses but does not affect the value of the substances it measures. Critics of that orthodoxy agree even as they bemoan the results: money denies through its very impersonality the social substrate of exchange. Against that commonsense, Baradaran directs us to consider how the institutions of money creation in the United States – commercial banks – have systemically originated money in white hands over decades. That is, considering money as a process – asking how value is packaged into the everyday units we call dollars and injected into circulation – reveals that we have designed a market that is racially discriminatory in its very medium.

Baradaran challenges us to recognize how much determinations about money’s design matter. That proposition is particularly striking because they are also remarkably malleable: altering the institutions that deliver credit in money can change the way people and groups relate to one another. I want to underscore Baradaran’s argument about the practice of black banking by exploring an alternative vision. Only when the monetary project of the agrarian populists failed did Americans settle on the exclusionary system that Baradaran describes. The contrast suggests that designing money is shaping community; it can bring people together or set them at each other’s throats.

We pick up the story with Baradaran in the post-Civil War South, a monetary wasteland by any measure. Banks there collapsed along with the Confederacy and its currency. According to Lawrence Goodwyn, the per capita money supply in Arkansas was thirteen cents; in Rhode Island, it was $77.16. Bridgeport, Connecticut had more banks than the states of Texas, Alabama, North Carolina, and South Carolina combined, while Massachusetts alone had a national bank circulation that was five times that of the entire South.

Behind the numbers rose the system of debt peonage that came to shape production for millions of poor Southerners, white and black. Bereft of cash, farmers turned to “furnishing merchants” for supplies: everything from clothes to tools, seeds to hardware. The goods came on credit and that credit was extremely expensive—merchants routinely charged exorbitant rates, 100 to 200% annually. In return, each merchant took a lien on the farmer’s crops. Once the lien attached, the merchant virtually monopolized that farmer’s connection to the market. As to consumption, the farmer could buy only from the merchant who held the crop lien because no other lender would advance credit without collateral And as to production, the farmer had to turn over his crop to the merchant for sale to pay off his debt.

The trap was, in fundamental ways, a monetary one. The devastation of the South’s financial infrastructure was only the beginning. After the Civil War, the federal government settled on a long-term deflationary policy; by limiting the amount of money in circulation, it aimed to drive down prices so that it could resume convertibility of the fiat currency that still circulated. But falling prices are devastating to debtors: they borrow when prices are high ($30 for a cartload of produce for example) and owe that denominated amount.  As prices fall ($15 for a cartload of produce), they must sell twice as much in order to repay the debt. As Martin Drake points out in recent work on “Employment as a Creation of Monetary Design,” prices fell by half after the War over a period of 15 years. The deflation eviscerated farmers who were, overwhelmingly, debtors. Locked ever more deeply into debt, they lost income, land, and dignity to those merchants who ran the credit system. Finally, having adopted a policy so destructive to the agrarian workforce, the federal government declined to ameliorate the situation. It constructed a national banking system that heavily favored the industrializing North, leaving the South with only 3% of national bank notes, a small share of national bank charters, and, as Drake concludes, “an extremely malnourished banking system.”

Goodwyn called the popular movement that began in response an “agrarian revolt.”  It was an astonishing mobilization, sprung from an efflorescence of “farmers’ alliances” that spread from Texas across states in the South and West in the 1880s, when members signed up in escalating numbers. Yet more startling to modern ears, it was a monetary movement, one that reimagined human relations by reconceptualizing credit and money creation.

Agrarian populism had roots in Greenback agitation. Appalled by the injuries imposed by deflation, Greenbackers argued that paper money, a currency indispensable to the North’s victory in the Civil War, also sank the costs of that conflict as it lost value. Its depreciation was a just result under the circumstances, one that distributed the price of the War to those best able to bear it. But the populists soon went further.  Confronting the divisive phenomenon of the crop lien system, they countered with a cooperative alternative. While merchants picked off farmers one-by-one, agrarian organizers proposed that farmers unify their productive power. They could centralize both purchasing and sales, buying at designated trade stores where they could concert their demands to get better deals and selling at supervised points of sale where they could hold out for decent prices.

The strategy subverted existing habits, including patterns of race relations. As organizers emphasized in a sweeping self-education campaign, agrarian power could only prevail if it operated inclusively. To an extent notable for the time, alliances reached across color lines. “Poor black and white farmers were natural allies” in the movement, Baradaran writes. Jeffrey Sklansky documents a shift from a white discourse of blame, directed at freedpeople for the tax burdens of Reconstruction, to a rhetoric of cooperation and mutual assistance. The movement required concerted action: “All must go together, or none can go at all.”

Populist scrutiny soon turned to the money supply itself.  When commercial banks denied credit to rising cooperatives, populists challenged the grip those banks held on money creation, proposing that the federal government reclaim that power. The government should lend farmers cash directly, taking their harvest as collateral. Invoking colonial American precedent, the plan articulated access to credit as an individual right, re-envisioned the relationship of the federal government to low-income individuals across color lines, and supported agrarian solidarity. It offered, in other words, an alternative theory of money and the market.

When opponents killed the populist initiative in Congress, they returned us to the commercial banks that Baradaran locates in the center of her story.  Absent the agrarian plan, those banks became the exclusive channel the government provided for money creation on private demand. Anchored on public debt, the national banking network grew into the Federal Reserve System that centralized clearing, supported lending on particular assets, and extended support for specified activities. Those permissions and privileges molded commercial lending, understood as a profit-oriented business. Even as the selectivities of the system disregarded the realities of the post-War market, banks claimed legitimacy as profit-driven actors best suited to support economic activity.

The banked system split farmers back into families at odds under humiliating conditions; race now offered an inviting category for resentment. The notion that black banks should operate autonomously further carved up the territory that the populists had tried to unify. The business model of banking depended on profits that came with enterprises able to transact widely, a clientele unrestricted by segregation, and collateral in the form of housing that would rise in value rather than suffer redlining. These were precisely the conditions denied to black communities, and in turn to black banks. In a final tragedy, the modern machinery of money creation presented itself as a private industry, neutral in its effects, even as it systemically short-changed black Americans. As the agrarian populists saw, money design could invite Americans to inclusive development. Instead, our monetary design decisions undermined productive relationships across race.