Three Books on Marxist Political Economy (Pt 6)

Shaikh’s theory of money

Shaikh deals with money in two chapters—one near the beginning of “Capitalism” and one near the end. The first is Chapter 5, “Exchange, Money, and Price.” The other is Chapter 15, “Modern Money and Inflation.” In this post, I will concentrate on Shaikh’s presentation in Chapter 5. In Chapter 15, Shaikh deals with what he terms “modern money.” I will deal with his presentation in this chapter when I deal with Shaikh’s theory of inflation crises that is developed in the last part of “Capitalism.”

In Chapter 5, Shaikh lists three functions of money—considerably fewer than Marx does. The three functions, according to Shaikh, are (1) money as a medium of pricing (p. 183), (2) money as a medium of circulation, and (3) money as a medium of safety. Shaikh deals with money’s function as a means of payment under its role as a means of circulation. The problem with doing this is that money’s role as a means of payment is by no means identical to its role as a means of circulation and should have been dealt with separately.

Anybody who has studied seriously the first three chapters of “Capital” Volume I will be struck by how radically improvised Shaikh’s presentation here is compared to that of Marx. It is in the first three chapters of “Capital” that Marx develops his theory of value, exchange value as the necessary form of value, and money as the highest form of exchange value. He does this before he deals with capital. Indeed, Marx had to, since the commodity and its independent value form, money, is absolutely vital to Marx’s whole analysis of capital.

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19 Responses to “Three Books on Marxist Political Economy (Pt 6)”

  1. Noa Says:

    “Credit money is therefore not a token, as Shaikh mistakenly calls it,”
    What page did Shaikh do this? In any case I think it would be fair to call also credit money (eg a banknote) a token (of gold), without failing to distinguish between state paper money and credit money.

    “As a general rule, credit money is created by banks that make loans in the form of imaginary deposits. ”

    This is not creation of credit money. ‘The same pieces of money can serve as instrument for any number of deposits’ (Marx 1981, p. 603).

    I give a quote eg William Huskinsson (1810) on the distinction between state paper money and credit money here: https://libcom.org/forums/theory/fallacies-about-banks-01102012?page=1#comment-589499

    P.S. In the discussion with Boffy to the previous post my last comment has not appeared yet. It contained a link to the chart of Shaikh’s golden prices and also Mandel’s 1980 article on the soaring “gold price”.

  2. Boffy Says:

    You say,

    “As long as the monetary tokens remain sufficiently scarce—relative to the metallic reserve fund—no matter how light or “clipped” they become in circulation, they can continue to circulate without losing their bullion value. Only if they are over-issued relative to the metallic reserve fund will they become depreciated. The degree of depreciation of a gold coin in circulation is measured by how much the market price of gold bullion in terms of the coin rises above the mint price.”

    But, that was Ricardo’s theory of money, which led to the disastrous 1844 Bank Act, which in turn led to the 1847 and 1857 credit crunches, and financial crises. Marx in Capital III, criticises this Ricardian Theory of money mercilessly.

    As Marx sets out the idea that the amount of currency in circulation has to be somehow limited to the amount of gold bullion value held in the reserve fund of banks (and as Marx points out, even where this is known as far as the Bank of England, its not known for all the other banks, and stores of bullion within the country) is nonsense.

    Gold or silver, or copper or whatever the money commodity consists of, at the particular time, is only a physical manifestation of exchange value, exchange value incarnate, of the universal equivalent form of value. As such it performs several roles. The important role here is its role as the measure of value, or unit of account. In other words, it acts as universal equivalent to say this commodity or this collection of commodities has an exchange value of X, equal to this amount of gold, if gold is the money commodity, or 14X if silver is the money commodity, using the examples that Marx gives in “A Contribution”, or maybe 100X, if copper is the money commodity.

    But, as Marx says, for money, be it it in the form of gold, silver or copper to perform this function as unit of account, it has no requirement whatsoever to be actually present. If I have 10 cars in my warehouse, I do not need to have, say 10 kilograms of gold to compare them with, so as to measure their value as being equal to that 10 kilograms. I merely need to know the value of gold and the value of the cars. When I write down in my ledger that these cars have a value of say £100,000, I am merely saying that they have a value equal to the value of 10 kilos of gold, if 1 kilo of gold has a value of £10,000. The fact that I write down this value on a piece of paper in now way changes the exchange value of the cars. If I similarly write down on paper, as an IOU to a creditor, that I owe them these 10 cars, I am equally saying that I owe them £100,000, or 10 kilos of gold, should they choose to want to hold gold for the sake of it.

    The role of money tokens as means of circulation, or means of payment, and even as a store of value similarly has no necessity of the equivalent amount of gold, silver or copper being present, either in the country, or in bank vaults as a reserve. All that is required is that the tokens issued, be they gold, silver or copper coins, or paper notes, are only issued in proportion to the amount of gold, silver or copper they purport to represent, in other words, that they represent that equal amount of value, that equal amount of social labour-time.

    Provided that remains the case then those tokens will continue to function as money in exactly the same way that gold, silver, or copper itself would have done. That applies whether there is any gold, silver or copper in the country or none.

    In fact, as Marx demonstrates in his analysis of the 1844 Bank Act, it was precisely this Ricardian nonsense of trying to impose a Gold Standard that limited the note issuance to the amount of gold bullion held in reserve that unnecessarily led to the crisis of 1847. The crop failures of the time caused Britain to import a lot more food, which given that it was already exporting large amounts of other goods, it paid for by a drain of gold.

    The Bank Act by imposing this ridiculous and unnecessary limitation of the note issue to the gold reserves, thereby led to the Bank of England, withdrawing notes and raising its discount rate. The consequence was to cause an even greater demand for cash, and a restriction of credit payments. Money was hoarded, which reduced the currency circulation even further. A severe credit crunch was created, which then led to a 37% reduction in economic activity.

    But, as Marx points out, it was all completely unnecessary, because the currency circulation should have been determined by the requirement of how much was needed to facilitate the circulation of currencies, the making of payments, and to ensure that reserve funds and hoards were maintained, not by the artificial and irrelevant question of how much gold bullion was held in reserves.

    And Marx and Engels show in relation to both the 1847 and 1857 crises, the proof of that is shown by the fact that this artificial restriction of note issuance to bullion reserves imposed by the 1844 Bank Act had to be suspended in both cases, and as soon as it was, the crisis ended. And, as Marx says, the Scots in particular objected, when the restrictions of the 1844 Bank Act were imposed on them, with the Act of 1845, because in Scotland, the use of gold had never been significant, the Scots always having preferred to use bank notes rather than gold, and who correctly saw the holding of large gold reserves, as an unnecessary cost to capital.

    As Marx put it in referring to the 1844 Bank Act, which imposed this nonsensical limitation of notes to the gold reserve, no bank legislation can prevent a crisis from occurring, but bad bank legislation is certainly capable of causing one. Attempts to impose gold standards or to limit note issuance to gold reserves is bad Ricardian economics and leads to bad bank legislation and monetary policy.

  3. Noa Says:

    Boffy wrote: “The role of money tokens … even as a store of value”

    I must disagree that tokens (or let’s say any non-commodity money) can serve the function of reserve/hoarding (a similar claim is made by Lapavitsas). Marx’s discussion of hoarding in ch.3 v.1 is clear on this. Btw this function of hoarding was discussed already by Fullarton.

    • Boffy Says:

      Noa,

      Marx in Capital II, discusses the hoards and reserves held by businesses, for example the reserves held to cover the replacement of fixed capital, the reserves of surplus value being held until they reached the minimum required size to be used for accumulation, as well as the reserves and hoards held by the capitalist to cover ups and down in cash flow in their business, or for their personal consumption.

      Nowhere does Marx suggest that these reserves and hoards have to be held in the shape of gold or some other money-commodity. Indeed that would be absurd, because, for example, as he says about Scotland, gold was never used their extensively as against the use of bank notes.

      In fact, not only do such hoards under capitalism – where as Marx says credit and credit money develops alongside capital itself – not just take the form of hoards of precious metals, but they do not even usually take the form of hoards of bank notes or credit money either! The money hoards of each capitalist enterprise takes the form of ledger balances, the corresponding hoard actually having been deposited in the bank, or else takes the form of notes and coins kept in the firm’s cash box. The same applies to all of the disparate money hoards held by workers, peasants, the middle class, landlords and rentiers that become mobilised with a developed banking system.

      And, when we come to the banking system, then as Marx says, the derivation of the word bank comes from the word bench, which is where the original bankers took deposits from customers, and gave them a paper note detailing the extent of their money hoard. Similarly the term credit is derived from the word trust, with the greater credit meaning the greater trust that someone had that they would make good on their IOU’s.

      Marx also deals with these issues in TOSV Chapter 17, of the role of money as unit of account, and as means of payment, where he makes clear precisely this point that it is not credit that explains crises, because as he says, credit predates capitalism by many centuries, whilst money predates it by thousands of years, yet there were no crises of overproduction during all that time.

      Credit like money itself creates a POSSIBILITY of crisis, but marx criticises mercilessly those that try to explain the actuality of crises by those things that merely represent the possibility of crisis, because it explains nothing. Money itself creates the possibility of crisis, because it is the manifestation under commodity production and exchange of the separation of the unity of production and consumption, of purchase and sale. And, that separation of this unity enables the two contradictory elements of that unity – production and consumption, purchase and sale, and indeed producers and consumers to become increasingly separate and independent of each other.

      It is that separation Marx says the increasing independence of the two poles of this contradictory unity which is the real basis of capitalist crisis. The actual crisis is nothing other than the violent and forcible restoration of that unity when the two contradictory poles have become so independent of each that they have become completely separated.

      Yet, money and credit exist under petty commodity production, and under the early stages of capitalist production, without crises of overproduction arising. Under petty commodity production this division of the unity of production and consumption etc. exists without this possibility being translated into the actuality of a crisis of production.

      It is only under developed industrial capitalism where machine industry brings about a qualitative change in the scale of production relative to consumption that this possibility of crisis becomes a necessity, with the first such crisis only arising in 1825.

      As Marx says, even then for long periods the system rolls along smoothly without any such crisis, and during this period not only does the existence of money and credit not result in crises, but it facilitates this smooth development of production and consumption, and facilitates effective accumulation of capital, the speeding up of the circulation of commodities and credit, as well as reducing the overhead costs of having to use money only as means of circulation, and to endure the cost of producing precious metals solely for the wasteful purpose of using them as currency.

      Its not money or credit that create the crisis, but the fact that production and consumption or producers and consumers do not form a unity, and that the workers are only allowed to work, and so consume if the capitalist realises sufficient profit from their labour, that production is governed not by the need to produce use values but to produce surplus value, but the conditions for producing that surplus value are contradictory themselves to the conditions for realising that surplus value as profit, whilst each individual capital, under machine industry is forced by competition to continue to produce on an ever larger scale, even after production has already been extended beyond the point where what has been produced can be consumed at prices that realise the profit, or even the capital consumed in production.

      As Marx says, such conditions can exist whether credit exists or not, and that is the basis of such a crisis of overproduction of the first form. That then results in a crisis of the second form, a crisis of credit, where a cascading failure of payments occur, but such a crisis of the second form cannot exist without the crisis of the first form already existing. By contrast, a crisis of the second form, a credit crisis, does not imply a crisis of the first form. That does not mean there are not crises caused by credit, but they are not crises of overproduction. They are financial crises, where credit is over extended, which results in speculation, bank failures, stock and bond and property market bubbles that burst, but as Marx sets out such money crises are separate from crises of overproduction, and there is no reason they have to impinge on the real economy, or as Marx says they can actually be beneficial because the shares and bonds fall into the hands of those who are generally “more enterprising” as Marx puts it.

      “The form mentioned first is possible without the latter—that is to say, crises are possible without credit, without money functioning as a means of payment. But the second form is not possible without the first— that is to say, without the separation between purchase and sale. But in the latter case, the crisis occurs not only because the commodity is unsaleable, but because it is not saleable within a particular period of time, and the crisis arises and derives its character not only from the unsaleability of the commodity, but from the non-fulfilment of a whole series of payments which depend on the sale of this particular commodity within this particular period of time. This is the characteristic form of money crises.

      If the crisis appears, therefore, because purchase and sale become separated, it becomes a money crisis, as ‘soon as money has developed as means of payment, and this second form of crisis follows as a matter of course, when the first occurs. In investigating why the general possibility of crisis turns into a real crisis, in investigating the conditions of crisis, it is therefore quite superfluous to concern oneself with the forms of crisis which arise out of the development of money as means of payment. This is precisely why economists like to suggest that this obvious form is the cause of crises.”

      (TOSV Chapter 17)

  4. Noa Says:

    ‘Hoards must not be confused with reserve funds of coin, which form a constituent element of the total amount of money always in circulation …’ (Marx 1987, p. 370). Reserve funds are ‘accumulations of money as means of payment’ (p. 379).

    And with the banking system even those (now centralised) reserve funds do not stay in the bank’s reserve, but are loaned out.

    Today banks in the UK (like in many other countries) do not have even any overnight reserve requirements. Inter-bank payments (in the UK’s CHAPS) are done by “daylight overdrafts”.

    When the state collects taxes, this money isn’t kept in a bank account until the state expends it, but converted into interest-bearing instruments.

    The foreign reserves of central banks consist not of actual dollars, euros etc. but of assets denominated in those currencies.

    But what about the hoarder of notes under the bed stock? The assets (on the CB balance sheet) backing those notes are continuously maturing, ie they are repaid with notes, it doesn’t matter that it isn’t with those particular notes under the bed.

    • Boffy Says:

      Noa,

      The distinction that Marx is making here between hoards and reserves is only a distinction of function, not of the constituents of either. A hoard, which is not in circulation in the way a reserve is can just as easily be comprised of notes and coins.

      Suppose we have a situation where A undertakes work for members of their community. Value is labour, and the measure of value is labour-time. A thereby produces value by their labour-time in undertaking this labour for various members of the community, and the amount of value is measured by the amount of labour undertaken.

      The members of the community for whom A undertakes this work cannot immediately provide an equal amount of value, by undertaking labour for A. Consequently, each of these members of society, provides a with a hand written paper IOU, which sets out how much labour/value they owe to him/her.

      In terms of the actual material of the paper IOU it has no value. The value it represents is only the amount of labour-time that it represents as being owed to A.

      If A hoards these IOU’s given to him, they constitute a store of value, not in terms of the physical material of the paper IOU, but in terms of what they represent – a claim to a given amount of labour-time, which is really what money is. Provided A trusts those who give him these credit notes, he will accept them, in the knowledge that he can claim payment of the labour/value owed to him at some future time, and this is the historical origin of credit, and how much credit different individuals organisations had, i.e. how much trust others had in them.

      In such a society effectively based around barter, of exchange of labour for labour, there is no use for money as a means of circulation, it only has a role as means of payment and store of value. Producers store the value they are owed in terms of these credit notes – though in a primitive commune they would probably just be entries in the village ledger of what labour was owed to each villager for the past work undertaken, and subsequently these notes act as means of payment, as the owner of the note cancels it once its obligation has been fulfilled.

      As Marx says the replacement of an actual money commodity for the vast majority of these functions occurred very quickly, with the development of clearance houses where contending credit notes were cancelled against each other periodically, leaving only the balance of those transactions to be actually met by the physical transfer of money.

      Today, not even that occurs, because banks via the clearing house do not even make any transfer of physical money, but merely make electronic transfers of amounts of value that are recorded in the ledgers of the clearing house, and the central bank.

  5. Noa Says:

    Boffy wrote: “A hoard, which is not in circulation in the way a reserve is can just as easily be comprised of notes and coins.”

    No, IOUs (or bills of exchange) are relatively short-term. You can’t bury them like gold. But suppose you have a 20-year bill of exchange, bury it and dig it up twenty years later, the person who issued it to you may have died (or in case of a company, gone bankrupt). What you have in mind really as “store of value” is government bonds and such like, but these are not even legal tender currency.

    From Capital v.2 (p. 261), emphasis on the final sentence, that with the banking system “money no longer functions as a hoard but as capital”:

    If we consider this exclusively on the assumption of simple money circulation, without any regard to the credit system, then the mechanism of the movement is as follows. In the first volume (Chapter 3, 3, a) it was shown that although part of the money present in a society always lies fallow in the form of a hoard, while another part functions as means of circulation or as an immediate reserve fund of directly circulating money, the proportion in which the total quantity of money is divided between hoard and means of circulation constantly alters. In our present case, money that has to be accumulated on a large scale as a hoard in the hands of a big capitalist is thrown into circulation all at once on the purchase of fixed capital. It is then divided up again in the society between means of circulation and hoard. By way of the amortization fund in which the value of the fixed capital flows back to its starting-point in proportion to the wear and tear, a part of the money in circulation again forms a hoard – for a longer or shorter period of time – in the hands of the same capitalist whose hoard was transformed into means of circulation and separated from him with his acquisition of fixed capital. There is a constantly changing distribution of the hoard existing in a society, which alternately functions as means of circulation, and is then again divided off from the mass of circulating money as a hoard. With the development of the credit system, which necessarily runs parallel with the development of large-scale industry and capitalist production, this money no longer functions as a hoard but as capital, though not in the hands of its proprietor, but rather of other capitalists at whose disposal it is put.

  6. Boffy Says:

    “No, IOUs (or bills of exchange) are relatively short-term. You can’t bury them like gold. But suppose you have a 20-year bill of exchange, bury it and dig it up twenty years later, the person who issued it to you may have died (or in case of a company, gone bankrupt). What you have in mind really as “store of value” is government bonds and such like, but these are not even legal tender currency.”

    No, what I have in mind is notes and coins as I said! The issue here is, if the notes and coins are only issued in line with the value they represent, then a hoard or a reserve of such notes and coins will act as a store of value.

    Remember your original objection had nothing to do with the distinction between hoards and reserves, but was simply with the idea that notes and coins could act as a store of value. You said,

    “”Boffy wrote: “The role of money tokens … even as a store of value”

    I must disagree that tokens (or let’s say any non-commodity money) can serve the function of reserve/hoarding…”

    If notes and coins were issued as stated, so no inflation, then they would act as such a store of value, and over short periods they do indeed act as such a store of value, even if you dig a hole, and bury them in a box in the garden.

    By comparison say you had bought gold at $800 an ounce in 1980, and stuck it in a box in a hole in the ground, but came to need that store of value 20 years later in 2000, you would then obtain the grand sum of $250 an ounce for it instead, thereby instead of acting as a store of value it would have acted as a steady destroyer of value. Moreover, the $250 an ounce you received in exchange for your ounce of gold in 2000, would buy you only a fraction of the commodities that $250 would have bought you in 1980, so that your actual loss of value from hoarding gold would have been in reality even greater!!!

    That is one reason that those who chose to hold their stores of value in the form of notes and coins did so, by depositing them in the bank where they could at least hope to counter the effects of inflation by obtaining interest on their deposit, or else chose to use those money tokens to buy bonds, which could be stuck as a hoard in a draw for 20 years, each year racking up an amount of coupon interest, and better still if they bought inflation linked bonds.

  7. Boffy Says:

    Incidentally, when you say,

    “but these are not even legal tender currency.” this is both in practice wrong, and at the same time irrelevant. Its irrelevant because the issue is whether they can act as store of value, not whether they can act as currency, but as Marx and Engels set out in Capital III, it is in practice wrong, because such financial assets operate as collateral, in other words, its possible at any time to obtain currency by borrowing against them.

  8. Noa Says:

    For the sake of clarity it would help a lot if you say then that notes (hypothetically) can keep their ‘purchasing power’. Just don’t confuse this with hoarding in Marx’s sense (in ch.3 v1 section on hoarding), eg:

    “In order that the mass of money, actually current, may constantly saturate the absorbing power of the circulation, it is necessary that the quantity of gold and silver in a country be greater than the quantity required to function as coin. This condition is fulfilled by money taking the form of hoards. These reserves serve as conduits for the supply or withdrawal of money to or from the circulation, which in this way never overflows its banks”

    In practice we don’t see long-term hoarding of notes. Besides, the state can declare them invalid (witness India’s banknote ban), or they can be just destroyed in a fire.

    But I also tried to address the hypothetical situation (as a social phenomenon it’s non-existent, unless you have figures that say otherwise) when there would be no depreciation and an individual kept notes under the bed just for the sake of it (ie not saving to pay rent or buy a smartphone – that would be reserve funds):

    “The assets (on the CB balance sheet) backing those notes are continuously maturing, ie they are repaid with notes, it doesn’t matter that it isn’t with those particular notes under the bed.”

    An individual can keep notes under the bed without depreciation precisely because there is no excess of notes in society, whereas gold (as Marx says) is hoarded because there is an excess of it. The Central Bank’s rolling-over of assets expresses a continual need for notes. During a note-shortage notes are stockpiled, the individual will certainly not want to rid notes from under his bed, whereas one of the functions of a hoard is to supply gold to circulation when required. If there’s merely the threat of an excess and the individual (unlike everyone else) doesn’t in a panic get rid of his notes but has the solid confidence that the CB will appropriately reduce its assets, his stockpiled notes will again not have fulfilled one of the functions of a hoard (ie withdrawing the excess from circulation), rather the intervention of the CB saved the day.

  9. Boffy Says:

    Noa,

    I did make clear that I was talking about the functions of money as tokens, the discussion of the distinction between hoards and reserves is one you have focussed on. I initially wrote,

    “The role of money tokens as means of circulation, or means of payment, and even as a store of value similarly has no necessity of the equivalent amount of gold, silver or copper being present, either in the country, or in bank vaults as a reserve. All that is required is that the tokens issued, be they gold, silver or copper coins, or paper notes, are only issued in proportion to the amount of gold, silver or copper they purport to represent, in other words, that they represent that equal amount of value, that equal amount of social labour-time.”

    However, just for clarification, your comments about hoards, and the quote from Capital I, also reflect a further misunderstanding on your part. In the quote you give, Marx talks about the amount of gold and silver being held as hoards in a country being greater than the amount of coin in circulation. The only reason he talks in that vein at that point is that the discussion of credit money and currency is not properly developed until Volume III.

    He could just as easily have said that the amount of notes and coins held as hoards is always greater than the amount of notes and coins in circulation as currency. The reason being that is discussion of hoarding here is about the need for pools of money or money tokens to be held in excess of what is immediately required for means of circulation and means of payment, because what is required for these functions continually rises and falls, and its necessary to keep these hoards into which this excess currency can return and out of which it can flow when required.

    I have described it in dealing with that discussion as a bit like the pools kept near to canals, so that at one time the water flows out of the pool when the canal level drops, and into which excess canal water flows, when it is too high.

    Understood properly as Marx describes that function your objection about long term hoarding of notes and coins becomes irrelevant. In fact, in Britain, the Bank of England has noted recently that around £1 billion of its note issuance has disappeared into hoards, as people have felt that their money was safer under their bed. In 2000, when the Euro was introduced, there was an outflow of huge amounts of currency held in hoards across Europe, not just from criminal activity, but also from people who had built up cash hoards from various forms of minor tax dodging. Much of it flowed into the purchase of Spanish Villas, which was one reason those prices rose sharply at the time.

    The Central Bank itself holds hoards in the form of notes and coins, as discussed by Marx in Capital III, and they perform exactly this same purpose, as Marx describes, i.e. when the currency circulation requires more notes and coins, the Bank reduces its hoard, and when it requires less it takes notes back in. There would be little point actually destroying notes taken out of circulation (unless they were actually worn out, which the introduction of polymer notes is intended to address) only then to have to print more notes a few days later, when the circulation required more currency.

  10. Noa Says:

    Boffy wrote: “The only reason he talks in that vein at that point is that the discussion of credit money and currency is not properly developed until Volume III.”

    No, in the preceding section Marx already spoke about state paper money and in the following section he says “credit-money springs directly out of the function of money as a means of payment”. With regard to hoarding’s function (of guarding against overflowing circulation etc.) Marx is following Fullarton (who too spoke here only of metal money) against the quantity theory.

    “He could just as easily have said that the amount of notes and coins held as hoards is always greater than the amount of notes and coins in circulation as currency.”

    But that would conflate the laws governing the circulation of notes (state paper and banknote – these 2 are different of course) with those of metal money.

    I agree that my objection about long term stockpiling of notes is irrelevant to my real point. And you’re right that it might be significant, Boeschoten (p. 168, 1992) estimates it at 39% in the US. But I addressed why it is not hoarding in Marx’s sense: we have to focus not on the particular notes, but their underlying assets. Marx in volume 3 says:
    “So far as the bank itself is concerned, all the notes outside of its wall, whether they circulate or rest in private treasures, are in circulation, that is, not held in its own possession.”

    With regard to your point that “when the currency circulation requires more notes and coins, the Bank reduces its hoard, and when it requires less it takes notes back in. There would be little point actually destroying notes taken out of circulation” – let’s realistically focus on the electronic accounts at the CB.

    Those account holders sell/collateralise an asset to the CB and are credited by the CB with currency, which they just need to make payments. With the repurchase of the collateral the CB gets its electronic money back, and that is now destroyed, except for the additional amount of the initial discount (which is profit for the CB and handed over to the Treasury who puts it in circulation). Lapavitsas’s argument (eg at the “Marxist Monetary Theory” conference 18 January 2017) is that since the crisis we have a couple of trillion excess reserves. But my point remains valid, that the assets backing those reserves are continually maturing. Furthermore those excess reserves are used for payments.

    • Boffy Says:

      Noa,

      What I said was that the discussion of credit money and currency is not fully developed until Volume III. I didn’t say Marx doesn’t mention credit money prior to that. The point is that Marx’s discussion of hoards itself means that such hoards can comprise, and indeed as he sets out in Volume III, do consist of bank notes, as easily as they can consist of gold or silver.

      Indeed if you read what Marx says about the reserves held of surplus value and the reserves held for the replacement of wear and tear of fixed capital, he points out that in practice these are never held as separate reserves, and that they are used interchangeably. The same thing applies in relation to reserves and hoards.

      Moreover, as he sets out in Capital II, the private reserves and hoards become bank reserves and hoards as banks come to consolidate all of these private holdings. Overwhelmingly they are held in the form of notes and coin.

      As far as conflating notes with precious metal currency, the reason that Marx says for not spending too much time on talking about notes in his initial analysis, is that the underlying laws on currency are the same for notes as for precious metals. That is in so far as the notes are issued in accordance with the same laws that regulate the amount of previous metal put into circulation as currency. Whenever people come to understand the laws relating to paper currency, Marx says, they are always forced to come back to the laws determining precious metals currency.

      Indeed, its that fact that enables him to understand the relation of notes to metal currency, and the way in which the excess of note issuance is not an excess in relation to the amount of gold reserves, as Sam set out in the article above, and as the Miseans believe, but is an excess in relation to the amount of precious metal that would have been put into circulation.

      It is the very fact that when notes are issued in excess of the gold or silver that would have been put into circulation, this results in a devaluation of the note, and an inflation of prices that shows that the laws apply equally to either precious metal currency or notes.

      “The token of value, say a piece of paper, which functions as a coin, represents the quantity of gold indicated by the name of the coin, and is thus a token of gold. A definite quantity of gold as such does not express a value relation, nor does the token which takes its place. The gold token represents value in so far as a definite quantity of gold, because it is materialised labour-time, possesses a definite value. But the amount of value which the token represents depends in each case upon the value of the quantity of gold represented by it…

      How many reams of paper cut into fragments can circulate as money? In this form the question is absurd. Worthless tokens become tokens of value only when they represent gold within the process of circulation, and they can represent it only to the amount of gold which would circulate as coin, an amount which depends on the value of gold if the exchange-value of the commodities and the velocity of their metamorphoses are given…

      The number of pieces of paper is thus determined by the quantity of gold currency which they represent in circulation, and as they are tokens of value only in so far as they take the place of gold currency, their value is simply determined by their quantity. Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity…

      The State which issues coins even 1/100 of a grain below standard weight debases gold and silver currency and therefore upsets its function as a medium of circulation, whereas the issue of worthless pieces of paper which have nothing in common with metal except the denomination of the coinage is a perfectly correct operation. The gold coin obviously represents the value of commodities only after the value has been assessed in terms of gold or expressed as a price, whereas the token of value seems to represent the value of commodities directly. It is thus evident that a person who restricts his studies of monetary circulation to an analysis of the circulation of paper money with a legal rate of exchange must misunderstand the inherent laws of monetary circulation. These laws indeed appear not only to be turned upside down in the circulation of tokens of value but even annulled; for the movements of paper money, when it is issued in the appropriate amount, are not characteristic of it as token of value, whereas its specific movements are due to infringements of its correct proportion to gold, and do not directly arise from the metamorphosis of commodities.”

      (A Contribution To The Critique of Political Economy)

      You say,

      “we have to focus not on the particular notes, but their underlying assets. Marx in volume 3 says:”

      But, for Bank of England banknotes, there are no underlying assets, the notes themselves constitute assets. There may be related liabilities. For example, the banknotes held by the bank may be there because they are the other side of the balance sheet to the capital contributed by the bank owners, or they may be the deposits of customers. In the case of the Bank of England, and other central banks it can simply print additional notes.

      The fact that notes outside the walls of the Bank of England may be counted as in circulation, and may be in private treasures does not mean that these notes are not forming part of a hoard in Marx’s terminology. A hoard is something that is continually in flux, as money flows in and out of it in accordance with the requirements of currency circulation, including the requirements to make payments.

      There is a difference between talking about money being in circulation here and talking about money as means of circulation. Money in circulation can be used both as means of circulation, and means of payment, and indeed acts as a store of value, where that money is held prior to being used as means of payment.

      Money only acts as means of circulation when it is used in a transaction such as M – C, i.e. where it is exchanged directly for a commodity, as a prelude to a transaction C – M. Money acts as means of payment where it is used to cover the balance of transactions previously conducted by credit. In other words, A sells B a commodity with a value of £10, and B pays £10 to A a month later. Or A sells a commodity to B with a value of £10, and B sells a commodity to A with a Value of £20, so that a month later A pays the difference of £10 to B.

      But, in both cases the money used as means of circulation and means of payment had to be money that was in circulation.

      I think you are confusing the policy of QE, or what used to be called Open Market Operations by central banks with its normal process of putting currency into circulation.

      Either way, my initial point was, and remains that notes and coins act as means of circulation, means of payment and as store of value. They achieve that in so far as they are are issued in accordance with the laws that Marx describes relating to metallic currency that they are only put into circulation to the same amount of gold/silver they represent in circulation. As Marx makes clear none of that has anything to do with the amount of gold or silver that the central bank holds as reserves, which was the requirement stipulated by Ricardo and Orreton as implemented in the 1844 Bank Act.

  11. Boffy Says:

    Should say Overton.

  12. Noa Says:

    The discounted bills of exchange (or private bank notes) can comprise part of the balance sheet of the Bank of England, but please provide a quote from vol. 3 where Marx calls them a part of its reserve fund (or more specifically hoard).

    Boffy wrote: “the private reserves and hoards become bank reserves and hoards as banks come to consolidate all of these private holdings. ”

    But in any case then, as I quoted, “money no longer functions as a hoard but as capital” (Capital v.2, p. 261).

    I think Marx in the section on hoarding could easily have slipped in a reference to notes, but he didn’t. Just like Fullarton didn’t.

    Boffy wrote: “the relation of notes to metal currency, and the way in which the excess of note issuance is not an excess in relation to the amount of gold reserves, as Sam set out in the article above, and as the Miseans believe, but is an excess in relation to the amount of precious metal that would have been put into circulation.”

    Agreed.

    Boffy wrote: “It is the very fact that when notes are issued in excess of the gold or silver that would have been put into circulation, this results in a devaluation of the note, and an inflation of prices that shows that the laws apply equally to either precious metal currency or notes.”

    By the way, Marx has in mind state paper money, which (as Sam indicates) must be differentiated from credit money. But recognising Marx’s point that:

    “…a person who restricts his studies of monetary circulation to an analysis of the circulation of paper money with a legal rate of exchange must misunderstand the inherent laws of monetary circulation. These laws indeed appear not only to be turned upside down in the circulation of tokens of value but even annulled; for the movements of paper money, when it is issued in the appropriate amount, are not characteristic of it as token of value, whereas its specific movements are due to infringements of its correct proportion to gold”

    – does not mean that were gold to be “issued” in excess (as in Ricardo’s example of the Bank sitting on a gold mine), the prices would rise. Here’s where the function of hoarding comes into play, the excess gold would be turned into hoards (these include luxury articles). Gold’s value would not depreciate, unlike in case of state paper. In case of excess of credit money (banknotes) they would return to the issuer (ie “law of reflux”).

    Boffy wrote: “There may be related liabilities. For example, the banknotes held by the bank may be there because they are the other side of the balance sheet to the capital contributed by the bank owners, or they may be the deposits of customers. In the case of the Bank of England, and other central banks it can simply print additional notes.”

    Banknotes must have related assets (not liabilities), eg discounted bills of exchange or government bonds. The Bank cannot “simply print”, it has to judge the credit-worthiness of its borrowers and the borrower has to be willing to borrow in the first place. That’s the difference with the expenditure of state paper money, which does not require matching collaterilised assets or willing borrowers.

    Boffy wrote: “The fact that notes outside the walls of the Bank of England may be counted as in circulation, and may be in private treasures does not mean that these notes are not forming part of a hoard in Marx’s terminology. A hoard is something that is continually in flux, as money flows in and out of it in accordance with the requirements of currency circulation, including the requirements to make payments.”

    It does mean that, because the notes (doesn’t matter if it isn’t those particular stockpiled ones) are expected to return when the assets mature. Gold coins don’t have assets backing them, they aren’t expected to return to any issuer upon maturation of some underlying asset.

    On tokens of value as opposed to metal money, btw here’s a quote (Volume 30, MECW, p. 92-103) that they can’t be considered capital:

    “If tokens of value circulate, whether they serve as means of circulation or means of payment, they merely represent the value of the commodities estimated in money or they directly represent money, which is equal in quantity to the amounts of money expressed in the prices of the commodities. As such they have no value. They are therefore not yet capital in the sense that the latter IS objectified labour. They represent instead in full the price of the capital, as they previously represented that of the commodity. If real money circulates, this is itself objectified labour — capital — (because commodity).”

  13. Boffy Says:

    “The discounted bills of exchange (or private bank notes) can comprise part of the balance sheet of the Bank of England, but please provide a quote from vol. 3 where Marx calls them a part of its reserve fund (or more specifically hoard).”

    Whose talking about discounted bills of exchange or private bank notes? I was talking about Bank of England banknotes and coins.

  14. Boffy Says:

    You say,

    “But in any case then, as I quoted, “money no longer functions as a hoard but as capital” (Capital v.2, p. 261).”

    Not if it simply sits as a reserve in the bank it doesn’t. It only becomes money-capital when the bank loans it out.

    I’ll come back to the rest of your comments later, when I have time.

  15. Noa Says:

    Prior to their distribution the Central Bank may have a stockpile of its own notes or always keep some ready in case of special demand, but I don’t even see it mentioned on its balance sheet. One might just as well say that the CB keeps a hoard of electronic money ready.

    Boffy wrote: “Not if it simply sits as a reserve in the bank it doesn’t.”

    Banks in the UK don’t need to hold even overnight reserves at their electronic account at the CB. Banks will do anything to avoid idle reserves. In case of the excess reserves due to the programs in the wake of the crisis, I believe they are used for inter-bank payments (the US Fedwire system daily handles some $3 trillion).

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