Monetary [Currency] Policy
Written by Carlos Bondone   


We can define money [currency] as the economic good of common use in the interpersonal exchanges, which allows to go beyond barter.

As the Theory of Economic Relativity (TER) states

  1. There is no money [currency] that doesn’t have its origin in a present economic good, whether it takes the form of money (present economic good) or of credit (interpersonal exchange of present economic goods for future economic goods).
  2. That credit can also be thought as an interpersonal exchange of economic time, configuring the most advanced state of money [currency] in human civilization, whereas the use of barter and money are less developed states of the interpersonal exchanges.
  3. That the interest is the price of economic time.
  4. That interest is the price of credit (for its condition of being economic time interpersonally exchanged), not of money, because money belongs to cash exchanges—in which time has a temporarily ephemeral space, as it happens in barter as well—.
  5. That when credit is used as money [currency], the interest is the price of money [currency], which implies that monetary [currency] prices are equivalent to the prices that take interest as a reference, more specifically: the interest of credit that is used as money [currency].
  6. That on the TER, the economic time (as it is the credit and its price: the interest) materializes in all cases in another present economic good, unlike all other economic goods that have an economic life or entity of their own.

Now it is convenient to focus on the implications derived from the previous deductive chain (further scientific extension to be found in the book “Theory of Economic Relativity..."). This way we will be able to obtain a completely different reading of the facts in relation to the monetary [currency] theories in effect.

Monetary [currency] price levels and monetary [currency] interest rate are deemed as two different economic agents, but under the TER it is evident that we are in front of two different analytical views on the same entity:

  1. The monetary [currency] price level is introduced to us as an statistical index which measures prices’ fluctuation of the economic goods selected for the measurement using as a unit of measurement for the calculation the price of money [currency].
  2. The monetary [currency] interest rate is, at the same time, the unit of measurement used for calculation in economy, because it is the price of money [currency], and this is it because it is the price of the credit that is being used as money [currency].

Monetary [currency] Policy is the one which tries to control the so called transmission mechanism which operates, as current theories explain, between the quantity of money [currency], the level of monetary [currency] prices and the interest rate on the market (monetary [currency] interest, wrongly called money interest).

The current monetary [currency] theory
with its different approches has a common quarry which is the crucial deviation of treating money and currency alike (which happened after Menger and not by him, and since Wicksell). This procedure is done in a tacit or implict way, more or less confusing, but it is evident that all the underlaying structure of monetary [currency] theory is based in giving the same category to currency and money, without noticing that currency is at a higher level of categorization than money, because currency can acquire both the forms of money and credit, but these two last entities are different.

Nontheless, it is important to have in mind that the basic categories in economy are conceived with the intention of take into consideration the need of the interpersonal exchanges as the centre of the solutions which human beings have been finding spontaneously to make this easier, to make this less costly in economic terms. Starting from barter, passing through money and ending in credit (all these economic goods to satisfy liquidity and the need of interpersonal exchanges at the least possible cost, which is done by the use of the economic good labelled as currency).

Another way to express the inicial mistake in the current monetary theory is to make relevant the difference between direct exchange (barter) and indirect exchange (with money), and from money to set all the monetary [currency] theory without noticing that the essential categories to be studied are: cash interpersonal exchange (barter and money) and credit. This places us perfectly in the situation of studying currency from a more elevated sphere than that of money and credit, and once located at this vantage point it is clearly observable that being the interest the price of economic time, and being the credit the interpersonal exchange of economic time, it follows that interest is the price of credit, not of money. All this leads us not to treat money and credit alike, this is why it is not acceptable the axiom which supports the current monetary [currency] theory: It is money all that has the function of money. It would be like considering a road and a car alike just because the two transport us.

Evident conclusion is that the TER makes untenable the monetary [currency] theory in effect as a whole when monetary [currency] systems operate with credit as if it was money [currency] . Then, with credit-money (PM and/or MF), the monetary [currency] policy is conceivable only with a theory that presents the amount of money [currency], price level and interest rate as different economic entities.

At the same time, according to the TER, it is totally inconsistent the basis of the monetary [currency] theories in effect, since we are in presence of different points of view (amount of credit-money [currency] , which is used as unit of measurement, price levels which are expressed in the unit of measurement credit-money [currency] , and the interest rate that is the price of the credit-money [currency] used as unit of measurement) of unique entities, credit-money [currency] that is used as unit of measurement.

Under the TER, it is evident there is no such entities as: zero and/or negative interest rate; neutral monetary [currency] policy; to consider interest as the price of the money and not of economic time (which is credit when exchanged interpersonally); that Wicksell’s original theory, which declares the existence of natural interest rate and monetary [currency] interest rate, has no foundations; independence of the financial system from the political power (of the central bank as much as of the banking system); quantitative theory; and other macroeconomic theories derived during the 20th century from the same current monetary [currency] theory, all which give institutional support to the current financial order.

The reader can notice then, the consequences that derive when an irregular credit (a credit that does not specify at its birth the quality and quantity of the present economic good in which it will be cancelled) is used as money [currency], origin of the irregular financial (monetary [currency]) systems, which I will analyze in another article at this same section.

Finally, it is necessary to emphasize the enormous implication that a legal order mounted on the base of considering as cash and credit cancellation (debts) the operations where paper money (PM) or Fiduciary Media (FM) take part, both derivates of the banking system. According to the TER, cash operations where PM and/or MF take part are credit operations, and the "cancellations" of debts with those instruments, are novations of debt (the change of a debt for another).
Buenos Aires, November 2006.


Translator Note: The distinction between money and currency is essential in this work. The author places the term “currency” as a more general categorization than that implied in “money”. Thus, currency can acquire whether the form of money or of credit, and this last can be regular or irregular.

The reader will find an indication of which term is being referred to each time according to the theory, between the [ ... ] symbols. E.g. “monerary [currency]” will be pointing to the meaning “currency” and not to “monetary”.

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