Chapter 2.C Theories of The Medium of Circulation and of Money
Its important, in reading this section, to bear in mind what has been explained in the previous sections, in relation to the differences between money, money tokens representing money, and fiat currency. That is the quantity of money is determined by the value of commodities for which it acts as the equivalent form of value, divided by its own value. So, commodities with a value of 1 million hours, have a money equivalent of 10,000 grams of gold, where a gram of gold has a value of 100 hours of labour.
The 1 gram of gold may be given the name £1, and acts as standard of price. As currency, it may take the the form of 1 gram gold coins. If each coin circulates ten times in a year, 1,000 of them are required in circulation. The coin, as token, rather than as money itself, does not have to contain 1 gram of gold. Its value, in circulation, derives from the fact that it represents such gold, and is redeemable for it. Its value stems, not from its own material content, but from the quantity of it in circulation, and, for gold coins, if that quantity exceeds the value of the gold they represent, full weight coins are withdrawn, and melted down into bullion (Gresham's Law).
For other money tokens, particularly paper tokens, if they are issued in excess, because they have no material value, they cannot be taken out, and their material value obtained. They remain in circulation, and their value is proportionally reduced. This reduction in their value is then manifest in a rise in prices – inflation. Any link to, and promise to redeem such notes, in a given weight of gold must then be abandoned. The notes become fiat currency, backed by the state, and each note, now, representing not a quantity of gold, but a quantity of social labour-time. Gold, now, like any other commodity, has its price determined by these notes.
Where the quantity of money in circulation is determined by the value of commodities to be circulated, it is the quantity of notes in circulation that determines the prices of commodities. Given that, today, the currency, in the form of these paper notes, is referred to as “money”, which is wrong on two counts, it would be easy to take Marx's discussion of money, in this section – and of money tokens representing it – as the same as discussing modern paper notes, for which, as he set out earlier, in fact, everything is reversed.
Marx begins by looking at the ideas of the Monetary School (not to be confused with modern Monetarists), of which Mercantilism was a development. The Monetary School/Mercantilists were not the fools that many later economists presented them as being, Marx noted. They were constrained in their views because of the particular historical and material conditions in which they were writing.
The Monetary School/Mercantilists saw the accumulation of money in the form of gold and silver, as the measure of national wealth. It was not surprising, given the the conditions of the time, that they drew this conclusion, and, understood in those terms, Marx says, their argument was valid. The great mercantile nations of the time, such as Holland and then Britain, did not amass their wealth on the basis of production, but of trade, and an ability to engage in unequal exchange. This is the basis upon which all merchant capital, as against productive-capital, obtains profits. In other words, these nations bought commodities cheap, in overseas markets, and then sold these, or other commodities produced with them, at a higher price in overseas markets. Exports exceeded imports, the difference paid in gold and silver, which formed increasing hoards of money.
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