So, in terms of money, the formula MV=PT holds, and it is the money prices of commodities, and volume and speed of transactions that determines MV. But, Marx says, there are occasions where the relation appears to have broken down, so that PT appears to rise by a greater proportion than MV. These occurrences are explained by proportional falls in the value of money, and this also explains why, with money tokens, this same phenomenon – inflation – arises. But, it may also be the case that the amount of currency increases by more than appears to be the case, because commercial credit expands.
“It is a sign of the superficial and formal character of simple money circulation that the quantity of means of circulation is determined by factors – such as the amount of commodities in circulation, prices, increases or decreases of prices, the number of purchases and sales taking place simultaneously, and the velocity of currency – all of which are contingent on the metamorphosis proceeding in the world of commodities, which is in turn contingent on the general nature of the mode of production, the size of the population, the relation of town and countryside, the development of the means of transport, the more or less advanced division of labour, credit, etc., in short on circumstances which lie outside the framework of simple money circulation and are merely mirrored in it.” (p 105)
In terms of money, if the velocity of circulation is given, then the quantity of money is determined by the prices of commodities, which, in turn, is determined by their values and the value of the money commodity.
“Prices are thus high or low not because more or less money is in circulation, but there is more or less money in circulation because prices are high or low.” (p 105)
But, again, that is the condition in respect of money. The situation is reversed when considering money tokens, such as paper notes, which Marx considers in the next section. Marx gives a preview of this argument by considering the situation where the money commodity falls in value, or is replaced by another commodity of lower value, for example, silver replacing gold.
“Thus, if the value of gold, i.e. the labour-time required for its production, were to increase or to decrease, then the prices of commodities would rise or fall in inverse proportion and, provided the velocity remained unchanged, this general rise or fall in prices would necessitate a larger or smaller amount of gold for the circulation of the same amount of commodities. The result would be similar if the previous standard of value were to be replaced by a more valuable or a less valuable metal. For instance, when, in deference to its creditors and impelled by fear of the effect the discovery of gold in California and Australia might have, Holland replaced gold currency by silver currency, 14 to 15 times more silver was required than formerly was required of gold to circulate the same volume of commodities.” (p 106)
Here, it is the lower value of silver that necessitates a greater quantity of it be thrown into circulation, but with paper notes, which have no intrinsic value, it is the other way around. Because they nominally represent a given amount of money, the more of them thrown into circulation, the less value each note has. It is, then, the quantity of them thrown into circulation that determines their value, and, as each represents the standard of price, its manifestation is higher commodity prices. So, now, it becomes MV=PT that is the driver, rather than vice versa.
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