Shadow Money in the History of Monetary Thought

ABSTRACTFollowing the 2007–9 Global Financial Crisis, scholars have conceptualized the credit instruments that lay at its center as ‘shadow money’. As this perspective seems to contradict many established monetary theories, we situate the shadow money concept in the history of monetary thought and clarify the assumptions under which it is meaningful. First, the shadow money concept stems from a market-based credit theory of money which rejects notions that money is primarily chosen by the state and that credit is logically subordinate to money. We explain the associated implications by mobilizing the ‘Matrix of Monetary Thought’ as an analytical tool. Second, the shadow money concept transcends the orthodox three-functions-theory of money because it prioritizes the unit-of-account function as the basis to operate payment systems. This is a theoretical position that stands in the tradition of Henry Thornton. Third, the shadow money concept assumes an inherent hierarchy within monetary systems with a spectrum of monetary forms at the edge of which definitions of moneyness get blurry. The defining feature for credit money is the existence of a par relationship with the ex ante defined unit of account. We conclude that conceptually ambiguous shadow money forms have existed across multiple historical eras.KEYWORDS: Credit theoryhierarchyfunctions of moneyGlobal Financial Crisisfinancial innovationJEL CODES: B20E40E44E50 AcknowledgementsWe would like to use this opportunity to acknowledge and thank the reviewers who reviewed this article and aided in its publication.Disclosure StatementNo potential conflict of interest was reported by the author(s).Additional informationFundingSteffen Murau acknowledges financial support by the German Research Foundation (DFG) through grant 415922179 and 499921148.