The Theory of Money and Credit
3. Schumpeter’s Theory
To call money a claim is to suggest an analogy to which there is no real objection. Althmough this comparison, like all others, falls short at certain points, it may nevertheless make it easier for many to form a conception of the nature of money. Admittedly analogies are not explanations, and it would be a gross exaggeration to speak of a claim theory of money, for mere construction of an analogy does not take us even halfway to any sort of monetary theory that can be expressed in intelligible arguments. The only possible way of building a monetary theory upon the claim analogy would be to regard the claim, say, as a ticket of admission to a room of limited size, so that an increase in the number of tickets issued would mean a corresponding diminution of the amount of room at the disposal of each ticketholder. But the danger in this way of thinking is that taking this illustration as a starting point could lead only to the drawing of a contrast between the total amount of money and the total amount of commodities; but this amounts to nothing but one of the oldest and most primitive versions of the quantity theory, the untenability of which needs no further discussion.
Thus until recently the claim analogy led a precarious existence in the expositions of monetary doctrine, without having any greater significance—as was imagined—than that of a means of expression that could easily be understood by all. Even in the writings of Bendixen, who would have been glad to see his obscure arguments designated a claim theory, the claim concept has no greater significance ascribed to it. But very recently an ingenious attempt has been made by Schumpeter to arrive at a real theory of the value of money starting from the claim analogy, that is, an attempt to construct a catallactic claim theory.
The fundamental difficulty that has to be reckoned with in every attempt to construct a theory of the value of money starting from the claim concept is the necessity for comparing the quantity of money with some other total, just as in the ticket illustration the total number of tickets is compared with the total amount of room available. Such a comparison is a necessity for a doctrine which regards money as “claims” whose peculiarity consists in the fact that they do not refer to definite objects but to shares in a mass of goods. Schumpeter seeks to avoid this difficulty by starting, in elaboration of a line of argument first developed by Wieser, not from the quantity of money, but from the sum of money incomes, which he compares with the total prices of all consumption goods.10 There might be some justification for such a comparison if money had no other use than to purchase consumption goods. But such an assumption is obviously quite unjustifiable. Money bears a relationship, not only to consumption goods, but also to production goods; and—the point is a particularly important one—it does not serve only for the exchange of production goods against consumption goods but very much oftener for the exchange of production goods against other production goods. So Schumpeter is only able to maintain his theory by simply putting out of consideration a large part of that which circulates as money. He says that commodities are actually related only to the circulating portion of the total quantity of money, that only this portion has an immediate connection with the sum of all incomes, that it alone fulfills the essential function of money. Thus “to obtain the quantity of money in circulation, which is what we are concerned with,” the following items, among others, have to be eliminated:
- Hoards
- “Sums that are unemployed but awaiting employment”
- Reserves by which we are to understand those sums of money “below which the economic agents never let their holdings fall; in order to be prepared for unexpected demands.”
But even the elimination of these sums is not enough; we must go still farther. For the total incomes theory is “not concerned even with the total quantity of money in circulation.” In addition we must exclude “all those sums that circulate in the ‘income-distributing’ markets, in the real estate, mortgage, security and similar markets.”11
These limitations do not merely serve, as Schumpeter thinks, to demonstrate the impossibility of dealing statistically with the notion of money in effective circulation; they also cut away the ground from beneath his own theory. All that needs to be said about the separation of hoards, unemployment sums, and reserves, from the remaining amount of money has already been mentioned above.12 It is inadmissible to speak of “sums that are unemployed but awaiting employment.” In a strict and exact sense—and theory must take everything in a strict and exact sense—all money that is not changing owners at the very moment under consideration is awaiting employment. Nevertheless, it would be incorrect to call such money “unemployed”; as part of a reserve it satisfies a demand for money, and consequently fulfills the characteristic function of money. And when Schumpeter further proposes to eliminate the sums in circulation in the income-distributing markets, we can only ask, What then remains?
Schumpeter has to do violence to his own theory in order to make it appear even fairly tenable. It cannot be compared with the point of view which opposes the total stock of money to the total demand for it (that is, to the total demand of economic agents for reserves), because it does not really attempt to solve more than a small part of the problem. To be of any use, a theory must try to explain the whole of the problem that is before us. Schumpeter’s theory arbitrarily splits up the stock of money and the demand for money in order to institute a comparison that would otherwise be impossible. If Schumpeter starts from the statement that the total quantity of money is distributed between three spheres, the sphere of circulation, that of hoards and reserves, and that of capital, then, if he wishes to provide a complete theory of money, the comparison which he makes for the sphere of circulation between total incomes and total amount of consumption goods should be repeated for the two other spheres also; for these also are not without significance in the determination of the value of money. Variations in the amount of money demanded or available for hoards and reserves—to retain this vague distinction—or for the sphere of capital, influence the value of money just as much as variations in the sphere of circulation. No theory of the value of money with pretensions to completeness dare omit an explanation of the influence on the value of money exerted by processes in the sphere of hoards and reserves and in that of capital.
We see, then, that even Schumpeter has not been able to make a complete catallactic theory of money out of the claim theory. The fact that his attempt to make the claim theory into a catallactic theory of money obliged him to set such extraordinary limits to the problem is the best proof that a comprehensive catallactic theory of money cannot be constructed on the basis of the claim analogy. His having arrived in the course of his admirable discussion at conclusions for the rest which do not differ essentially from those which have been discovered in other ways and with other instruments by the catallactic doctrine of money is merely to be ascribed to his having found them in the theory of money already and having therefore been able to adopt them. They by no means follow from the fragmentary theory of money that he himself has put forward.
