[OPE-L:5785] (Fwd) Re: explaining inconvertible money

Duncan K. Foley (dkf2@columbia.edu)
Mon, 1 Dec 1997 12:56:51 -0500 (EST)

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>Date: Mon, 1 Dec 1997 15:38:42 GMT
>Sender: owner-ope-l@galaxy.csuchico.edu
>From: Costas Lapavitsas <CL5@soas.ac.uk>
>To: ope-l@galaxy.csuchico.edu
>Subject: (Fwd) Re: explaining inconvertible money
>Forwarded message:
>From: Self <SOAS-HUB/CL5>
>To: "Duncan K. Foley" <dkf2@columbia.edu>
>Subject: 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.

Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu