From Money as Universal Equivalent to Money as Currency

Money as the universal measure of value

Last week, I demonstrated that as commodity production and exchange develop, one or at most a few commodities emerge as general equivalents. In their role of general equivalents, they measure the exchange value of commodities in terms of their own use values.

Originally, the commodities that played the role of general equivalents were those that were the main form of wealth of the given society. For example, in the Homeric poems, wealth is measured in terms of cattle. Cattle were indeed an early form of what Marx called money material, the physical material of the use value of the commodity that acts as the universal measure of value. Some societies even measured the exchange value of commodities in terms of slaves. In this case, the enslaved workers not only produced the surplus product for the exploiting non-workers, they served as money material as well!

But as commodity production and exchange developed further, slaves and cattle did not make very good money. Slaves can only be divided so far. A half a slave is a dead man or woman, not a slave. Slaves and cattle aren’t durable but live only a certain number of years. Enslaved humans generally had quite short lifetimes. As commodity production and exchange developed, a universal equivalent emerged whose main use value was its monetary function.

I will not bore the reader with a “history of money” and list all the commodities that have served as the money commodity at one time or another. I will simply say that generally metals—first copper, then silver and finally gold—have served this purpose.

Over thousands of years, however, it is the precious metal gold that has emerged as the main money commodity. Why has gold proven over time to be such a good money?

First, gold is quite rare in the earth’s crust, much rarer then silver, which has also been widely used as money throughout history. (1) Over the last century, silver has dramatically fallen in value—it now takes far less labor to produce a given quantity of silver than it took a century ago—but gold has held its value much better. No matter how much mining and refining technology advances, at the end of the day you need an ounce of gold in the ore to produce an ounce of gold.

Compared to silver-containing ores, most gold ores contain only tiny amounts of gold. Therefore, even when huge masses of labor, both dead in the form of constant capital and living in the form of variable capital, are thrown into gold production and refining, only a small amount of physical gold bullion, on average, results. In comparison to silver, it therefore takes a much larger quantity of abstract human labor to produce an ounce of gold.

Gold, therefore, represents a large quantity of value—abstract human labor measured in terms of time—in a small amount of use value. This makes it possible to carry in your pocket pieces of gold that represent rather large amounts of value. In addition, the high value of gold makes it very expensive when it is used as a raw material. As a result, there is a strong incentive for the industrial capitalists to find cheaper alternatives to gold as a raw material when they possibly can.

Therefore, the high value of gold greatly limits gold as a use value. This brings gold closer to the ideal money commodity whose only use value would be to serve as money. Gold doesn’t quite fit the bill, gold does have other uses, but it comes reasonably close. Why this is important will become clear as these posts progress.

Gold is an element, not a compound, and can therefore in theory be divided down all the way to its individual atoms without losing its use value. This is a reasonable approximation of the infinite divisibilty of the social substance that constitutes value—abstract human labor. In this post, I will assume unless indicated otherwise that gold and gold alone is the money commodity.

Money as currency

Money’s most well-known function is that of currency. Indeed, this is the everyday meaning of the term “money.” Ask a child what money is, and he or she will answer it’s what you use to buy things. Ask a professional economist who has earned a PhD through years of study, and you will get exactly the same answer.

In terms of Marxist value theory, however, currency is the representation of money in the sphere of circulation. Today, when we think of currency, at least in the United States and the many other countries where the U.S. dollar circulates, we think of pieces of green paper with pictures of dead U.S. presidents, and perhaps small coins, made of cheap metals, called pennies, nickels, dimes, quarters and half dollars plus the occasional dollar coin.

If you live in the European Union, where the euro is the currency, the color and pictures on the paper are different, and coins have different images stamped on them. But like is the case in the land of the dollar, you have pretty slips of paper with various images and numbers indicating the number of euros the note represents.

Once upon a time, however, currency consisted largely of coins made of precious metals such as silver or gold. (2) Going further back before the invention of coinage, the money commodity functioned simply as the measure of value.

I as a linen producer might have no direct idea how much my 20 yards of linen are worth in terms of coats. But if I know that 20 yards of linen are worth 50 head of sheep, and one coat of a given quantity is also worth 50 head of sheep, I know that I should demand one coat of that quality in exchange for my 20 yards of linen. Sheep, for reasons that should be obvious to the reader, though they are able to function as a measure of exchange value, make a really lousy currency. Try carrying around 50 head of sheep in your pocket!

But I can carry around pieces of gold. (3) As a child—or even a modern bourgeois economist of the Friedman school—can explain, I might not need a coat when I sell my 20 yards of linen. Or worse, no commodity owner who happens to possess 50 head of sheep worth of commodities wants 20 yards of linen.

But if instead of living in a society that uses sheep as money I live in a society that makes use of gold as money, I have an easy solution. I can always sell my 20 yards of linen for a piece of gold of a weight that represents the exchange value of 20 yards of linen. I can then use the piece of gold to purchase not only a coat but any commodity whose price equals the weight of the gold piece.

Coined money

But how do I know that a given piece of gold really contains the amount of gold—measured in terms of weight—that I think or hope it does? And how would the seller know? This problem can be solved if I find a reliable person to stamp a given piece of gold—or whatever metal, perhaps copper in ancient times—that serves as the money commodity, and therefore certify that it really contains a given amount of metal of a given quality. I will now have a reliable currency.

It is best if the person that certifies that the pieces gold or other money metal is not himself or herself engaged in commodity production. If he or she is, the temptation to cheat is simply too great! Who then is our trustworthy person?

Such a person is not usually an individual person but the state. The state, generally, is not a commodity producer and does have an interest in maintaining a stable and reliable currency in the broader interest of the ruling class.

True, the state isn’t all that reliable. The history of coinage—currency—is also the history of the depreciation of currency. Permanent inflation, therefore, begins not long after the invention of coinage 2,500 to 3,000 years ago. Inflation has been going on for a long time! (4)

Still, at least in thriving epochs when money material is abundant, the state will find it in its interest to maintain the actual metallic value of the coinage. Therefore, the history of coinage is the history of permanent inflation interrupted by periods when governments actually maintain stable currencies.

The last such prolonged period of currency stability was during the international gold standard, which prevailed from about the 1870s to 1914, when World War I broke out. A brief, half-hearted attempt to reestablish stable currencies—where currencies are defined in terms of a fixed quantity of gold of a given fineness—was also attempted under the Bretton Woods system, which started to operate after World War II and collapsed in the late 1960s and early 1970s. The examination of the international gold standard and Bretton Woods system will be left for later posts. (5)

Some other properties of money

As we have already seen, commodity-producing labor is divided into many private labors. How do we determine that a product of a given private labor is indeed part of social labor? Once the commodity is produced, it is put on the market at a given price. Price, remember, is a given weight of gold. In the minds of all the producers, buyers and sellers, the commodity, in addition to its actual material use value measured in units appropriate to that specific use value, also has an exchange value. The exchange value, or price, is a weight of gold, weight being the measure of the quantity of gold as a use value.

But now comes the difficult part. The commodity must show through its sale at its price defined in terms of a given weight of gold that the private labor that was performed to produce it was indeed a part of social labor. The labor that went into the production of the commodity is therefore only indirectly social. Gold, however—or, more broadly, whatever serves as money material—represents social wealth.

Labor that goes into the production of money material is directly social

But what about the labor that produces the commodity gold? Unlike the labor that produces all other commodities, the labor that produces gold is directly social. Here, remember, I assume gold is the only money commodity. If clamshells were used for money, the same thing would be true of the labor that is used to collect clamshells. The labor in a given quantity of gold—let’s say an ounce—doesn’t have to prove it is social labor by exchanging for gold on the market. It already is gold.

In other words, because the labor that produces gold produces the social form of wealth directly, rather than a commodity that the producer hopes will find a buyer at its actual exchange value on the market, the labor that goes into the production of money material is directly social.

Money has no price

The prices of all other commodities are defined as weights of gold. But what is the price of gold? Again, remember, our assumption here is that gold and gold alone is the money commodity. Under these assumptions, gold by definition cannot have a price. The closest that we can get to the “price of gold” is to read all commodity prices—that is, all exchange values in terms of various quantities of gold—backwards. Gold has as many “prices” as there are commodities, minus gold of course. If silver is also a money commodity, gold would have a price in silver, and silver would have a price in terms of gold.

The independent existence of exchange value

Last week, I explained that a commodity is a unity of opposites. It is both an exchange value and a use value. These are the two opposite poles of its existence as a commodity. But can I hold pure exchange value separated from a specific commodity in my hand or carry it around it my pocket? Yes, I can! Exchange value is nothing but the use value of the equivalent commodity that is doing the measuring.

Once the money relationship of production emerges out of simple commodity production and exchange, it is represented by the use value of the universal equivalent, the money commodity. Assuming gold is the money commodity, gold as a material use value becomes the independent form of exchange value. I therefore can hold exchange value in my hand and carry it around in my pocket.

The formula of simple commodity circulation

Money as currency gives rise to the formula of simple circulation that Marx develops in the first three chapters of “Capital”: C–M–C. Commodities C are produced, sold for money M and then exchanged for another commodity with a different use value, C, that has exactly the same exchange value as the original C. Those readers who are familiar with volume I of “Capital” will remember that capital, whose formula is M–C–M’, is not yet taken up in the first three chapters. There are only commodities and money but no capital or production of surplus value.

Money as means of accumulation or hoarding and the possibility of a general overproduction of commodities

An atom like a commodity is a unity of opposites. It contains both positive and negative electricity. The negative electricity is represented by electrons, which carry the negative charge. The positive electricity is represented by the protons, which reside within the nucleus. Can the contradictory poles of the atom be ripped apart? Yes, they can. Physicists call this “ionization.”

The poles of the commodity, use value and exchange value, can similarly be ripped apart. Since the money relationship of production is embodied in a special commodity such as gold, it is a material use value. We have already seen that money must exist independently of the commodities whose use value it measures, just like electrons can exist independently of protons.

Therefore, just as electrons can be ripped from a nucleus, so the exchange values of commodities can be ripped apart from their use values. In the simple commodity production mentioned above, the formula is C–M–C. Just because somebody has carried out the operation C–M, he or she is not obliged to immediately carry out the operation M–C. Unlike was the case with barter, the act of selling, C–M, can be separated in time and space from the act of buying, M–C.

Suppose for some reason a substantial number of commodity producers wish to hold on to their gold in order to accumulate or hoard it. Gold, after all, functions as the abstract form of social wealth. To the extent the social wealth consists of commodities, everything is valued in terms of it the money commodity gold.

If such large-scale hoarding of gold occurs, commodities will become “ionized,” so to speak. Their exchange values are ripped away from their use values. Commodities will not be able to realize, or at least fully realize, their exchange values. Because they cannot realize their exchange values, the commodities will not be able to reach those who need them as use values. So they can’t realize their functions as use values.

This is nothing else but a description, though in the most abstract terms, of a general overproduction of commodities.

Of course, this is only the bare possibility of such a crisis. I haven’t explained why crises actually occur. In reality, the appearance of crises of generalized overproduction at periodic intervals does not arise under simple commodity production, C–M–C, or even early capitalism, M–C–M’.

But without understanding the possibility of the physical separation of the use values and exchange values of commodities, an actual crisis of a generalized overproduction of commodities such as occurs in the real world, like the one we are now passing through, cannot be understood. We inevitably fall into Say’s Law.

This is why theories of the cyclical capitalist crises that either ignore the money relationship of production, or incorrectly understand it, are inevitably spoilt from the start. The whole concept of the generalized overproduction of commodities slips right through our fingers, and we find ourselves in the swamp of Say’s Law.

Money as a standard as price

Suppose we call a one-troy ounce of gold $50. This establishes a standard of price. A dollar will then be defined as 1/50th of an ounce of gold. Perhaps I can go to the government mint and bring an once of gold bullion—bullion means uncoined metal—and the state will stamp it into a $50 gold piece. (6)

But even if the state is not actually coining gold but simply defines a dollar or whatever the currency unit is as a given weight of gold, gold becomes a standard of price. For example, under the Bretton Woods system between the 1944 and 1971, the U.S. dollar was defined as 1/35th of a troy ounce of gold of a given fineness. Or what comes to exactly the same thing, the official price of gold was set at $35. What was a dollar under the Bretton Woods system? It was 1/35th of an ounce of gold.

Token money

In circulation, gold coins become converted into symbols of gold. Suppose a one-ounce gold coin turns over a hundred times in a year realizing the exchange value of a hundred commodities whose exchange value is one ounce of gold, or 50 dollars assuming the gold dollar is defined as 1/50th of an ounce of gold.

In circulation, in this case, one ounce of gold represents 100 ounces of gold in the course of a year. The faster the turnover of gold coins the fewer coins are necessary to circulate a given quantity of commodities—measured in terms of their gold prices—in a given period of time. There is, however, a limit. No matter how fast the turnover of gold coins is, a gold coin cannot purchase two commodities at exactly the same time. There are, however, other ways to economize on the gold coins that I will examine in later posts.

In circulation, tiny amounts of gold wear away—something like a machine made of moving parts eventually wears out—and the coins become lighter. Our $50 gold piece will now contain less than an ounce of gold. However, this does not necessarily lead to the depreciation of the gold coin.

How do we know whether the gold coin is depreciated? We know by the “price” of gold bullion in terms of the gold coin. As long as our worn gold coin still exchanges for an ounce of gold bullion on the bullion market, the coin is not depreciated no matter how little gold it physically contains. The coin has become a symbol of gold in circulation. It is worth more as a symbol of gold than it is melted down and transformed into gold bullion.

Notice in the above paragraph that I put price when referring to the price of gold in quotation marks. This is an important point. I, following Marx, have defined price as the exchange value of a commodity measured in terms of the use value of the commodity that serves as money. Assuming as I do throughout this post that gold is the money commodity, the price of a commodity is simply a weight of gold bullion of a given fineness. Gold itself cannot have a price. Being the money commodity, the closest we can get to the price of gold is to read all price lists backwards.

Gold appears to have a price

Yet, once gold coins are in circulation, gold bullion will appear to have a price in terms of those coins. What we really have here is not price in the strict scientific sense as defined by Marx. Rather we have an exchange rate, not unlike the exchange rate between the dollar and the euro, or the euro and the pound and so forth. A given gold coin will exchange for so much gold bullion—the bullion always measured in terms of weight. The exchange rate is between the coin and the bullion determined by how much bullion—gold—the coin actually represents in circulation.

In science, we have to be much more precise in terminology than we are in everyday life. It is a convenience to use the term “price of gold.” And to anticipate, the “price of gold” is an extremely important economic indicator. It is not for nothing that it appears every weekday at the top of the Wall Street Journal alongside the price of oil, the stock market quotes, and the quotes on government bonds.

We can use the term price of gold only so long as we keep in mind that gold in its role as money does not and cannot have a price in the strictly scientific sense of the word.

Gold becomes a symbol of itself in circulation

It is extremely unlikely, at least for very long, that a gold coin would represent less gold on the market than the amount of bullion it contains. If it did, the gold coins would be sent to the melting pot and transformed into bullion. One of the reasons why gold is such a good money commodity is that it can easily be coined, and gold coins can easily be melted down into bullion once more.

But how much gold must a circulating gold coin lose before it will depreciate against gold bullion? The answer is that there isn’t any limit. As long as coins are not over-issued, they can just as well be made of base metals such as copper. Or they can be replaced by pieces of green paper with pictures of dead U.S. presidents printed on them.

Token money turns out to be exactly the same thing as fiat money. Far from being an ultra-modern form of currency that arose after the end of the international gold standard, fiat money turns out to be among the oldest forms of currency in existence. It dates back almost to the invention of coined money, about 2,500 years ago, or in China maybe 3,000 years ago. Gold inevitably becomes a symbol of itself in circulation.

Token money not the same as credit money

A common mistake that many Marxists, not to speak of the bourgeois economists, make is to describe today’s paper currencies such as dollars, pounds, euros, yen and so on as credit money. (7) In the days of the international gold standard, the pound sterling was payable to the bearer on demand at the Bank of England at the rate of one gold sovereign per one-pound note. British law defined the gold sovereign as containing a given amount of gold of a given fineness and weight. Anybody who had gold bullion could go to the British mint and have it coined into sovereigns. The pound notes issued by the Bank of England were a form of credit money—not token money, since in contrast to token money such notes were payable in a certain amount of gold at the bank.

For example, the five-pound note was a promissory note on the Bank of England payable in five full-weight gold sovereigns. A pound was not defined as a paper note. It was defined as a gold sovereign of a given weight of gold of a given fineness. These promissory notes—called banknotes—were not only payable on demand at the bank but could be used as a means of purchase and means of payment in place of gold sovereigns.

But those days are long gone. The modern British pound notes, just like dollars and euros, are a form of token money, not credit money, even if they are still called “banknotes.” In coming posts, I will explore the laws that govern credit money, and we will see that these laws are quite different from those that govern token or fiat money.

Some laws of token money

Full-weight gold coins have the ability to circulate anywhere. Such coins can easily be sent to the melting pot and transformed into bullion and then into other national full-weight coins. In the days of the international gold standard, if I, a Yankee, were paid by a British importer of American-produced commodities in gold sovereigns, I could take them to the U.S. mint, which would weigh the sovereigns, melt them down and recoin them into American gold dollars.

But the U.S. mint cannot melt down paper British pounds and reissue them as crisp green American dollars at the current rate of exchange. Therefore, Marx explained, token money generally only circulates in the area governed by the state that through its “monetary authority” issues the token money.

The U.S. dollar seems to violate this law, however. Doesn’t it circulate in many other countries beside the United States? Indeed, the majority of paper dollars in circulation are circulating outside the United States. However, this exception actually proves the rule. The paper U.S. dollar is able to circulate outside the area that is formally governed by the U.S. state power because the U.S. state power certainly doesn’t stop at the U.S. border.

In fact, in countries with strong governments the U.S. dollar generally does not circulate. Instead, it circulates in countries with weak governments. In these countries, the political and military power of U.S. imperialism is much stronger than the weak political and military power of the local governments. It is under these conditions that the U.S. paper dollar is able so easily to push aside the weak local paper currencies.

Indeed, many of the anti-imperialist governments that have recently been elected in Latin America are trying to find ways to fight the “dollarization” of their economies. In order to do this, they have to stop the U.S. dollar from circulating within their home markets and get their own paper money—token money issued by their monetary authorities—to circulate instead.

When a government wants to establish a paper currency, it generally passes a law declaring that taxes are payable in the paper currency. If the government is not strong enough to collect taxes, its paper money will have little credibility and rapidly depreciate. Under today’s conditions, this will mean that the economy will become “dollarized.” Domestic prices will be quoted in U.S. dollars, which will be seen as the “real prices,” while prices in terms of the local paper currency will simply passively reflect changes in the dollar prices and the dollar value of the local currency. Debts will be made payable in terms of U.S. dollars, not the local currency.

Governments striving to establish the paper currencies issued by their monetary authorities as credible currencies will usually declare the paper currency as legal tender, payable for all debts public and private. This is why token money is frequently described as “fiat money.” The government by fiat declares that the paper money issued by the monetary authority is “legal tender.” It is illegal to refuse it.

However, the government cannot in this way overcome the economic law that if it over-issues the token—fiat—money, it will lose value against gold bullion, and inflation will break out. In addition to inflation, there will be other very negative economic consequences, which I will have to leave to future posts.

How much fiat money can the government and its monetary authority issue?

I have mentioned the “over-issue” of fiat money. I will define fiat money as over-issued when the currency starts to depreciate. Token, or fiat, money can be considered depreciated when the price of gold bullion in terms of the fiat money rises. Beyond that point, the price of gold bullion in the over-issued currency rises more and more, serious inflation develops, and negative economic consequence that I will explore in later posts multiply all around.

But what determines the amount of fiat money that the state can issue before the depreciation of the fiat currency begins? The bourgeois economists and probably the great majority of Marxists agree that the amount is determined by the amount of commodities in circulation. As the amount of commodities increases, more and more fiat money can be issued without fear of it depreciating.

Accepting the truth of this argument provisionally, we immediately run into a logical problem. How do we measure the amount of commodities in circulation? Perhaps we should measure the amount by their use values. But commodities have the most diverse use values. And as we saw last week with the linen and the coats, use values that are not qualitatively the same cannot be quantitatively compared. The total amount of commodities in circulation is therefore a meaningless phase if we measure commodities in terms of use values.

But as Marxists, we know, unlike the modern bourgeois economists, that the values of commodities are determined by the amounts of abstract human labor necessary to produce them. Therefore, why can’t we measure the total amount of value in terms of value—hours of abstract human labor? Won’t that determine how much fiat money the monetary authority can issue without the currency depreciating?

Accepting this, again provisionally, we immediately run into a another problem. The value of a commodity can only take the form of exchange value. And the exchange value of one commodity can only be measured in terms of the use value of another commodity. We saw that with our—or rather Marx’s—example of 20 yards of linen equals one coat last week. For reasons, we explored last week, value can never be measured directly in terms of x hours of labor. Even if it could be so measured, the producers, whether simple commodity producers or industrial capitalists, would have no way of knowing whether their products meet any social need. So, no, that won’t do.

So it seems that the only way we can measure the total quantity of commodities in practice is to measure them in terms of exchange values—that is, in term of prices. And assuming gold is our money commodity, that means measuring the amount of commodities in terms of prices defined as some weight of gold. Remember, the use value of gold that measures the exchange value of commodities is measured by weight. Logically, therefore, the price of commodities defined in gold exists before any of the fiat money is even issued.

But what determines the prices of commodities? Well that is an easy one for Marxists, it is value. But that would get us back to the argument that the total value of the commodities in circulation determines how much fiat money the “monetary authority” can issue. But, no, that didn’t work. In the long run, we know prices tend towards equality with values but only by constantly deviating from them. So it looks as though we are stuck. Perhaps it’s time to ask Marx himself how much token—or fiat—money a monetary authority can issue without the money depreciating.

Marx writes in chapter 3 of volume I of “Capital”: “In order that the mass of money actually current, may constantly saturate the absorbing power of the circulation, it is necessary that the quantity of gold and silver in a country be greater than the quantity required to function as coin. This condition is fulfilled by money taking the form of hoards. These reserves serve as conduits for the supply or withdrawal of money to or from the circulation, which in this way never overflows its banks.” (8)

We have seen that we can always withdraw full-weight gold coins from circulation and replace them with tokens such as modern fiat money. But only if “the quantity of gold … in a country [is] greater than the quantity required to function as coin.”

In other words, the amount of fiat money that the “monetary authority” can create without the depreciation of the currency is determined not by the amount of commodities in circulation but by the amount of gold—or in Marx’s day, also silver—in the country. (9) As globalization proceeds, and especially in regard to the U.S. dollar, it increasingly becomes the amount of gold available on the world market.

The gold need not be in the vaults of the central banks or the various ministries of finance. It can be in private hoards. But it must exist as a physical material reality. It is the quantity of gold measured in terms of weight that is in existence on the world market that ultimately determines how much fiat money the monetary authority or the “collective monetary authorities” of the world can issue before the “fiat money” starts to depreciate. (10)

I have already noted if we look at the socialist press, writers who do not specialize in economics tend to repeat out of loyalty to Marx that capitalist crises such as the current one are caused by a general overproduction of commodities. However, Marxists who are generally more informed on economics shy away from this explanation.

Under the old international gold standard, the amount of currency—in the form of credit money, not token money—that the monetary authority could issue was more or less limited by the amount of gold in the vaults of the monetary authority. But by freeing the monetary authorities from the need to redeem their currencies in gold on demand—thus converting their credit money into fiat money—it seems to such Marxists that the monetary authorities should always be able to create enough money to prevent a general overproduction of commodities relative to money.

If business threatens to slump, shouldn’t the monetary authority under fiat money systems be able to create enough money that would enable business to keep running smoothly? Any crises that still break out must therefore, according to these Marxists, be caused by some other factor such as a fall in the rate of profit or disproportionate production, but not by a general shortfall of monetarily effective demand relative to total commodity production.

Both Keynes and Friedman believed fiat money was key to preventing crises of general overproduction

Both John Maynard Keynes and Milton Friedman reasoned exactly this way. (11) They knew that under the gold standard the amount of money that the monetary authority could create was limited by law by the amount of gold that was in its vaults. Both men therefore supported replacement of the gold standard with “fiat money” systems. The way to banish the threat of a generalized overproduction of commodities was a well-managed system of fiat money, they thought. (12)

Friedman believed that establishing such a system would be enough to end crises once and for all provided the monetary authority issuing the fiat money used its powers wisely. Keynes knew that “fiat money” as well as “gold money” could be hoarded, so he thought that deficit spending by the government might sometimes be necessary to get money circulating again.

If the demand for money was strong enough, Keynes reasoned, deficit spending by the government wouldn’t work unless the extra demand for money could be met. Where would the extra money comes from? Like Friedman, Keynes answered from the “printing presses” of the monetary authority. Therefore, both Friedman and Keynes believed that given correct “monetary policies” by the monetary authority, and in Keynes’s case, sometimes correct fiscal policies—deficit spending—by the government as well, crises would in the future be avoided.

What neither Keynes nor Friedman could understand, given the limitations on their understanding imposed by the false marginalist theory of value held by both men, was that there is an economic law that does limit the amount of fiat money—token money—that can be created without the fiat money depreciating. That amount is limited not by the amount of commodities in circulation but by the amount of gold that is actually in existence on the world market. How this affects the ability of the governments and monetary authorities of countries engaged in capitalist production to combat crises will be the subject of future posts.

Next week I will explore another crucial function of money, which I have mentioned only in passing in this week’s post. That is the role of money as a means of payment. This will lead us to the exploration of the laws that govern another form of money, indeed the main form of money in circulation today, credit money.


1 Gold as an element is believed by scientists to have originated when stars many times the size of our sun exploded into supernovas. As the stars exploded, complex nuclear reactions were triggered that it is believed created gold and other heavy elements. When the earth formed about 4.6 billion years ago out of a dust cloud that contained the remains of these supernovas, gold because of its weight tended to sink to the core, where it cannot possibly be reached by any foreseeable technology. Convective currents within the earth, however, gradually brought small amounts of gold into the crust where it can be mined.

2 And before that, pieces of copper and bronze.

3 Bourgeois economists call this the double coincidence of wants. For the barter transaction 20 yards of linen for one coat to proceed, an the owner of 20 yards of linen must need a new coat, and the producer of the coat must need 20 yards of linen. The bourgeois economists point out that unless this double coincidence of wants is present the barter transaction cannot go through. At this point, the bourgeois economists explain, a certain “scarce” commodity begins to be used as money. They, therefore, begin their analysis of money with the analysis of currency.

Marx, in contrast, develops his concept of money out of the simple commodity form. Before he even introduces the concept of money, he develops the concept of abstract labor as the social substance of value. He then develops money out of the relative form of the commodity, where value must of necessity take the form of exchange value. Instead of seeing money as primarily currency, Marx first analyzes money as the universal measure of value. Only then does he develop the concept of currency as the representative of money in circulation, which does indeed eliminate the need for a double coincidence of wants.

4 Copper objects found in a Chinese tomb dating to the 11th century BC may be the oldest known form of coinage. Lydia, a state that was located in what is now modern-day Turkey, is known to have issued coins made of the compound electrum beginning about 600 BC. Electrum is a compound that consists of a mixture of gold and silver. The electrum was then further mixed with copper and additional silver. Therefore, currency is at least 2,600 years old, and in China currency might go back more than 3,000 years.

5 There was also a very short-lived attempt to revive the international gold standard after World War I. This attempt ended in disaster during the unprecedented economic crisis of 1929-33. I will explore in later posts the reason for the extreme violence of the 1929-33 crisis.

6 The U.S. government will actually coin gold bullion at the rate or mint price of $50 an ounce provided the gold is mined in the United States. These coins are legal tender and are officially part of the U.S. currency. However, these coins don’t circulate, because the price of gold bullion on the open market in terms of paper dollars is well above $50 an ounce. It indeed has exceeded $1,000 for brief periods during the past year.

It would be crazy to use a $50 gold piece to purchase a commodity or discharge a debt when you can sell the coin for its much higher bullion value. Let’s assume the price of gold is $900 an ounce. If I have a $50 gold coin, I can sell it as bullion for $900. I then have $900 paper dollars. I can use $50 of these paper dollars, to buy my commodity or discharge my debt. I have $850 paper dollars left over. If the price of gold bullion in paper dollars falls to $850 an ounce, like it has several times over the last year, I might even be able to buy back the gold coin! Here I leave aside any broker charges and so on that might be incurred, but the basic argument is not affected.

To better understand the role of gold as a standard of price, let’s examine the price of oil in terms of the present-day non-circulating U.S. gold dollars. On September 3, 2004, about three years before the current crisis began, the price of crude sweet oil was $43.99 per barrels. On March 14, 2009, the price of a barrel of sweet crude was $46.25. Notice that the use value oil is measured in terms of barrels of a specified size. Like all use values, sweet oil has its own unit of measurement. We know that oil first rose and then crashed dramatically between these dates. Overall, however, oil shows a slight overall rise in terms of paper U.S. dollars between the two dates.

But how much has the price of oil changed in terms of gold, the commodity that in its use value measures the exchange value of all commodities including oil? One way of calculating this is to use the gold dollar, which unlike the paper dollar is stable in terms of gold—it is, after all, made of gold—and in the economic sense is a much better measure of exchange value than the paper dollar is, since the paper dollar represents a variable quantity of gold as the dollar rises and falls againt gold. Remember, the U.S. government is currently coining U.S.-produced gold at a mint price of $50 an ounce

On September 3, 2004, while oil was selling for $43.99 paper dollars per barrel, the price of gold bullion in terms of dollars was $400 per ounce. Now if I divide $43.99 by the price of gold bullion in dollars per ounce on that date, 400, and then multiply by 50, I convert the price of oil in terms of paper U.S. dollars into gold dollars. That gives us a price of sweet crude of about $5.50 in gold U.S. dollars per barrel on September 3, 2004. The calculation is slightly off because I am ignoring the seignorage—the coins are worthly slightly more in terms of the paper dollar on the market than uncoined bullion of the same weight is—but the seignorage isn’t all that great, and so the basic argument is not affected.

Now, on March 14, 2009, the price of gold bullion in dollars was $928.80. The paper dollar has depreciated considerably against gold. Dividing the price of oil in paper dollars, $46.25 by 928.80, and multiplying by 50 we get a price of oil in gold U.S. dollars of about $2.49. Once the effect of the paper dollar’s depreciation against gold has been factored out, it turns out that oil has fallen considerably against the commodity that in its use value measures the exchange value of all commodities including oil.

But this isn’t really so surprising when you consider the global crisis of overproduction that began in 2007 and continues as I write. Oil like virtually every other commodity—leaving aside the money commodity—has been massively overproduced, so it is not surprising that its economically real price—which can be measured, for example, by using gold dollars rather than paper dollars as our standard of price, has fallen considerably since September 2004, when there was as yet no crisis of overproduction and the global industrial cycle was in its upward phase.

7 One of the reasons for this confusion is that the stability of paper currencies depends in part on the credibility of the government that issues them. For example, if governments and their monetary authorities grossly over-issue paper money, the capitalists might panic and start to dump securities denominated in a discredited fiat currency in favor of securities denominated in currencies that retain their gold value, or if these are not available convert securities and other assets into gold itself.

One of the greatest dangers that capitalist governments now face to their “stimulus programs” is that they will massively over-issue their fiat money, which would then end in a massive discrediting of that money. Since the current crisis began in August 2007, fiat currencies have been fluctuating violently when measured against gold as well as againt each other. Once we examine the role of money as a means of payment, we will get a better idea why this has been occurring.

8 An analogy can be made with the well-known fact, at least for Marxists, that capitalism, owing to its anarchic nature, requires a reserve army of labor. In the monetary realm, capitalism requires for the same reason that there be a reserve quantity of money material over and above that in circulation, whether the money in circulation consists of actual gold coins or token (paper) money representing money material.

9 Even Milton Friedman would have understood that if gold was “scarce” its price in dollars and other paper currencies would tend to rise. But Friedman argued that as long as gold coins no longer circulate—Friedman and liberal and neoliberal economists in general see money as little more than a means of circulaton—gold is not money but just another commodity. Stripped of its monetary function, gold indeed has relatively few use values and plays only a modest role as an industrial raw material. Therefore, changes in the “price of gold” should have little consequence, according to them.

No serious capitalist seems to take Friedman and the other bourgeois economists seriously on this score. That is why the price of gold is one of the most important economic indicators in the world. The pro-capitalist economists, not only Friedmanites but Keynesians as well, complain about this. Keynes famously described gold as a “barbarous relic.” They can’t understand the continuing “irrational obsession” with gold.

If you have been following the logic of my argument—which is really Marx’s argument—this far, the cause of this “obsession” becomes clear. In the final analysis, the obsession with gold is simply a manifestation of the broader phenomena that Marx called the fetish of commodities. The continued “obsession” with gold—especially in times of crises such as the one we have been passing through—is also a powerful empirical indicator that the Marxist theory of value is true and that the marginalist theory of value taught in the universities is false. The continuing “obsession” with gold is easily explained with the Marxist theory of value but makes no sense within the framework of the marginalist theory of value. Instead of reconsidering their theory of value, the bourgeois economists complain about the “irrational” behavior of capitalists!

10 Notice I am talking here about fiat or token money. How much credit money can be created is a different question entirely.

11 When U.S. President Richard M. Nixon broke the last official link between the U.S. dollar and gold in August 1971, completing the transformation of the dollar into token, as opposed to credit, money, Milton Friedman, despite his well-earned reputation as an extreme reactionary, hailed the move. He did, however, strongly oppose Nixon’s decision to impose wage and price controls, which was announced at the same time.

Friedmanites and Keynesians alike hate gold and want to eliminate it entirely from the international monetary system. This is much like hating the law of gravity and demanding legislation declaring the law of gravity annulled. The monetary role of gold—or some similar commodity—is an inevitable consequence of the law of value that governs the capitalist economy. Only abolishing the law of value through the transformation of capitalism into socialism can end the monetary role of gold or some similar commodity.

12 In the 1930s, paper money systems were frequently called “managed currencies.” The theory was that with “managed currencies” it would be possible to managed demand and prevent future crises.


2 thoughts on “From Money as Universal Equivalent to Money as Currency

  1. I’ve been following your posts closely. I’ve gone back to this one as I think it is the critical one from my perspective.
    I have to begin by commending you on trying to return economic analysis to a solid materialist base. It is indeed a worthy project.
    It seems to me as if the assumption about gold underpinning token money was accurate in the past. I am unsure about its continued accuracy. You state above that the amount of token money which can be issued is limited (if it is to hold its value) by the amount of gold in total circulation (i.e. globally). Now I understand why you might say that but I don’t understand how it can be proven. You have opted for the ‘proof by marx quotation’ method and then extended his words to mean much more.
    I am unconvinced. If token money can only be issued on the basis of the total gold in existence – how is that quantity valued? On what basis? Surely if more money is issued then the cost of gold goes up and then more money can be issued on that inflated valuation.

  2. Hi Anonymous. I’m not sure if you subscribed to the comments on this post, but I’m writing this in case you have. At this point, I’m pretty much on the same page as you in terms of being unconvinced. But I haven’t read enough of this blog yet to come to decide whether I’m conclusively unconvinced. Anyways, I’m wondering what your opinion on what the cause of crisis is? All of them seem mostly true but there’s always something that (for me at least) seems a bit off and thus puts the whole thing into question. And I can never tell if those things that seem off really are off, or only appear that way because my understanding is insufficient to understand that what seems off is actually right on. It drives me a little nuts. In following the blog so closely as you have, I assume it’s because you also have uncertainties about the current array of crisis theories, or perhaps have had doubts in the past but resolved them. So maybe you have some of your own thoughts and insights on the subject. If you think you have something valuable to share on that topic, it would be much appreciated.

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