Marx explains the basis of this inflation. Money is the universal equivalent form of value. Initially, this equivalent form comes as a series of regularly traded commodities, which act to measure, indirectly, the value of all other commodities. In other words, value becomes measured not in hours, but in a quantity of some other use value, its exchange-value. This exchange-value, measured by the money-commodity, is its money price.
Eventually, just one commodity, for example, cattle, gold or silver, is singled out to perform this function of being the universal equivalent form of value. Being the equivalent form means what its name suggests, when it comes to acting as money. If the total value of commodities to be circulated, in an economy, is equal to 1,000 hours of labour, then the equivalent form of these commodities must be a quantity of the money commodity equal to 1,000 hours of labour. It cannot be more, nor less than that, or else it is not equivalent. If gold is the money commodity, and 1 ounce of gold is equal to 10 hours of labour, then 100 ounces of gold would be required as money. However, because each ounce of gold can, during a year, act in several exchanges, less gold is actually required. If each ounce of gold acts in 10 exchanges, during a year, only 10 ounces are required to perform this function.
So, as Marx sets out in A Contribution To The Critique of Political Economy, if we have 100 commodities, each with an average value of 10 hours of labour = 1,000 hours, then the amount of money required as currency is determined by the value of an ounce of gold, multiplied by the velocity of circulation, 10 x 10 = 100, hence 10 ounces, if circulation is only 5, then 20 ounces, if an ounce of gold is equal to 5 hours of labour, and velocity is 10, then 20 ounces, and so on.
However, money and currency are not the same thing, because, as Marx sets out in the above work, gold and silver, take the form of coins, when they act as currency, and later, they take the form of bank notes. They act as money tokens, representing the specific quantity of gold or silver, whether those tokens are made of gold or silver, copper, nickel, or paper. A gold or silver coin, in circulation, gets worn down, so that the amount of gold or silver contained in it is reduced to a level whereby the value of that gold or silver is much less than the face value of the coin. However, provided only the required amount of coins are put into circulation, as determined by the above formula, in other words, if the total amount of gold they purport to represent is only what is required, they will continue to function, as though they were still full weight. Its this fact that enables the precious metal in the coin to be replaced, first by more base metals, and then by worthless paper notes.
However, this introduces a further factor. If too many gold coins are put into circulation, then the value of each coin falls, relative to the value of the gold each full weight coin contains. It becomes worthwhile for the owners of any such full weight coins to take them out of circulation, and turn the gold back from being money into again being a commodity, because they can now sell 1 ounce of gold for more than a coin representing 1 ounce of gold. The currency circulation would, then, automatically adjust.
Of course, if all gold coins in circulation actually contained much less than 1 ounce of gold, and that is what happens, when the state deliberately corrupts the coinage – usually to cover its debts – then its not possible to simply melt down the gold in the coin, and get more from it than the face value of the coin. In that case, the reality imposes itself over the appearance. Each coin comes to represent this new weight content/value of gold it contains, even if its historic name still links it to its past weight.
Because, each coin now represents a smaller amount of value, a smaller quantity of social labour, the number of coins in circulation, must rise accordingly. If each gold coin contains only half an ounce of gold, then, although it might retain the name Pound, it would, now, represent just 5 hours of social labour-time, so that, to be the equivalent form of 1,000 hours of social labour-time, in the form of commodities, 20 such coins would be required, if the velocity of circulation remained 10. Consequently, commodities whose exchange-value was formerly measured as £10, is now £20, the money price has doubled, even though the value of these commodities is unchanged. It is only their price that changes as a result of the depreciation of the currency.
Similarly, if gold is removed from the coin entirely, and is replaced by copper, nickel, or paper, the actual value of the coin or bank note is itself near zero. Its no longer possible to take them out of circulation, and melt them down to obtain the value of the content, if too many of them are put into circulation. And, so these money tokens continue to circulate, but, whatever the face value they have, whatever the amount of social labour-time that purports to represent, it can only, in reality, act as the equivalent form of the actual amount of value of commodities to be circulated. So, using Marx's formula above, which can be represented as MV = PT, i.e. the value of money in circulation, multiplied by the velocity of circulation is equal to the average price of commodities, multiplied by the number of transactions/quantity of commodities to be circulated, then, if too much M is put into circulation, and assuming no change in V, or in T, the effect can only be to raise P, i.e. the average unit price of commodities – inflation.
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