Forwarded message:
From: Self <SOAS-HUB/CL5>
To: "Duncan K. Foley" <dkf2@columbia.edu>
Subject: [OPE-L:5784] Re: explaining inconvertible money
Date: Mon, 1 Dec 1997 11:54:51
We should perhaps be more precise on what we mean by 'inconvertible
money'. I take it to mean mostly bank-created credit-money, backed by
bank loans and other private debt instruments. The exchange rate of
this money with commodities (and the accounting system of prices) is
primarily determined by the process of creation and repayment of
credit among firms and between firms and banks (what used to be
called issue and reflux) which regulate the quantity of credit-
money. In that sense, credit-money is endogenous.
Credit-money also rests on reserves, of the banks in the first
instance and the central bank ultimately. If the reserves are
partly gold, a produced commodity with its own value, and
convertibility somehow exists, reserve discipline operates on the
creation of credit. The manner in which discipline works might very
well differ for different institutional arrangements, eg in a gold-
exchange standard as opposed to a traditional gold standard. Its
operation might also involve crises as an integral part.
Nevertheless, reserve discipline supplements the operation of
credit advance and repayment, and by strengthening the regulation
of its quantity, prevents the exchange-value of credit-money from
losing its anchor in the money commodity. The combination of credit
advance/repayment and reserve discipline through gold invalidates the
quantity theory of money.
When reserves become mostly state-issued debt certificates, even for
the central bank, and convertibility is suspended, reserve discipline
ceases to operate with the external, thing-like objectivity of gold
(though independent central banks might attempt to replicate it
unconsciously). The quantity of credit-money is still
regulated by credit advance and repayment, and so this money remains
qualitatively distinct from state-issued fiat money, but the point of
reference for prices, given by the value of gold, has gone.
In that context, it seems to me plausible that the quantity theory of
money acquires a limited validity. Credit advance/repayment without
reserve discipline might result in quantities of credit-money out of
line with the quantities of commodities, and so generate instability
running from money to prices. If we assume that there is an asymmetry
in how the central bank deals with bank reserves (more likely to
provide them than to restrict them) secular inflation results. That
strikes me as a reasonable way of approaching post-Bretton-Woods.
Regards
Costas