The Transformation Problem Once More

Over the years, the issue of the transformation of values into prices has caused considerable controversy, including in Marx's time itself. Bohm-Bawerk believed that the divergence of values from prices proved that Marx’s theory was wrong. Some of Bohm's own students, such as Von Borkiewitz demonstrated that it was mathematically possible to use Marx's method, set out in Capital III, Chapter 9, to arrive at a set of prices, including input prices, that were transformed from values. In more recent years, there has been debate between the neo-Ricardians, who believed that the work of Pierro Sraffa made the LTV irrelevant, because it was possible to arrive at a set of prices without it, and Marxists who argued that the LTV remained fundamental. There has been debate amongst Marxists, too, over the interpretation of Marx's theory, and his method of transforming values into prices. A lot of this debate is misplaced because it is based on misconceptions of what Marx actually said.

For example, a large part of the debate has been about the fact that Marx does not, in Chapter 9, transform input prices alongside output prices. Some argue that this failure was due to Marx not recognising the need to do so; some that he did, but didn't get round to it; and others that Marx was right not to transform input prices, simultaneously with output prices. Alongside this is the supposed need to maintain a set of constants. For example, its argued that the amount of surplus value remains constant under a regime of prices of production compared to one where prices are determined directly by exchange values. This last claim is false. Marx directly refutes it. I want here to look at what Marx actually does say, in respect of this, and how it relates to what Marx says in general, which shows that he did recognise the need to transform input prices simultaneously with output prices.

What Marx does say, and what must follow from his theory, is that, at an aggregate level, the sum of values must equal the sum of prices of production. In other words, the sum of c + v + s is the same, whether it is measured by values or prices of production. In fact, c + v + s, is merely a quantity of abstract labour-time, so whether it is measured by value – which is nothing other than labour-time – or prices of production, derived from those values, it is tautologically true that the result must be the same. The only difference is how this labour-time is distributed under one regime as opposed to another. Nor can this be affected, as some claim by the introduction of credit money. The measurement of values and prices of production, using some money token, cannot change the underlying relation. A sum of value of £10, is equal to a sum of prices of production of £10, and if the value of money is halved by the introduction of credit money, this does not change this underlying equality. It simply means that the relation is expressed as a sum of value of £20, and a sum of prices of £20!

But, its precisely because of this equality, and because Marx recognises that transformed output prices also cause transformed input prices that the equation of surplus value under one regime as opposed to the other cannot follow, and Marx sets out precisely why that is. That also means that the rate of surplus value cannot be the same under the two regimes, which in turn means that the rate of profit cannot be the same under the two regimes. But, as Marx demonstrates, none of this undermines his theory one bit, or the conclusions he draws from it.

There are several places where Marx makes clear that he understood perfectly well that input prices must be transformed simultaneously with output prices. But, even were that not the case, its necessity is not only practically obvious, but both Marx and Engels, in their historical analysis of how prices of production come into existence, describe the actual situation in which both exchange values and prices of production exist side by side, because non-capitalist producers exist side by side with capitalist producers, although increasingly the former must become modified by the latter, precisely because non-capitalist producers are forced to accept market prices determined by capitalist producers on the basis of prices of production, and because non-capitalist producers themselves have to buy inputs from capitalist producers at market prices determined by prices of production.

I've set out the process by which Marx arrives at prices of production here - Prices Of Production – so I do not intend to rehash that explanation. But Marx, also specifically sets out that input prices must be simultaneously transformed alongside output prices. So, he writes,

Non-capitalist producers bought inputs from capitalist producers.
The inputs are priced according to Prices of Production, so even
when the peasant producer sells according to exchange value, a
part of their own output price has been determined by an input
price determined by prices of production.

“The foregoing statements have at any rate modified the original assumption concerning the determination of the cost-price of commodities. We had originally assumed that the cost-price of a commodity equalled the value of the commodities consumed in its production. But for the buyer the price of production of a specific commodity is its cost-price, and may thus pass as cost-price into the prices of other commodities. Since the price of production may differ from the value of a commodity, it follows that the cost-price of a commodity containing this price of production of another commodity may also stand above or below that portion of its total value derived from the value of the means of production consumed by it. It is necessary to remember this modified significance of the cost-price, and to bear in mind that there is always the possibility of an error if the cost-price of a commodity in any particular sphere is identified with the value of the means of production consumed by it. Our present analysis does not necessitate a closer examination of this point.”

Capital III, Chapter 9 

Marx insists that a characterising feature of capitalist production
is that its continuous.  Capital exists, he says simultaneously
in each of its different forms, and stages, so that inputs
incorporated into the final product, already simultaneously exist
in their reproduced form at the other end of the process, as well as
in the production process itself.  Taking capital as whole, the total
social capital, outputs exist simultaneously as inputs.

In other words, Marx is saying openly here that a capitalist who buys commodities as inputs, buys them not at their values, but at their price of production, i.e. at the output price of some other capitalist producer, and, because capitalist production is a continuous process, output prices are then simultaneously input prices. Because buyers purchase inputs at prices of production, even if this buyer is a non-capitalist producer, who would base their prices upon exchange values, their own prices are necessarily modified by the fact that they have bought inputs at prices of production not exchange values. This is why, Engels says in his Appendix to Capital III, that from the 15th Century, when capitalist production commences, the determination of prices by exchange values ceases. Exchange values can continue to form a large part of the prices set by non-capitalist producers, but the very fact that they buy inputs from capitalist producers means that their own output prices cannot be pure exchange values.

Marx elaborates on this in Capital III, Chapter 12, and here, not only does Marx set out why input prices must be transformed simultaneously with output prices, but he describes why this means that the surplus value differs in one regime compared to the other. He writes,

“We have seen how a deviation in prices of production from values arises from: 1) adding the average profit instead of the surplus-value contained in a commodity to its cost-price; 2) the price of production, which so deviates from the value of a commodity, entering into the cost-price of other commodities as one of its elements, so that the cost-price of a commodity may already contain a deviation from value in those means of production consumed by it, quite aside from a deviation of its own which may arise through a difference between the average profit and the surplus-value. 

It is therefore possible that even the cost-price of commodities produced by capitals of average composition may differ from the sum of the values of the elements which make up this component of their price of production. Suppose, the average composition is 80 c + 20 v. Now, it is possible that in the actual capitals of this composition 80 c may be greater or smaller than the value of c, i.e., the constant capital, because this c may be made up of commodities whose price of production differs from their value.”

Capital III, Chapter 12 

There can be no clearer statement by Marx than this that he recognised that transformed output prices become simultaneously transformed input prices, and that these transformed input prices, thereby form a part of the cost-price of the commodity in whose production they participate. In fact, as Marx says here, this means that even the commodity/industry that represents the average when measured in terms of prices of production may not be so when measured in terms of value, and vice versa.

But, what Marx then goes on to say, draws out the implications of this in relation to surplus value. Marx writes,

The prices of wage goods might be higher or lower when
 determined by prices of production, compared to if they
 are determined by values, because depending upon the
 composition of capital used in their production they may
 obtain a greater or smaller share of the total surplus value
 produced.  But, if the result is higher prices, workers
must perform more necessary and less surplus labour,
 and vice versa.  That affects the amount of surplus
value itself produced, and thereby affects the rate of profit.

“In the same way, 20 v might diverge from its value if the consumption of the wage includes commodities whose price of production diverges from their value; in which case the labourer would work a longer, or shorter, time to buy them back (to replace them) and would thus perform more, or less, necessary labour than would be required if the price of production of such necessities of life coincided with their value.”

So, if prices become determined by prices of production rather than exchange values, the consequence may be that the price of wage goods rises. If the price of wage goods rises, then as Marx says,

“the labourer would work a longer, or shorter, time to buy them back (to replace them) and would thus perform more, or less, necessary labour than would be required if the price of production of such necessities of life coincided with their value.”

The worker thereby produces less surplus value than would be the case if prices were based upon values. So, the idea that there must be an equality between the sum of surplus value where prices are determined by values, and where they are determined by prices of production is false. Marx here directly refutes it. But, this has further ramifications.

The total of c + v + s remains the same under both regimes. But, v + s, must remain constant, because v +s is nothing other than the new value created by labour. It is equal to the labour-time performed by that labour. In fact, its because of this that, as Marx says above, if v is higher when determined by prices of production as opposed to values, then s must be smaller – the rate of surplus value must also then fall. But, if c + v + s remains constant, and v + s remains constant, then c must also remain constant.

This might seem to contradict what Marx says above in relation to the average capital, but it does not. The, average capital, under a regime of prices of production, is not the same capital as that which is the average capital under a regime of values, precisely because input prices are transformed simultaneously with output prices. The total of c, across all capitals, remains constant, but is differently distributed, across different capitals, as a result of the transformation of input prices.

But, if c remains constant, then any change in v, as a result of the transformation into prices of production, thereby increases or decreases both c/v, the organic composition of capital, and c + v, which means that it changes the rate of profit. If v increases, this will be combined with a fall in s to bring about a fall in the rate of profit, and vice versa.

But, none of this undermines Marx’s theory, or the conclusions drawn from it. As Marx points out these laws do not flow from the measurements of different components of capital by value rather than prices of production. They flow rather from the proportions of these components of capital one to another. It does not matter whether v is measured in value terms or in terms of prices of production. If v rises, s falls and vice versa, given a fixed length and intensity of working day. Whether we use values or prices of production, it remains the case that the rate of profit is determined by the ratio of s to c + v. Moreover, the laws that Marx described in Chapter 11, showing the effects of wage rises and falls on capitals of different compositions remain entirely in force, so that a wage rise for capitals of average composition cause no change in the price of production, whereas they cause the prices of commodities produced under conditions of a lower organic composition to rise, and those produced under conditions of a higher organic composition to fall.

“For instance, in a capital of the given composition 80 c + 20 v, the most important thing in determining surplus-value is not whether these figures are expressions of actual values, but how they are related to one another, i.e., whether v = l/5 of the total capital, and c = 4/5. Whenever this is the case, the surplus-value produced by v is, as was assumed, equal to the average profit.”

Capital II, Chapter 14 - Part 4

A portion of the advanced capital must always be in the form of money-capital because it can never go immediately from being received as payment to being paid out for the purchase of productive capital. Its like a lake. It always has a certain amount of water in it, but its not all the same water. Water flows into it constantly, but water also constantly flows out. Firms have to retain money-capital as bank deposits and petty cash because, although money constantly flows in, it also constantly flows out.

Moreover, because the ratio at which money flows in, and flows out, is not constant, firms have to hold money to make up the difference. They create cash flow forecasts to predict when more money will flow in than flow out, so that balances can be run down, and vice versa, so that they can be increased.

Similarly, as seen previously, where supply is not regular or reliable, or where it takes a long time to secure, because, for example, of long transit times, a large stock must be bought, which means that capital is tied up in the stock, which is only a potential productive capital.

Marx quotes another similar example.

“In London for example great auction sales of wool take place every three months, and the wool market is controlled by them. The cotton market on the other hand is on the whole restocked continuously, if not uniformly, from harvest to harvest. Such periods determine the principal dates when these raw materials are bought. Their effect is particularly great on speculative purchases necessitating advances for longer or shorter periods for these elements of production, just as the nature of the produced commodities acts on the speculative, intentional withholding of a product for a longer or shorter term in the form of potential commodity-capital.” (p 258)

Again, more developed capital markets can help smooth out such problems. Speculators can be allowed to gamble on future prices, but actual buyers of those commodities can thereby enter into contracts to purchase the amounts of these commodities they need on a month by month basis, at a price certain, rather than having to lay out a large amount of capital at one time to secure a supply at a given price.

Those producers, with sufficient capital, can withhold their commodities from the market when prices are low, in the hope of higher prices later. This is not profitable, however, where the costs of storage are high, where the commodity may deteriorate, or where, as with livestock, it has to be fed etc.

Again, although futures markets have been criticised for supposedly causing higher prices by withholding (cornering) the market for particular products, its unlikely that this is the case. If speculators buy up a particular commodity and hoard it, rather than immediately selling it at the due date, it is normally because they expect actual market prices to rise in the future. By pushing up the future price, they actually thereby encourage producers now to increase their production, so reducing the potential future shortage, and spike in prices. Moreover, if speculators sit on commodities they have bought, pushing up current spot prices, that is only likely to encourage producers themselves to unload their current production directly on to the market, to take advantage of those higher prices. Spot prices would then fall, and the speculators lose money. With stocks having been reduced, speculators might also find they then faced higher future prices to replace their current supplies. The example of what happened to the Hunt Brothers on Silver Thursday demonstrates the dangers for such speculators.

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Circulating Capital

The term circulating capital is often confused with circulation capital or capital in circulation. As Marx sets out in a series of chapters in Capital II, it certainly confused Adam Smith and David Ricardo. In fact, Marx shows, its because Smith based his analysis on fixed and circulating capital, which he often confuses with constant and variable capital, that he prevents himself, and his followers, from being able to understand the source of surplus value.

Capital in circulation refers to capital that has passed through the production process, and been transformed into commodity-capital, and subsequently money-capital, prior to once more being transformed into productive-capital. But, neither commodity-capital nor money-capital can be circulating capital. The terms fixed capital and circulating capital refer only to productive-capital. That is means of production (constant capital) and labour-power (variable-capital) engaged in the production process.

Fixed capital can only ever be constant capital, in other words, capital which only transfers its value to the end product. But, circulating capital comprises both constant capital and variable-capital. In contrast to fixed capital, a part of whose value remains fixed within it, after the production process has been completed, all of the value of circulating capital is used up during the production process, which means it has to be continually reproduced in its entirety, for production to continue on the same scale. The situation in respect of the circulating constant capital is fairly straightforward here.

The circulating constant capital can only transfer its value to the end product. It is circulating rather than fixed capital precisely because none of its value is left at the end of the production process. It has to be reproduced in its entirety. 1,000 kg. of cotton physically disappears, and so does its capital value as productive-capital when it is spun into yarn. The capital value of the cotton is transferred to the yarn and now exists as commodity-capital not productive-capital. If this value is say £1,000, then, when the yarn is sold, this portion of the capital-value is realised as money-capital, which is then used to buy another 1,000 kg. of cotton to replace that consumed. In this way, the capital value of the original cotton is reproduced. It has been circulated.

The situation as regards the labour-power is not so straightforward. The term variable-capital is frequently confused with wages, when, in fact, as Marx describes, at length, in Capital II, they are two completely different things. Variable-capital is capital employed productively by capital, in the form of labour-power, but wages are not capital at all. Wages are simply money received by workers in exchange for the sale of their labour-power. They are no different than the payment of money for the purchase of any other commodity. Indeed, when the worker buys the commodities they need for their own reproduction, what they hand over to the seller of those commodities is not wages, but simply money.

The capital-value of the variable capital, like the capital value of the circulating constant capital, is reproduced in the capital-value of the commodity-capital. But, unlike the circulating constant capital, whose use value is consumed in the production process, and whose value is transferred to the end product, this is not the case with the variable-capital. The use value of the variable capital resides in its ability to create new value. That is why it is variable capital, it is capital with a constant value that is transformed into a variable value, in the production process, a value which varies depending upon the length and intensity of the working day. That use value cannot be transferred. Similarly, it is not the value of the variable capital that is transferred. Rather, the labour-power that constitutes the variable-capital creates entirely new value equal to the time it performs labour.

The commodities labour-power and means of production are
purchased, and form productive-capital.  The labour-power is
variable-capital, and the means of production constant capital.
The value of these portions of the productive-capital expressed
in money terms for ease of calculation, is constantly changing for
the same reason the value of all commodities constantly changes.
It forms the cost price (k) of the commodities produced.  In the
production process (P) the constant value of the variable capital
(the value of the labour-power) becomes a variable value, as the worker
performs surplus labour, creating a surplus value.  The capital-value of
the productive-capital is reproduced, in the end product, along with
this additional surplus value, and assumes the form of the
commodity-capital, C'.  C' is realised in money form as M'.  The
circuit closes.  M' divides into M and m.  Under simple reproduction
in a new circuit M reproduces the quantities of means of production and
labour-power consumed in the previous cycle - the capital has
 been circulated.  

The capital value of the variable capital is reproduced in the end product, only because the labour-power purchased creates this new value. This new value, where the worker produces more value than the value of their labour-power, thereby reproduces the capital-value of the variable capital, as well as a surplus value. The new value is produced irrespective of whether wages are paid, or what the amount of wages might be. Variable-capital is the capital-value of the labour-power purchased, but the wages paid to the sellers of that labour-power may be more or less than this value. Indeed, the variable-capital value might be reproduced in the end product, long before any wages are paid, because wages are usually paid in arrears, whereas the capital value of the variable-capital is reproduced as soon as the capital is turned over, i.e. once the production process is completed, the produced commodities sold, and the money-capital one more used to buy new productive-capital. In other words, as soon as that capital value has been circulated.

In a sense, all capital is circulating capital, and all capital is fixed capital. All capital is fixed capital in the sense that the production process is precisely that – a process. It has a start point and an end point. All of the capital used in this process is fixed for so long as it is taking part in that process. 1,000 kg. of cotton enters the production process as productive capital, but it does not all become yarn immediately. It may take a day for it all to be turned into yarn, and the value of that portion not yet processed remains fixed within it. The same is true of the variable-capital advanced to production.

Similarly, all capital is circulating capital. If a machine has a life of 10 years, then at the end of ten years, it will have transferred all of its value (less depreciation) to the products it helps create, via wear and tear. If the production process is taken as being a period of 10 years, then all of its value has been consumed and reproduced during that period. This means that capitalists are able to utilise this ambiguity in their accounting practices to manipulate profits, particularly for tax purposes.

But, in reality, the production process is an historically determined period or quantity of output. The production period for agriculture is essentially a year, and its on that basis that the Physiocrats provided the basic definition of fixed and circulating capital, used by Marx. The capital advanced to production that is fully consumed in the production process, and which has to be fully reproduced at the end of that process – such as seeds – they termed avances annuelles, and those which continue to exist beyond the production process – such as ploughs – they termed avances primitives. 

“The difference between these two kinds of advances does not arise until advanced money has been transformed into the elements of productive capital. It is a difference that exists solely within productive capital. It therefore never occurs to Quesnay to classify money either among the original or the annual advances. As advances for production, i.e., as productive capital, both of them stand opposed to money as well as the commodities existing in the market. Furthermore the difference between these two elements of productive capital is correctly reduced in Quesnay to the different manner in which they enter into the value of the finished product, hence to the different manner in which their values are circulated together with those of the products, and hence to the different manner of their replacement or their reproduction, the value of the one being wholly replaced annually, that of the other partly and at longer intervals.” (Capital II, p 193-4)

This highlights another difference, which is that for Marx advanced capital is capital advanced to production. Capital is required to be advanced during the circulation period, i.e. during the period when the commodity-capital is being sold, and when the resultant money-capital is being once more converted into productive-capital, but that is only because capitalist production is continuous. If production ceased during the circulation period, as it does with other modes of production, then no additional capital would need to be advanced during this circulation period. The productive-capital advanced is only the capital-value, not the money paid for the purchase of means of production or labour-power.

The period during which, the capital is advanced is the turnover time, which combines these two periods – the production time and the circulation time. But, the production time is determined by physical constraints, and historical precedents. The production time in agriculture was taken as being a year by the Physiocrats, because that was the limitation imposed by nature. The production time for wine is determined by the time required for the wine to ferment, and mature etc. as well as for the grapes to grow and be processed. The production time for timber is determined by the length of time required for trees to grow and so on.

But, even where these natural limits do not apply, there are other constraints that limit what constitutes the production process. For example, when pottery manufacturers sent their wares to market via pack horse, there was a fairly small quantity that could be shipped at any one time, so the amount that had to be produced as part of the production process was also, therefore relatively small. When they began to send their wares to market via canal barge, they could send much larger consignments, and because it made no sense to send only partly filled barges, the minimum quantity produced in the production process became correspondingly larger. Furthermore, as Marx sets out, when producers took their own wares to market they might only require a relatively small quantity, before they sold it, but when the task of selling is taken over by huge wholesalers, these wholesalers require correspondingly huge shipments. Similarly, where one producer sells their output directly to another producer as an input, the very fact that the scale of capitalist production expands massively means that the size of supplies from one to the other become larger also.

On the one hand, therefore, as productivity rises under capitalism, the production time for any given quantity of output declines, but that same expansion of capital means that the average quantity produced during the production process increases, which lengthens the production time. Generally, as Marx points out the rise in productivity outweighs the increase in the normal quantity of units within the production process, so that the production time tends to continually decline, shortening the turnover time. 

Whatever, the length of the production process, the capital that is fully consumed within it, and therefore has to be reproduced in full, is circulating capital, that which retains a portion of its value fixed within it at the end of that period is fixed capital.

Capital II, Chapter 14 - Part 3

As well as the selling time, the extent of transit time for commodities also affects the buying time. That is the time required to obtain the money, and be able to use it to replace the productive capital. Just how much the Internet, and modern financial services have speeded up this process, and thereby raised the rate of turnover, and consequently rate of profit, can be judged by the example Marx gives.

“Suppose a commodity is shipped to India. This requires, say, four months. Let us assume that the selling time is equal to zero, i.e., the commodities are made to order and are paid for on delivery to the agent of the producer. The return of the money (no matter in what form) requires another four months. Thus it takes altogether eight months before a capital can again function as productive capital, renew the same operation. The differences in the turnover thus occasioned form one of the material bases of the various terms of credit, just as overseas commerce in general, for instance in Venice and Genoa, is one of the sources of the credit system, properly speaking.” (p 255-6)

If we assume that the production time of these goods was one month, that is a total turnover time of nine months, or put another way, the capital turns over 1.33 times a year. Without any change in the production time, this same commodity if it were sold over the Internet, could today with modern payment systems developed by the financial services industry, have a circulation time approaching zero. Instead of the capital turning over 1.33 times a year, it would turn over 12 times a year. The consequence of that on the rate of profit is dramatic. The rate of profit is calculated as s x n/c+v.

If s = 1000 and c+v = 10,000, then it would originally have been (1000 x 1.33)/10,000 = 13.33%. However, it becomes (1000 x 12)/10,000 = 120%!

Marx notes that alongside this a further problem is that the longer the selling time, the greater the risk of prices changing in the intervening period. It is not just credit that develops to deal with this situation. The financial services industry developed to provide other solutions to this problem, e.g. the development of futures markets, whereby sellers could enter into contracts to sell a given quantity of a commodity at some future date, at a given price. Likewise, buyers enter into similar contracts to buy. Alternatively, they may take on futures options, whereby they pay a premium to have the option to buy or sell a given commodity at a particular date, but do not have to exercise that option, if prices have changed adversely.

The turnover time can also be increased as a consequence of capitalist development, on an ever larger scale. For example, if a buyer only wants a few metres of linen this might be produced in a day, sold to them, and the productive capital reproduced shortly after. However, if as a result of capitalist development, a large merchant requires 10,000 metres of linen, then, even with the greater productivity, this might require two weeks to produce and ship to them. Payment will only be made when the full shipment is received. The development of neo-fordist production systems, such as flexible specialisation, can be a way around this problem, because they use new technology to obtain the benefits of Fordist mass production, with the advantages of flexibility provided by small batch production.

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For A Political Revolution At The Co-op - Part 14

In Part 13, I looked at the way, as Marx and Lenin described, the trades unions are imbued with bourgeois ideology, and inculcate that mindset within the working-class via a perspective of bargaining within the system, rather than seeking to change the system, by mobilising the forces of the workers, to transform their material conditions, by the development of worker-owned property, and the social relations and ideas that spring from it. But, this perspective is also carried through into the actions of the workers parties, i.e. into the ideology of reformism.

Rosa Luxemburg is right when she says,

“Co-operatives and trade unions are totally incapable of transforming the capitalist mode of production. This is really understood by Bernstein, though in a confused manner. For he refers to co-operatives and trade unions as a means of reducing the profit of the capitalists and thus enriching the workers. In this way, he renounces the struggle against the capitalist mode of production and attempts to direct the socialist movement to struggle against “capitalist distribution.” Again and again, Bernstein refers to socialism as an effort towards a “just, juster and still more just” mode of distribution. (Vorwärts, March 26, 1899). 

It cannot be denied that the direct cause leading the popular masses into the socialist movement is precisely the “unjust” mode of distribution characteristic of capitalism. When the Social-Democracy struggles for the socialisation of the entire economy, it aspires therewith also to a “just” distribution of the social wealth. But, guided by Marx’s observation that the mode of distribution of a given epoch is a natural consequence of the mode of production of that epoch, the Social-Democracy does not struggle against distribution in the framework of capitalist production. It struggles instead for the suppression of the capitalist production itself. In a word, the Social-Democracy wants to establish the mode of socialist distribution by suppressing the capitalist mode of production. Bernstein’s method, on the contrary, proposes to combat the capitalist mode of distribution in the hopes of gradually establishing, in this way, the socialist mode of production.”

Reform Or Revolution

But, Luxemburg fails to notice here the basic difference between the Trades Unions and the Co-operatives, which is that the sole function of the Trades Unions is to operate within the existing system of property relations, whereas the worker-owned co-operatives are forced to to pose directly the socialised, worker-owned form of property in opposition to that of capitalist property be it privately owned capital, socialised capital in the form of the Joint Stock Company, or state capital.  It was for that very reason that Marx and the First International encouraged workers to establish worker owned, producer co-operatives.

"We acknowledge the co-operative movement as one of the transforming forces of the present society based upon class antagonism. Its great merit is to practically show, that the present pauperising, and despotic system of the subordination of labour to capital can be superseded by the republican and beneficent system of the association of free and equal producers...

We recommend to the working men to embark in co-operative production rather than in co-operative stores. The latter touch but the surface of the present economical system, the former attacks its groundwork."

Marx - Instructions For Delegates

It was Bernstein's approach that won out, but that was inevitable, because, to the extent that the Workers' Party actually is a party created by workers, and based upon them, it must, in large part, reflect the ideas of those workers. For so long as the workers remain dominated by bourgeois ideas, any genuine workers' party will also be dominated by those ideas too.  The Marxists can only win a majority to their ideas over a long period of struggle, in which their own actions and ideas play an important role in transforming the material conditions of the workers, and thereby create the basis for their changed consciousness.  Left alone, the trades unions, the co-operatives, the workers party will always tend to sink back into the morass of reformism, because bourgeois ideas naturally dominate the society as a result of the domination of society by bourgeois productive and social relations.  The question is, then should the Marxists try to isolate themselves from that reality by creating their own pure sects, separated essentially from the workers, or should they have faith in their own science, and immerse themselves in the broad labour movement, as Marx and Engels did, and attempt to develop it?  The answer is clear the workers will not spontaneously come to the ideas of Marxism, nor will they, therefore spontaneously come to the Marxists and their pure sects.  As Trotsky put it, "If the mountain will not come to Mohamed, Mohamed will have to go to the mountain."

As Engels describes in his "Condition of the Working Class", by the end of the 19th Century, the big industrial capitalists were not only able to offer reforms to the workers in return for their electoral support to guarantee political control of the bourgeois social-democratic regimes, against their opponents within the landlord class and ranks of small capitalists, but they had very good material reasons for doing so. These reforms, such as the creation of Welfare States, provided the big industrial capitalists with the labour-power they required, helped regulate markets and economies, and weakened their smaller rivals, as well as socialising the working-class, tying it ideologically to the bourgeois social democratic state.

Increasingly, the Marxist notion of working-class independence, of workers self-government was undermined by this ideology of reformism and welfarism. It encouraged the workers to simply see their role as workers and consumers, with the task of ensuring that their interests were defended being sub-contracted to specialists – trade union bureaucrats, reformist politicians. Trade Union membership itself came to be seen as little different to an insurance policy, not a means of collective protection, let alone means of mobilisation for wider goals.

Even in terms of the Left version of this reformism such as that put out by the Communist Party and its fellow travellers via the Alternative Economic Strategy, or by The Militant Tendency, in its ridiculous calls for the nationalisation of the 200 top monopolies, the workers were essentially being asked to swap the exploitation of private capitalists for the more effective exploitation of the capitalist state. As Kautsky had put it in the Erfurt Programme,

“If the modern state nationalizes certain industries, it does not do so for the purpose of restricting capitalist exploitation, but for the purpose of protecting the capitalist system and establishing it upon a firmer basis, or for the purpose of itself taking a hand in the exploitation of labour, increasing its own revenues, and thereby reducing the contributions for its own support which it would otherwise have to impose upon the capitalist class. As an exploiter of labour, the state is superior to any private capitalist. Besides the economic power of the capitalists, ii can also bring to bear upon the exploited classes the political power which it already wields.

The state has never carried on the nationalizing of industries further than the interests of the ruling classes demanded, nor will it ever go further than that. So long as the property-holding classes are the ruling ones, the nationalization of industries and capitalist functions will never be carried so far as to injure the capitalists and landlords or to restrict their opportunities for exploiting the proletariat.”

So, even that pinnacle of Left reformism, the demand for nationalisation with or without the demand for "Workers Control" (added out of a sense of shame as Marx put it) merely confines the workers deeper within the realm of bourgeois ideology, and what is more, as such state capitalism is identified in the minds of the workers with the notion that it is in some way “socialist”, the more this state capitalism is seen to be a more effective, more oppressive means of exploiting the workers, the more the idea of Socialism itself is discredited in the eyes of the workers. If we want to know why the workers put up little resistance to the fall of Stalinism in Eastern Europe, if we want to know why Thatcher came to power and stayed in power for so long, only to be replaced with Blairism, we only need look at just how badly those examples of state-socialism and state-capitalism failed to provide any solution for workers.

The task, therefore, of rebuilding the Labour Movement – the trades unions, the co-operatives, friendly societies, workers parties – is, therefore, one which requires an ideological rearming of the working class and its advanced guard. But, consistent with Marx's materialist analysis, that rearming is not one that can take place in a vacuum. The progress of ideas must proceed in dialectical interaction with changes in the workers material condition itself. I will turn to this in Part 15.

Back To Part 13

Northern Soul Classics - Good Things Come To Those Who Wait - Chuck Jackson

Another classic reminiscent of Kidsgrove Town Hall in the early 70's.  One of the many classics on Wand by Chuck Jackson.

Scotland, The Pound and the EU

“The Social-Democrats will always combat every attempt to influence national self-determination from without by violence or by any injustice. However, our unreserved recognition of the struggle for freedom of self-determination does not in any way commit us to supporting every demand for national self-determination. As the party of the proletariat, the Social-Democratic Party considers it to be its positive and principal task to further the self-determination of the proletariat in each nationality rather than that of peoples or nations. We must always and unreservedly work for the very closest unity of the proletariat of all nationalities, and it is only in isolated and exceptional cases that we can advance and actively support demands conducive to the establishment of a new class state or to the substitution of a looser federal unity, etc., for the complete political unity of a state.”

The National Question in Our Programme 

Its on this basis, set out by Lenin, that I oppose the establishment of new bourgeois states, be they a new Scottish state, a new Catalunyan state, a new Kosovan state, and so on. But, its also on this basis set out by Lenin that I defend fully the right of the Scottish people, the Catalunyan people, the Kosovans and so to establish such a state if that is what they choose. As with the other examples given by Lenin, defending a right to do something, is not at all the same as arguing for that right to be exercised. Marxists defend the right to free speech, for example, and that includes the right for someone to argue in favour of voting Tory. But, that does not mean that by defending the right for someone to do so, we are in favour of calling on people to vote Tory! Marxists defend the right of nations to self-determination, which includes the right to defend their borders, which also includes their right to impose immigration controls. But, that does not at all mean we are in favour of immigration controls!

So, I am against the separation of Scotland from the rest of Britain. As Marxists we seek to remove the borders and other barriers that separate one section of the global working-class from all others, not to impose new, additional borders, and thereby divide the working-class further. But, part of Lenin's argument here and elsewhere on the national question, is precisely in order to win over the workers who feel themselves in some way oppressed as a nationality, and to persuade them against such a course of separation, is that we must fully commit ourselves to defending their right to separate if they so choose, and that we should oppose any attempts by our own state, or others to physically prevent them doing so, or to bully them into submission.

On that basis, Marxists should be totally opposed to the attempts in the last week or so, by the British state, and by representatives of the proto-EU state, to bully the Scottish people with threats that an independent Scotland would not be able to use the Pound, and would not be able to be a member of the EU. For my own part, I don't know why an independent Scotland would want to use the Pound rather than using the Euro, which is a much stronger currency, but if they choose to do so, that is their choice, just as it has been the choice of other independent territories such as the Isle of Man, Channel Islands and so on to use the Pound.

As for Jose Manuel Barroso's claim that an independent Scotland, like an independent Catalunya, would not be able to join the EU, he should be very careful. If Scotland is a different country to the Great Britain that joined the EU, and so has to apply for membership, it would be unlikely to obtain, then likewise the remaining part of Britain is a different country to the Britain that was admitted to the EU, and would similarly have to re-apply for membership. The same would then apply to Catalunya and Spain! No doubt, Nigel Farage and the Tory euroseptics would be rubbing their hands in glee at such a prospect.

Capital II, Chapter 14 - Part 2

The improvements in transport and communication also have other effects. For example, with regular shipments made possible as multiple ships follow each other across the ocean, just as multiple trains follow each other from city to city, a regular supply of goods can be fed into markets, thereby removing the need to hold large stocks. In part, its such improvements that have made “Just In Time” systems possible, which in themselves increase the rate of turnover of capital, by reducing the time of circulation.

Alongside the development of faster forms of transport, and more regular transport, also comes greater capacity of transport. Ships become bigger, trains become longer, and able to haul more weight and so on. The Internet has followed exactly the same course. The same has also happened with mobile communication.

“Hence the return of capital likewise is distributed over shorter successive periods of time, so that a part is continually transformed into money-capital, while the other circulates as commodity-capital. By spreading the return over several successive periods the total time of circulation and hence also the turnover are abridged. The first to increase is the frequency with which the means of transportation function, for instance the number of railway trains, as existing places of production produce more, become greater centres of production. The development tends in the direction of the already existing market, that is to say, towards the great centres of production and population, towards ports of exports, etc. On the other hand these particularly great traffic facilities and the resultant acceleration of the capital turnover (since it is conditional on the time of circulation) give rise to quicker concentration of both the centres of production and the markets. Along with this concentration of masses of men and capital thus accelerated at certain points, there is the concentration of these masses of capital in the hands of a few.” (p 254)

At the same time, the changes noted previously occur as some centres of production develop as a result of new transport facilities, whilst others decline. A similar thing can be seen today with those companies that have been able to develop an on-line presence and those that have not. Business models based on town centre retailing have declined as e-tailing has risen.

“All branches of production which by the nature of their product are dependent mainly on local consumption, such as breweries, are therefore developed to the greatest extent in the principal centres of population. The more rapid turnover of capital compensates here in part for the circumstance that a number of conditions of production, building lots, etc., are more expensive.” (p 255)

But, the development of transport also exerts a dialectical influence. The more transport develops, the more each firm is led to seek to expand its market ever further afield. In other words, at the same time that this development reduces the time of circulation it also lengthens it! The more firms seek to ship their goods not just to local markets, but to markets all over the globe, the more absolutely, and relatively, of their capital is tied up in the form of commodity-capital, in the process of being shipped and sold in those markets. Alongside this creation of a world market also goes the increasing amount of capital required for transport, and all the attendant provision of ports, stations etc.

Back To Part 1

Forward To Part 3

How The Storms Reduce The Rate of Profit and Raise The Rate of Interest - Part 4

In Part 3, I explained that the rate of interest is determined by the demand for and supply of money-capital, but this is really just a reflection of the fact that a capitalist economy is a money economy. It is really the demand for and supply of capital itself, that is the supply of the surplus product, compared to the demand for that product for investment, or to replace capital losses, which is the real determinant.

To the extent that the aggregate surplus product/value is diminished, therefore, simply to replace the capital lost as a result of the floods, the ratio of what is left, to the total social capital is also thereby reduced. So, the aggregate rate of profit for British Capital is thereby reduced. The potential for accumulation out of that profit – the rate of growth – is thereby also reduced, contrary to the Keynesians belief that such catastrophes act to increase the rate growth, by the destruction of capital.

By reducing the pool of available surplus value – potential money-capital – the ratio of supply of money-capital to its demand falls, thereby causing the rate of interest to rise. But, of course, in a global economy, this rate is determined by global demand and supply, modified by local risk factors. However, the floods in Britain are not the only cause of increased demand for capital. Things such as roads, rail networks, bridges, schools, hospitals, ports and so on, even where owned by the capitalist state, form part of the fixed capital of the aggregate social capital. They are pieces of capital that must be there for the aggregate capital of a country, or even the global capital to function, and thereby maximise surplus value production and realisation. If they are allowed to fall into disrepair, or become destroyed, then as with Robinson Crusoe and the destruction of his stock-pen, the ability to produce surplus is thereby diminished.

But, in recent years, after a large rise in global capital formation in the first decade of this century, the period after the 2008 financial crisis has been marked by a kind of fear or what Marx calls the time after a crisis “when the spirit of enterprise is paralysed” and when “the investment of new capital is still out of the question”. (Capital III, Chapter 30 ) Capital expenditure has declined, and will have to be increased. Its not just Cameron's commitment to spend more on flood defences. The US needs to renew much of its infrastructure, and the same applies across Europe. Germany's road network is falling apart, and it needs to spend billions of Euros, just to bring its broadband infrastructure up to a reasonable level. Big companies too depend on continually innovating to reduce their costs, and bring in new types of products so as to retain and extend their market share. The need for new sources of energy, be it new nuclear, or the development of fracking, require vast new quantities of productive-capital and mean an increased demand for money-capital to buy it. In Africa, large new economies are developing, which increasingly require vast sums of productive-capital, both to develop new industries, and to build the infrastructure that comprises the fixed capital of the aggregate social capital.

Central Planners, like Mark Carney, can't dictate the rate of interest,
 or any other prices, as the Tories hope, and as the media continue to claim.

In short, the demand for money-capital is rising rapidly, at precisely the time when the rate of profit has started to fall globally, as the forces which caused it to rise for 30 years begin to reverse. The combination of a sharp rise in the demand for money-capital, at the same time as the supply of money-capital begins to slow down, has caused global interest rates to rise. The tapering of QE is a reflection of the need for central banks not to get too far behind that curve. The sharp falls in the currencies of a range of emerging economies is another manifestation of this process, as is the sharp rise in their interest rates. Whatever, the Tories hope in placing their faith in Mark Carney, he does not have the power to stop interest rates rising, or the collapse of financial and property markets that will happen in its wake. That process is simply the unwinding of 30 years during which fictitious capital was built up at the expense of productive-capital.

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496)

Back To Part 3

Money

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.