Title: The Rise of the Money Market
Description: This dissertation traces the commodification of money in the U.S. after World War II. In 1945, all money was issued either directly by the government or, under conditions determined by the government, by commercial banks. Today, forms of money that are issued by private firms without government backing make up the majority of all money claims, and a significant part of the U.S. payment system is operated by a private organization. These forms of money were essentially in existence by 1980; hence this dissertation focuses on their emergence between the late 1940s and the late 1970s. The new forms of money emerged outside public purview. In part, this was the result of their wholesale character: they were used not by the many households and small businesses that each made modest payments but by the few large organizations that moved vast sums around. But it was also the result of a fundamental choice made by these large organizations. They created new forms of money not by trying to change public laws but by evading them, through private contract and private law.

While public discourse and democratic decision-making played virtually no role in the process, the state as an issuer of financial instruments did. Central bank deposits and government securities formed the basis on top of which private actors built crucial parts of the new forms of money. Creating a new form of money is difficult because its creators need to achieve two potentially contradictory goals. To get private actors to join the market, the creators need to convince them that the products traded are equivalent to money. To keep public actors from shutting down the market, the creators have to convince them that the products traded are not money (otherwise, the creators would be involved in counterfeiting). The former goal, I will argue against non-sociological explanations, cannot be achieved only by discovering an opportunity for arbitrage, exploiting a legal loophole, or making use of technological change. As important as these cognitive innovations are, the creators of a new form of money also need to be able to mobilize preexisting social relationships, so that the necessary transaction volume to render a financial instrument a form of money is achieved.

The latter goal—keeping the state from shutting down the new form of money—was particularly hard to achieve in the postwar U.S. with its policy monopoly over money exercised by the Federal Reserve, a knowledgeable and powerful institution. I will argue that private actors found it possible to create a new form of money when the Federal Reserve saw the innovation only secondarily as concerned with money and primarily as furthering one of its other goals, in particular the financing of the U.S. government and the functioning of the banking system. Drawing on new archival data, this dissertation traces the eventful process through which the creators of private money navigated the two conflicting imperatives. Chapters 2–4 investigate new forms of money as a store of value. Chapter 2 describes how securities firms and corporate treasurers created a pioneering money market—the one in repurchase agreements—and how the major commercial banks reacted by calling for a restoration of the old monetary system.

Chapter 3 shows that, when this call went unheeded by the Federal Reserve, the commercial banks themselves began to create new money markets, with effects that percolated through the entire financial system and led participants to reassess their roles and the norms that guided their interactions. Chapter 4 explains the management of the first major crisis of the money market, in 1974, as a silent triumph of the commercial banks over the Federal Reserve—in a moment of weakness, the money market became entrenched. Chapter 5 turns to money as a means of payment. It shows that, in contrast to the decentralized emergence of the money market, major commercial banks in the late 1960s built a new payment system through coordinated action and, in the crisis of 1974, took tremendous risks to stabilize that new form of money.