Proudhon's argument was designed to prove that all commodities are not only potentially money, but are actually money, and their value, determined by labour-time. The purpose of this is, then, to argue that, if all commodities are money, none specifically need act as money; money can be abolished, and, in its place, can arise simply labour notes representing the amount of labour undertaken and value constituted.
“All this would be very fine, were it not for the awkward fact that precisely gold and silver, as money, are of all commodities the only ones not determined by their cost of production; and this is so true that in circulation they can be replaced by paper. So long as there is a certain proportion observed between the requirements of circulation and the amount of money issued, be it paper, gold, platinum, or copper money, there can be no question of a proportion to be observed between the intrinsic value (cost of production) and the nominal value of money.” (p 82)
Marx should, really, have distinguished, here, between money and money tokens or currency. As he sets out in A Contribution To The Critique of Political Economy, gold, as money commodity, in its role as measure of value, is always dependent upon its material content and value, determined by cost of production. It is only where money acts as currency, i.e. money tokens, that its material content becomes irrelevant, and the value of the token is determined, instead, by the quantity of them thrown into circulation.
“Ricardo understood the truth so well that, after basing his whole system on value determined by labour time, and after saying:
“Gold and silver, like all other commodities, are valuable only in proportion to the quantity of labour necessary to produce them, and bring them to market,”
He adds, nevertheless, that the value of money is not determined by the labour time its substance embodies, but by the law of supply and demand only.” (p 82)
Marx quotes Ricardo from his Principles to that effect, and, then, cites Say's use of this passage to argue against The Labour Theory of Value, and in favour of the determination of all value on the basis of supply and demand. Say argues,
“This example should suffice, I think, to convince the author that the basis of all value is not the amount of labour needed to make a commodity, but the need felt for that commodity, balanced by its scarcity.” (p 83)
The importance of the distinction above between money and currency, money as measure of value, and currency as means of circulation, is set out by Marx in A Contribution To The Critique of Political Economy, as well as in Capital and Theories of Surplus Value. It goes to the heart of Ricardo's error, and the error which, then, was embodied in the ideas of the Bullionists, and the 1844 Bank Act. The value of gold, as money/measure of value cannot be changed by supply and demand, and consequently, the amount of gold in the country, relative to the quantity of commodities. Its value is determined, as for any commodity, by the labour-time required for its reproduction. That value determines how much gold represents money, i.e. how much represents the equivalent form of value of the commodities to be circulated.
Contrary to the Quantity Theory of Money, therefore, if the amount of gold in the country increased, this did not increase the amount of money, and nor did it change the value of gold. By contrast, if the quantity of currency/money tokens was increased, relative to the money these tokens represented, this would reduce the value of each token, and so cause an inflation of prices.
“Thus money, which for Ricardo is no longer a value determined by labour time, and which J. B. Say therefore takes as an example to convince Ricardo that the other values could not be determined by labour time either, this money, I say, taken by J. B. Say as an example of a value determined exclusively by supply and demand, becomes for M. Proudhon the example par excellence of the application of value constituted... by labour time.” (p 83)
The reason the value of currency/money tokens is determined by supply and demand, their value falling as their supply is increased, is precisely because, unlike any commodity, this supply can be infinitely expanded without any change in their cost of production, because, particularly for paper tokens, this cost of production is minimal, and plays no part in the determination of their value. The supply of gold or wheat cannot be continually increased, with constant demand, because the market price would fall, as supply exceeded demand. Suppliers of gold/wheat would make less than average profit, and some losses, so that supply would fall. But, a £5 paper note has no significant cost of production, and, if twice as many are printed, the value of the note falls in half, but it does not cause a fall in profit of the mint, or reduction in supply, and £5 notes could be replaced with £10, £50, £100, or £1,000 notes with the same effect. In fact, that is what happens during a hyperinflation.
“Gold and silver are always exchangeable, because they have the special function of serving as the universal agent of exchange, and in no wise because they exist in a quantity proportional to the sum total of wealth; or, to put it still better, they are always proportional because, alone of all commodities, they serve as money, the universal agent of exchange, whatever their quantity in relation to the sum total of wealth.” (p 83)
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