Showing posts with label Metallism. Show all posts
Showing posts with label Metallism. Show all posts

Tuesday, February 16, 2016

Marx rejected Fiat Money

This can be clearly seen from Marx’s statement in Chapter 3 of volume 1 of Capital:
“The State puts in circulation bits of paper on which their various denominations, say £1, £5, &c, are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols. Now the quantity of gold which the circulation can absorb, constantly fluctuates about a given level. Still, the mass of the circulating medium in a given country never sinks below a certain minimum easily ascertained by actual experience. The fact that this minimum mass continually undergoes changes in its constituent parts, or that the pieces of gold of which it consists are being constantly replaced by fresh ones, causes of course no change either in its amount or in the continuity of its circulation. It can therefore be replaced by paper symbols. If, on the other hand, all the conduits of circulation were to-day filled with paper money to the full extent of their capacity for absorbing money, they might to-morrow be overflowing in consequence of a fluctuation in the circulation of commodities. There would no longer be any standard. If the paper money exceed its proper limit, which is the amount of gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required, and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.

Paper-money is a token representing gold or money. The relation between it and the values of commodities is this, that the latter are ideally expressed in the same quantities of gold that are symbolically represented by the paper. Only in so far as paper-money represents gold, which like all other commodities has value, is it a symbol of value.” (Marx 1906: 143–144).
So what Marx is saying here is as follows:
(1) paper money represents gold to the same amount as its face value;

(2) the paper money has to be backed by the same amount of gold, and if the state pumped out vast amounts of paper money in excess of the gold reserves, the standard of value would collapse (or as Marx says, “There would no longer be any standard”);

(3) paper money represents gold and it is clearly implied here that it needs to be officially convertible into gold at a fixed rate.
This rules out fiat money, and it is obvious that Marx was a metallist.

BIBLIOGRAPHY
Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Sunday, March 11, 2012

Keynes on Metallism versus Chartalism in 1914

There is a most interesting book review, now almost forgotten, written by John Maynard Keynes and published in 1914, in which Keynes reviews both the original German edition of Ludwig von Mises’s Theorie des Geldes und der Umlaufsmittel (Theory of Money and Credit; Munich and Leipzig, 1912), and Geld und Kapital (Money and Capital; Leipzig, 1912) by the German Chartalist Friedrich Bendixen (see Keynes 1914a).

The Chartalist theory of money derived from Georg Friedrich Knapp’s Staatliche Theorie des Geldes (The State Theory of Money; original German edition 1905; English translation 1924), which has been one of the important sources of recent Chartalism or Modern Monetary Theory.

Although Keynes was not hostile to Mises, nevertheless it is clear from his view of Bendixen’s book that Keynes already repudiated the Metallist position on money and was receptive to Knapp’s Chartalism. Keynes says:
“[sc. Bendixen says that the] … old ‘metallist’ view of money is superstitious, and Dr. Bendixen trounces it with the vigour of a convert. Money is the creation of the State; it is not true to say that gold is international currency, for international contracts are never made in terms of gold, but always in terms of some national monetary unit; there is no essential or important distinction between notes and metallic money; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance. With the exception of the last, the only true interpretation of which is purely dialectical, these ideas are undoubtedly of the right complexion. It is probably true that the old ‘metallist’ view and the theories of regulation of note issue based on it do greatly stand in the way of currency reform, whether we are thinking of economy and elasticity or of a change in the standard; and a gospel which can be made the basis of a crusade on these lines is likely to be very useful to the world, whatever its crudities or terminology.” (Keynes 1914a: 418).
Keynes (1914b) also published in 1914 a positive review of Mitchell Innes’s 1913 essay “What is Money?” Keynes (1914b: 421) even said explicitly in this latter review that he thought that Innes’s “historical conclusions ... have, I think, much foundation.”

So Keynes the monetary reformer was already moving to the Chartalist and credit theories of money by 1914, only a few years after he had begun lecturing in economics at Cambridge university in January 1909 (for Keynes’s education and emergence as an economist, see my post here).

BIBLIOGRAPHY

Bendixen, Friedrich. 1912. Geld und Kapital, Duncker & Humblot, Leipzig.

Keynes, J. M. 1914a. “Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen” (review), Economic Journal 24.95 (Sep.): 417–419.

Keynes, J. M. 1914b. “What is Money? by A. Mitchell Innes” (review), Economic Journal 24.95 (Sep.): 419–421.

Knapp, G. F. 1905. Staatliche Theorie des Geldes, Duncker & Humblot, Leipzig.

Knapp, G. F. 1973 [1924]. The State Theory of Money (trans. H. M. Lucas and J. Bonar), Augustus M. Kelley, Clifton, NY.

Mises, L. von. 1912. Theorie des Geldes und der Umlaufsmittel, Duncker & Humblot, Munich and Leipzig.

Mitchell Innes, A. 1913. “What is Money?,” Banking Law Journal 30.5 (May): 377–408.