Having established these laws for precious metal coins, its then possible to analyse the laws for paper currency and credit. As Marx describes, where such currency is redeemable for gold, the same laws apply, but, where they are not redeemable, different laws apply. What Hume saw was that when the amount of gold in circulation increased, prices rose, and the value of the currency fell. As Marx notes, what Hume saw was correlation not causation. The increase in the amount in circulation was the consequence of a fall in the value of gold, as new discoveries were made. The lower value of gold required more of it to act as money, more to be put into circulation. But, with non-redeemable, i.e. fiat currency, these laws are turned on their head.
If an excess of fiat currency is put into circulation, it is not taken out to be redeemed for gold, or melted down. It stays in circulation, and the value of each note/token, thereby, falls. There is inflation, and is manifest as a rise in prices. The idea that convertible paper notes can fulfil the same function as precious metal coins, provided they are issued on the same basis, is quite different to the idea put forward by Law, the Pereire Brothers, or, today, the proponents of QE and MMT. As Marx describes, with redeemable paper, any excess circulation results in inflation and rising prices, including the price of gold. So, paper notes would be redeemed for gold at the official rate. In other words, if a £1 note is redeemable for ¼ ounce of gold, but the market price of gold rises to £1.20 per ¼ ounce, due to the inflation of the currency supply, the holders of the paper notes would redeem them for ¼ ounce of gold, which, in the market, they could sell for £1.20!
This is essentially what happened in 1971, when France demanded to redeem its Dollars at the official rate of $35 an ounce, when the market price of gold was actually $350 an ounce, causing Nixon to end convertibility of the Dollar. In fact, as Marx set out in "A Contribution To The Critique Of Political Economy", convertibility becomes impossible in a regime of paper currency, and credit.
Contrary to Law or MMT, or QE, printing more paper tokens does not create more “money”, for the reasons Marx sets out in "A Contribution To The Critique Of Political Economy", and summarised above. If the value of commodities, in total, is equal to 1 million hours of labour, then the equivalent form of that value – money – can, also, only be 1 million hours of labour, whether it takes the form of, say, 1,000 ounces of gold, each ounce with a value of 1,000 hours of labour, or the form of 1,000 paper notes, each note symbolising 1,000 hours of labour. The limiting factor is the 1 million hours of labour/value, and, if 2,000 £1 paper notes are put into circulation, (assuming each performs one transaction), then, the value of each note must be halved to only 500 hours of labour. Prices would double.
This is why, as Marx sets out in Theories of Surplus Value, quoting Massie, the idea put forward by the proponents of QE, that inflating the currency acts to reduce interest rates is a fallacy. It confuses money tokens with money, and confuses money with money-capital. The rate of interest is determined by the interaction of the demand for and supply of money-capital. The demand for money-capital is a demand for money to buy commodities, either for productive or personal consumption, or to pay bills for commodities already consumed, or similarly as prepayments for such consumption.
Suppose the demand is for £1 million, and that to satisfy this demand, an interest rate of 6% is required to produce the supply of £1 million of money-capital from its owners. The quantity of money tokens put in circulation is doubled, but, the result of that is that each token is halved in value, and prices double. It may, at first, seem to be the case that the increased supply of liquidity increases the supply of money-capital, and so causes interest rates to fall. However, in reality, the reduced value of currency means that the prices of commodities double. Instead of the demand for money-capital being £1 million, it rises to £2 million. So the rate of interest remains 6%.
“Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.”
Indeed, for so long as the inflation persists, the suppliers of money-capital will require a higher rate of interest to cover the equivalent of depreciation of their capital. In other words, if they lend £1 million, today, with inflation running at 10%, they would require a return of £1.1 in a year's time just to maintain its net present value, before any actual interest is taken into consideration, just as, for example, someone who loans a machine, with a value of £1 million, would require the lessor to cover the wear and tear of the machine, as well as the payment of interest. On the basis of the above, example, they would require, at the end of the year, £1.1 million plus the 6% interest, the equivalent of a 16% nominal rate of interest.
No comments:
Post a Comment