Thursday, December 31, 2009

some notes about money

1. I want to start with the conventional theory of money. Actually, the use of words like "orthodox" and "conventional" in relation to economic theory is misleading, as Maurice Dobb demonstrates in his classic Theories of Value, the orthodox economic theory at any point in time is whatever is politically efficacious, hence the history of the orthodox theory is a zig-zag between bad ideas that are politically expedient at a particular moment, to shore up an unpopular existing policy; and this is right up to the present day. Anyway, the conventional theory of money has "narrow money": cash in circulation plus central bank liabilities, serving as a basis for "broad money": bank credits. The supply of "narrow money" is thought to be fixed at any particular time, as is the commercial banks' reserve ratio (by custom or law). Consequently "broad money" ought to be fixed. According to this way of looking at the problem of money, money would be "exogenous", a fixed amount, depending on variables amenable to control by the authorities (cash in circulation, central bank deposits, reserve ratio).

2. exogenous money is logically presupposed by the "Cambridge equation", which is meant to establish the relationship between prices and the money supply, and hence inflation and the money supply:

Mv = Y

or, the amount of money multiplied by its velocity of circulation equals income, for any particular period. Since "v" is immeasurable unless we know the other variables, the usefulness of this expression might be thought rather limited. The Cambridge equation is true in as much as it's a tautology, but it certainly isn't proof of the independence of M from Y.

3. Nevertheless, social systems that used a genuine commodity money, such as gold or silver pieces, and had no credit money, have certainly existed. The sort of "monetarist" argument put forward by Ricardo, for instance, sees paper money representing a more or less good claim to the commodity that serves as real money, e.g. gold. The argument that the value of paper money isn't increased by the multiplication of paper in excess of the gold it represents is essentially the same as the argument that the value of gold coins isn't increased by clipping the coins and adding the clipped gold to the clipped coins. Anyway, Geoffrey Ingham's book The Nature of Money clearly establishes that the development of credit money is coextensive with the development of paper money, so the whole school of monetarism is based on a misconception, insofar as it only understands paper-commodity-money, or exogenous paper money. The real thing is capitalist credit money.

4. Marx says somewhere that any attempt to analyse money invariably falls back on the idea that money might as well be thought of as gold. Suppose we tried to analyse inflation in a simple economy where all income is consumed, workers are paid a conventional minimum real wage and paper money is used. If the monetary authority takes it upon itself to print a certain amount of money to finance, say, pyramid building, the final result, after all adjustments have been made will be the same the same commodities in the same proportions being received by workers and capitalists, but higher prices. If the workers are able to continue to claim their minimum wage throughout the period of rising prices, they will suffer no ill effect from it. The cost of the labour appropriated by the monetary authority will fall wholly on the capitalists, who will have to increase their monetary capital, instead of distibuting profits, in order to pay increased money wages.

5. Hence we can see that inflation might appear as a social cost for the capitalist class as a whole, though the effects of inflation would really affect different capitalists or capitalist blocs differently, and some might actually benefit.

6. So, we can situate, as it were, Nicholas Kaldor's concept of endogenous credit money (which does represent a genuine theoretical advance), in the factional squabbles between sections of the western ruling class. The followers of Friedman wanted to end hyperinflation. Kaldor was involved in a sort of rearguard defence of social democracy.

This isn't the whole story though, and if I return to this theme, I might say something completely different about inflation and its causes and consequences.

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