Issues in Marxian Theory of Money and Credit

David Bailey boddhisatva at
Mon Mar 8 13:52:02 PST 1999

C. Rakesh,

I write and you respond/retort in the person of Trevor Evans.

> >
> >>I think the reason Marxism has so little *new* to say about finance
> >>capitalism is that Marxists lack strategies for (and often
> >>of) credit creation.
> Trevor Evans writes:
> "Thus although Marx's analysis of creidt money as permitting a
> 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 [Suzanne]deBrunhoff and the Regulation school,
> the modern money monetary system can be understood asa hierarchy
> private bank money, central bank money, and international money. In this
> system, credit money is created by private banks and effectively
> by the central bank. But while the system depends on active state
> management, the central bank does not control the creation of private
> money. A key feature of the system is that the process of social
> must be understood not as something that is ever accomplished
> but as something that,while it can be deferred at one level of the
> hierarchy, will reassert itself at a higher level. Consequently, the
> contradictions of capitalist accumulation which in the 19th century
> manifested themselves as an inability to sell commodities, can be
> and will ultimately be manifestd in the markets for foreign exchange,
> the different systems of national money are brought into relation with
> another."
> In "Issues in Marxian Theory of Money and Credit", ed Paolo Giusanni.
> International Journal of Political Economy, vol 27, no 1 (Spring 1997)

He's a smart cookie, this Evans, but I think that he is still searching for a contradiction, a crisis, where one may not be found. Still, good on him for boldly pointing out that Marx, like the Bible, was occasionally incomplete and even mistaken in its explanation of the world.

Obviously I would have to read the quote in context, but I think Evans is implying that the contradiction created by incomplete social validation moves up the hierarchy of moneys that he posits. First, we might continue the anti-dogmatic line and consider whether complete social validation can actually take place. Second, we might consider whether these moneys are not a hierarchy but a circle with each taking up the slack for the other in turn. That seems more reasonable to me. Thus, in the real world, private (in this case, U.S.) banks create credit and overstep the ability of the society to socially validate, the Fed tightens and raises rates, foreign currency comes in to more remunerative bonds, the banking system uses more foreign money, easing the constraint, and the Fed loosens, dropping rates on bonds, thus foreign money moves out (although not while rates are actively dropping and thought to be in a declining trend - as they have been since the 80's - since falling rates bring capital appreciation to bondholders).

This plays well into Dennis Redmond's hand and the idea that foreign capital is the last refuge of American capitalist scoundrels - the hierarchy idea. That assumes two things as I see it: First that American lenders are lending as fast as they can and second that the society has no underlying capacity to socially validate faster than it did before. I think that both are wrong. I think that the current process of credit creation is a significant restraint on the real capacity of the underlying economy. It seems to me that, so long as it is done carefully, lending/credit creation could be vastly increased without the society being unable to validate the new credit money.

I think that explains the recent success of monetarist policy. The vast deficit spending of the Reagan era worked to stimulate the economy but was accompanied by very high interest rates to retard lending excesses. Thus the ability of the economy to validate new credit money was increased and lending held back simultaneously. Those high rates then went into what might work out to a 20-plus-year declining trend, stimulating fast money growth as lenders racked up gains in capital appreciation of their portfolios. All the while the Fed keeps rates well above the inflation rate, assuring that the underlying capacity of the economy to validate expanding money is greater than the rate of expansion. What will eventually (and maybe soon) happen is that domestic lenders/credit creators will stop getting that lovely capital appreciation from falling rates and pick up their ball and go home, leaving the economy starved for credit. There is no capitalist answer for this phenomenon since capitalism asserts the right of capitalists to do this very thing: Pick up the ball and go home when they feel they aren't getting the profit to which "meritocracy" entitles them.

The underlying equilibristic assumptions in Marx deny the very reasonable assumption that the real economy is, in fact, restrained by its dependence on the noblesse oblige of capitalists. Thus Marx posited credit money that could never be validated because of an intrinsic shortfall of value while if, instead, we see the capitalist system as an unreasonable and artificial restraint on a growing, value-producing engine (really the other side of the same coin, assuming growth rather than equilibrium) the problem becomes one of not too much credit-money but too little.

An asset bubble or period of lending/credit excess is, in that case, not a general excess but a distortion with which normal mechanisms of ebb and flow are unable to cope.


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