Metallic money arises, because of the advantages of precious metals in fulfilling the requirements of a money commodity. They are homogeneous and divisible; they contain a lot of value for a small volume of material, and are portable, and storable with no deterioration. They are not used, in large quantities for industrial production, and so their removal for this function does not disrupt general production. But, they wear out, in circulation, meaning they are confined to high value spheres, and the value of the material itself encourages deliberate debasement. Each coin, thereby, becomes a token of the gold it purports to represent, and this fact facilitates their replacement by other tokens be they base metal coins or paper notes.
So long as money takes the form of precious metal, and money tokens simply represent it, and are redeemable or it, the laws relating to metallic money remain valid. Only tokens of equivalent value to the gold they represent can circulate. Gold coins that are devalued, relative to gold, leads to full weight coins being withdrawn, and converted to bullion, as described by Gresham's Law. Convertible notes, in excess of requirements, are devalued, as against commodities, and so are taken out of circulation, redeemed for the gold they nominally represent.
But, this is not true for fiat currency, i.e. non-redeemable money tokens. Even with redeemable tokens, as Marx described, their devaluation, usually leads to a reduction in the amount of gold they nominally represent, as determined by the standard of prices, thereby, validating the excess of them in circulation, and the consequent inflation of prices. With fiat currency also an excess in circulation leads to their devaluation, and an inflation of prices. Each token represents a smaller quantity of social labour-time, a reduction in the value of the standard of prices, and consequent inflation of commodity prices, manifest in a rise in the general level of prices.
Prices may rise because the value of commodities rise relative to the value of money or money tokens/standard of prices. For the value of commodities, in general, to rise, requires that social productivity itself falls. In the case of money based on a money commodity, such as gold, any such fall in general social productivity would be thought to also affect its value, as with other commodities. But, price is only exchange value against the money commodity, and so if its value rose along with that of other commodities there would be no rise in prices, i.e. if the value of commodities rise by 10%, and the value of an ounce of gold, as standard of price, rises by 10%, prices remain constant.
The price of some commodities may rise, because their value rises due to, say, crop failures, but that is not the same as a rise in the general price level. Indeed, because social productivity tends to continually rise, the value of commodities generally falls, so that the general level of prices should fall, or, more correctly, if the quantity of commodities remained constant, less money is required in circulation.
The quantity of money is determined by production, and the aggregate value of commodities. If the value of money remains constant, then, it is determined by the average value of commodities, and the quantity of them. If the economy contracts, so that fewer commodities are produced and circulated, their money equivalent also contracts, and less currency is required for circulation. If the level of output is constant, but the average value of commodities falls, their aggregate value falls, and their money equivalent is again reduced, requiring a reduction in the amount of currency in circulation.
Where money takes the form of fiat currency, this relation is inverted. There is no longer any necessary connection to a money commodity, and the value of each token is a function purely of the quantity thrown into circulation. Each represents a quantum of social labour-time, and this quantum is larger or smaller, dependent on the quantity of tokens in circulation. It is no longer driven or determined, thereby, by production, and the quantity and value of commodities. So, now, prices are a function of the quantity of notes thrown into circulation, and this enables central banks to manipulate the general price level, or, as with QE, to direct additional liquidity into specific areas of the economy, so as to manipulate specific prices, i.e. to inflate asset prices.
As Marx put it, inconvertible paper money,
“may fall below the value of the metal which it professes to represent, because too much of it has been issued, or it may fall because the metal it represents has fallen below its own value.” (p 174)
and,
“Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity.” (p 119)
“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 121-2)
And, today, these notes do not even purport to represent a quantity of gold, which is reduced to being a relic of the past history of money.
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