19. Analogies & differences

19.1. Introduction

The docility of convenience and, paradoxically, the quickness of thought of scholars, will lead them to establish analogies between Keynes’ concepts and present-day macroeconomics and Bernácer’s ideas and concepts. These thoughts are conditioned by repeated teachings, by the catechisms of professors and by readings. Economists’ enthusiasm for mathematics and the pleasure of sunny philosophising about the truth casts the truth of macroeconomics outside all suspicion. Thus, readers will find similarities between one scientific field and another, with a simple message lying behind the unwieldy words of this book: ‘Bernácer was somewhat ahead of Keynes and nothing more’.

But this is not true. Modern macroeconomics is the child or perhaps grandchild of Keynes’ ideas. This was proven in The General Theory…, which was knocked down, built up, criticised, reformed, etc. From the quarry of his initial ideology, conceptual blocks were carried here and there that mathematical architects have started moving to build the building of macroeconomics. I insist that the sunlight of proof made it possible. But not even mathematicians, no matter how astute, create concepts and when you look straight at the sun, it doesn’t illuminate but blind. And moreover, didn’t mathematicians calculate that the blinding sun took 24 hours to circle the earth and that the sun and the planet they walked upon were already blatant?

In this chapter, I establish the differences between concepts that seem analogous, such as disposable funds and liquidity, or disposable funds and hoarding; savings and investment; financial investment and liquidity preference; monetary interest and financial interest. There are other concepts that may now seem obvious but were not for Bernácer, such as the origin of interest, the primary realisation between interest and liquidity preference and, above all, the basic equation of macroeconomics.

I believe that this chapter will cast greater clarity on previous ones, on the precise explanation of the Bernacerian doctrine.

I will begin by establishing analogies and differences between different scientists (Keynes, Hawtrey, etc.), starting with the scientific genealogy of Bernácer’s work, so that it can be better used to establish the lineage of his science, which is also pure. Subsequently, the analogies and differences of the concepts will be established directly. And in this task of separating fruits from others that are different in the macroeconomic grove, the question of the originality of Keynes and Bernácer floats above it all⁹⁷.

19.2. The essential Keynes and the transcendent in Bernácer

19.2.1. Introduction ⁹⁸

The whole of the theory, exclusively monetary, was set forth systematically and in detail in The Functional Doctrine of Money in 1945. In this same year, the scientific laboratories of the world, mainly England and the United States, were forging and shaping Keynes’s work. There was a lot of fanaticism, or perhaps fascination, lent to the task. I repeat that his monetary theory took root in 1916 in Society and Happiness and in Bernácer’s words ⁹⁹ contained:

1) A doctrine on interest that was very different than what was in vogue at the time, although not original, as I have found out ¹⁰⁰

2) A theory of economic equilibrium that was quite original at the time, although today it would not be so original

3) An explanation of economic fluctuations

Bernácer didn’t give himself enough credit, as I believe he was much more original than he stated, above all in section 2 about equilibrium. He said that where R are production payments (don’t confuse this with non-production income so oft-cited above) born from production P, and R = P is fulfilled (don’t confuse P for prices with the P used here and throughout this section that refers to period production). d is actual demand expressed in monetary figures, which measures consumer and capitalisation demand (don’t confuse with the D for disposable funds) ¹⁰¹. Disposable funds at the beginning and end of the period are A and A’ respectively, which are the part of income not spent either on consumer or capital goods (remember The Theory of Disposable Funds, chapter 11). Thus

R + A = d + A’ and since P = R

d = R + (A – A’) = P + (A – A’)

and this equation responds to the definition of demand in the following way: demand with be total income plus the disposable funds from the previous period that continue growing in the period in question (R + A) minus the part of unspent income at period end, which is A’. Stated differently, I could say that¹⁰²:

d (demand) = Potential demand R + A − what hasn’t been spent at the end A’

These ideas were formally expressed in 1922 (article: Theory of…). In 1925, the book The Interest of Capital was published, in which he introduced a new area of analysis. The novelty consisted of including stock variations along with production P. Before, he had expressed A and A’ as the disposable funds or unspent income at period beginning and end. Now they were replaced by E and E’, which are stock or merchandise available at period beginning and end. If incomes are not spent and are therefore disposable funds, this necessarily implies the existence of disposable funds. From this statement, one concludes that this replacement does not distort the first statement, but says that they are numerically equal.

There is an initial situation of equilibrium when demand d equals supply O (d = O). If equilibrium is fulfilled, without the need of full employment, then unspent income entails an increase in disposable funds (Δ)A and the part of unsold production will involve an increase in stock (Δ)E. Obviously, the increase in disposable funds will have generated an increase in stock or unsold production. Consequently, in equilibrium: ΔA = ΔE. In itself, this identity does not exist without a series of restrictive hypotheses, which would be developed the year after the book’s publication in 1925. This article from 1926 entitled The Economic Cycle explained the six basic propositions from which Say’s Law would be destroyed. The propositions were:

1) All payments originally proceed from material production ¹⁰³.

2) All changes in value of sellable items are resolved through payment.

3) The general sum of all of them is necessarily equal to the total value of production.

4) Demand is a function of all payments made.

5) All demand causes the extinction of the payment (equivalent disposable fund).

6) All payments subtracted from demand entail an equal value in unsold products.

In this work, he explained double monetary circulation and, therefore, distinguished between productive circulation and speculative or financial circulation.

At the root of these propositions is a common contention that went against Say. Say stated that merchandise was exchanged for merchandise, while Bernácer said that supply of merchandise is not demanded by anything but money.

19.2.2. The explanation

Keynes, in Bernácer’s words (1945), did not provide a theory inspired by income-based thought (or non-quantitative) until 1930, the year in which Treatise on Money was published. The Keynes of before, a student of Marshall and Pigou, followed the footsteps of quantitative theory that would set him apart from Fisher’s theory. He concentrated, no longer on simple operations or business lines, but on something more transcendental. This was the amount of money in possession of economic agents as a result of having a specific purchasing power. This early Keynes is the one who published A Tract on Monetary Reform in 1924 (a year given by Bernácer). This neo-quantitative body of work laid the foundation for his future explanation of the demand for money. For Bernácer, there were many common points between Keynes’ book and his book written in 1936 (his glorious and renowned General Theory…) To Bernácer, this last book was – a return to the classical points of view! But it is an especially astute return, since it is dressed in new terminology. In essence, the issue that concerns me here is seeking the cause for surprise.

The Treatise… establishes the difference between three classes of money, which were extended upon due to trying to separate industrial and productive circulation from speculative / financial circulation which, we know, was a permanent feature in Bernacerian doctrine. Similarity asserts itself once again, although it is a perverse resemblance because the structure is different although the scientific profiles are similar. Keynes did not take advantage, as Bernácer did, of the extremely important consequences of monetary circulation between these two areas: the productive and speculative areas. These two analogies will be handled separately. First, Keynes’ production and Bernácer’s demand will be investigated and then monetary circulation.

Keynes’ production and Bernácer’s demand: Bernácer sent his publications to several different economists. And it is definitely known that he sent his Theory of Disposable Funds to at least Robertson at Cambridge. Bernácer would be dumbfounded when he later discovered his theory reflected in Keynes’ work from 1930. His words, mild due to his insurmountable shyness, were: ‘The theory developed by Keynes in 1930 offers so many similarities to those I developed seven or eight years earlier (he was referring to 1922), that it could not but catch my attention and I must state this fact, as I only just had the chance to read Treatise on Money in a financial magazine from Barcelona. Anales de Economía (number 1, March 1941, La Teoría Monetaria y la Ecuación de Mercado) set forth this analogy in extenso, of which here I will only give a summary.’ (The Functional Doctrine of Money, page 221)

These words written in 1945, when at least 30 years had passed since his first publication and the theoretical structure of his thought had been consolidated, are not bold. Neither is my journey a scientific hazard when I am playing with the mirrors of similarities between the two economists, above all when there are so many that they are frankly overwhelming. The most important similarities were stated by Bernácer in these words by Keynes:

We had agreed that Fisher’s quantitative theory experienced a healthy change from the Cambridge economists, a change that rested on replacing the volume of transactions by the volume and value of production. Production volume is represented by O and its price by π, and therefore the value is πO. Thus, the value of national product would be πO. This value will be equal to the value of income generated E, plus excess investments subtracted by savings I – S. This surplus is nothing but the difference between that which was spent on investment or the decrease in available income and savings or unspent income. Keynes wrote his formula ^104:

πO = E + (I – S)

O = total value of production

E = incomes (do not confuse Keynes’ E with Bernácer’s representing stock)

I = investment

S = savings

I – S surplus investments over saving

Stated in other words, income plus what was spent (and what was spent on investments made minus savings or unspent income) is equal to the value of production ¹⁰⁵.

Bernácer stated that this formulation was identical to his about demand set forth in 1922.

For Bernácer, actual demand is equal to the value of income plus what was spent; the same as Keynes. What was spent is the difference between two disposable funds at the period beginning and end. R is production income for Bernácer, and what was spent is measured by the variations in disposable funds, measured by the differences A – A’.

In principle, Bernácer and Keynes only coincide in the terms they use on the right side of the equality. The difference would be in production and demand. Production is important to Keynes and demand to Bernácer. It may seem like πO ≠ d. Why not think that in equilibrium πO production is equal to demand d? If Bernácer’s expression is:

d = R + (A – A’)

and Keynes’ is

πO = E + (I – S)

Bernácer said that these two equations are equal because: ‘R and E represent the same in their respective equations: the amount of income. I – S and A – A’ also represent the same thing, as the first expression indicates the surplus of investment over savings; thus, the sum by which capitalist investments have exceeded savings, while A – A’ is the decrease in disposable funds that occurred in the interval in question. If taking into account that investment surplus can only take place using the disposable funds or idle resources there were at the beginning of the period, and that they have disappeared as capitalist disposable funds, there is no doubt that both differences result in a similar concept (the italics are mine). A formal explanation can be given. S_a and I_a are the savings and capitalisation at the beginning of the period in question and S_b and I_b are the same items at the period end:

S_{a –} I_a = A

S_b – I_b = A’

representing non-invested savings at the respective times, so that

S_a – S_b = S and I_b – I_a =I

are the savings and capitalisations made in the period in question. Then,

A – A’ = (S_a – I_a ) – (S_b – I_b ) = S_a – I_a – S_b +I_b = (I_b – I_a ) – (S_b – S_a) = I – S

(The Doctrine…, page 222-3) ¹⁰⁶.

I believe that the right-hand side of the two equations has been proven both intuitively and formally, for Keynes E + (I – S) and for Bernácer R + (A – A ‘). Now, we have the second, which for the Englishman was production and for Bernácer was sales already made. This means that the similarity is more perceived than real, like what happens with almost all of Keynes’ and Bernácer’s ideas. One gets the impression that Keynes is a student who hastily and slyly copied another classmate’s exam answers (just an impression and nothing more). All together, the formal similarity is absolutely enormous.

In my judgment (and for the purpose of my suspicions), economists and scientists in general start with an idea that they feel is obvious and elementary, building prodigious analytical constructions and, however and paradoxically, forgetting to provide their original idea with content. Keynes and Bernácer started with the idea of equilibrium, and equilibrium is nothing more but equality between supply and demand, which for them did not have to be in a situation of full employment (their novelty consisted of this negation). Proof of absence of full employment for Keynes is (I – S) and for Bernácer (A – A ‘); that is, that there is a flow of income that is not spent, thus weakening actual demand.

Why do I believe that both started from income in equilibrium? For the simple reason that, if we subtract both members from Keynes’ first equation from Bernácer’s first equation or, in other words, (πO – d), it equals zero! Nothing but this could happen because Keynes speaks of supply and Bernácer of demand and, if both are right, demand equals supply in equilibrium. Thus:

It doesn’t matter if the economy has unemployment; the equality between supply and demand establishes equilibrium.

I repeat that both separately may have been thinking in equilibrium, but they did not formulate it a priori ¹⁰⁷.

Classes of money and circulation in Keynes and in Bernácer, the analogy: Three classes of money distinguish Bernácer and Keynes. In banking slang, they are called by Keynes: 1) income deposits, 2) business deposits, 3) saving deposits. The first two correspond to demand deposits ¹⁰⁸ (approximately), in so far as the last correspond to term deposits. Keynes makes this separation in chapter III of volume 1 of The Treatise… and he later expanded on it in chapter XV when trying to establish the separation between industrial circulation and financial circulation. In the first group are the income deposits and the business deposits used to maintain the current process of production, distribution and exchange (business deposits A). Savings accounts and remaining business accounts, used to feed business specifically derived from stock market and money market transactions, speculation and the process of making current savings and profits move into the hands of entrepreneurs, all of these belong to financial circulation.

Different classes of money ¹⁰⁹ and two areas of economic circulation; that sounds familiar. Of course, it sounds like the formal classification of money given by Bernácer in 1922, step by step, line by line, only that the imitation was bad. Keynes, if he read Bernácer’s theory through Robertson (this subject will appear again), and even if this were not the case, the truth is that he didn’t know how to profit from the issue, neither him nor the large Keynesian macroeconomic family.

Let’s look at the similarities and differences. Income deposits are equivalent to Bernácer’s disposable funds, while business deposits A form, in Bernácer’s terminology and herein, the disposable funds of industrialists and entrepreneurs ¹¹⁰.

Business deposits B and savings deposits belong indistinctly to the disposable funds of capitalists or savers. In his savings deposits, Keynes made a division whose conceptual boundary line was not precise. He distinguished between deposits A, which are held for individual reasons, and deposits B, which are held for speculative reasons; the latter set forth in The General Theory from 1936. The bearish strategy is for those that do not invest their disposable funds in securities because they think they are going to drop and prefer to keep their liquid position. Bernácer also said that Keynes’ distinction between industrial and financial circulation was identical to his.

It seems like Keynes, at those heights, lost his core of originality. I will try to be objective, although it is most difficult. Keynes is a distant child of classical economists and, therefore, from real economics, and he is the brother of empirical economists, little given to scientific disquisitions in the heavens of science and with their feet on the parquet ground of the stock exchange and the marble floors of banks. His daily travel colleagues were the speculators on the stock market, in London for example, which was the most important in the world. His manual tools, although he regrets it, are British classicists, and his heirs less classical, the neo-classicists like Marshall. It is not at all unusual that he differentiated these classes of money (income, business and saving). It was a necessary consequence of his mind. At that time in 1930, he was around 47 and was full of scientific experiences and financial toils, certainly very profitable. He knew that a production economy existed; he knew about it from the classicists and through common sense. As a speculator, he also knew that a speculative economy existed. And so he expressed it. Why would you think he would copy our provincial Spaniard? He didn’t need to, since he had greater firsthand experience than Bernácer.

What is hard to understand is why he did not take full advantage of this difference between ‘the moneys’ and of double monetary circulation, one in the production area and the other in the speculative area, like Bernácer did. Let me explain. For Keynes, the financial market is a body that is inside the ordinary market (productive) and financial circulation is found in the same flow as production circulation, just in the opposite direction. This means that, for Keynes, speculators trading financial assets receive money from their left pocket and spend it with their right in the production market. Then what they receive in the right pocket through sales from the production or ordinary market; they run to spend it on the financial market with their left pocket. Nothing else happens.

For Bernácer, the financial market is located outside of the production one, although they are connected. If money is in the production market, it is not in the financial market and vice-versa. It is precisely for this reason that I have been very precise with the term net disposable funds. If more disposable funds (saved and non-invested income) enter the financial market than leave it, then this event depresses actual demand in the production or ordinary market. Analogies with respect to this issue can be summarised as follows:

The connection between money and monetary circulation would be approximately as follows for the two economists:

Note: The lines – indicate analogies and the double ⇒ indicate connections or financing for each economist.

Bernácer’s explanations are from 1922 and Keynes’ explanations were made eight years later. There were communications between Keynes and Robertson in the period between the two works. Robertson was Keynes’ scientific brother or they were at least economic siblings at Cambridge.

19.3. Brief comment on the demand for money¹¹¹

The previous classifications by Keynes, completed in 1936, gave rise to the construction of one of the most sophisticated and important pieces of macroeconomics. This is the demand for money. Money is demanded for reasons of trade, precaution and speculation. These demands, which will not be explained here, have an inverse relation to the interest rate and a direct relation to income.

Economics students, and even more so a man on the street, would not understand anything of this complex mechanism. Bernácer did not understand it either. When income increases, which is simply money in the end, the demand for money increases. This is hard to understand. It may be easier to understand that the demand for money is related to the interest rate. And the fact that speculative demand is the most sensitive of all is reasonable. However, the complementary, inevitable, fatal and essential operation that is supply is not so reasonable. I am not referring to monetary supply, but to the complementary operation to demand, which is somebody buying something that he wants. Demanding means desiring something and having the possibility to acquire it. If what you want is money, then you have to buy it. With what? Nobody explains it; then the demand for money is something lacking sense. If a nation’s income increases, one can buy more things with it. But one cannot buy what one already has or keeps and that is money. Bernácer knew about the Keynesian demand for money formulated by Keynesians. I do not believe he was aware of the brilliant exposition by Baumol and Tobin. I make this comment so readers do not think that I am performing plays on words or a scientific sophism on a theme that is understood by economics scholars, but rather to emphasise Bernácer’s lifelong obsession. Demanding something is supplying something in exchange and vice-versa. On the market, whoever demands goods is really supplying money and whoever is supplying goods is really demanding money. This is the only meaning possible for Bernácer of the demand for money. All the rest are nothing but useless labyrinths, distracting your brain and making you get lost in trying to understand economic reality. Readers may think that everything could be explained if I started with the liquidity preference in regard to other profitable assets. Liquidity preference will be the object of study in another section. It is also an unnecessary concept.

19.3.1. Liquidity preference

I must be honest that the criticism made of Keynes or ‘what they say Keynes said’ was made by Bernácer and not me. He is accurate in his criticisms of Keynes and also somewhat unjust. I say unjust because, for any speculator and for understanding the reason to keep money, this psychological action or status, which means preferring something to a greater or lesser degree, money, compared to other assets. It is accurate because he believed it was an arficial idea created with a specific aim and did not generally adapt to economics mechanics, unless we discover what it really means deep down. Bernácer supplied this meaning clearly, so clearly that it seems like a joke. For the rest, the liquidity preference rests on a psychological belief (or reality?), which I admit, but isn’t useful, since it can’t be measured, on the one hand, and, on the other, it is an ‘a priori’ attitude in this economics mechanism. And what interested the empirical Bernácer, the physics, business and accounting professor were facts. Why would Bernácer’s explanation seem like a joke? Due to its simplicity. Let’s look at why:

‘The liquidity preference is the preference for this, compared to other things that do not have this condition. Since everything is bought with money, having money is the power to buy whatever you feel like at any time. Buying is losing liquidity and you can only lose what you have; from here the interest in having liquidity is to take advantage of good opportunities (article ‘Metric Economics’, Arquímedes magazine, 1955-6). And what does this all mean? Well, nothing more and nothing less than the traditional and old, although not obsolete, concepts of general supply and demand. He who wants liquidity sells to obtain money. He who wants or prefers having less liquidity, buys. What is sold and what is bought? All the things that are bought and sold. Let me explain. You can sell goods and services and, of course, financial assets. You can buy goods and services and also financial assets. What happens is that Keynes emphasised the more or less liquefiable assets, which are financial assets’.

Let’s follow old Bernácer in sticking to his guns. Whoever sells something is actually demanding money and whoever is buying something is supplying money. From here, the liquidity preference indicates that, if this decreases, it means that liquidity or money has decreased, which is explained by a desired purchase and, if it increases, this means that a purchase is going to be made ¹¹².

These explanations, made by Bernácer almost simultaneously in his book from 1955 (A Free Market Economy…) obviously referred to Keynes, displaying not necessarily confusion in his work, but a somewhat useless and dangerous tangle. It would be cheeky to say that Keynes was inspired by the concept of disposable funds in developing his theories about liquidity preference, because that would mean confirming his copying of Bernácer, which was never proven. Moreover, because the concept of preference is typically an idea, or perhaps an instinct, of speculators and Keynes was a speculator. I want to insist on this idea of preference to differentiate it and clarify what Bernácer meant deep down by this concept.

Increasing liquidity preference is only a psychological attitude. The same as decreasing it. Something has to happen so that the result of an operation has psychological meaning. If this something happens, it means firstly that this increase for preference has satisfied it, which can only happen if something was sold. Selling means receiving money for delivering something, which can be anything that has value and, in Keynes, would preferentially be financial assets. Secondly, if the desire to decrease liquidity has been sated, this means that this liquid money has been parted with, which can only happen when buying something that has value and, I repeat, for Keynes would normally be financial assets.

Desires to risk preference for liquidity or to decrease it have no economic result, since it is a mental operation of selling and buying on the goods and services market or on the speculative market. The satisfaction and annulment of these needs are economic operations, since they result from operations happening on the market. These operations are buying and selling.

The simplicity of this explanation is so elementary that, as mentioned, it seems like a joke and shows, precisely due to its sobriety, the deep knowledge that Bernácer had of macroeconomics and especially of Keynesian thought.

Thus, Bernácer said that we are expressing the same thing in different words, but his is so muddled that it is dangerous, since it seems like interest is born there. Liquidity preference implies the existence of interest and interest is born from the preference for liquidity. Bernácer asked what the initial origin of both was.

All economic operations require the participation of economic agents and not just one alone. You cannot say that someone increases or decreases their liquidity preference, in the same way that you cannot say that someone buys something without someone else selling something. In order for someone to increase liquidity, someone must agree to decrease theirs, deducing here that for someone to sell (and increase their own liquidity), someone else must have agreed to decrease their own through purchase.

For Bernácer, this economic operation does not determine interest (although it did for Keynes) but… price levels! You have already seen that they are operations involving buying and selling goods and services. But since financial assets are also bought and sold, these operations determine the market prices of securities, and comparing this market price with income R (not productive), interest arises. These are ideas from 1922 that easily let results be obtained like price levels and interest.

It is clear that Keynes, inspired by daily banking practices, related liquidity preference for liquid money to other profitable assets, specifically financial ones. Bernácer did not avoid this viewpoint and had the following reasoning: When liquidity preference increases, many want to sell and few want to buy and, thus, the price of money increases. There are many more who want money than those who want to part with it. If, conversely, many want to buy and few want to sell, this means that liquidity preference decreases and therefore the price of money increases. Bernácer insists that whoever wants to buy something, in this case securities (like Keynes said), is demanding money and vice-versa. These facts are elementary logic in economics that can be represented differently: If liquidity preference increases, there will be a greater supply than demand of securities, with which market prices become depressed and interest raises (Δi = R / ΔV). If liquidity preference decreases, there will be a greater demand for securities than supply, which contributes to increasing market prices and decreasing interest (-Δi = R / ΔV). These are basic operations hidden under a web of words.

In summary, Bernácer thought, like Keynes thought, about the permanent equality between savings and investment, where savings is supply and investment is the demand for funds and that it wasn’t possible to approach the problem of the price of money in this setting. Neither can the problem be approached in the terms of the classicists by saying that the problem of the value of money must be approached in terms of actual supply and demand, for the obvious reason that purchases are equal to sales. And since savings is equal to investment on the one hand and purchases are equal to sales on the other, a device must be sought to explain it. Keynes found it in liquidity preference, which is nothing more than a presumed psychological reality and that, to confirm this satiety, a sales and purchase operation must be executed that, who knows if it is psychological or not, only that it happens, returning futilely to the starting point.

Classicists were very close to finding the solution to the problem, only that they believed that merchandise was exchanged for merchandise, forgetting that this merchandise was bought and sold through the link of money. This proposition is true, even in the case of the existence of a neutral currency or purely transactional money.

The following words let Bernácer’s thought in this regard be ploughed through clearly and easily.

There are two prices of money: 1) the price of money in merchandise called buying power or purchasing power; and 2) the price of money as the interest on capital, but not capital as a factor of production, but rather the money needed to buy these machines, or money. The supply and demand for money play an important role both in the price of goods and in the interest paid for money. The demand for money makes the prices of things drop and interest rates go up. Surplus monetary supply makes the prices of things go up and makes interest drop. He said in this regard: ‘The reasons why one or the other vary must be different, but the distinction there must be between both concepts has never been clarified’ (article in Economía Métrica, 1955-6).

Trying to put the ideas into their places and with their corresponding authors, I could say that interest originates on the financial market for Bernácer and on the money market for Keynes. However, many activities are executed on the money market, an equal number of sales and purchases, but they can basically be boiled down to two: first is buying and selling goods and services, that the Englishman connected to the demand for money for transaction motives, and second is the buying and selling of financial assets. Here is the core of liquidity preference. So if I am interpreting Bernácer’s thoughts correctly, I could say that interest for Keynes develops in liquidity preference, which is understood as the greater or lesser demand for money for speculation. However, since interest is born from the combined demand for money against the combined supply of money being supplied, or monetary supply, liquidity preference must be understood by the special quality of money that is demanded to, in turn, demand general goods from the system (goods and services and financial assets). In summary ¹¹³:

19.3.2. Disposable funds and liquidity

Few ideas are quite as similar as Bernácer’s disposable funds and Keynes’ liquidity. Bernácer said that Keynes confirmed that: ‘…in the opinion of the public, the liquid security par excellence is money…’ Liquidity preference means a preference for money over other assets that, although profitable, are not money. Satisfying a greater desire for money, or the same thing, a greater liquidity preference, means obtaining money. If what you have is money, it is because this money was not spent, which is why it is liquid! If you spent part of the income earlier on goods and services or financial assets, it doesn’t matter if this purchasing power is recovered later by a subsequent sale. Liquidity is money that remains totally liquid.

If disposable funds are the part of income not spent on consumer or capital goods, that means they are simply money. This statement was highly refined and defined in the wise words of The Functional Doctrine of Money in 1922. Bernácer stated that Robertson knew of this work and Robertson admitted this was true.

It is clear that disposable fund and liquidity are similar terms in Keynes and Bernácer, like interest, monetary circulation, financial circulation, the identity between savings and investment. But this analogy and the others are not really identical, but illusions. They are labyrinths of fun-house mirrors that reproduce false images. The most deceitful of all are disposable funds and liquidity ¹¹⁴.

Bernácer said: ‘The difference between Keynes’ liquidity and my disposable funds consists of the fact that for the Englishman, liquidity includes more than money, while my concept of disposable funds includes less than money (A Free Market Economy…, page 45).

What does this all mean, if in the end liquidity and disposable funds are simply money? For Keynes, liquidity was also comprised of short-term debts and, he continued ‘… maybe (for Keynes) he didn’t exclude from his thought everything that could be easily liquefiable like precious metals or current merchandise…’ (A Free Market Economy…, page 45). In the concept of disposable funds, he stated that he excluded money in the hands of entrepreneurs required to increase production, as well as the money of consumers needed to consume. Remember that in the theory of disposable funds, authentic ones are the last or third-degree, those of savers, not those of entrepreneurs and consumers, since they need these funds for production and for living. It is clear that not all money in the system (cash in hand) is disposable. Disposability is something less as you can see. For Keynes, liquidity is money and something more.

Their processes of creation and destruction are also different. Keynes’ liquidity can be increased or decreased only by banking activity, creating or destroying money and bank balances and short-term documents that are easily liquefiable.

Disposable funds comprised of any class of money can also expand or contract by the destruction or creation of actual, fiduciary or banking money, but they can also be created or destroyed through the conversion of producers’ and consumers’ money into inactive money from disposable funds or vice-versa. When capitalists’ disposable funds are spent, either on consumer or capital goods, they move to feed the disposable funds of other producers and their production agents that are, in turn, consumers. Both have disposable funds again.

Private disposable funds, which are most similar to Keynes’ liquidity, are different from group or social disposable funds and this clarification is interesting. The holder of a current account has an individual disposable fund. If, as expected, the bank has lent this money to other people who have invested it financially, there is no social or collective decrease in disposable funds.

The inverse reasoning process can be done. If the owner of liquid money lends it to another person or buys a financial asset or security, his capital stops being disposable (he as an individual). But, if the person receiving the loan, borrower or seller of the security keeps it disposable, then there has been no decrease in disposable funds collectively or socially.

Keynes had started to shape the heterogeneous clay of his theory in The General Theory… with the skilled hands of an experienced economist, claiming order in his task. His many students imposed this order. Bernácer, who had done nothing but analyse ad nauseum the trajectory of money in the real and monetary economy for many years, found blunders in Keynes’ work everywhere. It was easy and his attacks are accurate. They are simple but demolishing attacks. Keynes didn’t respond and although Robertson did, he didn’t defend his fellow countryman Keynes. One of his criticisms was about liquidity.

According to Keynes (in the words of Bernácer), the demand for capital is born from its marginal utility at each moment and its supply is limited by the liquidity preference at that time. Stated differently: there is a demand for money to finance capital, but there is not enough due to the level of liquidity preference. If marginal utility increases, capital demand increases; but this demand is not satisfied, since liquidity preference does not permit it (classicists would say scarcity of savings). The level of this liquidity preference limits the amount of money that speculators want to obtain due to speculative reasons ¹¹⁵.

It can even be said that if the marginal utility of the capital doesn’t increase and remains constant and liquidity preference increases, capitalists would demand a greater amount of money to keep it unoccupied. The greater intensity of this demand raises the capitalisation rate, limiting the magnitude of capitals that can be applied with the required marginal utility. To understand what liquidity is, it must first be defined, no matter how slippery the concept is, and secondly, given that money is what is in question here, its typology must be established. Specifying these terms will make it possible to know what we are looking for.

Bernácer said that Keynes gave no precise definition of liquidity. It seems like sometimes it is money or even liquid capital, terms that are both ambiguous in Keynes’ work. Bernácer said that Marshall and Keynes himself, whom he called the ‘restless economist’, seem to define it as the desire to have capital in the form of money (monetary capital is clearly a contradiction) and that liquid capital is the money one has. As strange as it seems, this is not it. It is something else.

He insistently defined it as an ‘increase or decrease in the stocks of merchandise to be sold’ (The General Theory… page 75-76, from Bernácer’s quotes and comments in The Functional Doctrine…, page 280). In other words: part of the working capital in opposition to the other part, which comprises products in transformation. Thus, a shopkeeper would have liquid capital even though he would have problems selling it to obtain hard cash. If it is not clear at all what liquid capital is and liquidity preference for something unknown, neither is the typology of money.

Keynes admitted, along with money, the effects of short-term trade, treasury bonds and other meaningful debt instruments, where the last are future money exchangeable for present money. Of course these parts of working capital, which are finished products, are also future money. One gets the impression that it is a continuation of the concept of liquidity. Something like a field divided into two by an invisible line: on one side would be liquid capital, with working capital there; and on the other, the class of quasi money or quasi financial assets that were cited. The field in question would be what is desired or preferred, that is, liquidity.

Keynes, highly influenced by banking, thought that liquidity came from banking practice, since banks don’t rely on the money in their tills for money, but rather the money they can get quite quickly and safely through liquefiable credits and investments.

Bernácer’s concept is much better, which is that of disposable funds. He also stressed its superiority. Money indicates a purchasing ability, money that is in the pocket of the person demanding, which is there because she hasn’t spent it on either consumer or capital goods. Geographically, it is outside the shop display case and the stock market. On the other side are the suppliers and they supply the finished products, as well as these quasi financial assets. It is clear that both counterparties, trying to reach an agreement, are not on the same side of this display case, neither outside or inside, and this is the meandering claim made by Keynes. If they have finished products, this means they are supplying goods and demanding money. If these goods, no matter how readily convertible they are, are confused with liquid capital, Keynes was essentially saying that he will exchange liquid capital for liquid capital, demanding what he already has. The same would be true of this quasi money and quasi financial assets, such as documentary credits, treasury bonds, etc.

The ease of transforming an asset quickly and securely into money should not lead you to confuse this asset with the means that make this transformation possible, which is money. In short, the person who is going to buy, whether they are finished products or liquefiable financial assets, is a demander offering a disposable fund in exchange (disposable because it hasn’t been spent). This was Bernácer’s proposal. With Keynes’ liquidity, a person has monetary disposable funds in his pocket, along with finished products and other financial assets. Of course he has disposable funds because he hasn’t spent them and the latter because they have not been used up. This seems like a miracle, putting what is spent and what isn’t spent into the same bag. I will return to this point as it deserves our attention.

Let’s return to the analogies between disposable funds and liquidity. This time I will emphasise its historic origin as commented on by Bernácer the accountant. He said that for Keynes, liquidity preference starts for different reasons. Income motive represents the need to maintain a part of earnings (income) in liquid form to finance consumption. It is obviously identified with consumers’ disposable funds. The business motive responds to needs in place for maintaining production activity. They are industrial disposable funds. Consumer disposable funds are first-degree disposable funds and producers’ are second degree. Both the first and second are grouped into Keynes’ transaction motive.

Transaction motive is identified with the Bernacerian inflow that he called the production fund due to being the reciprocal and continual exchange between production and consumption.

Since the disposable funds cited are minimal, because they are demanded by consumer or production needs and will therefore remain disposable for only a short time. Now maximum disposable funds will be analysed. These third-degree disposable funds are the money that Keynes said obeyed the speculative motive. This money, with repressed patience, remains liquid to be placed speculatively when the opportunity arises, but has still not been placed. There is still money kept to ‘plan for contingencies that will require sudden payments or unplanned opportunities to make advantageous purchases’ (Bernácer quoting Keynes). This is precautionary money. This money floats between transactions and speculation, since the fact of keeping it liquid, planning for future contingencies, is not an obstacle to taking advantage of speculative or consumer opportunities in this interval. Bernácer said that the distinction was very subtle, as:

‘Either these sums are held for very immediate contingencies and confused with consumer disposable funds and calculated with a bit of give and take or they are for a far-off forecast and capable in the meantime of a speculative application, more or less easily liquefiable, analogous to capitalists’ disposable funds when there is an opportunity for an advantageous purchase…’

These are words quoted in The Functional Doctrine (page 285). In the book A Free Market Economy… (page 44), he said, ‘How difficult it would be for capitalists to know whether they have it for one reason or another!’. This useless confusion is eliminated if they are put into the speculative basket.

In Keynes’ 1930 work, he established a typology of money or monetary balances: 1) income balances, 2) business balances and 3) saving balances. He separated the total mass of money N, into two portions M₁ and M₂, the second of which only includes speculative disposable funds and the first the other three.

These analogies are similar to those established in the previous chart, only here the fact of demanding money is looked at and not the deposits A and B.

I have established the differences and similarities between money categories or typologies in Keynes and Bernácer, as well as the motives that generate them. Let’s look at the differences again. My insistence is not obsession fuelled by passion, but simply a matter of principles. We all know money is important and economic scientists also know it. The study of liquidity preference and the demand for money or, if you like, simply liquidity, takes us to analysing real and financial securities that are not money but have a monetary value. Being rife with liquidity means understanding many economic situations.

The essential is the following. Bernácer said: ‘For me, the existence of disposable funds entails not having used the purchasing power it entails, as far as the English author admits that the status of liquidity is not an impediment to savings having been capitalised, which is an obvious manner of having made use of it…’ (The Doctrine…, page 285). He continued with words whose simplicity was crushing:

‘For me, the liquidity position is that of savers who keep their savings in money while also keeping it liquid. Keynes believes that all savings is capitalised and that this is compatible with keeping a certain liquidity state, but the truth is that, like water downstream doesn’t move the mill, it is impossible that capitalised savings are kept disposable, which would entail the possibility of capitalising it or consuming it again…’

And he added:

‘I do not conceive of the liquidity state as more than a situation in which the holder of purchasing power neither employs it in consumption or in acquiring capital. From the individual viewpoint, it seems clear to me that whoever has liquid capital abandons his liquidity and, in resisting it, the advantage that this liquidity state has –which consists of money being the form of capital allowing anything for sale to be bought at any times– Keynes based his theory on interest…’

No comment seems necessary here. Only meriting mention is the eternal statement of Bernácer that between the supply and demand of goods, the supply and demand of money is produced internally. Liquidity means being able to demand goods and, if liquidity means keeping ‘other things’, it obviously implies already having made use of this purchasing power. Therefore, the money is not disposable according to Bernácer and, by common sense, is not liquidity.

I believe my emphasis is justified in considering the analogies and differences between Keynes and Bernácer, from which significant consequences can be drawn, related to the basic equation of macroeconomics or what is deduced from it: product equals national income. The present book would be substantially emptied of content if consequences were not obtained herein that affect modern macroeconomics (and naturally in the past as well). Bernácer’s greater originality compared to Keynes would be of only secondary interest.

Liquidity in the equation S = I¹¹⁶

The ink of Bernácer’s articles was long dry and Keynes’ still wet when Bernácer read his work. How did the Englishman interpret liquidity preference? It seems like this preference is for speculative motives. Let’s explore his line of reasoning.

One can allege that whoever loses liquidity by buying an asset, someone else acquires this liquidity and thus, as a whole, liquidity is not lost. This is the same reasoning that Bernácer set forth for his maximum or third-degree disposable funds that are kept on the financial market in this state when someone sells or buys assets on this market. With respect to liquidity and the previous argument, he said that these lines of reasoning closely follow the strict discipline of quantitative theory that, deep down, inspired the English authors. This is because they did not understand the functional mechanism of money. Our modest professor thus judged the English school. For them, there cannot be a change in market equilibrium but rather a variation in circulating money. For Bernácer, the function or position of money, or the changes in money’s position, was much more important. Purchasing consumer goods is transferring minimum, first-degree disposable funds to producers, which are then second degree. The same will happen in investment, which entails moving third-degree or maximum disposable funds to producers, for whom they are second degree. Of course there can be operations that do not involve a qualitative change in disposable funds, which are those operations happening on the financial market and also those derived from the buying and selling of already-created fixed capitals that, as we saw, he called realisations.

Financial and realisation operations, grouped under the name of passive operations, are not in themselves functional operations in the Bernacerian sense. On the contrary, active operations, like buying goods and the purchase of capital equipment, are functional. Capitalisation, for example, means the conversion of disposable funds into consumer income (wages of workers at these companies) and industrial disposable funds (profits of entrepreneurs at these companies). And here is a unique explanation by Bernácer:

‘Neither of them is liquid capital in the Keynesian sense…’ (Is he referring to the speculative sense? Probably.) ‘…of sums kept in money for speculative or precautionary reasons. They are, on the contrary, sums of money required for the running of businesses or for income reasons or, in other words, they obey transaction motives…’ He clearly related the liquidity preference with speculative demand. It seems like a contradiction in Bernácer given that, according to both authors, he himself found clear analogies.

Proof of Bernácer’s idea, that Keynes’ liquidity preference is basically speculative, is established in the following paragraphs. When a transaction that he called passive occurs, it does not affect general liquidity (or disposable funds). But, if the disposable fund falls into the hands of a producer or consumer, the matter changes, as the first invests and the second spends it on consumer goods. Stated again in symmetry to the previous argument: Industrialists’ liquidity has a different meaning than that of capitalist-savers! ¹¹⁷ Money continues to be the same but its interpretation, its function, is different. It is no longer money kept for liquidity preference, for income, business or planning motives. And he then added: ‘…I don’t know how it could go back to being the first while it is not converted into non-capitalised savings by someone who receives it as income…’

It is thus clear that the liquidity preference that Bernácer interpreted in Keynes is the demand for speculative money. This interpretation is odd given that he himself admitted analogies between his disposable funds and the three types of demand or liquidity preference. To what is this error owing in the normally, meticulous Bernácer?

Since he was concerned about interest, he saw the motive for demanding money as directly related to liquidity preference. I shouldn’t stray from the heading of this section, which is relating the savings identity to investment.

If for Bernácer, liquidity preference only could be the preference for liquid money, it is because liquidity –Bernácer’s definition– and disposable funds are equal (but not Keynes’ liquidity). Given that I am speaking of maximum disposable funds, feverishly occupied in work derived from financial transactions and that these proceed from the ordinary market via savings, it is clear that this part of savings is not capitalised. One part of total savings S, coming from the ordinary market, returns to this market via investment; Sk returns that, when I intervenes, returns these disposable funds (industrial ones). However, another part of savings are third-degree disposable funds D properly speaking ¹¹⁸, which are occupied with passive, sterile or financial market operations. Specifically, from our financial market. As seen, total savings is broken down as:

S = S_k + D

S_k = I

This is the essential point of difference between Bernácer and Keynes. That not all savings is capitalised! But if we are dishonest and play a trick and add frustrated demand via unsold products, then the equation balances. I must establish firmly that neither Bernácer nor I believe that stock or inventory investment is totally due to frustrated demand, since a part of it is working capital that has been possible to develop precisely owing to purchases with savings or with new money from production assets.

The equality (not identity) will always be true that states:

Income = Production (production income)

For Keynes, who had moved forward in his task, there was no other remedy than identifying the terms of the equality by accounting methods. This is Keynes, not the scientist and skilful speculator, but the Keynes who knew about accounting through practice and had excellent mathematical education and intuition. The identity is the following ¹¹⁹:

Since:

Production = Production of consumer articles + production of capital articles

And when income equals production:

Income = consumption + investment

Consequently:

consumer article production = consumption expenses

production of capital articles = investment

But if part of income is occupied in disposable funds, making passive operations possible, the market inevitably falters. Stated differently, the production of consumer goods is not totally absorbed by consumer spending and the production of capital is not totally removed by investment. The correct expression would therefore be:

Income = consumption + capitalisation + disposable funds

Where:

Savings = Income – consumption = capitalisation + disposable funds

This is Bernácer’s formulation that I will expand upon as follows. Since R always = Production.

Income – consumption = production – minus production of consumer goods

Production – production of consumer goods = investment + inventory investment

Then:

capitalisation + disposable funds = inventory investment

And since:

capitalisation = investment, then

disposable funds = inventory investment

which is interpreted, as mentioned several times, by stating that speculative activity depresses demand, causing articles to not be sold. It can also be confirmed that passive operations stand opposite active operations ¹²⁰.

I dare to insinuate that, in my opinion, in order for this last statement to make sense (D = I_u), working capital should not be placed in I_u but rather I_. Since part of unsold production is not due to a depression in demand, but rather to genuine production market activity for sales, part of this working capital would enter into I and the other in I_u. Here is how the relation can be seen between a concept that Bernácer tried to clarify, that of liquidity and its consequences. The sharp English stockbroker, if he basically knew what he had in his hands, had to conclude that this liquidity preference had its inevitable after-effect in the real economy, but he didn’t see it. Why? Perhaps because of degeneration, not theoretical but derived from the banking and financial practices he was used to; perhaps also because of a scientific distortion that made him seek entelechies like liquidity preference, which hide nothing but the ancient and human functions of the demand for goods and for financial assets ¹²¹.

19.3.3. The vicious circle of interest

Liquidity preference is produced because interest exists, which is the device that measures the cost of opportunity of keeping money. If one waits for specific assets, which yield rent or credit, to drop in price, one prefers liquidity to buy them at the opportune moment and thus obtain greater returns. The percentage level of this income that is interest is what permits the existence of a greater or lesser liquidity preference.

But liquidity preference, the desire and demand for more money, makes the existence of interest possible. The cause becomes the consequence and vice-versa. Robertson also criticised this obscure concept using almost the same arguments as Bernácer.

In my opinion, there are no greater foundations to this critique. Supply and demand, in this case for money, determine the price or interest and there is no doubt that this price then affects demand. This dynamic is due to two overlapping reasons, in my judgement. One is that not all speculators are equal in their liquidity preferences and the other is that not all speculators keep their liquidity preferences at the same level. Some speculators may lower their preferences, which entails having bought assets in exchange for money, which is monetary supply; while others raise their preferences, an operation that means demanding money and supplying assets. Sometimes the same speculators increase and decrease their preferences. All of this line of reasoning is to lighten the criticisms dumped on Keynes about this issue. What is first? Interest or preference? The chicken or the egg?

It is a dynamic process. Supply and demand determine price and this price, in turn, affects the supply and demand, an operation that is ever truer if recalling that in the middle, and complementarily to this game between monetary supply and demand, there is another game taking place, which is the demand for and supply of assets. With respect to liquidity preference, I understand these as more financial than actual.

19.4. Interest

With Bohm-Bawerk outdated by Keynes and Bernácer, the explanation of the origin of interest was approached. This issue has been handled from several areas, mainly economics and ethics, and has proven to be indomitable.

Swedish Wicksell would be influenced greatly by Keynes and not at all by Bernácer, although the latter did merit a passing mention at the end of Wicksell’s scientific life. Bernácer owed his theory on interest to Turgot, a physiocratic economist who, despite the serious burden of the school to which he was tied, intelligently formulated an almost-modern theory on interest. Both Keynes and Bernácer coincided in three ways in their understanding of the economy. First, the economy was not in full employment and, therefore, interest as an award for savings is annulled as a theory. Secondly, money is not only demanded for transaction motives or, in other words, money is not only a lubricant of the engine of the real economy. Thirdly, differentiation between the productivity of what accrued savings demands –capital– and the price of savings, becomes a compass for investors. I want to emphasise this last point. The moorings of the classicists are broken, who linked the supply of savings with its demand, with interest being the result. After Keynes the total supply of and demand for money remained, which determined interest. This interest could be compared to the profitability of production activity. Looking closely at this idea, it was actually not so new in economic science.

Bernácer, with great common sense, was close to the classicists. For him, interest was born from the supply of and demand for savings… that was not capitalised. This statement is a good reminder if I was not successful in my explanation about interest in the theory of disposable funds.

Disposable funds (D = S – S_k) ¹²² finance a series of speculative operations like properties, building sites (real), bonds, etc. (financial). Assuming that they yield a speculative income R (different from production income) of 100 and that the market price of these assets is 1000, the percent profitability would be 10%. This is the same as what Keynes said. These operations can be financed because they are disposable and totally liquid (for Bernácer, there were no different levels of liquidity). Disposable means not spent on consumer goods and not invested; basically that they were not demanded.

People supplying these speculative, real and financial assets demand these disposable funds. Supply and demand of speculative assets is an operation done through demanding and buying money. Stated more precisely, this operation is possible due to the supply and purchase of disposable funds. Saying that interest is the price of money is too excessively generic and distorts its meaning. In Bernácer, interest is the price of disposable funds or the price of non-capitalised savings. Of course, money created and destroyed and exiting and entering the financial market is added to this operation.

For Keynes, current interest is the percent profit yielded by the disposable funds placed. Where are they placed? For the Keynes quoted by Bernácer (The General Theory), the issue is not clear, since the familiar discount operation cannot be applied here, which is needed to find the real value of an old debt instrument at the cost of capital.

If you know the income that will be received periodically, the discount operation lets you find the actual value, which is well known. In my opinion though, it changes everything and Keynes did not explain it in the context of this explanation, whether the acquisition of a financial security or the acquisition of new capital is the same to him. This explanation would resolve a series of questions.

To Bernácer, interest is found in the supply and demand of these assets and the meaning of this operation is double: one is that the event (already occurred) on the financial market has prevented part of savings from being capitalised or invested. The other is that, upon generating interest, future investments in real capital, or part of them, do not happen. To Keynes, the existence of assets that generated returns conditioned the existence of a preference for liquidity and, in turn, liquidity preference conditioned the market price of assets and, therefore, interest. His argument did not extend to sales and purchase operations involved in liquidity preference. He coincided with Bernácer and moved away from Böhm-Bawerk in that security market prices do not involve the existence of actuarial calculations, since these market prices are determined freely by the market that notifies its findings after determining them.

He is different from Bernácer in that the existence of liquid money and financial assets does not involve depression in demand. The monetarist explanation of interest in Keynes is a quantitative reliquary. Remember that he entered through the door of monetarism, through the sliding door of liquidity preference and Bernácer through the firm footing of functional money. Readers should remember that liquidity preference does not have a direct connection to income, but rather an indirect one, and that it is furthermore a psychological manifestation. Nonetheless, disposable funds are a river flowing from production income and actually connected to the financial market via interest. This interest is born from operations in which aprioristic desires are not questioned but are already-convicted operations made possible with monetary forces proceeding from production income.

What Bernácer missed

Bernácer called his theory functional or income-based, since everything is explained by what money does and what it does involves a situation in the metabolism of disposable funds.

If income flows out of production, economic activities should be able to be explained by operations derived from the comings and goings of part of this income to and from production. These operations are buying and selling and that is basically it. Consequently, interest was studied by classicists by the supply and demand of this savings. In a certain sense, this systematic is suitable; given that savings is a specific entity that is traded. Savings is born from income. On the contrary, all of this about the supply of and demand for money creates images that seem exceedingly abstract and, even more so if linked to the psychological cord that is liquidity preference. Bernácer makes interest be born genealogically from income, but not all of it, just the part that is not spent or capitalised, which are disposable funds. Bernácer’s analysis has a certain classical sobriety, since if the classicists made interest come from the supply and demand for savings, Bernácer focused it on disposable funds. Whether or not the classicists were mistaken, it is true that savings comes from income, the same as disposable funds.

If financial interest is effectively born on the financial market, as a consequence of the exchange of disposable funds that occurs there, there is absolutely no doubt that there will be supply and demand with the other part of savings, capitalised savings (S_k), thus following a line of reasoning equal to that of the classicists.

I will repeat the argument. Total savings S is broken down into two currents. One that is capitalised S_k, and the other that is not capitalised. There will be supply and demand for each of them. Disposable funds are supplied and demanded on the financial market, giving rise to the market price of securities and, therefore, to financial interest. And the other part of savings is supplied and demanded on the ordinary market, giving rise to ordinary interest, with a different origin and different consequences than financial interest. This ordinary interest was what Bernácer missed ¹²³.

The classicists and Mr Keynes according to Bernácer

Despite Keynes and Bernácer breaking some ties with classical economics, the Spaniard drew close to them in finding contradictions in Keynes’ work.

When liquidity preference increases for some, it is satiated by the lesser preference of others. The first sells assets that the second buys. But if the community as a whole increases its liquidity preference, the matter changes. Then there would be more people demanding money than supplying it, which will contribute to interest increasing. The market comes into balance in this way; equilibrium that means that thirst has not been sated. Basically, the water has become more expensive. Bernácer said the following with respect to this preference: ‘if liquidity preference is unsatisfied, unsatisfied it will remain…’ (A Free Market Economy…, page 293).

The remedy remains of creating more money to satisfy the thirst for liquidity. If there is more thirst and more water, the price of the latter has no reason to rise. And we come to the heart of the problem. For Keynes, this greater amount of money, when there are unoccupied resources, will increase employment without the prices of things needing to go up. Keynes’ affirmation is also a statement made by many post-Keynesians and even monetarists (if considering employment). So this is false reasoning, since what normally happens is that the prices of goods increase. Strange, then. Bernácer didn’t explain the reason for this increase, which is precisely what is important. He only detailed what had to happen so that this increase did not happen.

If the tap is turned on and you don’t want prices to go up, those eager for greater liquidity just have to sate their thirsts or demand so-called income assets (our financial assets from our financial market).

Keynes knew that interest was born in liquidity preference and in its inevitable connection to the market price of financial assets. Since this preference is sated by the measures that make it possible for monetary authorities to increase or decrease the amount of money, Bernácer found it strange that to Keynes, the total money influences interest. This is not possible, just like a need for salt cannot be satisfied with sugar. Let me explain.

I stated that for the Keynes of 1930 and 36, interest is born from and for the speculative market. It is clear that not all money enters into play, just the money apt for speculation. And the money suitable for speculation is suitable or ready… because it has not been allocated to buying consumer goods or capitalisation. If it had been allocated to these tasks, of course it would not be in the speculators’ portfolio, not being suitable for anything, given that it wouldn’t exist. Thus, Bernácer said: ‘…only the money that has been put into speculation influences it…’ (A Free Market Economy…, page 294) and then, ‘So why talk about money that does not participate in the matter? Wouldn’t it be better to speak of specific things that determine interest?’

Thus, the classicists’ instinct and common sense was not erroneous, as they preferred to speak, not of the supply and demand of money, but of fractions of income or savings. The mistake of the classicists was that they didn’t discover financial circulation on the financial market like Keynes and Bernácer did.

Bernácer, as mentioned, incorporated the two advantages –of the classicists and of Keynes– as follows: from the first, he considered the supply and demand of disposable funds and the supply and demand of savings that is capitalised. And from the second, he used market dichotomy, one the ordinary market and the other the financial market. Since interest is born on the financial market and this is nourished only from disposable funds, it seems like not all money concurs in the determination of interest.

After this entire argumentation, it may seem like the matter is reduced to a simple question of rhetoric or a different way of looking at the problem. Economics is replete with unnecessary Byzantine fights provoked by mere sophisms in their approaches. But this case is not one of them. For Keynes and the Keynesians there cannot be an increase or decrease in interest if there is not a reduction or increase in money, but the reality is different. Recall the monetary circulation of disposable funds, it is enough that only part of money is destined to consumption or investment for liquidity to decrease. If those selling consumer and capital goods do not increase their liquidity since it is in a production fund, then it is transaction money and not full or disposable liquidity, which is what influences interest. Here is another way of looking at the problem with different results! There is no scientific rift in this line of reasoning.

With respect to liquidity preference, it leads us to acknowledge consequences opposed to those of classical economists. For the latter, the abundance of lendable funds would make market prices go up and interest go down. In Keynesian logic, the abundance of money involves a high level of liquidity preference that tends to increase interest.

In order to reveal the simplicity behind the Keynesian Baroque stone wall, Bernácer brought Erich Schneider to his aid. Baroque style, he said, is this vague and psychological term for liquidity preference. Ancient supply and demand curves are the hidden and simple reality behind this wall.

Schneider outlines the curves of the supply and demand for securities. The quantity of financial instruments are defined on the x-axis and their prices on the y-axis; the value of the instruments supplied or demanded is the result of multiplying the price by the number, like with any asset. Market equilibrium is the point where the supply and demand curves cross, since there is agreement between those who want to buy and those who want to sell these securities. This agreement relates quantity and price and, therefore, determines the amount of money to exchange. Whoever demands securities is supplying money and whoever is buying them is demanding money. How much money? The exact amount determined by the product, price and quantity.

The inverse operations can be done or, better stated, the same operation of buying and selling securities but the other way round, considering the supply and demand of money that makes the reciprocal operation of buying and selling securities possible.

Who demands money? Whoever manifests a liquidity preference. What does he do to sate his thirst for liquidity? Sell securities. Schneider called it new demand. Since it is true that the party keeps a liquidity state and starting from this situation increases it, Schneider called this first state self-demand. Thus, there are two liquidity states: the one from before and the part or margin he wants to increase, which is self-demand.

To satisfy self-demand or higher liquidity preference, the party will have to have sold securities. Total liquidity on the other hand is new demand and self-demand. So, given a liquidity state, total liquidity, self-demand is calculated by subtracting the amount of active demand for securities from the amount of money that exists (the supply of money). Total money in the system is comprised of the object of this transaction and that which is kept inactive. This total money completes equilibrium price levels. Bernácer did not specify which prices he was referring to, only those of securities or goods and services or both.

It would be easy to get confused at this point. The reason is that the liquidity preference, which I said hides the supply and demand curve, is connected to a specific transaction type: speculative. But what doubt is there that whoever buys consumer and capital goods temporarily loses his liquidity and whoever sells these goods increases liquidity. I will quote Bernácer to add clarity: ‘In the money not supplied, which we add to active demand to find liquidity preference, there is a good part that does not remain inactive due to liquidity preference. Transaction money is not inactive or retained by liquidity preference, but due to consumption and production preference and a part of the rest is not due to liquidity preference and hence not moving, but due to inertia, due to liquidity indifference.

Those who have lived in Keynes’ or Bernácer’s labyrinth move in it with the familiar confidence of a man walking in his home. And those of you who don’t know so much about macroeconomics move around it gropingly. If readers do not know Bernácer by now, meaning my account must be defective, you will want some synthetic explanation of this issue. In very general terms, liquidity preference in Keynes and Bernácer can be expressed by the supply and demand curves for goods and financial assets. That is, everything that has a monetary value. Let’s stop here to repeat that one thing is liquidity preference (greater or lesser) and another thing is alleviating this preference. Relieving this preference involves sales and purchase operations of everything that has value.

From the meaning that Keynes gave it, and even his interpretation of what Schneider said, one infers that liquidity preference is closely related to the financial market. It is Bernácer’s full liquidity or, better, the meaning of preference for full liquidity is the preference for third-degree or maximum disposable funds. Maintaining more or less disposable funds will entail crossed operations between the financial and ordinary markets, since operations executed within the financial market, which are passive to Bernácer, do not alter disposable funds or overall liquidity.

Liquidity alterations happening on the ordinary market are not like this, since they happen within the ordinary market derived from sales and buying operations of consumer and capital goods.

Liquidity preference, as used by Bernácer and Keynes, involves a supply and demand of money to and from the financial market; it is an exchange of money for financial assets. The rest of the money that is kept is not for liquidity preference but for specific operations of buying and selling goods and services. This is what can ironically and objectively also be called the illiquidity preference. The following chart summarises this section.

Author concept	Generic liquidity preference	Strict liquidity preference
Bernácer	Supply and demand of goods and financial assets	Supply and demand of Keynes’ financial assets
Keynes	Supply and demand for financial assets and quasi money	The same as generic
	Bernácer	Keynes
Liquidity	Only money, called maximum or third-degree disposable funds	Money plus other assets, short-term debts with easily- liquefiable securities
They change	Sales & purchase operations of everything that has monetary value + creation & destruction of money	By banking activities

19.5. Say’s law, without say and with Keynes

This question is valuable to delve into the identity S = I and into the macro-identity from which it came, which is income equals production. The simplicity and cold logic of the identity offers no discussion. The logical-scientific tether is so consistent that it is forced towards an identity. Classicists and also Keynes were involved in explaining it.

But, as mentioned, obvious truths shine so brightly that they blind and prevent you from seeing what is hidden behind the light. Bernácer turned his back to the light and discovered the plot that we will now see.

He started by saying: ‘If the postulate is established that savings and capitalisation are identical after accepting the equality between production and income, the logical consequence is the fatal and permanent equilibrium of the market and economy. The fact that this equilibrium does not exist necessary involves the negation of one or both of them. Trying to find the causes of market disequilibrium when accepting both is to consider the problem of movement, starting by establishing the impossibility of things moving.’ (The Functional Doctrine…, page 266).

What did he mean with those words? That Keynes, for whom the identity is a constant bill of fare in the economic system, formulated Say’s Law. It is intellectual servitude that he inherited from the classicists. Nonetheless, he tried to explain disequilibrium. Bernácer quoted Keynes ‘from his last book, page 63 contains the following syllogism’ (The Functional Doctrine, page 267). Since Bernácer’s comment is from 1945, he referred to Keynes’ book The General Theory and not to How to Pay for War from 39-40, since in the latter he didn’t handle the cited identities ¹²⁴.

Income = Value of production = consumption + capitalisation

Savings = Income – consumption

Then:

Savings = capitalisation

This is an issue looked at already in the section relating savings-investment and liquidity. I will return to it now for the penultimate time, as there is one more section where it is extensively developed.

Viewpoints differ on the next question. For Keynes (in Bernácer’s interpretation), investment happens when entrepreneurs decide to create or produce a capital product. Overall production is comprised of the production of consumer goods and the production of capital goods. The latter is called investment.

If the production of consumer goods generates income and the production of capital goods also generates income, overall production thus generates total income. If part of these incomes is consumed, the part that is saved inevitably will be equal to investment. The graph below explains this.

Unfortunately, the issue is more complex to Bernácer, for whom investment meant the previous formation of savings and, afterwards, either demanding the capital formed with this savings or helping create new capital via the purchase of supplies. Clearly things change. And they change because in Keynes’ interpretation, savings is equal to investment, so equilibrium will occur always, like the water in communicating vessels (where the water is income). Nonetheless and constantly for Bernácer, disequilibrium occurs because demand does not remove all production from the market. If all capital equipment formed is not withdrawn through savings, there are unsold articles and savings equals investment is not fulfilled. Of course, if we are not serious and twist economics to the servitude of arithmetic, we can place what is unsold I_u with another thing that is different, which is capital equipment (I + I_u), making it equal savings. But it is obvious that this formula would bother even a young child. This is the problem, which is that not all savings is invested. This problem leads us to another question. Why isn’t it invested? Well, due to Keynes’ liquidity preference, from which a second contradiction is brought to light in his work. For Bernácer, not all savings is invested because of the financial or non-productive market, although it is speculatively profitable.

The truth and problems have different plots. As do the previous identities. Maybe everything would be resolved if we understand that the important thing is not an equality with one brought from one side and the other from the other, but rather the mechanism of movement. Let me explain. We need to know the process through which income born in production and not consumed helps either in demanding capital goods or helps to form it and not only the identity S = I.

Bernácer said that part of income saved is invested, either by savers or by others through the bridge represented by the banking system. With this savings, supplies are bought that help create capital goods and also to buy capital equipment. The part of savings that performs this task is S_k. The other part is disposable funds D that go to the financial market to demand sterilely productive assets. This is a functional explanation, as it explains a function. If capitalised savings is added to noncapitalised savings, or disposable funds, this represents total savings S = S_k + D. And if looking at total savings, without having the good judgment of specifying which part is capitalised and which part isn’t, the conclusion is not that it will be equal to investment, but will be greater than investment. And if obstinacy prevails in our increasingly poor judgment and capital goods or investment are added to inventory investment, it is clear that the equation matches, although it is conceptually terrible. All of these words can be explained as follows:

	S > I	because not all savings is capitalised (S = S + D)
	Sk = I	because Sk is the savings that is capitalised
	S = I+ Iu	considering inventory investment Iu and all savings, including that which is not capitalised

Keynes’ formulation seems to be missing the supporting framework that links savings to investment and remains only with quantitative theory. The key consists in explaining and considering what investment or capitalisation really is.

For Bernácer it is a demand operation or bartering operation, or the exchange of capital goods for savings. For Keynes it is the formation of real capital or its creation. The lack of agreement in his theoretical crossword, liquidity preference, stays in the air. It has to be one of two situations: savings is kept liquid, in which case it is not capitalised; or it is not kept liquid, in which case it is capitalised, but not both things at once. And if readers think I am exaggerating my conclusions by blindly following exclusively monetary liquidity preference, I respond that if I had used other things as examples, i.e. the preference for liquidity through other assets, my criticism of Keynes would be even greater. If other non-monetary financial assets are acquired or held, it is undeniable that this disposable savings stops being such and is unavailable and, always and, this is what is important, not capitalised. I return again to repeat that, disposable or not, savings is not partly capitalised and does not fulfil the familiar identity.

19.6. The identities again ¹²⁵

The identity established by Keynes Y = O (Y income and O production), is simply Bernácer’s familiar formula that states R = P (R production income and P production). They are not the same thing; they are two different things. One is production, a real element with monetary value, which is found on the side of supply, and the other is money; a flow of money and potential demand. Product is what is created and income is what is received as a consequence of this creation. Thus, Bernácer said: ‘Merchandise is not merchandise until it passes into the hands of the entrepreneur and income is not income until it passes into the possession of its legitimate owner…’ (A Free Market Economy…, page 277). Bernácer complained of the uselessness of identities in science, but his complaint takes on legitimate outrage when pointing out that what people have agreed to call identities –like income and production, savings and investment– are not identities in the least, but rather equalities.

He defended Keynes against the Keynesians, more hotheaded than their teacher about imposing his doctrine. He said that Keynes clearly distinguished the terms and did not say they were an identity. Identities are useless as it means giving nicknames to the same thing. The fact that things like income and production are born from the same womb and are quantitatively equal do not predict anything about identity.

Rife with this type of speculation, Bernácer made the following explanation. One thing is consumption and another is spending on consumption, in the same way that one thing would be real capitalisation and another thing the spending to acquire it and shape it. Consumption and real capitalisation are activities related to real production and consumer spending and investment are related to monetary income.

A tough polemic between Bernácer and Dr Saénz of Mexico made the latter harshly respond to Bernácer: it is only possible to consume if you have first carried out consumer spending. I was surprised by this correct criticism by Saénz, since I think it is right, but I soon realised Bernácer’s intention.

If you spend now on consumer goods and invest in capital, triple of any other period and you acquire, for example, less than before, you couldn’t say that you had consumed and capitalised more or not even the same. And why is this important? Well, because spending was less than the supplied production, economic equilibrium is not produced.

Consumer spending and investment are monetary phenomena and consumption and capitalisation are real phenomena. The only thing that remains valid is that R = P in Bernácer’s formula and Y = O in Keynes’. It is not clear if savings must inevitably be equal to investment, given that period savings can demand production in capital goods that is less than what is supplied. Demanding capital equipment is called investment and if this investment is less, as mentioned, than the capital equipment supplied, it is clear that there is no concordance between real capitalisation and investment. I have repeated and repeated this argument each time I have dealt with the basic identities. There is a methodological trick that makes it possible for savings to equal investment, even in the same Bernacerian context. If capital goods are acquired with the savings formed (more, equal or less) and this act, operation, demand, purchase is called investment, then savings is equal to investment. Note that it is a kind of play on words equivalent to confusing buying or demand with money, and saying that money is the same as demand, insisting that without money demand wouldn’t be possible.

One thing is savings, which is the monetary term that breaks off from the monetary womb of income. Another is the real term that is capital goods and another thing, not a thing but an operation, is the operation of exchanging capital goods for savings. This operation is investment. If this savings is totally spent –even without there being sterile speculative operations and despite not withdrawing all capital goods from the market– it is clear that equilibrium does not happen.

If, as Bernácer interpreted Keynes, the act of investing means the creation of capital goods, then the identity S = I is fulfilled. Part of production activity flows into the production of consumer goods and the other part into the production of capital goods. If the latter is called investment and if part of the income coming out of production is allocated to consumer spending and what remains to savings, it will be equal to the production of capital goods. Savings is always equal to investment.

19.7. Bernácer’s criticism and defence of Keynes ¹²⁶

The monetary and the real term can be distinguished in the term Y = O. Economists have focused on the real term, a point on which Bernácer agreed, provided that the two are not confused, the real and the monetary. Thus, consumer spending is different than consumption, spending on capital goods or investment different than the production of capital goods. So I continue with an expression of the following type:

Overall income = Amount of all sales

I will not analyse the problem of assessing it. It doesn’t really need it. Merchandise is exchanged for money and this money means spending income.

Overall income is spent on consumer goods and saved.

Overall income = Spending on consumer goods + savings

Sales are broken down into two groups. On the one hand, sales of consumer goods and, on the other, sales of capital goods. The latter operation, the sale of capital goods, has entailed an exchange of income, or savings, for the person who bought them for capital goods.

Consumer spending + Capitalisation = Total amount of sales

I faithfully follow the expression commented on by Bernácer. Consumer spending could have equally been replaced by the sale of consumer goods and capitalisation by sales of capital goods, since sales are being dealt with here. In any case, the analysis would not change.

With the common term eliminated from both sides (consumer spending), the result is:

Savings = Capitalisation

The advantage of this adept logic of equations is that the real terms are not confused with the monetary ones, like consumption and consumer spending.

The disadvantage, and Bernácer’s mistake, is identifying the sales that produced the total income with the sales resulting from the investment of this income. This is the same as reversing the logical order of causality, cause with effect. If sales have led to incomes, the statement that gave rise to the equality: sales equal income, it cannot be confirmed that this income born from sales will be exactly equal to the income from where it was born. It would be an unjustifiable methodological distortion.

Bernácer believed that Keynes’ supporters adulterated the thought of their teacher. By establishing that Y = C + I, what he meant was that all income must come from a production of consumer or capital articles, so that the total value of production would necessarily have to be equal to the total of all production income. But he did not say that it was an identity.

I believe that Bernácer was one of the men who was most prepared to understand Keynes’ thought. As I continue to repeat, he had already walked down the road many times that Keynes’ scientific shoes would later trod. His defence of Keynes was justified.

He continued by saying that this income is either spent or kept or a bit of both. If it was spent, its equivalency will be found in the consumption and capitalisation made. If part was spent, the previous argument holds true and for the part that wasn’t spent, either kept or saved, this equivalency remains in the hands of producers or businessmen in compulsory capitalisation. Given that what wasn’t spent is savings, then savings and capitalisation are equal. How is this line of reasoning made by Bernácer about Keynes different from the previous one? In that there is no assimilation between the sales from one period and the following one, but rather a single production batch from which income comes. He didn’t consider the future destination where the flow of income would finish, but rather the fountain from where it comes, which is production.

To justify equalisation between savings and investment (S = I), factors of production must be considered equal with what is produced and not sold; that is, capital equipment and inventory investment.

The source of income is production or, if you like, the ordinary market. And the source of the error in question is admitting consumption and spending on consumption as the same. Since more can be spent in previous periods and, even so, less consumed in real terms, unsold production remains. This is investment in stock or inventories. This investment, badly called investment, will be comprised of capital goods also. And this capital equipment, while it is not separated from the market by entrepreneurs and added to production tasks in their workshops, until this happens, it is working capital. Working capital is also part of unsold consumer goods. And how to distinguish planned and unplanned working capital?

Another similar question could also be posed, which is: Wouldn’t it be better to establish a distinction between working capital, which is non-fixed factors of production, and end production? And why not establish a quantitative and differential distinction between inventory investment by periods, in order to set apart that which is produced due to variation in demand from what isn’t? One cannot confuse what represents the system’s capacity to increase production with other things that mean weakness in demand. Moreover, in my understanding, investment is a financial operation of buying capital equipment or financing new capital equipment with savings (plus new money, if there is any); inventory investment exists no matter how it came to be, due to the absence of demand in the system, whether it is planned or unplanned.

Producers’ demands are intermediate demands for final demand. They demand capital goods and working capital so that end demand removes their end production. This reasoning can respond to the reasoning that working capital from end production has been an intermediate demand for working capital.

20. The great doubt

20.1. Introduction

Those of us educated in Keynesian academies, or simply in macroeconomic laboratories, find a series of common sites that define the geography of this science. The marginal efficiency of capital, the demand for money, liquidity preference, the identity between savings and investment, national income, interest, the uselessness of commodity currency or the gold standard, the existence of cycles, the demand for financial assets, etc. are like the multiform mosaics that, like a puzzle, let us build macroeconomics.

Looking back, we find the enigmatic smile of Keynes who donated his work to science. His front men, attorneys of the impossible, arranged this complex inheritance so that it could be read and understood without too many problems. They were people like Samuelson, Hansen, Robinson, etc.

Modern economists, who know the secrets of macroeconomics, find an easy-to-read manual in Keynes body of work. This reading is so comfortable that it is soporific. It is the drowsiness you feel waking from a siesta after a heavy mid-summer meal.

Now it is known that Keynes did not say what they say he said. It seems to be something else. In any case, his monumental body of work is there for whoever wants to read it. It is complex, long and, above all, informed by intelligence. He intentionally confused and enlightened when he wanted to enlighten. It was strategic and wise. Let me explain. Keynes knew where he was going to crash and didn’t do it. He changed the route and misled us. He frequently removed useless labyrinths and outlined the master road with a sure hand. This is the great Keynes, heir of the haughty English school and the malleable moneychanger of the great metropolis. His financial intelligence and astuteness helped him reveal the science he believed to be new and conceal what he didn’t know and what he didn’t want us to know because nobody knew it.

In this pleasant saunter down a road that he discovered, a road that is both straight and twisted, it seems like he had a map in his hands. He is a sailor of ancient caravels that take to the seas seeking unknown continents and hidden treasures. He had a map in his hands, perhaps dirty and somewhat deleted by the impatient saltpetre of the sea. He received the map by a less audacious sailor than himself called Robertson. The map was called The Theory of Disposable Funds. A poor Spanish sailor, daring and self-confident like Christopher Columbus, discovered a continent and encrypted the route onto this map. This was Bernácer, who in life had died and not in a storm, but on the calm sea of indifference and oblivion. It was a Spanish sea.

This is only a hypothesis with which to moor this thesis.

20.2. The interpretation of doubt

Far away were the tributaries of the classicists and closer the streams of neoclassical economists when a breeze of restlessness made economists’ chests swell with impatience. Say’s Law cracked their solid foundation; equilibrium was revealed as a physical chimera; the gold standard shown to be golden boots that prevented movement.

They continued pontificating in university classrooms, with little conviction, on concepts corrupted by hypotheses. These are the years from around the beginning of the century –maybe a bit earlier– until the thirties. But no one dared to confront the Cyclops of classical economics, since the scientific honesty of self-respecting economists would mean they would have to have the courage and patience to break down the giant piece by piece… and then build another one. This Herculean Cyclops gazed with his single eye upon full employment throughout eternity. Its blood circulation is circular and always with oxygenated blood. Nobody could imagine –and much less so the Spaniards– that in a modest provincial capital, a humble merchant, with even more modest scientific means, would execute a scientific and unprecedented heroic deed. He created macroeconomics. This was around 1916. Attentively scanning our scientific history, it is easy to conclude that it would be the most important scientific discovery in Spanish science. The Cyclops fell in defeat after a mortal hit: the discovery of interest and the money market.

And it would be the scientific uprightness of Professor Robertson who presented Bernácer to the world, to the shame of the Spaniards in Spain. Our economist quoted Robertson (A Functional Doctrine…, page 214). His quote was ¹²⁷: ‘All of these writings (referring to his own) have no apparent impact until 1940, when the eminent English economist D.H. Robertson, current professor of Economics at Cambridge, repeated some excerpts from my booklet from 1923 in the English magazine Económica, and dedicated a very flattering comment to me, which ended as follows’: …And then Robertson’s quote on Bernácer:

‘I believe that the fact must be justified of not sharing Mr Bernácer’s essay with English-speaking economists before now. In addition to the obstacle of the language and the general difficulty of distinguishing authenticity in the droves of monetary literature we all receive, perhaps my excuse is a bit more well-founded. It is no tarnishing of Mr Bernácer’s work to say that it is perhaps not after all as interesting as it may seem at first glance. There is a legend today that approximately until the year 1930, all academic economists thought and wrote exclusively in terms of full equilibrium, with inspired devotees relegated to a handful who scribbled in solitary attics about problems related to idle money and unused resources. This legend is not true. If Mr Bernácer’s essay had ended up being more widely known by his economist colleagues in 1923, than what I believe it was, the order of ideas in content would not have been so unfamiliar to them as university graduates are led to believe. Nonetheless, I believe it is worth reprinting and I sincerely hope the author is still alive…’ ¹²⁸

And what truth is there and what is there of shrewdness? I believe, above all and firstly, that Robertson is an honourable man and a prudent scientist. But this prudence muzzles a truth. Which? Well, the sentence I repeat again referring to the novelty and interest of Bernácer’s discovery. ‘…perhaps it isn’t after all as interesting as it may seem at first glance…’ Of course it wasn’t interesting in 1940, after 1930, which is when Keynes started to dazzle… But it was indeed in 1923!

I would have had to have found out many more things that I will unfortunately never know. What exactly was the correspondence between Bernácer and Robertson? If it was his article on ‘The Theory of Disposable Funds’ or if the epistolary relationship was much more. One thing that Bernácer stated was that he did everything possible to disseminate it, sending no less than 150 copies abroad, accompanied by a summary in French.

Aware of its worth, Bernácer said:

‘…that poor seed that sprouted one day in December of 1905 has become a robust and mature fruit, which can rub shoulders with those obtained by other more or less academic economists, who have also stopped thinking in terms of perfect equilibrium…’ (The Functional Doctrine…, page 216).

In 1940, his work continued to be interesting and still is at the time I wrote the present book in 1989, when the double monetary circulation of the two types of wealth has still not been understood. The wealth generated in the ordinary market or real wealth and the actual secondary financial assets or illusions of wealth that exist and endure in the financial market. This double circulation explains two types of interest and two types of investments. In my judgement, this needs to be explained still.

The article ‘The Theory of Disposable Funds’ is a key that has an incalculable explanatory potential. Indeed, the book from 1945, The Functional Doctrine…, and the one from 1955, A Free Market Economy…, are both extraordinarily dense, heavy with ordered layers of ideas, just like the endless number of articles that were published in different international publications. This enormous body of work and this fertile quarry of concepts are simply further branches springing from this simple but incredible work on the theory of disposable funds.

In turn, ‘The Theory of Disposable Funds’ is a summary and sharp explanation of a nucleus of ideas that appeared in the extensive book Society and Happiness, written in 1916. He clearly polished the scientific mechanics in this gap of six or seven years between the two works. Alicante, a sunny, thriving and pretty city, did not exist in the scientific arena and even less so in economic science from the beginning of the century. Cambridge, conversely, was practically the world capital of economic science. Bernácer, our humble accountant, was only 33 years old (I do not tire of repeating this). In his words, the idea of monetary circulation, which he sensed in 1916, was born in 1905!

That year was when he intuitively started writing Society and Happiness. His testimony, which is the only information I have, is found in a footnote in The Functional Doctrine… It reads: ‘The book that has the subtitle “Essays on Social Mechanics” was started at the end of 1905. Difficulties inherent to new authors publishing works postponed its printing until the summer of 1915.’ I do not know if I should believe that such an accurate intuition sprang from a young man from the provinces when he was only 22 years old. Usually youth of that age are only excelling at sport. In the intellectual and artistic order, youth tends to be the time for musicians and mathematicians, but not of economists, if they are not economic mathematicians, which was not Bernácer’s case.

Perhaps the adolescent, who had worked in the small grocer’s shop of his parents since he was young in Alicante, thought about how money is exchanged for goods. And of the goods coming to this diverse shop, some were coming from gardens and crops and others from boats. The young Bernácer may have thought that there was a national and international monetary circulation there. In his domestic education as an accountant, he discovered basic, but practical, methodology, somewhat sensual and physical. Assets and liabilities always had to match up because one financed the other; everything had a causal order, etc. This same education, as well as the contacts he made at his parents’ small business with businessmen, small also, gave him knowledge of specific foreign merchandise like bonds, shares, public debt; lands that were speculated and whose prices rose vertiginously. He had heard people speak of how the state was going bankrupt, but it never did, and that the origin of this bankruptcy was closely related to these paper commodities called public debt. Of how interest went up and that this increase ruined entrepreneurs, etc.

Perhaps the first mental outline, which took up permanent residence in his brain, was his dichotomic vision between two types of merchandise. One that came from his parents’ grocer’s shop, which arrived from the neighbouring crops and the tireless boats and, the other, those that incredibly earned money: those sterile papers like public debt, shares, lands, with all of them multiplying their initial values. Furthermore, that authentic wealth, what was eaten from the grocer’s shop, the clothing that he wore, a train ticket and others were all exchanged for money. This was the common link in exchange. But if this money exchanged sterile wealth or past wealth, but multiplied in price, then primary wealth, that of the garden, what the boats brought in, would be demanded less. And Bernácer the child understood perhaps better than anyone, better even than the classicists and the English Keynesians, that demand is nothing more than the señora’s handbag opened to take out money and exchange it for food or a spool of thread. The much-heralded demand for money was understood before he was even 22 years old, before Keynes understood it, supposing that he did understand it. His father, the humble shopkeeper who offered goods, demanded money! Depending on this demand, he knew it well, led to his family’s wellbeing. The inquisitive eyes of a child and the later adolescent, the accountant, the shopkeeper’s son, understood humanity’s oldest operation: commerce and the money market, which is the same thing. Here is where his golden rule was born that he would never abandon: ‘Whoever demands goods is supplying money and whoever is supplying goods is demanding money.’ Only that this supply would split into two groups: what went to the shop and other shops and that which wasn’t wealth in itself.

These ideas, created from the loose threads of daily merchant observation, were the extremely fertile ball of wool wrapped up in 1905. This is my assumption. I believe, however, that Society and Happiness was not created whole in 1905, but much later.

20.3. The energy of suspicion

When Bernácer read Keynes book in 1930 and then the later one in 1936, he noticed two interesting aspects: One, the suspicious strategy of Keynes, who changed methodological direction between 1922 and 1930, and then changed again in 1936. These changes in direction had a lot to do with, not similar Anglo-Saxon ideas, but his own ideas. Another aspect that strongly attracted his attention was the similarities that are so miniscule, similarities that are both ideological and functional. I make reference to the income determination model in Keynes’ work and in Bernácer’s work.

There is still one more window through which the condensed and freezing air of suspicion entered our accountant’s soul. These overwhelming similarities are systematically transposed one by one. Very similar strategy, in fact, to the one frequency used by patent thieves when changing a shape here, a structure there, paint, size… altering appearances and appropriate ideas. Liquidity, financial interest, the demand for money, speculative demand, the supply and demand for goods, etc.

Bernácer was flustered and upset with these suspicions. Enervated and irritated. Given that he couldn’t speak of copying or plagiarism, he did something better still. He stripped Keynes bare, showing him his mistakes and other foolish errors. Keynes, oddly, not only did not respond to the push, but did not even quote Bernácer in passing. I believe it would have been the scientific obligation of a good academic upbringing to cite him, even in passing on a few lines of his crowded bibliographic references. But he never did it.

So readers will be asking me: So what is it, is it plagiarism or not? I don’t even think Robertson knew for sure and I know even less. The false serenity of prudence, and not sincerity, forces me to think this, although I don’t feel it. The following lines may twist everything even more and not clarify anything.

The General Theory… (1936) was not a branching off from the ideas contained in his previous book from 1930, Treatise… What he did was pick an entirely different road, practically a 180-degree turn. And if there are contact points between one theory and the other, they are in secondary points, adornments and artifices.

This was Bernácer’s opinion, which I will set forth now. I believe the similarity is unquestionable in Keynes’ and Bernácer’s equations. Recall Keynes’ production, O = E + [I – S], and Bernácer’s demand, D = R + [A – A’]. The work by Bernácer was done in 1922 and Keynes’ in 1930. Here is where the long and anguished path of suspicion started.

In Keynes’ earlier book from 1924, he started a type of analysis based on the disposal of a specific purchasing power, breaking the quantitative bindings of Fisher to join them to other quantitative ones –less mechanical and more real. Nonetheless, in 1930 he did not follow this type of analysis and started another branch of study, which was income-based theory.

And if he broke away from a certain continuity in 1930 compared to 1924, in 1936 he broke away from the conclusions he made in 1930 and jumped back to past conclusions from 1924.

I want to go into greater depth about these issues of dates and theories. If in 1936 Keynes returned to his work from 1924, did he return alone or equipped with new tools? I would have to tell Bernácer that he didn’t return alone, since he had not totally forgotten his ‘income-based tasks with respect to money’. Something remained and it is very important. He also returned with the psychological and scientific baggage of the economist who has seen how the capitalist world, this world built by classicist patience, had been falling apart since the tragic year of 1929. Seven years later, we can only assume that Keynes knew a lot more; specifically, that the great crisis of 1929 had been unleashed in such a frenetic hotbed of passions like the stock exchange. And Keynes was a speculator. Thus, these ideas from 1924, whose epicentre was the desire to maintain some purchasing power, returned to his mind with the tremendous force of inevitable logic.

It is now 1936 and also 1924. Keynes’ split in this earlier time from Fisher’s quantitative thesis had already been done earlier with respect to Marshall and Pigou. These latter economists changed Fisher’s business operations figure for another more closely related to the desire of keeping a certain purchasing power available. Keynes started the twenties (he was 36 years old) with some stock exchange and banking experience and it is quite sure that these desires of keeping a certain purchasing power in hand were affected by different aims such as business deposits and also speculative activities. And if Keynes knew all this at the beginning of the twenties, the suspicion about the plagiarism of the Theory of Disposable Funds was not so necessary. If further recalling that the English speculator and scientist in 1936 knew that the 1929 tragedy started on Wall Street, he had a certain obligation to incorporate it into his work.

He also forced himself to give a new theory to the scientific world and the world of business, to politicians, to businessmen; he owed them an explanation about unemployment and his General Theory… responded to these needs. It wasn’t really such a drastic change in strategy as Bernácer said (of 100º); it was a forced change. This was basically what Bernácer said of Keynes in 1936.

The total income of the community depends on the employment volume N. Active demand depends on the portion of income that is expected to be spent on consumption and the part expected to be allocated to new capitalisations. The latter is a function of another similar factor: the induction to place savings. This induction is in turn born from the ratio between the current interest rate and the productivity of the newly-employed capital (marginal efficiency of capital). How is interest born? From liquidity preference, the desire of capitalists to have more or less of their capital liquid, a desire that leads to a demand for liquid funds. This demand is handled by the funds that the banking system can supply; with a capitalisation rate resulting that in turn handles the marginal efficiency of capital, leading people to capitalise more or less. Thus, interest born from the money market or from the monetary economy is intertwined with the real economy born from capitalisation, leading to the incorporation of a capital flow, which is not total, due to which unemployment starts. This is an idea Wicksell had expressed and, I think, seems to have had an enormous influence on Keynes, although he never gave him credit for this influence.

The theory on prices is the object of a final chapter. Here simple quantitative theory is clearly noticed, although certain technical changes remove obvious similarity. The modifications are as follows: the elasticity of prices of employment, of production, of wages, of actual demand; all of which add up to a coefficient of price elasticity as a response to the changes in the amount of money. So…. said Bernácer: When this elasticity reaches the exceptional value of 1, Keynes’ formula is simply quantitative! He didn’t express it as a cunning criticism of Keynes. He did accept, like I do, Keynes’ great intelligence and scientific ductility in reaching these conclusions that let him combine a critique of Say’s Law with quantitative theory.

It seems like Bernácer’s suspicion of Keynes rested on the fact that the work from 1936 changed direction with respect to his 1930 work, and because he noticed an overwhelming similarity with his Theory on Disposable Funds. Thus, in 1936, Keynes was not acting suspiciously to Bernácer. Robertson had to have told Keynes or at least noticed this similarity between Bernácer’s 1922 body of work and Keynes’ from 1930. This is the most that I imagine. And who told us that Keynes would concern himself with Bernácer?

Keynes copied himself; he listened to Robertson, to Say and to Ricardo in the past. He also heard the frenzied shouting of the speculators on the London Stock Exchange. And the crazed litany of those who had seen their savings go up in smoke after the stock-exchange crisis had also reached his ears. And if he read Bernácer or heard him spoken about, he wasn’t worth quoting.

20.4. The invisible bridge of communication

There were many shouters around Keynes throughout his life. His father Neville Keynes, Marshall, Pigou, Robertson, the governor of the Bank of England, stockbrokers, bankers, Treasury clerks, gold standard technicians, foreigners like Wicksell, etc. and he himself. As mentioned, they comprised a varied murmur of voices that his intelligence knew how to direct, like a good orchestra director, to create a symphony like The General Theory…

I am interested in separating the precise and serious voice of Mr Robertson from the clamour of the rest. He is the only path to finding out something about this winding bridge between Bernácer and Keynes.

Robertson’s scientific nobility recovered an author, Bernácer, as one of the scientists who made contributions to economic cycles. Robertson published the article ‘A Spanish Contribution to the Theory of Fluctuations’ in the February 1940 issue of the prestigious magazine Economica, which was later incorporated into the last chapter of the Spanish translation of the book, also by Robertson, entitled Essays on Monetary Theory. 1940 was a year with a climate of war in which, moreover, scientists were still digesting the still-hot meal of The General Theory… Robertson’s opinion of Bernácer will be left till later and I will focus here on said bridge.

Keynes acknowledged the influence of Robertson’s ideas in his work and Robertson, in turn, also acknowledged that Bernácer’s ideas had perhaps had an influence on him. If Bernácer maybe influenced Robertson and Robertson maybe influenced Keynes, then it is also possible that the first influenced the last. This is the only proof I have! Evidence that a scientific judge would reject as insufficient.

Bernácer’s words in this regard were: ‘Professor Robertson has nobly admitted of his own accord the possibility that the reading of the French summary accompanying the booklet unconsciously influenced him (my italics) in his book Banking Policy and the Price Level (London 1926). Other similar influences were possible. (The Functional Doctrine…, page 218). He was referring to the booklet on his work The Theory on Disposable Funds..

Keynes in turn said: ‘With respect to me –and I believe that the same will happen to the majority of English-speaking economists– I am indebted to the lines of thought that have made my mind work in the good direction of the work by Mr Robertson in Banking Policy and Price Level published in 1926 (A Treatise on Money, London 1930, V l p. 170-1, note). He had already stated in the prologue: ‘Mr Robertson has focused a powerful light on specific essential subjects and this book would not have had its present shape without the help of his ideas’ (Op. Cit. Preface, VII). These were also Bernácer’s words in a footnote in The Functional Doctrine… referring to Keynes. And here is where all ephemeral reasoning of suspicion ends, like the small stream that dies in the desert due to lack of documentation and proof.

Suspicions disappear. Maybe they never even existed. The ‘history of economic thought’ does not contain Bernácer’s thought, while it contains an astonishing amount by Keynes. The children of the Keynesian school formed, in turn, other schools and many of them are already Nobel Prize Winners. In Spain and in the world naturally, nobody knows the name of Bernácer. And I am speaking of specialists. It seems like there was a time when he was recognised by internationally-renowned economists, but that is where it all ended. As we have seen, nothing has made anyone think of the scientific connection between these two scientists, if not for the noble passion of a researcher and enthusiast like myself.

But raising our eyes, our eyes gaze upon the vision of a mountain range with precise silhouettes, defined ravines, measured heights and numerous volcanoes. It is the Keynesian mountain range and then there is another exactly like the first, the Bernacerian, geologically earlier, with the same profile, which looks like a scale copy of the other’s topography. It is a labyrinth of mirrors, as I have said, with the mirrors in the labyrinths reproducing false images. Because Keynes reproduces the Bernacerian images one-by-one, like he wants to hide his prolific copy. Thus in the mirror there is one mountain in front of the other, a ravine imitating another, a height rubbing shoulders with the following, and so on. They are false images, since liquidity and disposable funds are similar but not equal, or interest, or the perverse oscillation of Say’s Law, or the narrow bridge of interest, or the boisterous money market or the asphyxiating corset tied with golden laces.

In this vision of the two symmetrical mountain ranges towering above me, which defeat me, I return to my suspicions and think about a conspiracy, a skilful plot drawn up by British astuteness and studied Spanish indifference. They were not both connected. The first is understandable and even, I dare to say, scientifically forgivable up to a certain point. Ambiguity is the trapeze of the adroit. I do not understand the second and it can only be understood by a total demonstration of lack of support from Spanish scientists.

Henry Guitton, French economist, author of the prologue of the work of French-Spanish economist Henry Savall, said: ‘Bernácer, so much time unknown, will he become the Spanish Keynes?’ Such a prestigious economist had commented earlier in the same prologue: ‘The famous proverb –nobody can be a prophet in his own land– has unfortunately been proven true. One could say that in Bernácer’s case there was a conspiracy of silence of Spanish economists…’ They are tough and blunt words, which in the style of a scientist, used to exactitude and precision, cover the sharp shape of a sword. It is true that Spanish-speaking philosophers and scientists are not known and that their potential renown has been recent in the international setting. However, Guitton mentioned in this same prologue that when he wrote his thesis on economic fluctuations in 1951, he knew about Bernácer’s body of thought on economic cycles. Did he know about them, like it should be, through his homeland, from his institutions, from the Bank of Spain where he worked or from the Business Studies School where he gave classes, from Spanish professors? No and thus Guitton stated: ‘Through Dennis Robertson, I found inspiration in them…’ (referring to Bernácer’s work).

In France, renowned economists knew of him such as André Piatier, Françoise Perraux and Jacques Rueff. The magazine Revue d’Economie Politique published homage to Bernácer in 1965 owing to one of his compatriots José Pozuelo.

Henry Guitton’s comments appear in the prologue to the book Germán Bernácer: Heterodoxy in Economics; a beautiful work, extraordinarily well-crafted and created by the mind of economist Henry Savall. I have great appreciation for the merit and scientific decency of Savall. Bernácer and I, who wrote this book, acknowledge the merit of Savall, who unveiled and made Bernácer into a Keynes. The merit of Savall’s work is indeed enormous because his work is extraordinarily complete and contains everything you read herein. These are the sincere words of a researcher who read his book with the difficult art of passionate precision, someone who knows about the issue in great depth.

Like most or all Spanish economists, including Professor Emilio Figueroa who knew Bernácer best, Bernácer passed right in front of him without anyone knowing about his theory. As strange as it may seem, Figueroa was not aware of Bernácer’s work, but his influence did lead to the solid scientific training of the economist who knew the economic space and the music of the master.

This work, which was written before I knew about Savall’s, was created through lessons from Figueroa and from Bernácer himself. I will ignore the reason, but I do know that the conclusion I obtain, unlike Savall, is not that I see Bernácer as a harbinger of Keynes. It was surely the opposite way round. Keynes was the precursor to Bernácer but not in the sense expected, but rather he repeated what the Spaniard said. If he copied him, which is improbable, he copied him badly, and if not, the similarities are astonishing. Furthermore, I stress the fact that Bernácer’s work is much better in many aspects.

In order to remove obstacles and eliminate annoying and angry debates with wise and scrupulous scientists, surely Spaniards, I will not carry on with the issue of who was first and if there was copying or not. It would be the same as continuing to investigate who discovered America first; if it was Christopher Columbus and if he were Spanish or not. I will not continue here on this road that will just entangle me like a vine of discussions that goes around and around a stake without ever reaching a conclusion. One thing I do want to stress is that Bernácer’s work is another tree next to the Keynesian one, but the latter has had several gardeners taking care of the tree, pruning and cutting it and planting these trimmings and all together, joined to the robust tree of macroeconomics, they form an organised forest called macroeconomic theory. Next to this forest, unshaken and upright, looking towards the sky and rooted into the ground, is the lone Bernacerian tree. It is incredibly alone, paradoxically solitary, where other Spanish gardeners walk right by the little tree and move onwards to watering and pruning the other forest: the Anglo-Saxon Keynesian one.

I also want to say that there are many sides, angles and peaks to this post-Keynesian economics, which have forgotten their roots. And I am not speaking of Keynes here, but of the conceptual quarry from where they should come from, business economics. This did not happen with Bernácer. And he thus gave importance to working capital, to its development, to inventory investments, to economic physical facts, etc. From Bernacerian teachings, a dangerous flame could be lit that could light and devastate the macroeconomic forest. This is perhaps the most important lesson to be included. These devouring flames could be the questions. How is it possible to keep savings liquid and keep it invested? Where is interest born? How does inventory investment join investment in capital goods? How does demand acquire capital goods and stop demanding what is paradoxically called inventory investment? Isn’t fixed capital still working capital as long as it isn’t demanded by entrepreneurs? And there are endless and tireless questions that have no answer in macroeconomics, but do have an answer in Bernácer’s work.

21. Robertson

21.1. Introduction

In the heat of my flurried and passionate research of Bernácer’s work, the shadow of Robertson continually appeared. Sometimes it seemed like the North Star, showing me the right path and, at other times, a mirage that led me astray. If I must be honest, I not only came to think that Robertson was the diligent postman delivering the correspondence between Keynes and Bernácer, but that, furthermore, Robertson’s theory on loanable funds seemed like the theory of disposable funds staged by a filmmaker.

With the disorder and research now organised and after rereading Bernácer’s work in order, chronologically and conceptually, as well as all the rest, the complementary and marginal, I can venture some hypotheses that are less fantastical.

I believe I have already qualified the relationship between Bernácer and Robertson and the one established between the latter and Keynes, although there is still ambiguity. I will not go on about the issue.

21.2. Banking policy and price level

In Banking Policy and Price Level, which was published in 1926, Robertson divided time into successive periods in which monetary events are developed. In these periods, there is a flow of money and other goods, so that the daily flow of products is bought with the daily current of money. Robertson’s time period is one day, which has nothing to do with a solar day, but is an arbitrary period of time. He established that income received during a period is not available until the following period. It is a hypothesis that greatly clarifies his experiment. The following day the income is spent or consumed, saved, hoarded or invested. The movement of prices will basically depend on the difference between savings and capitalisation. The money created by the state or central bank is added to this current of money. Price variations will also lead to a variation in savings, which is added to natural savings and is part of unspent income.

Certain analogies exist between Robertson and Bernácer since, as Bernácer himself said, both established the part of savings hoarded as the cause of price variations. The similarity finishes there, since to Bernácer, this bit of coincidence was but a small part of his vast physiological analysis of the economic body, which is the model of income circulation. This circulation was driven by expansion and contraction activities of the production and speculative capillaries through two doors: interest or marginal efficiency of capital and interest properly speaking or financial interest.

Bernácer said that Robertson had proven himself to be an exact, precise and critical scientist, skills that have stolen energy from his creative capacity. Robertson’s body of work was essentially set forth in 1933 in Saving and Hoarding and reprinted in Monetary Essays in 1940, not differing much from the one of 18 years earlier (in Bernácer’s words).

Maybe Robertson, who was generous with Bernácer by acknowledging the French summary of his work, could have been influenced in Banking Policy and Price Level from 1926. This generosity rests on the great possibility that he wasn’t influenced at all (and of course not by Keynes either) and everything would end in an idea or analytical road that was followed independently by Robertson.

The Robertson seen in Essays in Monetary Theory (1940) was severely critical of reigning economic theories, above all, Keynesian ones. Bernácer was not outside his normal shooting range in his bull’s-eye opinions.

21.3. Robertson’s criticism of the theory of disposable funds

Robertson knew The Theory of Disposable Funds well. I have no further information that could lead me to think that he was aware of the full body of work of Bernácer. The English magazine Económica published his A Spanish Contribution to the Theory of Fluctuations where he set forth the thought of our economist with the highest praise. In the Spanish translation of Robertson’s book Essays in Monetary Theory (Madrid, Aguilar 1961, the original English version, London, 1940) it appeared in the last chapter of the work. The original English version did not contain this last chapter (chapter XVI) and it was added to the Spanish translation with permission of the editors of Económica, King and Etaples. The book in question was translated by a good friend of Bernácer’s at the Bank of Spain, José Fuentes Ruiz, with the editing and prologue written by Bernácer.

He set forth the core of Bernácer’s thought extremely clearly with respect to the theory of disposable funds to, in the end, make a brilliant criticism, which shone with the sharpness and education of someone who had spent many years studying the agitated birth of macroeconomics. Criticising is not destroying. Criticising is building by shaping and moulding. It is a writing task that is auxiliary to that of sculpture, in this case the creator of such and such economic system.

Keynes was polished by Robertson and Bernácer was not freed from this constructive criticism. Mexican Dr Josué Sanz was also an important critic, perhaps confused by the rising Keynesian star. There were no critics in Spain, given that there weren’t even any attempts to get to know his work. Indifference and scorn from our country have filled his work with the sands of time. This sand does not destroy or build or sculpt, it hides something without showing it or revealing it. It is a shoddy task, born of mental banality.

Robertson undoubtedly acknowledged the similarity between Keynes’ and Bernácer’s thought. For both of them, interest is born outside of production. In general terms, it is born as the result of the connection between liquid funds and a mass of income-yielding assets. Given that interest will thus be freely generated, it acts from outside as a ‘containing wall’ against the employment of funds for industrial uses. If the money removed for speculative aims (Bernácer would say income-based) could be left in freedom, interest would decrease and the industrial system would be pushed towards full employment.

Robertson said that Keynes and Bernácer were similar up to this point, and similar as well in a mistake they made… ‘in their incapacity to recognise the productivity of investment funds as a determinant of interest on the side of demand…’ (Essays… page 251). And Keynes also erred in finding a strictly-monetary theory on interest. Bernácer fell into another mistake that is expressed hereafter.

I believe readers know where interest is born for Bernácer. I will repeat it nonetheless before continuing with Robertson’s criticism. Interest is a strictly-monetary phenomenon, since it is born from and due to the existence of money. Unlike the excessively-monetarist Keynes, the Spaniard believed that money in itself does not express anything, while an economic category like income does express something. This is why he called his theory income-based or functional. The part of money or income that is liquid funds (Robertson’s loanable funds) is savings, but not all, only that which is not capitalised or free savings or, better yet, disposable funds. These disposable funds D are exchanged for income securities or income goods (Robertson called them income-yielding assets. The percentage profitability of these collected and placed assets is called interest. This interest is basically born from goods that are not wealth or national product but rather past wealth, sterile assets from a productive viewpoint.

Given that any loan can be placed in these speculative activities and earn interest, if they stop executing this function, interest is deprived. It is a cost of opportunity. Given that the cost exists, all loans will accrue interest. In itself, from the nature of savings and loans, interest has no intrinsic reason that explains its existence, if not due to the existence of financial market assets. This is how I have understood Bernácer throughout almost all his works. But there is a small detail that, like a tiny grain of sand that falls into the perfect mechanism of a patiently-assembled watch, obstructs its operation. The grain of sand is Bernácer’s statement that land is the asset that genuinely accrues rent, a statement that is directly shared with David Ricardo and Turgot. Stated differently: The earth is the income asset par excellence; the mere possession of land generates income for whoever owns it. If this party gets rid of it, it is at least because it is compensated for by the differential rent of this land. Then if loans, which are cessions of savings, potentially stop acquiring land, it is because they are waiting to obtain compensation that is at least equal to the percentage return on this land. These words by Bernácer in A Free Market Economy…, published 15 years after Robertson’s criticism of Bernácer, may help clarify this concept

‘I must examine Professor Robertson’s criticism, which rated my theory as a piece of physiocracy… The truth is that, if the origins of interest are on the income-asset market, that all income goods owe their origin to loans, except for land, and that the loan with interest presumes land’s existence, it is obvious that the first cause of interest is profitable land and its exchangeability for money. This reminds us of the physiocratic idea of the produit net de la terre. Physiocrats attribute income to the forces of nature; this was the core of their doctrine: but we know from Ricardo that it is not the profligacy of nature, but its stinginess that does not provide us with enough top-quality lands, the cause of territorial income, whose origin must be sought in differential productivity…’

I will continue explaining why land comes into line with income assets. More than lining up, they are put in the first row. Income assets or financial assets or income securities, or income-yielding assets according to Robertson, generate income R (not productive). Land also generates income (more income from top-quality lands). Since land is exchangeable for money and it is clear that a loan, which can acquire land and doesn’t do it, stops earning interest or percentage income, the ultimate cause of interest is income from lands. And income assets or financial assets have their origin in loans. Since they generate profitability like lands, this is how loans generate interest.

Bernácer continued:

‘Interest exists because there are income assets, including land –which is a fact independent of all theories– and since these can be exchanged for money, money acquires the property of earning…’ (page 177).

In Society and Happiness, which Robertson surely did not read, he clearly expressed this term (I don’t know if correctly or interesting) about income from the land and he repeated it 29 years later. It was clearly commented upon in the brochure sent to Robertson, so much so that Robertson took hold of it to make a convincing criticism.

Robertson said:

‘Mr Bernácer acknowledges physical productivity as the primary source of interest; but not believing in the productivity of free capital or funds applicable to loans (‘loans in themselves are not the cause of interest’), he turns to seek refuge in the productivity of nature. In this piece of neo-physiocracy, I fear that he seems to fall somewhat behind the times; although he is some centuries ahead of the neo-medievalism of Keynes.’

It is an honest and tragic criticism. It is tragic because Bernácer did not need this neophysiocrat plot of land. Indeed, throughout the present book, I have done without it, as Bernácer did in reality.

Bernácer made a mistake in placing land income with securities. He should have changed roads and placed it on the ordinary market, specifically on the production market; and more so, pair it up next to capital goods. Neo-classicists understood that the same thing happens to capital equipment as land, which is that it is subject to the biblical law of diminishing returns of production. Of course this is my evaluation and not Robertson’s.

If land generates last profitability and Bernácer made the origin of interest rest there, the immediate criticism of Robertson can be nothing less than justified. But Bernácer, who knew about Robertson’s criticisms, did not take back what he said, but rather insisted upon it. He repeated it a year later in his article Monetary Theory and the Market Equation (1941), in which he responded to Robertson and also, as mentioned, in 1955 in a Free Market Economy… Bernácer did not move from this strip of physiocratic lawn.

In any case, economists and scientists in general, who live in their large scientific constructions, forget to set forth what they consider obvious, although the public does not. This may be the case for Bernácer’s income from land, which strikes me as a path without signposts. It is the same anxiety caused by David Ricardo. I find his pure classicism odd, with his monetary prejudices that were so close to the classicists, given that he was, like Keynes, a stock market speculator. I also find it strange that he took an effort with this issue of land income, when he could have focused on speculative income. And it is this land income on which Bernácer nails in his boots, with so much security that it makes me apprehensive. Why not go back and reread Ricardo and Bernácer along with (prejudices included) advanced, contemporary classicists and monetarists?

A third criticism Robertson made of Bernácer was, as he admitted, merely formal. He first paid homage, along with appreciation, to Mr Bernácer’s attempt to think dynamically in terms of time intervals. He then stated that there were points of confusion in the exposition. For example, he discovered a source of confusion between two lapses: The inequality emphasised by Bernácer between the execution of a production work and when the money is received, and the time that passes between the execution of the job and the sale of the product on which the work was done. I can imagine that the first interval is zero. In this case, Bernácer argued that there can be disequilibrium if the pace of spending in production –joined to the pace of the inflow of monetary income– increases or decreases with respect to the sales rhythm. Up to here, he could be compared to Mr Hawtrey, for whom excess spending over income would lead to a decrease in stock levels. But the Spanish economist did not do this, since he then spoke of a third lapse that I had not heard of before: the interval between receiving incomes and when they are paid out.

Robertson finished by admiring the luminosity with which Bernácer expressed the processes of hoarding and de-hoarding, although he does it… despite his algebra.

Bernácer did not make Robertson wait for a reply. The following year in 1941, in the cited article Monetary Theory… he answered:

‘I am not opposed to considering the period of time null ranging from production until the reception of payments; the generality of these are normally paid until the product is finished and can be sold to consumers, so that payments are generally received before the products are put onto the market.

What concerns me though is the lapse of time between the reception of payments and when some of them are disbursed. In this period, there is a part of income that is not spent and that, therefore, is totally disposable income. They are disposable funds!

I understand that this last criticism by Robertson and the response by the criticised party are episodic. It is an expositive formalism. Robertson, who was always concerned about dynamic analysis by period, understood it very well, so much so that he paid homage to Bernácer.

What I am concerned about is that in this article (1941, The Monetary Theory…) answering Robertson’s criticism, Bernácer did not answer the criticism of being a neo-physiocrat that was made to shine light on the origin of interest. If interest is a key piece of all self-respecting macroeconomic thought and this result is criticised, I do not understand why he did not take advantage of the occasion to defend his strong position.

21.4. Robertson’s theory on loanable funds

I try to be honest in this book, more than sincere and, at least honourable, as I said Robertson was with respect to his admired Germán Bernácer. I want these words to be used as a balsamic introduction to monetary theory on Robertson’s loanable funds, whose resemblance to Bernácer’s funds is strong. If this comparison causes readers to feel suspicion, this concern will belong to your scientific task and not mine.

After criticising Keynes’ theory on interest, he formulated his theory on loanable funds. This criticism had a precedent in Robertson’s 1926 work Banking Policy and the Price Level, which entailed a painstaking, although somewhat myopic, delving into the turbulent waters of the flows of income. This experience let Robertson criticise Keynes and, in turn, launch his theory on loanable funds. This theory is a design or map of the hydrographic basin of these monetary flows, which he called loanable funds, so well known by him, given that he dove into them. But Germán Bernácer knew them even better, who did something better than enter into these fast-flowing waters. What Bernácer did was rise up in an aerostatic balloon, that of his imagination and intelligence, and observe this hydrographic basin with an incomparable panoramic vision.

He drew up the hydrographic map and explained the multiple directions of monetary flows, which are different types of disposable funds. This map reached the hands of Robertson at the beginning of the twenties (23 or 24?) and he himself admitted the possible influence in his work. Let’s look now at the cited influence. The map is the article on The Theory of Disposable Funds.

In Banking Policy… he tried to imbue monetary phenomena with energy, making them appear by days, where these days were whimsical periods of time that were not related to a solar day. Time comparisons were a deep and constant concern of Robertson and mads him able to criticise Keynes, whom he considered the static economist. Keynes cut time into a specific moment and took a snapshot. He measured what had already happened on the market.

Robertson was interested in knowing what happened in the intermediate period of time and, to do this, he didn’t need a photo camera but a video camera ¹²⁹.

To Robertson, the interest rate was the market price to rent something that Marshall called free or floating capital and that others have agreed to call disposal of capital or control over capital. Modern writers seem to have come to an agreement to call them loanable funds or funds to be invested.

The amount of loanable funds supplied on the market at any price are comprised of the following elements, according to Robertson (some of them may be negative). (Essays in Monetary Theory, chapter dedicated to Mr Keynes and the Interest Rate, page 5, Spanish translation done by Germán Bernácer):

1) Current savings made during the period.

2) Detachments, or savings that were made in the past and are freed now from being part of fixed capital (buildings, tools, etc.) or working capital (merchandise being produced or in storage) and thus become available to be reincorporated to these capitals or other things.

3) Liquid de-hoarding, previously saved or previously detached, money taken now from the vaults to place on the market, minus the money that is currently being saved or detached and that is kept outside the market.

4) Liquid supplementary bank loans (naturally including placements in securities). At this time there is no distinction between the different markets. In other words, they are the gross amount of new bank loans granted during the period minus repayments made to the banks, proceeding from decapitalisations or current savings.

The amount of loanable funds that the public wants to remove from the market for one price or another can be analysed, according to the aims for which they require the funds, as follows:

a) Funds allocated for
investment in the establishment of new increments of fixed or working capital.

b) Funds allocated for investment in the conservation or replacement of existing fixed or working capital.

c) Funds allocated to remaining hoarded.

d) Funds allocated to consumer spending, both individual and collective (i.e. through state subsidies, etc.) in excess above current earnings.

The first four points explain the supply of loanable funds and the last four the demand for them. Why does the public want these funds? Mainly to finance investments, including stocks and products in production.

Deceased Spanish professor and mutual friend of Robertson and Bernácer, Jesús Prados Arrarte, commented that the Englishman would have to alter his opinions when looking at durable goods, especially houses. However, his conclusions will continue to be true.

Savings is a function of national income and interest. Robertson is clear that it comes from income and depends more on income (Böhm-Bawerk as you can see, is already forgotten) and, to a lesser degree, on interest. At the same level as income, savings leans towards interest.

Savings partly come from domestic economies and partly from companys’ undistributed profits. These savings are considerable and interest influences them only as a lure or stimulus to replace equity with loanable funds and vice-versa. It is clear that current studies about company financing strengthen Robertson’s theory on loanable funds given that, at least in developed countries, these come from self-financing or undistributed company savings.

21.5. Bernácer and Robertson’s theory on loanable funds

I acknowledge that the dynamic study of monetary flow and knowledge of the income dynamic were Robertson’s ideas. I will now comment on the possible influence, if there was one, of Bernácer while also making some criticisms. These are directly born from Bernácer and others from me, but using Bernacerian tools. The first thing I must stress is that this concept of loanable funds seems to me like a monetary fund, or the provisions of an errant vagabond who tries to place and sell his goods in the towns he passes through. It is floating, loanable, etc. money and is nothing but savings, which is born from income and offered by some, demanded by others. Since savings does not start out capitalised and its incorporation to investment is not magically instantaneous either, it is well-known that it floats for a period. But a cork floats in a pond without going anywhere and a tree trunk also floats in a river so that it reaches its destination downstream, which is investment. The two types of floating are different. Nonetheless, Robertson’s logical discourse has something when he says that they are loanable funds, that they have some inducement to the intention of loans.

Another point is the following: Bernácer differentiated two types of money, ordinary and financial money. He had bad luck with the names or adjectives, given that the money is the same, for example bills; but what is not the same is the functional operation of this money whether it is in the financial market or in the ordinary market. Bernácer took the idea of money on the financial market somewhat from Marshall when he spoke of free or floating capital and American Seligman when he spoke of money in the sense of Wall Street, or the stock exchange.

This floating money has that status because it is not subjected to the ironclad and rigid discipline derived from consumer and production needs. Floating money floats because there are last disposable funds or disposable funds properly speaking. The others, consumers’ and producers’ disposable funds (first and second degree) have such an ephemeral life that they practically don’t exist. Their life is something like subatomic particles whose life is a fraction of a thousandth of a second. And they live because they are claimed by the urgent needs of consumption and production. They are needs that create an ironclad and rigid discipline in monetary flows. Then, if there is floating money, it is because a part of income has not been consumed and has been saved, S. But that is not all of savings, but the part that has not been capitalised (S – S_k = D) and is called disposable funds. And floating or loanable savings can be in bad shape if, as Robertson stated, its aim is net capitalisation, replacement and consumption (and hoarding).

The meaning that Robertson gave it can be none other than the fact that this savings born from income is on the road to investment, in which case it is not floating, but on the way.

It may be most interesting to note that Robertson, like Keynes and Hawtrey, did not realise that loanable savings is lent and requested for speculation and not all for production activities. Why didn’t he list speculation as a motive for demanding savings? An economist squanders a magnificent occasion when not renouncing income-based ideas to speak of supply and demand of savings for speculation. I am sure readers could tell me that Keynes did indeed speak of speculative demand. I respond that he effectively spoke of speculative demand but money, a stock of money; and what I and Bernácer and Robertson speak of is the supply of and demand for savings (which is why I call them income-based), not simply of money.

And it is this appreciation where the problem and confusion arises: if savings were demanded for speculative activities, Bernácer’s disposable funds and part of Robertson’s loanable funds, it is clear that not all of this savings would be capitalised and the macroeconomic equation would be overturned.

Is everything savings? Almost everything. Robertson’s detachments are past savings connected to fixed and working capital (Bernácer gave an extensive explanation before Robertson about these types of operations). Net de-hoarding is old savings that comes out of hiding. What remains is the bank loan or banking money (the latter term my own).

Let’s compare these implications with The Theory of Disposable Funds, given previously by Bernácer. This comparative sequence will be done, one by one, relating demand with the supply of loanable funds.

Current period savings are total system disposable funds and they will be lent for consumption and production. And also for hoarding (Robertson) and neutral financial market operations (Bernácer).

The detachments of savings done in the past, which are free of their original attachment to fixed and working capital to now be lent, are their sales operations to Bernácer. They are transformed into producers’ disposable funds that are recycled into production and, once again, no longer disposable funds. Remember that sales of fixed capital to other entrepreneurs are called realizations and of working capital are called liquidations. If they are lent (Robertson) for fixed and working capital and for replacement, they are obviously called reinvestment.

De-hoarding did not mean anything to Bernácer and did not entail any operation. But if this de-hoarding is lent to invest in fixed and working capital, it is logically called investment (Bernácer).

If new bank loans are lent to investors in fixed and working capital, it is also called investment. If it is lent to consumers, it is for consuming, in which case this money is no longer available.

If the supply of de-hoarding is what is given to consumers, this entails a net absence of disposable funds, since they have been dumped into consumption.

Is there something left? To Robertson no and to Bernácer yes. A part of savings and bank credits (new money) remains that is not capitalised or hoarded, and these are net disposable funds. These disposable funds are supplied on the financial market in exchange for our financial assets. This operation does not imply an absence of disposable funds, since they become the net disposable funds on this market.

The meeting in Granada

Perhaps the destiny of the British and Spanish economists, after maintaining epistolary communications for many long years, without wanting it or provoking it, caused them to meet. It is not just the story that is interesting to me but the psychological aspect of it, increased by the polluting air of my unjust but perspicacious suspicion. I am referring to the glacial cold with which Bernácer received the effusive Robertson. The warmth of Robertson’s greeting was not cooled down by Bernácer’s ice.

An abundant correspondence started in 1940, the year when Robertson’s article about Bernácer was published. It was a paper bridge that hid the steel beams of a thought that both of them knew extremely well. The bridge really started at the beginning of the twenties, when Bernácer showed Robertson his work on the theory of disposable funds.

My tenacity has been what has driven me to work so untiringly on Bernácer’s works, as well as trying to assure its incorporation into modern macroeconomics. But chance, or fate if you will, also wanted me to work with Jesús Prados Arrarte, an admirer of Bernácer, although he didn’t know all of his work. He was the one who presented Robertson to Bernácer in Granada in 1954.

And it was also the incredible web of fate that put me into contact with Professor Emilio Figueroa to talk about issues related to monetary policy. Through these conversations, his relationship with Bernácer came up. Emilio Figueroa knew him quite well and intimately and in the peaceful days of retirement, the flame of his admiration had not gone out. He was his colleague at the Business Studies School, where he taught Economics and, also, at the Bank of Spain, eventually holding Bernácer’s post. Emilio Figueroa was a witness to the introduction between Robertson and Bernácer.

Jesús Prados and Emilio Figueroa have provided me with enough information to be able to freeze-frame a photograph of this meeting, although a photo is not enough to explain the coldness of the introduction. However, his family, who knew his heart, insists on one of his most-defined personality traits: his shyness. It was shyness and not humility, as it may have seemed, that muffled his emotions. With my non-scientific suspicions and others, I would like to re-enact the memorable introduction that took place in the city of Granada.

Robertson and Prados Arrarte were talking in the restaurant of the hotel where an international banking conference was being held. These types of meetings become a pretext for making contacts, informal chats, the gleaming of knowledge and, frequently, the start of fructiferous relationships. Prados thought to tell Robertson that Bernácer was there in the same building a floor below. He thought that Robertson might be interested in meeting him. They went to where Bernácer was. And they met after so much time, face to face, Robertson and Bernácer. The Englishman made a show of Latin temperament and towered over the slight Bernácer, hugging him enthusiastically. The force and maybe even the noise of this hug accompanied a gradual reddening of his white face. The Spaniard remained rigid, impassive, glacial, and a growing paleness fought to steal the colour from his dark Mediterranean face. His arms hung limp at his sides; I am not sure if they were imprisoned by Robertson’s arms. Prados and Figueroa witnessed the meeting, probably a bit unsettled. But neither they nor anyone else knew what hung between these two figures. The General Theory… separated them.

Prados, who told me the story, days after being appointed an academic of the Spanish language, laughed and said that Bernácer’s face looked as if he were ill. Figueroa, who knew Bernácer’s reactions well, said that he was very reserved. I think his family came closer to the truth, which I can never really know. They said their father was extremely shy. His widow said that he could have died from his timidity.

Imagine poor Bernácer suddenly being introduced to Robertson, the invisible man he had imagined so often and so vehemently debated and to whom he owed part of his ephemeral fame. And, still not recovered from the surprise, he suddenly received a warm and effusive hug from this Englishman. It was much more than he could handle in a few scant seconds, the timid, reserved and prudent Bernácer.

But even so, even the most irreconcilable enemies meeting at a social gathering show, at least, a modicum of courtesy. There are words and gestures that society has imposed on culture. But no, Bernácer was like Sarah, Lot’s wife, turned into a salt statue.

What happened? Nothing happened. This is what a scientist would say. However, since I am exhausted from my doubts and, indeed, this work is a way of exorcising them, I can infer from other hints, like glass when sunlight hits it, fractures into a thousand sparkles. I know that this doubt made Bernácer uncomfortable throughout his life. But it was a pebble in his shoe and not in his brain.

He met Robertson face to face, the son of the English school and the great Keynes’ blood brother, who knew the map of The Theory of Disposable Funds well. Like mirrors placed in front of each other, instantly reflecting images, the two met. Bernácer knew Robertson’s theory and knew that it was an imperfect adulteration of his theory and the Englishman knew that Bernácer knew. And between them, the cynical and seductive spirit of the great Keynes, criticised by Robertson and humiliated by Bernácer. Robertson’s hug could not have been closer because The General Theory separated them. Bernácer also knew that he walked the damp fields of Cambridge with John Maynard and that he told him about The Theory of Disposable Funds step by step. And Bernácer also knew, beyond any doubt or suspicion, that the great glory of the monetary theory of macroeconomics that Keynes had usufruct of, belonged to him. That this glory should have been for Bernácer… Robertson knew it. And thus, face to face, he met the source of the torment of so many years of tenacious suspicions, pestering Bernácer throughout his life like a hive of irritated bees. I knew about this hive of bees and about his doubts.

Perhaps Bernácer’s icy reception of Robertson was not irritation, however, but bewilderment, of not knowing what to do, of confusion. Robertson had another style of relating with scientists that was very different from the Spanish way. He was quicker and intelligent. He had admired him since 1940 and, as if it were nothing, gave him a big hug. It was the least he could do. In Spain the matter was different. A jungle of ominous sounds in which no animal could be seen that would face the consequences and attack, listened intently around Bernácer. It was the conspiracy of silence (Figueroa, Savall). There wasn’t a conspiracy though, because in the end that would have meant they knew about Bernácer’s work and in Spain, economists only knew about Keynes’ work. In fact, Figueroa was one of the pioneers in disseminating Keynes’ work. Although the heavy curtain of silence also fell on this man, Bernácer’s student.

In Spain they did glimpse the genius of his work through the sparks that returned from abroad via famous economists: Rueff, Piatier, Montgomery, Haberler, etc. who all knew his ideas. But he irritated them exceedingly or they simply didn’t believe it and, thus, through an aggressive and studied indifference, he ended up in the shadows, like an underground river flowing beneath a desert.

Beyond these suspicions about the English, not about the Spanish, are the facts; and the facts, steps that must be trod by the scientists who talk not about copying but a scientific continent parallel to the English one. The fact that Robertson received and read The Theory of Disposable Funds in the twenties has been acknowledged, as well the mere possibility that it influenced Robertson and the admission of a probable subconscious influence (Robertson’s own words) of Robertson on Keynes from Bernácer’s work. However, above everything else, the honour and nobility of Robertson is unquestionable, who told the international scientific community about Bernácer and, on the rebound, the Spanish community.

Mr Hawtrey

To my way of thinking, in this extensive and prolific network of scientific contributions that appear in the macroeconomic arena, there are two flows that are the central rivers. One is Bernácer and the other is Keynes. But it is undeniable that many others were born in the mountains of the past and others from nearby springs of the present, who claim their scientific contributions. One of them is Hawtrey, who merited Bernácer’s attention. He saw his ability to observe reality without unnecessary scientific complications. It is frequently the scientist who approaches the object of his study with the magnifying glass of the banker and the ruler of the accountant.

Bernácer did not execute a complete doctrinal critique of Hawtrey like he did with Keynes, but rather saw him as a clearing in the forest to clarify different concepts for him.

We are in the ordinary market where consumer and capital goods are born from production. Income comes from this production, where part will be saved and part will be spent on consumer goods.

He said that Hawtrey acknowledged a difference between the value of production and the income made up of the amortisation of fixed capitals. But Bernácer also said that Hawtrey needed to recognise that amortisation is a cost and a component of the value of production. In other words, profits are obtained from the product’s sales price, which is income in the end, and part of this is not distributed and forms a fund, with which depreciated capital equipment is demanded. The fact that income is undistributed does not mean it is no longer income and the fact that the capital equipment is not new capital equipment does not mean that it is not production of capital equipment.

Sinking funds, said Bernácer: ‘are a part of purchasing power born of production, which are available to exercise demand…’ (The Functional Doctrine…, page 260). It seems as if Hawtrey wanted to differentiate different levels of production and income arising from this production, due to the fact that part of income is undistributed and that replacement investment (my term) does not involve a new net flow of capital goods.

What does it matter! Whether income is distributed or not or whether a company or an individual receives it? Sinking funds are part of company income; when it is distributed, it is consumers’ income and when it isn’t distributed, it is income that legally and partly belongs to consumers and really belongs to the company. It is like consumers’ savings: that the company, as such, exercises a demand and the capital equipment replaces the depreciated equipment.

Thus, Bernácer said that Hawtrey confused income and disposable income, and that the fact that income is not disposable does not mean that it isn’t income. Naturally, consumers are not the ones who spend disposable income, but others, companies, for example.

If what Bernácer said of Hawtrey was true, it is possible that the latter was skirting the cognitive borders of Bernácer’s last or authentic disposable funds, or Keynes financial or speculative market. This could be true since sinking funds are placed preventively and speculatively (and temporarily of course) on the speculative market, to later bring them to the ordinary market as replacement investment. The fact that he somehow understood this idea but didn’t develop it may be why he stressed the non-potential demand of consumers.

Along the same line as the similarities found by Bernácer between his work and Keynes’ (income, business and saving deposits), he mentioned a similarity to Hawtrey.

He established a similar classification, breaking them down into three groups: consumer’s cash balances, trader’s cash balances and investment market cash balances.

This classification is very similar to Bernácer’s three types of disposable funds: First degree, second degree and the ultimate or third-degree or disposable funds properly speaking, which correspond to funds of consumers, producers and capitalists or savers, respectively.

It is not strange that those interested in the physiological explanation of a sale, against the classicists who did not consider it constant, would independently find three flows comprised of the same monetary waters.

As we know, Bernácer thought that working capital was the same for producers whether they produced consumer goods or fixed capital. He believed that many authors suffered from a general confusion (current authors) from which Hawtrey did not escape.

In Capital and Employment, he often mentioned that banks have to irrigate two fields of very different sizes: one that is reached via bank loans for working capital, established by the merchandise production sector, different than instrumental goods. This merchandise tends to be sold to merchants to form part of their stock. The other field is reached by the capital market, which consists of the production of instrumental goods.

One can conclude from this statement that consumer goods are financed with working capital, while capital or instrumental goods are financed by the capital market ¹³⁰.

Production does not have to be financed differently, if taking into account that, for the producer in general or macroeconomic production, everything produced, whether consumer or capital goods, is all working capital.

When the fixed capital is taken away by buyers, removing it from the market forever and adding it to their factory for production, is when it can be called fixed capital. And don’t forget one of the basic principles of Bernacerian macroeconomics that says that in order for equilibrium to exist, working capital (all production) must be financed with new money and fixed capital with system savings. If this does not happen, Bernácer emphatically stated, then financing of working capital with savings is depressive to the system.

He quickly pronounced Hawtrey correct (against Keynes) when he refused to admit that stocks accrued by producers or sellers, due to weakness in sales, was capitalisation. Capitalisation is a deliberate act, like consumption. He said the other was failed production. Inventory capitalisation is not that, whether it is in consumer or capital goods. Instrumental goods or capital is investment or it is capitalisation, the latter at the time when it changes from being working capital for the producer into the fixed capital in which he wanted to employ his savings. Clearly, working capital in instrumental goods cannot continue to be called fixed capital when it is still unsold and even less so for consumer goods pending sale. I believe that Bernácer, in agreeing with Hawtrey here, was referring to the book Capital and Employment.

Risking much, I believe Hawtrey was faced with the tough problem of fitting the piece into the puzzle; the real piece of unsold merchandise (poorly called inventory investment) with the monetary piece, income that is not spent and not hoarded. This problem did not exist for Bernácer after 1922, as maximum disposable funds were this monetary piece.

And I return for the thousandth time to the central point of macroeconomics, or the identity S = I. He believed, despite everything, that Hawtrey’s position was correct, when he said that this identity is only true in equilibrium. Lack of equilibrium will occur (and he also agreed here) by an absorption of cash balances. It is enormously similar to Hawtrey’s solution if not for his confusing different types of liquidity and disposable funds, unlike Bernácer. Our economist said that Hawtrey was prevented from reaching the correct solution due to the accumulation of different disposable funds of consumers, producers and capitalists, and adding the creation of money to this.

To be clearer: If Hawtrey had known about Bernácer’s theory of disposable funds from 1922, specifically, if he had known of the passive or neutral metabolism of maximum disposable funds, he would have formulated the same equation as Bernácer:

Income = consumption + capitalisation + disposable funds

Production = production of consumer goods + production of capital goods

where:

Savings = Income – consumption = capitalisation + disposable funds

This is the piece of disposable funds missing from Hawtrey’s puzzle. Unfortunately for Keynes and present macroeconomics, income is appraised only in consumer goods and capital goods. They are missing a third good, or anti-good, or illusions of wealth: our financial assets. And it is not that financial wizards like Hawtrey and Keynes and modern macroeconomists did not know about them, but that to them, financial assets represented a type of wagon carrying savings-coal to the production ovens of capital goods, forgetting that these wagons are the object of innumerable purchases and sales, which are done with period income.

In general terms, Bernácer’s evaluation of Hawtrey was quite positive.

Walras and desired cash balance, Keynes and liquidity preference and Bernácer and disposable funds

Relating analogous concepts in the labyrinth of science, unlike what it may seem, is a difficult task. It is more intuitive. Walras’ desired cash balance and Keynes’ liquidity preference are comparable concepts to Bernácer. It is not that other brilliant economists have not noticed this similarity, but that the relationship established by Bernácer is so simple and elementary that it is almost amusing. This comparison is a methodological pretext to remove unnecessary clothing from economic science, of mended and worn terms and concepts.

Disposable funds also enter into the game of this comparison. The article in which this analogy appeared is entitled ‘Metric Economics’ and was published in the magazine Arquímedes in 1955-56. Bernácer was around 72 and had already read The General Theory… and the post-Keynesian rash had already strengthened, not modified, his own body of work. This article, due to its real and apparent simplicity, established a small piece that let macroeconomics be understood quite simply. And it has merit given that part of Walras’ analysis, which is microeconomic and thus universal and macroeconomic, finishing with Keynes and his own, which is monetarist and macroeconomic.

The term desired cash balance (encaisse désirée) is a concept developed by Walrus in his general equilibrium to record the monetary provisions that the subject wants to keep to carry out his transactions. It is money that is neutral. Money desired by the subject can increase or decrease. Let’s look at two things: The first is that these operations have the possibility of money increasing or decreasing. The second question is: What is the value of the money?

Like any other asset, money is desired more or less intensely. If there is more desire, the estimation or value of the money increases and if there is less desire, this value will decrease. If it is desired more, the only possible operation necessary to obtain it is the sale of assets. Otherwise, the purchase operation is what makes it possible to part with money. And money is not rejected because you don’t like it or you desire money because it is beautiful, but because the buying and selling of goods and services are the operations that make liquid balances or desired cash balance increase and decrease. Obviously, I will rule out theft on the one hand and giving money away on the other, as well as counterfeiting, to maintain a determined and desired cash balance. These operations are not strictly economic.

Let’s look at the value of money. Money is worth what can be bought with it. The temporary renouncement of money also has a value and I could thus say that the value of money is interest. Purchasing power and interest are closely related. It is a very simple relation.

A greater demand for money, like any other good, makes the price go up, which is interest. How is this greater demand for money manifested? By offering goods in exchange, which makes its price drop. Thus, an increase in interest and a decrease in prices will be two sides of the same coin. Excess supply makes its price go down, making interest drop. Money is supplied in exchange for goods. A greater supply of money means an increase in the demand for goods, which makes their prices go up. In this way, a drop in interest and an increase in prices are correlative.

Thus, Bernácer said: ‘It is clear that desired cash balance is the opposite of effective balance, which is was called supply and demand before, if it has to mean something quantitatively and mathematically economic …’ (‘Metric Economics’, page 52 of Arquímedes magazine).

As seen, it is a direct road to explaining the relationship of the prices of goods and money, which leaves out the winding roads set forth by Keynesian macroeconomists. Having finished with Walras, let’s start with Keynes.

Liquidity preference is the preference for money, which is the most liquid asset. I will follow the same argument as with desired cash balance.

If you want to increase liquidity preference and satisfy it, an operation must be performed that makes this satisfaction possible. Similarly, whoever wants to decrease liquidity must perform an operation to contract this desire. In the first case, the operation the economic agent does to satisfy his thirst for cash is the sale of goods or demand for money. In the second case, the economic agent can get rid of liquidity by buying goods. These are just old names for old concepts, said Bernácer sharply. He who wants more liquidity sells and he who wants to keep less buys.

And you already know that, given constant monetary supply, an increase or decrease in liquidity preference makes interest change and also involves (the same thing) operations of buying and selling goods, then we can conclude:

An increase in liquidity preference will make the price of goods drop and will make interest increase. A decrease in liquidity preference will make interest drop and prices go up. The line of reasoning is the same as with Walras. Just replace the term desired cash balance with liquidity preference and the conclusions will be identical.

The conceptual matching between Walras and Keynes is the following: Cash balance with liquidity and desired with preference. And don’t forget that one thing is desired balance or liquidity, which is no more real than what is found in the heads of economic agents, with the fact of fulfilling or satisfying these desires. The latter are operations of buying and selling goods that are, in turn, the buying and selling of money, whose execution satisfies this desired cash balance and liquidity preference respectively.

Bernácer’s attack on classicists and Keynesians is methodologically simple and is thus summarised:

‘Supply and demand of money, without saying in exchange for what, does not make sense, because the act of exchanging money for money requires some qualification that takes away the appearance of an absurd operation’ (‘Metric Economics’, Arquímides, page 54).

The matter can be complicated if, as he correctly said, the money market is nothing more than an exchange operation between past money and future money. But it suffers from leaving out a fundamental issue, which is the market derived from the supply and demand of savings. For tricky Keynesian economics, this was no problem given that since S = I, the price of money cannot change, since the supply of savings, S, as mentioned, will be quantitatively equal to its demand for investment, I. Thus, you may be asking: How did Keynes make interest vary? Well, through the variation in liquidity preference.

In order for a group of economic agents to satisfy their higher liquidity preference, another group must be willing to part with liquidity. This detachment is the desire for cash or a lesser desire of liquidity preference.

This lesser desire will be focused, not on any money, but on totally available money. These are Bernacerian net disposable funds. Why? Because first-degree disposable funds, required for consumption, and second-degree disposable funds, for production, are not disposable. Nonetheless, that fraction of savings which is not capitalised (and obviously not consumed) will be disposable.

If one knows that the satisfaction of this higher or lower liquidity preference represents buying and selling operations and that they involve reciprocal buying and selling operations of money, as long as demand is greater than supply, or supply greater than demand, the price of money or interest will vary, as well as the price of goods in the opposite direction.

Bernácer complained, and not without reason, about this useless Keynesian muddle, which hid the buying and selling of goods inside of liquidity preference. In the end, liquidity preference, like the desire it is, is related to the psychology of economic agents, while operations derived from the market, buying and selling, are assessable and measurable economic realities. Bernácer’s complaint finished as follows:

‘Has anything been advanced by transferring the viewpoint to individual desires, instead of looking at economic realities? It has only put economics in a pickle while trying to take it out of a labyrinth.’ (A Free Market Economy, page 292).

These issues have been looked at already in this book, in particular when I compared disposable funds with liquidity. From there and other parts, I draw conclusions that will clarify these dangerously similar points greatly.

Walras, Keynes and Bernácer differed in fundamental aspects about the money market. Walras, a classical and neoclassical economist, analysed a real and not monetary world. In this world, money was kept (desired and maintained in the form of balance) only for transaction aims. That is, to lubricate operations of buying and selling goods.

For Keynes, keeping money totally liquid (preference for cash money) had a strategic orientation that rested on the opportunities of financial speculators. In Keynes’ world, unlike Walras’, the financial market was joined to the goods market and money divided into two types of operations: transactions with goods and speculative or financial transactions. He did not only differentiate the intentions of economic agents in Walras and Keynes, but in the operations in which this money is occupied via balance in the first and liquidity in the other. The latter group is greater than the first, given that in addition to transaction operations, it is also bought in financial operations.

For Bernácer, the matter changes. He, like Keynes, said money was demanded for two aims: one, pure transactions and the other, financial. But he never broke with his income-based vocation, as Keynes did, because he incorporated income into these preferences. The part of income that goes to the financial market establishes ultimate disposable funds or disposable funds properly speaking (S – S_k = D), and the other part continues on the course of operations derived from the buying and selling of goods and consumption and capital services. I said that Keynes broke with income-based theory because, while his analysis is basically a model for income determination, when dealing with the money market, he did not speak directly of income, but rather the supply and demand of simply money.

This kinship between desired cash balance and liquidity balance was not original to Bernácer, as he himself stated. Oscar Lange said that the demand for liquidity appeared in Walras as desired cash balance. Bernácer also quoted Deramoudt: ‘Between desired cash balance and liquidity preference, the coming together prevails…’ (G. Deramoudt: De l’encaisse désireé a la préférence de liquidité en Revue d’Economie Politique, page 383. It is a footnote in Bernácer’s A Free Market Economy…, page 289).

Bernácer also said that: ‘The idea expressed by Schumpeter is odd about desired cash balance, and that “mutatis mutandi” could be applied to liquidity preference…’ Then Bernácer spoke his mind about some of Schumpeter’s lines that said:

‘This idea of Walras of desired cash balance, which returns again in Marshall’s analysis and seems to be recently revived, is one of the elements of the least value in the powerful structure created by this great Frenchman. It is inoffensive only in its stationary status, although even so it surrounds an erroneous representation of facts. (Schumpeter: Business Cycles)’.

As you can easily imagine, nobody took an interest in relating Walras’ desired cash balance to Bernácer’s disposable funds. Our economist, unlike Keynes in England and in the world, did not have anyone in Spain to develop his theory, and even less someone to relate it to the Frenchman’s theory. This comparison was only done by Bernácer himself, clarifying their differences.

22. The bitter mexican controversy

keynesian pollination had travelled around most continents, bearing both fruits and controversies. Some Keynesians, like Doctor Josué Sáenz, debated with others who were not exactly anti Keynesian, but simply macroeconomists, such as Bernácer. They were bitter and impulsive discussions, sweetened by the appearance of academic civility. They were indeed driven by vehemence, but also by sincerity and purely scientific aims, as you will see.

The event in question took place in the prestigious Mexican economic-scientific magazine El Trimestre Económico between 1941 and 1947. This period is very significant in economic sciences, since many of Keynes’ ideas matured during this time, mainly in the United Status and England.

It all started when Bernácer published an article entitled ‘Monetary Theory and the Market Equation’ in this magazine in 1941 (volume VIII, no. 2, July-September, page 169-204). Dr Josué Sáenz responded quickly that same year in the same magazine with an article entitled ‘A Note on Monetary Theory and the Market Equation of Germán Bernácer’ (volume VIII, no. 3, October-December, page 521-525). Bernácer did not read the response until six years later, when he responded once again with an article entitled ‘Keynesian Disquisition’ (January-March 1947). Josué Sáenz, a Keynes admirer and defender, responded to Bernácer’s attack on the English economist with another article entitled ‘Ex Post Bernácer’ in the same magazine again.

The clashing of the academic sables is not what interests me as they move from defence to quick attacks, but rather the information I received about a very interesting period that was watering the macroeconomic tree. I am also interested in this discussion, because it lets us review and detail Bernacerian thought with greater precision.

Bernácer did not hide his gratitude to Professor Josué Sáenz for translating his article The Theory of Disposable Funds for Professor Robertson. Thus, readers should understand that Professor Sáenz was already quite familiar with The Theory of Disposable Funds. And of course he was also familiar with Keynes’ General Theory, so this polemic has great interest.

22.1. The debate

As stated, the origin of the debate started with Bernácer’s article entitled ‘Monetary Theory and the Market Equation’ (1941).

Since the last two articles contained the summary of both of their bodies of thought, I will focus on them. I will start with Bernácer’s article from 1947 ‘Keynesian Disquisition’, separating them into the same chapters as he divided his work. And since Professor Sáenz responded one by one to these chapters, in turn dividing his response into the same number of chapters as Bernácer, it makes sense to follow the same outline.

Keynesian syllogism

Keynes’ version to which Sáenz later gave a new version was the following:

    a)  Income = Value of production = consumption + investment

    b)  Savings = Income – consumption

    c)  Savings = Investment

The base error consisted of confusing real and monetary concepts. One thing is consumer spending and another is the real consumption of the good.

With respect to savings, investment and capital articles, the matter also changes, although it all corresponds to investment metabolism. Money is saved (monetary concept); capitals are factors of production (real concept). Investment is the transformation of money into these capital articles. Capital is not money and investment is the financing made with money from purchases and/or creation of capital goods. It is clear that if real consumption and capital are connected to their respective prices, a monetary expression is obtained, which is consumer spending and investment respectively.

And what is the importance of this conceptual and semantic disquisition? A lot. Let’s see why. You can spend three times as much on consumer goods than the year before and consume the same if prices have increased (tripled). Its immediate meaning is that this is not the reason why three times more consumer goods have been removed or demanded. In the formation of capital, there are three intimately connected processes: savings, investment and capitalisation. Sáenz defined it well (Bernácer said about him in reference to Keynes that: ‘…it cannot be considered investment while the spending made translates into the creation of a production good…’).

This is how savings can be increased, for example doubled, and this same amount will also be spent in the formation of capital. Investment will obviously be double of the previous period, but not necessarily capitalisation, which is a real term. Not though if the prices of these factors have doubled. If this happens, doubled savings and investment, the same quantity of capital equipment can be removed or demanded from the market (or formed) as in previous periods provided, naturally, that prices have doubled.

And I repeat: Why is it important that consumer spending and investment are different than consumption and capitalisation? The importance rests in the fact that there is always the possibility that consumer demand or consumer spending does not totally remove all of the production of consumer goods (real term) and that the demand for capital equipment does not remove all the capital goods created or partially created, which is the same as saying that investment does not match capitalisation.

And if this happens, demand would be lower than supply; demand that is a monetary matter and production that is real, although also monetary. Thus, there will be unsold products, which Keynes adamantly called inventory investment.

The question takes on more relevance when remembering that total production is divided into consumer products and capital products; better yet, the product value is divided between the value of consumer production and the value of capital goods. And if income is born from this production and only if there is equilibrium, total spending will demand part of the value of the consumer goods and the rest must necessarily demand capital equipment. But if this equilibrium does not occur because, for example, demand is less than supply, or because spending in consumer goods does not demand all consumer production and/or because the demand for capital goods (investment) does not remove all production of capital goods, you must understand that the rest can never be called investment. You must also ask yourself where the rest of this income is that has not exercised demand.

22.2. Sáenz’ response to the keynesian syllogism

Sáenz’ response is basic and clear. He said that common people definitely know that money is not the same as merchandise and economists naturally know this as well. He would not be the one to belie Bernácer about something so evident that does not clarify anything; like that spending is a monetary concept and consumption a real concept. After the number of physical units is measured, multiplying this number by the price will give us the monetary version. Since one implies the other, Sáenz said he had no objection about identifying both concepts. It is obvious that there cannot be consumption is there is no consumer spending.

The same thing happens with national income and national product. The first are monetary units and the second are physical units suitable for monetary representation. It is the same idea that will exist between savings, investment and capitalisation.

Economists frequently debate different subjects believing that they are talking about a common issue. Sáenz did not realise the intention or aim of Bernácer’s argument. The Spaniard was concerned simply with establishing the distinction between consumption and consumer spending, capitalisation and investment (and this with savings), with which he wanted to highlight the possible lack of correspondence between production-supply and demand. And if this happens, inventory investments will appear.

Nonetheless, Sáenz, who didn’t realise this, insisted on a debate that I believe lacked importance. He said that of course there could be imbalances between physical consumption and consumer spending during certain phases of the economic cycle.

‘I refer specifically to variations by consumers and sellers. The accumulation of stock during specific phases of the cycle can accelerate total spending of the community without correlatively increasing physical consumption; the drop in stock in the hands of consumers and intermediaries in other phases of the cycle can prevent the acceleration in physical consumption from increasing producers’ earnings…’

I believe these economists did not look at the problem to analyse it, but were so entertained in looking at each other that they got lost in the same polemic.

What happened was that the veil of words also veiled the argument and the matter is so subtle that it seemed more like a game. The problem is the following: Of course consumer spending is not the same as the physical consumption in Sáenz’ words. To Bernácer, when speaking of physical consumption, he emphasised the total number of units acquired and not the destruction that consumption implies. In this way both are right and what was sought –a clarification of the fundamental macroeconomic equation– was not clarified or darkened. It was basically not touched upon. While Bernácer was speaking of physical consumption units, Sáenz was speaking of the physical consumption of these units. They are not the same although they occupy the same words and the same number of them.

22.3. Forced equilibrium

National income is broken down into spending and saving; and production, which originated this income, is broken down into production of consumer goods and production of capital goods. Spending will acquire consumption goods and savings will demand capital goods and/or will help to form them. Sáenz previously admitted that

Income – consumer spending = Savings

Thus:

This coincidence to Bernácer was a market contingency and not an identity. Reflecting on an identity is nothing more than a forced hypothesis of equilibrium. This was always Bernácer’s opinion. That savings and investment are equal is a question that we will look at in the following example set forth by Bernácer. If the public as a whole decides to save more, their consumption or consumer spending will decrease, making production and sales not profitable. If, in parallel, demand for capital goods or investment increases with this greater savings, the opposite will happen, making capital resources and the matched working resources travel towards the capital market. And who tells us that savings is totally capitalised? Sáenz said that nothing happens, according to Bernácer.

And the argument, pretentiously dynamic, ends up being futile. If hoarding increases, the income of other individuals will decrease. Which individuals? Those who did not sell their products when they could because the money-income hoarded was not claimed from shops. In this way, greater hoarding by some people produced lower hoarding for other people, without this changing the amount of merchandise in the economic system.

Common sense believes this is logical and common. Everybody knows that merchandise wealth is created with rolling money. Merchandise is created and manufactured with money and then removed from shops with money and, furthermore, these purchases provide means for producers to continue production. None of this happens when the money is frozen, which will remain frozen, just like the merchandise in the shop windows. Nothing moves forward with hoarding, just like a reservoir, unlike what happens in the monetary river that brings navigable merchandise with it. It is not about the amount of money but the functionality or movement of this money. If it were about the quantity, you would just have to add the hoarded money to the money in operation to try to understand income and production. To Bernácer, supporter of his income-based theory, what matters is money in movement or money-income.

Note: Bernácer lost a golden opportunity here to explain his financial market theory to Sáenz, a market which is fed with disposable funds. Disposable funds or income that is not consumed or capitalised or hoarded, would have given his explanation more precision. Bernácer stayed with hoarding, despite the fact that most of his theory spoke of the financial market and disposable funds.

22.4. Sáenz’ response to forced equilibrium

Sáenz defended himself by saying that neither he nor Keynes, who he followed, said that investment decisions coincide with previous decisions to save, and that Bernácer had not read the voluminous literature about ex ante and ex post or understood Keynes’ theory.

Keynesian theory says that in actual results, or ex post, savings and investment match. Expansions and contractions in the volume of employment and national income make it possible.

I believe that this is exactly what Bernácer did not believe, that ex post savings and investment are equal. Of course he knew all about Keynesian literature and its contradictions, since his theory on disposable funds and his disheartening suspicions forced him to study it in depth. But Bernácer was only concerned with facts, like a good accountant and a good physicist. He didn’t care what was happening in the minds of saving and investing economic agents, although he did care about the result of these choices or the ex post operations registered and seen on the market.

Ex post savings and investment are only equal in the equilibrium hypothesis. This is what Bernácer understood and what Sáenz thought always happened, with or without equilibrium. If savings is not capitalised, then equilibrium and equality stop existing. This is the opinion that Bernácer always developed from the beginning.

With aggressiveness not free of ingenuity, Sáenz said that surely if a privileged mind like that of Bernácer had not understood this point in Keynesian theory, it was because The General Theory that reached Spain had been destroyed by censorship. Although there was great censorship at that time with respect to politics and morals and religion, there was no censorship in technical issues and much less in a theory that was quite complex.

Emilio Figueroa, who worked with Bernácer at the Bank of Spain, told him he should throw the ball back to the Mexican with the same force that Sáenz had thrown it. He could do this because the translation of The General Theory that came to Spain was done by a Mexican publishing house, Professor Sáenz’ country, which proves that it was neither mutilated nor unknown and that, if Bernácer had read it, it was through this prestigious Mexican publishing house.

On disposable funds

Sáenz translated the article about disposable funds for Robertson. The English economist, after acknowledging that he had received it 16 years earlier (spoken in 1940) said: ‘The translation done for me by Mr Josué Sáenz was of great help to me’. An article is not enough to set forth an entire economic theory, no matter how clearly it is written. A great deal more complementary literature is required to shape it, giving it internal coherence and greater precision and depth. And of course, neither Robertson nor Sáenz nor anyone else I know, except Professor Savall, has read Bernácer’s works. On these grounds, I can understand and comprehend Robertson’s and Sáenz’ criticisms of Bernácer’s disposable funds. The same happened to me at first.

At any time we consider, economic subjects will have part of their income available. It is available for consumers to spend on consumer goods and producers to spend on capital goods with savings. After this operation is done, the income is no longer disposable for these initial agents, but it is disposable for others. First-degree and second-degree disposable funds are not true disposable funds, since they are needed to carry out normal operations for individual and business survival.

Authentic disposable funds are those that are not required for consumption or capitalisation. This is money that is on the stock exchange. Bernácer added that this term –disposable funds– has been adopted in stock-exchange slang. It would be wrong to call a worker’s daily wages disposable funds or the part of company profits required to meet immediate emergencies for working capital.

For Sáenz, total disposable funds equal zero. This statement rests on the dangerous sophism that the money that some receive represents the disposable funds that others have spent. Sáenz did not see the most important fact, which is that everything depends on what is done with the fraction of income spent and where it is. If it has been spent on consumer and capital goods (1^st and 2^nd degree), it is then producers’ disposable funds. But if we recognise that part of savings –overall disposable funds– that are not invested and move to the financial market for speculation, with an agent buying secondary securities, then the disposable funds of one move to become the disposable funds of another. It is, as I said, a neutral operation and these disposable funds are not only positive but can also increase.

As mentioned, producers’ disposable funds are not maximum or authentic disposable funds, given that their destination is spending on the ordinary market. The same does not happen with speculative funds, whose aim is to remain in this state for speculation. Bernácer complained that Sáenz did not understand a single word of his modest writings. Neither he nor Robertson understood, owing to their brevity, since Bernácer did not have academic and cultural support that publicised the translation of his works.

Sáenz’ response to disposable funds

Sáenz acknowledged that he had not understood the comments about disposable funds which are, as we have seen, the most important part of his theory. In any case, he did not grant them importance for understanding the economic cycle.

He would have understood them better if he comprehended that, if these are born from savings, it means renouncing consumption and that they do not return to demand capital goods, meaning that they are necessarily invested and thus, savings will not equal investment. For this reason and many others, this section on disposable funds complements Bernácer’s on forced equilibrium. Only in equilibrium, I repeat, does savings equal investment.

Note: My formula, using other symbols but faithful to Bernácer’s thought, is the following:

S_k +D = S_total

S_k is savings that is capitalised and thus:

S_k = I

S_k < S_total

S_total > I

and for Sáenz and Keynes, it is: simply S.

22.5. Prospective and retrospective

Looked at from any viewpoint, the identity S = I is false. Bernácer started by connecting the following sentence by Sáenz: ‘It is obvious that at any given time, an individual can decide how much money he wants to save, even deciding to hoard it, and that there is no obligation for him to invest a quantity equal to his savings. In this prospective interpretation, it is clear that savings and investment, for individuals, do not have to be identical.’

Bernácer acknowledged that he did not understand. Thus, he asked – Is the fact that an individual saves and even keeps his money a prospective fact? I thought it was a real fact, accomplished. Our economist returned patiently and persistently to state that what he studied was what was really important, and what was really important was what really happened on the market, in other words, operations that had already been done, accomplished in short. And it is in these operations that had happened on the market when there was no coincidence between supply and demand.

He said that what happened is that both Sáenz and his teacher Keynes, when they thought about savings, they were implicitly thinking about investment or capitalisation, which is how they identified them. At this moment, when savings takes place, the only true thing is the saving and what is planned is investment, where there is also a lapse of time between one and the other. During this period, this savings is a temporary financial disposable fund, or what I call second-degree disposable fund. If after investment there is a disposable fund, this will be called a third-degree disposable fund, maximum disposable fund or disposable fund properly speaking.

Given that these disposable funds may live on, the error in believing that savings and investment are equal is clear, as well as the fact that they are not equal either conceptually or numerically.

But Bernácer had yet another criticism. Sáenz was right when he said that ‘in this prospective interpretation, it is clear that savings and investment, for a given individual, have no reason why they must be equal’ (my italics, commented on by Bernácer on page 647 of El Trimestre Ecónomico of January-March 1947 in his article entitled ‘Keynesian Disquisition’). He was right because savings and investment are not identical for a subject for several reasons. But Sáenz thought and stated that he believed that while this coincidence did not happen with respect to microeconomics, it did happen in macroeconomics. And this last suggestion was rejected by Bernácer also.

In this boisterous dawn of macroeconomics, the voices of the teachers were confused with the enthusiastic repetition of their students until, in the end; these multiple echoes blurred the original message. Nonetheless, there were certain truths and dogmas that were faithfully repeated and, what is worse, were not discussed. One of them is the time at which capitalisation is fulfilled. For Keynesians (and for Sáenz), it takes place when the producer decides to create a production means. This is not what Bernácer thought, as we have seen in several past sections, due to dealing with fundamental identities in his explanation.

For Bernácer, capitalisation, which is a different activity than saving, occurs when savings demands capital goods produced or demands the supplies required to manufacture them.

And furthermore, these production or capital goods were confused with a mass of products in producers’ hands called working capital. This mass is separated from producers at the time of capitalisation, via a purchase operation, which is done with savings. This time is also when it stops being called working capital and becomes fixed capital. Is this calculation ex ante? Are they prospective activities? No, they are registered facts that physicist and accountant Bernácer, used to parsimonious records and millimetric and temporary analysis, knew how to measure correctly.

22.6. Sáenz’ response to prospective and retrospective

After Bernácer made the exact definition of ‘fact’ very clear and the meaning of what is prospective and what is retrospective, Sáenz brilliantly replied that he did not know how to differentiate them, that he got entangled in the terms and that, furthermore, he did not know how to come to understanding. He said that Bernácer did not understand Keynes, since this economist did not analyse economics statically but rather dynamically. Proof of this was The General Theory, which establishes functional relationships and therefore the causality between employment, circulation, consumption, stock variations, hoarding, investment, national income, etc.

Sáenz, who must I admit know Keynes’ thought very well in these early years, did not directly criticise Bernácer. He didn’t say practically anything in this section. It is very possible that he was perplexed or maybe confused when reading this precise and millimetric Bernacerian formulation that separated savings, investment, capitalisation, etc. He did not explain in what Bernácer’s confusion consisted nor in what Keynes’ dynamism consisted and he did not explain neither the key term of capitalisation nor the almost-magical operation that is financing of capital goods made with savings.

For Sáenz, Keynes’ creation was an unprecedented scientific discovery and he closed ranks behind him. The same thing would happen in the Western world when legions of economists tried to perfect nascent macroeconomics. Clearly, Bernácer’s annoying criticisms of his teacher bothered him and, since he didn’t agree with him, he accused him of not understanding Keynes. I can assure Mr Sáenz, over close to forty years of distance (this article was published in 1989) that Bernácer bothered me even more.

There is a larger annoyance. In 1989, I collected a macroeconomic work that was arduously worked upon for fifty years by so many economists that I believe that the distance between The General Theory and what we read now in textbooks in infinite. It is logical that more is known now than before. Thus if it is understandable that the stone in the road (the stone being Bernácer) disturbed Mr Sáenz, why does it bother me? Because I understand that they have not understood the macroeconomic consequences of the financial market, of the disposable funds that nourish it and why these disposable funds breach the sacrosanct rite of equality between savings and investment. And also because I have never read anything more precise than what Bernácer established when differentiating consumption from consumer spending, savings, capitalisation, spending on capital goods…

Mr Sáenz probably did not have all of Bernácer’s work in his hands and did definitely have all of Keynes’ work, since it has always appeared very well documented. What he didn’t know was that Bernácer had already built a large part of the monetary apparatus before Keynes and that Bernácer had been surprised and irritated by the Englishman’s imperfections.

Keynes reached the world like an arrow launched by genius, sowing polemic wherever he went, offering specific theoretical solutions and practical ones also, naturally, on classical economics that were sunk into the swamp of useless dogmatism. Sáenz saw a continent worth conquering in this. The glitter of novelty and the shine of the English, of what is foreign, the glamour of Britain seduced him, like it also seduced Spaniards and even Bernácer’s student Figueroa. One Mexican and one Spaniard, both Spanish speaking and both born in countries where what is generated domestically is automatically scorned. Thus, Bernácer and Sáenz did not understand each other. It was a shame since the Mexican’s sharp intelligence could have, if it had wanted to, perfected the Spaniards doctrinal work.