As trade expands, it becomes obvious that the constraints of barter have to be broken, and also future payment on the basis of credit, no longer becomes viable. Sellers require buyers to provide to them the actual money commodity itself, so that they have, immediately, the equivalent value to that of the commodity they have sold, and in the form in which they can use this money commodity for the subsequent purchase of the commodities they require, C - M - C, commodities they can now buy from a whole range of sellers, having broken free of the constraints of barter. So, now, money acts not just as the unit of account, by which the prices of commodities are ideally established, but itself becomes the medium by which such exchanges themselves take place, it becomes currency, and this takes the form C – M – C. In other words, the seller sells their commodity, for a given amount of money, whose amount has been already ideally determined, prior to the exchange, and, now, with this money, can buy other commodities, to an equal value to that of the commodities they sold.
This establishes an important point in relation to the money commodity, and the value of the commodities it is to circulate by performing this function of currency. If the money handed over in each of these transactions is the equal of the value of the commodities being bought or sold, and it can only act as money on this basis, then the total amount of currency in circulation, must itself be equal to the value of the commodities it is to circulate, i.e. for which it is the equivalent form of value. At least, that would be the case, if each piece of money performed only one transaction, which, of course it does not. If we take 1 ounce of gold, in the example above, first of all it is used to buy the 1 litre of wine, then the wine seller uses this same 1 ounce of gold to buy 1 metre of linen. The same 1 ounce of gold (£1) has then acted as currency to circulate £2 of value. So, the amount of gold currency required in circulation, as Marx says, is given by the value of commodities to be circulated, divided by the value of the currency unit, multiplied by the velocity of circulation of the currency. Here, £2 = £1 x 2.
“Commodity circulation is the prerequisite of money circulation; money, moreover, circulates commodities which have prices, that is commodities which have already been equated nominally with definite quantities of gold. The determination of the prices of commodities presupposes that the value of the quantity of gold which serves as the standard measure, or the value of gold, is given. According to this assumption, the quantity of gold required for circulation is in the first place determined therefore by the sum of the commodity-prices to be realised. This sum, however, is in its turn determined by the following factors: 1. the price level, the relative magnitude of the exchange-values of commodities in terms of gold, and 2. the quantity of commodities circulating at definite prices, that is the number of purchases and sales at given prices....
But the quantity of money in circulation is, as we have seen, determined not only by the sum of commodity-prices to be realised, but also by the velocity with which money circulates, i.e., the speed with which this realisation of prices is accomplished during a given period. If in one day one and the same sovereign makes ten purchases each consisting of a commodity worth one sovereign, so that it changes hands ten times, it transacts the same amount of business as ten sovereigns each of which makes only one circuit a day. The velocity of circulation of gold can thus make up for its quantity: in other words, the stock of gold in circulation is determined not only by gold functioning as an equivalent alongside commodities, but also by the function it fulfils in the movement of the metamorphoses of commodities. But the velocity of currency can make up for its quantity only to a certain extent, for an endless number of separate purchases and sales take place simultaneously at any given moment.”
(A Contribution to The Critique of Political Economy, Chapter 2)
In other words, we have, here, the same Monetarist formula that Roberts cites of MV = PT. If we know the value of 1 ounce of gold, and we know the average price of commodities and the number of transactions (equals the total value of commodities to be circulated), then the amount of currency required is determined by dividing PT by the value of 1 ounce of gold x the velocity of circulation. Provided we assume that currency takes the form of a money commodity such as gold, then Roberts argument that it is the value of commodities to be circulated that determines the money supply is correct – well not entirely, because in Capital II, Marx sets out that in addition to the value of commodities to be circulated, there also has to be taken into consideration the requirements for currency to cover payments, i.e. the balances arising from credit transactions, as well as prepayments, payments of rents, taxes and so on. As Marx says,
“If the velocity of circulation is given, then the quantity of the means of circulation is simply determined by the prices of commodities. Prices are thus high or low not because more or less money is in circulation, but there is more or less money in circulation because prices are high or low.”
(ibid)
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