Monetary economics is not one homogenous bulk of theory. There are different schools of thought that battle over the question of what money is and what sort of role it plays in our economy and society.
Since its creation, money has always been the subject of intellectual discourse. Thus, it was ancient philosophers, then the ecclesiastical scholars of the Middle Ages, and finally the moral philosophers of the Enlightenment who thought about money. Finally, in the course of the 19th century, economics, like many other disciplines, became a science in its own right and was no longer part of moral philosophy. Discussions about money thus shifted to this new field of economics.
In general, the social sciences (to which economics originally belonged) sought to break away from the all-encompassing approach of philosophy. Instead, they moved closer to the methods of the natural sciences, based on observable evidence and testing of hypotheses in the search for so-called objectivity.
This change finally led to positivism. Its claim was and still is to be as value-free as possible in its analyses and interpretations by not referring in any way to metaphysical or ethical considerations. Skeptics of this approach like to speak of penis envy, which the social sciences did develop towards the natural sciences in the course of the 19th century and could never get rid of until today.
In monetary theory, there are two broad categories into which someone thinking about the nature of money can be placed: On one side consists of catallactic thinkers, and on the other is filled with acatallatic or chartalist thinkers. The main point of contention between the two camps is whether to see money as an institution that developed naturally and emergently within society, or whether money was created by the state. Chartalists go for the latter, while catallactic thinkers go for the former. Ultimately, every school of thought within monetary theory can be traced back to these two different assumptions about the character of money. We will take a closer look at the most prominent of these schools of thought below.
Representatives of this view see money as a state construct. Thus, they argue, it is ultimately the legal act of the state that creates money, namely by enacting and thus commanding the payment of taxes in its corresponding money. It also follows from this line of reasoning that the monopoly on money must naturally fall within the power of the state. While this theory originated from the thoughts and considerations of Chartalists, the so-called Neochartalists supplemented it with an important component. It was, among others, the economist Hyman Minsky who emphatically pointed out that money today was also created by the demand for credit. Thus, banks, as well as other financial institutions, would be able to create money surrogates that would have considerable moneyness. However, the fact that these instruments were money-like would ultimately be due to the fact that government debt today is considered a liquid asset that would have to be repaid through taxes. The government debt, i.e. the tax, thus turns all sorts of liablities into money.
This branch might be seen in some sense as a subcategory of the state theory of money. For here, too, it is assumed that the origins of money are to be found in structures of domination, in so-called central economies of the early hydraulic societies in the Middle East. Prominent with this theory, however, is the conviction that money must be merely a social construct. In this context, money is often spoken of as a shared illusion or as a mutual hallucination. In this sense, it is also possible that subordinate forms of money can exist without the state monopoly on money.
According to this theory, money can only arise in societies that have the institution of private property. Only in this way can a credit contract, and thus money, come into being if the collateralization can be ensured by property. This theory touches on the sociological theory of money in that money also represents a special social relationship. It is also close to the state theory of money, especially since the state can also secure access of real value at any time through its monopoly on the use of force and can thus monetize the liabilities it issues through the power of taxation. For the property theory, however, it is indispensable that this link to taxation always holds, which is why a radical view as advocated by proponents of Modern Monetary Theory (MMT), according to which the state can simply create money out of nothing, can only be rejected.
While most of the other theories ultimately always have a connection to the state theory of money, the market theory of money is its actual counterpart. According to the state theory, money is based on credit money or even token money character. The latter in particular means that money needs not to be backed by anything at all, a view held by the most radical adherents (MMTers) on the side of the state theory of money. Proponents of the market theory of money focus attention on real money, meaning money that is somehow anchored in the real world. According to this theory, money arose from the barter economy among strangers and simply serves to convey value anonymously. Money is an independent carrier of value and therefore does not need any relationships, not even a credit relationship. Its most prominent representatives are those of the Austrian School of National Economics.
Keynesian economics is one of the best-known schools of thought within economics today. Although some statements can be made about money from a Keynesian perspective, there is no actual Keynesian theory of money. For Keynes, money was primarily an instrument that the state should use to stimulate the economy during periods of depression. A tool, in other words, to play the keyboard of economic activity. In doing so, according to Keynes, the state should pursue the following: an increase in the supply of credit money, the lowering of interest rates and governmental investment in infrastructure. However, since expanding consumption and investment through borrowed money would raise interest rates and effectively crowd out other intended investment and spending, Keynes thought it more effective to finance investment and spending through the creation of new money.
Monetarism, in particular its probably most famous representative Milton Friedman, is often referred to as the counter-theory to Keynesianism. In fact, however, monetarism has taken fundamental beliefs from Keynes and combined them into a neoclassical synthesis. In neoclassical economics, the validity of formal models is to be evaluated by the results of their predictions rather than by their adequate representation of reality. The models assume a closed economy in which competitive equilibrium prevails and perfect knowledge is available to all agents. Money is an arbitrary unit of account, but can actually be dispensed with in the model. According to the neoclassical quantity theory of money, the main thing to control is inflation, since the latter is always and everywhere a monetary phenomenon. Monetary policy is responsible for controlling liquidity in the economy, mainly through the use of the policy rate, in order to fulfill the mandate for price stability.
Marx's views on money are interesting and difficult to pin down. Thus, it can be seen from his writings that he interpreted money as commodity money (gold). There is also evidence that Marx rejected the state theory of money. Thus, he himself wrote that gold and silver were accepted by law only because they were generally accepted in principle. And in reality, he said, they were in turn generally accepted because the present organization of industry and production requires a universal medium of exchange. For Marx, then, money seems to have developed organically. Of course, he differs from the free-market theory of money in that his deterministic-historical view of the world and the conviction that being defines consciousness makes him see money as the spawn of a capitalist order in which the state also has its role.
Today, the various schools of thought on money are interpreted and held more ideologically than ever before. In many cases, the respective representatives inflate their own school of thought to the sole truth. None of the schools of thought however has a total picture of reality and thus truth, but focuses merely on a partial range of it. Today's challenge lies in identifying the true parts of each school of thought and then combining them in the best way possible to get to the big picture, in order to get as close as possible to the actual reality and truth. Only those who remain open to all schools of thought and constantly revise their own thinking in analyses and synthesis should ultimately come closer to the actual goal of discovering what the essence of money really is.