I just was handed a patacon from someone who just returned from Argentina. The first thing that hits you is that it looks so much like their peso. The patacon was issued and used to pay government worker salaries. They key state power here was the declaration that patacones would be accepted in payment of taxes. Of course, then there is another state power implied there--the power to tax. An the power to issue the patacon. And the power to set prices for goods and services the government purchases. So any state power theory of money must recognize at least these powers: 1) power to tax; 2) power to issue currency; 3) power to declare "public receivability" (what will settle obligations at state pay offices); 4) power to set certain prices. This is straight chartalist monetary theory. Mat
-----Original Message----- From: Devine, James [mailto:[EMAIL PROTECTED]] Sent: Wednesday, January 09, 2002 12:05 PM To: '[EMAIL PROTECTED]' Subject: [PEN-L:21251] state power theory of money [was: RE: [PEN-L:21246] Re: FW: Re: Re: sinking Argentina ] Romain Kroes writes:> Very interesting and relevant subject of controversy, Jim.< thanks. > But is the "forced circulation" of fiat money a reality? < By "forced circulation," I mean (and I believe Marx meant) the use of state power to ensure that the fiat currency is used and accepted within a certain geographical area. The U.S. dollar has legal status in the U.S. -- it's legal tender for payment of all debts, public or private -- while the U.S. government accepts the fiat money in payment of dollars, fees, fines, etc., creating a permanent demand-side underpinning for its having a market-value above its production cost. (One interpretation of one U.S. financial crisis under 19th-century President Jackson was that it was sparked by the government's refusal to accept fiat money in payment for its sales of western lands. That is, the government lapsed in its role as underpinning the demand the fiat money.) Further, the Federal Reserve -- an agency of the U.S. government -- keeps its supply limited. As I said, if the power of the state collapses -- as in Germany after World War I or the U.S. Confederacy in 1865 -- the fiat behind the money collapses, so the fiat money itself loses value. (BTW, this presumes that the state doesn't want hyperinflation. I think that makes sense except when the state itself is falling apart.) > If it were, general level of prices would be immutable. < I don't get this, unless the power of the state is always constant. Also, though the power of the state is the fundamental or structural basis for the value of fiat money, there are all sorts of short-term or conjunctural factors which play a role. > Unless you believe in the "quantity theory". Do you? If yes, it is another controversy. < Somewhere in volume III of CAPITAL (I'll look for the reference if you wish), Marx endorses a version of the quantity theory of money for _fiat money_ (though not for gold or other commodity moneys). That is, if the quantity supplied of a convertible non-gold currency rises relative to the amount of gold that backs it up, the gold price of the former falls (cet. par.) so that prices stated in the non-gold currency rise. Under the gold standard, the same happens with officially non-convertible moneys. I don't believe in the quantity theory of money (which I interpret as positing a simple and stable positive relationship between the quantity of money and the price level), because the demand for money is typically unstable. Further, the quantity theory's added assumption that the economy always operates at full employment is demonstrably false. The quantity theory does have a "rational core," i.e., that if there's persistently too much fiat money in circulation relative to demand it encourages inflation and even hyperinflation. The problem is that the quantity theorists (e.g., Milton Friedman) interpret this type of event as merely a mistake by the government or as a sign of its perfidy. I interpret it instead as a sign that the state is falling apart, that society is divided by severe class and other struggles, that the government can't collect sufficient taxes or cut expenditures enough -- and finds itself able to borrow only at usurious rates that make its budget deficit worse. (If it can't borrow, then the deficit must be "monetized.") Economic dependency makes this sitution more likely. (Internal struggles need not be reflected in hyperinflation, as seen (until recently) in Argentina. With the kind of forced dollar/peso parity that Argentina had, the conflict is reflected in other ways. So even though conflict causes inflation cet. par., it need not do so in all situations.) > On the other hand, if people don't trust a fiat money, nobody can force them to use it. They use another one. I think that the problem lies elsewhere.< Though subjective trust in money -- i.e., a belief that other people will accept it -- is crucial, I believe that the forcing of the circulation of money described above is the objective basis for the subjective trust. > What can be forced is not the circulation but the full-discharge payment. In other words: the account unit of the debt. Fiat money enables producers to reflect all increasing costs of production in their prices of production and, this way, to pass additional cost on to the creditors.< please explain. > What the ancient monetary units like raw materials, grain, silver and gold did not allow, because of the "scarcity" you mention and define, that is to say they did not allow to restore relative prices when upstream prices increase. So that monarchs and oligarchs were periodically lead to purge the debt (as reflected in Ancient Testament, by the "jubilee"). But in both cases, recurrent moratoriums or full-discharging fiat money, the purge of debt is a destruction of financial capital. And this is, I think, the reason why fiat money is seen as "forced".< To me, it's not just the natural scarcity of gold, etc. (i.e., the need to use labor to produce them) that stands behind their use. (It's also not just the fact that gold is easy to make into coins, etc.) Rather, it's the fact that there's no need to use state power to ensure that people accept gold as money. The government's role is relatively minor, i.e., trying to make sure that the goldsmiths don't adulterate the metal, etc. That's why gold prevailed in Western Europe in the feudal period, where centralized states were the exception rather than the rule. That's why gold prevailed in the 19th century on the international level, when there was no hegemonic power of the U.S. sort (and no world government, of course). When there's no political unity under the power of the state, "natural" means are applied. Again, I don't quite get what you mean by not allowing the restoration of relative prices when upstream prices increase. Do you mean that the gold standard has a severe deflationary bias, except when there are new gold discoveries? and that such a bias squelches capitalist or commercial business operations? If so, I agree. But I would interpret the purging of debt -- jubilee -- in slightly different terms. I think it represents (1) an effort to respond to the social unrest that occurs under deflation as nominal debts become more valuable relative to wages and commodity prices; and (2) the government's own excessive indebtedness (typically due to wars). The latter also encouraged kings to "cheat" on the gold standard, adulterating the coins, etc. > Therefore, the problem is the one of debt a world money has first to be related to. It is matter of a full-discharging world money that depends, I agree with you, on the kind of economy which gets hegemony. If hegemony was of say oil-producers countries, world money would be oil or any currency related to oil. As hegemony is of an oil importer, world money is a fiat one that allows to govern relative and real prices between oil and final goods and services.< I don't think that an oil-based international monetary would work very well. The problem is that the price of oil fluctuates too much (since both supply & demand are inelastic). (I don't think the gold standard would work well now that gold has become a speculative commodity. One of the things that made the gold-dollar standard of the old Bretton Woods system work was that gold was prevented from being a speculative commodity.) It would only work if the hegemonic power could use its monopoly power to stabilize the price of oil relative to the average of other prices. More likely, that state would circulate fiat money and it would be accepted due to its military-financial-economic power, including its control over the oil supply & market. >So, the only way of getting out of monetary crises is an agreement between countries according to which every country may pay its debt in any convertible currency, but its own. The BIS can manage that. But that poses the problem of getting rid of asymmetric exchanges and of all kind of imperialism, when even UNO has become an instrument of occidental empire. Has it not?< Yes it has. The problem is that the kind of agreement between countries that you refer to has never fit with the interests of the hegemonic power, i.e., the U.S. Jim Devine
