Marx begins by pointing out that market exchange of commodities requires an orderly system of property rights and consensual exchange (Marx 1990: 178). Buyers and sellers are the “personifications” or “bearers” of the economic relations existing between them (Marx 1906: 97; Marx 1990: 179). Private property rights in commodities must be recognised and mutually respected (Marx 1990: 178). Commodities are therefore external and alienable things, and commodity exchange would not exist within a primitive community with wholly communal property (Marx 1990: 182).
The agent who offers a good for exchange derives no direct use value from it (except its ability to be exchanged for something else as a means of exchange), because if he did he would not bring it to market (Marx 1990: 179). Instead he wants a use value from some other commodity he can obtain in exchange (Marx 1990: 179).
Marx states that
“All commodities are non-use values for their owners, and use-values for their non-owners. Consequently, they must all change hands. But this change of hands is what constitutes their exchange, and the latter puts them in relation with each other as values, and realises them as values. Hence commodities must be realised as values before they can be realised as use-values.Marx also states that things only become commodities by means of the act of exchange (Marx 1990: 181). This is a crucial point: according to Marx, labour value in commodities can only be created if that commodity is demanded by some agent and has a use value to him or her. But this makes a nonsense of Marx’s earlier claims in Chapter 1 that he can establish labour value by completely abstracting from use value. There is a clear contradiction here, as discussed in this post.
On the other hand, they must show that they are use values before they can be realised as values. For the labour spent upon them counts effectively, only in so far as it is spent in a form that is useful for others. Whether that labour is useful for others and its product consequently capable of satisfying the wants of others, can be proved only by the act of exchange.” (Marx 1906: 97–98).
Next, Marx notes that an owner of commodity sees that commodity as a universal equivalent for potentially all other commodities, but other people do not see it this way. Marx is alluding to the famous double coincidence of wants problem here. Where money is lacking, there is no universal equivalent commodity (Marx 1906: 180).
Money as a universal equivalent is brought into being as a social process. Marx goes on to discuss money:
“Money is a crystal formed of necessity in the course of the exchanges, whereby different products of labour are practically equated to one another and thus by practice converted into commodities. The historical progress and extension of exchanges develops the contrast, latent in commodities, between use-value and value. The necessity for giving an 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 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 being accomplished, so also is the conversion of one special commodity into money.” (Marx 1906: 99).Thus Marx explains the emergence and nature of money as a universal commodity. Money emerges by necessity from barter exchange of commodities between different communities (Marx 1990: 181–182). It must be a uniform, portable, fungible and divisible commodity.
“Objects in themselves are external to man, and consequently alienable by him. In order that this alienation may be reciprocal, it is only necessary for men, by a tacit understanding, to treat each other as private owners of those alienable objects, and by implication as independent individuals. But such a state of reciprocal independence has no existence in a primitive society based on property in common, whether such a society takes the form of a patriarchal family, an ancient Indian community, or a Peruvian Inca State.
The exchange of commodities, therefore, first begins on the boundaries of such communities, at their points of contact with other similar communities, or with members of the latter. So soon, however, as products once become commodities in the external relations of a community, they also, by reaction, become so in its internal intercourse. The proportions in which they are exchangeable are at first quite a matter of chance. What makes them exchangeable is the mutual desire of their owners to alienate them. Meantime the need for foreign objects of utility gradually establishes itself. The constant repetition of exchange makes it a normal social act. In the course of time, therefore, some portion at least of the products of labour must be produced with a special view to exchange. From that moment the distinction becomes firmly established between the utility of an object for the purposes of consumption, and its utility for the purposes of exchange. Its use-value becomes distinguished from its exchange value. On the other hand, the quantitative proportion in which the articles are exchangeable, becomes dependent on their production itself. Custom stamps them as values with definite magnitudes.
In the direct barter of products, each commodity is directly a means of exchange to its owner, and to all other persons an equivalent, but that only in so far as it has use-value for them. At this stage, therefore, the articles exchanged do not acquire a value-form independent of their own use-value, or of the individual needs of the exchangers. The necessity for a value-form grows with the increasing number and variety of the commodities exchanged. The problem and the means of solution arise simultaneously. Commodity-owners never equate their own commodities to those of others, and exchange them on a large scale, without different kinds of commodities belonging to different owners being exchangeable for, and equated as values to, one and the same special article. Such last-mentioned article, by becoming the equivalent of various other commodities, acquires at once, though within narrow limits, the character of a general social equivalent. This character comes and goes with the momentary social acts that called it into life. In turns and transiently it attaches itself first to this and then to that commodity. But with the development of exchange it fixes itself firmly and exclusively to particular sorts of commodities, and becomes crystallised by assuming the money-form. The particular kind of commodity to which it sticks is at first a matter of accident. Nevertheless there are two circumstances whose influence is decisive. The money-form attaches itself either to the most important articles of exchange from outside, and these in fact are primitive and natural forms in which the exchange-value of home products finds expression; or else it attaches itself to the object of utility that forms, like cattle, the chief portion of indigenous alienable wealth. Nomad races are the first to develop the money-form, because all their worldly goods consist of movable objects and are therefore directly alienable; and because their mode of life, by continually bringing them into contact with foreign communities, solicits the exchange of products.” (Marx 1906: 100–101).
“In proportion as exchange bursts its local bonds, and the value of commodities more and more expands into an embodiment of human labour in the abstract, in the same proportion the character of money attaches itself to commodities that are by nature fitted to perform the social function of a universal equivalent. Those commodities are the precious metals.
The truth of the proposition that, ‘although gold and silver are not by nature money, money is by nature gold and silver,’ is shown by the fitness of the physical properties of these metals for the functions of money. Up to this point, however, we are acquainted only with one function of money, namely, to serve as the form of manifestation of the value of commodities, or as the material in which the magnitudes of their values are socially expressed. An adequate form of manifestation of value, a fit embodiment of abstract, undifferentiated, and therefore equal human labour, that material alone can be whose every sample exhibits the same uniform qualities. On the other hand, since the difference between the magnitudes of value is purely quantitative, the money commodity must be susceptible of merely quantitative differences, must therefore be divisible at will, and equally capable of being re-united. Gold and silver possess these properties by nature.
The use-value of the money commodity becomes twofold. In addition to its special use-value as a commodity (gold, for instance, serving to stop teeth, to form the raw material of articles of luxury, &c.), it acquires a formal use-value, originating in its specific social function.
Since all commodities are merely particular equivalents of money, the latter being their universal equivalent, they, with regard to the latter as the universal commodity, play the parts of particular commodities.
We have seen that the money-form is but the reflex, thrown upon one single commodity, of the value relations between all the rest. That money is a commodity is therefore a new discovery only for those who, when they analyse it, start from its fully developed shape. The act of exchange gives to the commodity converted into money, not its value, but its specific value-form. By confounding these two distinct things some writers have been led to hold that the value of gold and silver is imaginary. The fact that money can, in certain functions, be replaced by mere symbols of itself, gave rise to that other mistaken notion, that it is itself a mere symbol.” (Marx 1906: 101–103).
This is very much in line with the Classical and neoclassical explanation of money as emerging from barter trades and the double coincidence of wants problem. Modern anthropology and history show us how this view has serious problems and is in need of revision (as discussed here). The one interesting insight Marx does have is that commodity money probably arose between different communities in international trade not necessarily within communities, a view examined by Graeber (2011: 29–30) who notes that historically barter seems to have been prevalent between one community and another, or between people who were strangers and where relationships were implicitly or explicitly hostile.
Also, for Marx as commodity exchange becomes developed and people produce things specifically for exchange, socially necessary labour time comes to determine exchange values (Marx 1990: 183–184). Marx is therefore committed to the view that at least in the distant past commodities exchanged directly in terms of equal abstract labour time. However, there is very little evidence for such a view, as noted in this post.
Even worse, Marx is a metallist (Rugina 1983: 233) and for him money is a commodity, and he does not allow the possibility of non-convertible fiat money utterly divorced from gold and silver, as we have today.
In Chapter 3 of Capital Marx even stated that money needs to be a commodity in order to itself have an abstract socially necessary labour value that can be equated with those of other commodities:
“The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money.So only if money is a special commodity that itself has a labour value can it function as a universal medium of exchange and numéraire. In Marx’s own language, money can only be a universal equivalent because in a pure or ideal commodity exchange there is an equality in the quantities of abstract labour time needed to produce them, and the money commodity can have such a labour value as a produced commodity. The existence of fiat money destroys this argument, however. It is no wonder that Marx rejected fiat money or pure paper money unbacked by commodities.
It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.” (Marx 1906: 106).
Money, for Marx, has dual use value:
(1) a special use value merely as a commodity (e.g., gold used in dentistry), andMarx thinks it is wholly mistaken to regard money as a “mere symbol” or that its value is merely imaginary (Marx 1990: 185). Marx seems to shun the view that the value of gold arises out of an ultimately subjective utility or “imaginary value” (Marx 1990: 185, n. 10). In a footnote to Chapter 2, Marx also rejects the Chartalist view that money’s value can be fixed by governments (Marx 1990: 185, n. 11). For Marx, the real value of commodity money arises not in the process of exchange but in the human labour expended in producing it (Marx 1990: 184–185).
(2) a formal use value as its social function as a universal equivalent (Marx 1990: 184).
Later in Capital Marx also shuns the idea that a paper currency can function without gold backing:
“Paper-money is a token representing gold or money. The relation between it and the values of commodities is this, that the latter are ideally expressed in the same quantities of gold that are symbolically represented by the paper. Only in so far as paper-money represents gold, which like all other commodities has value, is it a symbol of value.” (Marx 1906: 144).Needless to say, the existence of fiat money all over the world since the 1930s refutes this view.
“… gold serves as an ideal measure of value, only because it has already, in the process of exchange, established itself as the money-commodity. Under the ideal measure of values there lurks the hard cash.” (Marx 1906: 116).
In the respect that Marx thought that money must ultimately be a commodity (though not in his explanation of why it needed to be), Marx has more in common with dogmatic Austrian school economists, and in other ways was mired in Classical economics in his thinking on money.
Marx holds that money is a commodity, but the difficulty is: how did it become a commodity with a certain value? (Marx 1990: 186). The answer is as follows. Marx explains the value of commodity money such as gold in terms of the abstract socially necessary labour time used to produce it:
“It has already been remarked above that the equivalent form of a commodity does not imply the determination of the magnitude of its value. Therefore, although we may be aware that gold is money, and consequently directly exchangeable for all other commodities, yet that fact by no means tells how much 10 lbs., for instance, of gold is worth. Money, like every other commodity, cannot express the magnitude of its value except relatively in other commodities. This value is determined by the labour-time required for its production, and is expressed by the quantity of any other commodity that costs the same amount of labour-time. Such quantitative determination of its relative value takes place at the source of its production by means of barter. When it steps into circulation as money, its value is already given. In the last decades of the 17th century it had already been shown that money is a commodity, but this step marks only the infancy of the analysis. The difficulty lies, not in comprehending that money is a commodity, but in discovering how, why and by what means a commodity becomes money.” (Marx 1906: 104).Marx is here clearly explaining the origin of money’s value by claiming that gold and silver were exchanged in barter with other commodities in accordance with their equivalent labour values (see Marx 1990: 186, n. 12). This entails that Marx must think that gold and silver were – at the very least – once exchanged at par with other commodities in terms of socially necessary labour time. But there is no evidence for this wildly speculative theory, and the reality is that the value of gold and silver money was established by subjective value, custom, their scarcity and the dynamics of supply and demand in the past.
“… gold and silver, just as they come out of the bowels of the earth, are forthwith the direct incarnation of all human labour. Hence the magic of money.” (Marx 1906: 105).
It is also astonishing that, if Marx is merely assuming as a simplifying assumption that all commodities (including the money commodity) exchange at their labour values, he never says so in Chapter 2. In fact, Marx never even mentions that money prices of commodities in terms of gold or silver would hardly ever equal his imagined labour values. But if gold and silver never at any point in human history directly exchanged for other commodities in terms of equal abstract socially necessary labour time, Marx’s whole explanation of the value of money would collapse.
A final point is that, for Marx, people have a money fetish, because money is ultimately a commodity with a labour value, so that the money fetish is bound up with commodity fetish and the former explained by the latter (Marx 1990: 187).
From the Post Keynesian perspective, one can only conclude that Marx’s theory of money is severely flawed and antiquated. In short, Marx’s monetary theories are grossly out of date. No serious modern economist, certainly not a Post Keynesian one, could hold Marx’s views on money with a straight face.
“The Nature, Origin and History of Money 101.”
“Wicksteed on the Contradiction in Chapter 1 of Volume 1 of Capital on the Labour Theory of Value,” May 21, 2015.
“Engels’ Letter to Werner Sombart on the Labour Theory of Value in 1895,” May 14, 2015.
“A Devastating Contradiction in Marx’s Argument for the Labour Theory of Value,” May 19, 2015.
Bellofiore, R. and Realfonzo, R. 2003. “Money as Finance and Money as Universal Equivalent: Re-Reading Marxian Monetary Theory,” in Louis-Philippe Rochon and Sergio Rossi (ed.), Modern Theories of Money: The Nature and Role of Money in Capitalist Economies. Edward Elgar, Cheltenham. 198–218.
Graeber, D. 2011. Debt: The First 5,000 Years, Melville House, Brooklyn, N.Y.
Harvey, David. 2010. A Companion to Marx’s Capital. Verso, London and New York.
Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.
Marx, Karl. 1990. Capital. A Critique of Political Economy. Volume One (trans. Ben Fowkes). Penguin Books, London.
Rugina, Anghel N. 1983. “There Are Two Karl Marxes!,” Eastern Economic Journal 9.3: 232–245.