[Marxism] Marxist perspective on money

Louis Proyect lnp3 at panix.com
Wed Oct 12 09:31:10 MDT 2005

>I've been reading _Capital_ by Marx, and I am in the depths of the
>section on money (I've also read _Zur Kritik_ on money).  Marx seems
>adamant on the issue that money is really a commodity - that is, gold
>or silver as the money-commodity is congealed labor-time, in his
>phrasing.  Does the fiat system of money change this?  How does it
>impact on the analysis of _Capital_?  What is fiat money, in the system
>described by _Capital_?  I'd be grateful for any essays or elucidation
>from posters with more economic training than I have.
>Thanks for any pointers on this question.

VI. Marx’s Theory of Money

In the same way as his theory of rent, Marx’s theory of money is a 
straightforward application of the labour theory of value. As value is but 
the embodiment of socially necessary labour, commodities exchange with each 
other in proportion to the labour quanta they contain. This is true for the 
exchange of iron against wheat, as it is true for the exchange of iron 
against gold or silver. Marx’s theory of money is therefore in the first 
place a commodity theory of money. A given commodity can play the role of 
universal medium of exchange, as well as fulfil all the other functions of 
money, precisely because it is a commodity, i.e. because it is itself the 
product of socially necessary labour. This applies to the precious metals 
in the same way it applies to all the various commodities which, throughout 
history, have played the role of money.

It follows that strong upheavals in the ‘intrinsic’ value of the 
money-commodity will cause strong upheavals in the general price level. In 
Marx’s theory of money, (market) prices are nothing but the expression of 
the value of commodities in the value of the money commodity chosen as a 
monetary standard. If £1 sterling = 1/10 ounce of gold, the formula ‘the 
price of 10 quarters of wheat is £1’ means that 10 quarters of wheat have 
been produced in the same socially necessary labour times as 1/10 ounce of 
gold. A strong decrease in the average productivity of labour in gold 
mining (as a result for example of a depletion of the richer gold veins) 
will lead to a general depression of the average price level, all other 
things remaining equal. Likewise, a sudden and radical increase in the 
average productivity of labour in gold mining, through the discovery of new 
rich gold fields (California after 1848; the Rand in South Africa in the 
1890s) or through the application of new revolutionary technology, will 
lead to a general increase in the price level of all other commodities.

Leaving aside short-term oscillations, the general price level will move in 
medium and long-term periods according to the relation between the 
fluctuations of the productivity of labour in agriculture and industry on 
the one hand, and the fluctuations of the productivity of labour in gold 
mining (if gold is the money-commodity), on the other.

Basing himself on that commodity theory of money, Marx therefore criticized 
as inconsistent Ricardo’s quantity theory. But for exactly the same reason 
of a consistent application of the labour theory of value, the quantity of 
money in circulation enters Marx’s economic analysis when he deals with the 
phenomenon of paper money.

As gold has an intrinsic value, like all other commodities, there can be no 
‘gold inflation’, as little as there can be a ‘steel inflation’. An 
abstraction made of short-term price fluctuations caused by fluctuations 
between supply and demand, a persistent decline of the value of gold 
(exactly as for all other commodities) can only be the result of a 
persistent increase in the average productivity of labour in gold mining 
and not of an ‘excess’ of circulation in gold. If the demand for gold falls 
consistently, this can only indirectly trigger a decline in the value of 
gold through causing the closure of the least productive old mines. But in 
the case of the money-commodity, such overproduction can hardly occur, 
given the special function of gold of serving as a universal reserve fund, 
nationally and internationally. It will always therefore find a buyer, be 
it not, of course, always at the same ‘prices’ (in Marx’s economic theory, 
the concept of the ‘price of gold’ is meaningless. As the price of a 
commodity is precisely its expression in the value of gold, the ‘price of 
gold’ would be the expression of the value of gold in the value of gold).

Paper money, banks notes, are a money sign representing a given quantity of 
the money-commodity. Starting from the above-mentioned example, a banknote 
of £1 represents 1/10 ounce of gold. This is an objective ‘fact of life’, 
which no government or monetary authority can arbitrarily alter. It follows 
that any emission of paper money in excess of that given proportion will 
automatically lead to an increase in the general price level, always other 
things remaining equal. If £1 suddenly represents only 1/20 ounce of gold, 
because paper money circulation has doubled without a significant increase 
in the total labour time spent in the economy, then the price level will 
tend to double too. The value of 1/10 ounce of gold remains equal to the 
value of 10 quarters of wheat. But as 1/10 ounce of gold is now represented 
by £2 in paper banknotes instead of being represented by £1, the price of 
wheat will move from £1 to £2 for 10 quarters (from two shillings to four 
shillings a quarter before the introduction of the decimal system).

This does not mean that in the case of paper money, Marx himself has become 
an advocate of a quantity theory of money. While there are obvious 
analogies between his theory of paper money and the quantity theory, the 
main difference is the rejection by Marx of any mechanical automatism 
between the quantity of paper money emitted on the one hand, and the 
general dynamic of the economy (including on the price level) on the other.

In Marx’s explanation of the movement of the capitalist economy in its 
totality, the formula ceteris paribus is meaningless. Excessive (or 
insufficient) emission of paper money never occurs in a vacuum. It always 
occurs at a given stage of the business cycle, and in a given phase of the 
longer-term historical evolution of capitalism. It is thereby always 
combined with given ups and downs of the rate of profit, of productivity of 
labour, of output, of market conditions (overproduction or insufficient 
production). Only in connection with these other fluctuations can the 
effect of paper money ‘inflation’ or ‘deflation’ be judged, including the 
effect on the general price level. The key variables are in the field of 
production. The key synthetic resultant is in the field of profit. Price 
moments are generally epiphenomena as much as they are signals. To untwine 
the tangle, more is necessary than a simple analysis of the fluctuations of 
the quantity of money.

Only in the case of extreme runaway inflation of paper money would this be 
otherwise; and even in that border case, relative price movements 
(different degrees of price increases for different commodities) would 
still confirm that, in the last analysis, the law of values rules, and not 
the arbitrary decision of the Central Banks or any other authority 
controlling or emitting paper money.



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