Evolution of currency forms examined through political economics lens

Source:Chinese Social Sciences Today 2023-05-16


A resident purchases snacks and drinks by scanning QR codes on a self-driving car in Sanya City, Hainan Province. Photo: CFP

In the digital era, non-cash payments, particularly via mobile devices, have developed rapidly and penetrated into all facets of daily life — from household consumption to family finances and microfinance. As third-party payments break the long-standing dominance of cash, a “cashless society” is looming near. Faced with this reality, this article seeks to analyze the evolution of monetary forms from the perspective of political economics to clarify digital currency’s development trend, and the future direction of currency.

Emergence of cash

As a special form of currency, the generation and development of cash cannot be separated from an analysis of the origin and morphological evolution of money. Money is the expression of something abstract in a concrete form, an objectification of general labor time. This concept has been reflected using different material forms through different social stages. Since labor provides the value of money, but labor itself is invisible and has no material form, contradictions inherent in money’s abstract relationship to labor will become increasingly disruptive as the social economy continues to develop. Eventually, money will break through the constraints of its material form. The evolution of currency forms, over thousands of years, is a concrete manifestation of this process.

The evolution of monetary forms can be roughly divided into three stages: commodity money, metal money, and credit money. In these different stages, monetary forms can be subdivided into primitive money, metal coinage, inferior coinage, paper money, bank notes, electronic money, and other forms. 

In the initial stages, commodity money and metal money were produced in low levels, and money in its physical form accurately reflected the total value of goods in circulation within a society. Gold’s supply capacity, and other physical currencies, were governed by specific production conditions. Improvements in productivity increased the supply of gold. However, physical objects such as gold remained in circulation, while other commodities were consumed. Also, limited gold reserves could not adapt to the rapid development of the commodity economy, and physical money could not reflect the total value of social commodities under higher productivity levels, which moved the economy into a state of contraction.

In order to avoid this economic contraction, the credit system and credit money took shape under capitalism. The concept of “cash” was created in the dual structure of a “central bank/commercial bank” under the modern credit system. In fact, before the establishment of the credit system, commodity money, metal money, and other forms of currencies could be regarded as cash, whereas after that, cash was considered to be a special form of money independent from credit money. The creation of cash was based on the emergence of the credit system. People’s interest in circulating cash also changed gradually with the development, and perfection of, the credit system. The use of cash in the future will depend on development trends for “credit” money. 

Credit money

As a product of the credit system, development trends for cash can only be clarified within the logical framework of the credit system. In the early stages of the credit system’s establishment, credit money was mainly represented by convertible credit currencies such as bank notes. With the large scale expansion of credit currencies, risk problems began to appear, such as drastic fluctuations in the quantity of bank note issuance, prevalent currency speculation, and bank runs. In order to solve the above problems, the government established a monetary authority system to gradually monopolize the distribution of convertible currency, so that the legal tender was issued by the central bank, endorsed by the national credit system, and was not redeemable for precious metals. This form of currency has generally been accepted by all governments. After this shift, central banks began retaining fiat money in specific accounts within commercial banks, establishing reserve deposits in commercial banks to supplement the assets on their balance sheets. Therefore, bank reserves become the claim commercial banks held on the legal tender issued by central banks, and commercial banks created credit money for circulation on this basis.

Under the reserve system, the mechanism for creating credit money in commercial banks is restricted by the central bank, and the cash reserve is the main method of restriction, which will not only bring nominal income to commercial banks, but also affect the number of loans issued by commercial banks, further reducing profits. As a type of special asset, cash doesn’t add any interest income to bank capital, because it does not contribute to the surplus value distribution process. However, as a restrictive factor for credit loans, reserves in the form of cash can curb the reckless expansion of credit money. 

According to Marx’s analysis, credit money arises directly from money’s function as a medium of exchange. Yet, the act of payment changes traditional commodity money’s circulation pattern and replaces it with a monetary capital circulation form, which circulates for the purpose of creating more money. Capital occurs when money is put into circulation to create more money. Due to the connection between credit money and capital, the social production of credit money has been created by commercial banks and other private sector actors. Therefore, reserves in the form of cash will interfere with capitalists’ ability to claim surplus value by influencing money creation channels. In this case, capitalists of all kinds are bound to unite to create more credit money through “financial innovation” to offset the restrictive effects of cash reserves.

The post-Keynesian view holds that the credit money, created in the short term by commercial banks, will not be substantially affected by the reserve. But bank loans, and thus credit money, are jointly determined by demand for private credit and bank loans. Such demand does not arise out of thin air, rather it is formed under the long-term reserve system. To break the constraints the contemporary credit system holds on capital accumulation, financial capitalists have developed non-traditional financial industries such as financial intermediaries, shadow banking, and third-party payment, and have created more credit money by bypassing the restriction of bank balance sheets and reserve systems. 

Meanwhile, as internet finance is booming, the convenience of mobile payment transactions has become the loudest advocate for capitalists who seek to suppress cash payment and promote non-cash payment. This payment method can not only help financial capitalists bypass the restriction of reserves, accelerate capital accumulation, and obtain surplus value, but also allows them to take advantage of regulatory loopholes and engage in regulatory arbitrage. This financial plunder creates a considerable amount of wealth. Therefore, “de-cashing” is not only a natural phenomenon in the evolution of monetary forms, but also a social phenomenon produced by commercial banks and other financial institutions to create more credit money and expand capital accumulation.

De-cashing trend

Despite the rapid pace of de-cashing and the declining share of cash in total payments, headwinds remain strong. It is generally believed that the imbalanced network infrastructure, security risks of mobile payments, consumer payment preferences, and the aging population will reshape the value of cash, slowing the trend of de-cashing.

However, since de-cashing occurs as capital breaks away from modern credit constraints, cash gains strength as this breakthrough process faces more problems. In fact, the modern credit system is riddled with defects. The dual structure of “central/commercial banks” means that credit money is created by commercial banks but restricted by central banks. Forced competition and financial capitalists’ desire for more monetary power make the credit money system disjointed. It is no longer a reflection of the total value of social commodities, but an effective tool for capitalists to pursue exchange value. Monetary instability tends to lead to inflation, and possibly to economic crisis, which in turn reduces the exchange value pursued by capitalists. The modern credit system can, to some extent, guarantee the stability of a high grade currency against a low grade currency, such as currency issued by central banks versus commercial banks, or the World Bank or IMF against a central bank. If the top of the system is still a sovereign currency, built on the basis of a modern credit currency, then the problem circles back to where it first started. Therefore, in the contradictory unity offered by capital accumulation and monetary stability, the current credit system cannot maintain its balance for long. If the system moves further away from cash it will further disrupt the original balance, thus, generating resistance against credit prevents crisis. 

In fact, as digital technology develops it has provided technical support to address the contradictions of our current credit and monetary system. For example, point-to-point transactions using blockchain technology can narrow the distance between people and the central bank and reduce dependence on commercial banks, thus strengthening the central bank’s control over commercial banks and maintaining currency stability. Also, adjusting production plans and optimizing transaction modes through big data accelerates the expansion of socialized production.

With the development of a legal digital currency, non-cash payments will become an inevitability, but as long as the dual structure of a “central bank/commercial bank” is still in place, cash issued as a regulatory currency will not disappear. Therefore, the current “cashless” phenomenon in China does not translate into a cashless society but is a concrete manifestation of the “cashless” process, in which the current credit system breaks through its own defects and transforms to a digital monetary system. The future digital credit system has still not been formed. When social productivity is developed enough to replace the traditional dual structure, the central bank can directly complete peer-to-peer transactions between people through its own digital accounts, without going through commercial banks. At that time, we can truly usher in a cashless society. 


Huang Zeqing is from the School of Marxism Studies at Renmin University of China; Zhang Chenxi is from the Chinese Academy of International Trade and Economic Cooperation.

Editor:Yu Hui

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