[OPE-L:1272] Credit money

Costas Lapavitsas (CL5@soas.ac.uk)
Fri, 1 Mar 1996 03:12:48 -0800

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Duncan's [1262] contribution to the credit money debate contains a
wealth of insights which should be discussed methodically. I would
like at this stage to comment simply at his point on the history of

Duncan argues:

> 1. I think there is pretty strong evidence that Marx made a major change
> in his views on monetary theory between the "Poverty of Philosophy" when
> he followed Ricardo's views very closely, and Capital, where he puts
> forward a view based on the Banking School and Tooke. The main difference
> is that in the earlier period Marx accepted a version of the quantity of
> money theory of money prices, while in the later period he insisted (more
> consistently in my view) on rooting the money price level in the
> reproduction cost of the money-commodity (gold).

Arnon's (1984) excellent paper indeed made the point that Marx drew
many of his anti-Quantity Theory insights from Tooke of the Banking
School. However, may I suggest that Duncan perhaps overstates Arnon's
case when he says that 'Marx made a major change' in his views.
Arnon's one-line reference to 'Poverty' (incidentally, the same
paragraphs as Alan Freeman circulated in OPE-L) simply states, on the
authority of Rosdolsky, that Marx accepted Ricardo's theory of money.
This does not necessarily mean that Marx accepted the Quantity Theory
of Money. Indeed, though in 'Poverty' Marx speaks highly of Ricardo
on money, there are no references which can be directly construed as
support for the Quantity Theory of Money. To substantiate the point
further, and I am sorry if this is turning into a rather technical
exercise in the history of thought, note that the key laudatory
remark on Ricardo in 'Poverty' also appears in a similar form in
the 'Contribution', by which time, if Duncan is right, Marx
had had a major change of mind regarding Ricardo's monetary theory:

'Doubtless, in international trade, money is determined, like any
other commodity, by labour time. But it is also true that gold and
silver in international trade are means of exchange as products and
not as money. In other words, they lose the characteristic of
'stability and authenticity', of 'sovereign consecration', which for
M. Proudhon, forms their specific characteristic. Ricardo understood
this truth so well that, after basing his whole system on value
determined by labour time, and after saying: 'Gold and silver, like
all other commodities, are valuable only in proportion to the
quantity of labour necessary to procure then and bring them to
market,' he adds, nevertheless, that the value of money is not
determined by the labour time its substance embodies, but by the
law of supply and demand only.' [Poverty, chinese edition, 80-81].

'According to this point of view, inconvertible paper money has only
one advantage over convertible paper money, ie, it can be depreciated
in two ways. It may fall below the value of the metal which it
prefesses to represent, because too much of it has been issued, or it
may fall because the metal it represents has fallen below its own
value. This depreciation, not of notes in relation to gold, but of
gold and notes taken together, ie, of the aggregate means of
circulation of a country, is one of Ricardo's main discoveries, which
Lord Overstone and Co. pressed into their service and turned into a
fundamental principle of Sir Robrt Peel's bank legislation of 1844
and 1845.' [Contribution, Progress, 174].

I think that the attack on the Currency School in the second quote is
a bit overdone, but it seems to me pretty clear that Marx still
accepted Ricardo's determination of the exchange-value of metallic
money by demand and supply alone.

What I am saying is that there is a Ricardian foundation to Marx's
advanced monetary thought (and further evidence can also be
provided if wanted). As Duncan rightly says, however, the mature Marx
was scathing about the Quantity Theory of Money. It seems to me, as I
have argued in a fairly recent paper in CJE, that Marx could do this
without logical violence because he held an essentially endogenous
view of the money supply. The exchange value of money could thus be
determined by demand and supply (as per Ricardo) but supply was also
endogenously determined (unlike Ricardo). The endogeneity of the
money supply was indeed something which Marx learnt form the Banking
School, and even more so from Steuart. I am not, however, for a
moment suggesting that Marx formulated a definitive theory of this

Does this have any relevance for modern monetary theory? I think it
does because it invites us to consider how the endogeneity of the
money supply changes when money is metallic, fiat, and, above all,
credit money. It also allows us to build a link with modern post-
Keynesian debates on monetary theory.

I hope this makes sense and I apologise for its length.