Inflation - Inflation and the Money Commodity as Equivalent Form of Value - Part 1 of 2

As set out at the start, prices are exchange-values expressed in terms of the money commodity, and subsequently money tokens that act as representatives of the money-commodity, and finally money tokens in a regime of fiat currency, in which each token represents an aliquot part of total universal labour/social labour-time. As with any exchange value, the value of one commodity is expressed, indirectly, as a quantity of some other commodity, and, is, thereby, a proportional relation between the two. As such a proportional relation, it can change as a result of a change in the value of either commodity, or both.

So, if a litre of wine has a value of 10 hours of labour, as does 1 metre of linen, the exchange value of wine is 1 metre of linen, and, if linen is the money commodity, the price of wine is 1 metre of linen. If the value of wine rises to 12 hours, and the value of linen remains constant, the price of wine becomes 1.2 metres of linen. If the value of linen rises to 12 hours, then the price of wine, is still 1 metre of linen. If, the value of linen rises to 15 hours, the price of wine falls to 0.8 metres of linen.

With gold or silver as money commodity, these relations are the same. If a quarter ounce of gold is given the name £1, and a quarter ounce of gold has a value of 10 hours labour, then it exchanges for a litre of wine, with a value of 10 hours labour, so that a litre of wine has a price of £1, and all the other relations described above can be represented accordingly as £'s, multiples of £'s, or fractions of £'s. The £, is the standard of price, and its value can decline either as a consequence of a fall in the value of gold, or as a result of the £ containing less gold. What distinguishes inflation from a rise in the price of any individual commodity, resulting from an increase in its value, is that inflation is an increase in the general level of prices, resulting from a fall in the value of the £ as standard of prices.

When precious metals, such as gold, were used as currency, both of these effects – a fall in the value of gold, and reduction in the quantity of gold within the standard of prices – were causes of inflation of prices.

“As a result of an historical process, which, as we shall explain later, was determined by the nature of metallic currency, the names of particular weights were retained for constantly changing and diminishing weights of precious metals functioning as the standard of price. Thus the English pound sterling denotes less than one-third of its original weight, the pound Scots before the Union only 1/36, the French livre 1/74, the Spanish maravedi less than 1/1,000 and the Portuguese rei an even smaller proportion. Historical development thus led to a separation of the money names of certain weights of metals from the common names of these weights.”

(A Contribution To The Critique of Political Economy, Chapter 2)

The name of the standard of prices, thereby, remained the same, but the value of this standard fell, as it continually contained less and less of the money commodity, and the manifestation of this was, therefore, higher prices. Similarly, the value of gold itself fell significantly at various times, for example, when Spain looted it from South America, when new gold supplies were discovered in California, and Australia.

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