Currency Causality
“The theory of money necessarily presupposes
the existence of a theory of liquidity of goods”
Carl Menger
“The theory of currency necessarily presupposes
the existence of a theory of liquidity of goods”
Carlos A. Bondone
“Currency causality is in the market,
not the State or the banks”
Carlos A. Bondone
By Carlos A. Bondone
Currency Causality
Contents
Introduction
Concept of currencies
Types of currency
Currency functions
Origins of currency
Currency causality
Endogenous (exogenous?) currency
Payment function of currency
Interest and currency
Currency demand paradox
Relative prices (versus absolute prices?)
“Locke’s problem”
Liquidity of a good and state of liquidity of an agent
Causality of central banks
Theoretical origin of institutional crisis
Conclusion
Introduction
The dominant issue in modern economies with paper currency and fractional banking system is understanding currency-financial causality.
With this in mind, the object of this work is to present a compilation of the differences between the different schools of economic thought when explaining the causality, existence and functioning of currency and financial institutions.
We will be able to corroborate that there are no relevant differences between traditional schools (the mainstream that supports current institutions), but there are differences with the new Austrian proposal that at the beginning of the twenty first century presented the Theory of Economic Time (TET).
In this sense we will consider the following schools of thought
- Keynesians
- Monetarists-quantitativists
- Austrians: that are divided into
- Mises, insofar as all his work can be considered a “compilation” of post Menger Austrian thought.
- TET, insofar as it is the —direct, with no intermediate stops— continuation of Menger’s money theory. More specifically we refer to TET’s development of the Theory of Currency (Currency Theorem and its axioms of equality and equivalence), and Theory of Interest. (1)
The work will consist of presenting the relevant issues and the items that compose it, followed by a brief commentary. (2)
Concept of currency
It is prudent to begin comparing the concept of currency in different theories:
Chart 1
Concept of currency
School / ConceptKeynesians (*) / Common use means of exchange
Monetarists (*)
Austrians / Mises (*)
TET / Economic good that satisfies liquidity
(*)Members of the mainstream, as this work will show.
It is important to stress the implications of both definitions, insofar as TET’s definition includes that of the mainstream —the need for liquidity implies a means of exchange of common use— and at the same time it follows the “fundamental economic causality: need (liquidity)→ economic good (currency)”. In this manner:
- It allows us not to worry about finding a definition that includes all the possible manifestations that can have the status of currency: money, credit (regular or irregular), bitcoin, digital currency, etc., and explain “the economy without money”. (3)
- Considering it an economic good, we need not search for a regression theorem or to resort to the “virtual Wicksellian” world of the mainstream to return to the “real” world.
- We can clearly differentiate the spheres of liquidity of an economic good, of the state of liquidity of an agent, to which we will refer.
Types of currencies
Let us see the different types of currencies that the different schools of thought present:
Chart 2
Types of currencies
School / Possible currenciesKeynesians / Currency ≡ Money
Monetarists
Austrians / Mises
TET / Currency / Money
Credit / Regular (4)
Irregular (5)
Chart 2 shows us that the traditional schools assimilate the concepts of money and currency, while everything that has the functionof money is money, from where the practice of adding heterogeneous entities derives: M1, M2…,Mn, derived from the theoretical structure of currency base and currency supply.
TET, on the other hand, presents its Currency Theorem (6) that differentiates money (currency composed of present economic goods), from credit-currency (currency composed of future economic goods), credits that in turn can be regular or irregular (PM). Thus TET does not admit the addition of M1, M2,… Mn.
Currency functions
In a simple chart (3) we can clearly observe the basic concepts that separate the different theories regarding the functions of currency.
We can observe essential differences pertaining to “contractual nominativity”, “payment function”, and “define the exchange”. These three new categories presented by TET, help explain currency-financial asymmetries. (7)
Chart 3
Currency functions
Concept / Keynesians / Monetar. / AustriansMises / TET
Common use means of exchange / Current / Economic good (a)
Conserve value (b) / Current
Accumulate (c) / Current
Unit of measure (d) / Current
Buying power (e) / Current
Contractual nominativity / “Locke’s problem”
Current / Does not exist
Payment function (f) / Current / Asymmetry
Define the exchange / No consideration / Cash
Credit
(a)See previous difference in the Concept of Currency presented by TET.
(b), (c)According to TET, these are non exclusive functions of currency and do not merit a special theory.
(d)Possibly it would be correct to say that currency is an accounting resource, an essential means for calculus.
(e) According to TET all merchandise has it, insofar as its buying power is the price arising from exchange.
(f)Referred to credit-currency, or specifically PC, since money has it per se.
Contractual nominativity: we interpret as such the mention or reference in contracts of temporal obligations to the economic good in which said obligations must materialize. I.e. it is the indication of final materialization in which a promise will be fulfilled at maturity, be it a debt or payment in compensation for a service to be performed (work, service, making a thing, delivering a good, payment of rent, etc.).
Contractual nominativity must not be confused with the final materialization of a credit, the nature of which belongs to the economic good. I.e., nominativity is the “deed” of the final materialization.
Payment function: see below “Payment function of currency”.
Define the exchange: for TET an exchange with money fulfills the currency function in a cash exchange (apart from the case where it is given in credit), but a credit currency fulfills the currency function in a credit exchange. A circumstance that clearly indicates that the type of currency defines the type of exchange.
We cannot close this section without mentioning the relevance that derives from connecting the three functions formally included by TET:
Contractual nominativity + payment function + define the exchange
Functions that, related to the types of currency, allow TET to develop the currency theory that preoccupied Menger and Hayek. Part of its dimension can be appreciated in the section on “Locke’s problem” and when referring to currency-financial cycles.
Origins of currency
Economics, insofar as it is scientific knowledge seeking to explain things, cannot escape the study of the origins of currency. Let us see the following chart related to it.
Chart 4
Origins of currency
Type of currency / Keynesians / Monetar. / AustriansMises / TET
Money / Market
PC / State / Market
Fractional bank-check / Banking system / Market
We can clearly observe the differences between schools in reference to the origins of currency, when we speak of PC and “fractional banking currency”.
Here the Mengerian ascendancy of TET is plainly visible, insofar as its posture extends the origins of money in the market to the origins of currency in the market. I.e., all types of currencies have their origin in the market, be they money or credit (regular or irregular), state or private, monopolized or free, fractional or not. Let us see a summary of the explanation of TET of the origins of credit-currency in the market:
1)The reason for the existence of currency is the market, the sphere of exchange. With a market and with no State currency exists, ergo, State intervention has no currency causality.
2)Credit currency (PC) and fractional bank checks, become the good- economic credit when they are exchanged for the first time in the market for present economic goods. Then they circulate as credit currency.
The demonstration is very simple: with the simultaneous use of double entry accounting, currency and physical. (8)
Thus TET showed that to determine the origin of credit-currency what is transcendental is who delivers the present economic good for credit to exist, not who prints the “paper” (be it State or private; monopoly or not; PC and/or bank check).
Finally TET establishes that currency is an economic good, be it money or credit (regular or irregular), with or without the previous existence of a merchandise (it does not need a regression theory).
Currency causality
According to the origins and functions assigned to currency, we can summarize in a few lines the theoretical causality with which the different schools explain the fundamental economic causality: need → economic good(9), of currency. Let us see the following chart:
Chart 5
Currency causality
School / CausalityKeynesians / Goods supply ← Currency demand ← Currency supply
Monetarists
Austrians / Mises
TET / Currency demand → Currency supply
The common knowledge was that currency causality was:
Goods supply → Currency demand → Currency supply
and that when PC and the fractional banking system appeared this inverted the sense of causality:
Goods supply ← Currency demand ← Currency supply
This requires a technical observation: the term Goods Supply should be limited in its reach insofar as it is exchanged against credit with no need for currency; it does include the demand for currency required to cancel credit; it does not show the difference of currency demand according to the degree of integration of production; etc. On the other hand there is a currency demand not necessarily destined for what is considered production (stockpiling, speculation, precaution, etc.). This technical digression does not alter the mainstream idea, but it is the source of equivocal theoretical developments (ex.: quantitative theory).
We can state that the expression of causality linked to the mainstream (Goods supply ← Currency demand ← Currency supply) subverts the fundamental economic causality: need → economic good, since there is no economic good if there is no need. Though this subversion is attributed to Keynesianism and monetarism, since TET finds its origin in Say’s Law (10), Gresham’s Law, and the dichotomies originated by Böhm-Bawerk and Wicksell, we also attribute it to the Austrian School-Mises (AS-M), (11) which is another reason to consider all of them part of the mainstream.
Let us see then a brief summary of how Say’s Law, Gresham’s Law and Bawerkian-Wicksellian dichotomies influence economic thought, a combination that according to TET led to the twin asymmetries.
Say’s Laws in Keynesians and monetarists: Keynes rejects it, but not with the sufficient theoretical arguments of TET. (12)
Say’s Law in Austrians-Mises: we consider very pertinent to refer to the expressions of professor Juan Carlos Cachanosky in Déficit Fiscal y Equilibrio Monetario (Fiscal Deficit and Currency Balance) (13) since it is an excellent summary of AS-Mises with our commentary in italics:
Say’s Law is key for the macro economic theory (Keynesian sphere). If supply and demand of money behave the same as for any other merchandise then there is no reason for it to be outside what is called aggregate demand… this implies that demanding money has a different effect than demanding any other good. But there does not seem to be any solid argument to suppose such a difference. (Currency must be treated as an economic good, it is not outside the economy). Keynesian economists have simply ignored this point.
If, instead, supply and demand of money behave just as with any other economic good, then traditional macro economics would be in serious analytical trouble. Say’s Law is an identity (14) and the Keynesian theory’s approach would fall apart. Note: [Paul M. Swezzy says that: “Keynesian attacks, though they seem to be directed against a variety of specific theories fall apart if Say’s Law is considered valid”, Seymour E. Harris, ed., The New Economics, Alfred Knopf, 1947, P.105. (TET says the same happens with AS-Mises even if Say’s Law is valid)]
Gresham’s Law in Austrians-Mises: in Cachanosky we read:
… but money that loses its value is abandoned (except if there is legal tender law). People reject it. (if there is a legal tender law they reject it anyway).
Summarizing, we can say that in the case of money, as opposed to all other goods, variations in its exchange value affect its use value (Misian summary, that TET rejects since this is true of all exchange goods). This is a fundamental relation that has much greater implications than economists generally suppose (underlined by us).
Summary AS-Mises approach: we believe these expressions by Mises, in his Theory of money and credit, are pioneering and defining of his theory:
(p 331) Adopting a uniform procedure, banks can expand indefinitely their emissions… (Inverted currency causality of the mainstream) to whatever they wish… (Credit without a present economic good, credit with no previous savings?) (P. 25)… But securities (currency substitutes) are not economic goods proper, they are means to have them, in themselves they have no value… (they would not be necessary or scarce, Wicksell’s virtual money, Keynes’ pm ≡ im = 0, with no cost)… (p. 238)… A credit transaction is an exchange of present goods for future goods…
With this entire scenario, it is logical for Misian Austrians to be confused when studying TET and its stance that says PC is a credit. (15) Confusion that can only grow with this excerpt from Mises in The theory of money and credit:
(p.242):…Ifcreditin the economic sense means the exchange of a present good or a present service against a future good or a future service, then it is hardly possible to include the transactions in question (fiduciary means and circulating credit) under the concept of credit (possibly there is no more original way of naming the twin asymmetries: credit in a non economic sense). A depositor of a sum of money who acquires in exchange for it a claim convertible into money at any time which will perform exactly the same service for him as the sum it refers to, has exchanged no present good for a future good. The claim that he has acquired by his deposit is also a present good for him (if his “money” is a credit, with which he obtains a present good, we have an example of a crossover between monetary types). The depositing of the money in no way means that he has renounced immediate disposal over the utility that it commands. … The fact that anybody hands money over to a bank in exchange for a claim to repayment on demand certainly shows that he has confidence in the bank's constant readiness to pay (credit is implicit in the word confidence). But this is not a credit transaction, because the essential element, the exchange of present goods for future goods, is absent. (Mises is right, without present goods there is no credit, Mises is wrong when he does not see that credit is configured when the security is exchanged in the market for a present good in THE FIRST EXCHANGE, which proves TET —Third Part of TER—, and then it circulates with that status of the economic good credit. This means that Mises does not advert the inverse, that when the market delivers a present good in exchange for a security already converted into credit, the credit is “endorsed”, since the security is a non present good). The note is a present good just as the money. [IT IS DIFFICULT TO FIND SUCH A —WRONG— THEORETICAL BASIS FOR THE LEGISLATOR TO AWARD PAYMENT FUNCTIONS TO PC AND FRACTIONAL BANK CHECKS, which he will confusedly try to revert in Human Action. This statement by Mises is not only wrong, it is rash; if in exchange for a future good (credit) I obtain a present good, does it mean we must consider said future good as a present good, because through it I have obtained a present good? Then, what sense is there in speaking of and/or defining credit as a future good?]
Here is the Misian-Austrian basis for monetary and financial asymmetries. Mises refers to the use-exchange of PC and fractional bank notes once the credit is already configured, with the first exchange in the market for a present good, a quality it does not lose even if it is “on sight”. In his text he wished to alert economists to what he himself did not understand: pretending to explain (and wrong) credit-currency and the fractional banking system “from the second accounting entry on, forgetting the first entry that places it as a credit economic good”. No doubt this was a slip by Mises, because you only need to refer to his quotation of Goethe to see he is an economist that respects accounting: double entry accounting is “one of the greatest and most subtle discoveries of the human mind”. (16)
If we compare the previous quotations from Mises with his later book, Human Action, we see:
Claims to a definite amount of money, payable and redeemable on demand (…) render to the individual all the services money can render (…) we may call such claimsmoney-substitutes (¡here they are credits! Further on, in “Locke’s problem”, we will be able to see everything more clearly)
Mises tells us, in another paragraph of The Theory of Money and Credit:
(p. 241) Fiduciary means increase the money supply in the broad sense, and therefore can influence the objective exchange value of money.
A simple expression that ratifies that Mises Austrian school belongs to the mainstream:
1)M1,… Mn, is considered money supply not credit denominated in currency. TET clarifies that liquidity is also solved by credit, and that contractual nominativity in currency in turn promotes credit.
2)Again the need to “touch-up” subjective value theory, to explain “money in the broad sense”. I.e., he ratifies the need for an ad hoc theory to explain what only becomes special if it is considered “virtual” ≡ extra-economic.
Evidently Mises was confused, but he sensed part of TET. Possibly his disciple Hayek summarized it all when he expressed his insatisfaction with monetary theory. Let us see a sufficient summary of Mises currency, credit and interest theory: (17)
1)Confused by the presence of currency in the form of credit, but not credit in an economic sense; we must ask what sense a credit can have that is not economic.
2)Confusion of not understanding that interest is the price of economic time. A situation that he expresses in an extreme form when saying interest is not a price in itself (a premonition of TET?).