In the age of free market competition, where a plethora of small private capitals competed for market share, on the basis of lowering prices, by lowering the individual value of their output, lower prices, in general, posed no great problem, although, as seen, states were led to devalue the standard of prices, both as a consequence of the normal wear and tear of coins, and as a result of debasement by the state as a means of paying their debts. In the 19th century, discovery of new goldfields, as Marx describes, reduced the value of gold, and so led to rising money prices.
Marx sets out the way the Bank of England increased the currency in circulation according to these laws outlined. But, what is also apparent is that, in terms of paper, fiat currencies, no relation to gold or silver need be maintained. As Marx has described, there have been periods when the value of gold has fallen, or where the quantity of gold represented by the standard of prices has fallen, but where the general price level does not rise proportionately, and that is because the quantity of money tokens thrown into circulation is not increased in the same proportion. It is not any relation to gold or silver of the token that is ultimately determinant, but the relation of the token to social labour-time. Gold and silver as money commodities, were simply historical phenomena that acted as physical manifestation of that universal labour, in the process of social development, and mediated the relation between social labour-time and currency.
A look at the huge fluctuations in the gold price from week to week, or month to month, shows that it no longer performs the function, or is needed for that function. The general level of prices can be influenced by central banks completely independent of any change in the value of gold, or the amount of gold represented by the standard of prices. As this was understood, it played an important role, as capitalism itself moved from the era of the monopoly of small private capital to the era of large-scale socialised capital, and oligopoly.
These huge socialised capitals require increasing levels of macro-economic planning and regulation, across increasingly large single markets. For the billions of Dollars of investment they undertake, they require as much stability as they can get, in order to ensure that such investment is going to be profitable over long time horizons. In these conditions, falling prices are to be avoided, and a moderate 2% p.a. inflation of prices is desirable.
For one thing, workers resist falling money wages, even when their living standards are rising, but Fordism was based on these money wages rising by less than the annual increase in productivity. If prices were constant, rising productivity means a lower value of wage goods, requiring lower money wages, even if these lower money wages bought a greater volume of wage goods (rising living standard). A small inflation of prices means that money wages rise, but by less than the increase in productivity, so that wages fall relative to output, raising the rate of surplus value and profits.
In addition, if one large firm increases its prices, its competitors will tend not to follow, unless they have to, because they hope to gain market share. However, if one cuts prices, the others will do the same, again in order not to lose market share. Such price wars are destructive of profits for oligopolies. The last thing they want is generally falling prices.
So, for example, in 1913, the US Federal Reserve was created, and one of its functions is to preserve price stability, now understood as aiming at this annual 2% inflation. A central bank is no longer constrained by quaint and now historically redundant questions such as the value of gold, in determining monetary policy. Whatever happens to the price of gold, silver or any other previous money commodity is irrelevant in influencing the general level of prices, which is achieved by increases or decreases in the volume of currency and credit in circulation. That is not to say that central banks have monolithic control over such phenomenon, as the current high levels of inflation indicate.
“The gold coin obviously represents the value of commodities only after the value has been assessed in terms of gold or expressed as a price, whereas the token of value seems to represent the value of commodities directly. It is thus evident that a person who restricts his studies of monetary circulation to an analysis of the circulation of paper money with a legal rate of exchange must misunderstand the inherent laws of monetary circulation. These laws indeed appear not only to be turned upside down in the circulation of tokens of value but even annulled; for the movements of paper money, when it is issued in the appropriate amount, are not characteristic of it as token of value, whereas its specific movements are due to infringements of its correct proportion to gold, and do not directly arise from the metamorphosis of commodities.” (p 122)
Where gold no longer acts as money commodity, and measure of value, its role in the process determining the quantity of paper notes in issue also disappears. The paper note does, indeed, then represent the prices of commodities directly, because the note itself, now, directly represents, not a quantity of gold, but a quantity of social labour-time.
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