[OPE-L:2316] State theory of money

From: Gerald Levy (glevy@PRATT.EDU)
Date: Thu Feb 03 2000 - 12:40:33 EST

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Date: Thu, 3 Feb 2000 12:23:19 -0500 (EST)
From: bhandari@mmp.Princeton.EDU (Rakesh Bhandari)
Subject: State theory of money

Sometime back there was mention of Knapp's theory of money. In writing a
piece about Paul Mattick Sr's work on government credit operations and
their inflationary effects, I came across an interesting consideration of
Knapp's theory. Just thought I would share the quote and some of my
Yours, Rakesh.

Simply put, since massive deficits could not be financed simply by taxation
or use of idle bank credits--that is, the government could not draw on
claims on commodities that already exist--it had to create claims on that
that do not as yet exist: the government had to borrow. Mattick argued
that in order to pay for war and economic stabilisation, the government had
begun to desperately create money by issuing bonds that banks received for
the credit they issued in exchange. While he had clearly anticipated the
limits of this strategy by the 1960s, his comment from 1976 here is quite

But a state monetary policy aimed at influencing the economy signifies at
least a partial elimination of commodity and money fetishism, and in this
snese it reflects the general process of decline of a market economy. It
indicates the acceptance of Knapp's state theory of money and its
adaptation to the mixed economic system of present vintage. But as long as
the stae controlled profitless sector of the economy grows more rapidly
than the private sector, the accumulation rate of the latter must fall, and
such a policy of conscious, purposeful intervention into automatic market
processes will not bring order into the system; its occurrence is rather a
sign of decay--regardless of any temporary economic relief it may bring.
Ultimately any state monetary policy meets its limits in the contradictions
at work in the sphere of private production. (p.67)

        Mattick demonstrates the explanatory power gained from Marx's
abstraction from credit money and all other obstacles that hide the real
relations of production and often seem to contradict them. By way of such
abstraction Marx was able to focus on the unchanging social relations of
production which assure the the production of surplus value through
fetishistic value of social production. Now Mattick demonstrated the
soundness of Marx's initial restriction to a contradiction inherent in
capitalist production, which, although ever present, need not be visible in
market events, as it can indeed by countered by capitalist reactions for
shorter or longer periods of time. The point however here is that the
contradictions immanent in production are explanatorily fundamental to
grasping and indeed anticipating the limited possibilities of government
credit money used as such a counter-tendency. Alone in his time, Mattick
thus vindicated the logical structure of Marx's method, often taken to be
arbitrary, by demonstrating the explanatory and indeed predictive power it
indeed enables.
        So facing those limits, the economy would suffer an inflationary
spiral, Mattick argued; since there was no corresponding creation of
capital to cover the transaction--why the government's credit backed orders
or 'investments' do not contitute capital augmentation but are rather
forms of social consumption is the crux of the matter as developed below --
the value of gold could only be greater than value of this (fiat) currency
which indeed led the US government to suspend convertability especially due
to the massive build up of euro dollars abroad. The money of the
government could now only buy less gold and thus only suffer depreciation
for the simple reason that whereas it required no time put into production
to 'create' that additional currency, the time to produce gold remained the
same: prices could only rise. The governement credit operations on which
the maintainence of the mixed economy relied had become seriously
destabilizing for the galloping inflation they engendered went beyond the
the simple prop to profitability and therewith accumulation from a rising
rate of exploitation from wages falling behind consumer price increases.


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