Chapter 3: Money, or the Circulation of Commodities

Submitted by libcom on July 27, 2005

Chapter 3: Money, or the Circulation of Commodities
Outline of Marx's Argument
Section 1: The Measures of Money
a. money as measure of value
- ideal
- real
b. money as standard of price
- price
- money names
- weight names

Section 2: The Medium of Circulation
a. metamorphosis of commodities
C - M - C, (P - U - I)

b. the circuit of money

qualitative: M - C - M'
quantitative: M = PQ/V

c.coin and symbols of value
- role of the state
- paper money

Section 3: Money
a. hoarding
- money as store of value
- monetary reserves
b. means of payment
- credit
- credit and class struggle
- credit and crisis
c. universal money
- extension of analysis to world level
- universal :means of payment
:means of purchase
:embodiment of wealth
First and foremost, in capitalism money is power. Money both embodies the power capital has had to impose work on people and bestows the power (through investment) to do it again. At the same time, from the point of view of the rest of us, money --if only we can get our hands on enough of it-- gives us the power to resist or refuse that work. Not surprisingly then, money is a frequent subject of popular music. Big money --especially corporate wealth-- is desired for the power it gives and feared for the threat that it carries. Pink Floyd in their song "Money" (on their ablum The Dark Side of the Moon, 1972), written in a period when capitalists were resisting wage increases, mock the ideological contradictions of such a situation: "Money so they say - is the root of all evil today - but if you ask for a rise - it's no surprise - that they are giving none away." They, of course, are the capitalists and their apologists who preach the evils of money to the working class while using it for their own purposes of domination. Rush, in the following song, written during the Reagan years when capital was wielding its money like a bludgeon against the working class, are more blunt about the power of money:

The Big Money
Big money goes around the world
Big money underground
Big money got a mighty voice
Big money make no sound
Big money pull a million strings
Big money hold the prize
Big money weave a mighty web
Big money draw the flies
Sometimes pushing people around
Sometimes pulling out the rug
Sometimes pushing all the buttons
Sometimes pulling out the plug
It's the power and the glory
It's a war in paradise
It's a cinderella story
On a tumble of the dice

Big money goes around the world
Big money takes a cruise
Big money leave a mighty wake
Big money leave a bruise
Big money make a million dreams
Big money spin big deals
Big money make a mighty head
Big money spin big wheels

Sometimes building ivory towers
Sometimes knocking castles down
Sometimes building you a stairway-
Lock you underground
It's that old-time religion
It's the kindom they would rule
It's the fool on television
Getting paid to play the fool

Big money goes around the world
Big money give and take
Big money done a power of good
Big money make mistakes
Big money got a heavy hand
Big money take control
Big money got a mean streak
Big money got no soul.....

Rush, Power Windows, 1985
Mercury/PolyGram Records
CD 826 098-2

In another song, written only three years later, still during the unapologetic reign of Reagan/Bush and their rich capitalist friends, Randy Newman makes the same point in his own low-key, ironic manner. How is it, he wonders, as so many of us have, that the best and the brighest often just scrape by while the wheelers and dealers, the slimeballs and the crooks are living high off the hog in their "great big houses" with their "great big swimming pools". The answer, of course, is money.

It's Money That Matters
Of all of the people that I used to know
Most never adjusted to the great big world
I see them lurking in book stores
Working for the Public Radio
Carrying their babies around in a sack on their
Moving careful and slow
It's money that matters
Hear what I say
It's money that matters
In the USA

All of these people are much brighter than I
In any fair system they would flourish and thrive
But they barely survive
They eke out a living and they barely survive

When I was a young boy, maybe thirteen
I took a hard look around me and asked what
does it mean?
So I talked to my father, and he didn't know
And I talked to my friend and he didn't know
And I talked to my brother and he didn't know
And I talked to everybody that I knew

It's money that matters
Now you know that it's true
It's money that matters
Whatever you do

Then I talked to a man lived up on the county line
I was washing his car with a friend of mine
He was a little fat guy in a red jumpsuit
I said "You look kind of funny"
He said "I know that I do"

"But I got a great big house on the hill here
And a great big blonde wife inside it
And a great big pool in my backyard and another
great big pool beside it
Sonny it's money that matters, hear what I say
It's money that matters in the USA
It's money that matters
Now you know that it's true
It's money that matters whatever you do"

Randy Newman, Land of Dreams, 1988
Reprise CD 9-25773-2

Of course, most of us understand that "it's money that matters" and not just in the USA but throughout the whole capitalist world. The difficult questions concern why it is money that matters and how it can be the weapon as well as the fruit of power.

Marx's analysis in this chapter gives us a broader understanding about how and why money is power. He focuses on a variety of roles which money plays in the capitalist world of commodities. In Chapter One he discussed the forms of value. These forms, which are abstract determinations of the commodity form, identify general aspects of the commodity world as a whole. The general form of value for example:

xA = wM

expresses the interrelation of all the commodities to each other mediated via the universal equivalent. The universal equivalent itself is not isolated from the whole but rather expresses value in relation to the potentially infinite series of other commodities. These forms presuppose the actual world of capitalist commodity exchange and are determinations of it. They express aspects of the relations among commodities, most importantly, those of the central exchange relation between the classes --the exchange of labor power for means of subsistence.

Now in Chapters Two and Three Marx evaluates the form of that exchange process within the actual circulation of commodities in exchange. There is a transition as he isolates and identifies the exchange process, a transition from the form of value, to the exchange aspect of its actualization.

When we look at the money form of value we can see that the form of simple commodity exchange C - M - C emerges if we isolate the mediated relation xA - w gold - yB.

yB = w gold xA - w gold - yB C - M - C

The money form expresses money as the universal mediator. In C - M - C we isolate a single mediated exchange in order to explore the general structure of such exchange. Later, that understood, we can aggregate all such exchanges to obtain circulation as a whole. Marx's analysis of money in chapter three (i.e., the role of M in C - M - C) therefore develops that of the money form of chapter one. Money and the money-form will no longer be confused.

Structure of the Chapter
Marx's discussion begins with money within nationstates --because of the way national governments have come to mint and regulate money-- and then later moves on to an examination of money at the international level. Both of these analyses add concreteness to the much more abstract discussion of chapter one where there was no such reference to nationstates and their role in exchange. He discusses 5 aspects of money within areas controlled by a single state (generally but not always national boundaries):
1. Money as measure of value
2. Money as standard of price
3. Money as means of circulation
4. Money as hoard or store of value
5. Money as means of payment (credit)

1. The difference between measure of value and standard of price
The first aspect of chapter 3 that I want to discuss is Marx's distinction between money serving as the measure of value and money serving as a standard of price. In this discussion Marx is speaking of the ideal or imaginary expression of value and price that occurs before commodities are actually sold. In terms of C-M-C we are only at the first C, neither C - M (sale) nor M - C (purchase) has actually been completed. We can picture this phase of the analysis as concerning:
C - M - C or C - potential M - potential C

C is produced and real but M is only an anticipated ideal, as is the subsequent M - C, so - M - C is ony potential.

Now we saw in the money form of chapter one that money is the expression of value of commodities and its magnitude measures that value.(1) We also saw in the price-form that with respect to a single commodity money not only expresses value but also price. Money (gold) is a standard of price in so far as "it is a fixed weight of metal," i.e., a measure of the quantity of gold (the w in w gold). The setting of this standard is a function of the State. The State sets both the weight unit or quantum with which to measure the amount of gold, eg., ounce, and it gives the money names to those units.

Let's take an example: 1 ton of iron = 1 oz. of Au

Since the amount of socially necessary labor time in the production of one ton of iron is the same as that in the production of 1 oz. of gold, the gold serves as an expression of the value of the ton of iron -both are crystalized, abstract labor time. In terms of the class relationships, both represent the same amount of imposed labor in capital, the same amount of social control -just as many workers can be set to work just as long producing 1 oz. of Au as 1 ton of iron.(2) Now, because the gold is measured, in this case by the ounce, the quantity of value is given, and the gold simultaneously can serve as standard of price. The 1 oz. measures the quantity of gold by a unit weight of gold. It thus gives the price of the iron. The 1 oz. is the weight-name for the price of iron. The State also gives such a measure a money-name, e.g., $35.00. In the days of commodity money, these money-names were attached to gold coins minted by the state at a given, standard weight. To summarize:

Commodity: iron
Quantity: 1 ton
Measure of value: = 1 oz. Au
Standard of Price: = 1 oz. Au or 35 dollars(3)

Various examples: Country, weight, name, coin

U.S., 1 oz., 35 dollars, 35 gold one dollar coins
U.K.,1 oz., 12 pounds, 12 one Lpound; coins
France, 20 grams Au, 100 francs, 100 franc coins

For several historical reasons money names became separated from weight names. One of the more interesting of these reasons was the physical debasement of coins by users. (There was also the debasement of coin by official act of the sovereign and the mint.) The debasement of coin, e.g., the shaving or clipping of metal from metal coins, is interesting because it was both a form of class struggle --anyone who could get their hands on a coin could shave a bit here and there-- and a direct challenge not only to the power of the State but to the class relations embodied in money. With debasement, the money names (i.e., dollar, pounds, francs, etc.) are still applied to coins, but the coins no longer contain the weight of the metal that is the standard of money, thus as standards of price they misrepresent value. A gold coin that was worth $10 upon coinage, after clipping might be worth only $9.95 or $9.90 because it contained less gold. Yet it would continue to be exchanged as if it were worth $10 --until, of course, a general perception of the debasement led to its rejection as a standard. This was the danger to exchange and to the power of the State. As a result the government agency which was responsible for coinage was invariably also preoccupied with ferreting out and persecuting those responsible for such attacks on the value of money.

This is why the distinction between money as measure of value and as standard of price is important. Values can change and leave prices uneffected, or prices can change with value uneffected. Suppose the money name or price changes due to sudden changes in demand, i.e., all of a sudden everyone wants to buy some commodity x. The price of x will be raised as a reaction to the sudden increase in demand but its value, grasped in terms of the socially necessary labor time has not changed. Inversely there may be an inability to sell said commodity at a price which equals the value, and it is either sold at a price under its value or not sold at all. In such cases the full value of the commodity is not realized. It is either devalued or if the price goes to zero, it has no value at all. This is the so-called realization problem. For a commodity to have value it must be exchanged, i.e., have real exchange value. If the price is above or below the value, then there is unequal exchange. If this persists then there will be a change in the production of the commodity, i.e., if it can't be sold, it won't be produced and its production will no longer provide the opportunity for the imposition of work. If price rises more may be produced. In case of what is considered a normal (i.e., upward sloping) supply curve, socially necessary labor time may rise with the increase in production as more people are put to work producing the product at marginally lower levels of productivity.

As a general rule throughout this chapter, and throughout the book more generally, Marx abstracts from such discrepancies and assumes that value = price. This simplifies his analysis and exposition --he doesn't have to be constantly dealing with such discrepancies. However, he is quite explicit about the fact that not only are there some commodities which have a price but no value, e.g., unworked land, but also as a general rule market prices do NOT equal value. He recognizes that the constant fluxuations of supply and demand occur far more rapidly than changes in the socially necessary labor time required to produce commodities. He can make such an abstraction because his primary purpose here is a social/class understanding of the role of money in capitalism rather than explaining price variations.

There have been many who have complained that Marx's theory in chapters 1-3 does not provide an explanation of the fluctuations in relative prices. This is true, but that is because it is not the purpose of the theory. Neoclassical microeconomic theory (or "price theory" as it used to be called) was designed for the analysis of just such market fluctuations and it does the job much better than Marx's value theory --which, I repeat, was not designed for the purpose. However, what Marxist theory does better than neoclassical theory is provide an analysis of money as a moment of the antagonistic relations of capitalism. Neoclassical theory doesn't do this because its purpose is other. For that matter, it doesn't even recognize the existence of class society. When we examine Marx's discussions of historical price fluxtuations we find that he uses a mixture of his labor theory and supply & demand analysis to understand price changes.(4)

2. Money as Means of Circulation
The second aspect of chapter 3 I want to emphasize is money as medium of circulation of commodities, i.e., the role of M in C - M - C. Now this circuit is actually a combination of:
sale: C - M
purchase: M - C

In sale, a commodity C is exchanged for money M. In this transaction, the owner of C realizes its exchange-value. The exchange-value of C now has actual existence in the form of the money M. This original owner of C has accomplished the first metamorphosis or change of form.(5)

Now when this money (the exchange-value form of C) is then used as means of purchase (M - C) the second change of form occurs --the second metamorphosis-- as the value of the original commodity is transformed by exchange into a particular use-value which is consumed. Thus the original contradiction between the use-value and exchange-value of the commodity discussed at length in chapter one, is resolved as it sequentially becomes potential exchange-value and potential use-value are transformed into actual exchange-value and actual use-value.

If anything occurs to break this sequence then we do not have a commodity circuit. The total process of exchange-value and use-value must be complete, e.g. if goods are never sold they are realized as neither exchange-value nor use-value and they never become a commodity. This is quite possible because the separation of exchange into purchase and sale means that the "commodity" may be suspended either in its original form (no sale) or in the form of money (no purchase). This polarity of sale and purchase and possible rupture implies both the possibility of commercial crises and reflects the underlying antagonistic polarity of capitalist class relations. As Marx writes in the Contribution to the Critique of Political Economy:

The "antagonistic nature of bourgeois production is, moreover expressed in the antithesis of buyer and seller" (Marx and Engels, Collected Works, Vol. 29, p. 331)

"The division of exchange into purchase and sale . . . contains the general possibility of commercial crisis, essentially because the contradiction of commodity and money is the abstract and general form of all contradictions inherent in the bourgeois mode of labor." (Marx and Engels, Collected Works, Vol. 29, p. 332)

Commercial crisis is the rupture of the smooth flow of sale and purchase. The possibility of such a crisis reflects and indicates the possible rupture of the underlying class relation, i.e., the rejection and potential destruction of capital's commodity form by the working class -- the end of sale of labor power by the working class, its purchase by capital, and of the need of the working class to purchase its means of subsistence from capital, i.e., the LP - M - C as expression of the basic imposition of the sale of LP and hence work on the working class by capital.

It is important to see that C - M - C is one moment in the general circulation of commodities, and how it is linked. It would be indicative but misleading to picture circulation as simply the sum of the circuits, because each part of the circuit C - M - C is also a part of two other circuits. Let (C - M - C)1 also be represented by C1 - M1 - C1. Then the sale C1 - M1 is also simultaneously a purchase from the point of view of the owner of money M. In other words, if the perspective is that of the owner of C1 then M1 is the transformed value of C1 and we call it M1. But for the owner of M, its nature is not derived from C1 but from some previous commodity C2 which was sold. So from this point of view the M is M2. Etc. Etc. We can picture this interlinkage as follows:

(Purchase) C2 - M2 - C2

C1 - M1 - C1 (Sale)

Physically M2 = M1, C1 = C2, but the subscripts designate the fact that they play different roles when viewed from different perspectives.

Since the series of such interconnections is unlimited or infinite and since it is interlocked, that infinity is of the "good" variety - self related and mediated by the universal mediator.(6) This is an essential point. The commodity circuit of capital involves all the exchanges. It is one huge circuit of circuits in which exchange-value and use-value are defined within the whole. The role of money as mediator is even clearer now than when we studied the money-form. In the relation C - M - C, we have a clear syllogistic form of mediation which in the Contribution Marx identifies as P - U - I (from Hegel's Logic) or particularity - universality - individuality. C exists for the seller only in a particular aspect of itself, i.e., as potential exchange-value (the seller is not interested in its use-value). When the commodity is then sold it is converted in form into money which is the universal equivalent. The money is then converted subsequently into some individual commodity which is consumed as use-value. Money therefore mediates the two extremes. The most important such mediation, of course, is that between the working class and capital in labor markets and consumer markets:

LP - M - C.

This remains true when we understand LP - M - C as transformed by capital into LP - M - C(MS) . . . P . . . LP*. Money mediates the renewal of labor power via productive consumption.

Although money is determined in circulation by the exchange of commodities, both qualitatively and quantitatively, money itself also circulates as one moment in this process. This parallel circulation, Marx represents as M-C-M. In the Contribution, the two forms are set out immediately together:

C - M - C
M - C - M

In Capital, the second is talked about but not specified in this way till the chapter on capital. The reason is clear enough. M - C - M makes no sense in and of itself. As Marx says, when we look at M - C - M, "one will immediately recognize the predominant form of bourgeois production" (Contribution p. 123.) But in capital M-C-M must be M - C - M', the expanding form of capital. Marx doesn't want to talk specifically about this expanding aspect of capital just yet, and he therefore restricts himself to dealing with the circulation of money as a moment of the circulation of commodities. Which is fine because it is consistent with the basic perspective of the chapter, namely studying money as the result of the production and circulation of commodities --that is to say, it both embodies and forms a part of the imposition of work (production) through the commodity form (circulation).(7)

The movement in Chapter One from simple value form of the commodity xA = yB to the money form, is paralleled in Chapter 3 by the movement from the flow of commodities to the flow of money. The order emphasizes what is fundamental.

The quantitative aspect of money as medium of circulation concerns how much money is necessary to circulate a given quantity and value of commodities (at a given rapidity). The relation between the required amount of money (M), the total value of the commodities (PQ), assuming value = price, and the rapidity of circulation or velocity of money = V is given by the formula:

M = PQ/V

Although this formula appears to be exactly the same as the "quantity theory" of classical political economy, usually written MV = PQ, or M=PQ/V, Marx's interpretation is quite different. The usual interpretation of the quantity theory assumes that Q and V are given and states that the prices of the commodities will be determined by the amount of money thrown into the economy. In other words P = f(M) and dP/dM > 0.

For example, many quantity theorists interpreted the rise of prices which occurred in Europe in the 16th Century in the wake of the huge new gold flows from the the rape of the New World, as having been caused by the increase in the amount of precious metals, i.e., of money, in circulation. Marx says just the opposite about money gold. Since money exists in circulation only to circulate commodities its amount is determined by the amount and value of the commodities being bought and sold. The value of the commodities is determined by the SNLT, the value of gold by its SNLT. Therefore, the amount of money is determined by the value of gold and the value and quantity of other commodities, or M = f(V), not visa versa. So that he explains the inflation of the 16th Century by the fact that the discovery and rape of the Inca and Aztec civilizations and of the subsequent use of slave labor in the mines of the Western Hemisphere which produced the new flows of gold dramatically reduced the costs of producing gold and thus lowered its value. With a lower value for gold it took more of it to represent the values of a relatively unchanged quantity of commodities. Hence the price rise.(8)

It should be noted here that M = PQ/V, (if M = xAu where Au is gold and x is a quantifier and price = value, and q = the quantity of goods) has the form of the price-form with the additional determination of velocity of circulation --a measure of how fast the exchanges of commodities for money takes place-- a factor not taken into account in chapter one or two. Since Marx is talking here about the totality of circulation, he has essentially added up all of the exchanges of the price form xA = yAu (gold), added up all the goods taken at their values and all the gold at its value. By adding in the additional information of how fast the gold circulates, he then knows how much money is required for circulation.

The metal money circulating is called coin. Since in circulation money "never comes to rest" as Marx says, but flows restlessly and unceasingly, there is no need to have money as means of circulation exist as precise quantities of gold itself --undebased metal coins. Therefore coins of baser metal (tokens) and even paper will serve as symbols of the appropriate amounts of gold. But because any symbol can represent a given value, different amounts of paper (which designate prices) can represent the same amount of value. In these circumstances, which we have already discussed above, where value and price differ, the formula above requires reinterpretation. Now let us write it as:

(1) M = VQ/Vel with V = value of commodities and Vel = velocity

In this form the interpretation remains the same as above. But, when we write:

(2) Mp = PQ/Vel whereP = price of commodities, and Mp = paper money

we must interpret differently. The amount of paper is clearly arbitrary and its value not determined by its cost of production (SNLT) which we can assume = zero. If the state decides to finance expenditures with huge increases in paper money, the amount of Mp will rise. Since prices are expressed in paper money-names, they will clearly rise as a result. For example, if Mp is quickly doubled then on the average P will double if Q and V remain constant, (i.e. assuming no feedback on production Q from the injection of money). The value represented by the doubled quantity of paper money will not have changed, anymore than will the quantity of commodities Q. Because the increased paper and prices represent the same aggregate value, the value represented by an aliquot portion of paper and prices (e.g. one dollar) has dropped. Paper money has been devalued. In other words we see that there was some truth in the quantity theory but only in the case of paper money. The value of paper money (or rather represented by) is seen to be a function of its own quantity and the values it represents. The failure of the classical political economists to clearly distinguish between value and prices hindered them from seeing this. Their politics, perhaps, kept them from making the distinction.

3. Money as Store of Value
The third point I want to discuss concerns money as money, or money as store of value. When money drops out of circulation it comes to rest as it were. When it does so, when it is held by its owners as hoard, it takes several forms. Often it takes on its corporeal form of gold coin or bullion. Or it takes on the form of gold reshaped into jewlery, sculpture, etc. The less time money is held out of circulation the less likely it will differ from the reserve of coin. The reserves held by individuals or banks for short periods may be of coin or of paper money. But money is still money when it is independent of circulation --when it is non-means of circulation. But in what sense? When such money falls out of circulation it breaks the flow C - M - C and the first metamorphosis is not followed by the second.
In hoarding, value is "stored." Money as the conclusion of C - M we saw to be the money expression of the exchange-value of C. If M is set aside or hidden away, that exchange-value is congealed and suspended in gold. "Exchange-value which was merely a form is turned into the content of the moment." Contribution, p. 128. Yet this solidification of money as solid gold must be understood as a necessary moment in the functioning of gold as money which is means of circulation. How? First, the flow of money into and out of hoard is necessary to regulate the amount of money in circulation. That is, as value, price, quantity and velocity change, the M implied by VQ/V changes. Hoard therefore, like reserves of coin and paper, serves as a reserve which provides the system with flexibility. This is perhaps most obvious in recent years in the case of central and international banks where foreign exchange reserves accumulate as circulation of commodities drops off and are drained in periods when rapid growth of commodity production and circulation demands more "liquid" money, i.e., more money as medium of circulation. Second, it is only because gold (or silver, etc.) proves by the process of dropping out and then returning as means of purchase, i.e. universal equivalent in M-C, that it is not just one more commodity but money. Thus the paradox that gold only becomes "money" as non-means of circulation. "The withdrawal of commodities from circulation in the form of gold," Marx writes, "is thus the only means of keeping them (gold and silver) continually in circulation (as money)." Contribution p. 128. Hoard is thus not simply separate from circulation, it is in continuous tension with it, i.e. flowing in and out over shorter or longer periods. If it did not, it would cease to be money as money.

The hoarders behave as misers, they are caught in a contradiction. As money is piled up in hoard, exchange-value is being accumulated. Now, as we have seen, exchange-value expresses an endless expansion - it has infinite character. But money as hoard is necessarily limited in quantity, and thus no matter how much money the miser has stored away, it is never enough; there is always the contrast between the endless possibility and the limited achievement. The miser is thus driven to pile up money endlessly. This kind of hoarder is, as Marx says, "a martyr to exchange-value." Unlike the capitalist who has understood that the way to accumulate ever increasing quantities of money is to continuously throw it back into circulation, the miser appears as the "holy ascetic seated at the top of a metal column." Another way of saying this, in the language of part 4 of Chapter One, is that misers are the victims of their own money fetishism. Unlike the capitalist who understands that the purpose of money is investment and putting people to work, the miser thinks that the object of making money is the money itself.

This narrow and limited perspective was found among the early mercantile "bullionists" who believed that the objective of foreign trade and government policy should be to enrich a country through the gathering of precious metals, or "treasure" as they often said. They wanted to restrict imports (and thus gold or silver outflow) while encouraging exports (and thus gold or silver inflow). This view was attacked both by more sophisticated mercantilists (like Thomas Mun and Richard Cantillon) and by classical economists (like Adam Smith) who demonstrated how the export of gold and silver (spending money abroad) could result in even more gold and silver being brought into the country (from subsequent exports).

4. Money as Means of Payment
This is the form money takes as the its function of means of payment is separated from the means of purchase. Instead of M - C, purchase, we have buying on credit where the good C is obtained before the payment of money M takes place. In this case M is credit money - generally an IOU of immaginary money which is later paid. For example, when you use a credit card you sign a paper as you purchase and acquire the commodity, but you have not yet paid. You pay later with a check drawn on your bank checking account.

The polarity and separation of actions (M - C) and (C - M) in credit, like the polarity of simple sale and purchase opens the possibility of the disruption of the circulation process --credit crises-- like the 1974-1975 fiscal crisis in New York, where the city government piled up a huge number of IOU's by borrowing to pay for growing services, etc., but then had trouble acquiring the means of payment by taxing business' C - M, etc. --partly because the class struggle in New York was leading to business' pulling out of the city or cutting down operations and thus reducing the number and size of their taxable C - M's.

This crisis was subsequently repeated on a world scale in the 1980s after US President Jimmy Carter's appointee to the Chairmanship of the Federal Reserve tightened up money supplies, dramatically raised interest rates and plunged the world into depression. The combination of high interest rates (dramatically raising the cost of debt service on international loans) and depression (shrinking business sales in both domestic and foreign markets and thus reduced possibilities for earning the foreign exchange necessary to repay the suddenly augmented debt service obligations) caused an international debt crisis from which the world has still not fully recovered.

Similarly, but not exactly the same, during pre-capitalist times, as Marx points out, the struggle between debtor and creditor was often an important aspect of class struggle as it is today:

"The class struggle in the ancient world, for instance, took the form mainly of a contest between debtors and creditors, and ended in Rome with the ruin of the plebeian debtors, who were replaced by slaves." p. 233.
Marx notes that once you have a developed system of credit and money as means of payment, then this must be taken into account in the discussion of the quantitative determination of the amount of money needed to circulate goods. This is taken into account partly by netting out the payments which cancel each other out and adding on the payments left over to those commodities circulating due to direct payment. p. 237 The discussion of money as means of payment and of the credit system is continued by Marx, within the framework of capitalist production and circulation in Volume III of Capital and can there be followed by the student who desires more information on this point.

5. World Money
Marx's remarks on money at the level of the international economy are very brief. He notes mainly that money loses "the local functions it has acquired, as the standard of prices coin and small change, and as a symbol of value." Instead it serves mainly in its original form as bullion, as the commodity gold or silver. In this form it serves primarily as
universal means of payment to cover debts incurred
universal means of purchase to circulate goods in international trade directly
absolute social materialization of wealth when wealth is to be transferred between countries but not in the form of particular commodities.
Because these international payments fluctuate with world trade and capital flows, just as circulation fluctuates within countries, he notes the need for international reserves. In his days when gold and silver were the main international monies, reserves would be held as gold or silver. Today, of course, such reserves are held primarily as stocks of foreign currencies, i.e., as credit accounts denominated in foreign currencies.

Even from these brief remarks, we can see how Marx extends his analysis of domestic money to the world market insofar as it is appropriate. We can do the same with other aspects of his analysis. For example, take his discussion of the separation of price and value. We can find such a separation of money name from value when paper currency (with a purely symbolic value) was used the fixed exchange rate system of Bretton Woods after WWII. The exchange value of the dollar had been fixed at 1 oz. gold being represented by 35 dollars. But, during the post-WWII period, the gold supply grew more slowly than the rapidly expanding trade that accompanied the recovery of Western Europe and Japan. As the result of a growing unwillingness of other countries to hold more dollars and of problems at home, after 1971 the dollar was devalued such that it took some $70 to purchase 1 oz. of gold.(9) The value of the 1 oz. of Au hadn't changed but that amount of gold was given a new money name. At the same time, the prices of all other commodities --whose values could also be assumed to remain the same-- denominated in dollars rose. Thus price can change while the value of a commodity remains the same. In the case cited the devaluation of the dollar has no effect on the value of an ounce of gold (or a ton of iron) but the price of the gold (or iron) as expressed in its money name roses from $35 to $70.

Similarly we can find in Marx's discussions of credit the beginnings of a useful analysis of the rise and role of international financial institutions such as the International Monetary Fund. The Fund was created along with the fixed exchange rate system as a lender of last resort. With a fixed rate system, countries needed to hold reserves in case their need to pay exceeded their inflows in a given period. The Fund managed a pool of reserves provided by participating countries who could borrow from it to cover short run needs --a kind of lender of last resort.

Most importantly however, we must always keep in mind the social relations which money embodies and represents, the class relations of power which are reflected and represented in the exchange form, the money form, etc. International money flows are international rearrangements in those structures of power, as are international commodity flows, and that must never be forgotten! It is always tempting to give in to the money fetish, to forget the social realities of money within the class context and be blinded by money and complicated money mechanisms as such. It is not always easy to translate the complexities of money into class terms. It is not always easy to avoid the fetishism that accompanies the failure to do so. But it must be done, the underlying class meaning must always be sought and laid bare.

To take an example, which extends Marx's analysis to the global level, we can examine the crises around the structure of debt and credit that exploded in the 3rd world in the wake of the two oil crises in the 1970s and in the wake of the fierce tightening of the supply of money in the U.S. in 1979-1981 which drove up interest rates and plunged the world into depression. The so-called Third World Debt crisis, however, must not be seen as merely the byproducts of OPEC price and U.S. monetary policies, but more importantly in terms of the class politics they embody.

Behind the OPEC price increases lay not merely greedy sheiks, but working class pressures for more income and better standards of living. Behind the tight money policies inaugerated by Carter, Volcker and Reagan lay the urgent need to attack a level of working class power within the United States which was driving an accelerating inflation, undercutting exports and business investment generally. Behind the build up of massive debt in Mexico, Argentina and Brazil lay the need for resources to cope with social and labor unrest (both through military and police repression and through development, i.e., more jobs and wages). Thus, behind the international negotiations between "creditor" and "debtor" nations lay the class politics within each, and within the world as a whole.

Paper Money and Credit
To put it simply, while we recognize that this chapter isolates and analyses only a limited number of the determinations of money and not all (e.g., not money as capital in all its complexity), we can also recognize that all the basic elements of Marx's analysis are just as correct today as they were when he wrote Capital. Money is still used to set prices ideally, still circulates commodities as universal mediator, etc. The fact that paper money has replaced virtually all coin does not change this, as Marx has showed. The value of the total paper money supply is determined by the value of the commodities and the conditions of circulation. The fact that in an earlier period paper was tied to gold, and today it is not, changes nothing in this respect. The same can be said about the rise of deposit banking and the rise of checking accounts -- of the replacement of coin and paper by IOU's and means of payment.
On the other hand, analysis of these new forms can show how they make it easier in some ways for capital to use money as a weapon against the working class in new ways (i.e., since the expansion of the money supply now has no legal limits fixed by a tie to gold production). Marx's analysis of credit-money here and in Volume III provides a beginning to understand the complex credit mechanisms of today. Marx did not know the credit card, but his theory grasps it easily. Already in chapter three, in footnote 54, p. 238, he marvels at how small a role is paid by the actual exchange of money (rather than credit) in the accounts of a London merchant bank. The fact that credit-money now functions as medium of circulation has many implications. But it does not change either the function of money as medium of circulation nor the fundamental relation between the value of the commodities in circulation and the supply of money. The latter is simply measured today largely in terms of the quantity of coin and paper plus the quantity of (credit) deposits: M1 (or, measured to include various other credit devices in M2 or M3, etc.).

It is through the new forms of credit that money is manipulated today via government monetary policy as a weapon against the working class in countries like the U.S. Bank reserves are reserves of coin and credit/money and these reserves are manipulated to expand or contract the money supply and thus have an impact on prices, demand for labor (and thus wages), and so on. This is the role of the Federal Reserve Banks in the U.S. -- by changing the legal reserve requirements as a percent of assets, and by changing the rate of interest at which it will lend money to the banks: the discount rate. (A third aspect of monetary policy tools is the buying and selling of government securities in open market operations -- this too depends on the manipulation of new forms of credit - but one which Marx already saw developing and describes in Part VIII on the role of national debt in primitive accumulation).

Yet through all these complex monetary relations we must discover the underlying class meaning. We must see for example how these new monetary tools can be used by capital to intentionally create or permit inflation that can be used to undermine the value of labor-power indirectly through the devaluation of money. However incomplete, Marx's discussion in this chapter provides keys to understanding such Keynesian strategies for lowering real wages, just as it can provide keys for understanding the more recent manipulation of commodity prices to achieve the same result, e.g., food and oil crises of the 1970s). Unfortunately, in far too many Marxist discussions of money in the past (and there have not been that many!) the interactions of money and commodities have been dealt with only in terms of those categories --in the fetishized fashion of chapter one. This tradition we must discard in this period in which the manipulation of money and prices, both nationally and internationlly has become one of the principal tools of capital against us.

Not surprisingly, given the role of money as a weapon of repression and exploitation in the Third World, it is common to find expressions of resentment against money, especially the dollar --the money most frequently used to finance repression-- throughout popular music, just as in the US. One good example of such resentment can be found in Peter Tosh's song "The Day the Dollar Die". One of the best known reggae musicians in the world, Tosh crafted an anticipatory song which celebrates the future (that he obviously thinks inevitable) death of the dollar, and of money more generally. The Day the Dollar Die
I see Johnny with his head hanging down
Wondering how many shillings left in that pound
Cost of living it is rising so high
Dollar see that, had heart attack and die
Bills and budgets awaiting
Finance Minister anticipating
Unemployment is rising and I hear my people
they're crying

The day the dollar die
Things are gonna be better
The day the dollar die
No more corruption
The day the dollar die
People will respect each other
The day the dollar die

Tell me Brother, is there something
I can do
Don't your let frustrations
Make you blue
Time is hard and I know that it's true
But if you pick yourself up
That's all you got to do

Things can be much better
If we can come together
Long time we've been divided
and it's time we be united

The day the dollar die
Gonna be better
The day the dollar die
I won't need no pockets
The day the dollar die
Don't have to be fretted
The day the dollar die

Now I see you're standing, on your feet
And you can also make two ends meet
Never your let life problems get you down
There is always a solution to be found

Bills and budgets are mourning
Finance Minister groaning
Unemloyment is rising and
I hear my people crying, down in the Ghetto

The day the dollar die
It's gonna be nice
The day the dollar die
Just you wait and see
The day this here dollar die
There'll be no more inflation
The day the dollar die, I say that
The day the dollar die
There'll be no more corruption
The day Sammy dollar die
We will love each other
The day the dollar die.

P. Tosh, Mystic Man, 1979

Recommended Further Reading
As mentioned in this section of my notes on Chapter 2, and as indicated by the multiple footnotes making reference to it in this chapter, Marx's earlier work Contribution to the Critique of Political Economy provides an interesting and useful supplement to this chapter, as does the chapter on money of the Grundrisse. In both cases you will discover something of Marx's political motivations that are not so obvious in Capital. In each of these books he critiques not only bourgeois political economy but also socialist theories, such as those of French socialist Pierre-Joseph Proudhon and his followers, which are based, in Marx's view, on a missunderstanding not only of the relation between money and commodities but also of the relationship between both of these and the class relations of capitalism.
With respect to the class politics of the debasement of money, George Caffentzis' book Clipped Coins, Abused Words and Civil Government: John Locke's Philosophy of Money, New York: Autonomedia, 1989, contains both an account of such problems and an analysis of its class character. It also presents an analysis of how and why it was not inconsistent for Locke, a well-known exponent of the quantity theory, to argue for recoinage (which everyone thought would reduce the money supply and cause deflation) during a period of crisis and war. Caffentzis shows that not only did Locke think the internal threat to state power (attack on the state's ability to manage the money supply) was greater than the external one but also how he didn't think the effects of recoinage would be deflationary anyway.

On the class politics of the fiscal crisis of New York, which turned out to be the prototype for fiscal crises everywhere, including the U.S. federal government, see Donna Demac and Philp Mattera, "Developing and Underdeveloping New York: The 'Fiscal Crisis' and the Imposition of Austerity", Zerowork #2, 1977, pp. 113-139 and Eric Lichten, Class, Power & Austerity: The New York City Fiscal Crisis, South Hadley: Bergin & Garvey, 1986.

On the class politics of the international debt crisis, see my article "Close the IMF, Abolish Debt and End Development: A Class Analysis of the The International Debt Crisis," Capital & Class, #39, Winter 1989 and issue #10 of Midnight Notes on the "New Enclosures".

Concepts for Review
measure of value
standard of price
means of circulation
store of value
means of payment
money names
weight names
debasement of coin
the realization problem
metamorphosis of a commodity
quantity theory of money
Questions for Review
1. Explain the role of Chapter Three in Capital. That is to say explain its relationship to Chapters One and Two and to what comes after.
2. Explain the relationship between the general form of value and Marx's formula C - M - C.

3. What can you say about the price on a price tag in a store using Marx's discussion in this chapter?

4. What is the role of the state with respect to the role of money as a standard of price?

5. Explain the relationships among gold, the weight name for the price of a good, and the money name for such a price. How can debasement result in a difference between the price and value of a commodity?

6. Give an example and explain how a thing may have a price but no value.

7. Explain why the general possibility of crisis exists within exchange relationships where money plays the role of mediator. What is the relation between this and a labor strike against a business?

8. Locate c-m-c within the overall world of commodity exchange. Analyse it into its component parts and relate them to the rest of that world.

9. Explain the logic of Marx's comments that c-m-c can be usefully examined within the framework of Hegel's syllogism P - U - I.

10. Explain the difference between Marx's quantity theory of money and that of classical political economy. How do they differ? Under what conditions do their interpretations converge?

11. Discuss the relevance of post-WWII international monetary "liquidity problems" for interpreting the quantity theory.

12. What is the role of hoard in the money system of capitalism?

13. What is the miser's mistake according to Marx?

14. Explain "credit money" in Marx's analysis. How does it not remove the possibility of crisis?

15. "The class struggle in the ancient world," Marx says "took the form mainly of a contest between debtors and creditors..." In what sense are struggles over debt today, especially in the international arena, part of the class struggle?

16. What changes, if any, do we need to make to Marx's discussion of money in order to analyse the role of money internationally?

1 Because so many things and relationships become commodities in capitalism, money comes to be seen as the measure of everything, even things which might otherwise be thought of with no reference to money. In his song "Money Machine" on his album In The Pocket, James Taylor sings "you can measure your manhood by it". Now it is only in a capitalist society that your "manhood" is judged by how much money you earn, but in this society it takes a critical faculty to be able to avoid such attitudes.

2 This is an imaginary example, not based on any empirical evidence.

3 I give $35 here because for many years the exchange value of gold was fixed by the American government at $35/oz. That was the price it would pay for gold and that was the amount of gold it would give up (to foreigners) in exchange for their dollars. Since gold was demonetized after the onset of the international monetary crisis in 1971, the price of gold has been set by supply and demand in the gold market and its price has varied enormously but in recent times around $350/oz.

4 You should note that Marx's analysis of supply and demand is not the same as that of contemporary microeconomics. He, like almost every economist of his time, was working before anyone (with the exception of a little known French economist named Cournot) had developed an analysis of supply and demand in terms of mathematical functions relating price and quantity changes. You will not find in his discussion, therefore, distinctions such as those between the quantity demanded at a price and the "demand" conceived in terms of a downward sloping curve. This said, you will also find as competent a discussion of market forces as was available in the mid-19th Century.

5 N.B.:Marx's choice of "metamorphosis", "chrysalis" etc., makes a clear analogy with the evolution of an insects' growth: egg, pupa, larva, chrysalis, adult, etc. -where the form changes but the essence remains constant.

6 On the "good infinity" see the discussion of the general form of value in my commentary on Marx's discussion of the form of value in chapter one.

7 In M - C - M' money appears as the initiator of the process, an occurrance which helps make it a fetish - which hides the centrality of the production process - the control over labor power and the production of commodities, including labor power.

8 In this interpretation Marx shared the position of Adam Smith who was consistent in his value and money theories.

9 The dollar was repeatedly devalued between 1971 and 1973 after which it floated against the other currencies and against gold -with the result that gold was effectively demonetized and its role as an international money collapsed.