C. Theories of the Medium of Circulation and Money
At the end of Chapter 1: Commodities we had “A:Notes on the History of the Theory of Value”. At the end of Chapter 2 part 1: The Measure of Value we had “B:Theories of the Unit of Measure of Money”. Now at the end of Chapter 2, after we’ve discussed the medium of circulation and money as money we get “C: Theories of the Medium of Circulation and Money.” It’s perhaps the densest part of the book but also the most useful for understanding contemporary debates on the role of Marx’s theory of money in our contemporary inconvertible system of money. Here we go….
Marx begins with an interesting discussion about Mercantilist theories of money. Mercantilist thought held that the goal of trade was the accumulation of money, and it understood this money to be commodity money such as gold and silver. The mercantilists singled out trade and certain branches of industry as the source of this monetary wealth. This wasn’t because they were blind to the profit-maximizing of capitalist production. It was because capitalist production wasn’t dominant enough to be the source of material wealth. Feudal production created products for subsistence. These products did not become commodities and therefore products were not turned into money. Feudal products were not embodiments of abstract labor. Money may have been the goal of trade but it was not the goal of production. In this primitive stage of trade the mercantilist focus was on circulation not production. They therefore confused money with capital leading to much confusion.
At the same time Marx snidely remarks that the long theoretical war of classical political economy against the “money and mercantile system is mostly due to the fact that this system blabs out in brutally naive fashion, the secret of bourgeois production, viz, its subjection to the dominance of exchange value.” In doing so Ricardo and Smith fail to see the ‘barbaric’ embryo of their own system in this subordination to money, to exchange value. Furthermore Marx points out the continued importance of commodity money in contemporary capitalism, as the final form of world money. Classical political economy focused on money’s capacity as medium of circulation rather than its role as money. This leads to a focus on the coin that circulate as tokens of value. And this leads us to Marx’s critique of the Quantity Theory of Money….
Hume is the target. The context is the depreciation of precious metals in the 16th and 17th century, something Hume was focused on. Hume believes that the quantity of money in circulation determines the value of money and the price level (the total value of commodity prices to be circulated in a period of time.) This is the Quantity Theory of Money (QTM). Marx hates the QTM. The rest of the chapter is a tirade against the QTM.
Marx believes that commodities have ideal money prices, prices measuring the relation of the labor embodied in the commodity to gold, and that they have these prices prior to entering circulation. Thus he believes that the amount of money in circulation is determined by the total level of prices and the value of money. Gold flows in and out of hoards (or is produced by mines) to adjust the level of gold to the needs of circulation. Of course in a system of token money, where symbols of gold circulate, tokens can’t be hoarded. Remember that Marx considers hoards of tokens to still be in circulation. This means that the quantity of tokens in circulation can rise and fall thus inflating or deflating the value of the tokens relative to the gold they represent. So how is Marx’s understanding of the role of token money different than the QTM? Let’s follow his critique of Hume for some clues.
Marx agrees that it sometimes appears that a change in the quantity of metallic money or tokens of money in circulation have a uniform effect on the price of commodities. The periods Hume considers are ones where there were sudden changes in the price level accompanied by corresponding changes in the quantity of tokens. But Hume’s problem is that the periods he considers were also periods where the value of money was also changing. There were openings of gold mines during this period which altered the value of money.
Hume treats gold as if it were the same as tokens of value. He thus makes all forms of money medium of circulation and ignores the role of measure of value. Hume has gold entering circulation without value and deriving its value from its quantity rather from its labor content. In fact he makes it seem as if gold enters circulation as “non-commodities; but as soon as they appear in the form of coin, he turns them, on the contrary, into commodities, which must be exchanged for other commodities by simple barter”. Hume imagines an “imaginary mechanical equalization process” whereby the quantity of gold and the volume of commodities balance.
In other words, for Hume the total volume of gold stands for the total value of all commodities and each commodity exchanges for just the right amount of gold in proportion to its value in relation to the total social product. For Marx this erases the antagonism between use-value and value which “manifests itself in the circulation of money.”
The difference between the QTM and Marx’s treatment of token money might seem like an abstract technical distinction. It’s not. For Marx, the quantity of coin, of tokens of value, in circulation change the unit of account but they don’t change the value of gold or commodities. They just change the unit names that these values are measured in.
There is an equilibrium assumption behind Hume’s QTM. If the amount of gold can de divided evenly to represent the corresponding magnitudes of the world of commodities, if total amount of money equals total commodity value to be exchanged, then we have erased the entire point of money in the first place: it’s ability to apportion and discipline labor through price-value divergences. In Hume’s theory there is a perfect balancing of labors and money is just a numeraire to facilitate the balancing of commodity values. There is no independent role for money as a representative of abstract labor. Though Hume is writing long before the imposition of general equilibrium analysis on bourgeois economics there seems to be an underlying hint of general equilibrium sentiment in his QTM. Marx accuses him of replacing a theory of commodities and money with an “imaginary mechanical equalization process”.
Sir James Stuart comes next. His ideas seem less problematic, if I am understanding the text. Despite some criticisms that Marx doesn’t develop, Stuart correctly develops the functions of money from the different aspects of commodity exchange. At a given time the “ready money demands” of society (the total amount of money needed to facilitate transactions) can only absorb so much gold. If there is too much gold it is hoarded. If there is not enough it can be replaced by tokens. Stuart argues that credit money can replace commodity money but not in the world market. This all seems to line up with Marx’s line of thinking. Marx hints at other disagreements with Stuart but he doesn’t develop them.
Ricardo gets a lot of attention from Marx. Marx gives us a cursory history of the historical phenomena that influenced 19th century discussions of money: the “suspension of specie payment by the Bank of England in 1797, the rise of prices of many commodities which followed it, the fall of the mint price of gold below its market price, the depreciation of bank notes…” These all led directly to political struggles in parliament and theoretical struggles outside of it. Of these theoretical struggles Marx notes that many thinkers confused bank notes with tokens of value or government-issued legal tender paper money. Bank-notes are not the same as tokens of value/state legal tender in Marx’s view. Furthermore Marx says that although these thinkers claim to deduce the laws of token money from the laws of metallic circulation they actually do the opposite, drawing conclusions about token money and then imposing these onto metallic money. They thus erase the function of money as measure of value and develop a theory based solely on money as means of circulation. This is similar to Hume.
Ricardo sees an increase in paper bills corresponding with a rise in prices. This causes him to focus on the effects of the quantity of money on the level of prices, over looking the function of money as measure of value.
However, Ricardo seems to start off in the right direction: The value of gold is determined by labor time. The volume of money is determined by the value of commodities and the value of money. Token money (tokens of gold) can replace gold without changing prices. Marx agrees with these positions.
The chapter can get confusing here because it seems, at first glance, that Marx next lays out a completely different version of Ricardo’s ideas, one the contradicts what he has just said. If I am reading the chapter correctly I believe that this is what is going on: Marx says that Ricardo’s mistakes begin when he looks at the international circulation of precious metals. This is where he starts to develop a QTM that contradicts his theory of labor-time determining the value of gold. Marx thinks that Ricardo’s argument just gets confused when he is dealing with the international sphere. So Marx abstracts away from international circulation for a few pages and presents the essence of Ricardo’s argument without the international circulation. What we get is a QTM:
Ricardo believes that if legal tender (tokens of money) are forced to stay in circulation then the money supply cannot adjust to changes in the value or quantity of commodities in circulation. Money then becomes a token of greater or lesser value depending on the total amount of tokens and the total amount of commodity value in circulation.The same happens with gold in circulation. It becomes a token of itself, representing greater or lesser amount of itself. Marx parenthetically points out that this concept of gold becoming a depreciated token of itself is an abstract deduction that comes from imposing the laws of legal tender on the laws of metallic money. We end up with a theory where the rise or fall of prices appears as effect of the increase or decrease in the amount of gold in circulation. When just the right amount of money is in circulation then money trades at its own value and prices are determined by the labor time embodied in commodities. But when the quantity of money is out of equilibrium with the total value in circulation then the quantity of money determines the price level. This movement of the value of gold and prices triggers changes in the production of gold mines which either increase or decrease gold production to bring the system back into balance. The same logic applies to tokens of value (which can be legal tender paper money) and to bank-notes, inconvertible or not convertible.
I have not read Ricardo on this topic so I can only surmise that Marx is developing this description in the way he does in order to make a specific point. Marx is starting from a theory of metal and then developing it to explain bank-notes. A reader may be more likely to intuitively accept that the quantity of bank-notes in circulation cannot be withdrawn from circulation and that therefore their quantity determines the price level. But we are less likely to believe that gold cannot leave circulation and that therefore the quantity of gold determines the price level. Marx is casting the argument mostly in terms of gold in order to bring out this problem.
At the same time we can see many similarities between Ricardo’s view and Marx. Earlier in the book Marx explained how gold coins can become debased therefore leading to a discrepancy between bullion value and nominal value. But because Marx understood gold to have the function of measure of value he did not see this process effecting the prices of commodities in the same way. Prices of commodities are ideal gold. However Marx does see gold being re-coined in response to debasement, which leads to tokens of value replacing gold. This leads to a change in nominal prices and the development of money as unit of account. In other words, the British “pound” ceases to be an actual pound of gold. The prices of commodities are measured in token units of account that are related to gold values. So for Marx, while the quantity of tokens has an effect on the price level measured in these units of account it does not effect the exchange value of commodities against gold. In other words if a banjo is worth a pound of gold this relation can be measured in various units of account. We could say a banjo is worth 600 dollars and 600 dollars is worth a pound of gold. Or if there is inflation we could say a banjos is worth 1000 dollars and a 1000 dollars is worth a pound gold. (Or this would be Marx’s argument if dollars were tokens of value rather than bank notes!) Because gold stands behind coin as the measure of value Marx is able to make this distinction between the medium of circulation and the measure of value.
Ricardo doesn’t make this distinction and so he counts the quantity of gold like he counts the quantity of tokens. This leads him to a theory of the equilibrium quantity of gold. This obsession with finding the perfect quantity of money dominates his understanding of international trade. For Ricardo there is equilibrium in international money supplies when all of the money in each country trades at its labor-value. This is a ‘normal’ volume of money. When the volume of money is ‘normal’ there is no need to export or import gold and prices are equal to values. The ‘normal’ level of a national currency is expressed as a balance of currencies in the international market.
How is this ‘normal’ level disturbed?- Marx asks. This is an important question. What Marx is getting at is that Ricardo believes the export and import of coin is not caused by trade imbalances, but vice versa, that the export of coin is caused by the cheapness of coin. If there is too much coin and thus money is depreciated then commodities are expensive and can’t be exported. This causes a trade imbalance. Ricardo then thinks that trade imbalances will be solved not by addressing the underlying inequalities in production between nations but by addressing the quantity of money in circulation!
Marx points out this idea collides with facts. He gives several examples of Ricardo’s theory clashing with historical facts. Ricardo states that in years of poor harvest there was too much coin in relation to the quantity of crops to be sold. This led to a depreciation of money and a rise in commodity prices which led to a trade imbalance. Marx says that the empirical evidence is against Ricardo on this, that in such instances as bad harvests there is not a super-abundance of currency. He references Tooke on this point. I will not list all of Marx’s other examples here.
We can see that although there appeared to be a superficial similarity between Ricardo and Marx on some points that there are important differences between the QTM and Marx and that these differences lead to radically different understanding of things like international trade imbalances. It became fashionable after Schumpeter to classify Marx as a ‘metalicist’ because he derives the money form from the commodity. It is also common to hear it said that Marx had a commodity theory of money. These two terms could mean many things and could lead one down the path of thinking that Marx had a more narrow view on money than he actually did. It is not true that Marx didn’t have a theory of tokens of value, or legal paper currency. And although he doesn’t develop a theory of credit money (bank notes, etc.) anywhere many, including myself, think that such a theory can exist within his framework. What is unique and important about Marx, and what makes him more than a simple ‘metalicist’, is that he develops his theory of money from the commodity form. Thus his theory of money is not exogenous to his theory of capitalism but flows directly from it. He develops all of the forms of money directly from the commodity form. Thus there is always a need for money as measure of value at some place in the theory. This need can take different forms at different places in history. It is common today for some to think that there is no need for a theory of money as measure of value, especially since general equilibrium models so popular in economics leave no room for money as a measure of value and treat money only as a numeraire. However I believe that these theories are gravely mistaken and that the everyday reality of money screams out the continued importance of money as a measure of value, especially in the arena of world money where the dollar is increasingly losing ground, the market price of gold is rising…. etc… ok I am getting off topic.
James Stuart Mill makes an appearance next. Mill continues Ricardo’s QTM but doesn’t bother with the international trade angle. Mill paints a picture of use-values circulating without prices, money circulating without value, everything to be determined in the market by the quantity of money. To get rid of the bothersome problem of hoarding to his theory Mill makes very liberal, and irresponsible, use of the concept of velocity. He basically slows down the measure of the velocity of money so that all money circulates in a time period.
The commercial crisis of the 1825 and 1836 led to further attempts to apply Ricardo’s theory to reality. Resolutions to these crisis were sought in the realm of monetary circulation. Ricardo’s so-called ‘laws’ of metallic currency were applied to credit and bank notes. The most general and noticeable phenomenon of a crisis, Marx tells us, is the sudden fall in prices after a prolonged period of rising prices. A fall in prices, by definition, means that the value of money rises (ie, money can purchase more commodities). Thus pointing to the fall in prices and saying this is because of the rise in the value of money is a tautology. It doesn’t actually explain anything. One is the flip-side of the other. Our only recourse is to theorize changes in the value of commodities or money. Did the value of money rise or fall due to changes in the production of gold? Did commodity prices rise or fall because of changes in productivity? Only these questions can unpack the phenomena to be explained.
Ricardo’s ideas led to the “currency principle” which became law in England in 1844 and 1845 at the hands of Lord Overstone and others. It led to immediate disaster. The idea behind the “currency principle” was that bank notes should be forced in and out of circulation so that they were directly proportionate to the quantity of gold in the country. Gold exports and imports had to be mirrored by changes in the quantity of bank-notes so that the amount of money in circulation was in equilibrium. Marx ends his tirade with “Thus did Ricardo, who proclaimed paper money currency as the most perfect form of money, become the prophet of the bullionists.”
The chapter ends with a brief discussion of Tooke. Tooke began as a Ricardian but the glaring contradiction between empirical reality and Ricardo’s ideas led him to abandon Ricardo’s theory of money. Tooke came to the conclusion that the expansion or contraction of currency, when the value of gold is stable, is always a result not a cause of changes in the price level.
While Marx is influenced by Tooke and Fullarton, and while he commends their ability to theorize money in many forms besides just medium of circulation, he also lists a few criticisms. They don’t establish an organic connection between the forms of money in the way Marx does, developing each form of money from the unfolding of the commodity form. They don’t understand the category of Capital in relation to money and commodities. Capital can be money but it can also be commodities. Gold becomes means of payment not because it is capital but because it is money. They also don’t grasp money in abstract form, derived from simple circulation. The vacillate between abstract forms of money which distinguish it from commodities and advanced forms of money which conceal real social relations. Marx does expand on this last point. I assume that he means that advanced forms of money like credit conceal creditor-debtor relations while money in simple circulation only references buyer and seller. Tooke and Fullarton must not make distinctions between these levels of analysis.
The critique of political economy is often published with an introduction. The same introduction is always published with the Grundrisse. I will not be posting notes on this introduction in this series. However I am starting a Grundrisse reading group here in NYC this fall (2013) so I/we may post some notes on this text then.