Books and documents:
Agustí Chalaux de Subirà, Brauli Tamarit Tamarit.
Agustí Chalaux de Subirà.
Agustí Chalaux de Subirà.
Agustí Chalaux de Subirà.
Magdalena Grau, Agustí Chalaux.
Chapter 4. The money system today.
- This chapter's goals.
- Ways of the present money system.
- Invention of money in present money system.
- The world diffusion of utilitarian relations.
- Functions of the money system today.
1. This chapter's goals.
After going through the history of the money systems, we will devote
this chapter to a more detailed analysis of the present money system and
of the serious social problems produced by this system, both with respect
to domestic market and society, and with respect to foreign trade and world
2. Ways of the present money system.
All along the evolution of the money systems, there has been a deeper
and deeper gap between the real-intrinsic value of precious metals and
the subsidiary-abstract value of the monetary instruments. With the arrival
of paper money, these two realities were definitely dissociated and since
then they had nothing to do with each other.
At this point of development, the money system, free from the heavy
burden of metals, can evolve to forms more and more intangible, more dematerialized,
more abstract, in accordance with its original nature.
And this is what has really happened and what still happens at present
under our own eyes. Today paper money, completely disengaged from gold,
is no longer the only monetary instrument in use. To it has been added
the so-called scriptural money or bank money, which is an
invention of the banks to face the shortage of paper money. Its emission
is officially controlled by the State through its national bank.
Scriptural money consists in recording money units in a current account
opened in a bank. A given quantity of paper money is deposited in a bank
and the bank opens a current account for the same quantity, where there
will be only records of movements of money units. Payments and collections
will no longer be made by delivering bank notes from hand to hand, but
only through a play of recordings in different current accounts: the customer's
and the supplier's.
However, at any time the holder of the current account, if it is at
sight, can transform the amount of his account into paper money. From this
point of view, the money circulation represented by a movement of records
between current accounts, must be considered a subsidiary of the circulation
of paper money, as it has not a total independence.
Scriptural money circulation has become the first monetary instrument
in all the countries where the development of trade and industry unite
to multiply the exchages made: it is very convenient, it does not get lost
and, above all, as we will see in the following paragraphs, is pre-eminently
the means of the bank credit. In some countries the circulation of scriptural
money can represent as much as 80% of the total money circulation.
On the other hand, the continuous technological evolution is rapidly
transforming scriptural circulation into electronic circulation:
some simple electric buttons and some magnetic memories are enough to do
the recording; even the ordinary «cheque book» can be substituted
by sophisticated systems of electronic transfer of funds.
This growing dematerialization of the monetary reality is the most evident
proof of its fundamentally instrumental-abstract nature.
3. Invention of money in present money system.
At present there are two different forms of monetary instruments:
On the one hand, bank notes or paper money -together with coins, which
have a face value much higher than their intrinsic metal value1-.
The emission of these is a monopoly of the State Bank or national bank,
and are therefore the legal means of payment.
On the other hand, the scriptural means of payment, produced by the non
official banks in order to avoid the above mentioned monopoly. These instruments
are currently accepted and used through the simple trust in the emitting
Since in principle there are two parallel monetary circulations, we will
have to consider two sorts of invention of money which take place at present.
A. Invention of money as paper money. This happens when new bank
notes are emitted in a higher quantity than that existing at the time.
This supplementary emission of bank notes (or of coins) can be made
every time the national bank effects one of the following operations:
operations with the State: it can be an advance on the funds the
State hopes to obtain through tax or credits granted to the State
by buying public debt titles.
operations with private companies -especially with the banks: it can also
be an advance on titles or goods or credits to the banks by discounting
operations with foreign currency: purchase of foreign currency.
B. Invention of money as money units recorded in current accounts.
We have already said that circulation of scriptural money is subsidiary
to paper money circulation, but this does not make it less important. Certainly,
the system of recording in current accounts avoids circulation of many
bank notes; but it also allows the creation of a new monetary circulation.
To obtain this, the bank simply opens a current account without
previously depositing bank notes. This is today the most usual way of bank
credit, whether it is a normal credit, discount of bills or pawning of
In principle, the only limitation to the extension of this form of credit
and therefore the invention of money is the fact that any sight deposit
-including those which are the result of a credit- is immediately convertible
into bank notes by simply asking. For this reason, it is necessary for
the emitting bank to hold a prudent relationship between the total of paper
money deposited in the bank by the public and the total of granted credits,
in order to always secure this convertibility. Therefore, banks cannot
invent boundless buying power, and must be submitted to a given proportion
between invention and paper money deposits.
If we make a more exact analysis, the theory commonly accepted by specialists
shows that the possibility of inventing scriptural bank money depends from
- First: the emission of buying power by the national
bank. We have already said that the scriptural bank instruments are subsidiary
to paper money as they are based on its convertibility. Therefore, if there
is no new invention of paper money -or in general, of liabilities of the
national bank- there cannot be a new emission of scriptural bank money.
If the national bank does not create new purchasing power, the private
banks cannot do so.
- Second: the relationship between cash and the deposits chosen
by the public. As a matter of fact, if people prefer to keep money at home
instead of taking it to the bank, deposits will be smaller and therefore
also the possibility of inventing purchasing power with them will be lower.
On the contrary, the more money is deposited in the bank, the more capacity
has this to grant credits.
- Third: the relationship between reserves and deposits held by
every bank. If we call reserves the total quantity of paper money and coins
there deposited by clients, plus the deposits of this bank in the national
bank, we will see that they correspond to what is called «working
mass». The relationship between these reserves and the total of deposits
by its customers (whether through previous deposits in cash, or through
a credit), is called cash coefficient, and we have already said
that it was fundamental to insure at any time convertibility of these deposits.
Therefore, the granting of deposits cannot jeopardize this relationship.
Since cash coefficient is fundamental to insure liquidity of the bank,
that is its ability to transform deposits into cash, the national bank
has two main instruments to insure it:
The compulsory reserve imposition: the national bank can compel banks to
deposit in it a part of their deposits, immobilizing them.
The increase of the rediscount ratio: by this means banks are compelled
to increase also their interest rates and therefore requests of credit
are discouraged, especially if they are as discounts.
From what has been previously said, it appears that the national bank has
a fundamental controlling role in the process of creating scriptural bank
money: in the first place for its initiative as an inventor of paper money,
and in the second place because of the instruments of monetary policy it
has to supervise and control the action of private banks.
But this idea of reality, which is currently accepted and defined by
most of the experts, can be discussed and questioned in its main aspects.
In the following paragraphs we follow the article of Francisco Vergara
«Les faux-fuyants du monétarisme2».
The first thing to be said is that the national bank itself cannot control
its money emission. We have already said that the national bank creates
money every time it produces bank notes for credit. Now the national bank
cannot refuse the banks to rediscount paper signed by solvent companies,
without jeopardizing the whole pyramid of credit, and it has no means to
avoid the increase of nominal value of such paper; the increase of course
elevates the value of the money mass.
In the second place, the instrument which has always been considered
the best means for limiting bank credit, that is the increase of the re-discount
applied by the national bank, apparently obtains results opposite to what
was expected, that is a higher rise of the money mass, because the high
interest rates atract capital.
Finally, it is necessary to point out that nowadays there are many other
forms of liquidity, besides paper money and scriptural bank instruments,
as they cannot be controlled by the national bank. The confusion of this
situation can be easily observed simply by considering the difficulty existing
to define what is meant by paying means. F.
Vergara mentions Lord Kaldor: «There is no clear-cut separation in
the interest of the total liquidity, of what is money and what is not.
Whichever the definition chosen for money, it will be surrounded by a myriad
of more or less liquid instruments which can act as substitutes».
Therefore, besides these legal instruments, theoretically controlled
by the national bank, there are new instruments that the public accepts
and uses. These instruments are born not only within the banks, but also
within the companies.
It is easy to deduct from the previous considerations that at present
there cannot be an effective control of creation of money.
The immediate result of this situation is that every bank, within the
more or less severe conditions imposed by the national bank, acts according
to its own interests. And there is no effective legal instrument in the
geopolitical society to allow to study global strategies for all the market.
It is not that the market needs, sectorial excesses or shortages of
liquidity are completely overlooked: proof of this is the fact that banking
at present is more than ever a good business. But means to meet these needs
are focused empirically, partially and not with a view to the common wellbeing,
mainly in favour of higher sectors of society.
National banks have not effective instruments to control the situation.
And monetary theory has not convenient conceptual solutions, since it has
not been able up to now to define exactly and rigorously the idea of money
The antistrategy of market and of invention of money followed has the
most evident proof in the present inflation-deflation crisis (stagflation)
which is so worrying, and to which nobody can find a solution.
4. The world diffusion of utilitarian relations.
To the situation of monetary disorder which we have described, must
be added all the problems derived from the present world diffusion of utilitarian
Trade among different countries is getting wider and wider, and more
far reaching, and it is necessary to point out all the advantages and all
its greatly positive aspects. Work division all over the world is a fact
that must be increased, as long as it is made according to an actual equilibrium
of the balances of payments: this is the main strategy to be followed to
insure the feasibility of foreign trade.
If the domestic money system in every geopolitical society is a cause
of error and confusion, it must be considered that on a world wide basis
the situation is not much better. What happens is that in the comparison
of currencies, stronger countries «export» their monetary problems
to the weaker ones, so that the situation of the latter worsens. Monetary
problems cross the frontiers and in this game there are always winners
The main monetary question to be considered in every foreign trade operation
, is the ways of payment to be used, as every geopolitical society has
a currency with an exclusively domestic validity.
This problem was easily solved in the regime of intrinsic metallic money,
in gold or silver, because all the payments were made in metal accepted
Under a regime of gold standard -that is of intrinsic metallic money
or convertible paper money- there was still no problem, at least in theory,
since convertibility of currency insured a given gold standard, and a dynamic
equilibrium of balances. The equilibrium of balances is based on several
mechanisms: transfer of gold from countries with a deficit to countries
with a superavit; the equilibrating movement of the general level of prices,
all of it reinforced by the action of the national bank on the official
rate of rediscount.
With the fall of the gold standard, and therefore with the interior
convertibility of money units in each country, relations with foreign trade
become complicated and confused. Between 1930 and 1945, several protectionist
measures -such as duties, quotas, suspension of external convertibility
and of the free money market, etc...- greatly reduce world trade. During
World War II contracting is very high.
In order to find an accepted system to restart world trade, in July
1944 is signed the Bretton Woods agreement, in which the USA in fact impose
what is best for them.
This agreement included:
to re-establish convertibility among the different inter-currencies;
a compromise of all the parties to keep the fixed exchange rates within
very narrow limits;
to appoint the dollar and sterling pound as reserve currencies,
that is as international paying means, accepted by all the parties to pay
transactions. These two currencies had, for the sole use of foreign trade
operations, a convertibility in gold which granted their strength. For
this reason the system established in Bretton Woods is called gold exchange
Even if its introduction after some time allowed the relaunching and prosperity
of foreign trade in the western world, the system showed some problems
which soon became apparent.
The first problem was the submission of the countries considered «weak»
to the countries considered «strong». In fact, when a geopolitical
society has a deficit in its trade balance, there are only two possibilities:
to have recourse to international credit or to its currency reserve. If
the deficit belongs to a geopolitical society producing reserve money,
this society can actually finance its deficit by means of new monetary
This was in fact the case of USA. The USA have taken advantage of their
privileged monetary position up to the limit of their possibilities, by
reabsorbing enormous deficits in their balance of payments through the
uncontrolled emission of dollars. It must be pointed out that the origin
of this deficit was not an excess of imports, it was an export of capitals
not backed up by a corresponding entry of merchandise.
USA policy of financing their deficit originated such an inflation of
dollars in Europe (export of inflation), that the convertibility of
the dollar, under the point of view of official standards, established
in Bretton Woods, was jeopardized. From 1967-68 inconvertibility became
a fact, even if it was not officially declared until August 1971, when
president Nixon denounced unilaterally the Bretton Woods agreement.
Since then, in spite of the attempts to find a readjustment according
to the Washington agreement of December 1971, -also unilaterally denounced
by Nixon in 1973- the gold exchange standard has been finally abandoned
and, at present, the currency exchange is considered «floating»,
that is there are no fixed standards and they are negotiated in a money
market. Therefore, there is no reference to a possible convertibility to
Currency floatation is in itself no ill for foreign trade. From this
point of view, the present situation would not be especially serious if
it were not for a fundamental fact: as long as the domestic currencies
of every geopolitical society are not rationalized, foreign trade
will not be rational either, and therefore it will not reach the necessary
equilibrium of balances, which should be its main goal.
It is impossible to have an equilibrated foreign trade as long as:
money units of the strong countries are imposed on those of the weaker
countries. In spite of the crisis, the dollar has been able to bear
the situation and still today it holds a pre-eminent position and privilege
which allows all its domestic money problems to be exported.
there is still a speculative currency market. This has a capital
importance. The possibility of exchanging a currency for another, without
a parallel movement of goods, promotes greatly the purely speculative operations.
When they are made on a great scale (erratic movements of capitals),
they help to reinforce the existing money imbalance within each geopolitical
society. They corner national banks and compel them to take external actions
in order to keep within reasonable limits their currencies' standards.
As always, the ones more injured are the weaker ones, both on a world level
and in each domestic society.
5. Functions of the money system today.
We are now in a position to draw the final conclusions of the analysis
we have developed on the money systems.
respect to the nature of the money systems, their present forms show more
than ever their fundamental abstraction. The historical clash between nominalism
and metallism has been largely won by the first one, even if the
references and the defense of metallist theories still hold an interest
in many books and writings on this matter. However, most of the critics
admit now that the money system is a simple auxiliary instrument without
any need to have an intrinsic and concrete value. We need only remember
Schumpeter and Lord Kaldor.
With respect to the mercantile and social functions of the money system,
we can say, after what has been exposed in this chapter, that we must rather
talk of irregularities: the functions traditionally taken up by money systems
(see chapter 2) are completely deformed and
defaced at present.
Metric malfunction: a money unit is, by nature, a measuring unit.
As such it shows at present a number of faults which prevent the exact
and trustworthy fulfilment of this function. In the next
chapter we will specify the qualities of a rational and efficient metric
Instrumental malfunction: present day monetary instruments -paper
money and scriptural instruments- act as agents in the exchange of goods
but, at present, this function is marred as it is shared by a lot of other
instruments on which there is no control whatsoever.
Documentary malfunction: this function, only partially fulfilled
by scriptural instruments, is completely ignored by paper money, which
is anonymous and depersonalized. In fact, we might say that present day
money systems are anti-documentary. This fact has very important consequences,
not only in the exclusively mercantile field, but also in the social field
and still more in that of information. Thanks to its being anonymous, the
present money system allows corruption with impunity, which is very injurious
to society: robbery, tax evasion, capital flight, corruption of judges,
politicians, state officers, etc.
Strategic malfunction: because of its metric and documentary faults,
the present money system cannot serve as an instrument of rational and
effective merchant-monetary strategy: the consequence is the terrible
crisis which appears both in the domestic markets and in foreign trade.
The need for a change in present day money system is the conclusion which
becomes apparent from what has been said up to now.
A rational and informative system must be reinvented, to accomplish
efficiently the functions which, as we have seen, it had in the beginning.
Therefore, in the next chapters of this essay we will describe a possible
new money system, more rationally adjusted to the demands of modern market.
A special importance will be given to its function of documentation and
information on the market.
through an incontrollable inflation, by melting coins an interesting benefit
is obtained with respect to the face value, all the coins of the sort disappear
quickly from circulation.
Vergara: «les faux-fuyants du monétarisme», le monde
diplomatique, december 1983.