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La teoria monetaria della produzione (The monetary theory of production)
272
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271-277
policy funds, i.e. the state providing assistance to industries in trouble in order to minimize political tensions, is inefficient and will delay the restructuring process, and thus support an active industrial policy, which involves, among other things, restructuring strategic state-owned enterprises, promoting the developments of small- and medium-sized enterprises, increasing infrastructural investments, devising a new training system, and building a robust financial system. The following chapters look at the industrial restructuring process in Eastern Europe from various angles. There are chapters looking at detailed changes in industrial and trade structure in different Eastern European countries during the reform period (chs 2 and 3). There are chapters looking at individual country experiences (chs 4-8). There are also chapters looking at changing enterprise behaviours (chs 9-10) and at the evolution of new financial systems (ch. 12). There is also another chapter providing a systematic and detailed analysis of industrial policy issues (ch. 11). Not surprisingly, for an edited volume, some chapters are better than others, but on the whole these chapters provide us with some interesting insights into the restructuring process in Eastern Europe, especially by drawing our attention to the 'path dependencies' that the reform processes in different countries are exhibiting, owing to the differences in their pre-reform institutional characteristics and economic structures. By providing a more sophisticated framework of analysis and by presenting more detailed empirical evidence, the volume has elevated the debate on industrial restructuring in Eastern Europe on to a higher plane. It will significantly add to our understanding of arguably the biggest historical event of the second half of the 20th century.
Ha-Joon Chang Faculty of Economics and Politics University of Cambridge
PII S 0 9 5 4 - 3 4 9 X ( 9 7 ) 0 0 0 0 9 - X
Augusto Graziani, La teoria monetaria della produzione (The Monetary Theory of Production), (Banca Popolare dell'Etruria e del Lazio, Studi e Ricerche, 1994). The reader will certainly notice that the title of Professor Graziani's latest book,
The Monetary Theory of Production, is the same as that chosen by Keynes for the earliest draft of his General Theory. Graziani's intention, however, is less ambitious than that of Keynes, his attempt being mainly that of providing a detailed picture of the theories dealing with the analysis of production from a 'bank money' point of view. A well-known expert on monetary problems, Professor Graziani has greatly
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271-277
273
contributed to the diffusion of the 'theories of the circuit', and his book is a further step towards the development of a monetary approach based on the concept of bank money circulation. In different parts of his work he proposes a rigorous survey of the way a monetary theory of production has developed, from the classics to modem times, along the lines of a macroeconomic analysis. Very rich in references, and with particular sensitivity to the historical evolution of economic thought, the book examines arguments spreading from the principles of monetary theory to the workings of the banking system. Specific items such as the relationship between saving and investment, between monetary and real interest rates or between real income and wealth are investigated both with reference to traditional analysis and by trying to integrate them into the context of the theory of the monetary circuit. Graziani's treatment of such a difficult subject as monetary economics is at the same time stimulating and rigorous. That is not to say that it will be unanimously accepted by fellow economists. On the contrary, it will probably annoy or even infuriate those who still believe money to be a real asset as well as those who are unwilling to abandon the old fashioned concept of money neutrality. In this respect, Graziani's contribution to the long-lasting dispute between monetary and real economics is of great interest. There can now be little doubt that economic theory must account for the important progress made by bankers in their daily monetary transactions. The book-keeping nature of modem money is a reality which can no longer be denied and to which a monetary theory of production must necessarily conform. Graziani is therefore quite right in taking bank money as the starting point of his analysis. However, up to now his analysis of a monetary economy is not up to the task of explaining the crucial distinction between money and income. Given the importance of this distinction for the theory of the circuit, on which Graziani bases his whole book, let us try to clarify the terms of the problem. According to Graziani, the circuit of money starts with the creation of money carried out by the banking system through the credit which banks grant to their clients, and ends with the destruction of money taking place at the moment the credit is recovered by the issuing banks. If this were the case, money could not be distinguished from income and capital, and its circuit would be positively inscribed in chronological time. Depending on how fast credits are reimbursed, money will flow more or less rapidly and the duration of its circuit will vary accordingly. Let us first consider the process of money creation. Graziani agrees that money is created by banks through their spontaneously acknowledging a debt to the economy. In book-keeping terms, this means that banks enter a sum on the liabilities side of their balance sheet to the benefit of their clients (let us call them firms, F). Now, according to the principle of double entry, the sum entered on the liabilities side must be balanced by an equivalent sum entered on the assets side of banks (B). Spontaneously issued by B on F's request, money is therefore simultaneously a debt of B to F (banks owe a given sum to F) and a credit of B towards F (firms owe an equivalent sum to B). Through this double entry, money is thus created as an 'asset-liability', that is, as a simple numerical unit. The result of the operation is not nil, but the simultaneous introduction into the economy of negative and positive numbers. In simple words, the creation of money is nothing other than the use of
274
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271-277
double entry book-keeping to provide the economy with numbers. If money were not conceived as a numerical vehicle with no intrinsic value whatsoever, its creation would remain mysterious, no human institution being endowed with the power of creating a positive value out of nothing. Now, as Graziani correctly points out, this creation acquires all its meaning when it is associated with a payment. The next step is therefore that of explaining how a numerical vehicle of no value can carry out a positive payment. Again Graziani is on the right track when he maintains that there is a payment which banks can carry out without having at their disposal any previous deposit. It is the principle according to which 'loans make deposits' which applies here. As can easily be verified by looking at the banks' book-keeping, the payment of the factors of production on behalf of firms leads to the formation of an entirely new deposit. Consider the payment of wages. As soon as it is carried out by banks it defines a positive deposit (credit) of workers (entered on the liabilities side of the banks' account) and a negative deposit (debt) of firms (entered on the assets side of the banks' account). Carried out by a simple numerical vehicle, the payment of wages is nevertheless positive since money is transformed into income through its association with real output. Money's purchasing power is thus derived from real production and not from banks. What has to be clearly understood here is that money itself is simply a means of payment and not the object or content of the payment. The object of the bank deposit owned by workers is not money as such (a mere numerical form), but its real content: physical output. Having played its role as a means of payment, money disappears leaving behind a book-keeping entry representing a positive amount of income deposited within the banking system. For a long time money has been considered as a commodity chosen from the set of real goods to act as their general equivalent. Nowadays this 'materialistic' conception of money is clearly anachronistic. The development of the banking system has made it plain to everybody that money is not a physical product but a simple double entry in the banks' account. This does not mean, of course, that money does not exist at all, but merely that its existence is instantaneous. Surprising as this may first appear, it is the only logical way of explaining the creation of money without being trapped in a metaphysical conception where a human institution is given the privilege of creating some physical entity ex nihilo. Hence, in accordance with its definition as a m e a n s of exchange, money exists only at the very instant a payment is carried out. Although Professor Graziani goes as far as to accept the idea that money is created at the moment a payment is carried out (p. 67), he does not go far enough to see that money is also immediately destroyed. A payment lasts the space of an instant and so does money. When Graziani claims that the monetary circuit has a positive duration in chronological time since money is created when banks grant a credit to the economy and is destroyed when the credit is paid back, he is effectively referring to the period of time separating the creation of income from its final expenditure. Generated through the association between money and real output, income is definitively destroyed at the moment it is spent on the final purchase of current output. Between the moment it is created (through the payment of the factors of production) and the moment it is destroyed, income is saved. Now, it is important to note that
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271-277
275
income saved is in the form of a bank deposit. Income, in fact, is not an object in itself, but a relationship between a positive bank deposit held by the public and the object of the equivalent negative bank deposit held by firms (that is, real output). As the owners of a bank deposit, income holders own a credit to the bank whose real content is the physical output stocked with the firms (and which constitutes the object of the debt of F to B). Like money, income only exists within the banking system in the form of a double entry relating two equivalent deposits of the opposite sign. It is precisely because of this particular nature of income that banks play such an important role as financial intermediaries. Thus, by lending to some of their clients what has been saved by others, banks allow for the exchange between present and future incomes and give firms the opportunity of selling their products at a faster rate. The consequence of the banking nature of money and income is that neither one nor the other can ever be physically held by any economic agent. Given the nature of book-entry money, this result is not really surprising. Income holders own a positive purchasing power over current output in the form of a bank deposit. It is true that they can hold their right under the form of a more or less liquid security, ranging from banknotes to long-term bonds. But this is precisely the point: they hold their right to a deposit and not the deposit itself. This is so much so that banks lend at once all the deposits saved by their clients. Referring to the banks' book-keeping it is not difficult to show that for every deposit there is a corresponding debt, which means that, through the intermediation of banks, deposits are necessarily lent to cover the debt incurred by the economy. This time it is the principle according to which 'deposits make loans' that applies. The reality of our modern monetary systems is thus based on the simultaneous application of the two principles, 'loans make deposits' and 'deposits make loans', where the first refers to the fact that deposits are created through the loans granted by banks to firms, while the second states that the deposits earned by workers are immediately lent to firms to cover financially their costs of production. What is true for the whole of the income created by production is also true for its parts. Thus, to the extent that income is spent on the commodity market, bank deposits are transferred to firms and destroyed (debts and credits of firms cancel out), while that part of income which is not spent on the final purchase of real output is transformed into capital and remains deposited under this form in the banking system. At the moment capital income is spent on the final purchase of current output, the circuit of income is completed. Being carried out through a monetary transaction, the destruction of income implies the intervention of money, with the banks once again at its point of departure and arrival. Graziani's description of the monetary circuit does not take into consideration the fact that money is created and destroyed in each transaction requiring its intervention as 'the great wheel of circulation'. His analysis is thus more appropriate to the circuit of income than to that of money. Even at this level, however, a problem arises. By assuming that money has a positive duration in time, Graziani is led to claim that income can be hoarded in the form of liquid reserves (bank deposits), and that an increase in the consumers' propensity to save is thus the only cause of financial losses suffered by firms (pp. 79, 154). The
276
Book Reviews/ Structural Change and Economie Dynamics 8 (1997) 271-277
very use of the word 'hoarding' sounds strange within a modern analysis of monetary production. Being entirely deposited with banks, income cannot effectively be hoarded since it cannot be diverted from circulation. Because of its book-keeping nature, income can only be saved as a bank deposit (as is clearly maintained by Graziani), and as such it remains entirely available within the banking system. Then, how could firms suffer from a definitive loss given that the income necessary for the final purchase of their output is still available in its totality? Saving does not destroy income so it cannot be the source of a positive discrepancy between global supply and global demand. The understanding of deflation, which is the principal cause of economic crisis, requires a more subtle analysis in which both the circulation of money and the circuit of income are accounted for in accordance with the workings of modern banking. The aim of every theory is to explain the reality of its object of inquiry. In the case of economics, a monetary theory must be able to explain the workings of our monetary systems and, therefore, also the genesis of their most worrying disequilibria: inflation and unemployment. The traditional approach based either on the quantity theory of money or on the Keynesian 'earning through spending' theory of income, has failed to provide a satisfactory framework for analysis, mainly because it is fundamentally inappropriate to the originality of modern book-entry money. The need to develop a theory in which money and production are complementary aspects of the same process is clearly perceived by Graziani. The monetary structure as such would be meaningless if it were not associated with the structure of production. Money and real output are related to one another as a (numerical) form is to its (real) content. From the beginning, banking and productive systems thus contribute to the determination of a unique macroeconomic structure. Now, the study of the laws governing this structure requires a clear understanding of the distinction between money and income, and between their respective circuits. It is only through a careful examination of the logical relationships existing between money and output, and of their transposition into double-entry book-keeping, that an analysis can be elaborated which can account for the actual discrepancies between monetary and real worlds. If money and product did not form a unity, there would be no objective criterion of demarcation between an orderly and a disorderly monetary economy. Hence, whereas the first step towards the building of a monetary theory of production must lead to the settlement of the principles governing the logical association between money and output, the following steps must allow for a satisfactory explanation of the way these principles are not always complied with. To test its validity, a monetary theory must be confronted with the task of explaining how anomalies such as inflation and deflation can arise in an economic framework in which money is entirely non-dimensional. The theories of circuit Graziani refers to in his book have undoubtedly contributed to emphasizing the banking nature of money and its 'vehicular' characteristic. The time has come to verify whether they are appropriate to fulfilling their task entirely. The above analysis of a monetary economy is fundamentally different from those analyses based on a dimensional conception of money and income. When it is agreed that money is book-entry money, there is no room left for physical concepts
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271~77
277
such as quantity, mass or velocity. A numerical vehicle has no mass and its circulation cannot be conceived as that of a physical object. The laws governing the monetary circuit have nothing to do with those of physics. As long as this fact is not clearly perceived, economists will always be tempted to reason in physical terms, thus missing the opportunity of understanding the mechanisms governing our monetary economies. Graziani's book represents an important step towards the clarification of the terms of this problem. His analysis deserves all our attention and has to be welcomed as a valuable contribution to the effort necessary to the construction of a monetary theory of production complying with the banking nature of book-entry money.
Alvaro Cencini Centre for Banking Studies Lugano Switzerland and University of Lugano, Switzerland P I I S 0 9 5 4 - 3 4 9 X ( 9 7 ) 00010-6
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271-277
policy funds, i.e. the state providing assistance to industries in trouble in order to minimize political tensions, is inefficient and will delay the restructuring process, and thus support an active industrial policy, which involves, among other things, restructuring strategic state-owned enterprises, promoting the developments of small- and medium-sized enterprises, increasing infrastructural investments, devising a new training system, and building a robust financial system. The following chapters look at the industrial restructuring process in Eastern Europe from various angles. There are chapters looking at detailed changes in industrial and trade structure in different Eastern European countries during the reform period (chs 2 and 3). There are chapters looking at individual country experiences (chs 4-8). There are also chapters looking at changing enterprise behaviours (chs 9-10) and at the evolution of new financial systems (ch. 12). There is also another chapter providing a systematic and detailed analysis of industrial policy issues (ch. 11). Not surprisingly, for an edited volume, some chapters are better than others, but on the whole these chapters provide us with some interesting insights into the restructuring process in Eastern Europe, especially by drawing our attention to the 'path dependencies' that the reform processes in different countries are exhibiting, owing to the differences in their pre-reform institutional characteristics and economic structures. By providing a more sophisticated framework of analysis and by presenting more detailed empirical evidence, the volume has elevated the debate on industrial restructuring in Eastern Europe on to a higher plane. It will significantly add to our understanding of arguably the biggest historical event of the second half of the 20th century.
Ha-Joon Chang Faculty of Economics and Politics University of Cambridge
PII S 0 9 5 4 - 3 4 9 X ( 9 7 ) 0 0 0 0 9 - X
Augusto Graziani, La teoria monetaria della produzione (The Monetary Theory of Production), (Banca Popolare dell'Etruria e del Lazio, Studi e Ricerche, 1994). The reader will certainly notice that the title of Professor Graziani's latest book,
The Monetary Theory of Production, is the same as that chosen by Keynes for the earliest draft of his General Theory. Graziani's intention, however, is less ambitious than that of Keynes, his attempt being mainly that of providing a detailed picture of the theories dealing with the analysis of production from a 'bank money' point of view. A well-known expert on monetary problems, Professor Graziani has greatly
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271-277
273
contributed to the diffusion of the 'theories of the circuit', and his book is a further step towards the development of a monetary approach based on the concept of bank money circulation. In different parts of his work he proposes a rigorous survey of the way a monetary theory of production has developed, from the classics to modem times, along the lines of a macroeconomic analysis. Very rich in references, and with particular sensitivity to the historical evolution of economic thought, the book examines arguments spreading from the principles of monetary theory to the workings of the banking system. Specific items such as the relationship between saving and investment, between monetary and real interest rates or between real income and wealth are investigated both with reference to traditional analysis and by trying to integrate them into the context of the theory of the monetary circuit. Graziani's treatment of such a difficult subject as monetary economics is at the same time stimulating and rigorous. That is not to say that it will be unanimously accepted by fellow economists. On the contrary, it will probably annoy or even infuriate those who still believe money to be a real asset as well as those who are unwilling to abandon the old fashioned concept of money neutrality. In this respect, Graziani's contribution to the long-lasting dispute between monetary and real economics is of great interest. There can now be little doubt that economic theory must account for the important progress made by bankers in their daily monetary transactions. The book-keeping nature of modem money is a reality which can no longer be denied and to which a monetary theory of production must necessarily conform. Graziani is therefore quite right in taking bank money as the starting point of his analysis. However, up to now his analysis of a monetary economy is not up to the task of explaining the crucial distinction between money and income. Given the importance of this distinction for the theory of the circuit, on which Graziani bases his whole book, let us try to clarify the terms of the problem. According to Graziani, the circuit of money starts with the creation of money carried out by the banking system through the credit which banks grant to their clients, and ends with the destruction of money taking place at the moment the credit is recovered by the issuing banks. If this were the case, money could not be distinguished from income and capital, and its circuit would be positively inscribed in chronological time. Depending on how fast credits are reimbursed, money will flow more or less rapidly and the duration of its circuit will vary accordingly. Let us first consider the process of money creation. Graziani agrees that money is created by banks through their spontaneously acknowledging a debt to the economy. In book-keeping terms, this means that banks enter a sum on the liabilities side of their balance sheet to the benefit of their clients (let us call them firms, F). Now, according to the principle of double entry, the sum entered on the liabilities side must be balanced by an equivalent sum entered on the assets side of banks (B). Spontaneously issued by B on F's request, money is therefore simultaneously a debt of B to F (banks owe a given sum to F) and a credit of B towards F (firms owe an equivalent sum to B). Through this double entry, money is thus created as an 'asset-liability', that is, as a simple numerical unit. The result of the operation is not nil, but the simultaneous introduction into the economy of negative and positive numbers. In simple words, the creation of money is nothing other than the use of
274
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271-277
double entry book-keeping to provide the economy with numbers. If money were not conceived as a numerical vehicle with no intrinsic value whatsoever, its creation would remain mysterious, no human institution being endowed with the power of creating a positive value out of nothing. Now, as Graziani correctly points out, this creation acquires all its meaning when it is associated with a payment. The next step is therefore that of explaining how a numerical vehicle of no value can carry out a positive payment. Again Graziani is on the right track when he maintains that there is a payment which banks can carry out without having at their disposal any previous deposit. It is the principle according to which 'loans make deposits' which applies here. As can easily be verified by looking at the banks' book-keeping, the payment of the factors of production on behalf of firms leads to the formation of an entirely new deposit. Consider the payment of wages. As soon as it is carried out by banks it defines a positive deposit (credit) of workers (entered on the liabilities side of the banks' account) and a negative deposit (debt) of firms (entered on the assets side of the banks' account). Carried out by a simple numerical vehicle, the payment of wages is nevertheless positive since money is transformed into income through its association with real output. Money's purchasing power is thus derived from real production and not from banks. What has to be clearly understood here is that money itself is simply a means of payment and not the object or content of the payment. The object of the bank deposit owned by workers is not money as such (a mere numerical form), but its real content: physical output. Having played its role as a means of payment, money disappears leaving behind a book-keeping entry representing a positive amount of income deposited within the banking system. For a long time money has been considered as a commodity chosen from the set of real goods to act as their general equivalent. Nowadays this 'materialistic' conception of money is clearly anachronistic. The development of the banking system has made it plain to everybody that money is not a physical product but a simple double entry in the banks' account. This does not mean, of course, that money does not exist at all, but merely that its existence is instantaneous. Surprising as this may first appear, it is the only logical way of explaining the creation of money without being trapped in a metaphysical conception where a human institution is given the privilege of creating some physical entity ex nihilo. Hence, in accordance with its definition as a m e a n s of exchange, money exists only at the very instant a payment is carried out. Although Professor Graziani goes as far as to accept the idea that money is created at the moment a payment is carried out (p. 67), he does not go far enough to see that money is also immediately destroyed. A payment lasts the space of an instant and so does money. When Graziani claims that the monetary circuit has a positive duration in chronological time since money is created when banks grant a credit to the economy and is destroyed when the credit is paid back, he is effectively referring to the period of time separating the creation of income from its final expenditure. Generated through the association between money and real output, income is definitively destroyed at the moment it is spent on the final purchase of current output. Between the moment it is created (through the payment of the factors of production) and the moment it is destroyed, income is saved. Now, it is important to note that
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271-277
275
income saved is in the form of a bank deposit. Income, in fact, is not an object in itself, but a relationship between a positive bank deposit held by the public and the object of the equivalent negative bank deposit held by firms (that is, real output). As the owners of a bank deposit, income holders own a credit to the bank whose real content is the physical output stocked with the firms (and which constitutes the object of the debt of F to B). Like money, income only exists within the banking system in the form of a double entry relating two equivalent deposits of the opposite sign. It is precisely because of this particular nature of income that banks play such an important role as financial intermediaries. Thus, by lending to some of their clients what has been saved by others, banks allow for the exchange between present and future incomes and give firms the opportunity of selling their products at a faster rate. The consequence of the banking nature of money and income is that neither one nor the other can ever be physically held by any economic agent. Given the nature of book-entry money, this result is not really surprising. Income holders own a positive purchasing power over current output in the form of a bank deposit. It is true that they can hold their right under the form of a more or less liquid security, ranging from banknotes to long-term bonds. But this is precisely the point: they hold their right to a deposit and not the deposit itself. This is so much so that banks lend at once all the deposits saved by their clients. Referring to the banks' book-keeping it is not difficult to show that for every deposit there is a corresponding debt, which means that, through the intermediation of banks, deposits are necessarily lent to cover the debt incurred by the economy. This time it is the principle according to which 'deposits make loans' that applies. The reality of our modern monetary systems is thus based on the simultaneous application of the two principles, 'loans make deposits' and 'deposits make loans', where the first refers to the fact that deposits are created through the loans granted by banks to firms, while the second states that the deposits earned by workers are immediately lent to firms to cover financially their costs of production. What is true for the whole of the income created by production is also true for its parts. Thus, to the extent that income is spent on the commodity market, bank deposits are transferred to firms and destroyed (debts and credits of firms cancel out), while that part of income which is not spent on the final purchase of real output is transformed into capital and remains deposited under this form in the banking system. At the moment capital income is spent on the final purchase of current output, the circuit of income is completed. Being carried out through a monetary transaction, the destruction of income implies the intervention of money, with the banks once again at its point of departure and arrival. Graziani's description of the monetary circuit does not take into consideration the fact that money is created and destroyed in each transaction requiring its intervention as 'the great wheel of circulation'. His analysis is thus more appropriate to the circuit of income than to that of money. Even at this level, however, a problem arises. By assuming that money has a positive duration in time, Graziani is led to claim that income can be hoarded in the form of liquid reserves (bank deposits), and that an increase in the consumers' propensity to save is thus the only cause of financial losses suffered by firms (pp. 79, 154). The
276
Book Reviews/ Structural Change and Economie Dynamics 8 (1997) 271-277
very use of the word 'hoarding' sounds strange within a modern analysis of monetary production. Being entirely deposited with banks, income cannot effectively be hoarded since it cannot be diverted from circulation. Because of its book-keeping nature, income can only be saved as a bank deposit (as is clearly maintained by Graziani), and as such it remains entirely available within the banking system. Then, how could firms suffer from a definitive loss given that the income necessary for the final purchase of their output is still available in its totality? Saving does not destroy income so it cannot be the source of a positive discrepancy between global supply and global demand. The understanding of deflation, which is the principal cause of economic crisis, requires a more subtle analysis in which both the circulation of money and the circuit of income are accounted for in accordance with the workings of modern banking. The aim of every theory is to explain the reality of its object of inquiry. In the case of economics, a monetary theory must be able to explain the workings of our monetary systems and, therefore, also the genesis of their most worrying disequilibria: inflation and unemployment. The traditional approach based either on the quantity theory of money or on the Keynesian 'earning through spending' theory of income, has failed to provide a satisfactory framework for analysis, mainly because it is fundamentally inappropriate to the originality of modern book-entry money. The need to develop a theory in which money and production are complementary aspects of the same process is clearly perceived by Graziani. The monetary structure as such would be meaningless if it were not associated with the structure of production. Money and real output are related to one another as a (numerical) form is to its (real) content. From the beginning, banking and productive systems thus contribute to the determination of a unique macroeconomic structure. Now, the study of the laws governing this structure requires a clear understanding of the distinction between money and income, and between their respective circuits. It is only through a careful examination of the logical relationships existing between money and output, and of their transposition into double-entry book-keeping, that an analysis can be elaborated which can account for the actual discrepancies between monetary and real worlds. If money and product did not form a unity, there would be no objective criterion of demarcation between an orderly and a disorderly monetary economy. Hence, whereas the first step towards the building of a monetary theory of production must lead to the settlement of the principles governing the logical association between money and output, the following steps must allow for a satisfactory explanation of the way these principles are not always complied with. To test its validity, a monetary theory must be confronted with the task of explaining how anomalies such as inflation and deflation can arise in an economic framework in which money is entirely non-dimensional. The theories of circuit Graziani refers to in his book have undoubtedly contributed to emphasizing the banking nature of money and its 'vehicular' characteristic. The time has come to verify whether they are appropriate to fulfilling their task entirely. The above analysis of a monetary economy is fundamentally different from those analyses based on a dimensional conception of money and income. When it is agreed that money is book-entry money, there is no room left for physical concepts
Book Reviews / Structural Change and Economic Dynamics 8 (1997) 271~77
277
such as quantity, mass or velocity. A numerical vehicle has no mass and its circulation cannot be conceived as that of a physical object. The laws governing the monetary circuit have nothing to do with those of physics. As long as this fact is not clearly perceived, economists will always be tempted to reason in physical terms, thus missing the opportunity of understanding the mechanisms governing our monetary economies. Graziani's book represents an important step towards the clarification of the terms of this problem. His analysis deserves all our attention and has to be welcomed as a valuable contribution to the effort necessary to the construction of a monetary theory of production complying with the banking nature of book-entry money.
Alvaro Cencini Centre for Banking Studies Lugano Switzerland and University of Lugano, Switzerland P I I S 0 9 5 4 - 3 4 9 X ( 9 7 ) 00010-6