International money, privileges and underdevelopment
Hansjorg Hen and Zeynep Nettekoven
1 Introduction1
In the world there are about 180 currencies.These currencies take over different functions, compete with each other and create a currency hierarchy. This contribution analyses currency hierarchies from a monetary Keynesian perspective. The second section clarifies what is meant by a monetary Keynesian perspective. In the third section a simple Keynesian portfolio model is presented which links the low quality of a currency to the reproduction of underdevelopment. Section 4 discusses preconditions and advantages of currencies with international functions. Section 5 analyses different types of currency hierarchies. The last section concentrates on the future of the currency system.
Basics of the monetary Keynesian approach
The Keynesian monetary approach goes back, as the name tells, to John Maynard Keynes who, however, experienced very different interpretations. Keynes developed a very unique understanding of money which is only partly stressed by the mainstream interpretations or completely forgotten.2 Keynes’ monetary approach was made popular in Germany especially by Hajo Riese (see Betz et al. 2001) who is internationally not very well known.
To explain the monetary approach, it is useful to use Keynes’ (1973 [1933]) metaphor of a capitalist economy. He spoke about a monetary production economy which does not allow the separation of a real from a monetary sphere. Unfortunately, most models in economics use the dichotomy between a real and a monetary sphere and judge the real sphere as the important one. As a result most economic models do not include money in an adequate way or do not acknowledge money at all.3 Keynes (1979) in his draft for the General Theory supported Marx’ idea that the nucleus of a monetary production economy can be shown by the formula M - C — M’ with an entrepreneur parting with money (M) for commodities (C) in order to get more money (M’). In the stage of‘C’ the entrepreneur buys capital goods, rents labour and organises the income creation process.
The employment of factors of production to increase output involves the entrepreneur in the disbursement, not of product, but of money. The choice before him in deciding whether or not to offer employment is a choice between using money in this way or in some other way or not using it at all.
(Keynes 1979, p. 82)
The formula easily can be made more complicated by adding banks and wealth owners financing the entrepreneur. Thus, in the centre of capitalist dynamic is a credit-income-creation process in which credit is given to the entrepreneur which invests the money in production processes. A very radical version of this idea is presented by Joseph Schumpeter (1911) who argues that the banking system is creating money out of nothing and, if the money is given and invested by the entrepreneur, employment, income and savings are created.
The consequence of this approach is that capitalist economies are characterised by a monetary macroeconomic budget constraint and not by a constraint given by physical resources (Riese 1986;Kornai 1979).4The Neoclassical paradigm assumes exogenously given physical resources — like manna from heaven - given to households which then start a (inter-)temporal exchange process of goods and labour services to increase their and societies’ welfare (see Walras 1874).There is no guarantee that a monetary production economy tends to full employment.The opposite is the case: It must be expected that unemployment is the normal state of affairs in capitalist economies (Keynes 1936, see also Herr 2014, Heine and Herr 2013).
The monetary Keynesian approach leads to several consequences which are relevant for our later analysis. First, the monetary macroeconomic budget constraint may erode if disbursement of entrepreneurs is very high and the economy hits the physical macroeconomic budget constraint. Such a situation typically leads to inflation driven by high demand confronted with full capacity utilisation and high employment which tends to lead to increasing nominal wages and cost driven inflation (Keynes 1930; Herr 2009). In such a constellation the operating conditions of a monetary production economy force the central bank to fight against inflationary processes and establish the monetary macroeconomic budget constraint again. It should be mentioned here that some countries have good institutions which allow high employment with low inflation, other countries not. The worst case is a flexible nominal wage level which responds quickly to changes of employment.
This leads us to the second and related point. The thing which functions as money must have a low elasticity of production and the private sector should not be allowed to produce it (Keynes 1936, chapter 17). Small iron rings which are allowed to be produced by private firms cannot become money. In this sense money must be made artificially scarce. In modern economies central banks must have the monopoly to supply central bank money and the power to guarantee the monetary macroeconomic budget constraint.
Third, money has three basic functions, the function as a unit of account, a means of payment and a store of wealth. It fulfils these functions on a national and international level.
Money as a unit of account is the most basic function. A particular unit of account cannot be substituted without changing the monetary system. An example for a change of the unit of account is the change from the D-Mark to the euro in 1999. Money as a unit of account is needed to express the value of goods or the value of assets. Very important is money as a unit of account in credit contracts.
Money as means of payment is transferred from one economic agent to another to buy goods, to pay out or pay back credits, and to fulfil other obligations like taxes. Money as means of payment implies that money has to be kept as a store of wealth.
This brings us to the function of money as a store of wealth or to the question how much money is demanded by economic units. In the typical Keynesian analysis three motivations are mentioned why money is held (Davidson 2011): (a) money is kept to carry out daily transactions; (b) if cashflows of private households or firms are irregular, money is kept for precautionary purposes, (c) for speculators it can be advantageous to keep money. However, there is one more motivation to keep money, (d) money can be kept for hoarding purposes. It satisfies the desire to keep social wealth as such and it helps to protect its owner from the imponderables of life in general and in a capitalist system especially. ‘Gold is a wonderful thing! Whoever possesses it is lord of all he wants. By means of gold one can even get souls into Paradise.’ (Columbus in his letter from Jamaica, 1503, quoted in Marx 1867, p. 85) ‘Because, partly on reasonable and partly on instinctive grounds, our desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future.... The possession of actual money lulls our disquietude.’ (Keynes 1937,p. 316;see also Marx 1867, p. 84fl). Fluctuations in the degree of confidence among economic agents cause changes in the ‘propensity to hoard’ (Keynes, 1937, p. 216). Higher uncertainty then leads to more hoarding. More concrete: Economic agents have a higher preference to keep liquidity; entrepreneurs are reluctant to invest; banks are afraid to give long-term credits or credits at all; and private wealth owners stop to buy long-term bonds or shares.3
The fourth point is: ‘Inflation as well as deflation constitutes flights out of the economy.’ (Riese 1986, p. 156, own translation). Both processes easily can lead to cumulative processes and destroy the coherence of a monetary production economy. High inflation fundamentally distorts the function of money as unit of account for credit contracts and destroys the function of money as store of value.
For it is unlikely that an asset, of which the supply can be easily increased ... will possess the attribute of‘liquidity’ in the minds of owners of wealth. Money itself rapidly loses the attribute of‘liquidity’ if its future supply is expected to undergo sharp changes.
(Keynes 1936,241)
Deflationary processes destroy the coherence of a monetary production economy mainly because they lead to an increase of the real debt burden and financial crises (Fisher 1933).
Based on these fundamentals a very simple portfolio model will be presented in the next section which allows also the analysis of different currencies.
