In A Contribution To The Critique of Political Economy, Marx describes this, in relation to gold producing countries. If country A is a gold producer, it exchanges the gold it produces, directly, as money. It buys, from country B, commodities it requires, such as tea, coffee, wood, steel and so on. Country B, now, takes the gold and coins it, throwing it into circulation as currency. Not all the gold would become currency, with some becoming jewellery etc. The amount required as currency, in B, would be determined by the laws previously described. Now, if A discovers a new source of gold, which significantly reduces its value, initially, it will continue to exchange this gold, with B, at the previous rate of exchange.
However, producers of gold, in A, will see the benefit of this situation, and each will increase their supply, and seek to obtain commodities from B, in exchange for it. As described earlier, this is an example of sustainable increases in supply, with constant demand, only being possible on the basis of a reduction in value. The supply of gold from A will rise, and, at the same time, cause the demand for B's commodities to rise. Competition from producers in A will eventually push down its exchange value, relative to the commodities produced in B. The amount of gold supplied to B will rise, and this increased supply, now as currency in B, will mean that the currency, itself, falls in value, so that not only will the price of B's commodities sold to A rise, but the prices of all commodities sold within B's economy also rise.
“But, for all that, the question of value determined by the quantity of labour has not been advanced a step. It still remains to be decided whether the value of these two marks (which have become what one mark was once) is determined by the cost of production or by the law of supply and demand.” (p 81)
Marx quotes Proudhon's assertion,
“It should even be borne in mind that if, instead of debasing the currency, it had been in the king's power to double its bulk, the exchange value of gold and silver would immediately have dropped by half, always from reasons of proportion and equilibrium.” (p 81)
Marx responds,
“If this opinion, which M. Proudhon shares with the other economists, is valid, it argues in favour of the latter's doctrine of supply and demand, and in no way in favour of M. Proudhon's proportionality. For, whatever the quantity of labour embodied in the doubled bulk of gold and silver, its value would have dropped by half, the demand having remained the same and the supply having doubled. Or can it be, by any chance, that the “law of proportionality” would have become confused this time with the so much disdained law of supply and demand? This true proportion of M. Proudhon's is indeed so elastic, is capable of so many variations, combinations and permutations, that it might well coincide for once with the relation between supply and demand.” (p 81)
As described earlier, this appearance of supply and demand in determining prices is only valid if we first look behind the two categories, and examine their determinants, and, in particular, the role of cost of production in relation to supply. It is not increased supply that results in lower value, but lower value/cost of production that is essential for any sustainable increase in supply, given constant demand.
“To make “every commodity acceptable in exchange, if not in practice then at least by right,” on the basis of the role of gold and silver is, then, to misunderstand this role. Gold and silver are acceptable by law only because they are acceptable in practice; and they are acceptable in practice because the present organization of production needs a universal medium of exchange. Law is only the official recognition of fact.” (p 81)
Similarly, as Marx sets out in A Contribution To The Critique of Political Economy, a sovereign can imprint a value on a money token, be it a gold coin or a paper note, and force it into circulation, but, having done so, cannot force those into whose hands it falls to accept it as representing the amount of value imprinted on it. It can only achieve that if, in fact, it conforms with the economic laws that determine that value of the token.
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