8 Money, credit and inflation
8.1 Labour and money
Marx’s derivation of money from commodity exchange, in chapter 1 of Capital 1, is neither an historical explanation of the origin of money, nor a purely logical derivation of the concept of money from the commodity (see section 1.1). Marx’s analysis presumes, first, that money and exchange are inseparable and, second, that exchange was marginal to pre-capitalist societies, while money also had ritual, ceremonial, and customary uses in these societies.1 Money emerges historically out of the interaction of com- modity owners with one another, especially exchange between different communities.2 Therefore, money implies a minimum level of regularity and complexity in exchange, but it does not require either generalised barter or that most of the output is for exchange.
Marx’s analysis of the forms of value, culminating with the money form, shows that money has an essence, to monopolise exchangeability and to be the universal equivalent. Simply put, money can be exchanged for any commodity, whereas commodities do not generally exchange for each other.
In addition to this, Marx’s analysis implies that the functions of money follow from its essence, rather than the converse as is presumed by neo- classical and post-Keynesian theory:
Marx’s approach to money implies that “what money does follows from what money is”: because money monopolizes exchangeability, it also 92 David Corkill
measures value, facilitates exchange, settles debt, and so on. Seen in this way, there is order and internal cohesion to the functions of money – no arbitrariness.3
The social and historical determinations of money, including its essence and functions, demonstrate that money is a social relation that derives from the form of articulation between commodity producers. Commodity exchange develops fully only under capitalism, when exchange becomes generalised and impersonal and the ritual and ceremonial aspects of money are largely irrelevant.
Marx distinguishes between money as money and money as capital.4 Money as moneyis the measure of value and the means of circulation, and it fulfils three functions, means of payment, store of value, and international money.Money as capital is money advanced for the production or transfer of surplus value. Money as capital is closely related to money as money, because the forms and functions of money are identical, and money may fulfil both roles simultaneously. For example, in the payment or expenditure of wages, what is C-M-Cfor the workers is M-C-Mfor the capitalists. Let us now look briefly into the functions and forms of money.
At the highest level of abstraction, money measures commodity values through a simple comparison of their RSNLT with its own, and expresses the result in the units of the standard of prices.5If, for example, the RSNLT of the monetary unit (say, the ounce of gold6) is thirty minutes (0.5 hours of socially necessary labour, hSNL), and £1 is its monetary name, the standard of prices is £1. In this case, the monetary equivalent of labour (MEL,m) is:
£1
mDž––– –––––––– £2/hSNL (8.1)
λg 0.5hSNL
This value of m implies that one hour of abstract labour creates a value of £2. It follows that the price of a commodity i produced in five hours (λi5hSNL) is:
pimλi£10 (8.2)
The determination of prices does not require the actual comparison of each commodity with money; therefore, as a measure of value money is merely ideal money.7 It was shown in section 5.3 that the price form expresses commodity values and allows differences between values and prices. There has been much controversy about the relationship between money, value and price in the labour theory of value, especially between Marxian and Ricardian interpretations (see section 2.1).8
A less known but equally interesting controversy involved Marx and the
‘Ricardian socialist’ proponents of ‘labour-money’, especially John Gray, John Bray, Alfred Darimon and Pierre-Joseph Proudhon.9This controversy Money, credit and inflation 93
illustrates the importance of properly understanding the function of measure of value.
Gray’s is the best argued case for paper labour-money. His proposed monetary reform derives from the belief that labour alone bestows value and, therefore, that labour should be the measure of values. He argued that the use of valuable commodities (e.g., gold) as money was problematic for two reasons. First, Gray argues that the supply of the money commodity could never increase as rapidly as the supply of all other commodities put together. Therefore, it would be generally impossible to sell the entire out- put, production would be chronically below potential, and there would be unemployment and deprivation because of the defects of the monetary system.10 This argument is clearly wrong, because Gray implicitly assumes that the velocity of circulation is always necessarily one, that turnover periods are identical for all capitals, and that hoards and credit are not available. Second, and more interestingly, the Ricardian socialists believed that money veils exchanges and allows the workers to be exploited by the capitalists, and the debtors exploited by the creditors. However, if the workers were paid in labour-money their participation in social production would be ascertained correctly, and they would be able to draw commodities with an equivalent value from the whole of that produce.11
Marx derided the labour-money idea in the Grundrisseand elsewhere, for two reasons.12 First, if the ‘just price’ paid for the commodities were deter- mined by the concrete labour time necessary to produce them, the economy would fall into disarray as the producers tried to make their commodities more ‘valuable’ by working less intensely. This nonsense stems from the implicit assumption that the normalisation of labours may be avoided, and that their homogenisation can be reduced into an identity between individual labour time and money (see chapter 5).
Second, if the ‘just price’ were based upon RSNLT, however determined, productivity growth would reduce RSNLTs and lead to the appreciation of the labour-money (deflation). This unwarranted outcome would benefit the cursed creditors, reduce investment and delay technical progress. Moreover,
The time-chit, representing average labour time, would never correspond to or be convertible into actual labour time; i.e. the amount of labour time objectified in a commodity would never command a quantity of labour time equal to itself, and vice versa, but would command, rather, either more or less, just as at present every oscillation of market values expresses itself in a rise or fall of the gold or silver prices of com- modities.13
These difficulties derive from Gray’s inability to understand the necessity of synchronisation and homogenisation of labour in commodity production.
When commodities are sold, money is the means of circulation (exchange).14 Again at the highest level of abstraction, in exchanges C–M–C the com- 94 Money, credit and inflation
modity owners at all times possess the same value, alternating between the original commodity, the money commodity and the newly purchased commodity. This presumption captures the essence of simple (equivalent) exchange. However, the use of gold coins causes their wear and tear (and might encourage the clipping of coins), implying that commodities generally exchange for coins worth less than their face value. The continuity of exchanges under these circumstances shows that circulating money is merely a representative or symbol of value. Symbols of money such as inconvertible paper may, therefore, perform the same service as pure gold:
in this process which continually makes money pass from hand to hand, it only needs to lead a symbolic existence. Its functional existence so to speak absorbs its material existence. Since it is a transiently objectified reflection of the prices of commodities, its serves only as a symbol of itself, and can therefore be replaced by another symbol. One thing is necessary, however: the symbol of money must have its own objective social validity. The paper acquires this by its forced currency.15
Let us now see how Marx analyses the functions of store of value, means of payment and world money.
Money functions as a store of value when it is hoarded. Hoarding is often justified in the literature because of individual preferences or uncertainty.
Although these factors can play an important role in the formation of hoards, there are structural reasons why money hoards are formed in the course of capitalist production.16 The most important reason is that production involves regular expenditures that are generally disconnected from the accrual of sales revenue. Producers must also accumulate reserves in order to meet unforeseen expenses, maintain and replace fixed capital, expand the output, pay dividends, offset price fluctuations and so on. These idle reserves are normally deposited in the banking system, and they form the basis of the bank reserves. Development of the credit system reduces each capitalist’s hoarding needs, because the hoards of the capitalist class are available to borrow.17 Bank loans facilitate the realisation of long-term and large-scale investment projects; however, they also facilitate speculative activity and, more broadly, increase the likelihood that localised disturbances (accumulation of inventories, price changes, technical innovations, etc.) will spread and trigger economic crises.
Money functions as means of payment when it settles transactions under- taken previously, and cancels a promise to pay. This is particularly important in commercial credit, that finances the sale of produced commodities, and banking credit, that finances new production.
Finally, the functions of money are performed in the international arena by world money, that is value in pure form and a crystallisation of abstract labour recognised across the globe. National currencies must be convertible into world money in order to allow domestic commodities to be exchanged Money, credit and inflation 95
for foreign goods, and to facilitate the inclusion of domestic labour into the international system of production.
Adjustment of the quantity of money to the needs of circulation is a complex process involving all functions of money.18In a simple commodity money system, it was shown above that the value of the money commodity plays an essential role in the determination of prices (see section 8.2). How- ever, at a more complex level of analysis the quantity and velocity of money are important determinants of the expression of value as price.
Marx rejected the quantity theory of money (QTM) in the case of gold because, for him, the quantity of circulating money changes in order to realise the value produced. These changes happen primarily through hoard- ing and dishoarding, the output of the gold-mining sector, international bullion flows and changes in the velocity of money. For example, if the output grows the additional money necessary for its circulation will be made available through the above channels; alternatively, if the gold stock in- creases (with all else constant), the additional gold will be hoarded or velocity will decline. In contrast with the QTM (and Ricardo), prices remain unchanged in both cases.19
It is different for fiat money, which can be issued by the state potentially in arbitrary quantities through the monetisation of budget deficits or open market operations. Marx generally agrees with the QTM that, if an in- creasing quantity of fiat money is forced into circulation, its exchange value would decline permanently (inflation; see section 8.3). Although fiat money is a suitable means of circulation, it is unsuitable for hoarding in the same scale as gold, because its domestic (and external) exchange value is unstable.
This instability derives from the absence of a direct relationship between the supply of fiat money and capital accumulation.20
It is different again with convertible money issued by the banks or the state, and with credit money. The value of convertible money fluctuates around the value of the gold that it replaces, temporary discrepancies occur- ring naturally during the cycle.21Inflation is possible in this system if the sphere of circulation is flooded with paper notes, but this process is limited because arbitrage makes it impossible for commodity prices to deviate permanently from their gold prices of production. However, this is likely to be neither a smooth nor a purely monetary process. Sudden disruptions of exchange, recessions, and fully-fledged monetary and economic crises, in which the money commodity plays an important role as means of payment and means of hoarding, are some of the ways in which the value of gold is made compatible with the exchange value of money.22
Finally, contemporary monetary systems include primarily two forms of money, inconvertible paper currency issued by the central bank (legal tender that discharges all debts) and credit money produced by the commercial banks (liabilities of private financial institutions, including deposits and banknotes, offering a potential claim on another form of money). The quantity and the exchange value of credit money are indirectly regulated by 96 Money, credit and inflation
the advance and repayment of credit, that is, by the processes of production and accumulation and, at a further remove, by the central bank’s influence on the operations of the financial system.23
Temporary discrepancies between the supply and demand for credit money are inevitable, for two reasons. First, and more generally, the empirical determinacy of the quantity and velocity of money declines as the analysis becomes more concrete. They depend on social conventions, including the property relations, the financial rules and regulations, the structure of the financial system and its relationship with production, the international relations, the degree of concentration of capital, and other variables that make ‘supply’ and ‘demand’ difficult to determine even theoretically. Second, and more specifically, even though the supply of credit money necessarily corresponds to individualdemand (credit money is always created in response to a loan request), the total credit supply may not reflect the needs of the economy as a whole. This is clearly the case when speculative loans help to inflate a real estate or stock market bubble, or when banks unwittingly finance the production of unprofitable or unsaleable goods. Excess supply is likely especially when a climate of optimism is fostered by rises in the prices of financial assets, which feed upon ongoing optimism and increase it even further. In other words, excess credit, fuelled by speculation or the surge of accumulation, may lead to price increases but, barring state intervention (see section 8.3), this process is limited by the unavoidable increase in financial instability and the possibility of crisis.24
These mediations in the determination of the exchange value of money do not imply that it is wrong to posit,ex post, a monetary equivalent of labour, as in equation (8.1). However, focus upon the MEL tends to conflate levels of abstraction, and it may obscure the contradictory elements in its determination, in which case financial instability and the possibility of crisis have to be reintroduced at later stage arbitrarily and, potentially, in an impoverished manner (see section 2.2.2).