Marx then deals with those occasions where the currency is debased and yet where the corresponding rise in prices does not occur. The reason for this is quite simple, as described earlier. If the currency is devalued by 50%, but the amount of currency put into circulation does not double, then prices, themselves, will not double, because the value of the currency/money tokens is a function of their quantity in circulation. In other words, if the standard of prices is based on silver rather than gold, a £ is devalued to 1/15 its previous amount, and 15 times as many £'s would be required in circulation, causing prices to rise 15 fold. If, however, only 5 times as many tokens are put in circulation, prices would rise only 5 fold rather than 15 fold.
“This is the solution of the difficulty which was not resolved by the controversy between Locke and Lowndes. The rate at which a token of value – whether it consists of paper or bogus gold and silver is quite irrelevant – can take the place of definite quantities of gold and silver calculated according to the mint-price depends on the number of tokens in circulation and by no means on the material of which they are made.” (p 120)
What is illustrated, here, is that the two functions of money, as measure of value, and as currency, are not only different, but also contradict each other.
“As regards its function as a standard of value, when money serves solely as money of account and gold merely as nominal gold, it is the physical material used which is the crucial factor. Exchange-values expressed in terms of silver, or as silver prices, look of course quite different from exchange-values expressed in terms of gold, or as gold prices. On the other hand, when it functions as a medium of circulation, when money is not just imaginary but must be present as a real thing side by side with other commodities, its material is irrelevant and its quantity becomes the crucial factor.” (p 121)
If silver is the money commodity, then ideal prices are markedly different to where gold is the money commodity, because silver itself is of much lower value than gold. If the value of social production is 1 million labour hours, and an ounce of gold has a value of 100 hours, then 10,000 ounces of gold is its equivalent form. But, if silver has a value of 10 hours labour, 100,000 ounces are its equivalent form. If an ounce is the unit for the standard of prices, then prices will be ten times higher in the latter regime than the former.
That is the case in terms of the measure of value, and standard of prices, but, as seen, when it comes to currency, the coins and other tokens used, although they represent money/social labour-time, may themselves have no value at all, in terms of their material content. An ⅛ ounce gold coin, as currency, may represent ¼ ounce of gold, for example, just as may ¼ ounce of silver, or copper, or a scrap of paper. What gives these tokens value is only their ability to represent money, i.e. to represent universal labour, social labour-time, and their ability to do this depends on them being accepted, and only being thrown into circulation within the limits described.
“Although whether it is a pound of gold, of silver or of copper is decisive for the standard measure, mere number makes the coin an adequate embodiment of any of these standard measures, quite irrespective of its own material.” (p 121)
The consequences of this are different in conditions where gold coins act as tokens than where paper tokens are used. As previously described, if ¼ ounces of gold is the standard of price, and has the name £1, then the quantity of gold coins in circulation must be equal to the number of ¼ ounces of gold that is the equivalent form of the value of commodities to be circulated, divided by the velocity of circulation. If gold coins are worn in circulation, so that, on average, 1600 ounces are required to obtain 1 lb. of gold bullion, rather than 1200 ounces, it means the money price of gold rises above its mint price. On the basis of Gresham's Law, owners of full weight coins, melt down 1200 of them to obtain 1 lb. of gold bullion, and then exchange this gold bullion for 1600 sovereigns.
But, such a process is impossible with paper notes. A £1 note has no material value, and its value is determined solely on the basis of the quantity of them thrown into circulation, relative to the money/social labour-time they represent. The greater this quantity, the smaller the aliquot portion of total value each note actually represents, but, because it continues to have the name £1, the manifestation of this can only be a rise in the prices of commodities, i.e. more of these notes are required to buy commodities – inflation.
“The rise or fall of commodity-prices corresponding to an increase or decrease in the volume of paper notes – the latter where paper notes are the sole medium of circulation – is accordingly merely a forcible assertion by the process of circulation of a law which was mechanically infringed by extraneous action; i.e., the law that the quantity of gold in circulation is determined by the prices of commodities and the volume of tokens of value in circulation is determined by the amount of gold currency which they replace in circulation. The circulation process will, on the other hand, absorb or as it were digest any number of paper notes, since, irrespective of the gold title borne by the token of value when entering circulation, it is compressed to a token of the quantity of gold which could circulate instead.” (p 121)
In other words, if total circulation amounts to 1 million hours of labour/value, which equals 1,000 £1 gold coins, but instead, 2,000 £1 paper notes are put in circulation, this cannot change the 1 million hours of value they represent. The total value represented by the notes is then “compressed” into this 1 million hours of value, rather than the nominal appearance. Each note now represents only half a coin, half the amount of social labour-time.
“In the circulation of tokens of value all the laws governing the circulation of real money seem to be reversed and turned upside down. Gold circulates because it has value, whereas paper has value because it circulates. If the exchange-value of commodities is given, the quantity of gold in circulation depends on its value, whereas the value of paper tokens depends on the number of tokens in circulation. The amount of gold in circulation increases or decreases with the rise or fall of commodity-prices, whereas commodity-prices seem to rise or fall with the changing amount of paper in circulation. The circulation of commodities can absorb only a certain quantity of gold currency, the alternating contraction and expansion of the volume of money in circulation manifesting itself accordingly as an inevitable law, whereas any amount of paper money seems to be absorbed by circulation.” (p 122)
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