But, currency does not now, and has not, for a long time, taken the form of actual gold or precious metal, but takes the form of tokens, and Marx describes how this turns the relations described above on their heads. As Marx describes, if the value of gold rises or falls, then this will obviously change the amount of it required as currency. When gold rushes led to a large fall in the value of gold, for example, this meant that more gold must be used as currency, because its exchange value fell relative to all other commodities. Similarly, if some other commodity such as silver is used to replace gold as the measure of value, much more of this has to be put into circulation than gold.
“Thus, if the value of gold, i.e. the labour-time required for its production, were to increase or to decrease, then the prices of commodities would rise or fall in inverse proportion and, provided the velocity remained unchanged, this general rise or fall in prices would necessitate a larger or smaller amount of gold for the circulation of the same amount of commodities. The result would be similar if the previous standard of value were to be replaced by a more valuable or a less valuable metal. For instance, when, in deference to its creditors and impelled by fear of the effect the discovery of gold in California and Australia might have, Holland replaced gold currency by silver currency, 14 to 15 times more silver was required than formerly was required of gold to circulate the same volume of commodities.”
(ibid)
But, as Marx then also points out, if gold (or silver) is replaced by tokens (even tokens themselves consisting of gold or silver) then what has been stated above only applies if the quantity of these tokens put into circulation is limited to that which represents the amount of gold that would otherwise have circulated, which is itself simply a proxy for social-labour-time, equal to the value of commodities to be circulated. If too much gold is put into circulation, then it is simply withdrawn. It becomes again bullion, or else is used as a commodity, for jewellery and so on. This can happen, precisely because gold is a commodity in its own right, and has value. But, if we take a paper token, representing a given quantity of gold that would otherwise have circulated, it has no real value. If too many of these notes are in circulation, compared to the gold or social labour-time they are supposed to represent, it is not possible to take them out of circulation, and melt them down so as to obtain their intrinsic value. Only the monetary authorities can do that, by contracting the currency supply, which they can do via various measures. They can increase their policy rates, so as to encourage commercial banks to increase their deposits with the central bank, and to discourage further credit creation; they can sell Treasury Bills and then sterilise the money tokens they receive in exchange for them; and they can instruct commercial banks to increase their reserve asset ratios, which means they have to reduce their lending.
But, as Marx sets out in Capital III, although the central bank has considerable power in all of these things it is not omnipotent. For example, the bank can influence bank credit, but it cannot control commercial credit. If firm A sells commodities to firm B for £100, A may agree to do so on the basis of commercial credit, giving B, say, 90 days to pay. B also sells commodities to a range of other firms, and similarly gives them 90 days to pay. For all of these transactions, no currency is required, and so any attempt by the central bank to restrict economic activity by reducing the currency supply will be limited in its effect on such transactions. In effect firms create their own currency. At the end of 90 days, all of the various transactions between A, B and so on, can be simply netted off against each other, with only any outstanding balances needing to be paid in currency. Particularly in times of rapid economic activity, firms are likely to engage in the provision of such commercial credit, between each other, in order to get goods out of the door as quickly as possible. The bills of exchange, and other such instruments they use, nowadays simply via invoicing, and bank clearing, means that they provide their own means of currency in these transactions outside that controlled by the central bank.
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