A Marxist Guide to Capitalist Crises
“A Marxist Guide to Capitalist Crises,” an eBook created from the key posts on the Critique of Crisis Theory blog, is currently in production. We’ll be sharing the completed chapters between our regular postings.
Chapter 7
How money emerges out of the simple exchanges of commodities
In Chapter I, Volume I of Capital, Marx presents the following equation of exchange: 20 yards of linen = one coat
For example, say I have produced 20 yards of linen. Under the prevailing conditions of exchange, I can barter the 20 yards of linen for exactly one coat of a given type. The equal sign assumes that, in some sense, 20 yards of linen are the same as one coat. But exactly what is being equated here?
First, we see that both linen and coats are useful things, objects of utility, or, as the classical economists called them, use values. Each use value is measured in a unit that is appropriate for it — in the case of linen, length. Marx used the old-fashioned English units of length yards — still used today in the United States.
On the right side of the equation, we have one coat. The unit of measure of coats is each individual coat. We can divide the linen, within certain limits without destroying its use value. But we cannot divide the coat in half without destroying its use value. So, the individual coat is our unit of measure. We could have one coat like we have above, two coats, 100 coats, and so on. The units that measure the two use values are quite different.
Second, the two use values are qualitatively quite different. No matter how much linen I have, I don’t physically have a coat. The reverse is also true. Coats cannot physically be reduced to linen. Yet the two are being equated. They must in some sense be qualitatively the same. The quality that they share, according to Marx, is that they are both products of human labor.
But the labor, the actual skills, necessary for the production of linen on one hand and coats on the other are quite different. An hour of the labor of one person differs quite a bit from an hour of labor of another person.
Indeed, no two hours of labor performed by the same person are identical. A garment worker might work much more efficiently when they are fresh than later in the day when they are tired. If forced to work 10 hours a day, for example, not only will they work slower, they will be far more likely to make mistakes. Indeed, every person who has ever worked at all can testify to the truth of these observations.
Human labor as such versus particular types of human labor
Here we have to make an abstraction. We’ve got to leave out every feature of a particular act of human labor — the exact skills of the workers, whether the labor was performed at the beginning or the end of the workday, whether the workers had had a stimulating cup of coffee just before the labor was performed, whether the workers were in good or bad health, happy or sad. What we get is labor in the abstract, or labor as the logical class: human labor.
This, however, is not a mere mental exercise. Commodity exchange actually performs the abstraction. All particular characteristics of human labor are stripped away, leaving only what is common to all human labor.
It is abstract human labor that creates value, as opposed to concrete labor, which produces use values. What is being equated through the process of commodity exchange is not concrete labor but abstract human labor, even though the measuring unit of both is some unit of time, whether seconds, minutes, hours, days, months or years.
No two units of concrete human labor measured in terms of time are alike. They are qualitatively different and therefore cannot be quantitatively compared. In contrast, abstract human labor is homogeneous. It can in principle be divided into an infinite number of smaller units without losing its qualitative properties.
However, the abstract human labor embodied in commodities is not a physical substance visible to the eye, even through a microscope. We cannot actually see it in the linen or the coat. It is, rather, a social substance. It is this common social substance that is being equated in the equation 20 yards of linen = one coat. Therefore, while concrete labor creates use values — real wealth — it is abstract human labor that creates value. The very substance of value is nothing but abstract human labor.
Now, how do we measure the value of a commodity in everyday life? Is it in units of abstract human labor measured by the clock? Exactly how much abstract human labor was contained in the cup of coffee you bought this morning? You do know that you paid a dollar, a euro, or sixty pence for it. The value of commodities is never measured directly in terms of hours of labor.
But why not? Indeed, many reformers over the decades have suggested just that. Why can’t we just issue currency that represents a unit of labor? For example, a one-minute note, a one-hour note, an eight-hour note, and so on. For example, why not pay a worker in an eight-hour note after the worker has performed a standard eight-hour workday?
Actually, we would have to pay the worker in a four-hour note, assuming the rate of surplus value is 100 percent. If that were done, the exploitation would not be hidden but would be obvious. There is also the problem, of course, that we would be measuring the worker’s concrete labor here, not abstract labor. But doesn’t, on average, eight hours of concrete labor amount to eight hours of abstract labor?
What makes such “labor money” schemes completely impossible is the very nature of a commodity economy. Commodity producers are independent producers performing their labor for their own private accounts. They have no idea what their fellow commodity owners are producing, let alone what the broader needs of society are. In earlier chapters, we have seen that production must be carried out in certain proportions. If it is not, production completely breaks down, and with it human society itself. How are the correct proportions among the various branches of production achieved and maintained under a commodity system where there is no central organ that consciously organizes the labor of society?
The first commodity exchanges were more or less accidental exchanges of products between different communities. But over time, one community — in effect an independent commodity producer — would not accept a ratio of commodity exchange — for example, 20 yards of linen for one coat — unless they knew that it took more or less the same amount of labor on average to produce 20 yards of linen as it takes to produce one coat.
Suppose I represent the community — the independent individual commodity producer, which can just as well be a collective as an individual worker — that produces linen. I will measure the value of my commodity linen by the use value of the coat. Marx called the linen — a commodity whose value in this example is to be measured by the use value of the coat — the relative form of value, and he called the coat that measures the value of the linen the equivalent form of value.
Value, then, must take the form of exchange value. The exchange value of 20 yards of linen, according to Marx’s example, is one coat. Notice that the exchange value of the linen is measured in terms of the use value of the coat. Here for reasons of simplification, we will assume that the amount of (abstract) labor that it takes to produce commodities remains unchanged.
Now suppose, for some reason, that the coat producers fail to produce a sufficient quantity of coats. After all, there is no central authority of any kind telling them what to produce. How would I, a linen producer, know that not enough coats are being produced? I will know because I will now need more linen to obtain a coat.
Perhaps my 20 yards of linen will only exchange for one-half a coat. But half a coat is useless both in terms of use value and therefore in value terms, too. Therefore, if I, as a linen producer, want a coat, I will have to work for twice the amount of time. I now need to produce 40 yards of linen to “buy” a single coat.
I will be tempted to shift to the coat trade. As a coat producer, I will have to work only half the time to obtain the linen I need. Perhaps I am too old to learn a new trade, but my children will shun the linen trade for the coat trade. Coats are now “hot,” not linen. Eventually, too many coats will be produced, causing the “price” of linen in terms of coats to soar. Now it will be linen’s turn to be hot while the coat trade suffers from overproduction and hard times.
Through recurrent “mistakes” by the commodity producers, first producing too much of commodity x relative to commodity y and then producing too much of commodity y relative to commodity x, a balance is maintained over the long run. It is precisely through competition — or the mutual pressure of one commodity producer on another — that the correct proportions of production are achieved and maintained over time. This is what Adam Smith called the “invisible hand,” and Marx called the “law of value.”
The differentiation of the real economy and money economy in embryo
The 20 yards of linen has both a use value and an exchange value — in Marx’s example, the exchange value of the linen is one coat. Here in the simplest form of barter, we see in embryo the polarization of the economy into a “real economy” and a “money” or “financial” economy. Just like every cell in the human body has the complete genetic blueprint of a human being, the division between the “real” and the “monetary” economy is built into the simple commodity, the cell of capitalist production.
But in the simplest commodity exchanges, we see this differentiation between the real and monetary economy only in an embryonic form. To linen producers, the coat is the equivalent of their commodity. The reverse is also true. From the viewpoint of the coat maker — or coat-making community — it is the coat that is the relative form of the commodity and the linen that is the equivalent form. But isn’t money nothing but the universal equivalent for commodities as a whole?
As commodity exchange evolved from occasional accidental exchanges toward a broader system of commodity production and exchange, one commodity or at most a few emerged as the universal measure(s) of value. It became the special function of the money commodity to measure in terms of its own use-value the exchange values of all other commodities. This indeed is the basic function of money.
In the simple equation of exchange of 20 yards of linen = one coat, the coat functions as the measure of value for the linen producer in terms of its own use value, and the linen functions as the measure of value for the coat producer in terms of its use value. Why can’t all commodities be both the relative form of the commodity — the commodity whose exchange value is to be measured — and the equivalent form of value at the same time?
Not all commodities can be money
Suppose all commodities could function as equivalents — in effect, all commodities would be money. I assume “price” is simply the exchange value of a commodity measured in terms of the use value of an equivalent commodity. I go into a coffee shop and ask the owner for my morning coffee. Naturally, I need to know what the “price” of coffee is today. The owner says that in terms of linen, it is such and such a length, while in terms of coats, it is a fraction of a coat of a given quality and another fraction of a coat of another quality, and so forth, while in terms of shoes, it is a such and such fraction of a shoe, while in terms of laptop computers it is …
Well, you get the idea. If n represents the total types of commodities produced, then each commodity would have exactly n – 1 “prices.” If linen and coats were the only types of commodities, this would work, but in a system of complex commodity exchange, not to speak of capitalism, where virtually everything is a commodity, this simply won’t do.
But the problem can be easily solved if we use only one commodity as an equivalent rather than all commodities. For example, if the general equivalent for commodities was linen, the store owner might say that the price of a cup of coffee is 1/4th inch of linen.
This is, of course, much closer to reality and is at least conceivable. Indeed, the name of the British currency, the pound sterling, derives from the fact that once upon a time, the pound sterling represented an actual pound of the commodity sterling silver bullion. And the use value of sterling silver is measured in terms of weight — for example, pounds in old-fashioned English weights.
Originally, commodities that played the role of general equivalents were those that were the main form of wealth of the given society and epoch. For example, in the Homeric poems, wealth is measured in terms of cattle. Cattle were indeed an early form of what Marx called money material, the physical material of the use value of the commodity that acts as the universal measure of value. Some societies even measured the exchange value of commodities in terms of slaves. In this case, the enslaved workers not only produced the surplus product for the exploiting non-workers, they served as money material!
But as commodity production and exchange developed further, neither slaves nor cattle made very good money. Slaves can only be divided so far. A half a slave is a dead man or woman, not a slave. Slaves and cattle aren’t durable but live only a certain number of years. Enslaved humans generally had quite short lifetimes.
As commodity production and exchange developed, a universal equivalent emerged whose main use value was its monetary function.
We will not bore the reader with a “history of money” and list all the commodities that have served as the money commodity at one time or another. We will simply say that generally, metals — first copper, then silver, and finally gold — have served this purpose. Over thousands of years, however, it is the precious metal gold that has emerged as the main money commodity. Why has gold proven over time to be such a good money?
First, gold is quite rare in the earth’s crust, much rarer than silver, which has also been widely used as money throughout history. Since the late 19th century, silver has dramatically fallen in value — it now takes far less labor to produce a given quantity of silver than it took a century ago — but gold has held its value much better.
No matter how much mining and refining technology advances, at the end of the day, you need an ounce of gold in the ore to produce an ounce of refined gold.
Compared to silver-containing ores, most gold ores contain only tiny amounts of gold. Therefore, even when huge masses of labor, both dead labor in the form of constant capital and living labor in the form of variable capital, are thrown into gold production and refining, only a small amount of physical gold bullion on average results. In comparison to silver, it takes a much larger quantity of abstract human labor to produce an ounce of gold.
Gold, therefore, represents a large quantity of value — abstract human labor measured in terms of time — in a small amount of use value. This makes it possible to carry pieces of gold in your pocket that represent rather large amounts of value. In addition, the high value of gold makes it very expensive when it is used as a raw material for the production of non-monetary commodities. As a result, there is a strong incentive for industrial capitalists to find cheaper alternatives when they can.
Therefore, the high value of gold greatly limits gold as a use value. This brings gold closer to the ideal money commodity whose only use value would be to serve as money material. Gold doesn’t quite fit the bill; gold does have other uses, but it comes reasonably close. Why this is important will become clear in later chapters.
Gold is an element, not a compound, and can, therefore, in theory, be divided down to its individual atoms without losing its use value. This is a reasonable approximation of the infinite divisibility of the social substance that constitutes value — abstract human labor. In this chapter, I will assume, unless indicated otherwise, that gold and gold alone is the money commodity.
In addition, gold is durable. It does not tarnish and lasts for all practical purposes forever. Unlike cattle or slaves, it is, in effect, “immortal.” This brings us to the second function of money — a means of accumulating wealth.
Cattle or slaves have to be maintained, and they soon perish. But gold bars or coins last forever. The misers of old accumulated wealth by constantly adding to their pile of gold coins that they stored in their money chests. Every other commodity is measured in terms of the use value of gold. When our miser needs a particular form of wealth such as food, clothing or housing, instead of wealth in its abstract form — gold — our miser simply uses some of his gold to buy the food, clothing, housing, or whatever. This brings us to the third function of money, money as a means of purchase or money as currency.
Money as currency
The most well-known function of money is that of currency. Indeed, this is the everyday meaning of the term “money.” Ask a child what money is, and he or she will answer it’s what you use to buy things. Ask a professional economist who has earned a PhD through years of study, and you will get the same answer.
In terms of Marxist value theory, however, currency is nothing but the representation of money in the sphere of circulation. Today, when we think of currency, at least in the United States and the many other countries where the U.S. dollar circulates, we think of pieces of green paper with pictures of dead U.S. presidents and perhaps small coins, made of cheap metals, called pennies, nickels, dimes and quarters plus the occasional half dollar and dollar coins.
If you live in the European Union, where the euro is the currency, the color and pictures on the paper are different, and coins have different images stamped on them. But as is the case in the land of the dollar, you have pretty slips of paper with various images and numbers indicating the number of euros the note represents.
Once upon a time, however, currency consisted largely of coins made of precious metals such as silver or gold. Going back to before the invention of coinage, the money commodity functioned simply as the measure of value. A linen producer might have no direct idea how much my 20 yards of linen are worth in terms of coats. But if I, as a producer, know that 20 yards of linen are worth 50 head of sheep, and one coat of a given quantity is also worth 50 head of sheep, I know that I should demand one coat of that quality in exchange for my 20 yards of linen. Sheep, for reasons that should be obvious to the reader, though they can function as a measure of exchange value, make a lousy currency. Try carrying around 50 head of sheep in your pocket!
But I can carry around pieces of gold. As a child — or even a modern bourgeois economist of the Friedman school — can explain, I might not need a coat when I sell my 20 yards of linen. Or worse, no commodity owner who happens to possess 50 head of sheep worth of commodities may want 20 yards of linen.
But if instead of living in a society that uses sheep as money, I live in a society that makes use of gold as money, I have an easy solution. I can always sell my 20 yards of linen for a piece of gold of a weight that represents the exchange value of 20 yards of linen. I can then use the piece of gold to purchase not only a coat but any commodity whose price equals the weight of the gold piece.
Modern bourgeois economists call this the double coincidence of wants. In the absence of money, two commodity owners will not be able to make an exchange unless both need for the use value of the commodity that the other possesses.
However, economists reason once you have money, this problem is solved. All that is necessary for the exchange to take place is for one of the two parties in the exchange to own a definite sum of money, while the other party must possess a commodity whose utility is desired.
It is true that the double coincidence of wants problem has to be solved before occasional commodity exchanges developed into a continuing process of commodity circulation — C-M-C. But before you can have a representative of the universal equivalent as means of circulation — for example, gold coins representing gold bullion — you need the universal equivalent — for example, gold bullion — that the means of circulation — gold coins — will represent in circulation.
Coined money
But how do I know that a given piece of gold really contains the amount of gold — measured in terms of weight — that I think or hope it does? And how would the seller know? This problem can be solved if I find a reliable person to stamp a given piece of gold — or whatever metal, perhaps copper in ancient times — that serves as the money commodity, and therefore certify that it really contains a given amount of metal of a given quality. I will now have a reliable currency.
It is best if the person that certifies that the pieces of gold or other money metal is not engaged in commodity production. If they are, the temptation to cheat is simply too great! Who then is our trustworthy person? Such a person is not usually an individual person but the state. The state, generally, is not a commodity producer but does have an interest in maintaining a stable and reliable currency in the broader interest of the ruling class.
True, the state isn’t all that reliable. The history of coinage — currency — is also the history of the depreciation of currency. Permanent inflation, therefore, begins not long after the invention of coinage 2,500 to 3,000 years ago. Inflation has been going on for a long time!
Still, at least in thriving epochs, when money material is abundant, it will be in the state’s interest to maintain the actual metallic value of the coinage. Therefore, the history of coinage is the history of permanent inflation interrupted by periods when governments maintained stable currencies.
The last such period was during the international gold standard, which prevailed from about the 1870s to 1914 when World War I broke out. A brief, half-hearted attempt to reestablish stable currencies — where currencies are defined in terms of a fixed quantity of gold of a given fineness — was also attempted under the Bretton Woods system, which started to operate after World War II and collapsed in the late 1960s and early 1970s. An examination of the international gold standard and the Bretton Woods system will be the subject of later chapters.
Other properties of money
As we have already seen, commodity-producing labor is divided into many private labors. How do we determine that a product of a given private labor is indeed part of social labor? Once the commodity is produced, it is put on the market at a given price. Price, remember, is a given weight of gold. In the minds of all the producers, buyers, and sellers, the commodity, in addition to its actual material use value measured in units appropriate to that specific use value, also has an exchange value. The exchange value, or price, is a weight of gold, weight being the measure of the quantity of gold as a use value.
But now comes the difficult part. The commodity must show through its sale at its price defined in terms of a given weight of gold that the private labor that was performed to produce it was indeed a part of social labor. The labor that went into the production of the commodity is therefore only indirectly social. Gold, however — or, more broadly, whatever serves as money material — represents social wealth.
Labor that goes into the production of money material is directly social
But what about the labor that produces the commodity gold? Unlike the labor that produces all other commodities, the labor that produces gold is directly social. Here, remember, I assume gold is the only money commodity. If clamshells were used for money, the same thing would be true of the labor that is used to collect clamshells. The labor in a given quantity of gold — let’s say an ounce — doesn’t have to prove it is social labor by exchanging it for gold on the market. It already is gold.
In other words, because the labor that produces gold produces the social form of wealth directly, rather than a commodity that the producer hopes will find a buyer at its actual exchange value on the market, the labor that goes into the production of money material is directly social.
Money has no price
The prices of all other commodities are defined as weights of gold. But what is the price of gold? Again, remember, our assumption here is that gold and gold alone is the money commodity. Under these assumptions, gold by definition cannot have a price. The closest that we can get to the “price of gold” is to read all commodity prices — that is, all exchange values in terms of various quantities of gold — backward. Gold has as many “prices” as there are commodities, minus gold, of course. If silver is also a money commodity, gold would have a price in silver, and silver would have a price in terms of gold.
Whatever commodity functions as money lacks the price form of value. Instead, it has what Marx called in Chapter 1, Volume I of Capital, the expanded relative form of value. Marx logically derives the money form by having linen’s value take the form of the expanded relative form of value. In its own use value measured in terms of measurement appropriate to linen’s use value — some unit of length — the value of all other commodities will assume the relative form of value. Relative to all other commodities, linen, therefore, functions as the equivalent form of value. Linen therefore becomes the universal equivalent or general form of value. The value of all other commodities is now measured in terms of some quantity-length of linen.
To get “fully developed money,” all that Marx had to do was to replace dull linen with dazzling gold measured in terms of the unit appropriate for gold — a unit of weight — and rename the “general form of value” the money form of value.
The independent existence of exchange value
We have seen that a commodity is a unity of opposites. It is both an exchange value and a use value. These are the two opposite poles of its existence as a commodity. But can I hold pure exchange value separated from a specific commodity in my hand or carry it around it my pocket? Yes, I can! Exchange value is nothing but the use value of the equivalent commodity that is doing the measuring.
Exchange value expresses itself only through use value
Once the money relationship of production emerges out of simple commodity production and exchange, it is represented by the use value of the universal equivalent, the money commodity. Assuming gold is the money commodity, gold as a material use value becomes the independent form of exchange value. I, therefore, can hold exchange value in my hand and carry it around in my pocket.
The formula of simple commodity circulation
Money as currency gives rise to the formula of simple circulation that Marx developed in the first three chapters of Capital: C – M – C. Commodities C are produced, sold for money M and then exchanged for another commodity with a different use value, C, that has the same exchange value as the original C. Those readers who are familiar with Volume I of Capital will remember that capital, whose formula is M – C – M’, is not yet taken up in the first three chapters. There are only commodities and money but no capital or production of surplus value.
Money as means of accumulation or hoarding and the possibility of a general overproduction of commodities
An atom, like a commodity, is a unity of opposites. It contains both positive and negative electricity. The negative electricity is represented by electrons, which carry the negative charge. The positive electricity is represented by the protons, which reside within the nucleus. Can the contradictory poles of the atom be ripped apart? Yes, they can. Physicists call this ionization.
The poles of the commodity, use value, and exchange value, can similarly be ripped apart. Since the money relationship of production is embodied in a special commodity such as gold, it is a material use value. We have already seen that money must exist independently of the commodities whose use value it measures, just like electrons can exist independently of protons.
Therefore, just as electrons can be ripped from their “orbit” around a nucleus, so the exchange values of commodities can be ripped apart from their use values. In the simple commodity production mentioned above, the formula is C – M – C. Just because somebody has carried out the operation C – M, they are not obliged to immediately carry out the operation M – C. Unlike the case with barter, the act of selling, C – M, can be separated in time and space from the act of buying, M – C.
Suppose, for some reason, a substantial number of commodity producers wish to hold on to their gold to accumulate or hoard it. Gold, after all, functions as the abstract form of social wealth. To the extent that social wealth consists of commodities, everything is valued in terms of the money commodity gold.
If such large-scale hoarding of gold occurs, commodities will become “ionized,” so to speak. Their exchange values will be ripped away from their use values. Commodities will not be able to realize, or at least fully realize their exchange values. Because they cannot realize their exchange values, the commodities will not be able to reach those who need them as use values. So they can’t realize their functions as use values. This is nothing else but a description, though in the most abstract terms, of a general overproduction of commodities.
Of course, this is only the bare possibility of such a crisis. We have not explained why crises actually occur. In reality, the appearance of crises of generalized overproduction at periodic intervals does not arise under simple commodity production, C – M – C, or even early capitalism, M – C – M’.
But without understanding the possibility of the separation of the use values and exchange values of commodities, we cannot understand the essence of an actual crisis of a generalized overproduction of commodities. We inevitably fall into Say’s law, which states that commodities are paid for with commodities, and therefore generalized gluts are impossible.
This is why theories of the cyclical capitalist crises that either ignore the money relationship of production or incorrectly understand it, are inevitably spoiled from the start. The whole concept of the generalized overproduction of commodities slips right through our fingers, and we find ourselves in the swamp of Say’s law.
Now let’s examine some other functions of money.
Money as a standard of price
Suppose we call one troy ounce of gold $50. This establishes a standard of price. A dollar will then be defined as 1/50th of an ounce of gold. Perhaps I can go to the government mint and bring an ounce of gold bullion — bullion means uncoined metal — and the state will stamp it into a $50 gold piece.
But even if the state is not coining gold but simply defines a dollar or whatever the currency unit is as a given weight of gold, gold becomes a standard of price. For example, under the Bretton Woods system between 1944 and 1971, the U.S. dollar was defined as 1/35th of a troy ounce of gold of a given fineness—that is, the official price of gold was set at $35 an ounce.
Token money
In circulation, gold coins become converted into symbols, or tokens, of gold. Suppose a one-ounce gold coin turns over a hundred times in a year, realizing the exchange value of a hundred commodities whose exchange value is one ounce of gold, or $50 assuming the gold dollar is defined as 1/50th of an ounce of gold.
In circulation, in this case, one ounce of gold represents 100 ounces of gold in the course of a year. The faster the turnover of gold coins, the fewer coins that are necessary to circulate a given quantity of commodities—measured in terms of their gold prices—in a given period of time. There is, however, a limit. No matter how fast the turnover of gold coins is, a gold coin cannot purchase two commodities at the same time.
In circulation, tiny amounts of gold wear away — like a machine made of moving parts eventually wears out — and the coins become lighter. Our $50 gold piece will now contain less than an ounce of gold. However, this does not necessarily lead to the depreciation of the gold coin.
How do we know whether the gold coin is depreciated? We know the “price” of gold bullion in terms of the gold coin. As long as our worn or “light” gold coin still exchanges for an ounce of gold bullion on the bullion market, the coin is not depreciated no matter how little gold it physically contains. The coin has now become a symbol of gold in circulation. It is worth more as a symbol of gold than if it is melted down and transformed into gold bullion.
Notice in the above paragraph that I said price when referring to the “price of gold.” This is an important point. I, following Marx, have defined price as the exchange value of a commodity measured in terms of the use value of the commodity that serves as money. Assuming as I do throughout this chapter that gold is the money commodity, the price of a commodity is simply a weight of gold bullion of a given fineness. Gold itself cannot have a price. Being the money commodity, the closest we can get to the price of gold is to read all price lists backwards.
Gold appears to have a price
Yet, once gold coins are in circulation, gold bullion will appear to have a price in terms of those coins. What we have here is not price in the strict scientific sense as defined by Marx. Rather, we have an exchange rate, not unlike the exchange rate between the dollar and the euro, or the euro and the pound, and so forth. A given gold coin will exchange for so much gold bullion — the bullion is always measured in terms of weight. The exchange rate between the coin and the bullion is determined by how much bullion — gold — the coin represents in circulation.
In science, we have to be much more precise in terminology than we are in everyday life. It is a convenience to use the term “price of gold.” But what the dollar price of gold indicates is the amount of gold bullion measured in terms of some quantity of weight that a U.S. dollar represents. It is not for nothing that it appears every weekday at the top of the Wall Street Journal alongside the price of oil, the stock market quotes, and the quotes on government bonds. We can use the “price of gold” only so long as we keep in mind that gold, in its role as money, does not and cannot have a price in the strictly scientific sense of the word.
It is extremely unlikely, at least for very long, that a gold coin would represent less gold on the market than the amount of bullion it contains. If it did, the gold coins would be sent to the melting pot and transformed into bullion. One of the reasons why gold is such a good money commodity is that it can easily be coined, and gold coins can easily be melted down into bullion again.
But how much gold must a circulating gold coin lose before it depreciates against gold bullion? The answer is that there isn’t any limit. As long as coins are not over-issued, they can just as well be made of base metals such as copper.
They can also be replaced by pieces of green paper with pictures of dead U.S. presidents printed on them.
Token money turns out to be the same thing as fiat money. Far from being an ultramodern form of currency that arose after the end of the international gold standard, fiat money turns out to be among the oldest forms of currency in existence. It dates back almost to the invention of coined money, about 2,500 years ago, or in China, maybe 3,000 years ago. Gold as money material inevitably becomes a symbol or a token of itself in circulation.
Money as a means of payment
With the development of credit, the act of purchasing a commodity and the act of paying for it is separated. This brings us to yet another function of money, money as a means of payment. For example, you may purchase a house against a mortgage, but you then must pay for the house — plus the interest on the mortgage — over many years. Another example of money as a means of payment is the use of money to pay taxes. In this case, no commodity purchase is involved.
The development of the credit system leads at a certain stage to credit money. Credit money is an IOU or promissory note that is payable to the bearer on demand. The promissory note can be passed from one person to another and thus function as means of payment. Today, the most well-known form of credit money is a checking deposit, which can be transferred by its owner to another person using a check or, nowadays electronically. The checking balance is a promise by your bank to pay a certain sum of money to you on demand, in effect a promissory note. Since it can be transferred to another person, it can function as a means of purchase or a means of payment.
However, it can only perform these roles as long as the bank is willing and able to pay the owner of the checking account on demand a sum of money in some other form. In times past, this would have been in gold or silver coins. Today, checking accounts are payable in legal tender token — paper — money.
If the checking account for some reason should become unpayable in some other form of money, it will completely lose its quality as credit money. Unlike a full-weight gold coin, for example, which has value because it is physically made of gold bullion — a product of human labor — the checking account depends on the credit of its issuer, the commercial bank. In these days of insured bank deposits, the checking account is also backed up by the credit of the state to the extent that bank checking accounts are insured.
A common mistake that many Marxists, not to speak of bourgeois economists, make is to describe today’s paper currencies such as dollars, pounds, euros, yen and so on as credit money. In the days of the international gold standard, the pound sterling was payable to the bearer on demand at the Bank of England at the rate of five gold sovereigns per five-pound note. British law defines the gold sovereign as containing a given amount of gold of a given fineness and weight. Anybody who had gold bullion could go to the British mint and have it coined into sovereigns.
The pound notes issued by the Bank of England were a form of credit money — not token money, since in contrast to token money, such notes were payable in a certain amount of gold at the bank to the bearer on demand. In the days of the gold standard, the paper currency notes were promissory notes on either a central bank or a ministry of finance payable to the bearer of demand in a certain weight of gold — the money commodity.
For example, the five-pound note was a promissory note on the Bank of England payable in five full-weight gold sovereigns. A pound was not defined as a paper note. It was defined as a gold sovereign of a given weight of gold of a given fineness. These promissory notes — called banknotes — were not only payable on demand at the bank but could be used as a means of purchase and means of payment in place of gold sovereigns.
But those days are long gone. The modern British pound notes, just like dollars and euros, are a form of token money, not credit money, even if they are still called “banknotes.” The Bank of England is not legally liable like it once was to pay the bearer of the notes on demand in a certain sum of full-weight gold coins. Instead, the amount of gold that a pound represents is determined by the pound “price” of gold on the open bullion market, a “price” that fluctuates minute by minute.
Under the dollar standard, the “price of gold” is quoted in dollars. The “price of gold,” as we have seen, is not a price at all. Instead, it is the quantity of gold bullion measured in some unit of weight that a U.S. dollar represents at a given moment in time. The lesser currencies are quoted in terms of U.S. dollars and through the U.S. dollar indirectly in terms of gold. While most countries hold the bulk of reserves in U.S. dollars — in the case of a “run” against their currencies, they can sell U.S. dollars to prop up the value of their currencies — the U.S. holds the bulk of its reserves in gold. In the event of a “run” on the U.S. dollar, the U.S. Treasury can dump gold on the market and at least momentarily prop up the value of the U.S. dollar.
For example, as of March 2015, 74% of U.S. reserves were in old-fashioned gold bullion. China, often pictured as a country that is about to replace the U.S. as the leading economic power, in contrast, had only 1% of its reserves in gold.
By this far-from-unimportant measure in 2015, China had a long way to go to catch up with the U.S. Russia had only 13% of its reserves in gold, while the chief oil monarchy Saudi Arabia had only 2% of its total reserves in the form of gold. A few other countries, mostly imperialist countries, keep large percentages of their reserves in gold.
However, there is a catch. A lot of this gold is physically held in the United States, much of it in a huge vault located under the Federal Reserve Bank located near Wall Street in lower Manhattan. Since possession is 9/10 of the law, if not 10/10, both U.S. gold reserves proper plus a huge percentage of the gold reserves of other countries are held physically in the United States. Therefore, this foreign gold “backs” the U.S. dollar just like the gold that formerly belonged to the U.S. Treasury Department does. In turn, the U.S. dollar “backs” the domestic countries of virtually every other country on earth. This is the “monetary” side of the U.S. world empire which enables the U.S. dollar — a token currency — to function not only as the domestic currency of the U.S. but as a world currency that represents gold in circulation on a world market-wide basis.
Dollar standard
What is the current gold value of the dollar? Just open your browser and type in http://www.kitco.com. Take the reciprocal of the dollar price of gold — if it is $1,500 per ounce, a dollar represents exactly 1/1,500th of a troy ounce of gold.
The value the dollar represents in terms of hours of abstract human labor is the amount of abstract human labor that it takes to produce 1/1,500th of a troy ounce of gold at a given moment in time. Once you know how much gold a dollar represents, you can easily calculate how much gold the dollar’s satellite currencies represent — for example, the present-day British pound.
You check the current exchange rate of the pound against the dollar — how many dollars a pound represents. You then multiply that number by the amount of gold the dollar represents.
Each of the three forms of money — metallic, token and credit money — is governed by quite different laws. This is why it is important to distinguish between the token money currencies of today and the credit money currencies that prevailed in the days of the international gold standard.
For example, if the quantity of metallic money expands — all else remaining equal — the rate of interest falls, and there is a potential expansion of the market. If the quantity of credit money expands, again all else remaining equal, it will be harder for the issuers of the credit money to redeem the paper credit money for cash. For example, under the fractional reserve banking system, if the banks, through their loans, create more (imaginary) deposits while their reserves of token or metallic money remain unchanged, it will become harder for the banks to redeem their deposits if a “run” develops. Since one piece of money cannot settle two debts at the same time, at some point, an “over-issue” of credit money will lead to a general banking and credit crisis.
If the quantity of token money is increased, all else remaining equal, the result will be a depreciation of the individual currency notes and a general rise of prices in terms of the now-depreciated currency notes. For example, if we were to double the number of paper dollars — again, all other variables remaining equal — the result would be both a doubling of the dollar price of gold and a doubling in terms of dollars of the prices of all other commodities.
Some other properties of token money
Full-weight gold coins can circulate anywhere. Such coins can easily be sent to the melting pot and transformed into bullion and then into other national full-weight coins. In the days of the international gold standard, if I, a Yankee, were paid by a British importer of U.S.-produced commodities in gold sovereigns, I could take them to the U.S. mint, which would weigh the sovereigns, melt them down, and re-coin them into American gold dollars.
But the U.S. mint cannot melt down paper British pounds and reissue them as crisp green American dollars at the current rate of exchange. Therefore, Marx explained, token money generally only circulates in the area governed by the state power that, through its “monetary authority” — either the central bank or the finance ministry — issues the token money. As a general rule, the state power declares the token currency to be “legal tender for all debts private and public.” It is declared illegal to refuse it as a means of payment.
However, the U.S. dollar seems to violate this law. Doesn’t the dollar circulate in many other countries besides the United States? Indeed, the majority of paper dollars are circulated outside the United States. However, this exception proves the rule. The paper U.S. dollar can circulate outside the area that is formally governed by the U.S. state power because that power certainly doesn’t stop at the U.S. border!
For example, when the U.S. government decided to eliminate Osama bin Laden from the ranks of the living, it was not at all deterred by the “technicality” that Pakistan, where bin Laden was living, was not legally a part of the United States. Indeed, in the legal sense, at least, Pakistan is an independent sovereign country.
On the other hand, it is hard to imagine Pakistan similarly eliminating a man wanted by its authorities for crimes against its citizens and residents who happened to be living in the United States. Just like it is hard to imagine the Pakistani rupee replacing the dollar as the main world currency. The U.S. is far more than a country; it is the seat of a worldwide empire. This is why the U.S. dollar, though it is only a form of token money, can circulate throughout the world.
In fact, in countries with strong governments, the U.S. dollar generally does not circulate. Instead, it circulates in countries with weak governments. In these countries, the political and military power of U.S. imperialism is much stronger than the weak political and military power of the local governments. It is under these conditions that the U.S. paper dollar is able so easily to push aside the weak local paper currencies.
How much fiat money can the government and its monetary authority issue?
I have mentioned the “over-issue” of fiat money. I will define fiat money as over-issued when the currency starts to depreciate. Token, or fiat, money can be considered depreciated when the price of gold bullion in terms of fiat money rises above its official value. According to the books of the U.S. Treasury and the International Monetary Fund, the official “price of gold” is $42 per troy ounce. So the U.S. dollar is quite depreciated these days! When the price of gold bullion in the “over-issued” currency rises more and more, serious inflation develops. This has all kinds of negative economic consequences that will be explored in the coming chapters.
But what determines the amount of fiat money that the state can issue before the depreciation of the fiat currency begins? The bourgeois economists and probably the great majority of Marxists agree that the amount is determined by the number of commodities in circulation. As the amount of commodities increases, more and more fiat money can be issued without fear of it depreciating.
Accepting the truth of this argument provisionally, we immediately run into a logical problem. How do we measure the number of commodities in circulation? Perhaps we should measure the amount by their use values. But commodities have the most diverse use values. And as we have already seen with linen and coats, use values that are not qualitatively the same cannot be quantitatively compared. The total amount of commodities in circulation is, therefore, a meaningless phase if we measure commodities in terms of use values.
But as Marxists, we know, unlike the modern bourgeois economists, that the values of commodities are determined by the amounts of abstract human labor necessary to produce them. Therefore, why can’t we measure the total amount of value in terms of value — hours of abstract human labor? Won’t that determine how much fiat money the monetary authority can issue without the currency depreciating?
Accepting this, again provisionally, we immediately run into another problem. The value of a commodity can only take the form of exchange value. And the exchange value of one commodity can only be measured in terms of the use value of another commodity. We saw that with the example of 20 yards of linen equals one coat. As we have seen, value can never be measured directly in terms of x hours of labor. Even if it could be so measured, the producers, whether simple commodity producers or industrial capitalists, would have no way of knowing whether their products meet any social need. So, no, that won’t do.
It seems that the only way we can measure the total number of commodities in practice is to measure them in terms of exchange values — that is, in terms of prices. Assuming gold is our money commodity, that means measuring the amount of commodities in terms of prices defined as some weight of gold. Remember, the use value of gold that measures the exchange value of commodities is measured by weight. Logically, therefore, the prices of commodities defined in gold exist before any of the fiat money is even issued.
But what determines the prices of commodities? Well, that is an easy one for Marxists. It is value. But that gets us back to the argument that the total value of the commodities in circulation determines how much fiat money the “monetary authority” can issue. But, no, that didn’t work. In the long run, we know prices tend towards equality with values but only by constantly deviating from them. So it looks as though we are stuck. Perhaps it’s time to ask Marx himself how much token — or fiat — money a monetary authority can issue without the money depreciating.
Marx writes in Chapter 3 of Volume I of Capital: “In order that the mass of money actually current, may constantly saturate the absorbing power of the circulation, it is necessary that the quantity of gold and silver in a country be greater than the quantity required to function as coin. This condition is fulfilled by money taking the form of hoards. These reserves serve as conduits for the supply or withdrawal of money to or from the circulation, which in this way never overflows its banks.” (1)
We have seen that we can always withdraw full-weight gold coins from circulation and replace them with tokens such as modern fiat money. But only if “the quantity of gold … in a country [is] greater than the quantity required to function as coin.”
In other words, the amount of fiat money that the “monetary authority” can create without the depreciation of the currency is determined not by the number of commodities in circulation but by the amount of gold — or in Marx’s day, also silver — in the country. As globalization proceeds, especially regarding the U.S. dollar, it increasingly becomes the amount of gold available on the world market.
The gold need not be in the vaults of the central banks or the various ministries of finance. It can be in private hoards. But it must exist as a physical material reality. It is the quantity of gold measured in terms of weight that is in existence on the world market that ultimately determines how much fiat money the monetary authority or the “collective monetary authorities” of the world can issue before the “fiat money” starts to depreciate.
Money and general crises of overproduction
Under the old international gold standard, the amount of currency — in the form of credit money, not token money — that the monetary authority could issue was more or less limited by the amount of gold in the vaults of the monetary authority. But by freeing the monetary authorities from the need to redeem their currencies in gold on demand—thereby converting their credit money into fiat money—it seemed that the monetary authorities should always be able to create enough money to prevent a general overproduction of commodities relative to money.
If business threatens to slump, shouldn’t the monetary authority under fiat money systems be able to create enough money to enable business to keep running smoothly?
Both Keynes and Friedman believed fiat money was key to preventing crises of general overproduction
Both John Maynard Keynes and Milton Friedman reasoned this way. They knew that under the gold standard, the amount of money that the monetary authority could create was limited by law by the amount of gold that was in its vaults. Both men, therefore, supported the replacement of the gold standard with fiat money systems. The way to banish the threat of a generalized overproduction of commodities was a well-managed system of fiat money, they thought.
Friedman believed that establishing such a system would be enough to end crises once and for all, provided the monetary authority issuing the fiat money used its powers wisely. Keynes knew that “fiat money” as well as “gold money” could be hoarded, so he thought that deficit spending by the government might sometimes be necessary to get money circulating again. If the demand for money was strong enough, Keynes reasoned, deficit spending by the government wouldn’t work unless the extra demand for money could be met. Where would the extra money come from?
Like Friedman, Keynes answered: from the “printing presses” of the monetary authority. Therefore, both Friedman and Keynes believed that given correct “monetary policies” by the monetary authority, and in Keynes’s case, sometimes correct fiscal policies — deficit spending — by the government as well, crises would in the future be avoided.
What neither Keynes nor Friedman could understand, given the limitations of their understanding imposed by the false marginalist theory of value held by both men, was that there is an economic law that does limit the amount of fiat — token — money that can be created without the fiat money depreciating. That amount is limited not by the number of commodities in circulation — if this were true, avoiding crises of the general overproduction of commodities would be easy — but by the amount of gold — money material — that is actually in existence on the world market.
Many Marxist economists today seem to accept the view that under a fiat money system, monetary authorities should always be able to create enough money to prevent a general overproduction of commodities relative to money. Often, in deference to Marx, the socialist press will have a reference to overproduction crises in popular explanations of crises. But the Marxist writers who specialize in economic questions shy away from that explanation and emphasize alternatives — whether underconsumption or the tendency of the rate of profit to fall. At most, these Marxists speak of the “overaccumulation” of capital but avoid the term the general overproduction of commodities that both Marx and Engels saw as the essence of capitalist cyclical crises.
(1) Karl Marx, Capital, Volume One, Chapter Three: Money, Or the Circulation of Commodities. Section 3 Money, A. Hoarding. https://www.marxists.org/archive/marx/works/1867-c1/ch03.htm (back)
A Critique of Crisis Theory 