The amount of currency in circulation is determined by the standard of prices, and the velocity of circulation, as against the total value of commodities to be circulated, MV = PT, In other words, if the average value of commodities per transaction is 10 labour hours, and 100,000 transactions take place, total value to be circulated equals 1 million labour hours, and its money equivalent is, also, thereby, 1 million labour hours. If the standard of price is £1 – which may be represented by a sovereign of ¼ ounce of gold, with a value of 100 labour hours, or simply by a £1 paper note representing 100 labour hours – the total money equivalent is £10,000, and if each £1 circulates 10 times per year, then 1,000 such notes must act as currency.
If, however, there is no change in the values of commodities or the standard of prices, but a slowdown in economic activity results in fewer commodities produced and to be circulated, so that transactions falls to 80,000, then the money equivalent of these commodities falls correspondingly to £8.000, and if there is no change in the velocity of circulation, only 800 £1 notes are required to act as currency. If the currency supply is not reduced accordingly, then, there is now excess liquidity amounting to 20%, and each coin/note is correspondingly devalued, so that rather than prices falling – deflation – they are inflated by 20%. In other words, each coin/note, now represents only 80 labour hours, and so more of them have to be exchanged for commodities, leading to the general level of prices rising by 20%.
That is why the hopes of governments and central banks to reduce inflation by causing recessions are doomed, so long as liquidity itself is not reduced. However, in reality, the purpose of those policies is not to reduce inflation, but to put pressure on workers to not seek pay rises to compensate for price rises. Its why, when UK GDP came in at a stronger than expected 0.5% for October, at a time when politicians, central banks and their ideologists are proclaiming recession, the government was quick to downplay the figure, and strength of the economy.
But, what, then, of the opposite, of an excess of aggregate demand over aggregate supply, i.e. an underproduction of commodities? Firstly, it has to be asked where this excess aggregate demand might come from. The demand for the elements of constant capital, consumed in production, itself comes from capital.
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| The demand for the elements of consumed constant capital (MP) comes from capital itself, as its preserved and reproduced in the value of output C(M). The demand for wage goods comes from that part of the new value created by labour, and also contained in C(M), and equal to wages (variable-capital). The other part of the new value created by labour, is contained in c(m), and appropriated as profit, forming the basis of demand for consumption goods by capitalists, and of the accumulation of additional capital. In short the demand for the replacement of consumed constant capital comes from capital, c, whereas the demand for consumption goods, and accumulation comes from revenues (v + s). |
In other words, the value of the consumed constant capital is reproduced in the value of output, and provides the fund for its replacement, on a like for like basis. The total value of output is resolved into c + v + s, and so the demand for c, has, then been accounted for. We then have the demand for consumption goods, and the demand for additional constant capital i.e. investment/capital accumulation, to account for. But, the funds for that are also produced in current output. In other words, workers are paid money wages, equal to v, and capitalists obtain money profits, equal to s, which they divide between meeting their own consumption needs, and that part used for capital accumulation.
So, unless liquidity is increased, by adding additional currency, there is no basis for any excess monetary demand for commodities, in general, though there may be excess demand for some commodities. One source of additional demand may come from the mobilisation of savings from previous years, however.
For example, firms accumulate money reserves to cover the replacement of worn out fixed capital, and they may use these reserves, instead, to accumulate additional capital. However, as Marx sets out in Capital II, these money reserves, are themselves generated from the fact that the value of wear and tear of fixed capital is recovered in the value of output, and if it simply sat, in total, in these reserves, for years, until, fixed capital actually wore out, it would result in an under-consumption by Department II, and corresponding overproduction by Department I. As Marx describes, this overproduction is avoided by the fact that different firms replace fixed capital at different times, and new firms buy fixed capital as they enter production, and, also, this use of amortisation funds for capital accumulation. But, the reason why firms would be accumulating at a faster pace would itself be a consequence of a more rapid pace of economic activity, and generation of additional monetary demand, as more workers are employed, wages rise and so on.
Another alternative is what has just been seen, in which supply was deliberately curtailed by lockdowns, and yet, government paid wages to workers for not working. In other words, additional currency was created and handed to workers to spend on commodities they had not produced, so that this monetary demand exceeded supply causing market prices to rise. But, again, this was an example of not more money being created, but of excess money tokens being created, each token, thereby, being devalued, manifest in this excess monetary demand, and rising prices.
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