Chapter Two – Money or Simple Circulation, Measure of Value - Part 12 of 14

As described earlier, it is in the nature of metallic currency that its metal content becomes denuded, naturally or intentionally. When I was young, I collected old coins, most of which I still have. One of them is an old penny, the date on which is just about decipherable as 17??, but otherwise, whose surface has been worn perfectly smooth, and its general thickness reduced by about half. The consequence of this is dealt with by Marx in his subsequent analysis, but he gives some sense of the way precious metal coins become devalued, here.

“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.” (p 72)

In other words, the prices of commodities are set in terms of the given standard of prices, be it £,$,₣, ¥, or whatever, but, whilst these names given to the standard of prices remain the same, the actual value of this standard is reduced over time. The coins that act as representative of this standard, as currency, suffer a continual reduction in the value of their own material content, due to wear and tear, clipping and so on. So, when the value of the standard of prices is reduced, because it acts as measure of value, the value of commodities, measured by this standard of prices inevitably results in higher prices. We, now have two means by which the price of commodities in aggregate may rise.

Firstly, the value of the money commodity, such as gold, may fall, and secondly, the quantity of gold contained in the standard of prices may be reduced, whilst the name of that standard remains the same. If we take the £ as standard of prices, and assume it is equal to 1 gram of gold, which is equal to 10 hours of labour. Firstly, this standard may fall, because the value of gold falls, so that, say, 1 gram of gold represents only 5 hours labour. Secondly, the standard may fall, because although the value of gold itself, as money commodity, does not fall, the quantity of gold contained in £1, is reduced by half. The effect is exactly the same, a doubling of prices. In both cases, the amount of social labour-time represented by £1, as the standard of prices, is halved, so that twice as many £'s are required as universal equivalent form of value.

Contrary to the Miseans, and bullionists, who see this inflation as a consequence of fiat currency, which would be ended with a return to the Gold Standard, it was a feature of precious metal currencies too, for the reasons set out, and to be further elaborated. It was never the case, for example, that gold coins contained the weight of gold their nominal value indicated. Benjamin Franklin noted the same in relation to silver coins. But, he noted that, despite this fact, the coins continued to circulate, and to act as though they were full weight. The reason was that these coins, although comprised of precious metal, were, in fact, merely money tokens, representing the precious metal of which they were comprised.

A 1 gram gold coin, given the name £1, still has the name £1, when half its gold content has disappeared. In terms of its material value, it is only worth £0.50, but continues to circulate as though it still had the value of £1. Half of its material content no longer exists, and this £0.50 of its nominal value is accounted for entirely by it being a money token. In order for this to continue, those circulating these tokens must trust that this value will be honoured, and the only institution capable of that is the state. In fact, therefore, even though the currency takes the form of precious metal coins, it is already a fiat currency, based on credit/trust,

“Because the designation of the unit of measure, its aliquot parts and their names is, on the one hand, purely conventional, and on the other hand must be accepted as universal and indispensable within the sphere of circulation, it had to be established by legal means. The purely formal enactment thus devolved upon the government.” (p 72)

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