Abstract
Up to now there has been no comprehensive and widely accepted theory of a monetary economy. Maybe this can be explained by the prevailing doubts within the profession of economists whether there is a monetary economy at all. The majority of economists believe that a monetary economy is merely a money using economy which however, in its basic nature, functions as a barter system. Therefore, in addition to real economic theories on production, consumption, trade and growth, a theory of money was put forward dealing, on the one hand, with the demand for money on the part of individual agents and, on the other, with the supply of money by the banking sector (including the central bank).
In the end, individuals are only interested in the consumption of goods. This has always to be kept in mind when dealing with monetary theory.
Rudolf Richter1
A debt is fundamentally an obligation to give not money but wealth.
Ralf G. Hawtrey2
An economy where money is created by banking processes that finance the acquisition of capital assets and the production of investment outputs has essentially a nominal core.
Hyman P. Minsky3
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References
Richter 1989: 31.
Hawtrey 1923: 14.
Minsky 1984: 454.
Richter 1989: vii. The expression “exchange involving the use of money” goes back to Max Weber (1956: 636) who, contrary to modern mainstream economic theory, was well aware of the particular features of a monetary economy: “Any act of exchange involving the use of money (sale) is a social action simply because the money used derives its value from its relation to the potential action of others. Its acceptability rests exclusively on the expectation that it will continue to be desirable and can be further used as a means of payment. Group formation (Vergemeinschaftung) through the use of money is the exact counterpart to any consociation through rationally agreed or imposed norms. Money creates a group by virtue of material interest relations between actual and potential participants in the market and its payments. At the fully developed stage, the so-called money economy, the resulting situation looks as if it had been created by a set of norms established for the very purpose of bringing it into being.”
Patinkin/Steiger (1989) note that the concept was put forward firstly by Hayek (1931: 27–8). As the predominant metallic money in the classical era was a produced good, it was impossible to separate the vector of relative prices from the level of absolute money prices as strictly as in the neoclassical approach (cf. Mill 1871: 488, 501–2, Laidler 1991: 10–1).
Hahn 1982: 1.
Cf. Davidson 1978: 405–8, Kregel 1995, De Vroey 1999.
Niehans 1978: 3.
Pigou 1933: 188n.
Hayek 1928: 218.
Riese 1995.
Hellwig 1993: 238, cf. Davidson 1981, Laidler 1988.
Cf. Hahn 1982, Hahn/Solow 1995.
“Mark I” monetarists thus believe in some temporary real impacts of monetary shocks (cf. Meltzer 1995). Similar views were held in classical economics. As the choice-theoretic foundations of a labour supply curve were yet not developed the labour market, equilibrium did not serve as a centre of gravity. Moreover, rational expectations were unknown; for a private lesson on that issue given to David Hume see Lucas (1996).
Formally we have where the equilibrium value of some variable x“ (a level or a rate of change) depends on fundamental forces (determining x) and on the difference between last period’s actual value and x. The parameter.1 (0 <_) <_ 1) measures the degree of hysteresis. If A = 1, the ”natural“ rate of unemployment, for example, only depends on the path of demand-determined employment. ”High unemployment is even worse than we thought, because it raises the NAIRU, and lower unemployment is even better than we thought because it reduces the NAIRU“ (Stiglitz 1997: 8).
Cf. Richter 1989: 38. Looking at classical economists, at least Marx (1890: 379) knew that capital represents a specific social organization of production and not just an efficiency-enhancing tool.
Menger 1909: 579, cf. by contrast Luhmann 1988: 196–7, Riese 1995.
Goodhart (1994: 103) in a critical review of the modern theory of monetary policy.
Marx 1890: 30.
“The terms in which contracts are made matter. In particular, if money is the good in term of which contracts are made, then the prices of goods in terms of money are of special significance. This is not the case if we consider an economy without a past and without a future. […] If a serious monetary theory comes to be written, the fact that contracts are indeed made in terms of money will be of considerable importance ” (Arrow/ Hahn 1971: 357 ).
This has been emphasized especially in classical economics: “Almost all loans at interest are made in money, either of paper, or of gold and silver. But what the borrower really wants, and what the lender really supplies him with, is not the money, but the money’s worth, or the goods which it can purchase. [üI By means of the loan, the lender, as it were, assigns to the borrower his right to a certain portion of the annual produce of the land and labour of the country to be employed as the borrower pleases” (Smith 1786: 152).
Keynes 1933: 82, cf. 81, Marx 1890: 69–73, Luhmann 1988: 196–7.
Riese 1987: 172.
Aristoteles 1996: 25.
Marshall 1920: vii.
Keynes 1937a: 101.
Cf. Priddat 1993: 25–6.
Wicksell 1901: 154, cf. Bliss 1975: 3–4.
Cf. Jevons 1879: 240–1, Böhm-Bawerk 1884: 400–4, Hayek 1927. Critical opinions are expressed in Knight 1934, Schumpeter 1954: 322–34, 645–62, Riese 1988, Kurz 1998.
The break between classical and neoclassical theories of capital, i.e. the contradiction between the idea of granting interest out of a surplus which originates from the productivity of capital, on the one hand, and the opposite conception of linking the rate of profit to the rate of interest, on the other, can best be studied in the work of John Stuart Mill (cf. Spahn 2000).
Schumpeter 1934: 158, 184, cf. 190.
cf. Richer 1989: 154.
Hahn 1980: 132.
Cf. Hicks 1946: 154, Bliss 1975: 10, Richter 1989: 43–5.
Cf. Robinson 1971: 8, Schefold 1976: 182, Milgate 1982: 22, 129–39.
“There is literally no ‘sense’ in the notion of an inherent reluctance to postpone, or preference to future enjoyment, as a general principle embedded in human nature, rational or sentimental. Jevons saw this clearly. […] The permanent and cumulative saving and investment we actually and typically find in the world cannot be explained in any degree through comparison between present and future enjoyment, or ’waiting’ and being paid for waiting. […] Wealth, viewed socially and objectively, is perpetual income capitalised, but what it means psychologically to the individual accumulator is a problem outside the sphere of the price theorist” (Knight 1934: 272n, cf. Friedman 1969: 21–2, Lutz/Niehans 1980, Richter 1989: 46 )
The central bank has to fix a price level target and ü being an “foreign body” in a market economy ü should be controlled by government (cf. Richter 1989: 137–80, 322).
“An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does notnecessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. […] Moreover, the expectation of future consumption is so largely based on current experience of present consumption that a reduction in the latter is likely to depress the former, with the result that the act of saving will not merely depress the price of consumption-goods and leave the marginal efficiency of existing capital unaffected, but may actually tend to depress the latter also” (Keynes 1936: 210, cf. 192–3, Kregel 1980 ).
Keynes 1934: 456.
Riese 1987: 163.
Luhmann 1988: 224–5.
Wicksell 1901: 145, cf. 149, Keynes 1933/34, Kurz 1998. Hicks (1974) noted that classical economists in general stuck to the “business man’s concept” of capital as a fund, with an eye on the debt side of balance sheets, whereas the neoclassicals after 1871 adopted the view of capital essentially consisting of goods.
Keynes 1937b: 213, cf. Hicks 1989: 64–71.
Hicks 1969: 73–4, cf. Riese 1988: 383.
Here history of economic thought for a long time has resisted to recognize the importance of banks as creators of credits, not least because this threatened to undermine the traditional belief in the virtue of saving. In order to escape from this cognitive conflict holders of banking deposits later were regarded as saversalthough they just supply the banks with liquidity (cf. Schumpeter 1954: 1114, Chick 1983: 239 ).
Schumpeter 1954: 573–4. This way of creating wealth “out of nothing” has also been emphasized by Knight (1934: 277): “The amount of capital is always the capitalised value of an expected future stream of services. When conditions change, capital simply appears or/and disappears, and is written up or written down without reference to ‘production’ ”
Hahn/Solow 1995: 144, cf. Riese 1995. Kregel (1998: 123) links the interpretation of money holdings as an option with Keynes’ concept of “user costs”: “Buying investment goods, or consumption goods, or buying financial assets [ü] or repaying debt means that money will no longer be available to be ‘used’ at a future date when the prices of the assets or goods will be different. The ‘user cost’ of expending money today can than be defined as the present value of the potential future gain or loss that has been foregone or avoided by parting with money today. [ü] The user cost of money could thus be defined as the equivalent of a call option on a deposit at the current interest rate. Alternatively, holding money uninvested in a portfolio allows you to avoid the sale of an investment asset to meet an unanticipated need for liquid funds.”
Hicks 1982: 240, cf. Hicks 1989: 52.
Cf. Keynes 1937b, Townshend 1937.
“A liquidity premium [ü] is a payment, not for the expectation of increased tangible income at the end of the period, but for an increased sense of comfort and confidence during the period” (Keynes 1938: 294). Townshend had written: “The reluctance to part with liquid money ü the property of liquidity which gives it exchange value and enables people to obtain interest by parting with money under contract ü has its origin in the doubts of wealth-owners as to what may happen to values before the end of any interval, however short; and I suggest that the basic cause of interest is bound up with this” (1938: 291, cf. Heinsohn/Steiger 1996: 183).
Keynes 1936: 293.
“Expenditures on goods, services and assets involve commitments of an agent’s resources to illiquid ends. But if the future is uncertain, agents may prefer notto make such commitments, and instead remain liquid. Exercising this ‘option to wait’ by remaining liquid enhances the agent’s flexibility in the face of an uncertain future ” (Setterfield 1999: 482 ).
Keynes 1937c: 116.
See e.g. Davidson 1978: 10–32, 140–158, Robinson 1980, Shackle 1982. Kregel (1976) however had already pointed out that in Keynes’ methodological concept of a shifting equilibrium, different expected states of the world would simply appear as shift variables in choice-theoretic market functions and thus would not preclude even a long-run analysis.
Cf. Wicksell 1901: 209, Marshall 1920: 483, Kurz 1988.
The liquidity theory of the rate of interest in no way implies that the relative scarcity of means of payments may be overcome by monetary policy actions. Attempts to increase the quantity of money without limit will simply erode the notes’ reputation as a means of payment.
“It is much preferable to speak of capital as having a yield over the course of its life in excess of its original cost, than as being productive. For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive ü at least in the physical sense” (Keynes 1936: 213, 242, 375–6, cf. Keynes 1933/34).
Keynes 1936: 221, 376.
Dillard 1955: 12.
Davidson 1978: 12.
Riese 1988: 381–2.
In former times prominent central bankers felt even stronger than today that the rate of interest was a market variable, not a policy instrument. The president of the German Reichsbank Havenstein stated in 1908: “The policy of a central bank does not create the discount rate, rather, it is essentially determined by the economic circumstances of a country [ü1. Therefore the central bank’s interest rates, in principle, [ü] have to adjust to the money-market’s rate, the bank [ü] can influence that rate only within moderate limits” (quoted from Borchardt/Sch?tz 1991: 181n).
Cf. Schumpeter 1970: 219, 224–5, Robinson 1938.
Cf. Wicksell 1898: 178–96, Hawtrey 1923: 420, Hicks 1989: 102–11, Holtfrerich 1989. Hayek (1928, 1931) on the other hand continued to believe in the necessity of intertemporal changes of the price level. In particular, a “balanced evolution” was said to require falling prices due to improvements in technology. Hayek did not think of distributing productivity gains through nominal wage increases.
Keynes 1936: 231, 235, cf. 203–4, 210–21, Dillard 1955, Dillard 1987, Davidson 1978: 145, Davidson 1981, Chick 1983: 293–311.
Smith 1786: 186.
Clower 1967: 207–8.
Streiäler 1983: 464, cf. Robinson 1971: 12–3, Hahn 1977, Hellwig 1993.
Cf. Riese 1987: 158, Riese 1988: 386, Riese 1995: 49, 57, and — for a critical review — Heering 1991: 99–102.
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Spahn, HP. (2001). Money, Interest and Capital. In: From Gold to Euro. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04358-5_3
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