Where Do They Think The Money Comes From?

The usual suspects from the media, and opportunist politicians are again demanding that the government close down economic activity, and that, at the same time, the government “create” more money, and hand it out to people so that they can continue to buy goods and services. Even setting aside the need, let alone the wisdom, of again closing down large areas of economic and social life, as a response to the Omicron variant of COVID, the question arises of where they think this money comes from. I don't mean that in the sense its usually understood of being where the government would raise the taxes and so on, but, literally, where do they think the money itself comes from?

To understand that let's look at the economic reality in a simplified model, prior to the existence of what today is understood to be money. In other words, let's think of an economy where there are two people producing use values, some of which they consume themselves, as products, and some of which they exchange as commodities with the other. In other words, this is an economy based upon direct production. The value of the products each produces, whether they are simply use values they consume themselves, or else are commodities they exchange with the other, is determined by the labour required for their production. Indeed, its this fact that a) enables the rate of exchange of these two commodities to be established – their exchange value, or ratio of the value of a quantity of one to the value of a quantity of the other – and b) enables each producer to decide how to allocate their available labour-time so as to maximise their welfare, on the basis of comparative advantage. In other words, if A spends 1 hour producing a kilo of potatoes, whilst B spends 2 hours producing a kilo of potatoes, but A spends 2 hours producing a kilo of carrots, whilst B spends only 1 hour producing a kilo of carrots, it makes sense for A to use their labour time producing potatoes, and B to spend their labour time producing carrots. That way, total production is increased, and both can meet their needs more easily.

But, as Marx describes, what is actually going on here, when A and B exchange their commodities? What is it that they are actually exchanging, or, put another way, with what does A buy B's carrots, and with what does B buy A's potatoes. Superficially, it appears that A buys with potatoes, and B buys with carrots. However, what enables A to buy with potatoes is only the fact that these potatoes represent a given amount of value, i.e. a given amount of labour-time. The same with B's purchase with carrots. The fact that it seems that it is the commodity – potatoes or carrots – that innately contains the value, and enables it to function as means of payment is an illusion, what Marx calls commodity fetishism. What A and B actually exchange is not commodities, but equal amounts of labour-time, what exists between them is a social relation, but which has the appearance of being a relation only between things, commodities.

In fact, if we look at societies from across the globe this relation can be seen through history. But, its also for this reason that Marx says, every commodity is money. In other words, every commodity can act as the means of purchasing every other commodity, so long as those selling are prepared to accept it. For A, potatoes act as money to purchase carrots from B, and for B carrots act as money to purchase potatoes from A. The price of carrots is measured in potatoes, just as the price of potatoes is measured in carrots. In Capital I, Chapter III, Marx describes this as the relative form of value.

But, a very obvious truth is then uncovered from this, now that we have removed the veil of both commodity fetishism, and the illusion created by the intervention of money. It is that the “money” itself, here, the means of purchase, has to be created, and, like any other commodity, it has to be created by labour. It has to itself have value. It cannot be simply conjured from thin air, or, as with paper tokens, that have no value, simply printed in endless quantity.

For A to be able to buy carrots with potato “money”, they must first exert labour in the production of potatoes, just as B must do the same in the production of carrots. If not, then A would have no potatoes to function as money, as means of purchasing carrots, and vice versa. Indeed, more than that. Suppose, A produced 2 kilos of potatoes, but B failed to produce any carrots. Now A would have the means of buying carrots, but there would be no carrots for them to buy. Their potatoes now could not function as money, for the simple reason that, to function as money, they must have something against which they can exchange, in other words, it must have an equivalent. Otherwise, the potatoes exist not as money, or even as a commodity, but merely as a product, a use value, which has value, but not exchange-value. It can only be consumed directly by its producer, in order to consume its value alongside its use value.

If we scale that up to the level of society, and imagine half of the population producing commodity A, and the other half producing commodity B, then nothing fundamentally is changed in these relations, and the conclusions drawn above. If, for whatever reason, the amount of labour being undertaken is reduced, so that the amount of value produced, and available to act as exchange-value, is correspondingly reduced, then the amount of value equivalent is also, thereby reduced, i.e. the amount of money is reduced. No amount of printing of bits of paper, or creation of credit can change that fact, and the reality is simply manifest, then in an inflation of prices, as each bit of paper represents a smaller amount of that money.

In the example, A and B exchange commodities, C – C, of equal value. What Marx showed was that, as a consequence of these exchanges of commodities, some commodities are traded most frequently, and these particular commodities can, thereby, fulfil the function of being an equivalent form of value, used to measure the value of other commodities, rather than trying to measure each value in labour-time, before comparing it with other commodities. This is how a money commodity, such as gold or silver arises. But, someone must produce this gold or silver, as with any other commodity, for it to fulfil this function.  It is only because it is a use value, with value that it can a) become a commodity, and b) become the general commodity - money.  Its why crypto-currencies are not money.

Now, it might seem that this is not the case, because gold or silver, when they act as currency, change hands many times. An ounce of gold has only to be produced once, and yet its value can act to buy commodities to its value many times. That is true, but again, this merely obscures the underlying relation. When the ounce of gold acts as currency, the above relation of C – C, is transformed into C – M – C, so that A sells a kilo of potatoes, and obtains from B, gold to an equal value. A now uses the gold, and buys a kilo of carrots from B. So, now everything is back to where it was. The real relation was the value created by A by their labour producing potatoes, and the value created by B in their labour producing carrots. It was this that represented the real economic activity, and basis of exchange, not the gold money that merely acted as a means of facilitating this exchange.

Its true that the gold acts as currency, mediating this exchange, and for that reason, money tokens can take the place of the gold, but it cannot change the fact that it is the production of value that is central, and determines the amount of money, not vice versa.

If more gold was thrown into circulation, it could not act as additional money, for the simple reason that no additional equivalent value exists, in the form of additional potatoes or carrots. The fundamental requirement is that labour is undertaken, so that value is created, and money can only exist as the equivalent form of this value. Literally, therefore, when less labour is undertaken in the economy, so that less value is created, less money – as the equivalent form of that value – is necessarily created along with it. So, when it is proposed that both less labour be performed, as a result of additional lockdowns and so on, and yet, additional “money” be created, and handed out, by the government, what is being asked for is impossible to achieve, and simply shows that those making such calls have absolutely no idea what money is, or where it comes from.

What they are actually calling for is additional money tokens to be printed, but printing additional tokens, be they coins, paper notes, or additional credit, even when the amount of money remains constant, i.e. when the amount of value created remains constant, simply necessitates that each token then represents a smaller quantity of that money. Its like deluding yourself that a field has become three times longer by measuring it in feet rather than yards. In the case of money, the effect of that is that the money prices of commodities rise – inflation. To both reduce the amount of money, by reducing the amount of value produced, as a result of physically limiting the amount of labour undertaken, and at the same time to increase the quantity of tokens in circulation representing that diminished quantity of money, is to invite a hyper inflationary spiral.