[OPE] Chartalist theory of money

Dave,

If I say "There is not a shred of historical evidence that it was the state
which originally invented money" then this is logically and theoretically
quite compatible with saying "I do not argue that the state theory of money
is completely wrong." My argument has been that money is a necessary product
of the growing sophistication of commodity-trade, that develops out of an
increasingly complex division of labour. I do not deny that the state can
influence or regulate this process, but what I deny is that the state
started it.

I think Randy Wray and Matthew Forstater would happily agree, that some
varieties of money predate state control over the issue of currency. But
they are likely to argue that the state gradually established a "monetary
regime" on a scale which makes the preceding trading processes look rather
pitiful by comparison.

The problem is that the argument about state-money is much more complex. It
was certainly possible for the ancient and medieval states to issue
currency, without however being able to have control over the circulation
process. Moreover, the very phenomenon that there is only "one state-issued
currency" in circulation within the country, is actually the exception, and
not the rule, in the history of capitalism. Most of the time, several
currencies have circulated side by side, i.e. local currencies were used
plus currencies also used in adjoining regions..

I sense a real difficulty here in that Marxists, just like the bourgeois
theorists they criticize - not being thoroughly familiar with the relevant
historical facts - happily project today's theories about money thousands of
years into the past, assuming that money and prices must have functioned in
the same way. Now, whereas there are certainly insights we can have today
which were impossible in the past, it is also true that in the past things
functioned quite differently, and power relations were qualitatively
different. Thus, for example, often writers assume that the early state had
the power to do all sorts of things, which it cannot have been able to do,
because it was practically impossible for the state power to respond very
quickly and on a large scale to problems in society.

As I have explained many times on OPE-L, the controversy between free trade
and protectionism is an eternal debate within the bourgeoisie, because the
losers in competitive market trade seek protection against the winners, and
the strong players do not want to be fettered by the demands of the weak
ones. This debate is also reflected in the theory of money.

The Keynesians supported state intervention, because they realise the
inadequacies and inequities of unregulated markets, and the theory is, that
the state is in control of the monetary regime. On the other side, e.g.
Milton Friedman argues that all that it required of the state is that it
controls the money supply, and if it does more the economy goes wrong. The
problem is that both kinds of theory are faulty, because in fact the state
cannot fully control the money supply or the circulation process, it can at
best only influence it, but at the same time it always controls more than
the money supply.

The reasons are, among others, that:

- private agencies can independently credit,
- the state is constantly responding to a national and international trading
process, involving vastly larger capital flows than its own.
- it is not possible to regulate every kind of transaction.
- the bourgeois state is itself beholden to its creditors, and cannot escape
from the necessity to collect tax (it has no independent source of wealth)

Impressionistic journalists look to e.g. Ben Bernanke etc. to solve the
problems of the US financial system, but this is delusional, because the
Federal Reserve does not control the flows of capital, it can at best
influence them. The impression is created that the crisis is solved because
the state intervenes to solve the crisis, but this is a very one-sided
interpretation which gives far to much weight to actual state policy. It is
true that government functionaries can talk the dollar up or down, but
ultimately the state responds to capital flows which it can only influence,
but not fully control.

If it was true that the state can control and regulate the financial system,
there would never have been a financial crisis on such a large scale in the
first place. There is also no way that the state can regulate financial
flows in the wake of the crisis, except by prohibiting certain forms of
capital transactions. The trouble is that for every regulation that the
state makes, capital markets will find a way around it. As Marx said,
capital can be understood only in motion, and as soon as you make fixed
definitions for capital, another way will be found to escape the formality.
And thus, the main "disciplining" of the markets is by the simple fact that
businesses lost an awful lot of money, and therefore think twice about very
risky or dodgy invesments in the future.

Jurriaan

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Received on Sat Jun 13 12:25:10 2009