David Bieri

Taubman College of Architecture and Urban Planning, University of Michigan

Political Space Economy Lab, Ann Arbor, MI

ICOS Lecture – October 2014

Urban questions

• Why do cities exist?

• Why do cities vary in size?

• Why do competing firms cluster?

• What causes urban growth and decline?

• Who benefits from urban growth?

Does money matter for cities?

Urban questions

• Conventional approaches in urban economics,

economic geography do not consider role of

monetary-financial system in process of urbanization.

• Focus of this talk:

How the “spatial non-neutrality of money” shapes the

American metropolis

Historical process of U.S. urbanization driven by changing

tension between “money interest” and “the public interest”

Develop a spatial theory of financial instability (cf. Lösch

1940, Minsky 1992, and Mehrling 1997)

Urban hierarchy: Stylized facts

Urban hierarchy: Stylized facts

Urban hierarchy: Stylized facts

Source: Kim (2007)

Urban hierarchy: Stylized facts

Urban hierarchy: Stylized facts

Source: Abel and Deitz (2010)

Urban hierarchy: Stylized facts

• Geography (still) matters: Christaller’s central places

– Continued importance of “portage cities” in the United States

– Industries are geographically concentrated

– Concentration is too great to be explained by exogenous spatial

differences in natural advantage

• Cities are neither completely specialized nor completely

diverse (specialisation, concentration and diversity)

• Large cities produce more output per capita than small cities

• Urban evolutions: The urban hierarchy is “restless”

– Innovation-driven shocks drive churning of industries across cities.

– Cities grow or decline following net gains or losses of industries.

– Changes occur within a stable distribution (“Zipf’s Law”)

“A Unified Theory of Urban Living” (Bettencourt and West, 2010)

“It’s Time for an Urbanization Science” (Solecki, Seto and Marcotullio, 2013)

• Panoply of research on cities has failed to focus

on process of urbanization and its intersection

with other (environmental) systems

• Contemporary urban studies are unlikely to

deliver the information and knowledge required

• “Urbanization Science” needs to – Define components of urbanization across time, space, and place

– Identify the universal laws of city-building

– Link system of urbanization with other fundamental processes that

occur in the world

On theory and vision

“[…] we should have a view that in a sense is prescientific of what the game is

about, about the way the beast functions, about the way the various parts of

economics and social science are related and, yes, about our own maps of

Utopia.

Once we have a vision, then our control of theory, our command of institutional

detail, and our knowledge of history are to be marshaled to support the vision –

Schumpeter’s methodology of vision and theory, with theory a servant of vision,

may seem cynical, but, in truth, it is honest. It is a way of systematizing thought

so that dialogue could take place.

The division between vision and technique leads to a recognition that we are

marshaling evidence when we do theory, when we analyze data, and when we

read history. Schumpeter’s methodology undercuts much of the pretentious

nonsense about economics as a science and elevates the importance of

discourse, of dialogue, and of just plain good talk for a serious study of society.”

– Hyman Minsky (“Taking Schumpeter’s Methodology Seriously”, 1992)

Source: Thomson Reuters

http://sciencewatch.com/nobel/2014-predictions/economics-laureates

Predictions for 2014

Nobel Prize in

Economics: We’re all

Schumpeterians now …

but with “monetary

amnesia”!

How economists forgot

Schumpeter’s monetary

theory … (see below)

Outline

1. Money and the city: Ideas, institutions and events

2. Detroit’s place in U.S. monetary history

3. A tale of two hierarchies (hierarchy of cities,

hierarchy of money)

4. Rethinking the geography of money

Key hypotheses

1. The evolution of the urban spatial structure is the joint result

of the historical urbanization of capital (urban hierarchy) and

recurring financial instability (monetary hierarchy),

alternatingly emanating from the real sector or the financial

sector.

2. These interrelated processes govern spatial risk distribution,

financial regulation and government intervention, leading to

financial innovation, opening up new financial frontiers.

3. In turn, this creates alternative avenues for the (sub)-

urbanization of capital, giving rise to new dynamics for the

evolution of urban form.

Money and the city:

Ideas, institutions and

events

Money and the city

“The metropolis has always been the seat of the money economy.”

– Georg Simmel (Die Philosophie des Geldes, 1930)

“Space is a social morphology: it is to lived experience what form itself is to the

living organism, and just as intimately bound up with function and structure …

what we are concerned with, then, is the long history of space, even though

space is neither a ‘subject’ or an ‘object’ but rather a social reality – that is to say,

a set of relations and forms.”

– Henri Lefebvre (La Production de l'Espace, 2002)

“Capitalism is essentially a financial system, and the peculiar behavioral attributes

of a capitalist economy center around the impact of finance upon system

behavior."

– Hyman Minsky (Issues in Banking and Monetary Analysis,1967)

Ideas, institutions and events

Two important ideas unified: The idea of modern money and finance and the

Jeffersonian ideal of the spatial arrangement of the metropolis.

Money matters: Theories

Economic paradigm Origins of

economic cycles

Real-monetary

sector

relationship

Nature of crises Spatial

consequences

Classics Real sector Neutral Resources Not considered

Marxism (Lefebvre, Harvey) Real sector Non-neutral Over-

accumulation Urbanization

(Post) Keynesianism Both sectors Non-neutral Financial

instability Not considered

Monetarism Monetary sector (Super)neutral Inflation Not considered

“New” urban economics, new

economic geography Real sector Neutral None Agglomeration

Money matters: Stocks and flows

“Capital represents itself in the form of a physical landscape

created in its own image, created as use values to enhance

the progressive accumulation of capital.”

– Harvey (1978): “The Urban Process under Capitalism: A Framework for Analysis,”

International Journal of Urban and Regional Research, 2(4): 100—131.

“To analyze how financial commitments affect the economy it

is necessary to look at economic units in terms of their cash

flows. The cash flow approach looks at all units – be they

households, corporations, state and municipal governments,

or even national governments – as if they were banks.”

– Minsky (2008): Stabilizing and Unstable Economy, New York: McGraw-Hill, p 221.

PK Institutionalism and MMT

Joseph A. Schumpeter

(1883–1950)

John M. Keynes

(1883–1946)

August Lösch

(1906–1945)

Hyman P. Minsky

(1919 –1996)

John R. Commons

(1862–1945)

Morris A. Copeland

(1896–1989)

Wesley C. Mitchell

(1874–1948)

Post Keynesian Institutionalism:

“Spatial Non-Neutrality of Money” “Flow of funds”

“Financial instability” “Spatial price waves,

hierarchy of money”

Edgar M. Hoover, Jr.

(1907–?) Walter Isard

(1919–2010)

Alvin H. Hansen

(1887– 1975)

Wassily W. Leontief

(1906– 1999)

Harvard, early 1950s

Kiel Institut für

Weltwirtschaft,

late 1920s

U. Michigan,

1930s

Schumpeter’s monetary theory

• Long gestation period with many trials and misadventures

– Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (1908), attempts to overcome fissures of the “Methodenstreit”

– Das Wesen des Geldes (1970)

• Standard approaches to monetary theory are missing:

– Determinants of money demand, money supply

– Money and real sector interaction, monetary policy

• Walrasian GE beginnings abandoned, later emphasis on

“institution of money”:

– Sociology of money, institutions for social accounting, Money creation

by banks

– Nature of money, theory of price level, theory of money process and

functions of the money market

Schumpeter’s monetary theory

“Event today, textbooks on Money, Currency and Banking are

more likely than not to begin with an analysis of a state of

things in which legal tender “money” is the only means of

paying and lending ... it may be more useful […] to look upon

capitalist finance as a clearings system that cancels claims and

debts and carries forward the differences – so that “money”

payments come in only as a special case without any

particularly fundamental importance.

In other words: practically and analytically, a credit theory of

money is possibly preferable to a monetary theory of credit.”

– Schumpeter (1954, p.717)

“Sunspots” – Circuit of capital

Sources: Jevons (1884); Wagemann (1930); Diamond and Dybvig (1983); Kiyotaki and Moore (1997)

Ideas, institutions and events

Ideas, institutions and events

Source: Bieri (2014)

Detroit’s place in U.S.

monetary history

(1805 – present)

The fluttering veil

“It is well that the people of the nation do not understand our banking and

monetary system, for if they did, I believe there would be a revolution by

tomorrow morning.”

Henry Ford (1922)

Detroit in U.S. monetary-financial history

• Stereotype of land-capital dynamics: Detroit’s rise and fall are

largely driven by successive stages of monetary-financial

evolution that enabled speculative real estate development.

• Prototype of financial instability: Institutional origins of

financial instability and banking-led crises in Michigan begin

in 1830s (Free Banking). Detroit is at the epicenter of 1933

banking crisis; municipal bankruptcy precedent in 2013.

• Archetype of frontier finance; As the financial frontier moves

across time and space, different “zones of exclusion” emerge

(mortgage speculation, large scale vacancies, financial

illiteracy, underbanked sections of the population).

Form follows finance

Source: Bunge’s “Fitzgerald: Detroit Geographical Expedition and Institute” (1971)

“Frontier Finance”: 1805–1815

• After great fire of 1805, the Bank of Detroit begins, without

any congressional authorisation.

• Gov. Hull and Woodward leave for Washington in 1805 to

meet with Congress to craft the legislation to incorporate the

City, and authorise the Woodward Plan and banking.

• Bank of Detroit is a true pioneer and has no competitor west

of the Alleghenies.

• Paper currency swindle leads to closing of several Detroit

banks. Law passed that prohibited unauthorized banking.

• First Bank of the United States’ charter expires in 1811. End

of first era of centralised frontier finance.

“Frontier Finance”: 1816–1845

• Reorganisation of Northwest Territory opens up the western

frontier to development ($1.5/acre)

– Huge influx of population and land speculation. Capital shortage.

– Michigan is deemed to become the wealthiest state in the Union.

• Bank of Michigan chartered in 1817 with primarily east coast

Whig money and General Lewis Cass. Michigan State Bank

founded in 1835 by John R. Williams with the help of Albany

capitalists.

• Second Bank of the United States is chartered from 1816 to

1836. End of second episode of central banking

• Michigan pioneers free banking legislation in 1837, banks

jumps dramatically. Other states follow and adopt “Free

Banking Acts”

“Frontier Finance”: 1933

• The deepest banking crisis of the Great Depression touched

off by failure of two Detroit banks in early 1933 (Guardian

National Bank of Commerce and the First National Bank in

Detroit among five largest national bank casualties).

• Henry Ford threatens to pull funds out of Michigan banks;

Bank holiday in Michigan to prevent bank run, followed by

national bank holiday shortly thereafter (Emergency Banking

Act of 1933).

• Reconstruction Finance Corporation and Alfred Sloan (GM)

create the National Bank of Detroit. Federal funding and

assumed assets of the two failed Detroit banks (First National

Bank of Detroit and the Guardian National Bank of

Commerce)

“Frontier Finance”: 2000–date

• With Wall Street’s help, Detroit under the Kilpatrick

Administration borrows $1.44 billion to restructure pension

fund debt. ($2.8 billion over the next 22 years; represents

nearly one-fifth of the city’s debt)

• Kresge Foundation and other industrio-philantropic interests

emerge as key players in pre-crash Detroit real estate

market, looking to invest in Downtown (waterfront) and

Midtown areas, the City puts out a plan to shrink the city.

• Dan Gilbert’s Quicken Loan emerges as one of the largest

nondepository mortgage credit intermediaries of the Great

Housing Boom, with large presence in the US subprime

markets.

“Frontier Finance”: 2000–date

• Real estate crash and new urban renewal

– Kresges pull funding from smaller projects and invest in Detroit Future

City Plan.

– Gilbert emerges the new “Charles Trowbridge (1800-1883)”, a key

frontier financier, and with a visionary financial commitment to

downtown and Midtown

• Financialisation, bankruptcy and post-crisis rebirth

– One of the country’s largest-ever urban farming projects gets green

light from Detroit and state officials. (Hantz Farms, 140 acres of land

on Detroit’s east side, owned by Hantz Group, primarily a financial

services company)

– Developers propose to buy Belle Isle

Regional flow of funds

Source: Isard (1960)

Form follows finance

“Frontier Finance”

• Three interrelated themes emerge:

– Co-movement of capital flows and changes in the urban functional

hierarchy

– Socio-spatial evolution of the frontier concept

– Michigan’s “money men” and Detroit’s “cathedrals of finance”

“Frontier Finance”

• Three interrelated themes emerge:

– Co-movement of capital flows and changes in the urban functional

hierarchy

– Socio-spatial evolution of the frontier concept

– Michigan’s “money men” and Detroit’s “cathedrals of finance”

Form follows finance

• The rearticulating land-capital

nexus is instrumental to history of

urban and financial development:

– Co-movement of capital flows

and changes in the urban

functional hierarchy

– Inextricable linkage between

the process of securitization

and urban sprawl

– Flow of mortgage credit, land-

use change and the

morphological transformation

over the cycle of the Housing

Boom and Housing Bust

“Money interest” vs. “Public interest”

Detroit is at the epicenter of cyclical instability driven by the

spatio-temporal evolution of the U.S. monetary-financial system

and its urban hierarchy.

– “Proto-Central Banking” (1795 – 1815)

– “The Great Banking Experiment” (1816 – 1845)

– “The Great Banking Crash” (1933)

– “The Securitisation Bubble” (2000– ) and the post-crisis normal

Central tension between “money interest” and “public

interest” as a key theme for the last two centuries of

Detroit’s economic history

A tale of two hierarchies:

The hierarchy of cities

and hierarchy of money

A tale of two hierarchies

• Hierarchy of cities: Cities as “organisations”, positioned

within a spatial order of economic production.

• Hierarchy of money: All money is credit money and credit is

always and everywhere fundamentally hierarchical in nature.

Credit allocation as a core function of modern states.

Historical interaction between urban and monetary hierarchy

matters for distribution and evolution of economic activity

across space.

The trajectory of spatial development and the advancement

of the monetary-financial system is a joint historical process

A tale of two hierarchies

• Hierarchy of cities: Cities as “organisations” within a spatial

order of economic production

– Diversity in size and scope from differences in scale economies

relative to per-capita demand.

– Small number of large cities and large number of small cities

– Place in hierarchy is changing over time, depending on relative

specialisation

A tale of two hierarchies

• Hierarchy of money: All money is credit money and credit is

always and everywhere fundamentally hierarchical in nature

– The modern monetary-financial system (MFS) is hierarchical in finance

and in power (“taxes drive money”, “lender/dealer of last resort”).

– MFS is a hybrid where public liabilities (“outside money”, a net asset

to the private sector) and private liabilities (“inside money”)

– Spatial relationship between financial variables and institutional

functions matters for urban development (e.g. interest rates or credit

intermediation)

– Hierarchy of money shifts across economic cycle through three

phases (hedge finance, speculative finance and Ponzi schemes)

– Money and credit fluctuate between states of discipline and states of

elasticity (cf. Mehrling 2012).

A tale of two hierarchies

• Hierarchy of money:

• Hierarchy of balance sheets:

Money Gold

Currency

Deposits

Credit Securities

Central Bank Banking System Private Sector

Assets Liabilities Assets Liabilities Assets Liabilities

Gold Currency Curreny Deposits Deposits Securities

Securities

Urban hierarchy: The laws of motion

• Path dependency vs. standard narrative

• Higher productivity occurs because

– large cities disproportionately attract both high- and lows-skilled

(“extreme-skill complementarity” of spatial sorting),

– large cities select more productive entrepreneurs and firms

– agglomeration economies (sunk cost, IRS)

• Urban efficiencies (“contrasts in agglomeration”) depend on

– Numbers (such as city or industry size),

– Nature of urban interactions (“The whys and wherefores of urban

diversification” Chinitz 1961; Jacobs 1969)

Urban hierarchy: The laws of motion

• Agglomeration economies differ in important ways

– localization economies attenuate rapidly across space

– industrial organization affects the benefits of agglomeration

• The microeconomic determinants of agglomeration

– 3 Marshallian transportation costs: “goods, people, ideas”

– Input-output linkages (input sharing, product shipping costs)

– Labor market pooling

– Knowledge spillovers

– Natural advantage (“first geography” vs. “second geography”)

• “Coagglomeration” matters

– General tendency of various industries to locate together,

– Clusters …

Monetary hierarchy: Theories

• Two main approaches to monetary theory

• Money as a medium of exchange, unit of account and store

of value

– Money is a numéraire good, arising from portfolio preferences,

intermediation technologies and high-powered government money

– Monetary sector forms “veil” behind which “real economy” operates

• Money as a form of credit (“credit theory of money”)

– Promise to pay income at some future point.

– Debt claims to assured income flows provide liquidity which can be

bought or sold)

– Taxes-drive money view

Monetary hierarchy: Mechanics

• Business cycles across different economic paradigms:

– Marxian: M – C – M’

– Keynesian: Y = C + I + G + (X-M)

– Monetarist: PY = MV (Quantity Theory)

– Flow of funds: sources of funds = uses of funds (endogenous

money)

• Re-theorising money and finance within economic

geography

– Taking history and institutions seriously

– Theorizing spatial aspects of the monetary-financial system

Money matters

“[M]oney plays a part of its own and affects motives and decisions and is,

in short, one of the operative factors in the situation, so that the course of

events cannot be predicted, either in the long period or in the short,

without a knowledge of the behaviour of money between the first state and

the last.” – Keynes (1933, p.123)

“The essential problem is whether any macroeconomic theory that is

constructed upon a set of assumptions from which the proposition that

money and finance are neutral is derived can be a serious guide to

understanding our economy and to the development of policies for our

economy.” – Minsky (1993, p.77)

Money matters

“The supposed relationship between [economic quantities]

falls down because the variables are not constituted or linked

in a mechanistic way. It would be better to conceive of the

financial system not as a machine but as an organism, which

includes automatic reflexes, processes of substitution and

immune systems which frustrate intervention and control.

Just as in the human body, successful remedial action is

possible, but it is more complex and difficult than a

mechanistic theory would suggest.”

Hodgson, G. (1993): “The Economy as an Organism — Not a Machine,” Futures, 25(3):

392—403.

Rethinking the

geography of money

Treatment of money in regional analysis

• Mainstream urban and regional economics is fully

“neoclassical” (including NEG or “geographical economics”)

• Economic geography is steeped Marxian political economy

(largely without M–C–M’ or MELT)

• A case of “Hamlet without the Prince”? Mostly, but there are

important exceptions:

– Regional differentials in the cost of credit (Lösch, 1954)

– Keynesian theory of regional financial markets (Dow, 1986)

– A Post Keynesian perspective on the relation between banking and

regional development (Chick and Dow, 1988)

Treatment of money in regional analysis

Employment,

earnings

Urban labour market

Cost-of-living

Real estate, housing

market

Amenities

Geography,

environment, local

public goods,

infrastructure, culture

Regional

employment share

Migration, job creation,

firm formation

relative rents relative wages

expenditure

real income

Monetary sector

Money supply, credit

intermediation, liquidity

preference, interest

rates, exchange rates

Inflation price level of labour and current output

Interest rates

price level of capital

assets

Circular flows: Regional perspectives

Source: Kircher (1962)

A tale of two hierarchies

Source: Kircher (1962)

Geographies of money

• Little “monetary content” of contemporary economic

geography, despite active research on financialisation

• Marxian and other classical approaches focus on

accumulation (“Hamlet without the prince”)

– Spatial re-switching of capital (Harvey’s “spatial fix”)

– Sheppard and Barnes’ (1990) The Capitalist Space Economy:

Geographical Analysis after Ricardo, Marx and Sraffa

• Re-theorise “real-financial linkages” by spatialising the Post

Keynesian approach to monetary theory

– Circular cumulative (spatial) causation and financial instability, not

accumulation (Kalecki & Kaldor meet Minsky)

– Inherent hierarchy of money matters for the hierarchy of spatial

development (Knapp & Hawtrey meet Lösch)

Towards a spatial “money view”?

• Spatialisation of the hierarchies of money:

– Gold, currency, deposits and securities

– Balance sheets, market makers: Central bank, banks (small and

big), dealers and money funds

– Prices: Exchange rate, par, interest rate

• Spatial hierarchy of money is dynamic across the

economic cycle, expanding and contracting in quality and

quantity (cf. Mehrling 2011, 2012)

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