Thursday 27 April 2023

Chapter 2.C Theories of The Medium of Circulation and of Money - Part 17 of 20

Price is only the exchange value of commodities expressed as a quantity of the money commodity, say gold. The gold is itself only a proxy for a universal/general commodity, and the labour that produces it, and, thereby, a proxy for universal, abstract labour. So, in fiat currency regimes, price is merely the exchange value of commodities expressed as a quantity of the standard of prices, which in turn, is merely a unit representing a quantity of social labour-time.

If we consider the situation in respect of metallic money, therefore, the starting point is the exchange value of commodities.

“We know that if the exchange-value of A expressed in terms of B falls, it may be due either to a fall in the value of A or to a rise in the value of B; similarly if, on the contrary, the exchange-value of A expressed in terms of B rises.” (p 183)

The money commodity, say gold, is simply one commodity that is separated from the others, so that it becomes the indirect measure of the value of all other commodities. Prices may rise, therefore, either because the value of commodities rise, relative to the value of gold, or because the value of gold falls, relative to the value of commodities. But, according to Ricardo's theory, the changes in prices were attributed solely to the value of money, and this value of money was no longer determined on the basis of Ricardo's own value theory, the labour theory of value, but, on the basis of the physical quantity of gold, relative to the aggregate value of commodities.

“Prices therefore rise and fall periodically, because periodically there is too much or too little money in circulation. If it is proved, for instance, that the rise of prices coincided with a decreased amount of money in circulation, and the fall of prices with an increased amount, then it is nevertheless possible to assert that, in consequence of some reduction or increase – which can in no way be ascertained statistically – of commodities in circulation, the amount of money in circulation has relatively, though not absolutely, increased or decreased.” (p 183-4)

Ricardo believed that, even with a purely metallic currency, these changes in prices must occur, because of alternating periods when there was either too much, or too little currency in circulation. When there was too much currency in circulation, the value of gold fell and commodities rose, so cheaper commodities would be imported, and gold exported, thereby removing its excess. When there was too little currency in circulation, the value of commodities would fall, and gold would rise, so exports would rise, relative to imports, and gold would come into to cover the difference. So, Ricardo believed that a self-correcting mechanism existed, and the rises in prices would be neutralised by subsequent falls in prices, and vice versa. This fails to account for actual changes in the value of gold itself, or for changes in the value of the standard of prices resulting from a change in its material composition.

But, there were not only purely metallic coins in circulation, but also bank notes, redeemable in gold. As described previously, the laws relating to these money tokens are the same as for gold itself. In other words, only as many of them can be put into circulation as the gold they represent. In terms of redeemable notes, if the currency falls in value, relative to gold, the notes will simply be redeemed for gold. If they rise in value, against gold, banks will issue more notes.

Again, as Marx describes, this does not apply to fiat currencies, where no such redemption for gold is possible, and where the notes must then remain in circulation leading to inflation. In the case of inadequate paper currency, Marx sets out in Capital III, how, in conditions of economic expansion, this is dealt with even if central banks fail to provide the required liquidity. In other words, it is accomplished by capitals themselves by the creation of commercial credit, i.e. originally the creation of Bills of Exchange, and today, simply extended periods of settlement on invoices. This also becomes an important element of currency regulation, because as such transactions form an increasing proportion of economic activity, the amount of commercial credit, and so liquidity, rises and falls along with the volume of such transactions.


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