I want to thank ‘A’ for taking my blog seriously enough to raise these interesting and important questions.

First, I should clear up some misunderstandings. It’s not correct to say that the amount of token money that can be issued “is limited (if it is to hold its value) by the amount of gold in circulation.” Token money replaces gold in circulation and implies that gold has fallen out of circulation and accumulated in hoards both official and private.

“It seems to me,” ‘A’ writes, that “if the assumption about gold underpinning token money was accurate in the past, I am unsure about its continued accuracy.”

This gets to the heart of the matter. Marx demonstrated that when social labor is broken up into independent private labors, labor embodied in the products must take the form of value. He also showed that value must, in turn, take the form of exchange value. The exchange value of one commodity must always be measured in terms of the use value of another.

With the development of commodity production, one or a few commodities emerge as the universal equivalent that measures the exchange values of other commodities in terms of its own use value. This is the essence of Marx’s theory of value and price.

Now I agree with ‘A’ that we cannot prove things by quoting authorities, even such an authority as Marx. I would recommend that ‘A’ and other readers of my blog who are confused on this point—and I would bet that would include most, probably all, readers—go back and seriously read or re-read the first three chapters of volume I of “Capital.”

Do so with a critical spirit. Just because Marx says something doesn’t make it true. But if there are flaws in Marx’s logic, what are they? This is not an easy read. You cannot simply read it and understand it. You have to think about it for days, weeks, months, years and, in my case, even decades.

You might come to the conclusion that Marx was wrong or that I have misunderstood him. Both are possible. But if so, you have to explain why either Marx was wrong, or where I have misunderstood him, or perhaps both.

But if you come to the conclusion that Marx was correct, I think you will see that “non-commodity” money is simply impossible as long as commodity production and therefore capitalism exist. If it were possible, we would all be living in a very different world.

I know my views on this subject are shared by very few. They will be dismissed as absurd by the professional economists. These economists make no pretext of upholding Marx’s views on labor value, let alone on money and price, and least of all, of course, on surplus value. They were taught in their student days that Marx was scientifically refuted more than a century ago.

More importantly, for those of us who uphold the continued relevance of Marx’s ideas, my views would be rejected by most Marxists. These would include not only “critical Marxists” who reject Marx’s value theory, but even Marxists who claim to uphold it.

Most of this latter group of Marxists seem to believe that token money somehow represents abstract human labor directly, rather than representing a commodity that must actually be produced by value-creating human labor. But exactly how is token—paper—money supposed to do this?

‘A’ wants to know how the total amount of token money can be valued. First, you take the price of gold measured in troy ounces in terms of U.S. dollars. For example, the dollar price of gold is now about $900 per troy ounce. Therefore, one dollar represents about 1/900 of a troy ounce of gold. Then, you multiply that number by the total number of token dollars in existence. This will give you a certain weight of gold that can be expressed in either troy ounces, grams, metric tons, or similar unit of weight. This will give you the gold value of the total number of token dollars in existence.

You can carry out the same procedure with all the other token currencies. Since gold, like other primary commodities, is quoted on the London gold market and similar exchanges in terms of U.S. dollars, you begin with the price of a troy ounce of gold in dollar terms as quoted on these markets. Then divide the dollar price of a troy ounce of gold by the value in terms of dollars at the current exchange rate of the currency whose gold value you want to determine. This gives you the amount of gold measured in terms of troy ounces that a unit of a given currency represents at any instant in time. You then multiply the quantity of gold in terms of troy ounces that a given unit of a particular currency represents by the total amount of token money in existence denominated in that currency.

Once you have completed this operation for all the token currencies, you add up the total amount of gold measured in terms of some unit of weight—you would probably want to convert troy ounces into a larger unit such as metric tons or the numbers would get very big—and you get the amount of gold that all the token currencies added together represent. If you know how much abstract human labor is necessary to produce that gold under the present conditions of production, you then arrive at exactly how much abstract human labor measured in terms of whatever unit of time you prefer that the total amount of token money in existence represents.

`A’ questions my assertion that the total amount of token money that can be issued is limited by the total amount of gold that exists at any given time on the world market. Does the total amount of token money exactly equal the quantity of gold or of monetary gold that exists on the world market? I am sure it doesn’t exactly. This is an area where some empirical research would be very useful.

Capitalist governments issue many useful economic statistics—though their accuracy should always be viewed critically. But they don’t issue any statistics on the relationship between the total amount of gold in existence and the total amount of token currency. If anybody wants to come up with such an estimate, it would be a very useful contribution. This would make it possible to test the exact relationship between the growth in the quantity of gold and the the value of the total quantity of token money on the world market.

I think that economic history does offer many examples of the value of paper currencies, whether the individual units or the total quantity of the currency, dropping suddenly due to a loss of “confidence” by the capitalists without any change in the quantity of either gold or the currency in question. Conversely, if the capitalists suddenly gain “confidence” in a given token currency, that currency can suddenly represent a lot more gold than it did before.

But even a regular bourgeois economist would agree that if the growth in the quantity of gold—which is determined by the level of gold production—lags behind the growth in the quantity of token money, gold will sooner or later rise in price in terms of that token money. And conversely, if the growth in the quantity of gold exceeds the growth in the quantity of token money, the price of gold in terms of token money will drop. We don’t need the Marxist law of labor value for that. All we need is the concept of supply and demand.

However, since our ordinary bourgeois economist has no concept of labor value, he or she will assume that the change in the price of gold will have very little overall effect on the economy, since gold has a rather limited role as an industrial raw material. I also think most of today’s Marxists would agree with the bourgeois economists on this point, if indeed they have given it any thought at all. This is the view I am challenging.

It is generally assumed by economists of all schools, whether Marxist or bourgeois, that it is the total quantity of commodities in circulation that determines how much token money can be issued before the token money depreciates and unleashes inflation. If this is true, however, why couldn’t the “monetary authorities” that issue token money be able to abolish crises of overproduction simply by increasing the quantity of token money whenever such a crisis threatens?

Or to put the question in more concrete and contemporary terms, why didn’t the U.S. Federal Reserve System greatly increase the growth rate of the supply of U.S. dollar token money—the monetary base—after the initial panic of August 2007? If the value of token money is determined by the quantity of commodities in circulation, they should have been able to increase the quantity of token money sufficiently to head off both the financial panic of last fall and the current deep global recession that followed. What held them back?

Because so many Marxists accept the view, or at least don’t challenge the claim, that “non-commodity money” now exists that represents value directly, not through a specific money commodity such as gold, they can’t understand how generalized crises of overproduction can still occur. That is why many of our modern Marxists economists prefer to speak of the “overaccumulation of capital” but rarely if ever refer to the “overproduction of commodities.”

Finally, ‘A’ asks, “If token money can only be issued on the basis of the total gold in existence – how is that quantity valued? On what basis? Surely if more money is issued then the cost of gold goes up and then more money can be issued on that inflated valuation.”

By “cost of gold,” ‘A’ obviously means the price of gold in token money. Even if the total amount of gold is considered fixed in terms of weight at a given point in time, won’t a rise in the price of gold in dollars, euros, yen, and so on raise the amount of gold in existence in terms of dollars or other units of token money? If the price of gold were to rise from around $900 to $1,800 in the near future, the total amount of gold measured in dollars will indeed double. Therefore, how can the quantity of gold limit the amount of dollars the U.S. Federal Reserve can create?

The simple answer is that it can’t, any more than the empty coffers of the Reichbank in Germany in 1923 limited the total amount of marks that the German Reichbank could create in that year. However, the total quantity of token money that the German Reichbank created during that fateful year, though it was almost unmeasurably large in terms of marks, represented very little money in terms of gold or U.S. dollars. In those days, the U.S. dollar was not a token currency but instead was defined as a fixed weight of gold.

One question that I have not dealt with yet is the whole question of international trade and the effects that surpluses and deficits in the balances of payments have on the amount of gold, and through gold the amount of abstract human labor, that currencies represent as exchange rates fluctuate on the world currency market. I will take up this question in the next series of posts, which will deal with world trade. These posts will examine David Ricardo’s theory of international trade and the views of John Maynard Keynes.

I hope this clarifies some of the issues, or perhaps better yet, sets the terms of the discussion.

Sam