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December 19, 2010Marx and Monetary TheoryPosted inEconomicstaggedEconomics,Marxismat 14:17 by Matthijs Krul

In the context of the current crisis, with quantitative easing to the tune of hundreds of billions of dollars

on the one hand and the rush to liquidity that accompanies financial crises on the other, it may be useful

to take a look at how Marxs economic theory relate to issues of money and monetary policy. The aim here

is to provide a clear and understandable overview of what Marxs theory of money was, how it relates to

our current-day monetary system internationally, and how this relates to his value analysis generally. I will

not aim to say anything particularly new or original, nor go into everything in the depth it really deserves,

but I will limit myself to providing a general popular overview, as much as the rather abstract nature of the

subject allows.

Modern-day neoclassical economics has often been particularly criticized for the weakness, or really

nonexistence, of a serious theory of money. For neoclassical economics, all that matters about money is

the fact that it is generally accepted and functions to reduce transaction costs in exchange (when

compared to barter). This is the story of money generally presented in high school economics textbooks,

where eventually people get tired of having their goods spoil and having to carry heavy items around and

decide to mutually accept something tangible and not particularly productively useful, like gold, in order

to facilitate exchange. This allows division, savings, and so forth, and thereby is beneficial to this simple

economy and helps make it sophisticated. Usually the bridge between gold as a measure and paper money

is not even made, and the story boils down to nothing more sophisticated than saying that money is

generally accepted because it is generally accepted. Even in more serious and academic neoclassical

economics, it is rare to see any systematic attempt at drawing a theory of money into a larger framework

of an economy; money usually is nothing other than anumeraire, i.e. a number for counting,

considerations of its independent role limit themselves to theories of inflation and its consequences, and

money and crisis theory are seldom related at all. As Dan Lavoie has pointed out:

Neoclassical models often employ so sterile a concept of money as to preclude the

development of an adequate explanation of the gross macro-economic disorders we

call crises.

(1)

Most of neoclassical economics relies at the macro level on Walrasian general equilibrium theory, in which

one way or the other all supply and all demand must match; but while Walras was quite aware that this
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reduced money to no more than a numeraire, without an independent role, and that this was unrealistic,

the significance of this seems to have faded from view since.

The result of there being no seriously integrated theory of money in neoclassical economics has somewhat

oddly been that this field has been ceded for the most part to the Austrian school of economics. Their

most famous disciple in particular about monetary theory in recent years is the American libertarian

politician Ron Paul, whose platform of isolationism in foreign policy is as unorthodox nowadays as is his

explicit insistence in domestic policy on the return of the gold standard. Austrian economics makes much

hay out of their positions on monetary theory, which I think its proponents themselves consider one of its

foremost salient points; but other than such policy ideas as free banking and the obsession with the gold

standard, the core of the theory in fact is (as it is in most other respects) more Romish than the Pope on

the issue of general equilibrium. In fact, Austrian monetary theory really denies that there is or can be

such a thing as a theory of money, stating that in reality there is only a theory of prices.(2) Hence their

desire for the gold standard and their never-abating struggle against what they see as the evils of inflation

consequent on the creation of central banks issuing fiat money from their point of view, all they can do

is drive up the numraire, distorting the expectations in the market, without at all making any substantial

difference. While for neoclassical economics the neutrality of money, i.e. its effective irrelevance in terms

of playing an independent role in economic theory, is merely a long-run assumption, for Austrian

economics this is an absolute necessity.

Yet crises occur, and if we are not to ascribe every crisis to a no true Scotsman style failure to follow

some necessary (but apparently avoidable) logic of the market, as the Austrians do, we must take the

possibility of disequilibrium seriously. This applies to money supply as much as to anything else. The

most influential current-day proponent of this viewpoint is of course John Maynard, the Lord Keynes.

Although his theories were written off by most liberals as being proven wrong and/or hopelessly outdated

after the stagflation crisis of the 1970s, he has opportunistically come into vogue again as those same

liberal bankers and economists now have been driven into the defensive in the wake of one of capitalisms

most serious crises since 1932. It makes sense in such times for theories that understand disequilibrium,

or at least the possibility of disequilibrium, to become popular again. This is all the more so for Keynes

since most peoples basic understanding of him is not at all based on knowledge of his actual economic

doctrines, but rather on a perception of the man as an icon of social-democratic politics on the one hand,

including state support to increase employment, and skepticism about laissez-faire in the finance

industry on the other hand. Neither are ideas to be sneezed at by any means, but it will not do to claim

to be a Keynesian just because it happens to be politically convenient. One must also understand and

address his economic theories, and compare them with other theories of disequilibrium.


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money plays in a specifically capitalist economy it is essential to understand that such an economy is

characterized by general commodity exchange, that is, that commodity exchange is the way people as

economic actors relate to each other in such an economy. Now for any commodity to be exchangeable

with another, it is necessary to compare their relative values; and if there are very many commodities, this

means that when each commodity is the measure of value of all the others, there is a humongous amount

of different standards of exchange value. It makes sense, therefore, that there be one commodity which

functions as the measure of exchange of all the rest: this is the money commodity. (If not, one would

obtain the same indexing problems economic historians have nowadays when attempting to create an

equivalent measure of value for commodities at different historical periods.(6)) Money of course has

existed for a very long time, and in pre-capitalist societies; but Marx sees the unfolding of the

monetization of the economy exactly as the unfolding of the law of value in those economies, the gradual

dominance of the commodity form as the means of reproduction of mankinds social relations. As

commodity exchange becomes dominant, and thereby exchange value the dominant measure (rather thanthe utility or use value of individual items), so too does money become the life-blood of commerce. As

Marx puts it in Capital:

The historical progress and extension of exchange develops the contrast, latent in

commodities, between use-value and value. The necessity for a giving external

expression to this contrast for the purposes of commercial intercourse, urges on the

establishment of an independent form of value, and finds no rest until it is once and

for all satisfied by the differentiation of commodities into commodities and money. At

the same rate, then, as the conversion of products into commodities is beingaccomplished, so also is the conversion of one special commodity into money.

(7) This is Marxshistoricaltheory of money.

Here we have then money as an accepted measure of exchange value, a commodity produced for this

purpose. Marx assumes throughout Capitalthat this commodity money exists and that it takes the form of

gold, freely produced in the capitalist market, for which currencies are exchangeable at the central bank.

Needless to say, this is not at all the case today in the world market nor in any specific national market.

Does this then invalidate Marxs theory as an outdated metallic one? The answer, of course, is no, as Marx

then sets out to explain the different other functions and further development of money under capitalism,

starting from the vantage point of its role as accepted measure of value. When the capitalist economy fully

develops, the gold standard, this fetish of the Austrian economists, becomes a fetter on the full unfolding

of the value economy. There will be times when the economy is growing and yet the private supply of gold

is not, and over time the development of credit and thereby the finance industry will cause a tremendous


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expansion of the available capital at any given time, which a gold standard cannot match. Moreover, with

money functioning as the measure of value, the point of capitalism for the capitalists becomes the

accumulation of money, rather than the accumulation of wealth in the form of use values. The demand for

money therefore massively increases as capitalism comes fully into being.(8) The result then is that the

gold standard works as a strong deflationary drag on economic growth, i.e. capitalist accumulation, and

on the credit system. It must therefore be overcome, and it is overcome.

Commodity money is replaced by symbolicmoney, i.e. credit bills and the like, which can overcome

temporally the restrictions that gold convertibility imposes. Over time, as such symbolic money expands,

the convertibility with gold becomes totally obsolete for the purposes of money and accumulation; soon, it

is abandoned. The result is that one is left with two forms of money that prevail: the one is fiat money,

which is (usually) worthless paper functioning as money because of the guarantee by a particular state that

it shall be accepted as a measure of value, and the other is credit money, which takes the form of private

claims on banks, i.e. banknotes. The state over time tends to take over this latter form, because for these

private banknotes to function fully as money in a developed capitalist economy, they must be

universalizable as a measure of exchange value, as we have seen; and private issuing of banknotes

contradicts this. So one private issuer must take the form of the state authority as issuer, which then

becomes the central bank to which all other banks are subjected. This does away also with the Austrian

illusion of free banking. Again, the state entirely replaces the innate connection be tween money and

commodity-value, by authorizing fiat money.(9)

How then does this work, however, at the level of the world market? After all, there is no single state there

that sets price numraires and authorizes fiat money. Marx, still assuming gold standards, states therefore

that there can be no world money, since individual currencies lose their function as standards of local

exchange value and become mere gold bullion, a commodity like any other.(10) This then also constitutes

a barrier to capitalist expansion, to the universalization of the value logic (even though it can give ample

opportunity for individual capitalists to make money on currency arbitrage). One possible solution is to

have one currency remain controvertible with gold, and to make all other currencies effectively bound to

this one currency on the basis of a controvertibility of their own; this combines the possibility of a world

money with the gold standard. This system was historically the Bretton-Woods system, where the US dollar

remained on the gold standard and all other major currencies were controvertible with the US dollar

according to set (bandwidths of) exchange ratios. However, this still leaves the major currency with the

problem of the gold standard as described above, something which will become in particular problematic

during a crisis period when the gold standards severe deflationary effect makes itself felt. For this reason,

the American President Nixon abandoned the gold standard in 1973. This then irrevocably forced world

capital into the second solution, namely a world money as fiat money; and this then of course also implies


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a world state with the power to maintain its guarantees for this currency, just like national governments

do for their own fiat money. Again, the United States has ever since endeavoured to play this role on the

world stage, and some of the current crisis can be understood as a currency crisis, a crisis of the ability of

the world state to maintain its currency, both the US dollar and the new competitor world money, the

Euro. But that is a subject for a separate essay.

In order to sum up Marxs theory of money, we must finally consider what makes money so special within

a capitalist economy, what makes it different from other commodities in Marxs theory. We have noted

that one such thing is the role of demand for money. But fitting Marxs conception of commodities dual

nature, money itself has a separate dual nature next to the normal dual nature of all commodities. This

special dual nature is the time factor in money, in other words, the ability to hoard and to dishoard

money. Since in Marxs conception capital is nothing other than value in motion, and capitalism only

exists in and through constant movement to accumulate, any stock of money is nothing other than a

hoard waiting to be thrown into circulation at a convenient time, i.e. as capital; and equally, any

expenditure of money as capital is nothing else but a dishoarding of money, whether in cash or in credit,

for the purpose of accumulation. As a result, moneys potential role as capital makes it contradictory in

nature: it is always held in order to be spent, and spent in order to be held by another.(11) Since there

exists uncertainty about future investment and future circumstances in the market, the hoarding-

dishoarding role of money necessarily implies the possibility of disequilibrium; it is subject to changes in

the expectations about future investment. This identification of uncertainty as inherent in money because

of its role in private investment, nonneutralizable by any monetary policy, Marx and Keynes have in

common.(12) All of these considerations apply to fiat money as much as to commodity money. However, it

is important to note that Marxs assumption of a gold standard, while as we have seen not strictly

necessary within his theory, does play a real role when we look at the role gold plays as a reserve money.

Whenever there is a time of crisis, the creditworthiness of the state and its backing of fiat money may

come into question, especially if the crisis is severe and international in nature. It is in these times that the

demand for the specific fiat money falls, and the demand for gold increases as a universal substitute for

symbolic money, a commodity money that can play the role of universal exchange value in a time when

fiat moneys value has collapsed. Here we see the fundamental contradiction that affects fiat money it is

by nature an attempt to dislodge money from its basis in commodity values, in order that capitalist

expansion isnt limited in boom times by the restricted nature of a gold or even silver standard, but as

with any element of the capitalist economy it is impossible for the value connection to disappear entirely.

As Park describes it so well, even though the labour-value dimension as an anchor of the value of money

is severed from the monetary system its effect seems to linger on behind the scene.(13)


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So although the move to fiat money overcomes the restrictive corsage of the gold standard, it also (as the

Austrian economists never let us forget) introduces chronic inflation into the system. Since the only thing

underwriting the value of the fiat money, and thereby its real usefulness as universalised exchange value,

is state credibility, there is a constant risk of such credibility coming into question. Here, again, the

psychology plays an important role. The central banks of the different capitalist states with fiat money are

forced to hunt down and repress inflation more severely than the Medieval heretics ever were, in order

that a vicious cycle be avoided where the expectation of inflation leads to a lower estimate of the

credibility of the currencys value, leading to more inflation, etc. The existence of the state and its role as

guarantor of money and crusader against inflation then is, as Park has pointed out, completely

endogenous to Marxs theory of money. This puts it miles ahead of any competing theory in its ability to

link up money as a social phenomenon with other social phenomena such as the state, the private nature

of investment, the psychology of expectations, and so forth, even beyond Keynes.(14) Marxs theory of

money besides is able to encompass both metallic and non-metallic money, and moreover analyzes eachof them as a counterpart of the other, whereby the uniting aspect of both is the contradiction in capitalism

between the need of capital to expand indefinitely and the need for money to be universalizable exchange

value, i.e. bound to real value production and its realization in trade.

In this sense, fiat money plays an analogous role to credit in the theory of crisis: financial crisis occurs

when the expansion of pure credit, functioning as fictitious capital, exceeds in a certain critical mass the

real production of new value. Some exogenous or endogenous shock then causes a sudden reverse in the

trend, a demand for liquidity becomes paramount, the fictitious capital evaporates, and a severe crisis

occurs. Fiat money plays a similar role in that, as we have just explained, when the expansion of fiat

money exceeds in a critical mass the real production and realization of value, this threatens the credibility

of the state and the value of its money, and the result is severe inflation. Repressing this inflation then

requires a contractionary approach, as would have occurred automatically under a gold standard system

the difference with the gold standard of course still being the ability to expand during boom times and the

much greater freedom for states to choose and adapt policies to combat the threat of inflation and loss of

credibility, even up to accepting certain high levels of inflation as a semi-permanent feature. Yet one

important strength of Marxs theory of money is exactly that it does not fully equate the two. Money is a

medium of exchange, a measure of value, anda store of wealth, and all three of these are important and

interdependent.(15)

What does this imply then in terms of monetary policy? We have seen that the romantic reactionary

critique of fiat money by Ron Paul and other proponents of the Austrian school is beside the point. As with

all their romanticism about the supposed unspoilt Paradise of the free market in the 19th century, they

miss the reasons why capital has moved on since then. A gold standard is highly deflationary, translates


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virtually any internal or external shock into crisis, and restricts the ability of capital to expand during

boom times. At the same time, fiat money overcomes the latter restriction, but at the cost of running the

risk that it loses sight of the necessary connection between money and the real movement of value. This

creates the problem of systematic inflation on the one hand, although how bad inflation actually is

(especially as against unemployment) is a disputed topic, and more significantly the possibility of

monetary crisis analogous with financial and credit crisis on the other hand. In both cases, it is capitals

own expansion that then causes it to run into the barriers it has set itself. This is Marxs general theory of

capitalist crisis, of which his theory of money is an essential part.

1) Dan Lavoie, Some Strengths in Marxs Disequilibrium Theory of Money, in:Cambridge Journal of

Economics7:1 (1983), p. 56.

2) See e.g., Joseph Salerno, A Simple Model of the Theory of Money Prices, in:The Quarterly Journal of

Austrian Economics9:4 (2006), p. 39.

3) For this point, see http://critiqueofcrisistheory.wordpress.com/responses-to-

readers%E2%80%94austrian-economics-versus-marxism/are-keynes-and-marx-compatible/are-keynes-

and-marx-compatible-pt-2/.

4) Allin Cottrell, Post-Keynesian Monetary Economics: A Critical Survey, in:Cambridge Journal of

Economics18:3 (1998): http://ricardo.ecn.wfu.edu/~cottrell/old_papers/pkme.pdf, p. 10, 16.

5) Karl Marx, A Contribution to the Critique of Political Economy(New York, NY 1970), p. 51.

6) Lavoie, p. 60.

7) Karl Marx, CapitalVol. I, (New York, NY 1967), p. 86-87. Quoted in: Steve Shuklian, Karl Marx on the

Foundations of Monetary Theory. Marshall University Working Paper 00-02-A, p. 7.

8) For these and following points, see: Hyun Woong Park, Endogeneity of Money and the State in Marxs

Theory of Non-Commodity Money:

http://www.peri.umass.edu/fileadmin/pdf/conference_papers/newschool/Park_2010._noncommodity_mo

ney.pdf, p. 9-10.

9) Park, p. 11.

10) Park, p. 12.

11) Lavoie, p. 63.

12) Lavoie, p. 64.

13) Park, p. 16.

14) Park, p. 16-17.

15) Lavoie, p. 60.