The money commodity is that commodity that evolves out of the exchange of commodities as the universal equivalent form of value, and, thereby, as the materialisation of universal labour, and measure of value. It is to begin with some commodity whose own value is well known, and relatively stable, and traded widely. One first such commodity was cattle.
“And that it by no means took so long for the relative amount of value of these products to be fixed fairly closely is already proved by the fact that cattle, the commodity for which this appears to be most difficult because of the long time of production of the individual head, became the first rather generally accepted money commodity. To accomplish this, the value of cattle, its exchange ratio to a large number of other commodities, must already have attained a relatively unusual stabilization, acknowledged without contradiction in the territories of many tribes. And the people of that time were certainly clever enough — both the cattlebreeders and their customers — not to give away the labour-time expended by them without an equivalent in barter.”
(Engels – Supplement to Capital III)
The value of the money commodity, say cattle, having been established, it then performs the role of being proxy for universal labour. In other words, all of the variations inherent in concrete labour, i.e. its use value as tailoring labour as against blacksmith's labour, as well as its variations as complex or simple labour, along with the determination of what is socially necessary labour, are subsumed within it. The consideration of all these variations, then, become subsumed in each commodity, via competition, by their value being measured, indirectly, against the money commodity, so that their value itself becomes determined, not by the amount of concrete labour embodied within them, but by the amount of universal labour they represent as measured by the money commodity.
As Marx describes in A Contribution To The Critique of Political Economy, this involves a two-stage process. On the one hand, the money commodity acts as measure of value, and so determines the “ideal prices” of these commodities. In this context, the money commodity does not need to be present to fulfil this function. If cattle function as money commodity, and a head of cattle represents 100 hours of universal labour, and it exchanges for 100 metres of linen, and 20 swords, then the value of these other commodities can also be determined as equal to 100 hours of universal labour. It is not necessary to actually have cattle physically present to make this evaluation, and so, for example, 100 metres of linen could be bartered for 20 swords, as both representing equal value. The “ideal prices” of linen and swords are thus established, but that does not mean that, in reality, either of these commodities can achieve these prices. That depends upon whether there is sufficient demand for them at these prices.
This was the error made by the Ricardian socialists, such as Bray, and copied by Proudhon, Rodbertus and others in their proposals for the replacement of money with labour notes. If failed to understand the role of money in determining universal labour, via competition. Simply handing out such “labour notes” on the basis of the amount of labour performed, does not act to reduce this performed labour to universal labour. It fails to distinguish between concrete labours, complex and simple labours, and socially necessary as against socially useless labour.
The same error was made on a huge scale by Stalinism, which handed out what amounted to such labour notes, but in the form of money wages, for labour performed that was socially useless, i.e. it produced use values that no one wanted, and so created simultaneous gluts and shortages, as well as devaluing the notes themselves, whose owners tried to trade them for western currencies to buy the commodities they actually wanted. The same applies to the statists who seek to replicate that inside capitalism, by having the capitalist state nationalise businesses and industries that fail having similarly undertaken useless labour. Or as Marx puts it in Capital, in relation to such useless production,
“The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”
(Capital III, Chapter 30)
And, this aspect is only manifest in the second stage of the process, when it is not a matter of the ideal price of commodities being established, but when they come to be actually sold in the market. Now, the money commodity, or its representative in the form of a money token, must be present. Now, money assumes the role, not as measure of value, but as means of circulation. The seller, must be able to find a buyer who will but their supply at this price, i.e. hand over actual money equal to that price.
The ideal price reduces all concrete labour, and complex labour for each commodity, and determines what is socially necessary labour, via competition. All variations of concrete labour are subsumed within it, and only that labour socially necessary for producing that particular type of commodity, i.e. the average for that industry, is counted. But, as Marx sets out, in Capital III, there is another aspect of what constitutes socially necessary labour, and that is this factor of whether there is demand for what has been produced.
The first aspect of socially necessary labour only involves the requirement that commodities are produced by the most efficient means, so that for each commodity it becomes the average time for production that determines their value. However, as Marx describes, in Capital III, if 1,000 commodities are produced, each using the most efficient means possible, and representing each 10 hours labour, say £1 in money terms, if at this price of £1, there is only demand for 800 of them, in fact, only 8,000 hours out of the total 10,000 hours of labour was socially necessary. It becomes as though 2,000 created no value, and so, the value of each commodity becomes equal to 8 hours (£0.80), and not £1.
In terms of its role as means of circulation, as against its function as measure of value, money must be physically present, or at least its representative must be present in the form of a money token. For money commodities such as cattle that would be cumbersome, and difficult. As Marx sets out in A Contribution To The Critique of Political Economy, in Russia, where furs were the money commodity, they were represented in circulation by printed strips of leather, which became Kopeks.
Because, in this function as means of circulation, the money commodity performs many transactions, the quantity of it required to perform this function is much less than the total value of commodities to be circulated. In this function as currency, the amount required is only the total value of commodities to be circulated, divided by the value of the money commodity, multiplied by its velocity of circulation. If the value of commodities is 1,000 hours, the value of the money commodity is 10 hours, and each unit of it performs 10 transactions per year, only 10 such units of money commodity are required.
The requirements of a money commodity, as trade expands, leads to certain types of commodity being adopted to perform that role. In short, it tends to become precious metals, because they have large values in small volumes, they are durable, and they are divisible into homogeneous, discrete portions. Initially, because gold was first discovered on the surface, whereas silver had to be mined, the value of silver was higher than that of gold, and led to silver being used as money commodity, but as obtaining more gold, increasingly required mining that was reversed, and gold tended to replace silver as money commodity.
As measure of value, a given weight of metal is used as the basis, for comparison, i.e. the value of an ounce of gold, or a pound of silver. These units of weight then give the names to the standard of prices used. For example, the Pound Sterling gets its name from a pound weight of sterling silver. These standards of prices then become the basis of determining the prices of all commodities, i.e. instead of prices being determined as 1 pound of silver, they are determined as £1. These names for the standard of prices remain constant, even though both the value of the money commodity itself, and the quantity of it contained in that standard of prices, changes. The value of gold and silver fell, over time, as new mines were opened, but also the quantity of them represented by the given unit of prices was reduced.
“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 result of this fact that the name of the standard of prices remained but the amount of value/universal labour it represented fell, means for the reasons set out above, the prices of commodities rose. Because, the precious metals were subject to wear and tear as a result of being passed from hand to hand in circulation, they were restricted to higher value transactions, where the velocity of circulation is lower, and in other spheres, more base metals were used as their representatives. These latter were, then, only tokens of value, representing money, but, also because even the precious metal coins became worn, they, too, were, only tokens of value. They were able to function as representatives of that money/social labour-time, because they were backed by the state.
But, that fact, meant that it was possible for the state to simply replace precious metals altogether with tokens, be they base metal coins, or paper notes. So, long as the measurement of universal labour took place via the medium of some money commodity such as gold, the laws determining the quantity of gold in circulation as currency, set out above, remained for these money tokens, or else, with the tokens exchangeable for the gold they represented, any devaluation of notes would result in their owners exchanging them for gold. However, states recognised that being able to devalue money tokens was a useful mechanism for macro-economic planning and regulation, because, by issuing excess money tokens, they could ensure that the general level of prices rose each year.
That was required for two basic reasons. Firstly, oligopolies dislike falling prices, because they result in increased competition and reduced profit margins. Secondly, wages are sticky downwards, so that rising productivity that results in higher living standards, but falling money wages are resisted by workers, who also want to see rising money wages. Inflated prices enable capital to do that, even though the money wage, does not rise in real terms. That was a central requirement to the operation of Fordism and Social-Democracy. It became a function of central banks from the start of the last century.
Money commodities, thereby, lost their function, and, now, with money tokens not convertible, each note itself simply represents a quantum of social labour-time directly, without a money commodity acting as intermediary. The value of each note, is, thereby, determined by the total value of commodities to be circulated, divided by the quantity of notes in circulation multiplied by their velocity of circulation. And, today, it is not just physical notes and coins included in this calculation, but their digital equivalents.
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