Have you ever had a “light bulb” moment? A moment when a huge amount of information just falls into place like the pieces of a puzzle spontaneously rearranging themselves into a clearly recognizable image? Here’s a passage that did that for me a couple of days ago:
The two extreme types of monetary systems are: the 'realist' under which each unit of money has, as a counter-part in the balance-sheet of the bank that has issued it, an asset that can be sold on the market for an equal value; and the ‘nominalist’ under which money is nothing but a token, void of substance. All the systems that have been, are, or will be in force range somewhere between these two models. (my emphasis)
(Chapter 6, Page 170 - "The Institutional Problem Of Money" from “Balance of Payments” by Jacques Rueff published by The Macmillan Company in 1967)
In 'Balance of Payments' Jacques Rueff explains that a 'realist' money retains its purchasing power. So while it is convertible into assets of equal value it also retains parity with all forms of wealth and consumption goods and services as well as claims that are sound e.g. the debts of creditworthy borrowers. (The words 'convertible' and 'exchangeable' have the same meaning here.) A 'nominalist' system treats money as mere tokens:
"('Nominalist' money) can be brought into circulation by a deficit and withdrawn by a surplus. It will therefore never be self-regulating, and can be regulated only by the utilization of an appropriate fiscal policy. With respect to it (a 'nominalist' system), the management rules of the Keynesian pharmacopaeia will have to be used." (my emphasis)
This post started life as a response to a Tweet from Koos Jansen. Koos asked if anyone could recommend a book on international economics. My initial reaction was – one book, no way – but after sleeping on it I decided that two books by Jacques Rueff studied together might go close to delivering what Koos was seeking. I’m referring to Balance of Payments (‘BoP’) and The Monetary Sin Of The West. You can download ‘Monetary Sin’ here but I haven’t been able to access a digital copy of ‘BoP’. So I started this post because I believe that you need the content of both books in order to appreciate the elegance of Rueff’s economic theories.
Back to that “light bulb” moment. I have read a huge amount of material on economics, monetary systems and banking. I came to the conclusion some time ago that money should be the organizing principle of my studies and attempts to discuss what I was studying. That passage from ‘BoP’ supplied something else I have been striving for – an appropriate conceptual framework. It’s been obvious to me for years that there was a war being waged throughout economic history (and right up to the present) but I lacked a suitable framework with which to view the opposing forces.
I have been exposed to several concepts and theories about how these forces should be grouped – debtors and savers – labour versus capital – soft/easy money versus hard money - socialist versus capitalist and so on. Ultimately none of these categorizations provided me with a satisfactory conceptual framework. As Rueff points out:
"Contrary to the belief of the uninformed, there is no orthodoxy in monetary matters. A great number of systems can be conceived, each of which has its own distinctive merits. It is only from the standpoint of the functions that one assigns to Society that any one of these systems may seem preferable to the others.....('BoP' Page 170)
I found that when I tried to extrapolate from money as an organizing principle I soon ran into this "orthodoxy" problem. But this notion of realists versus nominalists works for me on several levels. I think I can reorganize a lot of the material I have collected within this framework and present it in a way that makes sense.
That Was Then This Is Now
I have copped some flack over the past couple of years for trying to apply lessons to the present gleaned from old books and texts on the basis that they are outdated. Some folks have argued that the world has moved on and old knowledge no longer applies to the modern world. I marvel at the lack of introspection this attitude implies. To me this is just another version of the "This Time It’s Different" mentality that takes hold during the boom phase of the boom and bust cycle. I think it's a kind of willful, collective amnesia.
Here is Jacques Rueff's description of the aspirations that policy makers and the general public had for their monetary system back in the late 1960s:
"At present, the consensus demands, above all, of a monetary system that it should not hinder the development of production, and should thereby favor the 'full employment' of productive possibilities, but at the same time it wishes that the system chosen should give to the general price level the fullest stability consistent with the preceding aim."
Wow! Radical aspirations - full employment, price stability, an adequate money supply.... That passage could have been written today. Yet, despite the apparently well-meaning efforts of economists, governments and central banks since that time today we are even further away from this ideal monetary system than they were in the 1960s. In fact we now have an extreme 'nominalist' monetary system that has in turn lead to the creation of the biggest pile of debt the world has ever seen.
In 'BoP' Jacques Rueff describes the main benefit of a 'realist' system and how to structure it in a way that is partially self-regulating:
The essential feature of the 'realist' system is that, if suitably administered, it permits the creation of a situation that tends to avoid all threats of inflation or deflation.... Now, all practitioners know the difficulty met with in foreseeing inflationary or deflationary tendencies before they produce their effects. Therefore, more or less intentionally, monetary systems have been so devised that the regulating reactions have a tendency to develop spontaneously, thus acquiring a partially self-regulating character...."
Interestingly, Jacques Rueff an advocate for gold-based monetary systems, places a metallic currency at the extreme end of the monetary system spectrum. My reading of economic history leads me to believe that the pendulum has just about reached its limit in this swing toward the nominalist extreme. I doubt that it will swing back to something equally extreme as bi-metallism - been there done that! I imagine that a compromise somewhere in the middle is on the way.