Thursday, 20 February 2014


Money is the Universal Equivalent Form of Value. This definition, developed by Marx, makes clear that money is something completely different from its material representation, whether that representation takes the form of a money commodity, such as gold or silver, or whether it takes the form of money tokens, be those tokens paper notes, metallic coins, or bitcoins.

Value is labour, and labour undertaken for the creation of products is value. A given quantity of value is then a given quantity of labour, and the means of measurement of labour is by time. This labour being measured is not some specific labour, but labour in the abstract, in the same way that the measurement of length, in units of feet, is not undertaken on the basis of some specific person's foot, because everyone's feet differ in size, but on the basis of an abstract foot.

In Capital I, Chapter 3, and in Capital III, Marx describes the historical and logical process by which products become commodities, as the intermittent exchanges of primitive tribes, of these products, become regular trade. At the same time that products become commodities via this gradual process of the expansion of exchange, so the value of the products being exchanged start to be measured against each other, so that the exchange of a product, with a particular value, occurs on the basis of the receipt of a product or products with an equal value. In other words, what is being exchanged is really an equal amount of labour. As Marx points out, with the range of commodities exchanged being very limited, and with peasant producers continuing to be close to the production process for all commodities, each participant in these exchanges knows fairly accurately the average time required for their production. Even when the range of commodities increases, and when the range of times actually taken for production varies more widely, because production is undertaken by a large number of individual producers, under different conditions, the fact that a class of merchants arises, who take on the function of buying up all of this disparate production, and selling it, averages out these differences, because the merchants' ability to make a profit from such activity depends upon them having an accurate knowledge of what is the average labour-time required for the production of each commodity.

This process by which the value of one commodity becomes measured against the value of other commodities passes through a series of historical and logical stages analysed by Marx – The Value Form. Money, as the universal equivalent form of value is the culmination of this process. Money then here replaces abstract labour as the measure of value, and, as Marx says, the labour-time used for producing the money-commodity, thereby replaces abstract labour. Money as value, is by definition, therefore, labour, a claim on a definite quantity of labour-time. A given amount of money is nothing more than a given amount of labour-time, it is a claim to have in exchange for it a given amount of value/labour-time.

It is this aspect of money that would continue to apply under Communism, as Marx sets out in his Critique of the Gotha Programme.

“Accordingly, the individual producer receives back from society -- after the deductions have been made -- exactly what he gives to it. What he has given to it is his individual quantum of labour. For example, the social working day consists of the sum of the individual hours of work; the individual labour time of the individual producer is the part of the social working day contributed by him, his share in it. He receives a certificate from society that he has furnished such-and-such an amount of labour (after deducting his labour for the common funds); and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labour cost. The same amount of labour which he has given to society in one form, he receives back in another. 

Here, obviously, the same principle prevails as that which regulates the exchange of commodities, as far as this is exchange of equal values. Content and form are changed, because under the altered circumstances no one can give anything except his labour, and because, on the other hand, nothing can pass to the ownership of individuals, except individual means of consumption. But as far as the distribution of the latter among the individual producers is concerned, the same principle prevails as in the exchange of commodity equivalents: a given amount of labour in one form is exchanged for an equal amount of labour in another form.” 

Those who mistake the forms that money takes for money itself are guilty of a type of fetishism, similar to commodity fetishism. It is not gold that is money, or any qualities of gold that make it money. Gold is merely a commodity, which can perform the functions of money, better than most other commodities. The functions of money as set out by Marx are to act as unit of account, means of circulation, means of payment and store of value.

As Marx sets out in Capital I, Robinson Crusoe can calculate the
value of all the products in his store, by keeping account of the
labour-time required for their production.
If the value of any commodity is equal to the labour-time required for its production, then a unit of account could be a period of labour-time. In a communist society, as described by Marx above, all that is required for this is an accounting of the labour-time required for the production of the various products. Each product could be labelled with a price-tag in labour-time rather than in £'s, €'s, $'s etc. If a yard of linen is equal to 10 hours of labour-time, I can calculate the value of all the linen in my store, by multiplying the number of yards by 10, to give me the total value in labour-time. The hour of labour-time here is the unit of account. The problem here, of course, is what constitutes an hour of abstract labour-time. If I am a carpenter, and contribute an hour of my labour, this might be equal to 2 hours of the concrete labour of the cobbler. The problem arises of how to convert an hour of this concrete labour to an hour of abstract labour. This problem, Marx says, was resolved in the marketplace, by what the consumers, of the products of these diverse concrete labours, were prepared to pay. But, once money takes the shape of a money commodity, the physical embodiment of value/labour-time, then this money-commodity fulfils this function. If 1 ounce of gold has a value equal to 10 hours of labour-time, then each yard of linen in my store has the value of 1 ounce of gold. It is no longer necessary to measure an amount of one type of concrete labour with the same amount of another type of concrete labour, but only to measure each commodity against the money commodity, which represents abstract labour itself.

If we relate this to the representation of money as simply a certificate entitling the owner to a given amount of social-labour-time in exchange, the difference between the form of money and money itself becomes clear. Suppose, in a communist society, such as that described by Marx above, 1 billion hours of labour-time is expended on the creation of products, all available to be consumed. If there are 1 million people in this society each having worked the same amount of abstract labour-time, they obtain a certificate entitling them each to 1,000 hours of labour-time out of the common store. This certificate is stamped 1,000 hours of labour-time, and 1 million of these certificates are issued. Everything is fine. 

However, suppose instead 2 million of these certificates are issued. It soon becomes clear that there are not enough products, not enough labour-time available in the common store, to honour all of these certificates. Whatever, the face value of the certificate says, its real value has been halved. This problem exists for any kind of token, be it a coin, paper note, or bitcoin that represents money, i.e. represents a given amount of value/labour-time, and obviously, as Marx demonstrates, the same applies to credit. The token is what it says, it is a token simply standing in the stead of some real money commodity, which in turn exists only as a physical manifestation of money itself, i.e. of a given quantity of value/labour-time. As Marx puts it describing the relation between these tokens, and the actual money commodity.

“If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.

Paper money is a token representing gold or money. The relation between it and the values of commodities is this, that the latter are ideally expressed in the same quantities of gold that are symbolically represented by the paper. Only in so far as paper money represents gold, which like all other commodities has value, is it a symbol of value.” (Capital I, p 128-9)

In “ A Contribution To A Critique of Political Economy” he writes,

“How many reams of paper cut into fragments can circulate as money? In this form the question is absurd. Worthless tokens become tokens of value only when they represent gold within the process of circulation, and they can represent it only to the amount of gold which would circulate as coin, an amount which depends on the value of gold if the exchange-value of the commodities and the velocity of their metamorphoses are given…”

So, the paper note here (say a £10 note) is a “ token of value”, but value is nothing more than a given quantity of labour-time. It has value as a £10 note only because it represents a given amount of value/labour-time embodied in the money-commodity – here gold. The name of the money unit is historically derived from this given amount of the money commodity, so for example, a Pound Sterling, was the value of 1 pound weight of sterling silver. Its quite possible, as illustrated by the example of the communist society, however, that this token of value might have no real reference to such a money commodity. It could simply be a token representing a given amount of labour-time, and, as the form of money increasingly takes the shape of these tokens (and then credit) rather than of some money-commodity, such as gold, this is essentially what these tokens do represent. This does not change the underlying economic law, by which the total amount of value of commodities in circulation, is equal to the labour-time required for their production, and this value determines the quantity of money required for their circulation.

“The number of pieces of paper is thus determined by the quantity of gold currency which they represent in circulation, and as they are tokens of value only in so far as they take the place of gold currency, their value is simply determined by their quantity. Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity…."

Because money is the universal equivalent form of value, the amount of gold, put into circulation, as the money-commodity, depends upon both the value of all the commodities to be circulated, and the value of gold. If the total value of commodities to be circulated is equal to 1 million hours of labour-time, and one ounce of gold has a value equal to 1 hour of labour-time, then 1 million ounces of gold has to be put into circulation, assuming each ounce performs just one transaction, i.e. the velocity of circulation is equal to 1. However, if the value of gold rises, because more labour-time becomes needed for its production, then the amount of gold put into circulation falls. If an ounce of gold rises in value to 2 hours of labour-time, then only 500,000 ounces of gold are required for circulation. If tokens replace gold, then the nominal value of these tokens must be limited to the gold they represent, which is nothing more than saying they must be limited to the amount of value/labour-time they represent.

Marx illustrates the way in which, with gold,silver and copper, any excess of money, in circulation, is automatically withdrawn. If too many gold coins are in circulation, the value of each coin falls below the value of the gold, which comprises it. As a result, gold coins are withdrawn from circulation, and melted down into bullion, then sold on global markets. But, money tokens such as paper cannot be withdrawn, in this way, because, unlike gold, silver or copper, the paper token has no value itself.

His power to determine the value of money, and of interest rates
is mere illusion.
“The intervention of the State which issues paper money with a legal rate of exchange – and we speak only of this type of paper money – seems to invalidate the economic law. The State, whose mint price merely provided a definite weight of gold with a name and whose mint merely imprinted its stamp on gold, seems now to transform paper into gold by the magic of its imprint. Because the pieces of paper have a legal rate of exchange, it is impossible to prevent the State from thrusting any arbitrarily chosen number of them into circulation and to imprint them at will with any monetary denomination such as £1, £5, or £20. Once the notes are in circulation it is impossible to drive them out, for the frontiers of the country limit their movement, on the one hand, and on the other hand they lose all value, both use-value and exchange-value, outside the sphere of circulation. Apart from their function they are useless scraps of paper. But this power of the State is mere illusion. It may throw any number of paper notes of any denomination into circulation but its control ceases with this mechanical act. As soon as the token of value or paper money enters the sphere of circulation it is subject to the inherent laws of this sphere…."

In the same way as illustrated above, the amount of paper notes needed to be thrown into circulation is a function of the total amount of labour-time embodied in commodities to be circulated, and the amount of labour-time represented by each note. If the total amount of value to be circulated is equal to 1 billion hours, then assuming the velocity of circulation is 1, if 1 billion notes are issued, then whatever the nominal value of each note, each can only have a value equal to 1 hour. If 2 billion notes are issued, the value of each falls to just 0.5 hours of labour-time. In reality, the nominal value stamped on each of these notes obviously remains the same, but the fact that each note has fallen in value, is then reflected in the fact that the prices of the commodities they buy rises.

The value stamped on each note may continue to say £1, which previously was equal to 1 hour, but where previously this £1 note would buy 5 kg. of potatoes, now it buys just 2.5 kg. The price marked on the 5 kg. of potatoes rises from £1 to £2. In other words, we have inflation.

“The rise or fall of commodity-prices corresponding to an increase or decrease in the volume of paper notes – the latter where paper notes are the sole medium of circulation – is accordingly merely a forcible assertion by the process of circulation of a law which was mechanically infringed by extraneous action; i.e., the law that the quantity of gold in circulation is determined by the prices of commodities and the volume of tokens of value in circulation is determined by the amount of gold currency which they replace in circulation. The circulation process will, on the other hand, absorb or as it were digest any number of paper notes, since, irrespective of the gold title borne by the token of value when entering circulation, it is compressed to a token of the quantity of gold which could circulate instead. …

“In the circulation of tokens of value all the laws governing the circulation of real money seem to be reversed and turned upside down. Gold circulates because it has value, whereas paper has value because it circulates. If the exchange-value of commodities is given, the quantity of gold in circulation depends on its value, whereas the value of paper tokens depends on the number of tokens in circulation. The amount of gold in circulation increases or decreases with the rise or fall of commodity-prices, whereas commodity-prices seem to rise or fall with the changing amount of paper in circulation. The circulation of commodities can absorb only a certain quantity of gold currency, the alternating contraction and expansion of the volume of money in circulation manifesting itself accordingly as an inevitable law, whereas any amount of paper money seems to be absorbed by circulation.”

In other words, the total quantity of notes (and other tokens) in circulation has a value equal to the amount of value/labour-time of the commodities being circulated (divided by the velocity of circulation). If the value of the commodities to be circulated remains the same, but the quantity of tokens rises, then the value of each token falls proportionately, so that their total value remains unchanged.

He didn't have the power to reduce interest rates.  Interest rates fell
because the supply of potential money-capital rose relative to the
demand for it, as the volume and rate of profits rose massively
from the mid 1980's.  Like other central bankers, he only has the
power to destroy the value of money tokens by printing more of them.
This also indicates why central banks cannot reduce interest rates by printing more of these money tokens. The rate of interest is a price like these other prices. It is a function of an interaction of demand and supply for money-capital. If the value of money tokens is reduced by 50%, as a result of money-printing then this affects both sides of this demand-supply equation equally. If the original demand for money-capital was £1 billion = 1 billion hours of labour-time, and this demand was met, at an interest rate of 5%, by the supply of £1 billion of money-capital, then after the money has been devalued, the demand for money-capital will still have a value equal to 1 billion hours of labour-time, except now this will be represented by a nominal value of £2 billion. But, likewise, because 1 billion hours of labour-time is now represented by £2 billion, this £2 billion will continue to be supplied only if those supplying it are paid an interest rate of 5%. The real value relations underlying the exchange have not changed. The interest rate could only change if those underlying value relations change, that is if the amount of actual money-capital supplied changes in relation to the actual amount of money-capital demanded. Changes in the nominal value of money tokens cannot change this.

It can be seen why gold was best suited to act as money-commodity for the other functions described by Marx. Because, the value of gold is determined by the labour-time required for its production, the value of gold remains stable for long periods of time. It is only when new large sources of gold are discovered, such as with the California and Australian Gold rushes, that the labour-time required for its production falls, the value of gold falls, and the prices of other commodities, therefore rise against it. A similar thing occurred, when Spain acquired large amounts of gold by simply looting it from South America. When the value of gold fell as a result of the California gold rush, this, Marx explains, was a means of capital accumulation, in Britain. Rents on farm leases were set for long periods at fixed nominal money prices. When the value of gold fell, the value of agricultural commodities rose. Capitalist farmers incomes thereby rose, whilst their rents remained the same, increasing their profits, and providing thereby increased capital.

But, the fact that the value of gold remains constant for long periods, makes it suitable as a means of circulation, because those exchanging it for commodities and vice versa have some certainty about the rate of exchange. The same is even more true as regards its function as means of payment and store of value. Money acts as a means of payment, because commodities can be bought at one point in time, but paid for later. Textiles might be bought by merchants for sale in India in January, but not arrive for sale until June, payment for them only being made after that delivery. Both seller and buyer need to know that the price that was fixed in January has not changed hugely by June as a result of any fluctuation in the value of gold. If I have a hoard of money for whatever purpose, but ultimately the purpose is to be spent at some future date, in other words, if I am using gold as a store of value, then this is only possible if the gold itself does not depreciate during the period it is stored.

The fact, as Marx sets out, that the gold coins that circulate, which initially have a weight corresponding to their face value, are frequently themselves devalued, because they get clipped as they circulate, suffer wear and tear, and because the state itself mints coins that are light, in order to cover its own debts, does not affect this function, provided that the coin acts as a token of value, in the way previously described. Provided the quantity of coins in circulation remains consistent with the amount of value/labour-time they represent, and the value of commodities to be circulated, each coin can retain its nominal value. It is only if the quantity of coins put into circulation is higher than this level that their value falls.

It is this fact, as Marx states, and as was recognised by Ben Franklin, in arguing for a paper currency, in the US, that means that such tokens can readily replace gold and silver, provided their issuance conforms to these laws. But, of course, when the state issues money tokens and credit in excess of that required, the consequence must be that the value of each token falls. That is manifest in inflation, whether it arises as an inflation of consumer goods prices, as happened in Weimar, Argentina, and Zimbabwe, at various times, and on a smaller scale in developed economies in the 1970's, or in the inflation of asset prices as has happened since the 1980's, with the huge bubbles that have been blown up in shares, bonds, property etc.

No comments: