Issues in Marxian Theory of Money and Credit || Marxian Theories of Credit Money and Capital

Marxian Theories of Credit Money and CapitalAuthor(s): Trevor EvansReviewed work(s):Source: International Journal of Political Economy, Vol. 27, No. 1, Issues in Marxian Theoryof Money and Credit (Spring, 1997), pp. 7-42Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/40470692 .Accessed: 01/10/2012 09:10

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Int. Journal of Political Economy, vol. 27, no. 1, Spring 1997, pp. 7-42. © 1998 ME.Sharpe, Inc. 0891-1916 / $9.50 + 0.00.

Trevor Evans

Marxian Theories of Credit Money and Capital

Money is central to the Marxist analysis of capitalism. Marx himself introduces money at the beginning of Capital, and it is of significance at every subsequent stage of his analysis. For Marx, capitalism is necessarily a monetary economy, although he also stressed that monetary factors could only be understood by relating them to developments in the sphere of production. This is very different from the main body of neoclassical economics, which develops its analysis largely in terms of a real, or moneyless economy, and then adds on a monetary sector at the end, principally in order to determine the price level.

Since the publication of Capital the Marxian theory of money has received relatively little attention. One notable exception is Rudolf Hilferding's Finance Capital although the first half, where the theory of money is considered, has been discussed much less than the second half, which develops the famous thesis that banking capital had come to merge with and dominate over industrial capital. LI. Rubin's Essays on Marx's Theory of Value addresses some important methodological issues, although, as the title suggests, the focus of this work is on value rather than on money. By contrast, the importance of money is stressed in Roman Rosdolsky's The Making of Marx's Capital which provides a very clear exposition of the methodological foundations of Marx's

Trevor Evans worked for many years at the Centre for Regional Economic and Social Research (CRIES) in Managua, Nicaragua, and is currently based in Ber- lin. This paper was written in 1988 and revised in April 1994. I am grateful to Laurence Harris and Chris Edwards for their comments on the earlier version.

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approach, although Rosdolsky does not attempt to develop Marx's theory at all. More recently, Ernest Mandel has also emphasized the key role of money in Marxian economics in his theoretical writings, and he is one of the few Marxian writers who has addressed monetary issues in his extensive empirical analyses. Nevertheless, Mandel's work is based essentially on applying Marx's approach to contempo- rary conditions, rather than on developing it.

In recent years, a number of writers in France have developed a more innovative approach to Marxian monetary theory. One of the most important of these is Suzanne de Brunhoff, who has extended Marx's approach through a careful analysis of modern systems of money.1 There are also a number of writers associated with the Regu- lation School who have developed a wide-ranging analysis of postwar capitalism that gives considerable attention to the role of money. They have attempted to develop the Marxist theory of money, in part by drawing on the recent work of Post Keynesian economists. The foundations of this approach were laid by Michel Aglietta, although he subsequently distanced himself from his earlier Marxist perspective, and the task of elaborating a regulation analysis of money along Marx- ist lines was taken up by Alan Lipietz.2 However, the position that both these writers adopt on some of the key issues, in particular the analysis of credit money, has also been developed independently by Duncan Foley in the United States.3

Two main issues occur in discussions of the Marxist theory of money. One concerns the right starting point for a theory of money under capitalism: whether such a theory should be based on the fact that capitalism is a commodity-producing economy, or whether it should be based on the fact that the commodities are produced under capitalist social relations with the aim of making a profit. This question is important in its own right, but it is also important because it is closely linked to the other main issue. This concerns the relation between commodity money and credit money, and how Marx's theory, which relies heavily on a notion of commodity money, can be used to analyze money that is not convertible into gold.

To consider these issues, it will help first to clarify the analytical method employed in the Marxist theory of money. Marxist economics analyzes capitalism on the basis of two types of social relation. The first is the commodity relation, which refers to the organization of production in private, independent units that relate only indirectly

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through the process of exchange. The second is the capital relation, which refers to the fact that workers are employed for a wage by capitalist enterprises that own the means of production.4 These two relations provide the starting point for the Marxist theory of money, which involves four stages in all. The first stage considers money and the commodity relation; the second considers money and the capital relation; the third looks at how the analysis has to be modified when the first two stages are combined; finally, the fourth stage extends the analysis to include banks and credit and the transformation of money capital into a commodity that is borrowed and lent.

Each of these stages is considered briefly in the next four sections. This then sets the scene for two sections in which each of the questions posed above is considered - namely, whether the analysis of money should start from the commodity relation or the capital relation, and how the relation between commodity money and credit money should be conceived. The last main section then outlines how recent writers have attempted to relate their approach to modern systems of money based on a hierarchy of different forms of credit money.

Money and commodities

The first stage of the Marxian approach is based on considering independent producers who own their means of production and who use their own labor to produce commodities for exchange. Marx referred to this as simple commodity production, although since he first employed the term, there has been some disagreement about how it should be understood. Engels and, more recently, Ernest Mandel, among others, have interpreted it as a historical stage of development and conceive of a simple commodity economy as the forerunner of a capitalist economy.5 I.I. Rubin, by contrast, points out that it is only under capitalism that there is a widespread circulation of commodities, and he questions whether small pockets of commodity production within precapitalist societies would have been subject to the same types of economic pressure as a fully developed capitalist economy. More fundamentally, though, he argues that, irrespective of its historical validity, the concept of simple commodity circulation is intended as a means of analyzing some features of a capitalist economy while temporarily abstracting from many of its other features.6

Whichever of these positions is adopted, there is broad agreement


about the main features of simple commodity production. The labor that is expended in producing commodities is considered to comprise two different aspects: Qualitatively, it involves a particular type of concrete labor, while quantitatively it entails a definite amount of abstract labor. The value of the commodities is considered to be determined by the amount of abstract labor that is socially necessary to produce them, and this value is established by a social averaging that is effected through the process of exchange.

The framework of simple commodity production is used to develop two basic ideas that underlie the Marxist theory of money. The first is the idea that money is the means by which commodities express their value. Marx develops this idea using a logical-historical argument that combines a theoretical account of what money is with a historical account of how it emerges.7 He argues that, because of the social nature of value, the value of one commodity can only be expressed in terms of the amount of some other commodity for which it can be

exchanged. Marx describes a process that begins with each commodity expressing its value in one other commodity and culminates with all commodities expressing their value in one single commodity, which Marx calls the general equivalent. He argues that the commodity that comes to be socially accepted as the general equivalent is money. According to this perspective, therefore, money is the commodity that is used to measure the value of all other commodities.

The second basic idea is that money is the means by which society validates private expenditures of labor. The ability of a producer to specialize in the production of a particular commodity presupposes that there is a division of labor in which other producers will specialize in producing other commodities. However, in a commodity economy, there is no organizing authority that consciously assigns each producer a part within the operation of the whole. Consequently, when producers set to work, they are in the first instance expending their own private labor, and whether this will conform with the allocation of labor that is required in the society is only determined subsequently. Producers only learn whether they have expended their labor in a way that corresponds with what is required in the society by being able to sell their products. Along these lines, money is seen as the means by which society validates the labor that has been expended privately by the dissociated yet interdependent producers who constitute a commodity economy.

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The relative importance attached to each of these two basic ideas varies among different Marxian approaches to the theory of money. Marx elaborates the first idea - money as the means of expressing value - at considerable length and then goes on to show how he considers this to be the basis for the second idea - money as the social means of validating private labor. Foley, however, develops his analysis exclusively from the idea of money as an expression of value. The French writers (de Brunhoff, Aglietta, Lipietz), by contrast, pay some attention to the first idea, but their analysis is couched predominantly in terms of money as a social means of validating private labor. The shift of emphasis is taken even further by Hilferding, who develops his analysis exclusively on the basis of the second idea. This difference, it might be noted, is not merely academic, but goes to the heart of dis- agreements about the possibility of overcoming the social and economic contradictions that emerge in a capitalist economy. There is a direct link between Hilferding's exclusive focus on money as the social means of validating private expenditures of labor and his view that a social democratic government could, through a system of planning, overcome the tendency toward periodic crises in a capitalist economy.8

Despite the differences just mentioned, there are a number of important issues on which most of the Marxian approaches to the theory of money agree. In the first place, there is agreement that money is a necessary feature of a commodity economy, and not something that can be added on to an already established process of exchange. In an economy where production is organized for exchange, commodities require some means of expressing value. Even in an exchange where money is not actually present, such as barter trade, money is still required to express the value of the commodities, and the proportions in which they are exchanged. Alternatively, to use Hilferding's telling metaphor, in the absence of any coordinating authority, money functions as the collective intelligence of society - that is, it is through money that society effects the assignment and reassignment of social labor between the different branches of the division of labor.

There is also broad agreement that, following the lines of Marx's own analysis, there is a logical priority for analyzing the different functions of money.9 The idea of money as the socially recognized means by which commodities express their value leads to the view that money's primary function is as a measure of value and that priority should therefore be given to this function when analyzing more com-


plex situations. This differs from the neoclassical or quantity theory of money, which gives priority to money's function as a means of circulation, or Keynesian theory, which attaches primary importance to money's function as a store of value.

The second function of money is as a means of circulation. The idea that money is first and foremost a measure of value implies that the amount of money that will be required as a means of circulation will be determined by the value of the commodities to be circulated, and not the other way round, as in the quantity theory.

Following the discussion of money as a measure of value and as a medium of circulation, there is a set of functions of money that Marx terms money as money. This refers to functions that can only be conceived of because, as Marx expresses it at one point, money represents the autonomous embodiment and expression of the social character of wealth.10

The first function of money as money concerns the notion of forming a hoard, which refers to the possibility that money can be with- drawn from the process of circulation.11 It arises if a commodity is exchanged for money and the money is not then used right away to buy some other commodity. The logic of a simple commodity economy does not suggest many reasons for forming hoards, except perhaps as a reserve fund to ensure that every purchase does not have to be immediately preceded by a sale. (At a subsequent stage of the analysis it will be shown that hoarding corresponds to a significant aspect of capitalism.) An important consequence of the idea of hoarding is that it demonstrates how, if the amount of money required as a medium of circulation is determined by the value of the commodities to be circulated, the amount of money in circulation can adapt to changes in the value of commodities. The concept of forming a hoard is also significant because it recognizes that, in a monetary economy, since every sale need not be followed immediately by a purchase, a breakdown in economic reproduction is a possibility.

A second function of money as money is as a means of payment. This refers to a situation where a commodity has been exchanged not for money but on credit, and money is said to act as a means of payment when it is subsequently used to settle the outstanding credit.

The third function of money as money that Marx mentions is as world money. This refers to the use of gold to settle outstanding balances of payments that result from transactions between different

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countries. Although Marx introduces the concept of world money along with the other functions of money as money at an early stage of his analysis, this raises certain problems. The previous functions of money have all been developed within the theoretical framework of a simple commodity economy, but the function of world money introduces the notion of national economies and implies the presence of the state and the idea that, within national economies, something other than gold might function as money.

Money and capital

The second stage of the Marxian analysis focuses on the relation between capital and workers. It does so by considering just a single capital, thereby excluding from consideration the relations among different units of capital. In the Grundrisse, Marx refers to this as "capital in general." Conceptually, it is as if all the capitals within an economy were treated as a single firm that employs all the workers.12

Money becomes capital when it is advanced with the aim of making a profit. The source of the profit is surplus value, which originates in the employment of waged workers who create more new value in the process of production than they are paid in wages. Marx characterized this process with the famous formulae, M-C (LP, MP) . . . Ρ ... C - M. Money is advanced to buy the commodities labor power and means of production; in the process of production workers are set to work to transform raw materials into finished commodities; finally, the finished commodities are sold for an amount equal to the initial value advanced plus a profit. The important point here is that capital is characterized as value in the process of expansion, and money is one of the forms that capital adopts in the course of this process.

The analysis of money as capital introduces two types of issue for the theory of money. The first concerns the functions of money. Money's social function as a means of validating private expenditures of labor does not come into play at this stage, since the focus on a single capital excludes consideration of the division of labor between private units of production. However, money does acquire a very important new social function. It is through the payment of a money wage that workers are integrated into the process of production, and the dependence of workers on a wage in order to live is a central means of ensuring that, once employed, workers submit to management disci-


pline and the requirements of capitalist valorization. The process of valorization also introduces a new task in relation to money's function as a measure of value. The aim of valorization is to ensure that the original value advanced is reproduced with a surplus, and money therefore serves to measure not just value but also surplus value; or, in terms of everyday accounts, not just prices but also profit. The function of money as a measure of profit is one of the most crucial aspects of a capitalist economy, not only since profitability is the aim of the whole process, but also because it determines the extent to which a firm will be able to accumulate, and thereby proceed more successfully in the future.

The analysis of capital also introduces a rather different issue for the theory of money. The reproduction and accumulation of capital involves an expanding circuit in which capital moves through several forms - money capital, productive capital, commodity capital, and again money capital. However, even if the circulation of capital is not interrupted, the reflux of capital in the form of money occurs with a certain discontinuity. This arises because the various elements of capital have different turnover times, and it leads to the formation of so- called hoards of money at different points in the economic circuit: All the costs of wages and other inputs do not have to be paid at the beginning of a cycle; the flow of money for the depreciation of fixed capital builds up over a period of time before it is invested in a replacement; and the flow of profits must be accumulated until there is suffi- cient to convert into additional productive capital.13

The formation of these hoards, particularly in relation to the depreciation and accumulation of fixed capital, demonstrates that capitalist production results in the generation of irregular financial flows that can be a major source of tension for the smooth functioning of capitalist financial systems. Once the analysis is extended to include many firms, it is possible to see that such hoards might not all be formed at the same time. Indeed, Marx saw these hoards as the basis of the credit system, which ensured that the funds would not lie idle, but rather would be employed profitably by some other enterprise. However, this is to jump ahead of the analysis.

Capitalist competition

The third stage of the analysis introduces the fact that capitalism does not consist of one giant capital, but rather of many capitalist firms that

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compete with each other. This stage involves combining the features that were analyzed separately in the first and second stages of the analysis. Building on the first stage of the analysis, the economy is conceived of on the basis of a social division of labor, in which private units of production produce commodities for exchange. Building on the second stage, these private units of production are analyzed as capitalist firms that employ wage labor and are motivated by the pur- suit of profit. When the features of both stages are combined, the two ideas that were previously stated to underlie the Marxist theory of money - as an expression of the value of commodities and as a means of socially validating private labor - continue to be valid. However, having previously established the basic principles involved in these two ideas, it is now necessary to consider the more complicated and transformed way in which they actually operate when account is taken of the interaction of the commodity relation and the capital relation.

As a means of expressing the value of commodities, money is considered to provide a measure of the total value added in the economy, and of the division of this total between wages and profits.14 However, at the level of individual commodities, this relation is thought to be modified. Because capitalist firms are organized to produce profit, the

price of specific commodities is considered to be derived not directly from the value of the commodity, but from the cost of production raised by the average rate of profit. Nevertheless, value magnitudes continue to be of significance indirectly because, given the amount of

capital advanced, it is the total amount of surplus value generated in the economy that will determine the average rate of profit. Conse-

quently, while money expresses value, the determination of prices is mediated by a process involving a redistribution of the total value

generated in production. In relation to particular commodities, money now is seen as expressing the modified value or price.

In a similar way, money is also still considered to effect the social validation of private expenditures of labor, although the way in which this is understood to distribute social labor in the economy undergoes a

significant modification; it is now conceived as part of a process that is mediated by the movement of capital. In the first place, the exchange of a commodity for money will affect the profits of the firm that produced it; then, the amount of profit will act to encourage or discourage the advance of additional capital in that branch of production;


finally, the movement of capital will, given the prevailing levels of social productivity, determine the allocation of social labor.15

Combining the analysis of the commodity relation and of the capital relation involves conceiving of the economy in terms of many compet- ing units of capital. There is, however, one further issue that arises at this point of the analysis. The previous comments about money were framed as if all units of capital were directly involved in the production of commodities. However, at this stage of analysis, the Marxian approach also takes explicit account of the fact that units of capital specialize in activities related to a particular phase in the circulation of capital. This gives rise to a distinction between industrial capital, which is concerned with the production of commodities, commercial capital, which involves the circulation of commodities, and financial capital, which is concerned with the circulation of money.

The key institutions of financial capital are banks, which combine two types of activity. First, they organize the circulation of money and payments for industrial and commercial firms. From the point of view of the reproduction of capital, this does not make banks any more strategic than commercial firms, which organize the circulation of commodities. However, banks do occupy a special position, because the organization of the payments system provides the basis for their second activity, which is the organization of the credit system.

Finance and the credit system

The introduction of banks and credit into the analysis brings us to the fourth and final stage of the Marxian theory of money. Banks are involved in the credit system in two ways. First, they act as intermedi- aries, collecting the money capital that is not currently being employed by its owners and lending it to firms that are willing to pay interest to use it. This ensures that no money capital need stand idle; it also provides a powerful and important means of directing money capital to that point in the economy where it can produce the most profit.

The second and more striking way in which banks are involved in the credit system is that they extend loans that do not correspond to value that has already been produced, but rather that constitute an original creation of credit money. Marx starts his analysis of credit money by considering the exchange of commodities for a bill of exchange.16 A bill of exchange is a private instrument of credit issued by

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an industrial or commercial firm in exchange for certain commodities, and the issuer of the bill promises to pay for the commodities after the lapse of a specified period of time, such as one or three months. For Marx, it is clear that the social validation of the labor involved in producing the commodities occurs, not at the moment when the commodities are exchanged for the bill of exchange, but when the bill is redeemed for real money.

Marx then develops his analysis by observing that bills of exchange themselves came to function as a means of payment in the period before they were redeemed: The initial beneficiary would endorse the bill by signing it on its reverse side and would use it to make a payment to another party, who in turn could use it to make another payment. In this way, a bill of exchange could acquire a long list of endorsees on its reverse side, and it would be the person holding the bill when it became due who would approach the issuer for payment in money. The use of a bill in this way was, however, confined to a circle of people who trusted the reputation of the original issuer, or the judg- ment of one of the subsequent endorsees.

Marx's approach to bank notes is to consider them as an extension of the principles involved in a bill of exchange. In this way, the substi- tution of a note issued by a bank for a bill of exchange is seen as just one further step in the process of widening the sphere within which a

private instrument of credit could function as a means of payment. Concretely, the enterprise that first receives a bill of exchange might take it to a bank, and the bank could advance notes to the value of the bill, with a deduction for interest, depending on the rate of interest and the length of time until the bill was due to be redeemed. (Until the 1844 Bank Act, note issue in Britain was not restricted to the central bank.) The bank note would then enter circulation as a means of payment. When the original bill of exchange was due, the bank would present it to the issuer to be redeemed in real money, and the bank would then be in a position to retire an equivalent amount of its notes from circulation. While the issue of bank notes came to be restricted in many countries in the course of the nineteenth century, for Marx, ex-

actly the same principles governed the process by which banks lent

money through crediting a current account with a deposit that could then be drawn on using a check.

The key to Marx's analysis of credit money is that the exchange of a commodity for a private instrument of credit does not socially validate


the private expenditure of labor involved in the production of the commodities. Social validation is only effected subsequently when the private credit is redeemed for real (commodity) money. The one exception is where two private credits cancel each other out, a process that achieves essentially the same result. The important point here is that credit money is seen to involve a displacement of the process of social validation - from the moment when a commodity is exchanged for some sort of credit instrument, to the moment when the credit instrument is either redeemed for money or canceled.

The correct starting point

These four stages provide a framework for considering some of the differences that exist between various Marxian approaches to money. The first of these differences concerns the correct starting point for the theory of money. The most widely held position on this question is that the correct starting point should be the commodity relation. One of the clearest examples of this position is found in the work of Suzanne de Brunhoff, who argues that Marx's method involves a general theory of money based on an analysis of simple commodity circulation, and that it is only on the basis of this general theory that the special conditions of circulation in a capitalist economy can be understood.17 De Brunhoff goes to great length to maintain that the Marxist theory of money involves an analytical distinction between the commodity relation and the capital relation. "The concept of money capital," she states, "is a relation between two distinct terms which cannot be merged. One cannot derive the function of money from its character of capital, nor that of capital from its money form."18

Two other positions, however, can be identified on this issue. One of these is the position that de Brunhoff criticizes Hilferding for adopt- ing. Hilferding is criticized, not for explicitly arguing against the importance of the distinction between the commodity relation and the capital relation, but for failing to maintain the distinction properly in the course of his analysis. According to de Brunhoff, Hilferding appears to follow Marx's approach by starting with an analysis of the general functions of money as a measure of value, means of circulation, and so on, but, by then introducing credit money at that stage, he leaps beyond the framework of simple commodity circulation and mis- takenly includes a category that presupposes the existence of capital.19

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This line of criticism is obviously of wider significance since it bears on the discussion about commodity money and credit money, and it could be applied to anyone who argues for a theoretical approach based on credit money, a point we will return to below.

There are also a few writers who quite explicitly deny that the theory of money should be based on the commodity relation. This position is particularly associated with certain Italian Marxists, especially those linked with the current known as Workers Autonomy, which stresses the importance of placing the working class and its

struggles at the center of any analysis. One of the leading representa- tives of this current is Antonio Negri, who argues that in Marx's Grundrisse, the theory of money is based not on value but immediately on surplus value. For Negri, this means that money is presented from the outset not in terms of the exchange of equivalents, but - in one of his many striking formulations - in terms of exchange organized for

exploitation.20 Negri repeats this argument in various forms both in a

chapter on money and in a subsequent chapter on surplus value. In the later chapter he embellishes the point by adding that the labor com- manded by capital is required to produce not just value but surplus value as well. However, despite the vividness of Negri's opposition to

capitalist exploitation, and the importance he attaches to placing strug- gle and contradiction at the very heart of the capitalist process of

production, at no point does he provide a theoretical justification for his interpretation, which involves collapsing the commodity relation into the capital relation. The fact that widespread commodity production is only found in a capitalist economy, and that in practice the

production of value and surplus value occurs in the same process, does not undermine the validity of the theoretical distinction between the two stages of analysis.

Another Italian writer who attempts to base the Marxist theory of

money on the capital relation is Augusto Graziani.21 In an article principally concerned with the issue of credit money and commodity money, he argues that the theory of money concerns two different relations: The first is the exchange between capital and workers; the second is the exchange of commodities within the capitalist class. The true problems of money, Graziani argues, are concerned with the first of the relations, that between capital and workers. In that relation, he says, money is on the one hand the means of uniting the socially antagonistic forces of capital and wage labor, and on the other hand it


is a measure of wealth - but crucially of wealth that is in the process of expansion. In effect, he is reversing Marx's order of proceeding, and the idea of simple commodity circulation is then presented as just a hypothetical construct that can be employed to understand the process of exchange within the capitalist class.

Graziani touches on many of the important issues in the Marxist theory of money, stressing the necessity of money, the essential link between money and social relations, and the antagonistic nature of such relations. Nevertheless, Graziani's approach leads to a direct identification of wage labor and the monetary nature of the economy, and he argues, quite explicitly, that these are two aspects of the same capitalist reality. But whatever the political attractions of this approach, it too involves collapsing the commodity relation into the capital relation.22 To the extent that generalized commodity production only exists under capitalism, it is true that money and labor power are two faces of the same reality; but the distinction between the commodity relation and the capital relation suggests that they stem from different aspects of that capitalist reality, and neither Negri nor Graziani provides a sound reason for abandoning the analytical distinction.

One of the weaknesses with the discussion about the correct starting point for a theory of money is that it can appear rather formal. Some of the issues it raises, however, are of significance in the discussion about whether money must be a commodity, something that begins to turn the discussion toward more practical questions.

Commodity money and credit money

The conventional Marxist view of money has been that it must be based on a commodity. The basis for this view is Marx's argument that money emerges spontaneously from the process of exchange as the commodity in which all others express their value. Furthermore, when Marx analyzes the functions of money, he states that, as a measure of value, money must be a commodity. Nevertheless, he also says this does not mean that the actual commodity money has to be used all the time, and that in order to fulfill its function as a measure of value, money need only be present "ideally." What Marx appears to mean by the notion of being present ideally is that, where some type of fiduciary currency serves as money, its value continues to be determined by reference to some socially established standard set by a commodity

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money. This was the approach Marx employed in his analysis of the inconvertible paper money issued by the British state during the Napo- leonic wars.

There are two other forms of money that Marx considers. The first is paper money issued by the state, which he says can be used in place of commodity money insofar as money functions as a means of circulation. The state is important here because Marx sees it as the only institution that can impose the social acceptance that commodity money gains spontaneously from its relation with other commodities. However, Marx considers that such paper money only acts as a symbol or representative of gold. This means that the paper does not act as a means of expressing the value of commodities; rather, it is merely a symbol for the gold that would be required to express the value of the commodity.23 The key to analyzing paper money is therefore to consider what would have occurred had gold been employed.24

In the case of convertible paper money issued by the state, Marx considers the situation completely straightforward, since here paper functions exactly as gold, into which it can be converted at any time. In the case of inconvertible paper money, Marx says that, so long as the amount of paper money is not greater than the minimum required to meet the fluctuating need for means of circulation, it too will behave like gold. In the case where the state increases the supply of inconvertible paper money, as in the case of the Napoleonic wars, Marx considers that the paper money can continue to function as a means of circulation but he argues that its value will be determined by the amount of gold that would have been necessary. This is, it should be noted, a different position from that of the quantity theorists, for whom the value of money is determined by the relation between the quantity of money in circulation and the volume of commodities to be circulated. It might also be noted that, when Marx talks of "real money," he is referring to both gold and paper money that behaves like gold.

The final form of money that Marx considers is credit money, al-

though it is only introduced at a much later point in the analysis.25 This is because, according to Marx's schema, a developed system of credit money presupposes an analysis of capital and of interest. Marx considers credit money a very important feature of capitalist reproduction, and, indeed, at one point he refers to it as the most adequate form of money for capitalism. However, as pointed out above, Marx regards credit money as a substitute for real money, and, as a result, when he


analyzes such situations as the scramble for real money that was a feature of economic crises during the nineteenth century, this leads him to refer to the collapse of the credit system into the monetary system.26

Marx therefore believed that paper money should be analyzed in terms of the gold it represents and that credit money is only a provi- sional substitute for real money. It might be noted, however, that while Marx argues that the analysis of money must be based on gold, the only function of money that he clearly states must actually be carried out by money with intrinsic value is as world money.27 The fact that Marx conducts most of his analysis in terms of gold money can be explained as a simplifying assumption - although it is certainly true that on many occasions he gives the impression that he believes there is a more necessary link.

Most Marxists have accepted - at least until quite recently - the view that money must be based on a commodity. In many cases, such writers have merely followed Marx's account of how one commodity emerges spontaneously as the general equivalent, and then assumed that gold is money. There are some writers, however, who defend the continued need for gold primarily in terms of its function as world money. Hilferding discusses the possibility of a system of money based on only paper but concludes that, in practice, it would not be viable. His main argument is that, even if gold were replaced by paper money within a country, in order to make international payments, a link would have to be maintained with world money, which he assumes must be a metal with intrinsic value.28 A similar position has been put forward by Ernest Mandel, who argues that gold cannot be dispensed with as world money unless there is some form of world government, and he argues that this is not possible under capitalism because of the rivalries that the system engenders between national states.29

This approach to money, which has its roots in Marx, has seemed less plausible as the link between money and gold has steadily weak- ened. The idea that commodities express their values in terms of gold, which is then represented by paper, has been more difficult to sustain since the domestic convertibility of money was ended in most capitalist countries in the 1930s. (Even in the United States, which appears to be the one exception, the domestic convertibility of gold was illegal.) And any arguments that rest on the ultimate convertibility of currencies for gold through the dollar or on the need for gold as international

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money have been undermined by the ending of the convertibility of the dollar in 1971.30

In opposition to the view that money must be based on a commodity, a number of writers, including those of the French Regulation school and Duncan Foley, have suggested that, in a capitalist economy, the theory of money should be based not on a commodity with intrinsic value but on credit money. In this view, true capitalist money is seen not as commodity money but as credit money. Starting the analysis from credit money in this way appears to breach two features of Marx's approach: first, the idea that money must be a commodity and that value can only be measured by something which itself possesses value; second, the need to develop a theory of capital and interest before analyzing credit money.

Alain Lipietz has developed an approach that addresses the first of these issues.31 For Lipietz, exchange relations under capitalism are associated with two types of value relation. The first concerns the commodity relation and is referred to by Lipietz as instantaneous or synchronie value. This involves the allocation at a given moment in time of total social labor between the production of different types of commodity. The second concerns the capital relation, or what he calls diachronic value. This involves individual values-in-process that are moving through time and different forms of existence (money capital, productive capital, commodity capital) as they pursue the process of self-expansion. Lipietz compares the interaction of these two forms of value with the process of weaving a piece of cloth. Thus, a value-in- process is likened to the woof, which is woven in and out of the system of instantaneous values, represented by the warp. The problem of maintaining a viable set of proportions between the two different types of value he calls, with a touch of Gaelic verve, the woof-warp duality.

Lipietz argues that because instantaneous values concern the fact that different amounts of labor are required to produce commodities, this calls for money that is itself a product of labor that possesses value. Commodity money therefore corresponds to instantaneous values. By contrast, a value-in-process is a single value that is attempting to expand in relation to itself, and, since this involves a purely relative measure, this value can be represented by something that is merely a symbol of value. For this reason, says Lipietz, credit money can serve as a representative of a value-in-process.

Lipietz uses this framework to distinguish between two types of


monetary regime. Under a gold regime, he argues, values-in-process were subordinated to instantaneous values, and while some divergence could emerge during a period of boom, it was eliminated by a crash. The ending of convertibility, however, made it possible for values-in- process to achieve far greater autonomy from instantaneous values, and this permitted a shift toward a situation in which firms could base their pricing decisions on costs plus a markup. The main features of Lipietz's approach, therefore, are his attempt to provide a theoretical basis for credit money by linking it to values-in-process - that is, to the capital relation and the production of surplus value - and his view of gold as one particular means of regulating the expansion of credit money.

A more thoroughgoing alternative to Marx has been proposed by Duncan Foley.32 Foley claims that there is a contradiction at the heart of Marx's theory of money - namely, that it involves two determinations of the value of money. On the one hand, Marx's account of the emergence of one commodity as the general equivalent leads to the idea that the value of money is determined by the value of the money commodity. On the other hand, Marx often refers to money as repre- senting a specific amount of abstract labor time. In an innovative formulation, Foley says this notion of the value of money corresponds to the total labor time expended in an economy divided by the monetary expression of the value added. According to Foley, these two concep- tions of the value of money will not necessarily coincide, and that Marx fails to provide a satisfactory explanation of the institutional means by which they could be reconciled in practice.

While most Marxists have followed the first of the determinations of the value of money, Foley proposes that one might start instead from the second. He suggests that the simplest way in which value can be transferred between agents is through a system of promises. Such promises could be canceled against other promises at a later stage, or cleared using a promise to pay issued by a third party. Foley conceives of a monetary system in which a chain of promises of higher and higher social validity is created, and in which at every level of transactions the promises of a third party circulate as money. Following this path, credit issued by the state or, failing all else, a metal such as gold might be conceived as standing at the end of this chain of promises as the ultimate means of settling payments. The essential feature of Foley's approach is that it inverts Marx's argument and views credit as

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the basic form of money, bringing in gold only at the end as the final means of settling payments when all else fails, such as at a time of crisis. Following this approach, the elimination of gold in the twentieth century and its replacement by state credit at the apex of the chain of payments can be viewed as a perfection of the system of credit money.

Foley's argument is radical because it suggests that the social expression of value can be a credit; it is also striking because it suggests that the most direct and unmediated expression of value is to be found in something that is as apparently ordinary as a bank note. However, while Foley engages with Marx's view of gold as the basic form of money, he does not address the issue that credit money presupposes an analysis of capital and interest. One attempt that does try to show how a theory of credit money might take account of these methodological concerns has been developed by Heiner Ganssman.33

Ganssman is concerned with showing that, because Marx starts from a simple concept of money as a commodity, this does not mean that all complicated monetary issues should be analyzed by reducing the matter to a certain quantity of gold. He argues that Marx's theory of money involves two stages: It starts from a simple theory of money that provides the theoretical basis for a simple concept of capital that can then be used to analyze capitalist production. The simple concept of capital is subsequently developed in the course of the analysis of circulation, and this leads to a more complex concept of capital which, in turn, provides the foundation for a more complex concept of credit money. Ganssman argues that this approach should be understood as a process of what he calls "emergence," by which he means that the logic of the derivation cannot be reversed. The reason it cannot be reversed is that the emergence of credit money leads to a change in the significance of money, and to what constitutes economically rational behavior. Crucially, once interest is paid on deposits, all money is potentially money-capital, and any use of money must be considered in the light of the interest that it could earn. According to Ganssman, therefore, truly capitalist money is credit money, but credit money cannot be explained by reducing it to commodity money.

On the basis of this approach, Ganssman questions how useful it is to regard gold as the general equivalent in the Bretton Woods era when most currencies were linked to it only indirectly via the dollar - a point that is, of course, even more valid in the period since the end of convertibility. He suggests that, instead of arguing from some a priori


view, it is necessary to construct a theory that is based on how values are actually expressed, that is, in terms of credit money. He points out that, in Marx's own analysis, gold emerges as money as the result of a

spontaneous social process, and it is, he argues, therefore theoretically quite permissible to conceive of this changing as the result of a further social process.

The idea that the general equivalent might change is also important in the approach to money developed by Michel Aglietta.34 Aglietta first introduces money in an orthodox way: He reproduces the tradi- tional Marxist account of the spontaneous emergence of a money commodity as the means by which other commodities express their value. This is located within a predominantly theoretical context, and the extent to which this theory is supposed to provide a historical account of the development of money is not discussed at this point. Aglietta does, however, propose a means of relating the notions of value and

money through what he calls the monetary expression of the working hour, which directly relates monetary units with a certain amount of abstract labor. This attempt to establish a relation between Marxian theoretical categories and observable price categories is very similar to Foley's concept of the value of money, especially since, unlike most earlier Marxist approaches to the relation between values and prices, both focus on the value added or net product, rather than on the total value or gross product.35 When Aglietta first advances his formulation, he states that the value of money will vary over time, but the analysis is then left at a rather indeterminate point, with only a very general, abstract reference to the monetary system as the set of conditions that affect the formation of the general equivalent.

When Aglietta returns to analyze money at a later point in his work, he introduces a concrete historical dimension to his approach. He elaborates an analysis in which credit money issued by private banks plays a key role in economic reproduction. However, according to Aglietta, this private credit money cannot effect a final social validation of private labor; rather, that validation is displaced to the point where the credit money is validated as the general equivalent. How that validation occurs is seen as a central feature that distinguishes different forms of capitalist regulation. Aglietta identifies a monetary system based on gold with the form of capitalist regulation that existed until the 1930s. In this system, gold functioned as the general equivalent, and the regulation of the economy is therefore tied to the conditions of

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production in the gold industry. For Aglietta, however, the link to gold is based on a social relation and, like all other such relations, it evolves through a process of transformation. He argues that a crucial change occurred in the 1930s, and this gave rise to a new form of monetary regulation, associated with the emergence of what he calls a regime of predominantly intensive accumulation, or Fordism. A key feature of this change is that central bank money replaces a commodity as the general equivalent within the space of a national economy. But, at the same time, other changes, most notably the development of the central bank's function as lender of last resort, ensure that all private bank money can always be converted into the central bank money, thereby ensuring that it too can function as the general equivalent.

A final point about Aglietta' s approach is that he relates the changed position of credit money to the payment of wages. This rests on the argument that, once credit money ceases to be employed solely in transactions between capitalists and is also used to pay wages, its purchasing power must be immediately guaranteed, both because of the importance of workers' consumption in the Fordist regime and for reasons of political stability. He then develops an analysis of a cycle in which bank money is said first to be integrated and then at a subsequent moment disintegrated from the process of economic reproduction. It is integrated when a firm borrows money from a bank and uses it to pay wages to workers who will produce commodities. This bank money forms an income that is then spent, and the real value of this bank money will be determined by the extent to which it leads to the realization of the commodity values that have been produced. If all the commodity values are realized, then the entire income has been spent; firms are in a position to repay their credits, and the bank money is said to have been disintegrated.

While Aglietta's counterposing of the creation of incomes and the production of values provides the basis for a sophisticated analysis of inflation, it is not clear that credit money can be linked exclusively to wages in the way he proposes. Although wages do constitute a major component of incomes, there are also other elements of income that are financed by bank credits before the values to which they correspond have actually been produced. Lipietz briefly considers a number of these, such as managerial salaries, rents, interest payments, and taxes.36 If Aglietta is abstracting from these in order to lay out the bare bones of the system, there is no problem, but it is not clear that a


theoretical link between credit money and wages can be established in the way that he at times appears to propose.

Although the development of a Marxist theory based on credit money is relatively recent, it is clear that the various contributions involve either an implicit or an explicit critique of Marx's theory of commodity money as the general equivalent. The main points of the new approaches can be summarized as follows: First, all the writers share the view that credit money can serve as the means of expressing the value of commodities, and some explicitly relate this to Marx's argument that money is selected through a social process. Second, many of the writers accept that commodity money did once function as the general equivalent but believe that, as a result of innovation and transformation, it has since been superseded by credit money. Some writers, however, suggest a more general critique of the theory of commodity money. Third, most of the writers attempt to provide a theoretical foundation for the role of credit money by relating it in some way to the capital relation (value in process, the payment of wages, interest-bearing capital).

A great strength of Marx's theory of commodity money is that (if we overlook the contradiction pointed out by Foley) it poses in a very simple and uncomplicated way a form of money whose value is clearly determined and that, because it represents social labor directly, can serve to effect the social validation of private expenditures of labor. As a theoretical starting point, this provides an important tool for analyzing capitalist production, which, in turn, is a precondition for analyzing the capitalist credit system. So, while credit money must perform many of the relatively straightforward tasks identified in the analysis of commodity money, it also introduces a series of additional, more complex tasks. There is a hierarchy of money, and at each level of the hierarchy social validation emerges as something that is always limited and pro- visional, and subject to confirmation at a higher level in the hierarchy.

The monetary hierarchy

One of the most developed attempts to elaborate an account of a system of credit money within a Marxian framework is by Suzanne de Brunhoff, and the members of the Regulation school, and, although there are some differences of emphasis, they share a similar approach and even draw on each other's work. The framework of their approach

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is based on a hierarchy consisting of three forms of money: private credit money, which consists of deposits at commercial banks, state money, which consists of bank notes and deposits at the central bank, and international money. In contrast to those approaches that argue that one particular form of money is the key to understanding the system, de Brunhoff argues that all the components of the system depend on one another, and that no single form should be singled out as real money.37

Credit money, which constitutes the first level of the hierarchy, is created by commercial banks when they extend a loan. In order to analyze the process that follows, the French writers have developed a fairly elaborate set of terms. When a credit is extended by a bank to an industrial company, the credit is advanced in a private relation between the bank and the firm on the understanding that the company will employ the money to produce commodities that can be sold for suffi- cient money to pay back the credit with interest. The private advance of money therefore anticipates that the labor expended in producing the commodities will subsequently be socially validated, and the process is therefore referred to as "antevalidation." In the meantime, the money is used to pay wages and other production costs, and the incomes that are formed in this way, before the values to which they correspond have been produced, are said to be "prevalidated."38 If these incomes are spent so that all the commodities that have been produced are successfully sold, then each firm is able to cancel its original credit, and this will bring about a full social validation of the labor that had been expended. The requirement that the prevalidated incomes should give rise to expenditures that permit the values of the antevalidated commodities to be realized is called the "monetary constraint."

If, however, some firm is unable to repay its credit, whether because it produced commodities that no one wanted or because it failed to achieve the prevailing level of productivity, or for some other reason, then one of two possibilities could occur: One is that the bank takes a loss. This is the position that predominated in the nineteenth century. Banks would expand credit rapidly during an economic upturn, but when a downturn in the business cycle occurred and firms could not repay their credits, some banks would be bankrupted, and, because of the links that existed between different banks, this could rapidly esca- late into a financial crisis. The bankruptcy of a bank would lead to the


loss of the deposits placed with it, and the deflationary impact of destroying one part of the total stock of money would exacerbate the downturn, resulting in a form of recession characterized by a sharp rise in unemployment and a fall in the level of both wages and prices.

The structure of banking in which the costs of credits that are not subsequently validated fall on individual banks is known as a fractional system.39 Since the 1930s, instead of individual banks having to cany the entire cost, a second possibility has emerged as a result of a change in the relation between private bank money and state money: Should prevalidated expenditures of private labor not subsequently gain social validation, the consequences can be displaced up the monetary hierarchy.

The next level of the monetary hierarchy is state or central bank money, which consists of bank notes and deposits at the central bank. A key feature of the modern system of credit money is that, since the 1930s, central bank money has not been domestically convertible into gold and its acceptance as legal tender has been enforced by the state. However, whereas Marx argued that inconvertible paper money should be analyzed as a symbol of gold, de Brunhoff and the Regulation writers look upon it as a form of credit money. As noted above, Aglietta considers that central bank money has replaced gold as the general equivalent,40 although de Brunhoff avoids such a direct identification and refers instead to the reproduction of the general equivalent involving the interplay of all three levels of the monetary hierarchy.41 (This usage of the term "general equivalent" obviously differs from that of Foley, who identifies it specifically with Marx's account of commodity money.)

Central bank money fulfills a number of different functions within the structure of the monetary hierarchy. First, the acceptability of private bank money as a means of payment rests on its exchangeability with central bank money. It was because private bank money could not be exchanged for either gold or central bank money that it ceased to be acceptable as a means of payment at times of financial crisis during the nineteenth and early twentieth centuries. However, a key feature of the modern system is the emergence of the role of the central bank as a lender of last resort. Because of this, the central bank today in effect guarantees the exchangeability of all credit money issued by private banks.42 This exchangeability ensures that, within the space over which a particular state has jurisdiction, all private credit money can

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serve as a direct representative of social labor in the same way as the central bank's money, and for this reason the French writers refer to the combination of private bank money and state money that is inconvertible for gold as "national money."

The second function of central bank money is that it serves as a means by which private banks can settle their outstanding balances with one another. It might be mentioned here that, while this is true today in most countries, in the United States, where there are still many regional banks, this task is still performed for smaller banks by the larger, money-centered commercial banks.43

The third function of central bank money is that it provides the means through which the state attempts to manage the operation of the system based on credit money. In a system where the central bank guarantees the exchangeability of all private bank money, and where the expansion of central bank money is not subject to the restriction of gold reserves, the state assumes the responsibility for the management of the system. What de Brunhoff and Aglietta describe as the monetary constraint becomes subject to political management.

Many neoclassical economists assume that the system of reserve requirements ensures that the supply of private credit money will be limited to a simple multiple of the reserves of state money made available by the central bank, but this view has been challenged, most notably by a number of Keynesian and Post Keynesian writers. They argue that commercial banks first extend credit and then subsequently concern themselves with securing the reserves that are necessary in order to comply with the central bank's reserve requirements. This is the so-called endogenous theory of the money supply.

Two different lines of argument are used to explain the mechanisms that enable commercial banks to act in this way.44 One approach is to argue that the central bank's responsibility for the stability of the monetary system ensures that it will always accommodate the private bank's reserve requirements, either through open market operations or by extending central bank loans.45 This implies that the direction of causation runs from the expansion of private credit to the expansion of deposits to the expansion of reserves. The other approach accepts that the central bank is concerned with issues such as inflation and the exchange rate, and that it will therefore not always automatically provide the reserves necessary to accommodate the expansion of private bank credit. However, even in this situation, it is argued, banks are


able to evade the constraint on the availability of reserves by engaging in liability management. This involves offering higher interest rates so as to attract funds away from accounts that carry relatively high reserve requirements, such as current accounts, to forms of deposit that have lower or even no reserve requirements. In this way, a given amount of reserves can support a larger deposit base and so facilitate an expansion of credit, although at a cost that is reflected in higher rates of interest.46

In a key contribution to this debate, Albert Wojnilower has argued that each upturn in the U.S. business cycle since World War II was brought to an end by a sudden credit crunch, usually caused by a credit expansion coming up against regulatory restrictions that prevented banks from continuing to expand their deposit base.47 However, he argues that banks turned to new forms of liabilities, such as certificates of deposits, and later the euro-dollar market, in order to circumvent restrictions on the amount of interest that could be paid to attract deposits. He also claims that, following each downturn, the restrictions were lifted in order to prevent the expansion of credit from being constrained in a similar way again.

The difficulty of controlling the expansion of private bank credit through the supply of reserves and the gradual elimination of controls, referred to by Wojnilower, have led to a situation where, it is argued, the central bank is only able to regulate the expansion of credit by using interest rates to discourage further borrowing. There is, however, no consensus about how interest rates affect borrowing. Conventional neoclassical theory suggests that the desire to borrow will decline as interest rates rise. By contrast, the Post Keynesians argue that rising interest rates do not in themselves lead to a decline in borrowing, and only interest rates rising to a level that induces a recession will have a significant impact on borrowing, as industrial and commercial compa- nies are forced to cut back on all their activities.48

Whatever the limits on the possibility of using the supply of central bank money to control the expansion of private bank money, the relation between the two is central to the functioning of a system of credit money. The creation of private bank money involves a prevalidation of private expenditures of labor. This privately created money is accepted as money within a national economy because it can be converted into central bank money, the social validity of which is enforced by the state. The principal way in which de Brunhoff refers to the convertibil-

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ity of private credit money for central bank money being maintained is through the provision of bank notes: "The notes issued by the central bank to allow for the conversion of private bank funds represent a social validation of the anticipated private returns of both bank and entrepreneur."49 Lipietz also refers to the provision of central bank notes in this connection, but he goes on to make it clear that in his view deposits with the central bank - that is, the reserves that commercial banks hold in the central bank - also come to fulfill this function.50 It might also be added that, whatever is most important for the day-today functioning of the system, the role of lender of last resort ensures that, in the event of any failure in the system, the central bank will ultimately guarantee the exchangeability of all deposits.

At this point it is worth emphasizing the significance of the separa- tion between the two levels of the monetary system, that is, credit money and state money. The important issue is not that one is privately owned and the other state owned, but the domain within which the money that is created is valid. If all credit were directly extended by the central bank, then every value in process would automatically be socially validated.51 According to Lipietz, "A hierarchy of lending . . . makes it possible to devalorize credits selectively in the event that the corresponding production is not validated."52 What this means is that, even though the exchangeability of all private bank money is guaranteed under the centralized (as opposed to fractionalized) system of banking, private banks are required to carry some of the cost of credits that do not result in the production of a value that subsequently gains social validation.

The last major issue regarding central bank money is that, even if it is backed by the state, because it is a form of credit money, it is unable to achieve the type of definitive social validation envisaged by Marx in his theory of commodity money. De Brunhoff poses this issue by proposing that, if the expansion of private bank money represents a prevalidation of a value, then the related expansion of central bank money represents an indirect prevalidation of a value. She and the other French writers attempt to capture what is involved in the expansion of central bank money by characterizing it as a "pseudo-social validation of private labor." Lipietz has a similar position, although there is a small difference between his and de Brunhoff s approach. According to Lipietz, de Brunhoff uses "pseudo" to mean that values are not really validated, whereas he, rather adroitly, argues that values


"are still not really validated, but they are treated as if they were, until they come to be ... or not."53

The notion of pseudo- validation is used to show how a system of credit money permits a further stage in the process of displacing the social validation of private expenditures of labor. An expansion of private bank credit and its pseudo-validation by the central bank makes it possible to realize commodities that might otherwise have remained unsold. However, if this creation of money is not accompanied by a corresponding creation of values, the value of money declines. One of the fullest attempts to specify the mechanisms by which this occurs is provided by Lipietz,54 who argues that the sale of commodities for money appears to effect a social validation; but, as other prices are also determined on the basis of costs plus a markup, when the money comes to be spent, it will no longer purchase as much as before. This is what Lipietz is referring to when he talks of values being treated as if they were validated, at least for a time. The result is, of course, inflation, and a loss that would otherwise have been borne by an individual firm or bank is socialized by distributing the cost among everyone who holds money.

The pseudo- validation of prevalidated values can therefore permit economic reproduction to continue, even when values are not truly socially validated, albeit at the expense of inflation. However, the constraint of social validation is not thereby evaded; rather, it is displaced once again upwards, this time onto the relation between central bank money and international money.

In the nineteenth and early twentieth centuries, the international monetary system was based on gold, and, as noted above, many Marx- ists have maintained that, in the absence of an international state, gold cannot be replaced at an international level. It should be noted, however, that even the gold standard was not the automatic, self-regulating system that it is sometimes made out to be. As a number of studies have shown, the international gold standard required day-to-day management by the Bank of England, and this depended on the international dominance of London as a financial center, and the dominance of the Bank of England over other financial institutions within Lon- don.55 However, the growth of New York and Berlin as important international financial centers, on the one hand, and the emergence of a few relatively large commercial banks within London as a result of a centralization of banking capital, on the other hand, undermined both

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of these conditions, and this would have brought the system to an end even if war had not broken out in 1914. It can therefore be seen that, even under the gold standard, the operation of the international monetary system depended on a degree of state regulation.

Under the Bretton Woods system, which operated during the period from 1945 to the early 1970s, international money was based on the so-called dollar exchange standard. The value of the dollar was fixed in terms of gold, and other currencies were valued at a fixed rate in terms of the dollar. It was the responsibility of central banks to maintain the value of their national currency within a narrow band around its agreed value, although in certain circumstances this value could be adjusted.

Under the system of fixed exchange rates, the operation of the monetary constraint was displaced onto the balance of payments. If a central bank continued to pseudo-validate private credits that were not subsequently socially validated, in either the domestic or the international market, this could lead to a balance-of-payments deficit. A deficit had to be financed from the central bank's international reserves, and although these could - within limits - be increased by borrowing from the International Monetary Fund, it was necessary for the state to introduce measures that would curtail domestic economic expansion and the demand for credit from the private banks. As a result of this process, the business cycle assumed the form of the "Stop-Go" cycles that were an especially marked feature of economic development in Britain in the 1950s and 1960s.

The Bretton Woods system rested on the international dominance of the U.S. state, and with the erosion of this dominance as a result, on the one hand, of the rapid expansion of private financial markets and, on the other hand, of the growing economic strength of rival capitalist states - in particular, Japan and West Germany - the system's viability was undermined. The convertibility of the dollar for gold was restricted in 1968 and completely abolished in 1971, and the system of fixed exchange rates collapsed between 1971 and 1973. Since the early 1970s, the international monetary system has, in the absence of any other agreed standard, been based on an inconvertible dollar and floating exchange rates.56 This system does not mean, however, that there is no central bank intervention; rather, this intervention is not continuous, as it was with fixed exchange rates.57 It is considered legitimate for central banks to intervene to smooth out temporary fluctuations in the exchange rate, but it is also clear that the monetary authorities have often gone beyond this, some-


times openly, more often surreptitiously, and attempted to influence the underlying level of the exchange rate.

Under the system of floating exchange rates, the operation of the monetary constraint has been displaced onto the exchange rate itself. The pseudo-validation of an overexpansion of private credit leads to a fall in the exchange rate, and, since such a fall can become self-rein- forcing and will exacerbate inflation by raising the price of imports, the state can find itself forced to rapidly introduce measures that will curb the expansion. Dramatic examples of this occurred in Britain in 1976, in the United States in 1979, and in France in 1982.

An important feature of this system, to which de Brunhoff draws attention, is that part of the cost carried by the central bank reserves with the system of fixed exchange rates is transferred to private banks with the system of managed floating: "The absence of continuous central bank intervention, which in the nineteenth century served to place the risks of monetary convertibility upon the private banks, now affects private holdings of foreign currencies."58 The losses incurred by banks as a result of foreign currency holdings can therefore be seen, like the destruction of private bank money in the nineteenth century, as a means of devalorizing overaccumulated capital. A particularly striking example of this process is the huge losses that were incurred by Japan- ese and other financial institutions as a result of holding dollars, or dollar- denominated financial assets, in the period after 1985, when the value of the dollar fell by as much as 50 percent against some currencies.

It can therefore be seen how Marx's idea of credit involving a displacement of social validation has been conceived of in relation to a monetary system based on a hierarchy of three interdependent forms of credit money. Before we conclude, however, a few final points about the hierarchy are worth noting.

In the first place, Lipietz argues that the operation of the hierarchy has been modified in an important respect by the growth of private financial markets. In place of a hierarchy in which private bank money was confined to the first level of the hierarchy, and where U.S. central bank money functioned as international money, Lipietz says that the growth of private multinational banking has led to a situation in which private bank money now also functions as international money. How- ever, although the euro-dollars that are created privately at the international level in this way are ultimately dependent on their exchangeability with dollars issued by the U.S. central bank, the rela-

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tive absence of state regulation of the euro-markets means that the link is remarkably weak. Consequently, while Lipietz considers that U.S. central-bank dollars remain at the top of the monetary hierarchy, he argues that, because the quantitative link with euro-dollars is so weak, the U.S. Federal Reserve has to rely largely on raising interest rates if it wishes to constrain the expansion of credit at lower levels in the hierarchy.59

A rather different point about the operation of the hierarchy has been made by de Brunhoff, who reintroduces into the analysis the notion of a definitive social validation. She argues that because dollars issued by the United States are a form of credit money, they cannot effect a definitive international settlement of payments imbalances at the highest level of the hierarchy. (Here she seems to revert to the conventional Marxist position that only a commodity that itself embod- ies value can realize this.) For de Brunhoff, therefore, the shift to a dollar standard and floating exchange rates does not resolve the problem of the validation of national currencies. Rather, she views the collapse of fixed exchange rates as a sign of the breaking up of international markets.60

Finally, while Lipietz and de Brunhoff have developed some of the fullest attempts to relate the Marxian theory of money to the modern institutions of credit money, the notion that contradictions are displaced upwards within a hierarchical system of money has been elabo- rated in more general terms by David Harvey, although his approach to the analysis of money is formulated in slightly different terms. Harvey builds his analysis on what he refers to as the intrinsic contradiction within a commodity between its exchange value and its use value, which he says comes to be expressed in a contradiction between money's functions as a measure of value and as a means of circulation. Harvey argues that credit money is superb as a means of circulation but suspect as a measure of value, and this contradiction is played out in the hierarchy of monetary institutions. "The hierarchical ordering of monetary institutions overcomes the contradictions between the equivalent and relative forms of value, between money as a measure of value and a medium of exchange, at the local and national level only to leave the antagonism unresolved in the international arena."61 And in even more general terms: "the central contradiction between money as a measure of value and money as a medium of exchange is never resolved: it is merely transposed to higher and higher levels within a hierarchy of monetary institutions."62


Conclusion

Although the Marxist theory of money has received relatively little attention, it can provide a very fruitful basis for analyzing the modern system of credit money. The theory rests on two basic ideas: that money expresses the value of commodities, and that it is a means of socially validating private expenditures of labor. These ideas lead to the view that a commodity economy is necessarily a monetary economy, and they provide a framework within which money is analyzed in relation to the process of social production.

Marx developed his analysis in terms of commodity money, and, although he explains that not all transactions have to be carried out in commodity money, he makes the working assumption that they are through most of his work, and he believes that the key to analyzing monetary issues is to treat them as if they did involve commodity money. Marx's analysis of commodity money is a theoretically powerful means of expressing his basic ideas about money in a simple way. However, the historical dimension of Marx's analysis of commodity money is more questionable. In particular, his method of building an analysis from nothing but the simple commodity form can appear to underplay the importance of the state. In fact, the state played an important role in the emergence of gold as money, and it was also involved in the regulation of more complex systems of money that were based on gold.

Although the simple conception of money as a commodity is open to certain criticisms, it provides a theoretical basis for an analysis of capital and the production of surplus value. This, in turn, makes it possible to develop an analysis of interest-bearing capital, and of credit money. But, while the origin of credit money might be explained theoretically and even historically with reference to commodity money, the operation of a developed system of credit money cannot be reduced to that of commodity money. Thus, although Marx's analysis of credit money as permitting a displacement of the process of social validation is an insightful means of linking the expansion of credit to the process of production, this cannot be used to justify his view - part argued, part assumed - that credit money can in practice never be more than a substitute for real money.

Following the approach of de Brunhoff and the Regulation school, the modern monetary system can be understood as a hierarchy involving private bank money, central bank money, and international money.

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In this system, credit money is created by private banks and effectively guaranteed by the central bank. But, while the system depends on active state management, the central bank does not directly control the creation of private bank money. A key feature of the system is that the process of social validation must be understood not as something that is ever accomplished definitively, but as something that, while it can be deferred at one level of the hierarchy, will only reassert itself at a higher level. Consequently, the contradictions of capitalist accumulation, which in the nineteenth century manifested themselves as an in- ability to sell commodities, can be displaced and will ultimately be manifested in the markets for foreign exchange, where the different systems of national money are brought into relation with one another.

An analysis based on credit money presupposes the existence of interest-bearing capital, and hence of capital in general and the production of surplus value. It therefore shares a certain familiarity with the approach taken by Negri and other Italian writers who argue that the analysis of money should be based not simply on the production of value, but on the production of surplus value. There is, however, an important methodological difference, since the Italian writers appear to collapse a number of theoretically distinct stages of analysis into one another. Nevertheless, although the link is not as direct as they propose, they succeed in highlighting the crucial link that exists in Marxist theory between money and the exploitation of the working class.

Notes

1. Suzanne de Brunhoff, The State, Capital and Economic Policy (London: 1978). See also her study, Marx on Money (New York: 1976).

2. Michel Aglietta, A Theory of Capitalist Regulation (London: 1978), and Alain Lipietz, The Enchanted World (London: 1985).

3. See in particular Duncan Foley, "On Marx's Theory of Money," Social Concept, U 1 (May 1983).

4. Alain Lipietz, following Bettleheim, includes a third basic relation which concerns the labor process and the progressive expansion of productivity and the real domination of wage labor by capital. While I regard these as central features of the analysis of capitalist development, I am not convinced that they constitute a separate basic relation. (Enchanted World, pp. 26-28).

5. Ernest Mandel, Marxist Economic Theory, vol. 1 (London: 1968), pp. 65-68. 6. I.I. Rubin, Essays in Marx 's Theory of Value (Detroit: 1972), pp. 254-256. 7. Capital, vol. 1, chapter 2. Page references to Capital refer to the Penguin

edition (London: 1976). 8. Hilferding s emphasis on the contradiction between private and social


labor, to the exclusion ofthat between concrete and abstract labor, is criticized by Roman Rosdolsky in The Making of Marx's Capital (London: 1980), pp. 120- 123.

9. For Marx's presentation, see Capital vol. 1, ch. 3. See also Rosdolsky, The Making of Marx 's Capital chs. 6-8.

10. The phrase is taken from Capital vol. 3, p. 707. 1 1 . It might be noted that the German term Schatz used by Marx could also be

translated by the less pejorative word "treasure." 12, Since I wrote this, I have read Michael Heinrich's article, "Marx's Theory

of Capital" (Capital & Class, 38 [1989]) in which he argues, convincingly, that between completing the Grundrisse, and writing Capital, Marx abandoned the concept of capital in general, and that this was replaced by an approach that corresponds to the subtitles Marx employed for the three volumes of his work -

namely, the process of capitalist production, the process of capitalist circulation, and the process as a whole.

13. Marx's analysis of this issue may be found in Capital, vol. 2, especially ch. 2; see also the discussion in Hilferding, Finance Capital, ch. 4.

14. The formulation in terms of value added follows the interpretation suggested independently by Gerard Duménil, Alain Lipietz, and Duncan Foley. This provides a solution to the widely noted problem with Marx's formulation, which is in terms of total value.

1 5. See Rubin, Marx 's Theory of Value, p. 224. 16. Capital vol. 3, pp. 525-529. 17. De Brunhoff, Marx on Money, pp. 19-20 and M-5t>. 18. Ibid., pp. 55-56. 19. Ibid., pp. 20-21. 20. Antonio Negri, Marx beyond Marx (London: 1984), pp. 23-26. 21. Augusto Graziani, "La teoria Marxiana della moneta, in Claudia Mancma

(ed.), Marx e il mondo contemporâneo (Rome: 1986). 22. Graziani also attempts to link credit money and the wage, but, while his

article raises many important questions, it is difficult to take his argument on this issue seriously, since it relies on an entirely formal analysis that isolates capitalist production from any historical context. He says that, if one abstracts from ex- changes between capitalists and focuses just on the relation between capital and workers- that is, Marx's "capital in general"- ̂then at the outset of production, capitalists could not pay wages in commodity money, since commodity money, like any commodity, is the result of a production process. According to Graziani, this is why wages have to be paid in credit money.

23. "Paper money is a symbol of gold, a symbol of money. Its relation to the values of commodities consists only in this: they find imaginary expression in certain quantities of gold, and the same quantities are symbolically and physically represented by the paper. Only insofar as paper money represents gold, which like all other commodities has value, is it a symbol of value" (Capital vol. 1, p. 225).

24. "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 oi gold which would circulate as coin" (A Contribution to the Critique of Political Economy [London: Lawrence and Wishart, 1971], p. 1 18).

25. "Credit money . . . implies relations which are as yet totally unknown from

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the standpoint of the simple circulation of commodities" (Capital, vol. 1, p. 224). 26. See, for example, Critique of Political Economy, p. 146. 27. There is, however, some ambiguity in his analysis of whether paper money

can function as a domestic store of value. 28. Hilferding, Finance Capital, pp. 57-58. Hilferding argues (1) that even if

gold were entirely replaced by state paper money within a country, in order to settle international payments, a stable link would have to be maintained with world money, which he assumes must be metal (here he is following a comment by Marx that other writers have also discussed); (2) that it would be impossible to prevent national states isssuing more paper than required to meet the minimum level of circulation, which would disrupt circulation; and (3) that commodity money is necessary as a store of value.

29. Marxist Economic Theory, p. 257; "Introduction," Capital, vol. 1, p. 79. 30. Mandel has attempted to show that gold is still of significance for money,

even though there is no longer a fixed link between the two. He argues that if central banks valued the gold in their reserves at its market price, it would be seen to be of much greater significance than appears from the official figures (The Second Slump [London: New Left Books, 1978], p. 122, n. 34). Another approach would be to argue that, at a time of crisis, gold will reassert its importance, and this line might be supported by pointing to the spectacular rise in the price of gold at the end of the business cycle upturn in 1979.

31. Lipietz, Enchanted World, especially ch. 6. 32. Duncan Foley, "On Marx's Theory of Money," Social Concept, /, 1 (May

1983). 33. Heiner Ganssman, "The Structure of a Marxian Theory ot Money, hree

University of Berlin, February 1988. 34. Aglietta, Theory of Capitalist Regulation, chs. 1 and 6. 35. The only difference is that, while Foley poses the value of money in terms

of the relation between the price of the net aggregate product and the total value added, Aglietta's expression is in terms of the relation between the price of the net product and the total abstract labor involved in producing it.

36. Enchanted World, pp. 44-52. 37. State and Capital, p. 43. 38. This is the form adopted by Lipietz. De Brunhoff uses the term prevalida-

tion slightly differently: "To refer to the circuit M-C-M', one might say ... that the bank which advances M is performing a private 'pre-validation' of private labor, while the real social validation occurs when the product (C) is exchanged for M" (State & Capital, p. 46).

39. There is an extensive discussion of fractional and centralized systems of banking in M. Aglietta and A. Orléan, La violence de la monnaie (Paris: 1982). I have relied on the brief summary of their analysis by Michel De Vroey in "Infla- tion: A Non-Monetarist Monetary Interpretation," Cambridge Journal of Econom- ics (1984), pp. 381-399.

40. Theory of Capitalist Regulation, p. 342. 41 . State & Capital, p. 43. 42. According to Charles Goodhart, a leading figure in orthodox discussions of

why central banks exist, the position of the central bank results from its superior credit (The Evolution of Central Banks [Cambridge, MA: MIT Press, 1988], p. 19).

42 INTERNAnONAL JOURNAL OF POLITICAL ECONOMY

Goodhart argues that the key factor that gives rise to the need for central banks is the vulnerability the banking system faces as a result of "providing fixed nominal value loans to borrowers, where information costs make it impossible to observe the actual outcomes of the project, for which the loan was sought, at all accu- rately" (p. 104).

43. Goodhart notes that, in the nineteenth century, the role of clearinghouse was seen as the central bank's principal function. He also notes that the key condition for a central bank to fulfill this function is for it to be above the competitive fray {The Evolution of Central Banks, pp. 38-39, 45).

44. For a summary of the debate, see Robert Pollin, "Two Iheones ot Money Supply Endogeneity," Journal of Post Keynesian Economics, 73, 3 (Spring 1991), 366-396.

45. See Nicholas Kador, The Scourge of Monetarism (Oxford: Oxford Univer- sity Press, 1982), and Basil Moore, Verticalists and Horizontalists; The Macroe- conomics of Credit Money (Cambridge: Cambridge University Press, 1988).

46. See Hyman P. Minsky, Stabilizing an Unstable Economy (New Haven, CT: Yale University Press, 1986), and Stephen Rousseas, "Financial Innovation and Control of the Money Supply," in Marc Jarsulic, Money and Macro Policy (Boston: Kluwer-Nijhoff, 1985).

47. Albert M. Wojnilower, "The Central Role of Credit Crunches in Recent Financial History," Brookings Papers on Economic Activity, 2 (1980), 277-326.

48. Otto Eckstein and Allen Stein, 'The Mechanisms of the Business Cycle in the Postwar Era," in Robert J. Gordon (ed.), The American Business Cycle: Conti- nuity and Change (Chicago: Universtiy of Chicago Press, 1986).

49. State & Capital, p. 46. 50. Enchanted World, pp. 91-92. 51. De Brunhoff, State & Capital, appendix; Lipietz, Enchanted World, p. 97. 52. Enchanted World, pp. 97-98. 53. Ibid., p. 104, n. 15. 54. Ibid., pp. 99-103. 55. See Marcello de Cecco, Money and Empire: The International Gold Stan-

dard, 1890-1914 (London: 1974). 56. It has also been argued that, during the period from 1945 to 1971, the

international monetary system was also based de facto on a dollar exchange standard, despite the formal commitment to convertibility. See, for example, Ganssman, "Marxian Theory of Money."

57. De Brunhoff makes the interesting argument that if there were no state intervention and if floating exchange rates did adjust automatically so as to elimi- nate any international payments imbalance, this would amount to an abolition of national currencies as such: "They would become instruments of exchange used by private concerns, with a status which was no different from that of any other goods" (State & Capital, p. 51).

58. Ibid.. D. 52. 59. Enchanted World, pp. 95-96. 60. State & Capital, pp. 50-53. 61. David Harvey, The Limits to Capital (London: 1982), p. 250. 62. Ibid., p. 251.

Issues in Marxian Theory of Money and Credit || Marxian Theories of Credit Money and Capital

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