The Role of Commodity Value in Inconvertible Credit Money A Contemporary Unoist Perspective
1. Introduction
The quantitative easing policy
implemented after the 2008 global financial crisis reflects an exogenous view
of the money supply, consistent with monetarist policies. However, even during
quantitative easing, endogenous money supply theories began to emerge. This
resurgence is evident in some central banks’ publications (Saito 2023; McLeay
et al. 2014; Deutsche Bundesbank 2017). Modern Monetary Theory (MMT) has also
contributed to popularizing endogenous money supply theories among the general
public. In “mainstream” economics, New Keynesian and Neo-Wicksellian frameworks
occupy a central position as part of the New Consensus, where the money supply
is assumed to adjust endogenously at the interest rate determined exogenously
by the central bank (Lavoie 2022, ch. 4; Monvoisin and Rochon 2006; Fontana et
al. 2020).
Endogenous money supply theories
explain only that the money supply adjusts endogenously to the demand from
non-bank economic agents, but do not clarify what money is based on or what
money itself is. Therefore, despite the apparent broad agreement on the concept
of endogenous money supply, there are significant variations within these
theories.
Moreover, many of the endogenous
money supply theories require certain historical conditions, such as the
suspension of gold convertibility and the existence of central banks. Among
these theories, why inconvertible money can circulate is also a major point of
contention. Some proponents of these theories argue that money becomes fiat
money, capable of circulating by government decree. Others emphasize that money
cannot circulate solely by government decree and that money is issued by bank
credit and extinguished by repayment. In contrast, some traditional Marxian
economists viewed inconvertible money as government paper money. However, other
Marxians argue that inconvertible money is also credit money, based on
commodity value. There are numerous other theories as well, but addressing all
of them is beyond the scope of this paper.
This paper aims to distinguish
between the endogeneity and exogeneity of money supply, on the one hand, and
the endogeneity and exogeneity in the logical emergence of money, on the other.
The latter refers to whether money logically emerges endogenously within the commodity
market or is exogenously injected by non-market authorities. Following this
distinction, the objective of this paper is to elucidate a theory of money in
which both the supply and the emergence of money are endogenous, by further
developing the recent Unoist approach.
The remainder of the paper is
structured as follows: Section 2 presents a 2 × 2 matrix with axes representing
the logical emergence and supply of money to clarify the dual interpretations
of the endogeneity and exogeneity of money. Section 3 discusses the Commodity
Theory of Money as developed by the recent Uno school. Section 4
examines the “Inter-Capital Organization” theory, developed by
recent Unoist scholars, as a condition for endogenous money supply. Finally,
Section 5 concludes this paper.
2. The 2 × 2 matrix:
logical emergence and supply of money
Though the term "endogenous money" is often used in
the context of money supply, the principle in Marxian economics also interprets
the endogeneity of money as its logical emergence from the commodity economy.
For example, Shigeru Yamaguchi, an Unoist scholar, argued that the endogenous
perspective asserts that money arises from the commodity world, whereas the
exogenous perspective claims that money is injected externally into the
commodity economy. The value-form theory in Marxian economics, which derives
money from the commodities, aligns with the endogenous stance (Yamaguchi 2000:
240).
As another example, Costas Lapavitsas
(Lapavitsas 2017) uses the term "endogenous" in two different senses
when referring to money. In chapters 2 to 6, he uses “endogenous” to describe
how the quantity of money is adjusted or supplied to meet market demand. In
chapters 9 and 12, he uses “endogenous” to refer to the logical emergence of
money in market trading, particularly in the context of his critique of
neoclassical economics.
Considering these two meanings of
“endogenous” in relation to money—its logical emergence and its supply—we can
create a framework, as shown in Table 1, to classify the diverse views of
money.
Table 1. Classification of money theories.
Below,
I explain the four conceptual categories in a simple sequence: a) to d). Yet it
is important to note that these categories are conceptual, and there are
intermediate positions between them.
a) Exogenous money supply theories
Exogenous
money supply theories posit that the government or central bank can inject
money at will and adjust the quantity of money, regardless of initial market
conditions. These theories postulate that changes in the money supply can lead
to changes in prices and/or production volume.
Regarding the emergence of money, these theories assume
that government legal tender laws allow money to circulate.
b) Metallism
Metallism
views physical gold (or silver, etc.) as the sole proper money. In terms of
money emergence, metallism is considered to be endogenous because gold is
inherently a commodity, making metallism one of the commodity theories of
money. However, metallism typically does not recognize inconvertible credit
money as commodity money. Therefore, regarding the contemporary inconvertible credit
money, it does not belong to the commodity theory of money.
Metallism is exogenous regarding the money supply. Yet,
money supply in metallism view might be endogenous in some scenarios: gold
production, hoarding (hoard and dishoard), and promises to pay in proper
metallic money. However, even if gold production can increase the money supply
in response to demand, it cannot decrease it. Hoarding cannot quickly respond
to rapid and widespread changes in the demand for money. In a capitalist
economy, promises to pay in gold were mainly issued through bank credit. When
the promise to pay in metallic money is issued without limit, unfettered by the
quantity of metallic money, it is based on the borrowers’ assets rather than on
metallic money itself and thus aligns with commodity money in cell d), as will
be discussed in Section 3.
c) Endogenous money supply theory
In
this theory, the money supply is evidently endogenous, but the issue lies in
the logical emergence of money. Some proponents argue that the money supply can
be endogenous because money is not a commodity, and emphasize government decree
as the origin of money. Others focus on the efflux and reflux of money but
leave unresolved the question of its logical emergence.
d) Commodity theory of money
Michiaki
Obata, a leading Unoist scholar, redefines “commodity money.” According to him,
commodity money is rooted in commodity value and can be classified into two
types: material money and credit money (or debt-type money). These forms of
money are illustrated in Figure 1.
Figure 1 Classification
of forms
of money
In Figure 1, money is divided into two categories: commodity
money, which is based on commodity value, and chartalist money, which is not
based on commodity value but dependent on the government decree. Only commodity
money can circulate within a commodity economy.
Material money circulates as
physical objects of the commodity, while credit money is characterized by
commodity value being self-sustained in the form of a claim (Obata 2009:
46–47). Material money aligns with metallism, as shown in Figure 1, cell b).
Credit money corresponds to the commodity theory of money, as depicted in
Figure 1, cell d). Credit money, issued through banking channels,
is grounded in commodity value. The concept of commodity value in credit money
will be explained in detail in the next section.
3. Logical Emergence of Money: The Commodity Theory of Money
3.1 Is Money Creation from Nothing?
The
endogenous money supply theories claim that banks can create new money,
primarily in the form of deposit currency, without accepting deposits in
advance. This method of issuing money is often referred to as money creation
(or credit creation) from nothing (or ex nihilo).
However, Yamaguchi argued that credit
creation does not imply that newly created money exceeds reserves; rather, it
means that newly created money is backed by a credit claim
(Yamaguchi 1984: 45). The relationship between credit money, reserves, and
credit claims is illustrated in Figure 2 with a balance sheet.
Figure 2 The
expression of Yamaguchi’s theory of credit creation with balance sheet
|
Asset |
Liability and capital |
|
|
Reserve |
Bank note and deposit (Credit money) |
|
|
Credit claim |
||
|
Capital |
The
“from nothing” view considers the relationship [ Credit Money > Reserves ]
in amount. In contrast,
Yamaguchi argues for [ Credit Claim = Credit Money ]. In other words, credit
money is created backed by the credit claim, not “from nothing.”
By extension, it can be said that the credit claim
itself is backed by the borrower’s future repayment. Furthermore, the
borrower’s future repayment is secured by the borrower’s current and/or future
assets. These relationships are illustrated with three balance sheets in Figure
3.
Figure 3 The Structure of Bank Money
|
Borrowers |
Bank |
Deposit holders |
|||||
|
Assets |
Liabilities |
Assets |
Liabilities |
Assets |
Liabilities |
||
|
Assets (commodity value) |
Liabilities to bank |
Credit claim |
Deposit liabilities |
|
Deposit currency |
Net worth |
|
|
|
|||||||
3.2
The Approach to Explaining the Logical Emergence of Money
There
are two potential methods for explaining the endogenous emergence of money:
a) Using the Value-Form Theory:
This method demonstrates that the value expression of multiple commodities is
concentrated on bank liabilities (or a specific bank's liability), thereby
making those bank liabilities the general equivalent. This approach is orthodox
within the principles of Marxian economics, as seen in Marx's The Capital (volume 1,
chapter 1, section 3). However, I have previously attempted this method in
Iwata (2022, 2024), and it requires a long and complicated explanation.
Therefore, I will omit it in this paper.
b) Using Balance Sheets: This
method statically demonstrates the commodity foundation of bank money.
3.2 The Commodity Foundation of Bank Money
As
mentioned earlier (in section 3.1), the foundation of bank money lies in the
commodity value of the borrower's assets. To understand this, it is essential
to grasp the concept of a “commodity” precisely.
By definition, a commodity includes the uncertainty of its
sale, constrained by its specific use-value. Therefore, the realization of its
value is only potential. The bank, through credit assessment of the borrowers, reflects
the potential value in its own bank money, which is not constrained by its
specific use-value. The bank’s assessment is validated when the borrower's
commodity is sold (i.e., when its value is realized). In other words, when the
bank provides credit and issues money, the borrower's commodity value is
pre-validated as money. When the borrower sells their commodities and repays
the bank, the bank money is ante-validated[1].
Between pre-validation and ante-validation, there is credit risk associated
with credit money.
While deposit holders (bank money possessors) have
claims against the bank, they do not have a real right (in rem) to the assets
of the bank's debtors. The bank pre-validates the value of the borrower’s
commodities and provides the deposit holders with money (deposit currency)
backed by the commodity value of the borrower’s assets.
It should be noted here that what backs bank money is not
only the quantity of commodity value but also the use-value, which enhances the
salability of commodities. The bank deliberately selects the borrowers with
more salable commodities through its credit assessment. Thus, the bank
indirectly aggregates and controls many salable commodities. Borrowers seek
bank money circulating in the market for repayment, while bank money holders
seek the commodities held by the borrowers in exchange for bank money. This
complementary relationship is facilitated by the bank’s credit assessment.
Consequently, bank money is based not only on the quantity
of commodity value but also on the use-value of commodities. Such a view is the
commodity theory of money.
4. Endogenous Money Supply in the “Inter-Capital Organization”
4.1 The Essence of Banks: Circulating Debt as Money
Banks’ profits primarily derive from interest earned on
credit operations. In these operations, the bank creates its liabilities, which
can circulate as money, to acquire credit claims. Therefore, banks strive to
maintain the value of their debt as money and to expand circulation of their
bank money.
4.2 Credit Creation by Individual Banks within the Banking
System
It
is often said that credit creation is possible within the entire banking
system, but not by an individual bank, because an individual bank may lose
reserves due to the payment request for deposits created through credit. In
such a situation, an individual bank must prepare some amount of reserves in
advance before lending, which constrains the endogenous supply of money.
There was a complex debate within the Uno School regarding
reserves. In simple terms, Yamaguchi argued that securing payment reserves in
advance is not crucial for banks. The primary concern for banks is the credit
risk associated with loan claims, while the liquidity risk of insufficient
payment reserves is merely a secondary issue (Yamaguchi 2000: 134-135). He
mainly gave two reasons:
1) As
long as the claims are sound and there is repayment of principal and interest,
the repayment will exceed the liabilities by the amount of interest, thus
negating the need for payment reserves (ibid., 134).
2) Even
if there is a payment exceeding the reserves, as long as the discounted bills
as claims are sound, reserves can be replenished through rediscounting with
other banks (ibid., 145).
4.3 Payment Reserves and Interbank Lending
In
this section, we assume the simplest case where there is no requirement for a
statutory reserve ratio, and all payments are made through the transfer of
deposits within a bank or between banks. Furthermore, we assume that there is
no credit risk and that the interbank market functions smoothly.
In this scenario, a payment
from Bank A corresponds to a receipt at another bank, which we will refer to as
Bank B. Therefore, if Bank B extends credit to the paying Bank A, Bank A does
not need to hold payment reserves in advance, as shown in Figure 4.
Figure 4 Excess Payments through Borrowing: Excess Receipts through Lending
This credit
extension automatically offsets the payment and receipt, eliminating the need
for the movement of reserves between banks. Consequently, each bank can
endogenously issue money through credit without securing reserves in advance.
However, this presumes an overly harmonious relationship, which contrasts with
the Uno School’s logic that traditionally emphasizes the uncertainties inherent
in the circulation process. Yamaguchi’s explanation limits the analysis of the
market structure to the essence of capitalism. However, to analyze the concrete
structure[2], it is
necessary to apply the concept of “Inter-Capital Organization” theory, which
has been recently developed within the Uno School.
4.4 Reserves in the
Inter-Capital Organization
Although the meaning
of “Inter-Capital Organization” varies by scholar, it can be briefly summarized
as follows: To reduce the burden of uncertainty in the circulation process,
multiple competing capitals establish special contracts for trading. Table 2
shows the correspondence between simple transanction and organized or structured transanction.
Table 2 comparison between simple, and organized or structured transanction
|
simple transanction |
organized or structured transanction |
|
spot, small lot, distributed sporadic transanction |
continuous, large lot, concentrated transanction |
When applying the theory to
banking organizations with an endogenous money supply, the following two
factors are possible: the horizontal space for concentrated transactions
and preemptive measures. These factors are based on the pursuit
of profits by individual competing capitals and do not conceptually overlap
with each other[3].
Table 3 compares the two factors.
Table 3 Two factors forming banking organization to facilitate reserve adjustment
Preemptive measures
refer to contracts made in advance to secure reserves in preparation for
potential future shortages. This corresponds to a credit line. The bank
providing the credit line can expand the circulation of its deposit currency. The
bank to receive the credit line can supply money endogenously within the credit
line.
5. Conclusions
and perspectives
The endogenous money supply theories were critical tools again
st
mainstream economics. However, as views for endogenous money supply become more
widespread, it becomes increasingly important to understand the differences
within these theories.
This paper examines the distinction between
endogeneity and exogeneity from two perspectives: logical emergence and money
supply. While a comprehensive review of all miscellaneous theories of money is
beyond its scope, this study aims to elucidate the endogenous theory from both
perspectives using the Unoist approach.
In modern capitalism, money is issued by
bank credit and held as bank liabilities. As long as money is issued through
banking operations, it is backed by the borrowers' ability to repay, which is
based on the salability of their commodities, either current or future. This
relationship exists regardless of whether the money is convertible or
inconvertible. Therefore, money issued by bank credit is essentially commodity
money.
The importance of the commodity basis of
money lies not only in the quantity of value but also in its use-value. Through
credit assessment, banks indirectly aggregate and control many salable
commodities. Thus, both in terms of value and use-value, bank money is aligned
with the commodity theory of money.
This paper argues that the condition for an
endogenous money supply is the inter-capital organizations, which are formed by
competing banking capitals to increase their own profits.
Based on these conclusions, the following
perspectives offer a deeper exploration of the theoretical implications and
future directions for understanding money and banking.
The relationship between banks and
commodities in the commodity theory of money reveals the theoretical
possibility for banks to indirectly penetrate the commerce and production
processes. This penetration aims at strengthening the salability of
commodities. The inter-capital organization theory has the potential to
theoretically explain the role of central banks and various banking
organizations through competition among banking capitals. Furthermore, this
theory enables the explanation of the formation of private organizations among
financial institutions, operating outside the central bank-led system.
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[1]
On pre-validation and ante-validation,
see Evans (1997: 29).
[2]
Yamaguchi classified the role of Marxian economic principles into elucidating
the essence of capitalism and providing tools for analyzing real capitalism.
[3]
The conceptual derivation of non-overlapping foundational factors is based on
the Morphic Approach by Obata.
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