b) The Circulation of Money
“In the first instance real circulation consists of a mass of random purchases and sales taking place simultaneously.” (p 98)
Unlike barter, where commodities exchange as a series of simultaneous bilateral trades, with commodity circulation there is a series of simultaneous bilateral exchanges of commodity for money. This circulation does not consist of a circle of payments, such as A-B-C-D-A, nor of a series of payments such as A-B, B-A, A-C, C-A, and so on, with A sitting at the centre of a hub, with money going out from, and flowing back to it. A given coin may pass in payment sequentially from A to B, to C, to D, but, also, at the same time, that these transactions are occurring, E is making payment to F, who pays G, who pays H, and so these payments require a completely different coin. This is one of the limitations on the extent to which the velocity of circulation can reduce the amount of currency required in circulation.
“Commodity and money thus move in opposite directions, and this change of places – in the course of which the commodity crosses over to one side and money to the other – occurs simultaneously at an indefinite number of points along the entire surface of bourgeois society. But the first move of the commodity in the sphere of circulation is also its last move.” (p 98)
This is true, at least, for simple commodity circulation. The wine producer sells wine to a buyer, C-M, and the buyer then consumes the wine, so that is the end of it. The money, however, in the hands of the wine producer, can now go on to act as means of circulation in any number of transactions. If we are dealing not with simple commodity circulation, but with more developed forms, the wine might have been bought by a merchant, who sells it to a merchant in another country, who sells it to a restaurant, who, in turn, sells it to a consumer.
Consequently, the second phase of the circulation of any commodity is always undertaken by its metamorphosed form as money.
“The movement of the metamorphosed commodity is thus the movement of gold. The same coin or the identical bit of gold which in the transaction C—M changed places with a commodity becomes in turn the starting point of M—C, and thus for the second time changes places with another commodity.” (p 99)
In this section, we will learn how it is the prices of commodities, the number of transactions, the value of gold (money commodity), and its velocity of circulation, which determines how much gold is required in circulation, as represented by the equation MV = PT, where M is the quantity of money, V is the velocity of circulation, P is the average price of commodities, as determined by the standard of prices, and T is the number of transactions.
As Marx has already described, because money is the equivalent form of value, the money equivalent of the value of all commodities to be circulated is already determined, by P x T. If the total value of commodities is 1 million labour hours, then the money equivalent must also be 1 million labour hours. If the standard of prices is 1 gram of gold, given the name £1, and is equal to 100 labour hours, then the money equivalent is 10,000 grams of gold = £10,000. But, if each gram of gold circulates 10 times, only 1,000 grams of gold (£1,000) is actually required as currency.
If more than this is put into circulation, it will not increase the total value of commodities, or their prices. It will be driven out of circulation. It is PT that determines the amount of money required, not vice versa. However, as Marx describes, money, here, must not be confused with money tokens, be they precious metal tokens, base metal tokens or paper notes. The laws set out above remain intact, but suppose the £1,000 of gold is now represented by £1,000 in paper notes/money tokens. They will continue to perform the required function, because they still represent 1 million hours of social labour-time.
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