Sunday, December 11, 2011

The Monetary Production Economy and Fiduciary Media

L. R. Wray describes the essence of the monetary production economy:
“In a monetary economy, production occurs not to satisfy ‘needs’, but to satisfy the desire to accumulate wealth in money form. Production is not undertaken by a Robinson Crusoe type agent who is both a producer and consumer; instead, there are those who own private property, and those who do not – and so must work for wages. However, the existence of propertyless workers extends market demand, and extends the use of money as a medium of exchange. Unlike production in, say, a tribal society, capitalist production always involves money. The capitalist must hire workers to produce the goods that will be sold on markets. As production takes time, the capitalist must pay wages now, before sales receipts are realized. Furthermore, because the future is uncertain, sales receipts are uncertain. This means that interest must be paid on liabilities and that capitalist production is only undertaken on the expectation of making profits. Thus, capitalist production always involves ‘money now, for more money later’. Since money contracts always include interest, and because contracts always are of the nature of money now for more money later, this means that monetary contracts will always grow over time at a rate determined in part by the rate of interest … This generates a logic of accumulation: all monetary economies must grow. If they do not, accumulation falters and nominal contracts cannot be met. The logic of monetary production, then, requires nominal economic growth. It cannot be constrained by a fixed money supply, nor by a commodity money whose quantity expands only upon new discoveries.” (Wray 1999: 180).
Fractional reserve debt-financed production, rather than production backed by prior “saving” (whether in money or real terms), is a fundamental element of modern capitalism.

Businesses and enterprises engaged in production of goods and services require factor inputs today, which they will turn into the commodity they sell for cash or money in the future. They frequently do not have the money to pay for them. They require debt, and credit/bank money and negotiable credit instruments such as bills of exchange or promissory notes have fulfilled that function for centuries to facilitate commerce and business, especially by merchants involved in long distance trade. The bill of exchange functioned as a means of payment as the person or business holding it could use it to buy other commodities, or by discounting it could obtain money before the date when it was due.

If I own a business that has not sold any commodities to date but I have a good reputation, I could pay for my factor inputs by signing a bill of exchange (where I am both the drawer and drawee). In issuing a bill of exchange two private parties have created a financial instrument that can be used a means of payment. In fact, the bill of exchange was the major financial instrument used as a medium of exchange and means of payment from the Middle ages to the 19th century (Wray 1999: 180), which also caused expansion of the money supply in an endogenous money system.


Wray, L. R. 1999. “The Development and Reform of the Modern International Monetary System,” in J. Deprez and J. T. Harvey (eds), Foundations of International Economics: Post-Keynesian Perspectives, Routledge, London and New York. 171–199.

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