The Currency Of Money
Whereas, commodities complete this circuit via their metamorphosis from one commodity into another C-M-M-C, that is not true of the money. It continually moves away from its possessor. The linen seller receives money, but the money moves away as they buy the bible, it moves away from the bible seller as they buy the brandy and so on. Each can obtain more money, but only by opening a new circuit, by selling more commodities. This passage of money into ever new hands, Marx describes as its “currency”, referring to its original usage - “cours de la monnaie”, or course of money.
Just as "commodity fetishism" turns things on their heads, so that what is in reality a relation between Men(an exchange of the labour-time of one for that of another) appears as a relation between things (20 yards of linen = 1 coat), so the same here. What is really a process of circulation of commodities appears as being a movement of money.
“Again, money functions as a means of circulation only because in it the values of commodities have independent reality. Hence its movement, as the medium of circulation, is, in fact, merely the movement of commodities while changing their forms.” (p 117)
Although commodities take part in this circulation, they continually fall out of it, as they are consumed. Money, on the other hand, remains within the sphere of circulation, which begs the question of how much money is absorbed by it. Marx once again elaborates this not just as a logical but as an historical process.
We are still at the stage, he says, where we are considering commodity exchange in its initial stages – petty commodity production. The process is described like this.
The money commodity (gold) acts as the general equivalent form of value. So, it is the unit of measurement of the value of commodities, which takes the form of their money price. In other words, the Value of say 20 yards of linen can be considered in a purely imaginary way (i.e. I do not have to actually exchange it to put a price on it, I do not have to physically set an amount of gold against it) as being equal to 2 oz. gold, now given the name £2.
Now, at this stage of history (before the development of banking, credit etc.) in order to sell the 20 yards of linen, will require that this imaginary price of £2, brings forth an actual amount of gold i.e. £2 equal to it. The gold money has acted first as a measure of Value in determining the price, and secondly as currency. The gold money has acted as means of circulation, so that the linen could be sold by one person and bought by another. So, the amount of gold money in circulation must be equal to the gold money prices of the commodities to be sold.
But, we have seen that the Value of the gold, as with every other commodity, is determined by the labour-time required for its production. And, the prices of commodities are a function, not just of their own Values, but also the Value of the Gold. Exchange Value or Price is a relative not an absolute measure.
So, if the value of commodities remains constant, but the Value of gold falls (because say the California Gold Rush means less labour-time is required to produce a given amount of gold) then the Exchange Value and prices of commodities will rise. If an oz. of gold can now be produced in half the time, then 20 yards of linen will equal 4 oz. gold its price will be doubled to £4, and vice versa.
But, things do not end there. If the fall in the Value of gold by half causes prices to double then by the same token, the amount of currency in circulation will also need to double in order that there is enough to buy all the commodities at their new higher prices.
To stress once more, the VALUE of these commodities has not changed. Only their Exchange Value vis a vis gold has changed. If previously 1000 yards of linen were in the market, with an exchange value of £100 = 100 oz. gold, now this 1000 yards of linen will have an Exchange Value of £200, requiring 200 oz. gold money. In other words, the fall in the Value of the gold money has caused an inflation of all commodity prices except gold.
The same is true, as Marx sets out, if silver is replaced by gold as the money commodity, as it was in Britain. If Exchange Values are measured against silver they will be higher than measured against gold (because silver has a lower value than gold). Prices will be higher measured in units of silver. But, if gold pushes out silver, then its higher value means that prices will fall even though the actual values of the commodities have remained constant. For example, if 20 yards of linen are priced at £30, where £30 = 30 oz. silver, then if gold pushes out silver, and 1 oz. gold equals 15 oz. silver, then if £1 = 1 oz gold, now not 1 oz. silver, then 20 yards of linen = 2 oz. gold, which equals £2. You can see the significance for this in relation to the Eurozone. Suppose Spain leaves the Euro, and restores the Peseta. A Peseta might be really only worth a tenth of a Euro. If the Euros in your bank account, however, were redeemed at par i.e. 1 Peseta per Euro, then essentially you would have lost 90% of your savings! That is why people are rushing to take their Euros out of Greek, Spanish, Portuguese and other Eurozone banks!
Marx also sets out how this process plays out historically. At this stage of petty commodity production, barter continues as far as the gold producers are concerned, because their commodity is money itself! They exchange their gold directly for the commodities they require.
If the Value of gold falls because less labour-time is required for its production, then competition amongst gold producers means they will have to hand over more gold to obtain those commodities than they did previously. In the rest of the economy, where commodity producers are not exchanging directly with the gold producers, this change may not be seen or known about. As a consequence, prices for these other commodities may remain unaltered.
However, because those commodity producers who exchange directly with the gold producers will obtain more gold, competition between them for the commodities they buy will gradually push up these prices until such time as all commodities prices reflect the new exchange relation to gold. In orthodox economic theory, the Austrian School have adopted a version of this argument to suggest that those closest to the source of an inflated money supply i.e. the banks and finance houses, together with very large businesses, are able to obtain an advantage compared to other market participants further down the chain.
It is not the increased supply of gold which causes its Value to fall and prices of other commodities to rise. It is the fall in its Value which causes the supply of it as money to rise.
“If now its value fall, this fact is first evidenced by a change in the prices of those commodities that are directly bartered for the precious metals at the sources of their production. The greater part of all other commodities, especially in the imperfectly developed stages of civil society, will continue for a long time to be estimated by the former antiquated and illusory value of the measure of value. Nevertheless, one commodity infects another through their common value-relation, so that their prices, expressed in gold or in silver, gradually settle down into the proportions determined by their comparative values, until finally the values of all commodities are estimated in terms of the new value of the metal that constitutes money. This process is accompanied by the continued increase in the quantity of the precious metals, an increase caused by their streaming in to replace the articles directly bartered for them at their sources of production. In proportion therefore as commodities in general acquire their true prices, in proportion as their values become estimated according to the fallen value of the precious metal, in the same proportion the quantity of that metal necessary for realising those new prices is provided beforehand.” (p 119)
For the ease of argument, Marx assumes a constant Value of gold. In that case the amount of money needed for circulation is determined by the sum of all prices. If the values of other commodities remain constant, then an increase in the number to be sold will require more money. If the number sold remains constant an increase in their prices will require more money and vice versa. Similarly, if only some commodities increase in price it will require more money. And, if some prices fall and others rise, it will depend on whether the sum of the rises is greater or lesser than the sum of the falls.
Marx then takes this analysis on both logically and historically. The more trade advances so that these exchanges are more numerous and more frequent, the more it is clear that these transactions occur sequentially. So, over a given time period, the same piece of money can perform several operations. The same £2 can be used to purchase 20 yards of linen, then to buy a bible, then 4 gallons of brandy. So, the £2 has been enough to facilitate £6 of exchanges. The number of times a given amount of money moves in a given period of time is called the Velocity of Circulation.
“the quantity of money functioning as the circulating medium is equal to the sum of the prices of the commodities divided by the number of moves made by coins of the same denomination. This law holds generally.” (p 121)
The different types of transactions increase or decrease this velocity. Some transactions consist of just a sale and a purchase, the money then standing idle. Others result in a whole series of transactions. The higher the velocity the less money actually needed in circulation and vice versa.
With money based on precious metals, circulation can only tolerate as much money as is required. If more money is put into circulation than is required, its velocity slows down, and ultimately the metal is withdrawn. In the Contribution to a Critique of Political Economy, Marx refers to the historical facts in this regard. Where coins were simply accumulating, so that the Value of the coins fell below the value of the metal, the metal was melted down, and sold.
The velocity of circulation is a reflection of the speed with which commodities are themselves being exchanged, and, therefore, of the state of economic activity. But, Marx also elaborates,
“Herrenschwand’s fanciful notions amount merely to this, that the antagonism, which has its origin in the nature of commodities, and is reproduced in their circulation, can be removed by increasing the circulating medium. But if, on the one hand, it is a popular delusion to ascribe stagnation in production and circulation to insufficiency of the circulating medium, it by no means follows, on the other hand, that an actual paucity of the medium in consequence, e.g., of bungling legislative interference with the regulation of currency, may not give rise to such stagnation.” (Note 1 p 122)
Marx here is levelling his criticism at the 1844 Bank Acts which were based on an incorrect view of money held by Ricardo. As Marx says,
“The erroneous opinion that it is, on the contrary, prices that are determined by the quantity of the circulating medium, and that the latter depends on the quantity of the precious metals in a country; this opinion was based by those who first held it, on the absurd hypothesis that commodities are without a price, and money without a value, when they first enter into circulation, and that, once in the circulation, an aliquot part of the medley of commodities is exchanged for an aliquot part of the heap of precious metals.” (p 125-5)