[OPE-L:2355] RE: commodity money

Duncan K Foley (dkf2@columbia.edu)
Fri, 24 May 1996 11:18:47 -0700

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On Fri, 24 May 1996, Chai-on Lee wrote:
(leaving out a number of remarks for time)
> >How do you fit the current institutional situation (floating exchange
> >rates, no guaranteed convertibility of national currencies into gold) >into your interpretation?
> Chai-on (3)
> ----------
> IMO, foreign exchange rate needs somewhat longer discussion.
> Even in the gold standard system, the market price (or market value of
> gold is deviating from the offical convertion rate of gold into bank notes.
> The two were mutually influencing. The most determinant was the
> current production condition of gold and/or the import price of gold.

This is true, but how relevant do you think it is to the contemporary
international financial system?

> By analogy, the fixed rate of echange in the foreign exchange
> corresponds to the offical conversion rate while the floating rate of
> exchange does to the market price of gold. And "the current production
> condition of gold and/or the import price of gold" corresponds to the
> import and export prices of goods.

It seems to me that there's one determination fewer here when there is no
legislated link between the value of the national currency and gold (or
some other produced commodity).

> In theory, the central banks can issue paper money with no limit
> as far as it is backed by foreign currencies. They can intervene
> in the foreign exchange markets with unlimited freedom. Its feasibility
> zone is limited by the import and export balances.
> Yet, if the central banks collaborate (among the G7 countries) to
> increase the issue of money in the same proportion, the exchange
> rate does not change with no interest rate being influenced.
> In this situation, the credit money turns into the pure state paper
> money. (the difference between the state paper money and the
> credit money consists in if the issue of money is backed by bonds
> or not).

To the extent that a central bank tries to stabilize the value of its
currency on the foreign exchange markets, it does establish a link between
the national currency and other currencies (mainly the dollar, I guess).
But this doesn't solve the system-wide problem of determination unless the
reserve currency (the dollar) is convertible into gold or some other

> The collaborated G7 countries can enjoy the primitive
> accumulation from the rest of the world, which must be the privilege
> of the advanced economies with high technologies as the capitalist
> power. More discussion should follow, however, about the
> international labour theory of value.

I would call it "seignorage", but I agree that it represents an important
channel for the flow of value between countries.