Was Marx A Monetarist?

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RedHughs
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Mar 21 2009 19:21
Was Marx A Monetarist?

Seeking to aquaint myself further with the variety of monetary theories that are out there, I found the article "Was Marx a Monetarist?" at Marxists.org.

In this article, Edgar Hardcastle argues that Marx was not a monetarist because monetarists viewed the amount of bank deposits as being a key determiner of prices whereas Marx instead looked at the amount of paper currency in circulation as a key determiner of prices.

This assertion brings up the objection that there may soon be a situation in which there is no supply of paper currency in circulation at all and transactions consist entirely of direct bank debiting. Already, this would describe a good portion of monetary transactions in the US and the amount will only increase. If paper currency did not exist, how could it determine anything? Even now, when paper currency exists, one could argue that it is no longer the most commonly used money-like-entity. If commonness is measured by total size of transactions rather than by the number of the transaction, paper currency is presently rather marginal as a medium of exchange.

Perhaps I'm barking up the wrong tree. Do others defend this?

Hardcastle wrote:
For Friedman and other Monetarists, as for the bank-deposit theorists, “money” includes, along with the relatively small amount of currency, the much larger amount of bank deposits. Professor Edwin Cannan, in his book Modern Currency and the Regulation of its Value, published in 1931, had a chapter entitled “The Bank-deposit Theory of Prices”. Cannan’s description of that theory showed it to be exactly the same as the theory now advanced by Friedman under the name Monetarism. Cannan was of course opposed to it.

Marx and the quantity theorists made it quite clear that by “money”, in connection with prices, they meant only the currency. In Capital vol. 1 (Kerr edition, p.143), Marx dealt with inflation in terms of the “bits of paper”, put into circulation by the state, “on which their various denominations, say £1, £2, £5 etc. are printed”. Nothing about bank deposits being the factor determining the price level.

Edit Note: Pressed "save" instead of "preview" in the first version, sorry to have published the earlier more-typo-filled-than-usual-even-for-me version of this topic

RedHughs
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Mar 21 2009 20:19

Sorry about the typos, pressed save instead of preview and now I'm waiting for the moderation system to approve the typo corrections... (edits now seem to be approved)

mikus
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Mar 22 2009 02:41

I think there's a bit of confusion in the Hardcastle article, actually.

Anyway, the short answer is no, Marx was not a monetarist, but not for the reason/s that Hardcastle mentions. Marx was not a monetarist because he didn't believe that the value of money was regulated by its supply, except in the case of inconvertible paper money issued by the state in payments. Note that this only partially applies to the United States government (and most other governments), since they do not print money and then spend it on new projects, wars, etc., but rather in the purchase of Treasury bills. The money issued by the central bank (plus interest) returns to the central bank when the Treasury bills mature, thus wiping out that new supply of money. This is very different from how inconvertible money was issued in Marx's day, when it was used to pay the military, finance wars, build infrastructure, or whatever the state wanted. Hence I think one has to be very cautious when applying Marx's comments on inconvertible paper money to the sort of inconvertible paper money in use today. Hardcastle is not cautious and I think that's where the some of his mistakes are made.

A little relevant history on the monetarists. The precursors of the monetarists were the Currency School, who Marx had little respect for. Marx ridiculed the main proponents of the "Currency School" (Lord Overstone, Torrens, McCulloch, and their precursors Ricardo and Hume) throughout Vol. 3 of Capital, and also a handful of times in Vol. 1 and 2. He thought they were ridiculous. Marx generally supported the opposing Banking School theorists, namely John Fullarton, Thomas Tooke, and James Wilson (especially Fullarton), although he criticized them on certain issues as well (see especially Ch. 28 of Vol. 3 of Capital).

That said, there are big differences between the Currency School and the modern monetarists, particularly as how they regard bank deposits (correctly pointed out by Hardcastle) but they are generally acknowledged to be the forerunners of the monetarists. The vast majority of mainstream history of economic thought (even if it is hostile to monetarism) is very pro-Currency School and extremely dismissive of the Banking School.

There is a lot of evidence, however, that the modern theory of central banking owes a lot more to the Banking School theorists than the Currency School. Walter Bagehot, for example, who is generally regarded as the first real theorist of central banking, was the son in law of James Wilson, a prominent Banking School theorist, and the creator of The Economist. Bagehot got many of his ideas on central banking from the Banking School. As Marx also got many of his ideas from the Banking School, and modern central bankers largely got their ideas from Bagehot (directly or indirectly), it shouldn't be surprising how much Marx agreed with modern central bankers, particularly in more practical issues. This is something neither Marxists nor central bankers would like to admit, however.

Anyway this is fairly complex stuff that's hard to get into in one post on a messageboard. The amount of misinformation, even within generally good histories of economic thought, is impressive. The quantity theory of money has had a pretty hegemonic status in mainstream economic theory and alternative theories are generally dismissed out of hand, without much serious argument.

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jura
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Mar 22 2009 08:12
mikus wrote:
Anyway this is fairly complex stuff that's hard to get into in one post on a messageboard. The amount of misinformation, even within generally good histories of economic thought, is impressive.

Mikus, could you recommend an article (or a book) that goes into this? (i.e. Marx's views on money as opposed to the quantity theory of money, and the connected banking issues)

ajjohnstone
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Mar 22 2009 09:11

I'm not going to endeaver to make any original contribution to this debate because i know my limitations and i won't get out of my depth .

But i thought i add another link which provides additional related reading which was more than likely also written by Hardcastle .

Quote:
"...This makes Marx sound like a “monetarist”, and he is indeed saying that inflation (as a rise in the general price level) will be the inevitable result of an excessive supply of an inconvertible paper currency. But there is a fundamental difference: whereas a man like Enoch Powell (who sees well enough that inflation is a purely monetary phenomenon and cannot be caused by monopolies, trade unions or taxes) tries to explain everything in terms of supply and demand, Marx’s explanation is solidly based on the labour theory of value. The monetarists have no theory as to what would be the right amount of paper money that would need to be issued to avoid inflation. Marx has, and it is based on the underlying value-relation between the money-commodity (gold) and all other commodities..."

http://www.worldsocialism.org/spgb/education/Marxian%20theory%20of%20inflation.html

capricorn
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Mar 22 2009 11:00

I think that Hardcastle has a point when he says that both the Keynesians and the Monetarists include "bank deposits" as money and that this confuses the issue. Especially as even the term "bank deposits" includes two entirely different types. Most people will interpret the term "bank deposit" to mean money that someone has and that they deposit in the bank, ie in effect lend to it even if they are not paid any interest (but are granted free banking in lieu of this). But the Keynesians and the Monetarists also include as bank "deposits" loans made by banks which take the form in effect of a credit line on which the borrowers pay interest to the banks. So, they mean by "bank deposits" both money that is lent to the banks and money that is lent by them. Anybody can see that this involves double counting as some of the money that the banks lend will come from the money that has been really deposited with them.

But if bank deposits are excluded from the definition of money, what's left except the currency (notes and coins)? Monetary statisticians have a concept of "narrow money" which is notes and coins + the reserve deposits of commercial banks with the central bank. See thisfor Britain. It could be argued (and I think Hardcastle was trying to argue this) is that even this is not narrow enough as it includes the reserve deposits (which don't circulate). According to the Bank of England's statistics, more than 50% of M0 is made up of notes and coins and this percentage is increasing at the moment.

So I don't think we can ignore the significance of the amount of currency in circulation even if the Keynesians and the Monetarists both dismiss this as merely "small change". I take Red's point about the move towards a "cashless society" but this can be seen as increasing the velocity of circulation of the currency.

Incidentally, Mikus, you talk of "some of Hardcastle's mistakes" but don't say what they are, so what do you think they are.

mikus
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Mar 22 2009 16:25
jura wrote:
mikus wrote:
Anyway this is fairly complex stuff that's hard to get into in one post on a messageboard. The amount of misinformation, even within generally good histories of economic thought, is impressive.

Mikus, could you recommend an article (or a book) that goes into this? (i.e. Marx's views on money as opposed to the quantity theory of money, and the connected banking issues)

On Marx, no not really. Suzanne deBrunhoff's book "Marx on Money" is considered a classic. I don't think it's all that great but it's certainly not bad, and the part on credit and foreign exchange has some interesting stuff. But as regards the issues I'm talking about, it doesn't have a lot. You can find her book online here.

Anitra Nelson wrote a book "Marx's Concept of Money," which you can find here. It tries to deal more directly with the issues I raised (sort of), but I can't recommend it. I could only get through the first few chapters before I stopped reading it, it just seemed like a waste of time. The bibliography is impressive, which gave me high hopes, but her commentary makes me think that she didn't read any of the original sources she cited. She is pretty dismissive of Marx's theory, in such a way that makes me think she really doesn't understand it.

There is also a book called "Marx's Theory of Money," available here. (These academics need to find new book titles. It gets confusing.) It was a long time ago that I read it (or most of it) and if I remember it well, it's not very good. But there is one interesting article in the book, by Pichit Likitkijsomboon, called Marx's Anti-Quantity Theory of Money. It's a criticism of Marx, and I disagree with it, but he at least understands what Marx's argument was.

So I really don't know of any good secondary sources on Marx's monetary theory. My own impression of this comes from reading the original participants in the monetary debates (only some of them -- it's pretty boring even though you learn quite a bit), and secondary material on the debates. For secondary material on the banking vs. currency school debate, the most comprehensive is generally considered to be Jacob Viner's Studies in the Theory of International Trade. He's one of the mainstream historians of economic thought I mention who is overly dismissive of the Banking School, not really understanding their main arguments and being overly apologetic for the Currency School even when they contradict more modern mainstream views of money and credit. But it's overall still a very useful book. Just take it with a grain of salt. (Marx isn't mentioned in the book even once, so it'll only help you understand Marx indirectly.)

The one person who may have written interesting things on Marx's theory of money is Arie Arnon. Unfortunately I don't have access to a university library and can't find his materials. Here's a couple of citations:

Arnon, A. (1984), "Marx's Theory of Money - The Formative Years", History of Political Economy 16, 555-575.
Also in Wood, J.C. (Ed.), Karl Marx's Economics: Critical Assessments, Croom Helm, 1988.

Arnon, A. (1994), "Marx, Minsky and Monetary Economics" in G. Dimsky and R. Pollin (Eds.), New Perspectives in Monetary Macroeconomics: Explorations in the Tradition of Hyman P. Minsky, 353-365, Ann Arbor: Michigan University Press.

I know Arie Arnon is a serious theorist because I read his book Thomas Tooke, Pioneer of Monetary Theory. He knows quite a bit about the Currency vs. Banking school debates, and Thomas Tooke in particular. In the book he sometimes uses Marxist terminology (mode of production, and I think even surplus value) despite the fact that he never discusses Marx, so I assume he's some kind of Marxist or once was. If you find the articles I cited please let me know, I'd really like to get ahold of them.

Hope that helps.

mikus
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Mar 22 2009 19:00

First of all, I think it's very wrong to say that all circulation will be performed by checks, debit cards, credit cards, etc., in the near future, or that the amount of currency in circulation is small change, or anything like that.

In the week ended March 18, 2009, the amount of currency in circulation in the US (paper money) was just under a trillion dollars. The amount of Federal Reserve deposits (reserve balances of depository institutions plus all non-reserve deposits) was just over a trillion dollars. The total base money (currency plus Federal Reserve deposits) was just under 2 trillion dollars. Circulating currency is currently about 45% of the total base money supply.

Base money is the basis of the credit system. This money is used in the payment of debts, and it is not itself a debt.

Circulating currency composing 45% of base money is not small change, and it shows that we're very far away from all the monetary base becoming electronic deposits with the Federal Reserve. I don't think it would be a huge theoretical issue if it did, but for the sake of accuracy and avoiding needless hyperbole I want to make that point. The obsession with electronic banking generally consists of large exaggerations, and this is no exception.

As for what I think was (possibly) Hardcastle's error. I see no reason to separate currency in circulation and Federal reserve deposits. I'm not sure if Hardcastle did this or not. He never directly discusses this issue, as far as I remember (if he does, please point it out, as it would clear things up), but the thrust of his argument seems to point to the separation of the two.

I don't think such a distinction is a good one for the simple reason that a federal reserve deposit is not a liability of the central bank. The possessor of a central bank deposit can demand that money in cash, but the central bank just has the Treasury print it at essentially zero cost. The supply of paper money is unlimited. If there were a gold standard, then those deposits would be liabilities, since the possessor of a central bank deposit could withdraw X amount of gold on demand from the central bank. But no major economy is on a gold standard, so those deposits aren't liabilities. (In central bank balance sheets both currency and deposits are treated as liabilities. But this is just an accounting convention.)

Thus, if Hardcastle was trying to distinguish between money, properly so called, and credit (which is how I had initially read him, but after rereading some of his writings I'm not so sure), then both currency and central bank deposits should be considered money, since neither is a credit.

If, on the other hand, he wanted to distinguish between money instruments that circulate, and money instruments that don't, then he would have to treat both currency and deposits (not just central bank deposits but all deposits) together, since the majority of purchases are made not with currency but with various credit instruments (and sometimes even with securities, like government debt or even shares of stock).

mikus
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Mar 23 2009 00:39

Jura, I found the first article I mentioned here. I'm don't have access to it, though. Are you able to retrieve it? (Or anyone else reading this, for that matter.)

capricorn
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Mar 23 2009 07:25
mikus wrote:
As for what I think was (possibly) Hardcastle's error. I see no reason to separate currency in circulation and Federal reserve deposits. I'm not sure if Hardcastle did this or not. He never directly discusses this issue, as far as I remember (if he does, please point it out, as it would clear things up), but the thrust of his argument seems to point to the separation of the two.

In the last part of the article which Alan J refers us to (and which he says was written by Hardcastle), a part entitled "How the Government Causes Inflation", a distinction is drawn between "cash" and "currency":

Quote:
The banking activities of the Bank of England are those of a central bank, acting as banker for the government and for the commercial banks. The commercial banks themselves have deposits at the Bank of England, but they get no interest on them.. These deposits are, however, instantly convertible on demand into notes and coins. This is why, in the literature on the subject, they are lumped together with the actual notes and coins in the tills and vaults of the banks and known as “cash”. Cash in this sense, it should be noted, is not the same as its everyday meaning of notes and coin; it is these plus the deposits of the commercial banks (and of the discount houses) at the Bank of England.

"Cash" in this sense would seem to be the same as M0 (it is obvious that the article was written in the early 1970s before this usage came in). At that time the banks' non-interest bearing deposits with the Bank of England would have been simply entries in a book. Today they would be blips on a computer.

The article goes on to explain the link between "cash" and "currency":

Quote:
One way in which the commercial banks can come to be short of money to lend to the discount houses is through the government selling bonds. Most of these are sold to the banks, who have to use up some of their cash to buy them. To do this they may have to recall their money lent to the discount houses, and in any event will have less to lend them. Government sales of bonds in fact is one way the government can force the discount houses to borrow from the Bank of England, and so begin a process which will lead to more notes being put into circulation.
Let us consider this in more detail since it is the roundabout alternative way of inflating the currency to simply printing more paper money and putting it directly into circulation. Very simply, the government borrows money from the discount houses by selling them Treasury Bills; the discount houses borrow money to pay for these bills from the commercial banks; but if, maybe because the government has depleted the banks’ cash by selling them bonds, the discount houses can’t borrow enough money from the banks, then they can go to the Bank of England for it. So, in this way, the government supplies the cash for the discount houses and through them the commercial banks, to lend back to them.
This “cash” is not, as we saw, just notes and coins, but notes and coins are a part of it. And any increase in the cash the Bank of England makes available will ultimately reflect itself as an increased demand for notes and coins too. Since, on its own admission, the Bank of England’s role in issuing notes is “passive” (Report of the Committee on the Working of the Monetary System (Radcliffe Report), Cmnd. 827, 1959, para 4), this increased demand for notes will automatically be met by setting the printing presses in motion.
Normally, such an increased demand for currency will come through the commercial banks converting into actual notes and coin some of their deposits with the Banking Department of the Bank of England.

Hardcastle would appear to have made his distinction between "cash" and "currency" to explain how today extra currency gets into circulation - via "cash", which didn't exist in Marx's day and certainly not in those States which in his day issued an inconvertible paper currency (and which has today become the norm).

Dave B
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Mar 23 2009 12:18

I think if you are going to do this one surely you need to pull in the following

Karl Marx: Critique of Political Economy, c. Coins and Tokens of Value

http://www.marxists.org/archive/marx/works/1859/critique-pol-economy/ch02_2c.htm

Unless it has already been done, haven’t read through previous posts properly.

Dave B
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Mar 23 2009 12:43

In fact I did this before post 5

http://libcom.org/forums/theory/capital-general-discussionnon-chapter-specific-thread-25092008

Dave B
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Mar 23 2009 14:14

The problem with the money in circulation argument, be it paper, electronic or whatevever is that it needs to be looked at in a slightly different way as something called the velocity of money. Which is the average rate at which all money in existence is used for transactions.

If there is a large amount of money on deposit in bank accounts not being used to buy and sell things then that decreases the average ‘velocity’ of the total money.

I wrote a discussion document on this kind of thing before and just to show that I am not completely out on my own and totally outfield the guy in the following link is saying something similar with his;

Quote:
P=MV But let's go back to our equation, P=MV. If velocity slows by 10% ……….”

M = money supply, V =velocity and P is GDP or something

http://www.marketoracle.co.uk/Article4482.html

He is not alone with kind of stuff;

Anyway from me, unfortunately I won’t be around in a couple of days to defend it so go easy on me it is just a proposition;

I think that when it comes to the issue of fiat money, irrespective of ˜how it is done or in what form that fiat money manifests itself ie in palpable green paper or paperless electronic money. The exchange value of the fiat money depends on the total actual value of the commodities that the fiat money is used to exchange

The exchange value’ of the fiat money not only depends on the total value of commodities being exchanged but on the rate at which the fiat money is used to exchange commodities, often called velocity of money

Actually Karl mentioned this a few times just in passing however, as he confessed, it had been somebody else’s idea The velocity of money theory is now orthodox amongst those classical economists who also believe in the money supply theory of inflation.

A simple example of it would be that with an increasing supply of fiat money, and it being thrown into the system, it being compensated by people taking it back out of the system or circulation by hoarding it under the bed. Thus producing no net change.

That effect would reduce the average number of times each fiat dollar in existence changed hands, or its velocity.

The deflation or threat of it that we are seeing at the moment is probably due to a small extent to recessionary effects of price cutting and things selling below their value etc.

More importantly it appears that it is the effect of the decreased velocity of money which has several causes including fiat money hoarding as people take fright to loaning it out to others for it to be used, ie putting it into circulation ,and what amounts to the same thing, having it invested in capital or stocks and shares.

Which is being discussed as such in non Marxian analysis elsewhere.

At some point the increasing over supply of money should more than compensate for its slowing velocity and then the value of fiat money will fall. At that point the green paper hoarders will take fright and try and dump it for something else and returning it into circulation exacerbate the problem

Then it’s value, probably of the dollar as the international fiat currency of choice, should fall like a stone.

To put it in more concrete and simpler terms you could have a community of 100 that exchanged 100 commodities with each other and with each commodity having a value of I hour of labour time, in one day. And that the whole community possessed one dollar of money for the purpose of exchange.

The velocity of the money transfer would have to be 100 tranfers or exchanges of the dollar per day.

It should be obvious that the dollar would have to have the exchange value equal to the value of each commodity or I hour of labour time.

If the number of dollars is increased to two and the velocity of the money was to remain the same, ie the number of times it changes hands or is involved in a transaction then the two dollars would have to stay together in each transaction or exchange. Thus each commodity that has a labour time value of one hour would be exchanged for another that has a labour time value of one hour using 2 dollars.

Thus a commodity with value of one hour of labour time that used to require one dollar and now requires two, or two dollar now equals one hour of labour time.

Now that we have two dollars we could carry out all the transactions in two chains of 50 transactions each that could run along side each other simultaneously.

In which case one dollar would be being used to exchange one hours worth of labour time or value for each transaction. However each dollar would only make 50 transfers per day or its velocity would have fallen.

So if

Ct = total value of commodities, in labour time, exchanged in a day

$ = exchange value of a dollar, or money, in labour time

Q = quantity or number of dollars in existence

V = average number of times each dollar in existence changes hands in a day.

Some won’t change hands at all like the stuff hoarded under a bed but that
will just bring the average down

Then

Ct = $ x Q x V

Or

$ = Ct/( Q x V)

The number of dollars in existence, Q can also be reduced if they have been loaned out by the creator and are subsequently repaid or returned.

On ways of printing money there is some recent stuff below;

http://informationclearinghouse.info/article22271.htm

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jura
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Mar 23 2009 15:57

Mikus, thanks for the comprehensive references. I wasn't able to get to the articles by Arnon, though. The university library here does not have a subscription for Duke University Press sad.

mikus
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Mar 25 2009 21:14

I think this quote on Minsky's view of the quantity theory of money, the basis of monetarism, closely corresponds to Marx's own view.

"[Minsky] believes that the financial and banking systems are basically demand determined, that is, the final users of the liabilities and assets determine their quantities. If the demand for 'money' increases, the various institutions will find the means to supply this growing demand, even if in the process the price of 'money' will increase. They will supply money through a more efficient usage of their existing resources (liability management), and through financial innovations. The conclusion is that sufficient liquidity will always be generated."

Arie Arnon, "Marx, Minsky and Monetary Economics", pg. 361. (I was able to obtain the essay.)

When he refers to "price of 'money'", Arnon is speaking of the rate of interest. He puts "money" in quotes because he is referring to "credit money", or the variety of financial instruments supplied by the banks themselves to perform certain functions of money (bills of exchange, deposits, bank notes, etc.).

The monetarists, on the other hand, take the supply of means of exchange (which includes both money, properly so-called, and credit money) as an exogenous variable that determines the price-level. Marx, following the Banking School, was strongly against this view.

I think it's increasingly clear in the present crisis that the Banking School, Marx, and Minsky, were correct. The demand for credit is endogenous to the business cycle itself. The Federal Reserve, for example, has been unable to control the supply of bank deposits (i.e. the supply of credit). Even Ben Bernanke (a monetarist) has had to admit this.

Ben Bernanke wrote:
Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve is effectively printing money, an action that will ultimately be inflationary. The Fed's lending activities have indeed resulted in a large increase in the excess reserves held by banks. Bank reserves, together with currency, make up the narrowest definition of money, the monetary base; as you would expect, this measure of money has risen significantly as the Fed's balance sheet has expanded. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate.

from The Crisis and the Policy Response, Jan. 13, 2009

capricorn
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Mar 26 2009 08:31

I think that any "Marxist" theory of money must start, as Marx did in his analysis of other aspects of capitalism, from the Labour Theory of Value. In fact this is what Marx did when explaining the origins of money, as a commodity, a product of labour having its own value, came to be one in which the value of all other commodities could be expressed, the "universal equivalent". In practice this money-commodity was either gold or silver and up until the First World War the currency was gold or silver coins or paper or metallic tokens converted on demand into a pre-fixed amount of gold or silver (depending on the country).

Marx was writing when this was generally the situation and his analysis starts from this. Before him and in his time there was a controversy amongst economists and bankers over whether or not the amount of the money-commodity in circulation determined the general level of prices or vice versa. Marx waded into to this discussion against those who argued that it was the amount of money in circulation that determined the price level, against the Currency School Mikus mentions who put forward this Quantity Theory of Money. This made him sympathetic to their opponents, the Banking School, who argued that the amount of money in circulation depended on number of type of transactions that the economy required (for buying things, settling debts, paying taxes, etc). They argued that, with a currency composed of gold or paper tokens convertible into a fixed amount of gold on demand, it was impossible for there to be too much money in circulation. If too many gold coins or convertible paper tokens were minted or printed the excess would not circulate but would be melted down for other purposes or hoarded.

With such a currency, the only way that the general price level could be affected would be a change in the value of the money-commodity itself through this rising as mining conditions became more difficult or falling as new easier-to-mine gold mines were discovered and worked. Which did happen a number of times in the 19th century, a fall in the value of gold leading to a rise in the general price level, a rise in its value leading to a fall in the price level.

There were a number of occasions in Marx's lifetime when some countries did issue inconvertible paper notes, as in Britain and France during the Napoleonic Wars. Marx analysed this too, still sticking to the Labour Theory of Value. He said issuing such an inconvertible currency would not lead to a rise in the general price level as long as the amount issued corresponded to the amount of gold that would otherwise be needed by the economy to effect its transactions. But, he went on, if more than this was issued then the result would be the same as a fall in the value of gold; the inconvertible notes would come to represent a lesser amount of gold and so the general price level would rise. He was in fact saying that, where there was an inconvertible paper currency the Quantity Theory of Money did come into its own: the level of prices did depend on the amount of paper money issued. So he was a partisan of what Mikus has called "The Quantity Theory of Inconvertible Paper Currency".

All this, Jura, is set out in his A Critique of Political Economy which first came out 150 years ago this year.

During the First World War convertibility was suspended and was never restored permanently again. Today nearly all currencies are inconvertible paper ones. On the question of whether or not Marx was a monetarist, obviously he wasn't in terms of the policy they advocate (as he didn't offer policies for running capitalism) but he was saying that, with an inconvertible paper currency, issuing too much of it (inflation) would lead to a rise in the general price level. In other words, that such a rise was a purely monetary phenomenon and was not caused either by workers demanding higher wages or by monopolies charging higher prices. I suggest that the facts confirm this as what other explanation can there be for the continuous rise in the level of prices since the beginning of the Second World War? Inflating the currency, either deliberately or by accident, is the only one.

The Monetarists say something similar but they define "money" as much broader than merely the currency by including in it bank deposits and various different forms of credit. In other words, their theory is not based on the Labour Theory of Value. In fact, it opposes it by suggesting that banks, or the banking system, can create assets out of thin air. They can't. They can only lend purchasing power (generated by value-production) that already exists. The only body that can create an asset without a corresponding liability, i.e. create an asset out of thin air, is the central bank which issues the inconvertible paper currency. But the economy is not deceived: if the note-issuing authority does issue more currency than the economy requires the result will be a depreciation of the currency. The asset (the extra purchasing power represented by the excess paper money) will not last but will disappear back into thin air as the economy adjusts downwards the purchasing power of all the other notes in circulation.

I’m not quite sure why Mikus argues that it is only when the central bank gives the extra paper money directly to the government to spend that causes a rising in the general price level. How the extra currency gets into circulation in this respect is irrelevant. It has the same effect if it gets into circulation through the commercial banks converting a part of its deposits at the central bank into currency and using this for any purpose, as is the cause in modern capitalist states. Only Zimbabwe and banana republics print money for the government to spend. So the claim by Governor of the Bank of Zimbabwe that he anticipated "the quantitative easing" now adopted by the Fed and the Bank of England is not quite true.

Anarcho
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Mar 26 2009 16:24
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I think that any "Marxist" theory of money must start, as Marx did in his analysis of other aspects of capitalism, from the Labour Theory of Value.

Doubtful, given that Marx argued that "there is no 'natural' rate of interest. What is the natural rate simply means the rate estabished by free competition. There are no 'natural' limits to the interest rate." [Capital, vol. 3, p. 478]

While Marx's analysis of the money supply and credit are somewhat underdeveloped, it is pretty clear that he did not consider the Labour Theory of Value as being relevant to it. Interest, he noted, was related to the use-value of money, i.e., whether it can be invested to make money or not.

May I recommend this article by Steve Keen plus the section on Marx in Doug Henwood's excellent Wall Street

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oisleep
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Mar 26 2009 17:10

aren't you conflating the lending of money as interest bearing capital (to which the quote you refer to refers) with the emergence of money as money, i.e. measure of value, means of payment etc.., to which capricorn was referring

it's true what you say about interest, but what you say relates only to interest, being the amount captured for alientating the use value of money capital - this has nothing to do with the value of money itself - so the value of the gold money that capricorn refers to above immediately after the part you quoted would of course, like all other commodities, be subject to the labour theory of value. if that gold money was lent out as IBC then the 'price' paid for that money would, as you say, be determined purely by demand & supply/competition

capricorn
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Mar 26 2009 22:03

Marx did apply the Labour Theory of Value to interest. He said that under capitalism it was one of the divisions of the surplus value extracted from the working class along with profit and ground-rent, part of the unholy trinity of Rent, Interest and Profit.

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oisleep
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Mar 26 2009 22:40

i wouldn't say he applied the labour theory of value to interest as a category in itself

sure interest is just one of the divisions of surplus value extracted, but the labour theory of value plays no role in the level/rate/amount of interest in terms of establishing some central basis point of which the actual 'price' itself fluctuates around (as in prices/value of commodities)

interest is just a part of surplus value and whatever the division of that surplus value between interest, profit of enterprise and rent alters nothing in regard to the nature & origin of that surplus value

vol3, ch22 wrote:
And the circumstances that determine the the magnitude of the profit to be divided, the value product of unpaid labour, are very different from those that determine its distribution among these two kinds of capitalist, and often operate in completely opposite directions

sure it sets some limits on it in that, in the long term, if there was no surplus value to divide there would be no interest, but that's not the same as saying that marx thought that the labour theory of value explained the level, (or even the existence of interest in the first place) which was the point i was making

Cleishbotham
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Mar 26 2009 23:03

Can I just ask If anarcho above has not just scuppered this whole ahistorical debate? None of the condtions which pertain today existed in Marx's time. The rate of interest (which is the papsage I remembee from Vol III) is set by a committee not by the free operation of the market as in Marx's day. There were no Keynesians in Mar's time and therefore ther were no monetarists so the whole issue is just a form of intellectual titillation. Carry on lads!

mikus
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Mar 27 2009 00:58

The Bank of England performed some open market operations even in Marx's day, and exerted a fairly high degree of control over the rate of discount on bills of exchange (the most important rate of interest at that time), particularly during times of crisis. This was well known at the time. Marx himself wrote about it.

Get your history straight before getting too proud yourself.

mikus
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Mar 27 2009 00:57
Anarcho wrote:
While Marx's analysis of the money supply and credit are somewhat underdeveloped, it is pretty clear that he did not consider the Labour Theory of Value as being relevant to it.

This is wrong. Marx's theory of money and credit are related to his theory of value in a couple of obvious ways. He says that:

1. The value of commodity money is determined by its price of production. Its price of production is of course determined in the same way as that of any commodity -- cost-price plus the average rate of profit. The average rate of profit in its turn is determined (partly) by the total amount of surplus-value.
2. The interest accruing to the creditor is a deduction from profit, which itself is extracted from the laborer as surplus-value. The labor theory of value doesn't explain the exact level of interest, but the theory of the general rate of profit, itself a result of the labor theory of value, does determine the limit of the rate of interest.
3. The functional role of interest in capitalist production is explained entirely on the basis of Marx's theory of accumulation, which was itself based on Marx's theory of value.

Anarcho wrote:
Interest, he noted, was related to the use-value of money, i.e., whether it can be invested to make money or not.

See point 2. Whether or not the money can be used to make more money is determined, for Marx, by the rate of profit, which is itself determined (partly) by the rate of surplus-value.

mikus
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Mar 27 2009 02:48

I was thinking more about what Cleishbotham said. It's a fairly common sort of view. The main problem is that it idealizes both early and modern capitalism, as if in early capitalism there was a pure free market, whereas today the economy is directly controlled by the state. There's no doubt that state intervention has increased over the years but we should not exaggerate this.

Central banks always played a large role in determining interest rates, especially during crises. They were less sophisticated with their methods (although more sophisticated than is commonly thought -- as I mentioned before, the Bank of England has used open market operations since the 18th century), but they were engaged in basically the same tasks. So in Marx's day (and for some time before) the rate of interest was not determined "by the free operation of the market", as Cleishbotham says, but was determined largely by the board of directors at the central bank.

Also we should not forget that central banks don't determine interest rates by decree. They determine short term interest rates by controlling the supply of reserves held by banks. So the rate of interest is not directly set "by a committee", but rather a committee determines what their interest rate target will be, and they then change the supply of reserves in such a way as to make the actual rate of interest correspond to their target. They've gotten very good at it, but it doesn't always work. I pointed out on the crisis thread, probably around 6 months back, that the Federal Reserve was losing control over the federal funds rate (the rate charged between banks, generally for overnight loans). The fed funds rate was around 0.3%, far below its target of 1% at the time.

So central banks nowadays aren't all-controlling, and central banks back then didn't shy away from control. Much of the monetary theory from the 19th century is still very relevant.

capricorn
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Mar 27 2009 08:45

I think a distinction needs to be made between the short-term and the long-term rate of interest. While central banks can partially influence short-term rates (by fixing the rate at which banks can borrow from them) they can't do anything about long-term rates. And even with short-term rates they mainly react to the overall economic situation, taking into account such external factors as the rate of the rise in the general price level and whether the economy is in a boom (when the short-term interest rate tends to go up naturally) or a slump (when it tends to go down).

It is only in the past 20 or so years, following the failure of the Monetarist policy of trying to control their definition of the "money supply" (currency + bank loans), that interest rate policy has been used as an instrument to try to control the way the economy works. But it hasn't succeeded. It didn't succeed in stopping the boom (not that they tried very hard) and we'll see that it's not going to stop the depression running its course either.

This is relevant to the discussion of Marx's definition and theory of money, as one reason why Monetarism failed to achieve its object and why short-term interest rate manipulation is failing as well, is that "bank loans" are included as money. But there is no way in which the central bank can influence the demand for bank loans. This depends on the prospect that capitalist firms (to which the banks make loans) judge they have of making a profit. In a boom when firms are making good profits and assume this will continue the demand will be high, so the banks will lend. In a slump it will be low, so the banks won't lend however low the central bank reduces the short-term rate (which given the continuing rise in the general price level is now effectively negative) and however much newly-created money it introduces. As they say, you can bring a horse to water but you can't make it drink (as they found out in Japan).

Cleishbotham
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Mar 27 2009 15:18

So Mikus, Marx never wrote in Capital Vol III that the interest rate was set by the market in the nineteenth century?

And the difference between the operation of the state in the nineteenth century and its operation today are light years apart (even if we had banking acts in 1844 etc). Before WWI the state's share of GDP was just about in single figures but today (before the collapse of the speculative bubble) it averaged somewhere between 40 and 60% for the leading capitalist states. But then this is probably just another detail of history worth discounting...

mikus
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Mar 28 2009 01:50
Cleishbotham wrote:
So Mikus, Marx never wrote in Capital Vol III that the interest rate was set by the market in the nineteenth century?

Marx wrote that the rate of interest is determined by the supply and demand for loanable money. Marx new full well that the Bank of England's discounts was one of the main determinants of this supply, since the Bank of England was one of the main market participants and also the only supplier of the reserves used by all other banks. As I said before, he wrote about this. See for example his NYT articles, or even some parts of Vol. 3 if I remember correctly. This was extremely common knowledge at the time. Changes in the central bank's rate of interest were in business news all the time. The most common response to a gold drain was to raise the rate of interest in order to attract foreign gold.

In any case, even if Marx had denied that the rate of interest was determined partly by the Bank of England, this would not change the fact that the rate of interest (on bills of exchange) was partly determined by the Bank of England. I'd be happy to give you references on this.

Cleishbotham wrote:
And the difference between the operation of the state in the nineteenth century and its operation today are light years apart (even if we had banking acts in 1844 etc). Before WWI the state's share of GDP was just about in single figures but today (before the collapse of the speculative bubble) it averaged somewhere between 40 and 60% for the leading capitalist states. But then this is probably just another detail of history worth discounting...

I never said that the details were unimportant. I said the way that the rate of interest operated wasn't so different then as you said it was. Specifically, central banks did control interest rates to some extent, although less aggressively than today. Why you're bringing in the state's share of GDP, I don't know. It doesn't make your claim about the rate of interest any more correct.

mikus
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Mar 28 2009 01:43

Capricorn, you asked why I said that the important point is the interest received by the central bank which then is transferred to the Treasury. I'm now second guessing myself. I'll have to think about it and get back to you.

Spassmaschine
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Mar 28 2009 03:04
mikus wrote:
Jura, I found the first article I mentioned here. I'm don't have access to it, though. Are you able to retrieve it? (Or anyone else reading this, for that matter.)

Not sure whether it's still relevant, but a pdf of the article is now here:
http://www.mediafire.com/?tztw5mywxyq

Cleishbotham
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Mar 29 2009 14:34

Mikus. The operation of the state in the different epochs is important to me as I consider that in the epoch of imperalism although capitalism operates by the same laws these are distorted by the centralisation and concentration of production which Marx explained would happen but which carried on to an even greater degree after Marx's time (i.e. monopolies which could distort the operation of the law of value). Agreed that Marx does refer to the intervention of the Bank of England during nineteenth century crises but as you agree the normal state of affairs was for the market to set the rate of interest (and this is a supposition on which much of the discussion in Vol III is based). The state was not absent from capitalist regulation in its so-called laissez faire days but it is now omnipresent to the point where it frames the conditions for accumulation in good times and in bad. And this is why I think the question about Marx and monetarism is ahistorical since we are not talking about the same conditions.

capricorn
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Mar 30 2009 16:23

I can see the point you are trying to make -- that we need to take into account the development of state capitalism since Marx's day. You might have a bit of case if each capitalist state is treated in isolation (though I think you are exaggerating here), but this ignores the fact that capitalism is a world system and that there's certainly not World State to control the World Market.