Four questions for LK on money

by Jehu

In another post to his blog, “A Marxist agrees with me on the Labour Theory of Value and Fiat Money!”, LK thinks I agree with him on labor theory and money. So, I thought I would mark where I think we agree and where we don’t agree just to keep both of us honest.

Among the points on which we agree are the following:

First, for Marx money is a commodity, a thing having both use value and labor value — Marx is clearly insistent on this point and held to it for his entire career. The labor value content of money allows it to express the value of all other commodities in a mode of production founded on exchange. Fiat currency is not money in the full sense that Marx uses that term, since it has no value of its own, but only symbolically represents some definite quantity of actual money. It is, in a phrase, a placeholder for money.

Second, I therefore, completely agree with this statement by the writer:

“It would follow that the trendy modern Marxist idea of the MELT is entirely intellectually bankrupt too, under Marx’s dogmatic metallist theory of money.”

I would quibble with the phrase, “dogmatic metallist theory of money”. Marx never said money had to be metal, he only said money was by its nature gold. “Gold is not money, but money is by nature gold” is how the concept is usually phrased. This implies that there is something of the nature of money itself that is not completely captured by any money object, even gold.

On the other hand, the writer is less than accurate to state that I think fiat currency has destroyed the ability of money to properly reflect values. What I stated is that fiat currency does not reflect the values of commodities. There is nothing in this that implies currency has destroyed the ability of money to properly reflect values. Gold still retains the capacity to properly reflect the values of commodities; it simply no longer serves as the medium for circulation of commodities. The only thing that has changed is that since 1971 fiat is no longer tied to any definite quantity of gold; this change only affected fiat and had no impact on gold as a measure of the values of commodities.

Third, the writer then asks a critical question: “How, then, could Marx’s theory still be right?” His answer is relevant:

“The answer: modern currency is not really money at all! In addition, prices and labour values diverge as in volume 3, but now fiat money has destroyed even any relation between values and prices of production even as postulated in volume 3 of Capital, since this is (apparently) the trajectory of capitalism as supposedly prophesied by Marx.”

The writer is basically correct here, although, again, I would quibble with his phrasing. What makes Marx’s theory correct is that his theory predicted the breakdown of production on the basis of exchange value, i.e., money, almost 70 years before it happened. Moreover, Marx’s theory is the only theory that made this prediction.

This should count for something. It is entirely unfair and even specious to acknowledge, on the one hand, that Marx held to the opinion money is a commodity, yet, on the other hand, ignore he also stated this money commodity would eventually become an obstacle to production of material wealth. Yet this is what many writers on labor theory want to do.

Where we definitely do not agree is on the writer’s assertion that money is the same thing as currency. Currency is, of course, a money-form, a form derived from money in its specific function as medium of exchange, but so is a ledger entry in an accounting book, a paper IOU, or a price tag. Side by side with “real”, i.e., commodity money, are a number of symbolic representatives of money adapted to specific needs of commerce. What the writer calls Marx’s basic concept of money includes all of these derivative forms in principle.

And what are we to make of this statement by the author:

“If fiat money is impossible, then our modern economies would have collapsed decades ago when money was severed from gold in the 1930s for domestic economic transactions, and certainly since the end of Bretton Woods (a system in which gold only had a role in the international payments system anyway).”

Now, here is the thing about the author’s argument that I find somewhat disturbing: On the one hand, first he ridicules Marx’s prediction the trajectory of capitalism led to the breakdown of the relation between value and prices. Then he argues the actual breakdown of the relation between value and prices would mean “our modern economies would have collapsed decades ago when money was severed from gold”.

This argument is very muddled and raises questions as to whether the writer has really thought through his/her position vis a vis labor theory.

First, to be clear, Marx never predicted a breakdown of capitalism; he predicted a breakdown of production on the basis of exchange value.

Why do I make this rather obscure distinction?

Because the relation between values and prices was severed by industrialized countries in the 1930s precisely to save capitalism, to prevent its total collapse. As the author fully knows, or should know, the economies of the industrial nations did actually collapse in the 1930s — we call this collapse the Great Depression. The historical evidence gathered from many sources shows the economies of these countries only began to recover once they left the gold standard and severed the values of commodities from their nominal (fiat) prices.

Again, am I making this fact up? Let’s consult the Wikipedia:

“According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. … The connection between leaving the gold standard as a strong predictor of that country’s severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries.”

While the writer wants us to believe that severing gold from fiat leads to economic collapse, Marx actually predicted the reverse: economic collapse would lead to the severing gold from fiat.

I am willing to engage the writer on this subject, but he has to come clean on several points:

  1. Did not Marx predict the collapse of production on the basis of exchange value?
  2. Did this collapse occur in the 1930s just as Marx predicted it would?
  3. To save capitalism was it not necessary to sever gold from fiat?
  4. What was the implication of the collapse of the gold standard for Marx labor theory of value? Does it validate Marx’s theory of money or disprove it?