7. Money

7.1. Introduction

‘Our civilisation is the child of money, as it is the child of fire, of the alphabet and of some of these elemental and grand inventions upon which the sciences and the arts rely’, Bernácer affirmed. Later, he continued by saying ‘Among easy-to-move merchandise, there is none that surpasses money’. These sentences appear in a masterly book in which he summarised his essential body of monetary thought. Other sentences include: ‘Great economic revolutions have taken place revolving around money’. And another, perhaps the most appropriate: ‘Money… whatever form it takes, is essentially the sign of a claim against society, the symbol and measure of a right held by society to claim those things that the market views as equivalent to money’²⁴. This sentence is the child of his monetary thought and, like the others, it appears in: The Functional Doctrine of Money (1945).

As one can see, he astutely expressed his enthusiasm for the advantages of money, but he also warned about its dangers. Like all economists, he knew that he needed to talk about equilibrium between the quantity of money created and the wealth generated. Like Schaaft, Hitler’s minister of finance with whom he had a lively conversation, he knew that when too much money is manufactured, inflation accompanies the economic system. Like Keynes also knew, if there is scarcity in the symbol of wealth (symbol and not wealth) like money, that same wealth cannot be increased and ends up suffocating the production apparatus and the market. This is the criticism made of the gold standard, which, when lacking, becomes a golden restraint for Bernácer. But, the original criticism that he made of money does not refer to money itself, but rather to its use. Indeed, money is a basic means of exchange and can be used to trade anything that has monetary value. What does this term monetary value mean? Well, that to which society gives a value. Unfortunately, not only those things that are useful for life have value, such as goods and services that are generated, but also speculative artifices that we have included in our financial assets.

Useful things for life mean, in addition to said utility, their manufacturing and the distribution of their value in the form of income. And if money, created by and for the ordinary market, a laboratory where useful things for life are manufactured, finances and makes transactions possible in illusions of wealth, anti-wealth, or symbols of symbols of wealth or, more simply, our financial assets, then it weakens the market where it came from, thereby resulting in economic crises. Money, furthermore, has its own movement, or as a physicist would say: its kinematics. This movement means passing through different economic agents, each of which have their own function. These agents are consumers, savers, producers, intermediaries, investors, etc. This passing of monetary units from one agent to another entails a metabolism or different economic function, and its explanation makes it possible to fully and completely understand money or, in other words, the economic operations that are carried out with it, which are all of those encompassed by economic events.

Anyone who knows the theory of disposable funds and its implications in depth will find that it is not the first, but yes one of the primary monetary scientific contributions to the history of economic thought. It was deservedly discovered and praised by Robertson. Due to the early years in which it appeared, at the beginning of the twenties (14 years before Keynes’s General Theory), one can say that not only was it original but that it was totally modern. Moreover, I believe that its incorporation into modern macroeconomics has yet to happen.

7.2. Money²⁵

Money is useful because it is demanded by everyone for everything. Since it means the possibility of things having a price, exchange is possible, and this is made possible by production and production, in turn, by the division of labour. Money also makes it possible to produce and distribute this value through income. But, in the same way that its measurement requires the non-variability of what is an abstract symbol of measurement, such as the metre for lengths, the value of money is more of a desire than a reality. One of the most useless efforts put forth by economists, where illustrious minds have been worn down, consists of finding an invariable way to measure the value of things. In fact, things are permuted through money according to the preference and scarcity of each thing; therefore, its value is mutant.

Our kingdom, Bernácer says, is that of relativity. But, one thing is that the value of things –or the price of things– changes due to the varying relationship of the preference between both, and another thing is that the price is altered by the value of the currency itself. Nonetheless, a point of reference is needed to measure the price of things, and this point is money, in the same way that the geodesist needs a fixed point to measure the height of the mountains and that physicists, like Huygens and Newton, needed to invent an immobile ether that could be used to measure the speed and propagation of light. A balancing is necessary, in turn, to establish the value or price of things, which is to first establish the value of currency, even though this value may be temporary. He developed this estimate in a complete and simple way²⁶.

It’s not possible, he said, to establish the value of the currency on the one hand and the value of merchandise on the other. One of the many reasons that it is not possible is that the value of the currency is necessary to value the goods. Another reason, and it is the most important one, is that these markets are so inter-related that the sum is an operation that requires at least two addends.

The oldest historical economic transaction since the creation of money is to supply money and demand goods and supply goods and demand money; this is one seamless whole due to how the two actions complement each other perfectly. Thus, he said: ‘Whoever supplies goods –or products– is actually demanding money, and whoever supplies money is actually demanding goods’. What economists teach is nothing more than an academic simplification that is so pure that it is almost false, and it consists of studying the supply and demand of goods separately. Microeconomics studies the supply and demand of a specific good, and macroeconomics more generally and exotically studies the supply and the demand of national product as a whole.

Since it is necessary to understand the supply and the demand of goods in order to create equilibrium in the goods market and to do so money is necessary, the money market, or what is the same, the value of currency, is automatically determined. And if, on the other hand, the goods market is not stable, like the water level of the ocean, but instead oscillates searching for equilibrium, then the value of money is not stable either, i.e. it also oscillates searching for its complementary equilibrium.

7.2.1. Disposable funds²⁷

Disposable funds or available funds are that part of income that is not used to demand consumer or capital goods. It is disposable precisely because it has not been allocated to these natural destinations. Therefore, they are potentially gravitating over the market and, since they are composed of money, given that in the end they are money, they represent potential demand in the same way that they represent a non-executed demand. Disposable funds can be found by subtracting as follows:

S_k = invested savings

D = Y – C – I or D = Y – C – S_k S_k = I

From the above expression, it may seem like disposable funds are the same as hoarding. We will see that it is not exactly this way, given that disposable funds are a flow that comes from a greater flow, which is income, which provisionally and continually turns up to demand financial market assets.

In a more generic sense, disposable finds are that part of income that has been recently earned by economic units. Thus, domestic economies, producers, capitalists themselves, when receiving their income as a whole, keep all of their income disposable while they don’t spend it. When income becomes consumer goods, capital goods or financial assets, it stops being disposable in the portion that is spent. The most important thing is the monetary circulation explained by Bernácer through the economic transactions of consumption, investment and speculation (the latter would be financial investment). This circulation brings about a disposable funds process that is continuous and different in the hands of consuming, capitalising and speculating economic agents.

7.2.2. The Theory²⁸

In 1922, Germán Bernácer’s first strictly macroeconomic and monetary treatise appeared. His article, which was well-known by Robertson and extensively praised by him, was entitled: The Theory of Disposable Funds and was published in 1922. This fantastic intuition-creation is one of the most important contributions to the history of economic thought, even though it does not appear in any text on the History of Economic Doctrines.

The contributions made by Newton or by Einstein to physics or those made by Galileo to astronomy, among others, were original intuitions that suddenly made science advance infinitely in knowledge. They were the result of long years of work, and it took many years to equip them with greater scientific precision, but when they appeared, they were simply intuitions. In them, we not only find the truth, but the prolific source of other findings, in the same way that when a discoverer discovers a continent, he is making other future findings possible by other men on the same continent. Thus, The Theory of Disposable Funds is discovery of this type.

And it is one of these sorts of discoveries even though nobody has bothered to develop his theory in the least, not even in Spain, Bernácer’s birth country, which would have been natural somewhere else. I say that it is a fertile discovery, because from this discovery sprang the paths that made it possible to explain the theory of the money market, of interest, of economic cycles, all of this through a number of varied and, at the same time, basic economic operations.

The General Mechanics of Disposable Funds²⁹

I have roughly explained what disposable funds are, saying that they are the part of income that remains available. In principle, income received by economic agents is totally available to them. Later we see that they will spend some of it and save the rest of it and will pass on to another economic agent, not only the spending, but also the saving. The first will be passed on to industrialists or entrepreneurs and the second to capitalists. Likewise, this spent and saved income becomes a part of the disposable funds of entrepreneurs and capitalists, and they will spend it or use it on certain economic activities; the former, for the supplies and expenses of their production tasks; the latter, when transferring it to investment units so that they invest.

All will make payments in the form of wages, salaries, capital interest, rents, leasing and profit, in short income (national income) to production agents. Money, as can be seen, has different functions depending on where it is, and it is these functions that are much more important than the amount in and of itself. The transfer of fractions of monetary mass from one place to another explains economic operations: consumption, savings, investment, industrial spending, loans, etc.

If disposable funds are totally formed when income is created, they completely disappear when they are used for expenses or when lent to another economic agent. This is not totally true. In a consolidated monetary system, there will be certain net disposable funds that will be formed during the economic process. This is the first clarification to be made; the second is that the separation between consumers, savers, saving capitalists, producers, investors, is an abstract separation, since producers can frequently be consumers, savers, capitalists and, of course, investors. Consumers are production agents to the extent that they represent part of the workforce in the economic system. However, the breadth of the market in a modern economy makes one think about the phenomenon of the division of labour. Various production units appear in the form of companies in a large and complex system of units that channel savings. These then move from consumption and production units to a series of domestic economies that engage in acts of consumption and that are factors of production that are in turn hired by entrepreneurs.

7.3. The two markets³⁰

It is important to remember the two markets. One is the ordinary market, which is where national product is produced: productive agents are paid income according to their productivity, and the income is later used to demand products. All of these operations are carried out with money. National product is a real magnitude that when multiplied by its price has a monetary representation P * Q = M, where P is price, Q is units produced and M is monetary stock. Income paid is a monetary flow and demand is an exchange of things or wealth for money.

The operations described involve activities for creating wealth, accruing income, which are total disposable funds that are later spent and saved and subsequently go through this spending and this saving to become part of producers’ disposable funds. This flow of disposable funds with a varying degree of availability occurs on the ordinary market. As will be seen later, this is where certain net disposable funds will be formed, which will then flee from the ordinary market. The fact that these disposable funds are formed means that the entirety of consumer and producer income will lead to the formation of some savings which will not return via investment, but instead they abandon the consumption and investment cycle, thus leaving the ordinary market.

These disposable funds leave the ordinary market and become a part of the financial market, where it is possible to buy and sell stock or securities, ‘papers’ or secondary financial assets or actual secondary assets. In short, such actions entail profit-oriented transactions that do not involve the creation of wealth or the generation of income (in which case we are obviously referring to production income or national income). Such operations are focused on profitability and/or speculative gain.

If this happens, it is because they have received money that has made it possible (see diagram), money that is nothing other than the disposable funds that come from the flow of income. Accordingly, the money metabolism of the ordinary market that deals with production, distribution of income, consumption, savings and investment will continue to occur but with a smaller and smaller volume of money.

It is true that the economic system creates money and that this money is channelled towards the ordinary and financial markets, but this phenomenon will not interrupt the natural and anti-natural process entailed in the creation and fleeing of income respectively.

7.4. The explanation of the theory³¹

Bernácer discusses three types of disposable funds, which are divided into different degrees due to the way they are employed. These are:

1) The disposable funds of consumers: Consumers receive income, which they use to meet their basic needs for survival or minimum vital services and those that are essential according to the common levels marked by civilisation. They are called minimum or first-degree disposable funds, because they are the most difficult to separate from the expense or final destination that is consumption. As Bernácer would say, there is no business more interesting than subsistence itself.

2) The disposable funds of producers: These are generic disposable funds in the sense that they are profits and other income received by producers, but they stop being so to the extent that the normal course of the business largely conditions the reinvestment or productive spending thereof. Therefore, they are called second-degree or intermediate disposable funds. They are not required by the urgency stemming from the private needs of producers but are required by the needs of their production activity.

3) The disposable funds of savers or capitalists: In the ordinary sense and that which has been formed by them, monetary stock of merchants, funds of producers formed above and beyond the needs of their business or activity. Since it is deemed that they have been formed once expected personal and productive consumption expenses have been covered, they are called maximum or third-degree disposable funds.

The disposable funds that have been referred to and that will be dealt with subsequently will be the latter, third-degree or maximum disposable funds. The reason is as follows: the first two, those of consumers, i.e. first degree, and those of producers, i.e. second degree, will stop being available as soon as they are spent. This is not the case with the last disposable funds, which are created precisely because they are not spent and so that they may be used for other speculative activities.

Bernácer made a terminological mistake in calling these three types of disposable funds ‘three classes of money’, when in reality they are three different ways for money to operate as opposed to different classes of money itself.

7.4.1. The Functional explanation of the theory

As was stated earlier, the movement of disposable funds through the market entails various operations, which will be explained below.

When production begins, entrepreneurs have their assets in liquid form and they transform them into non-liquid assets by, on the one hand, acquiring fixed capital and, on the other hand, demanding working capital; one in collaboration with the other will work to transform them into sellable items, which, it should not be forgotten, are sometimes not sold and continue to be working capital. They use the initial liquid assets to pay income to workers, thus making them no longer liquid for producers while they become liquid for employees. Subsequently, liquidity and disposability return once again into the hands of producers by means of the sale of the product. This passing on of money is made possible due to demand, which in hands of producers is for factors of production and in hands of consumers is for final goods.

Fixed capital will be eroded by depreciation and it will be recovered by creating a sinking fund for it. This fund will be used to fund compensatory investments or replacement investments.

Receivers of income or wages do not spend them entirely, but instead create savings from the disposable funds of producers that, if used to fund the acquisition of production capital, is called investment. Investment is a financial operation for purchasing capital or financing to create capital. If this savings, on the other hand, is spent on consumer goods, this operation is called dissaving.

Capitalisation does not only mean using money for production, it also means transforming it into industrial disposable funds. Let’s take a look at decapitalisation. Transforming capital into cash is called decapitalisation. This is the case of fixed capital, he said, it can only be done through redemption. This operation consists of trying to keep the level of disposable funds invested previously in their construction so that, in this way, it is possible to acquire these capital goods. The truth is, Bernácer could have used decapitalisation to refer to depreciation or erosion of capital goods. Bernácer was concerned about developing a monetary theory, and he uses decapitalisation to refer to the monetary activity necessary to eventually be able to be capitalised, and while it is not capitalised, it is a disposable fund. This activity, the activity of accumulating a disposable fund in the theoretical context of equilibrium between technical and financial amortisations, means that capital is eroded to the same extent and with the same intensity that disposable funds are formed. Thus, the monetary measurement of depreciation is decapitalisation.

With working capital, decapitalisation is nothing more than the selling of products to consumers. This necessary and desirable operation for the market is called liquidation. And, decapitalisation in working capital persists provided that this money from sales is not reinvested during the period into production or purchasing other products. Remember the considerable importance that working capital has for Bernácer, or its internal complexity, which I believe is an issue that has been and continues to be dealt with little by macroeconomics. Working capital is partly products that for one company are finished and that for the following company are products in progress to which the latter will be responsible for adding value to: they are raw materials, energy, labour that makes it possible to add this value. It is also money and end products, both consumer and capital, produced by the last company and upon which no production or value is added, as long as they are not sold.

All of said operations, consumption, investment or capitalisation, savings, dissaving and decapitalisation, are active operations in the sense that they entail a change of disposable funds in the economic cycle. On the contrary, passive operations are those operations that, although they are economically necessary, do not entail a global or macroeconomic change of disposable funds.

Active operations affect price levels, and passive operations do not, since active operations are operations upon demand and supply among different production agents and other agents, while passive operations are not. This aspect will be dealt with later.

7.5. Active operations³²

Active operations are those that entail a flow of income in one direction and a reciprocal flow of goods and services in the opposite direction. Successive movements of disposability among the different economic agents are evident in active operations. The aforementioned active operations will be repeated describing the functional variations of disposable funds.

Consumers, as production agents, work for companies and receive wages. This operation means that, while consumers don’t have this income, they are producers’ disposable funds that will be passed on to consumers. Once consumers have this income, it becomes minimum or first-degree disposable funds.

Consumers acquire goods produced by producers by paying their price. As a whole, producers will receive disposable funds measured by multiplying total production units sold by their prices. These disposable funds are those of the producer to the same extent that they have stopped being the disposable funds of the consumer through spending. They are second-degree or intermediate disposable funds.

Producers acquire capital goods and working capital with their disposable funds, which stop being disposable as they spend them and in turn create the disposable funds by means of the ‘liquid capital’ operation, by means of the accumulation of company sinking funds and reserves, as well as by liquidation operations, which consist of the sale of end products. Before the sale, end products sold by companies are the working capital of such companies. Savers in the economic system are both consumers and business owners (in the same way as business owners are also consumers). Academically speaking, and for the purpose of this analysis, these economic agents are placed into another compartment and are called savers or capitalists. These agents provide resources to businesses through loans so that businesses can demand capital goods and to consumers so that they spend. The first operation is called investment and the second is called dissaving. Investment means that system disposable funds that are on the borderline between second degree or intermediate disposable funds and third degree or maximum disposable funds stop being such in order to carry out, through spending, the acquisition of capital goods and thus subsequently become entrepreneurs’ disposable funds. Dissaving means that disposable funds are returned to consumers to be spent on consumer goods, thus transforming consumers’ disposable funds into the disposable funds of producers or business owners. In fact, the operations of dissaving and saving are not in themselves active operations but are rather neutral operations. What is done with them next is another economic event that involves, via consumption and via investment, active operations.

These operations are depicted in the following graph created by Germán Bernácer that explains them clearly and insightfully, first published in his article on disposable funds. It also shows the formation of the money market and the financial market³³.

I’ll begin by explaining Bernácer’s reasoning shown in the larger diagram. The smaller diagram also includes the financial market, and is one Bernácer repeats several times in his works. I believe it may be a personal interference from his original position.

Let’s take a look at the following phases:

1) Masses of disposable funds. They are described by the lowercase letters a, b, and c, where b is the mass in the hands of consumers, a is the mass belonging to savers and c is the mass of producers. The total amount of money will be: m = a + b + c.

2) The grouping of different funds according to the common function they perform is shown by the symbol ‘}’. Thus, there are three groups, represented by the capital letters A, B and C. A is the acquisition fund, B is the production fund and C is the available fund. The functions are as follows: the acquisition fund is used to acquire consumer and capital goods, which are a and b (disposable funds of consumers and capitalists). B or the production fund feeds the production fund of business, and with the available fund C, it is possible to do ‘anything’. It is made up of the savings of savers and capitalists and the liquid funds resulting from sales liquidations and from accruals in sinking funds and reserves. This available fund can be used to demand capital goods, but it can also be used to speculate, in which case it will be outside of the ordinary market and it will not have been capitalised nor will it have been invested nor will it be disposable, because it has already demanded something: financial or real assets from the financial market. This is described in the second diagram (the lower small one).

3) The arrows indicate the direction of disposable funds, which entails two reciprocal flows: active operations. As can be seen, each operation involves a movement of a disposable fund mass (a, b and c) toward consumers, producers or savers, thus making variations in a, b and c possible, as well as the large masses or funds (A, B and C).

The mechanics of active operations and those explained hereafter, passive operations, are equivalent to continuous supplies and demands for money, which in Keynesian and modern macroeconomic language are nothing more than the demand and the supply of money for transactional reasons. We can ‘do anything’ with the available fund, and part of it is used to look for a speculative profit on the financial market. This market offers a supply and demand of money for this purpose against a demand and supply of these assets respectively. In other words, it explains speculative demand (and supply) of money.

The money market was clearly explained by Bernácer in 1922 and the scientific superiority of his explanation over that of Keynes is evident. Bernácer not only makes his explanation with greater clarity and detail, but he also explains the operations of the real economy within the same framework as the money market and not outside of it, which is logical, since operations entailing the buying and selling of goods are nothing more than a symmetrical and reciprocal reflection (even legally speaking) of operations involving a supply and demand of money.

7.6. Neutral operations

If one consumer gives another consumer his disposable funds (he obviously cannot give him the disposable funds he has already spent) or if a producer gives another producer his disposable funds for nothing in return, the first disposable funds will remain wholly with consumers and the second disposable funds wholly with the group of producers. There will no transferring of external disposable funds, i.e. between different agents (producers, consumers, savers) and, therefore, such actions do not involve demand or supply operations and, henceforth, do not affect price levels. These operations are classified in five groups in order to be better understood.

1) Payments made without a benefit received in return, such as donations and inheritances

2) Payments without a present benefit received in return, such as loans and loan repayments

3) Payment for realisation operations (sale of businesses and buildings that do not involve present production)

4) Payment for advisory services

5) Payments between merchants and industrialists

The explication of each of the above is as follows:

1) Donations or inheritances are simply a passing on of disposable funds from the pocket of one party to another, and they do not entail wages, payment or opposite economic operation. In macroeconomic terms, they are equivalent to taking money from the left pocket of a pair of trousers and putting in the right pocket.

2) Loans are a neutral operation similar to the preceding one. In this case, lenders transfer their disposable funds to borrowers. The operation itself is passive, yet the purpose for which the loan is used shall not be passive; it may be used for consumption or investment, both of which are active operations, but these operations are different from the loan. Loans do not change the amount of disposable funds in the system; however, since there is a loans market, loans directly affect the price of money (not that of goods), i.e. they affect the interest rate.

3) If a business owner sells his business, part of it or simply elements pertaining to the production activity such as capital goods move to another party in exchange for what has been sold, but producers’ disposable funds as a whole do not change. This was Bernácer’s affirmation, which I agree with; however, I don’t agree with the following: Bernácer stated that these disposable funds do not affect the price of these goods, since in the end… ‘the value of money is its exchange ratio with common products, that is, the fruits of current production’. The truth is that the price is the existing exchange rate between money and what is bought or sold, and it doesn’t matter if the good is present or past (personal comment).

This aspect should be given great emphasis, because these operations, which are effectively passive, are potentially active in the long run; they are negatively active.

This is because in these types of operations, the disposable funds buy real secondary assets that are one of the components of the financial market. The other components, financial assets, are evidence of previous funding and of past production that it helped finance. When these goods (or past goods) are demanded, disposable funds begin their exodus from the ordinary market to the financial market.

According to Bernácer, financial market elements are valued and demanded for their financial value (or capitalisation or updating of the income they generate). This is true, but it does not hinder what is demanded for its price, a price which in turn they help create.

4) This operation, which is not at all innocent for the market and is neutral, is called realisation. The seller has the same capacity of liquid savings, of third-degree disposable funds, that the buyer had before. The buyer principally had liquid capital and now he has real capital, but the market as a whole does not have more real capital or more disposable funds.

5) Payments for services are enormously significant for two reasons in my opinion. First, as an object of study of a neutral operation being executed. Second, and most importantly, because of the analysis that Bernácer carried out about its nature, similar to accounting methods in countries with communist systems, which is an incongruity given the aversion he had for this type of economic system. Bernácer began by separating two types of services: production services and consumption services. Contrary to what it may seem, this separation is not brought about by the activity type, as it should be, but in something as superficial as the accounting technique. However, there was macroeconomic logic behind his analysis. This logic was as follows: he said that if a physician provides his services to a company, then his monetary compensation or income is recorded by the company as a cost and, therefore, the final product cost includes the physician’s activity. But, if this same physician works outside of this company, at a private surgery, providing his valuable services to the public, then the service is consumption and not production. As can be seen, this whimsical separation does not involve the nature of the product or activity.

He stated that including services or intangible production, apart from the fact that it completely violates the concept of product, offers many disadvantages and no advantages. Even his writings included words like: ‘… When valuing a country’s production, no one counts the value of non-productive services…’ I am not sure what Bernácer was thinking to make these outdated and erroneous assertions that date back to the time of classical economists when they believed that product or wealth had to be something material. In modern economics, including those in which Bernácer lived, a large part of production or wealth of a country is comprised of services or intangible production and, for over a century, economic science has known that wealth is comprised of both tangible and intangible products and services. For example, at a barber shop, the scissors (tangible) and the actual haircut (intangible) both comprise part of the national product.

As stated, the logic in Bernácer’s assertions is as follows: the service provided by a lawyer in a company is accounted for as a cost that is reflected in the product. This means that the value of the product on the market amounts to a cost that represents nothing less than compensation generated to create it, including the wages paid to the lawyer. In this way, it is possible to state: as much product as income. If all purchasing power must entail an article ready to satisfy it, this cannot happen when the lawyer or physician works for himself (outside of the company), since in this situation, the client or patient uses his income to pay for something invisible that is not offered on the market as supply. Even so, this assertion is not very correct, since nobody can affirm that these services are not supplies. The only possible solution is that Bernácer deemed the market of invisible services to be in the flow of disposable funds rather than where the services are generated. Clients or patients, demanders of invisible services, transfer part of their disposable income, which was earned when they helped to create the product, to the suppliers of these services, the lawyer or the physician.

As can be seen, these operations do not affect the level of income or production or the prices of current production, as opposed to active operations. Another type of operation should be noted, active financial operations. These operations entail buying and selling on the financial market.

7.7. Active financial operations³⁴

Bernácer didn’t use this name for these operations. He simply divided operations into active and passive operations. Given that his entire work is centred on explaining the movement of disposable funds to the financial market, I have equitably added this section. This clarifies the explanation by making it more rigorous and methodical, at least in my opinion.

When maximum or third-degree disposable funds have been formed on the market, which are the authentic and definitive disposable funds, these funds go to the financial market to demand assets there (real and financial assets). Active financial operation is used to refer to this passing on or exodus of this income to the financial market and from here to the ordinary market. In the first case, it means that part of available income acquires financial assets, which brings about an impoverishment of the ordinary market and an enriching of the financial market. It thus decisively affects production, income and price levels. In the second case, it entails a sale of assets on the financial market, which indicates a flow of income to the ordinary market. It positively affects production, income and price levels. Since the two operations stimulate the financial market, they affect the price of securities and other assets V and interest i.

These are basically active operations, but the process by which they are formed has a different logic than that of other active operations.

If D is disposable funds, these D will come and go during the course of active operations from and to the available fund C.

Operations on the ordinary market are necessary to attend to the economy’s production and consumption needs or, in other words, survival needs. This is not the case with speculative operations on the financial market. Basic operations include production, payment of wages, saving, investing, etc.

During basic operations, consumers obtain a utility and producers obtain profits. Neoclassical theory would assert that when in equilibrium, the former maximise their utility while the latter their profits. For producers, who are the agents that channel ‘their c or industrial disposable funds’, the profitability of such disposable funds is the object of their attention. Speculators focus on interest or financial profitability proportional to disposable funds, and the system as a whole –producers that are speculators and vice versa– is concerned with whatever provides the most profitability.

Therefore, it is possible to explain the flow of disposable funds from one market to another by the difference in profitability. This assertion is the starting point of economic cycles.

7.8. Monetary equilibrium of the market

There is a market for factors of production, which give rise to a price. Land, labour, fixed capital and working capital, etc. have their price and, like any other production supply, prices are derived from the resulting forces of supply and demand. Business owners acquire an amount from each one of these factors that, multiplied by their respective prices, determines the amount that they pay for these production inputs.

When these supplies are acquired, it is said that an expense has been incurred, and when they have been totally or partially destroyed, such as fixed capital goods, it is said that a cost has been generated. The cost is basically a sum of buying powers that are reflected in the product. In other words, the cost has generated a demand that is equal to the cost of supplying the product. But the cost does not coincide with the value. The product is sold on the market at a higher price, and the difference is the profit obtained by the capitalist entrepreneur.

For the first time, discontinuance occurs in the income and product creation process, since the value of the product, which is equal to the system’s income, is not instantly equal or at least not in the period. Incomes resulting from production have been paid and they measure the cost of the product and admit the possibility that this demand may remove the product from the market at its cost price. The other income, the residual income or profit, is yet to come, and it will be realised when the product is sold. Bernácer says, ‘From the point of view of the circulation of money, the creation of value is a function of monetary activity…’

With profits, businesses receive a production fund c. This fund will be used to increase the production of the following year, and part of it will be saved in the form of a sinking fund and reserves. This is the most dangerous time, since this savings is not kept inactive by businesses; businesses try to find a combination of liquidity and profitability. They look for this on the financial market by acquiring financial assets, which are more or less liquid and more or less profitable. This operation can become dangerous, given that profitability can deceive business owners and resources can end up not returning to the production activity, thus decreasing c and increasing financial disposable funds D. This assertion can be expressed as follows:

An outflow of c in favour of D entails depression of the ordinary market and marks the beginning of economic crisis.

Both company macroeconomics and economics deem this step mechanical. They consider it important to the extent that if the company failed to form a sinking fund, it would decapitalise on the basis of the non-recoverable depreciation of the capital goods. Bernácer believed that not only is the formation of the sinking fund and reserves important, but the way in which it is formed is also important. Moreover, danger looms when developing the sinking fund, because it depends on the internal physiology of the economic process, a process by which the monetary magnitude formed by the expendable fund C (and of course c) transforms into a real magnitude that is the value of capital goods destroyed.

Oddly enough, this doctrinal statement was experimentally verified by economist Jesús Prados Arrarte, who was also Spanish. What is amazing is that Prados Arrarte did not know about Bernácer’s theory and was astonished when someone explained the similarities between their two theories. I also explained it to him (before the connection was made) that if this was fulfilled, the basic macroeconomic equation was unfulfilled. Prados rejected it categorically saying that ‘…S = I is as true as arithmetic …’ that ‘… it was a mere accounting formality…’ (see the prologue). He simply found it absurd. However, he fully agreed with Bernácer’s theory explaining how sinking funds and the management and maintenance thereof allow those funds to leave the ordinary market to go and demand financial and real assets from the financial market. The real assets from this market can entail the purchasing of buildings, purchases that are speculative, as well as the purchasing of land, and so on, in other words, real assets that are not newly created³⁵.

Prados conducted a study on Chilean corporations and monetary instability over a considerable period of time. This study is of great methodological value because macroeconomic conclusions were derived from a microeconomic study, or better yet, a business accounting study. Comparing the balance sheets of corporations at different periods of time, it was noted how companies ceded their sinking funds. Rather than using fixed assets to acquire amortisable assets, they were used to acquire non-amortisable ones. This clearly showed something, and that was that companies were really decapitalising, although their balances resulting from the balance sheet showed monetary profits.

In short, it is possible to draw somewhat more extensive conclusions about the market than those in the first chapter: Actual demand is the demand effectively realised on the ordinary market. It is fed by or comes from income, but not all of the income, but from the income that remains after having separated maximum or authentic disposable funds.

When that savings is spent on acquiring capital goods, it is referred to as making an investment. This demand, investment coupled with consumer demand, makes up actual demand. The following diagram explains the process:

That is:

R = C + I + D

Where R is income (equivalent to the modern nomenclature Y_e income), C consumer spending, I investment and D disposable funds. Therefore:

R – D = C + I

The disposable income cited above has nothing to do with the macroeconomic concept that cites it. The latter or modern disposable income has to do with that part of the income that remains after deducting taxes, while ours is related to the income that returns to the ordinary market.

As has been shown, not everything is that simple. There are a number of intermediate operations, such as the formation of sinking funds, taxes, public spending, etc. But these operations originate from income and return in the form of spending

Incomes are divided fully among consumers. This income R_c is coupled with the business R_e to form the total system income R (equivalent to the aforementioned Y). Of the total income that consumers use for spending, it is the consumer spending (carried out with part of the b from disposable funds) and the other part consumers save. This savings is in addition to the business savings that has been formed by the undistributed profits with the intention of forming sinking funds and reserves. This fund will be used to replenish depreciated capital goods, and it will be possible to do so given that there is disposable income (disposable income C). This is social savings.

The diagram shown by Bernácer in The Functional Doctrine of Money (page 58 of the 1956 edition, the original dates back to 1945) has an error that has been corrected in the lower diagram (small). In fact, the upper diagram (large) explains the theoretical functioning of the market in the context of Say’s Law. In it, savings and sinking funds and reserves are completely used to acquire capitalisation products, when we know from Bernácer that part, the maximum or third-degree disposable funds, the authentic ones, are diverted and escape to the financial market. The latter circumstance is shown in the lower diagram and is an original diagram that I created.

It is time to move forward to discuss an aspect of great importance that has already been hinted at in previous pages. If it is true that the maximum disposable funds have been formed and they are lubricating the financial market, they are ceasing to demand current production, the income from which they originated. This ingratitude is punished by the market through a production of consumer and capital goods that has remained unsold, which is arbitrarily called investment in inventory. These are reflected in the lower diagram and are l_u.

This is the main reason why he harshly criticised the fundamental macroeconomics equation.

General equilibrium entails:

1) That there is parallelism between the total value of production and the buying power used to purchase it.

2) That there is equality between the production of consumer goods and the demand used to acquire it.

3) That there a is correlation between the production of capital products and the portion of buying power reserved for purchasing it and formed by total savings in the system (consumer savings plus sinking funds and reserves).

When explaining economic crises, economists focus on the asynchrony between savings and investment, or between spending on consumer goods and the production of consumer goods. True crises, of course, are those that are manifested by unemployment and this can only be explained by weakness in demand. For Bernácer, the disequilibrium caused in a market, consumer goods or capital goods, is wrong, because if disequilibrium exists, it will only be a partial disequilibrium that the market will tend to correct. Thus, he says: ‘… if the demand for machinery falls and that for fabrics increases, it is a sign that it is necessary to stop producing one thing and work harder at producing another …”.

Large fluctuations, he says, must be sought in disequilibrium between overall demand and supply, or, as a modern macroeconomist would say, the difference between aggregate demand and supply. If, as Bernácer says, there is an exodus of disposable funds from the ordinary market to the financial market, financial crises can only be caused by a weakening in demand, which some economists pretentiously refer to with another name: overproduction, which in the end is the same.

8. Macroeconomic terms for the market: Global supply and demand

8.1. Introduction

This chapter deals with a somewhat complicated scientific area in the functional doctrine of money, yet the initial idea is rather simple. There is an extensive and broad set of symbols that is structured mathematically, which makes reading it slow and difficult. The math is not complex but rather the need for readers to remember at all times what each letter means. There are, moreover, letters like p, e, 1, and K that in the normal macroeconomic set of symbols mean one thing and that in Bernacerian macroeconomics mean another. I will try to be clear about their meanings at all times.

The technique to be followed will consist of an explanation that is neither mathematic nor symbolic. Once the market terms have been described in a number of appendices, they will then be described mathematically. I want to make sure readers can clearly understand the explanations.

The vast number of symbols in Bernacerian macroeconomics is not arbitrary. It corresponds to the large number of operations that take place on the market and that Keynes and modern macroeconomics have not fully explained or have simplified unnecessarily. Each operation –and not several– has a specific economic meaning and in each of them, money experiences a specific metabolic process.

8.2. Actual and potential supply and demand

You must understand Say’s Law in order to understand the market, and understanding the market involves understanding the exact mechanisms that make it possible for Say’s Law to not work. This non-fulfilment is generated by different routes other than handy hoarding.

Actual supply and demand is that which has actually been generated. It has happened and could therefore be shown on the books. Potential supply and demand is going to happen and can maybe be forecast, planned for or budgeted. As the Swedes would say later, there will be planned and unplanned elements in demand and supply. Bernácer, unlike the Swedes, did not try to be so wise. Throughout his work, he was always suspicious of subjective implications and scientifically studied what happened. Therefore, he focused on studying actual supply and demand.

Demand is the child of income, which results from production; and in turn, production generates supply. Little more can be said of the market. For Bernácer, there is a simple and clear explanation for these relationships.

Production becomes a part of the market as a flow of supply. This is potential supply. To generate this flow, it is necessary to pay production agents through income, which, once in the pockets of these agents, constitutes present disposable funds that make up potential demand. Disequilibrium, which is common, should logically be rare and almost impossible. Therefore, it will be explained.

The relationship between potential supply and demand is critical and inevitable and the relationship between this potential and actual supply and demand is probable. It is a desire in the brain of economists and politicians.

The first thing we must understand is that income and production are two different things and I could set forth a formula for this relationship. They are not the same, they are two different things. However, I can say that their potentials are equal numerically. Potential supply and demand are even less equal (we know that actual supply and demand are not equal). One thing is demand and the other thing is supply. And although potential supply and potential demand are numerically equal, the nature of each one is different. One action is to demand, and one demands with money to satisfy a need, and the other action is to supply, and one supplies what has been produced in order to demand money.

Since production P (P in my examples is not price) is equal to income R

P = R

then market imbalances must be corrected by way of demand or, what is the same, so that income originating from production does not once again demand the fruit of current production. In this respect, Keynes and Bernácer are in total agreement.

Since there may be weakness in demand, a weakness that can only be measured by unsold production, which is measured by the difference between potential supply and actual supply or supplies sold, there will be a real value in stock. Let’s take a step-by-step look at the processes of market equilibrium and disequilibrium. Disequilibrium will be balanced numerically, not economically.

1) Real or actual demand is made up of consumer and capital demands. In other words, actual demand is comprised of consumers’ disposable income (consumption and capital) that has not been spent at a given time. That is why it is available. This floating acquisition fund, called A, will undergo variations. If they are positive, it will signify new income that has not been spent and entails an increase in stock ΔE; spent income signifies decreased stock. It is referred to in this way because they are unsold production. It is only offered, but not sold, and is weighing over the market. If it were sold, it would no longer be on the market.

Let’s take a look at interval ab, where ΔA is the increase in this acquisition fund and d is the real demand of this fund (not to be confused with maximum disposable funds D). Thus:

A                        A’

a                         b

A’ – A = ΔA

A’ – A = – ΔA

R = d + ΔA         R production income³⁶

Part of income is spent d and the other part, in principle, is not spent (later, what happens with these disposable funds will be seen).

d = R – ΔA

Later, demand is measured by income minus the fraction of income that is not spent.

2) Production is either sold or kept in stock E. If production is P and supply is O, then:

P = O + ΔE

where real or actual supply is production P minus the part that is unsold and remains in the warehouse. Before continuing, it is important to remember a reality that is commonplace in business economists, which is that while this production is not sold, it is working capital for the merchant and the producer.

The increase (or decrease) of ± ΔE is the merchandise’s value at time b, minus the initial value at initial time a and assuming price constancy. The value of E must be determined by measuring what it has effectively cost to produce it.

3) In the event that real supply and demand are the same, then:

R = ΔA = P – ΔE

Given that:

R – ΔA is actual demand and

P – ΔE is actual supply

And since I stated that income and production are the same, or P = R, then:

ΔA = ΔE

a simple expression that means something as evident as the fact that some disposable funds A have been formed, which entails a fleeing of buying power. On the other side of the market, the supply side, there are goods that have not been sold ΔE. If consumers’ and savers’ available funds decrease, it is because they have spent them and they will have, therefore, withdrawn from the market a part of production P, thus decreasing E.

The diagram of disposable funds showed that A was formed by the disposable funds of consumers and of producers (A = a + b). There are other disposable funds that are in the hands of business owners or industrialists, c. If we add all c, this gives the total disposable funds in the system M = a + b + c (or if you like, M = A + c).

Now I will add the disposable funds c to the equation A = E.

ΔA + ΔC = ΔE + Δc

It is possible to see that:

a) The increase in disposable funds Δc is being handled here and not simply all c.

b) A + Δc is the amount of money in the system. Given that all system money is here, it is possible to analyse what happens on the other side of the equation and to understand its meaning.

c) E + Δc is simply working capital. As is known, working capital is made up of resources that the company consumes in the production period and that are used up in the production process. This includes production supplies and inputs, included in the capital goods that are transferred to another production sphere to continue with production. Money is also added. Even finished production, whether consumer or capital goods, continues to be working capital while it is not sold.

   Therefore, I can say:

A + Δc = ΔM is the increase in the amount of money

E + Δc = ΔK is the total increase in working capital

And eliminating variables:

ΔM = ΔK

Which inevitably expresses the condition of equilibrium (remember that R – ΔA = P – ΔE; R = P and therefore ΔA = ΔE added to Δc A + Δc = E + Δc; ΔM = K).

The condition of equilibrium is expressed as follows: ‘…It is only possible when a change in working capital accounts for an equivalent variation in the amount of currency in circulation’. This assertion is the key to economic events for Bernácer.

This means that to increase production, new money is needed in the system. Thus, the creation of money will fund new production, giving rise to monetary equilibrium, an equilibrium that will reflect equivalence between money and production. This statement stipulates that income from the savings system should not be used to finance working capital, because if it is, it cannot be used to demand current production. And if it demands current production –final production– it is not able to fund working capital.

This brief mathematical explanation is fundamental to understanding Bernacerian equilibrium. Market balance was also briefly explained in the preceding chapter.

4) Equality between supply and demand without the creation of money is expressed if A = M – c is taken into account

d = P – ΔA =

d = P– Δ(M – c) = P + Δc – ΔM

And since the creation of money ΔM = O is not being considered, it is necessary for:

d = P + Δc

5) If equilibrium in the market does not exist, D and O are different and their difference will be:

d – O = P – ΔA – (P – ΔE) =

ΔE – ΔA =

ΔE – Δ(M – c) =

ΔE + Δc – ΔM = ΔK – ΔM

since:

ΔE + Δc = ΔK

Demand exceeds supply by the increase in working capital ΔK. Since supply is referred to as P – ΔE and demand as R – ΔA (supply is what has been produced minus what hasn’t been sold and demand is what one has minus what has not been spent) and with P = R, the equality between supply and demand is ΔE = ΔA, it is possible to see that:

d – O = ΔE – ΔA

And since it has already been stated that the difference between supply and demand is ΔK, it is possible to conclude that:

ΔK = ΔE – ΔA

Here it is deduced that: demand exceeds supply by the increase in working capital, which in turn equals the difference between the increase in stock and available funds of the acquisition fund (potential supply and demand, respectively).

If ΔE > ΔK where ΔK is positive, then more income has been spent in buying the sold products than they earned. If ΔK is negative, the opposite has occurred; less income has been used to acquire sold products than the products earned.

If available funds increase, it means that spending has decreased; if available funds decrease, it means spending has increased. If stock has increased and is greater than available funds ΔA, there will have been an increase in spending. And if there has been an increase in spending, how is it that the ΔE has increased?

This question only has one answer, although Bernácer doesn’t explain it. E is working capital that aids production and has been funded with available funds ΔA. It is precisely because of this operation (disequilibrium without new money) that available funds decrease in favour of working capital that increases.

6) The same merchandise may be resold. This means that a final product that was circulating for the producer or merchant left the market when it was sold but returned to the market when it was resold. A good can be resold to a consumer or to another merchant.

If it is sold to another consumer, such an operation only entails a transferring of disposable funds between consumers, and acquisition fund A is not changed. It is, therefore, a passive operation. If the good is sold to another merchant, this merchant buys the good with his acquisition fund, which is industrial fund c. In this case, acquisition fund A is fed by fund c and all stock on the market increases by the price of the objects that return to circulation.

The amount of money does not increase, since it is money that leaves c and goes to A; stock E or working capital also does not increase in net terms, given that it was already manufactured.

In the expressions for supply and demand, (R – ΔA and P – ΔE) respectively, ΔA and ΔE reduce demand and supply, as has been seen many times. But in the resale transaction, the opposite occurs, since it is an increase, an increase that was corrected with the positive term ΔL, where ΔL is the amount of resale transactions.

Without resale operations               With resale operations

Demand d = R – ΔA                     d = R – ΔA + ΔL

Supply O = P – ΔE                     O = P – ΔE + ΔL

These operations that correct resale transactions L are not very important for the market, provided that we dispense with intermediaries, which, in the short term, carry out a mere exchange of available funds A and of stock E.

However, the buying and reselling of gold is very important, since gold can be a means of payment and its speculation distorts the market.

Of course, the importance is fundamental if instead of buying and reselling consumer products, actual secondary financial assets are bought and resold. This is an operation that profoundly changes the kinematics of the market.

8.2.1. Summary

These monetary operations that explain a change and permute between different market disposable, which are clearly specified within the framework of Bernácer’s theory of disposable funds, have already been dealt with in the end of the last chapter (7.8 Monetary Equilibrium on the Market). They are operations that are understood without symbolic or mathematical devices; they are very simple operations.

8.3. Capitalisation and decapitalisation

Consumer and producer funds each have two possibilities.

Savings are that part of income that both consumers and producers have in principle separated from its final destination. Savings can be used potentially ‘to do anything’. Savings can be used to carry out the following functions:

1) Hoard them.

2) Use them in passive or neutral operations, such as giving them to another saver (inheritance, legacy, etc.).

3) Allocate them to buy current production items such as consumption or capitalisation.

4) Use them in production.

Hoarding entails a permanent flight of part of M, which involves a definitive reduction of disposable funds a, b and c. Ultimately, after hoarding there will be a monetary mass M’ < M and, therefore, several a, b and c such that a’ < a, b’ < b and c’ < c, which will depress the market, a market that might be in equilibrium.

The overall liquidity situation is not changed in neutral operations, since available funds do not change their nature, because they simply permute between pockets within agents of the same sector: consumers, savers or industrialists.

When making purchases using available funds from current production, whether consumption or capital purchases, companies make their working capital liquid; this enables them to continue producing. The final effect is to increase actual demand to the extent of purchases made.

When used for production, savings added to these activities go through various stages:

a) The creation of savings.

b) The influx of savings from private capitalists to industrialists and businesses (passing on of disposable funds a to industrialist disposable funds c).

c) Investment of these available funds in circulating or fixed capital.

8.4. The operation of capitalisation

Let us take a look at points a), b) and c). Explaining this process is much more detailed and exact than the explanation given by pre– and post-Keynesian economists.

The formation of savings represents a weakness in demand, while it is not invested.

The second operation involves a transferring of available funds between different economic agents, savers and industrialists. Yet at this stage, no operation has been carried out. However, what has happened is that business owners have a greater amount of money without having sold anything and, therefore, consumers have not bought anything either. On the contrary, acquisition fund A (A = a + b) has decreased, even though no purchase was made. Entrepreneurs have increased their available funds by Δc. Let us suppose that the influx or loaning of available funds made to industrialists or producers were Z. Then, the net influx or net increase in net disposable funds of producers would be Δ(c – Z).

Available funds can be invested as follows:

1) Buying end capitalisation products of other companies (4^th operation in the previous section)

2) Manufacturing and constructing capital goods, machinery, initial set-up costs, new plants, etc.

3) Use all or part of the resources to increase working capital

The operations involving the creation of fixed capital (2^nd operation) or those of creating working capital are divided into two parts: one part that is used to pay for raw materials and other part that is used to make payments (salaries, interest and general costs). The first goes to industrialists and the second to A or the acquisition fund.

The meanings behind the 2^nd and the 3^rd operations have different logic. Let us see why. Investment in working capital adds stock and, therefore, burdens supply. It is, furthermore, one more demand on the market. Investment in fixed capital eliminates supply on the market and is also a realised demand. This aspect, which has such different effects on the market, can never be stressed enough; investment in one case adds production to supplies and in the other case it decreases supplies. It is therefore evident that in order to bring equilibrium to the market, new money will be needed to finance working capital. This is an assertion that is understood intuitively and directly.

The amount invested in working capital must be eliminated from the total amount used in investment in order to find net demand or simply end market demand. This means working capital is eliminated from the total savings that is loaned or passed on to business owners. It is clear that funds used for fixed capital are included within the initial whole allocated to working capital while they do not receive real investment. The destination of the funds is clearly to move later to investment in fixed capital, which is an operation of a different nature.

In short, the following has occurred: throughout the three phases mentioned referring to investment in disposable funds, the formation of savings resulted in an accumulation of disposable funds A (A = a + b or acquisition fund) and of E or accumulation of stock. Therefore, there was a decrease in supply and demand equal to savings. This decrease can only be corrected by a final increase in demand so that it takes away part of the product on the market. This demand will be investment, and what is taken away is capital goods, industrial plant, etc. However, this correction is partial and is not enough, since greater demand is needed. This means that a deficit is produced on the market. It is once again necessary to stress the different nature of investment in fixed capital and investment in working capital. The latter is demand, but it adds more potential supply to the system, while investment in fixed capital takes away supply.

As a result of the flows that are lent to industrialists ΔZ, part is withdrawn, which is the net demand that took place. In other words, this is the investment in fixed capital and the rest is working capital. This deficit in the system is caused by working capital. This deficit is exactly equal to the disequilibrium between potential supply and demand.

In other words: the acquisition fund grew insofar as payments increased (wages and salaries, not the payment of raw materials that was passed on to industrialists) and it decreased by the volume of savings transferred to business owners. However, available stock or potential supply increased by the difference between these payments paid minus the capitalisation made (not the funds transferred to business owners Z). This gap in the market is a result of the difference between supply and demand, and is like the comparison of the net increase in the acquisition fund with the increase in stock.

This difference determines the savings fund transferred minus the part of this fund that is transformed into investment in fixed capital. Of the part of savings that is invested, part is for fixed capital and the rest is for working capital. Later, this difference between savings transferred and fixed capital is working capital. The final outcome, if money is not created, is inevitably inflationary. This is one of Bernácer’s most original principles, which states that the system, without any external cause, even without the existence of our financial market, contains the seed of dysfunction, or crisis, within its internal mechanism.

Precisely, if money is not created, the increase in working capital must correspond to an equivalent provision of production funds. But as is often the case, this fund entails a prior savings so that its provisional formation involves market weakness; the process as a whole is deflationary.

This phenomenon does not happen with fixed capital, whose financing, while it should entail savings, removes the product or supply from the market and transfers funds to industrialists. However, with working capital, the savings that are transferred and help fund this capital result in new working capital (until sold) on the market that needs new money to be sold.

Bernácer expressed this disequilibrium as follows: ‘Disequilibrium between demand and supply is the same as that existing between the increase in working capital and the provision of disposable funds to production’. The provision of disposable funds to production will never exceed provisions to working capital. Disposable funds are initially used for working capital. That is, what is lent for working capital cannot exceed working capital, because it would indicate that the money would be idle or semi-hoarded, which contradicts common sense, since by definition working capital cannot be inactive. It is essential for working capital to be active.

8.5. Symbolic mathematical interpretation of the operation of capitalisation

This section will be used to symbolically develop what has been explained in the preceding section. The conceptual and symbolic interpretations were not done together so that readers would not be overwhelmed, finding the formulas a bit complex. Thus:

The loan is Z that is a flow of previous savings that is joined to c industrial disposable funds, which after are Δ(c + Z).

Demand (R = P) is P – A, but when savings are formed, it will be less inasmuch as the savings that are formed and lent by Z, hence:

d = P – Δ(A + Z) = P + Δ(c – Z)

The reason behind the second half of the equation is explained by Bernácer: ‘if the real increase in industrialists’ disposable funds is Δc, the virtual one, i.e. that which would have been without this neutral operation of transferring disposable funds to production, would be Δ(c – Z), and the virtual acquisition fund (the real one being ΔA) would be Δ(A + Z).’

The investment that savings fund is divided into two parts:

Fixed capital .............................. z

Working capital ......................... K

For the production of both, it is necessary to pay:

Payments (salaries, interest, expenses, etc) ...................... r

Raw materials ................................................................ y

…y moves to industrialists

…r moves to acquisition fund A, thereby increasing P (the same amount of production).

If Z are the funds transferred for industrial uses and these are earmarked for working capital K and for fixed capital z, then:

ΔZ = ΔH + z

Note that K has been replaced by H, since K is working capital and H is the part of the funds that is going to form working capital, which is not always the same.

In addition, these saved funds will be used as a whole for r payments, for y raw materials, etc. Thus:

ΔZ = y + r

The result of the capitalisation done will be:

A has increased by .......................... r

c has increased by .......................... ΔZ – r = ΔH + r – r

P = R has increased by r.

Logically, these increases have had to be this way following the process of disposable funds. The letter r is money received by the industrialists’ employees (it is not received by the industrialists) and therefore increases acquisition fund A. Business owners increase their disposable funds in the process of capitalisation insofar as the transferred funds –savings– Z, minus the part that is taken from the disposable funds and goes to others, which is r. Since these savings were used to fund working capital ΔH (the part that is channelled toward working capital) and fixed capital z (Z = H + z), in the end it will be held by the industrialists as has been explained ΔH + z – r.

The previously mentioned expression d = P + Δ(c – Z) would end up substituting P = r, c = ΔH + z – r, ΔA = r

r – r – ΔZ = – ΔZ

The increase in demand d is only z, said Bernácer (improperly, in my opinion; he should have said final net demand). The working capital employed, H (not simply working capital, which is K), will need to be deducted from demand d, since actual demand in fixed capital z is the same as ΔZ – ΔH.

d = P – ΔA – ΔZ is transformed into d = P – ΔA – ΔH; working capital has been taken out. In reality, and without altering Bernácer’s thought, working capital invested really is a demand. And because it is demand, it is also supply at the same time, thereby eliminating the demand for working capital on the market, which is why it is preferable to refer to final net demand. As indicated, H includes the transfers of funds made to industrialists and those used for fixed capital as long as they are not invested.

It is necessary to subtract the disposable funds allocated to working capital from the total disposable funds of industrialists c, thus making it so the final demand on the market is as follows:

d = P + Δc – ΔH

(do not forget that production = P = R income).

When analysing supply, an increase in P was seen equal to r and an increase in stock of the same value (X production equals X supply equals X stock while it is not sold). But the demanded fixed capital, an operation referred to as investment, entails a withdrawal of stock from the market, because producers withdraw it for themselves and not to supply. The reasoning is as follows:

As seen, the expression for supply will be:

O = P – ΔE

Since ΔP = ΔE in the increase in new production (the same increase in production as supply…) and both are equal to r and taking into account the sign opposite to capitalisation z, the previous expression of the supply is as follows:

r – r + z = z

The increase in fixed capitalisation carried out is the amount of the demand in equilibrium.

If the three stages are considered as a whole: first, the formation of savings and decreased demand; second, the transfer of disposable funds to industrialists and; finally, the investment of disposable funds, it is necessary to close the circle.

The first involved an increase in ΔA and ΔE; so much savings led to so many unsold products E. These decreases are equal to Z.

This decrease is partly offset by an increase in demand z that is investment in fixed capital. Since the investment in working capital is H and it entails new supply, there will be a demand deficit. The demand is partly compensated, as mentioned, because it is not enough; something else is needed: this quantity is measured plus the deficit:

ΔZ – z = ΔH

This is where the heart of the Bernacerian argument lies. New money is needed on the market to feed demand. Since demand is unable to absorb supply by H, which is supplied working capital (while this working capital is unsold), the new money created must have exactly the same value as this working capital. It is important to stress that new money is needed to fund working capital.

This deficit amounts to a disequilibrium between potential supply and demand. Why? The acquisition fund grew by r because of the payments made and decreased by ΔZ because of the savings. Therefore, the total increase will be r – ΔZ. This is the case on the demand side. However, on the supply side, stock does not decrease but rather increases by r – z, so that the total disequilibrium equals:

P + Δc – ΔH = P – ΔE

We thus have:

c + ΔE = ΔH = ΔK

It was already shown that c + ΔE is working capital. For it also to be equal to the working capital that savings pours into it and for equilibrium to be possible on the market, assuming that money is not created, it must match a transfer of funds to production (Z). But since this transferring of funds entails the formation of prior savings that cause a depression in the market, the process inevitably involves a deflationary process.

This assertion, which is necessarily repeated throughout Bernácer’s work, insistently necessary, constitutes one of his explanations of economic cycles.

The expression for demand was: d = P + Δc – ΔH. If supply is taken away, we have:

d – O = P + Δc – ΔH – P X ΔE = Δ(E + c) – ΔH = ΔK – ΔH

This expression states that the disequilibrium between supply and demand is the same as that which arises between the increase in working capital and the provision of disposable funds to production for working capital.

Obviously H will never exceed K when both are positive, because this would mean incorporating idle funds, which by simple logic is impossible, since working capital is active. If it is not active, it is not working capital.

If K is negative, it means that working capital decreases and H must be positive. This is true as a result of the working capital that is decapitalised.

The mathematical operation relating to the capitalisation expressed in this section, which symbolically and mathematically explains the capitalisation operation (explaining more than just capitalisation), helps to understand Bernacerian concepts and symbols, which originate from the ebb and flow of disposable funds.

It is not necessary to emphasise the breadth of space devoted to capitalisation, since the system is playing with its future in this operation.

8.6. Decapitalisation

The explanation given by Bernácer on first-class and second-class working capital was not very clear. It was included in the first chapter (section on working capital).

The explanation will be repeated here. It is known that the sum of added values is the same as national product and that this is the same as the national income.

Values added to production are done during each production phase. For the agents adding or manufacturing it, it is working capital while it remains in their power. It is decapitalised by the sale of this product to the next buyer-producer for whom it is, in turn, working capital. The first or previous producer recapitalises the monetary amount of the sale. Even the last producer or last producers have the total of national product: they have a total of working capital.

Total national product (consumer and capital goods) that has been produced and not sold will be working capital while it remains in the warehouses and shop windows waiting to be sold. How is value added? Through the addition of the new product or value to the previous value. What cannot be done, obviously, is to add the new value to the previous value and then in turn add all of the first production to this resulting value that is transferred to the following producer. This would mean entering the same item into the books twice. As stated earlier, Bernácer carried out such an operation, which is really an extremely strange operation, when it isn’t wrong. But, he then stipulates that this is not the national product, since, as he well knew, national product is the sum of added values. In addition, in 1945, the definition of national product was widely known (see chapter 2 ‘Capital’). .

One thing is certain: each stage of production generates production that is working capital. The sum of all working capitals is the sum of all the bars on the following diagram which is repeated here for convenience. This operation, which is the sum of all working capitals, indicates all the payments actually made by productive agents. The sum of this working capital is not the final bar, but rather a much longer bar.

The last bar, af, is national product. The sum of working capital (set of payments) is K₂. The final working capital is the national product, which Bernácer called primary working capital K₂. Subtracting the difference between first-class working capital from the sum of all payments (long bar) is second-class working capital.

I don’t understand it. If the preceding symbolic explanation is followed, it can only mean the following. First I will explain the graph:

National product: K first-class working capital

Sum of payments: sum of all of the bars or final bar

Sum of payments K₁ ± K₂ = second-class working capital

The first observation that must be made is that the sum of payments does not mean that an equal amount of money is needed. Indeed, one sector of the production process pays the former one that has transferred it its working capital, which liquidises it, but in turn, the latter sells it to the following and recovers part of these liquid resources. The second producer, for example, pays ab to the first, but he recovers it when selling the fraction ac to the third producer. Thus, all in all, money must equal national product and equal national income. The continual sequence of creation and destruction of working capital makes it possible to form national product or, what is the same, the continuous pace of capitalisation and decapitalisation (liquidation) of working capital.

Fixed capital is decapitalised by depreciation and is capitalised by the amortisation of the company’s non-distributed profits. This operation is an accounting operation that may or may not maintain equilibrium with the actual depreciation of capital goods. Although it is possible that after being amortised it may still have a practical use or, conversely, may be decapitalised before its equivalent amortisation has been carried out.

By means of functional depreciation or theoretical functional erosion, capital goods transfer part of their value to product. By means of destruction, working capital transfers all its value to the product. Fixed capital is covered by means of periodic and partial amortisation. Working capital is decapitalised at once; through product sales or liquidation. It is also capitalised all at once.

There is another difference. The purpose of the decapitalised sums is to be recapitalised. Buying capital, whether fixed or working, by means of savings is called investment. Investment is recapitalisation. For fixed capital, it is carried out through the operation of rebuilding depreciated capital and adding new capital equipment (net investment), and for working capital, it is carried out by acquiring new materials, labour, etc. to continue production. The pace at which they both occur is very unequal. Each one takes its own time, which is always greater that that of fixed capital.

Both investment in fixed capital and investment in working capital equipment are demanded, but their economic functionalities, however, are different. Saving is the operation prior to any investment and implies a temporary dip in the market (while it is savings). The demand for fixed capital monetarily has the same meaning as the demand for consumption, because it means that production has been withdrawn from the market. The same cannot be said of working capital, because although it stimulates the demand for raw materials and production services to the same extent that it creates new income, it places or adds new production on the market (it doesn’t withdraw it, as with fixed capital).

If working capital is an increase in stock ΔE and in liquid disposable funds of industrialists Δc, given that (ΔK = ΔE + Δc), there must be an increase in the disposable funds of the acquisition fund ΔA = Δ(a + b) plus industrialists’ disposable funds (industrialists’ demand). If equilibrium is to be reached, the acquisition fund plus the industrialists’ disposable funds must as a whole entail a demand capacity that can absorb this working capital (which will be all production). In other words: all increases in working capital must be accompanied by an increase in the amount of money. Repeating what was expressed above:

ΔM = ΔA + Δc: amount of money increased

ΔK = ΔE + Δc: working capital increased

ΔM = ΔK in equilibrium

Bernácer finishes this assertion by saying:

        ‘In sum, the increase in working capital, without which it is impossible to expand production, implies a decline in overall demand that makes increased production superfluous. It is not possible to escape this vicious cycle, except by increasing the volume of money in circulation, which enables both working capital and total demand to increase at the same time.’

9. Commodity currency

9.1. Introduction

Real money or commodity money is comprised of a valuable material of equal value to that which it really represents.

Fiat money symbolises a value, although the material of which it is comprised has a negligible value. Here, Bernácer introduced the value of the coin’s metal into his equations. Bernácer’s entire economic body of work is coherent and can be explained mathematically.

In the case of commodity currency, being dealt with here, it is easily adapted to be handled and incorporated into other parts of his theory in which he criticises the gold standard. For some time, I thought Keynes’ criticism of the gold standard was better than Bernácer’s. However, the mathematical treatment derived from his disposable funds theory in the chapter ‘Commodity Currency’ made me change my mind. It is possible to precisely determine the exact measurement of the monetary disorders caused by the gold standard in Bernácer’s doctrine. This measurement is explained in his equations.

9.2. Explanation

Noble metal is simply another type of merchandise. It is valuable because it is valued by the market. Upon being rescued from the bowels of the earth, it is working capital while it is not sold as a final good. Its extraction entails the generation of a part of national product and its cost generates income. Here, I will not be concerned with its transformation into durable consumer goods, but rather how this supply is transformed or permuted into demand according to capitalisation.

As mentioned, the act of minting involves the conversion of what was a supply –the merchandise– into a disposable fund, which is minted metal. The market becomes unbalanced in this way, a benign inconvenience for the market, as it has engendered an increase in purchasing capacity.

Disequilibrium is explained because a new potential demand has appeared, or disposable funds (A) that do not come from income or at least from period production. Whether it arises or not from period production is not an issue that concerns us as much as the fact that this increase ΔA of disposable funds is not accompanied by an increase in stock ΔE or working capital. In this analysis, the increase of disposable funds or unspent income is logically accompanied by an increase in unsold production. This not only does not happen here –increased disposable funds A without increased stock– but, if gold or silver is considered stock ΔE, it disappears when money is minted, decreasing the resulting –ΔE. Now there is not a decrease in disposable funds but, conversely, an increase.

The situation is flipped doubly and with a double magnitude. Here, disposable funds increase to the same degree that stock decreases. The situation is equal to demand that has removed production from the market by ΔE. Then disposable funds, instead of decreasing, have instead increased by the value of ΔE.

Let’s start with a status of equilibrium where ΔA = ΔE. When ΔE decreases or disappears because minting new money means –ΔE, since ΔE is transformed into ΔA, ΔA + ΔA = 0 and, simplifying the equation: 2ΔA = 0.

The terms have changed on the market: merchandise has decreased without any demand and the disposable funds are the previous ones plus the new ones. I said it was harmless to the market because stock has disappeared (I assumed that the only merchandise on the market was gold) and, furthermore, demand has potentially increased, or restating this, disposable funds have increased.

What was said in the last chapter about the need to finance working capital is not required in the case of minting money. The reason is that working capital disappears on its own and more money does not need to be created because it has already been created by this minting of new money.

Bernácer’s mathematical formula on this issue (which will be set forth in the next section) seems to be vexingly complex. Concerned about the issue of money due to the weakness of actual demand, Bernácer knew how to see the advantages of minting coins (gold is worth more as a currency than as a production instrument) and the enormous disadvantages of the gold standard. His conversation with the famous Dr Schaaft is also famous. This conversation that took place at the Council of Scientific Research in which Bernácer told Hitler’s Minister of Finance at that time –contradicted him may be more precise– that part of Germany’s development was due to abandoning the gold standard.

Like Keynes, he clearly understood the ideas of mercantilists and interpreted them correctly. About them he said: ‘… Mercantilists understood well that the abundance of precious metals was a reason for prosperity, not because they were wealth, but because obtaining a means with great enough circulation, at a time when there was no currency but commodity currency, was a necessary condition for expanding production. Lacking this circulating means, production could not be extended, even with a surplus of material and personal means to do so, due to the impossibility of distributing it while maintaining the prices paid…’ (The Functional Doctrine…, page 101, 2^nd edition, 1956)

As to the rest, the young Keynes in 1913 systematically described the gold standard-exchange. He would later originally criticise this system. Furthermore, in his historic studies, he rescued the monetary reasoning of the mercantilists.

Bernácer had not discovered a Spanish pioneer who spoke of these issues. I am referring to what historians of economic thought, Schumpeter and, more methodically, Margarie Hutchinson cite as the School of Salamanca. I am specifically referring to Tomás de Mercado, who established the relationship between the quantity of money and inflation in 1560. It seems as if Bernácer did not know of him or the school or at least didn’t cite them.

9.2.1. Symbolic-Mathematical Explanation of the Commodity Currency

This is the amount of metal with the value S that is transformed into a sum of money ΔS via minting. The worker doing the minting receives r for his work in wages, which will be equal to:

ΔS – s = r

The operations explaining the variations of the acquisition fund and stocks are:

                      Acquisition fund:      ΔS
Increase in:      Stock by:                r and decreased by S
                                                   end increase: r – ΔS = –ΔS

Demand easily ends up being overpriced. This demand is the difference between production and disposable funds A. Given that minting does not involve any demand transaction, the latter must be corrected by –ΔS, which is the metal that has disappeared.

Supplies are improperly decreased, where this decrease is measured by: r – (r – ΔS) = ΔS. This error must be corrected by adding a negative term equal to the value of the minting executed.

I consider minting as a fixed capitalisation act. Sales are equal to fixed capitalisation, here equal to ΔS. The apparent increase in demand is equal to r – ΔS = ΔS – (Δs – ΔS) = –Δs (where the creation of money is not considered). Since in reality, it experienced an increase of ΔS, the previous formula will have to be corrected by the addition of ΔS + s. Supply has undergone an increase ΔS. The formulas obtained will be:

d = P – ΔA – ΔH + s + ΔS

O = P – ΔE – ΔS

The difference between supply and demand then is:

d –O = ΔE – ΔA – ΔH + ΔS + s

replacing ΔA = ΔS – Δc, the following is obtained:

ΔE – Δ(S – c) – ΔH + ΔS + s = ΔE + Δc – ΔH + s = ΔK – ΔH + s

The expression of demand, according to industrial disposable funds, will be:

D = P– Δ(S – c) – ΔH + s = P + Δc – ΔH + s

In conditions of free minting the margin between S and s is very small, so much so that it can be left out. Bernácer could have saved unnecessary complication by explaining that s = S from the beginning.

D = P– ΔA – ΔH + 2ΔS

D = P + Δc – ΔH + ΔS

The first equality explains that demand is income minus the disposable funds from the acquisition fund A and minus the quantity provided for working capital while H is not applied and more than double of the minted amount S.

Equating supply and demand, we then have:

P + Δc – ΔH + ΔS = P – ΔE = P – ΔA – ΔH + 2ΔS

And:

ΔE + Δc + ΔS = ΔK + ΔS = ΔH = ΔE – ΔA + 2ΔS

which indicates that market equilibrium survives while the increase in working capital plus that of commodity currency is balanced by the cession of funds to production for working capital. This statement is the same or equivalent to the so-often repeated one that the increase in working capital must always be financed with new money. Otherwise, the investment in working capital would be depressive for the system. Here, the same is affirmed for the minting of coins.

The criticism of the gold standard arises alone through this equation although Bernácer did not specify this equation in his criticism of the gold standard. Consider the case that gold does not exist in the gold standard and it is decided to increase working capital. Consider something worse as well: in gold hoarding, where gold is highly suitable for hoarding.

The last part of the previous equality will now be isolated:

ΔH = ΔE – ΔA + 2ΔS

Equilibrium is obtained when supply O and demand d are equal (O = d) and complete, necessary and sufficient equilibrium is achieved when potential supply and demand are also balanced (ΔE = ΔA). The first equality does not indicate efficient allocation of economies if it is not accompanied by the second. The accrual of stock will be accompanied by an accrual of disposable funds.

Total equilibrium, which is also expressed by ΔA = ΔE means that the previous equation:

ΔH = 2ΔS

since ΔA and ΔE cancel each other out, which is interpreted as follows: The increase in provisions for new working capital must be double the minting executed. Thus, if assuming that there is no transfer of funds to industry (ΔH = O), then ΔS = ΔK (where ΔK is the change in working capital), which translates into the fact that the increase in circulating currency is compensated for by the decrease of stocks due to the disappearance of the minted metal.

10. Fiat money

10.1. Introduction

In Bernácer’s contributions about fiat money, there are the following significant aspects:

An extensive and detailed study on the creation of money by the banking system.

1) The advantages of the independence of the gold standard and the free creation of money.

2) The beneficial impact of the creation of money on the cost of money. Interest drops and this will favour the production system.

3) If Bernácer’s basic proposition is that savings must finance investments in fixed capital and that working capital must be financed with new money, the relevance of this new money is clear in the creation of fiat money.

4) New money M is expressed in the basic context of the theory of disposable funds, which is the starting point for the creation of flows of national income, the backbone of the whole of Bernácer’s theory.

Bernácer sets forth a comprehensive explanation of the role of money in the formation of working capital. His description of the role of private banking in the creation of money is even better. As he stated, this is already well known and other economists besides Bernácer and even Keynes may have contributed to explaining the role of banks. For this reason, I will not go into great depth in this part of the work that is not original, which Bernácer himself knew.

However, certain criticisms can be made about his reasoning. One example is when he stated that bank currency is used to finance working capital and that legal tender, issued by the central bank, is the support for income and final demand. According to Bernácer, this is because production agents, entrepreneurs and merchants use bank cheques to pay each other and that to pay their most immediate production agents, such as employees, they directly use legal tender. It is likely that Bernácer was influenced by banking and payment customs of his time in Spain, but this does not give him license to generalise.

Thus, he stated ‘…Legal tender is used for the payment of production wages that make up the total value of the product and are also generally used for the payment of consumer products…’. He then stated: ‘…In summary, the use of bank currency must be limited to financing working capital and not all working capital, but that which I have called second-class working capital, as opposed to first-class, which finances the basic part of the value. And, outside of this, passive operations…’.

I think Bernácer confused desire with reality here. Like Keynes, he believed in the free creation of money and thus blessed the creation of money by the banking system. According to his theory, whoever invests in working capital not only demands but also increases the supply of products, then system income is not enough to achieve equilibrium, but needs the support of demand fed by new money, as well as an increase in working capital.

If, as he stated, the new money created by banks is possible due to the genesis of working capital (payment between entrepreneurs of working capital) and this money also finances working capital, this desire or reality, I am not sure, makes the system move towards equilibrium. What makes this miracle possible? Private banks.

There is another aspect of great interest with respect to fiat money. Bernácer stated 20 years before the publication of his book The Functional Doctrine of Money that ‘…Bills entailed nothing less than the indefinite reduction of merchant interest up to the possible disappearance of the profit of the large part of capital employed in trade, which is known as working capital…’ (The Interest of Capital, page 131). This sentence was written three years after the appearance of his theory on disposable funds, in the context of his theory on interest. Bernácer’s blessing is repeated when blessing the creation of money. His line of reasoning is clear: a drop in interest lets new monetary flows exceed the ceiling of interest and be invested. But things are not that simple. They are more complex and, in turn, complementary. In short: This money is not created easily but comes from bank money that spreads due to payments made between the production system. This money is also made possible by and for working capital, which is gradually transformed into national product.

The banking system creates money to finance working capital. Since production agents make payments owing to the origin of working capital, this money inside the banking community vessels lets this money be multiplied. By how much? Approximately as much as the increase in working capital. What does this increase in money mean? A decrease in interest, which opens the door to the input of savings in the production system that, in turn, lets fixed capital equipment be financed.

It would be difficult to find greater harmony in an economic theory established by a single man using a core set of ideas. Greater harmony will be reflected when the question of why interest is born is understood, despite the tireless fight of the economic system to make it disappear through banks creating money.

10.2. Fiat money in the theory of disposable funds

This chapter analyses the vicissitudes of disposable funds in active and passive operations, in capitalisation and decapitalisation, in commodity money and, now, in fiat money. In this section of the book related to money, I simply explain the theory of disposable funds in depth. Then I will analyse other aspects deriving from it.

M is the total amount of money in the system from which disposable funds a, b, and c originate, where a are saver-capitalist disposable funds, b consumer disposable funds and c business-owner disposable funds. M will be the total monetary fund of the market, whatever this fiduciary money may be, merchandise, registered or banking.

The following transactions are analysed:

1) Money moves to consumers, increasing their disposable funds while they don’t spend them. Product, income and demand do not increase.

2) Money moves into the hands of consumers, who spend it. Demand increases and disposable funds don’t change, given that the new input of money is compensated by the decrease caused by demand.

3) New money is received by producers for production aims and they employ it totally in working capital. Net final disposable funds, income and demand do not change. Money taken for working capital and new money are equal and neutralise each other, since there are no sales.

This is an analytical stage that is not clear to me, given that applying working capital means having demanded it, which also supposes increasing a part of the end added value and, therefore, national product and income. This is clear, although net final demand doesn’t change because the supply increases in line with working capital, which cancels out its demand.

4) Money moves to producers who use it to invest in fixed capitals, which entails an increase in end demand. The quantity of money M and demand undergo increases.

As done before, I will repeat the previous line of reasoning, but do so mathematically. I believe this provides fluidity and better overall understanding.

Logical-Symbolic Explanation of Fiat Money

Let’s start with the basic for actual demand:

d = R – ΔA – ΔH

(R = income, H = money saved and transferred to working capital and A = a + b). With the incorporation of new money:

a = R – ΔA – ΔH + Δ M

Repeating the previous argument:

1) The fund A increases while buyers receive it and don’t spend it. Therefore:

ΔA = ΔM and H y d remain constant

2) Consumers spend money that moves into the hands of producers. Since they have new money, which they also spend, there is no change to disposable funds. And H and R do not change either.

ΔA = O and H and d remain constant

3) Producers receive new money for their aims and employ it in working capital, then H and M increase, but not d or R or A.

ΔH, ΔM and d, R and A remain constant

4) Producers receive the money, applying it to fixed capital. Demand increases, as well as M and demand.

ΔM, Δd

Repeating the expression D = R – A – H + M and replacing ΔA for its equivalent ΔM – Δc, the expression becomes:

D = R – (ΔM – Δc) + ΔM – ΔH = R + Δc – ΔH

This formula must have the same variations applied as the previous one. Let’s see why:

First case:	neither of the two quantities change.
Second case:	Δc increases due to sales made by consumers.
Third case:	equivalent increases of c and H mutually eliminate each other (Δc = ΔH).
Fourth case:	H only contains increases in working capital and, therefore, does not increase despite the influx of funds. d sharpens the increase of fixed capital investment, which increases actual demand.

11. Foreign trade

11.1. Introduction

Foreign production and income are related to their interior and domestic counterparts through international trade. We will not be concerned about foreign trade, only to the degree that it entails demand for domestic products and, thus, influences the management of domestic product and national income.

The demand for foreign national product is a topic considered in the theory of disposable funds as it involves a transfer of income abroad.

Operations derived from trade involve other intermediate operations, such as buying and selling foreign currencies or international capitals, which are reflected in exchange rates. In another part of his theory, Bernácer condemns fixed exchange rates, since they transfer economic crises with greater speed. In any case, this is not the subject here, but rather how foreign trade is related to the theory of disposable incomes. Another important part to stress is the transference generated on internal disposable funds, the inflow and outflow of purchasing power.

What Bernácer explained did not make reference to the advantages of international trade set forth by Adam Smith and David Ricardo, but rather the movement of internal and external disposable funds. As to the rest of international transactions, his explanations mirror those of other economists.

11.2. Foreign affairs in the theory of disposable funds

The accounting document that records foreign economic relations is called the balance of payments (BOP). This balance is comprised of four sections:

1) Exchange of common merchandise

2) Exchange of metal coins and monetary metals

3) Exchange of services

4) Exchange of liquid capital or disposable funds

Each of these accounting items has its balance in what will be called respectively m, n, p and q. Conventionally and logically, their sum is equal to zero.

m + n + p + q = 0

These operations determine balances that are positive (+) when speaking of imports and negative (-) for exports. This should not be surprising, given that only the exchange of goods, metals and services is in question here (m, n, p), still not disposable funds, which are quantities of money used for exchanges. An import entails an inflow of goods and an export an outflow. All commercial transactions are paid for or are owed. Therefore, there must be an account that records the debit status of the country with abroad and vice-versa. This is the capital account.

If we are owed money from abroad, capitals have been exported and if we owe money abroad, capitals have been imported. Thus, if m, n, p is positive, this means we have imported goods and have therefore imported capitals for this quantity and if the figures are negative, it means that we have exported capitals.

Imports are paid for with exports, possibly totally and exactly and possibly not. The difference is registered in the capital account, which sets forth the debit or credit status of foreign trade.

Bernácer clearly explains this monetary mechanism for trade, although his comments are in line with normal accounting transactions in international trade.

11.3. Operative technique

However, Bernácer was original in his application of a peculiar operative technique for understanding trade mechanisms as a manner to understand situations of equilibrium and disequilibrium.

There are three possibilities and each case will be considered sequentially and separately:

1) Zero balance of the four different entries.

2) Zero balance of two entries and compensation of the other two.

    a)   p = 0, q = 0, m = –n

    b)   n = 0, q = 0, m = –p

    b’)  m = 0, q = 0, n = –p

    c)   p = 0, n = 0, m = –q

    c’)  m = 0, p = 0, n = –q

    d)   m = 0, n = 0, p = –q

3) General case: none of the entries is zero.

    a)   A single balance with the same sign and the other three opposite.

    b)   Two balances with one sign and the other two the opposite.

Each of these three analytical stages is linked mathematically to the theory of disposable funds, but they do not add anything new as a whole (as regards mathematical formulas). Disposable funds, unminted metal and minted metal, when it exists, etc. come into play. The best way to really understand is to summarise the different balance and imbalance situations on the balance of payments.

11.4. Balance and imbalance on the balance of payments

I am obviously speaking of situations of economic equilibrium and disequilibrium. Formal accounting is rigorous and is always used because it follows the double-entry convention. The following cases will be looked at in this order: balance and imbalance, warning that a debt or credit cannot be left pending, whether it is a capital export or import.

1) Balanced balance

The supply of goods is not altered given that the articles that are imported allow for the replacement of those articles exported. Qualitatively, not quantitatively, imported goods are preferred to the excess called exportation.

The payment mechanism, which is what can involve demand, is explained as follows. To collect, domestic exporters issue bills against their foreign clients that they take to the bank, which discounts them and gives them domestic currency. Bankers, in turn, buy foreign currency and place national currency into circulation and then issue the discounted notes to foreign branches so that they are paid in the currency of their country. Foreign bankers in turn receive the notes from their exporting clients to be collected in other countries, which send them to their branches to cash them. Part will be against our country and collection by national bankers will pay them back from their expenditures for the purchasing notes from the foreign entity.

Like our country, hypothetically there is a balanced balance after carrying out the compensations between different banks and the arbitrage transactions that liquidate the largest debts from countries with larger credits than others, the bankers’ accounts will be settled. In short, they act as intermediaries between importers and exporters, collecting money from the first to give it to the second.

There is no increase or decrease in money M. Monetary circulation is equal to production and the sale of part of national product. Money moves from consumers (part of b) to producers (c) and then returns to consumers (x again) and to financiers (part of a).

2) Unbalanced balance

An excess of imported or exported articles represents an increase or decrease in overall demand. When balancing the foreign notes collected and paid, national bankers will end up either in a creditor or debtor position. In the first case are those that have a surplus and the second those that have a deficit. In the first, there will be more money in circulation than was removed. Conversely, in the second case, there will be more money removed, with the money in circulation decreased. If the foreign currencies that are hypothetically needed are not available, in no case can the credit be made up for in foreign currency or the debt contracted eliminated.

Bankers will unload their debit or credit balance, turning to capitalists in the respective country who wish to exchange their balances in national currency for balances in foreign currency. Bankers in the country with surpluses then repay their excess money in exchange for fund holders, thus contracting the amount of circulating money that equals the surplus.

In deficit countries, bankers will pay individuals who want to accept pending debt with foreign currencies. In the first case, buyers’ disposable funds decrease, or potential demand. Due to this, for the formula to be exact, the amount of the surplus must be decreased (Bernácer used m + n + p – q = O and also W = m + n = – (p + q) where W is the joint balance of the balance of payments. In the second case, the amount of the deficit must be added to re-establish the deficit situation. The addend W is negative when there is a surplus and positive when there is a deficit.

If the previous solution is not viable, foreign currency holders or debtors will want to settle their positions and bankers and individuals will place pressure on the foreign currency market and will make the exchange relation vary in favour of the country with the surplus. This phenomenon will be against the country with a surplus, whose exports will become more difficult, stimulating deficit countries, tending to reestablish balance equilibrium. Here, Bernácer follows a traditional line of reasoning made by Hume (and probably by the mercantilists before him). He continued: if the deficit country wants to defend its currency from relative depreciation, it will implement a restrictive commercial policy on imports and give priority to exports. If these measures prove to be insufficient to obtain balance and absorb the remainder of its previous disequilibrium on the exchange market, there are two measures to equilibrate the banking foreign exchange balance: loans are issued in the creditor countries so that the market is cleaned of foreign currencies with the foreign currencies obtained.

In this last case, the contraction of the country’s circulation with favourable balance operates because the loan subscribers decrease their disposable funds, which are deposited in the bank to settle the monetary deficit in its foreign department.

Exporting gold is another solution. There will be an increase in the country’s circulation that receives it, provided that the country does not eliminate the gold by using it for durable or industrial consumer goods. This elimination will of course be monetary. The minting operation or replacing coins with bills is independent of the event of importing metal, which in international trade is simply one more type of merchandise.

12. Interest

12.1. Introduction

Interest is the price of money. If money in some way springs up from production or the ordinary market and thus represents wealth, then why does it have a price? All prices reflect situations of greater or lesser scarcity. If this is true, why does money get so scarce that it gets expensive? In a non-monetary economy, goods are exchanged for goods. In a monetary economy, they are exchanged for money, with the result being the price of the goods.

Money is used to transport and distribute income arising from production. Income and production are equal. The supply and demand of money should also be equal, while in my judgement, it seems like the clearest truth of macroeconomics is that the supply of goods is a demand for money and demand for goods is nothing but a supply of money.

One can argue, albeit not very correctly, that interest is the outcome of the supply and demand for savings and capital, respectively. I admit that this is true. The next question that must be asked is what part of and why income leaves consumption to be saved. For Böhm-Bawerk, this is obvious: people save to receive compensation through interest, which is an award for renouncing consumption. For Bernácer, there are additional reasons. Savings are demanded to acquire capital goods and capital goods are acquired to obtain profitability. Keynes gave an explanation about the marginal efficiency of capital. But the origin of interests continues to be a concern, which is a price that reflects relative scarcity. Scarcity of what? Of money. Along the present line of reasoning about savings, if a price is generated, it is because savings is scarce. Scarcity is a relative matter. For example, savings can be abundant in absolute terms, even more than in other periods, but if there is a greater demand for savings and it becomes scarce, relatively, then the price or interest goes up. Capitalists who form savings (entrepreneurs that produce capital goods are producers and the savers who acquire this capital good are capitalists or investors) can offer a lot, but if producers request more than they produce, savings becomes scarce again and interest rates rise. One thing that is clear in Bernácer’s theory is that the cause of interest is basically found in the relative and even absolute scarcity of savings. Savings become scarce because they flee to the financial market, outside of the ordinary market, which is where national product is formed³⁷.

Savings or not, what is true is that money has moved to the financial market, a type of limbo where shadows roam with a monetary value, but lacking a real body or national product. If income and production are equal and the supply and demand of goods reflect the demand for and supply of money, respectively, the fleeing of money distorts the same money market, making it scarce.

12.2. Explication³⁸

Interest is a rate normally expressed in a percentage. A percent is the relation between a base magnitude and a variable rate. The quotient between the variable rate and the base is the percentage. Thus, I can speak of a child’s growth rate by month or by year, of the temperature increase rate, etc.

Interest is a percentage that indicates the increase rate for an amount of money and the amount of money that is lent or requested for a loan. If it is not repaid or it becomes a debt, one owes the accrued amount multiplied by the interest rate. This is the rule of commercial calculation or financial maths.

However, this explanation tells us nothing. Conversely, the percentage does explain something, which relates the gross yield of an investment with its cost. If an investment V for an amount of 1,000,000 gives us a yield R of 100,000, the profit percentage or percent yield would be R/V = r

(R in this case is non-production, speculative income. In other parts of the book, R refers to income or national income).

When the yield is from the financial market and the investment is a financial investment, the yield r is interest i.

Interest is a percentage. It is the percent determined by the yield of an investment and its cost R/V = i. This statement makes no sense without the following explanations. Firstly, investment is simply a placement of speculative money. Secondly, this placement in speculative assets does not represent the creation of new wealth, but it is rather past wealth or an illusion of wealth. The initially-cited term investment is quite ambiguous, given that for myself and any sane economist, investment can only mean an increase in the economy’s production capacity.

Speculative assets can be financial or real. Both are secondary and are sold and bought on the financial market.

These assets are bought with part of non-capitalised savings. The percentage profitability of the savings that is not capitalised is the interest rate. As you will see, savings that are not capitalised are disposable funds. S = S_k + D where S_k is the capitalised savings and D the disposable funds or non-capitalised savings, and S is simply total savings.

Disposable funds finance the acquisition of speculative assets, so:

D=V

if i: R/V

then:

i = R/D

Note: R = non-production earnings in this case (and not Y or income).

Which has the following consequences³⁹:

1) Interest is generated outside of production.

2) Interest is bait that leads to the formation of disposable funds.

3) The fleeing of savings causes its scarcity on the ordinary market, which needs money for production and income to exist, causing scarcity on the financial market and thus leading to the formation of interest.

After understanding the theory of disposable funds, the theory of interest may be known, which in turn requires an understanding of the financial market. These two areas will be explained in this chapter.

These two areas comprise the third neutral operation in the theory of disposable funds. I believe that neutral operations were a poor name choice by Bernácer, given that they are the most dynamic of all transactions. Pernicious and dynamic operations. The classification of the financial market operations that give rise to interest are cited in the present work. Payment for realisation operations, business payments and property payments that do not represent present production.

12.3. Background and explanation of the origin of interest for Bernácer

In Society and Happiness, the theory of interest was set forth and even explained. Land is an asset with which you can speculate, because its possession lets the owner obtain free rent (not for the operator or farmer though). Land is not the only speculative asset. Robertson believed this and fondly chided Bernácer as a neophysiocrat. Bernácer said: ‘…Wealth lent for another purpose accrues interest or a profit in favour of its owner, equivalent to what would be obtained by employing it to buy lands…’ Relating it to other assets that are not new wealth, the interest rate will be obtained. But the theory of interest cannot be completely set forth due to the simple reason that the theory of money is not constructed. The theory of money was written in 1922 in the work entitled The Theory of Disposable Funds. His exclusive treatise on interest was published three years later, in The Interest of Capital in 1925. The Problem of its Origins (obviously written earlier than 1925, indicating that there was little time between 1922 and the development of the theory of interest).

This treatise explains interest from a complete monetary viewpoint and from even a psychological point of view. The treatise demolishes the masterly work of Austrian Böhm-Bawerk. The theory of interest is a wise and polished piece, which is adapted with millimetric precision to the vast building of Bernacerian macroeconomics.

12.4. Interest and savings

In 1925, there was no other remedy than explaining interest as the supply of and demand for savings. It cannot be isolated from the long classical and neoclassical legacy, even though different conclusions are reached than in those schools. I believe that if Bernácer lived in present days, he would continue thinking the same and would follow the route of savings to explain interest. In 1956 he published his last article and in 1955, his last book. At that time, the Keynesian models of the supply and demand of money were more or less developed (although not for money). Bernácer knew them and criticised them, continuing loyal to his analysis.

Why do savings form? In principle, I could say that it is because it hasn’t been necessary to spend it. This statement has several consequences. The fact that money is not spent does not mean that it hasn’t been necessary to spend it. Maybe it is spent out of need and maybe it is saved because, even though it was needed, a sacrifice was made to save. And if a sacrifice was made, it is because you think you will be rewarded for it. This reward is interest.

This is Böhm-Bawerk’s proposal and also Bernácer’s. The only and essential difference between the two is that Böhm-Bawerk used it to explain the origin of interest, on which his entire theory is based. For Bernácer, the sacrifice derived from savings is one of the causes that explains the birth of savings, not necessarily interest, and nothing else. The explanation given by Bernácer to determine the birth of interest requires an explanation of the money market or the monetary metabolism of disposable funds, already set forth, and of the financial market). It also requires other considerations: deep down, the mill of national product production moves continuously with water working at full employment for Böhm-Berwerk, but not for Bernácer.

12.5. The origin of savings

People save for a wide range of reasons. These causes are both psychological and real. In any case, desires are satisfied through savings. Thus, Bernácer said: ‘Saving is simply one of the multiple objectives demanded by our desires and resources, a particular case of choice and preference.’ The reasons that lead to the formation of savings are the following:

1) The need to obtain positive profits over time will lead subjects to postpone consumption for the future. This postponement is savings. Excess consumption of a good will cause saturation and probably leads to a negative utility. Needs according to Bernácer ‘…are not an indivisible whole’, like physicists’ matter is made up of portions with limits of divisibility and elasticity. As they are satisfied, their marginal intensity decreases and the value given to products to appease them is less than what is attributed to those destined at starting to satisfy them.

Here is where a mortal attack is made on the Austrian school, in the same psychological arena and using the same weapons. Böhm-Bawerk, with ties to Menger and Wieser, should have forecast this contingency, but maybe the timelessness of marginalism cut off possibilities when analysing interest. Timelessness that is quite paradoxical in the case of interest, which is related to time by definition.

In the act of renouncing consumption when satiated, the desire to obtain greater future profits arises, greater utility that is not explained by interest and that involves some type of sacrifice.

2) People save to consume no more and no less than the savings they have accumulated. People save even when interest is not paid. You want jewellery, a car or a house. Since you don’t have enough money, you save and you save, even though this savings does not accrue interest. You reject present consumption obviously to obtain greater future consumption. This greater consumption is made possible because you have saved, not due to the accrual of interest. Bernácer said ‘…I have a situation here where a future good is valued more than a present one; the act involves depriving yourself of current pleasure for a greater future pleasure.’ Note that Bernácer’s argument is not clearly set forth. He should have added that this greater pleasure, or greater consumption, is nothing but the sum of all savings (without compounded capitalisation). I am referring to the motivation for obtaining greater consumption.

If you can obtain interest for this savings, even better, even though the goal is not interest, but more consumption. Let’s look at this as a formula:

S₁ + S₂ + S₃ + … + S_n = n S =

= value of the consumer good you have saved for

This is Bernácer’s statement for this specific case.

It is not:

S (1 + i)ⁿ = S’

where S is total savings, S’ capitalised savings and i is interest.

3) People save with the objective of financing a production instrument. Carpenters save to acquire an electric saw and cobblers save to acquire leather and nails. This savings will be collected for essential goods from the production system, whether or not there is interest. Sure, it is better if there is interest, but the savings will be made regardless.

This should be the natural destination of savings, assuring economic equilibrium. This final operation, not the formation of savings, but the purchase of capital with this flow, is called investment and lets national product and the flow of wealth be increased. In this sense, one can speak of the percentage profitability of savings, where this percentage profit is that of the investment, or the theoretical-real profitability of savings in investment. I stress its importance because the dynamic explanation of economic cycles will come from this understanding.

If the relationship is established between savings and investment and we consider that profitability (or increases in national product) is: ΔPNN. Then real interest is i_r = ΔPNN/ΔK, with the understanding that savings S finances ΔK. This explanation is not set forth in the theory of interest but rather at the end of his book A Free Market Economy from 1955. I thought it important to cite this work now to relate it to financial interest, which is real interest.

Here there is suddenly a cause for savings that does not spring from interest but from the typical needs of the economy.

4) Human beings have the ability to look towards the future. Since the future is unknown and filled with uncertainty, you accumulate savings to protect yourself against the unknown. Other future realities are known. Thus, he said ‘Planning can go further and you may set up reserves for days when you cannot or do not want to work, thus consuming in the future without producing, although in the present you produce excess without consuming it. Here is where the word appears that is so often repeated in economics: forecast. Savings are formed as a forecast (one does not say that money is demanded in anticipation). The fact of having forecast and calmed the future, the known and the unknown, is a utility, a good that calms a psychological need and savings somehow buys this good. And, the price of this good, which could be called security (my word, not Bernácer’s), is savings, but not interest. Furthermore, savings can become a pleasure in itself in these cases.

In any of these cases, the future is confronting the present, a confrontation that is intelligently established. Greater consumption, the inevitable financing of the investment, prevention, etc. are nothing more than the continuous psychological evaluation of the balance in our minds, of present needs with estimated future needs. But needs are felt and the present is felt, but the future is not felt, at most it is calculated. Thus savings is the result of a psychological and rational, intuitive and logical web. Bernácer had a good sentence that gave an explanation of savings ‘… so that savings is done, planning faculties and future aspirations must enter into conflict with current needs. Continuing: ‘…Of course, the fewer projections that must be placed on saving, the more that will be saved equally to other circumstances, but individual psychologies have an enormous influence…’

And in economics, I don’t think there is anything as true as the law of minimum effort and, if this effort is minimum and the yield is maximum, savings activities are assured. I am referring to owning assets that have been bought with savings that, although in our possession, generate profits. This monetary profitability is achieved without any present work. This causation is explained in the next section. Profits without working (savings was formed with past work) is a reality that has been deeply-rooted in human psychology since ancient times.

5) The economic system makes it possible for a lender to give his savings to other people, borrowers, with the promise that they will return interest along with the savings lent. This operation is as important as the real and institutional manner in which it is carried out. Large loans are implemented via legal means; where there is a certificate that accompanies the right and that the law calls movable property or bearer securities or securities. In macroeconomics, these are called financial assets (for the lender or holder) and financial liabilities (for the issuer or borrowers). There are other ways of accruing income while keeping savings and these are real assets with a different nature than financial assets, but with the same microeconomic causation.

This institutional complex makes it attractive to manage savings and it is attractive because the savings, due to accruing interest, lets people obtain free earnings R (not national income or production income).

Savings are accrued here in the system, exclusively by obtaining interest.

An explanation of the causes and consequences of monetary flows that make this savings possible is not suitable here, but I will make one comment about its birth. This savings is independent of the reasons set forth in 1), 2) and 3). And I believe that this savings is created after covering future needs for consumption, investment and planning, although the last is very difficult to separate from speculation of 4). The first are peremptory and the last are desires to place what is left after heeding the most-pressing estimated future needs.

This savings, formed to obtain interest, is the maximum third-degree disposable funds, or simply disposable funds D. They are similar to savings due to foresight, because the person saving seeks to obtain profits temporarily.

Even without interest, savings will be needed and this need will rest on other needs, such as future consumption, hiring a production assistant or planning for future contingencies. After meeting these needs, there may still be one more: obtaining marginal profits on the savings. This can only be obtained if interest exists. As you can see, it is one further factor that explains the formation of savings.

I still have not explained interest, where it comes from or how it survives. In principle, I can say that interest is a price and thus comes from the exchange that is agreed and executed between the suppliers and demanders of savings. If interest is a price, this means that spontaneous savings in the system is not enough to meet the normal needs of industry, with investors (not capitalist-savers) fighting to attract it, a fight that translates into higher interest rates.