Adam Smith on money, the source and as a method of exchange.

Whoever derives his revenue from a fund which is his own, must draw it either from his labor, from his stock, or from his land. The revenue derived from labor is called wages. That derived from stock, by the person who manages or employs it, is called profit. That derived from it by the person who does not employ it himself, but lends it to another, is called the interest or the use of money. The revenue which proceeds altogether from land, is called rent, and belongs to the landlord. The revenue of the farmer is derived partly from his labor, and partly from his stock. To him, land is only the instrument which enables him to earn the wages of this labor, and to make the profits of this stock.

WHEN the division of labor has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labor can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men’s labor as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.


But when the division of labor first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former consequently would be glad to dispose of, and the latter to purchase, a part of this superfluity. But if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them.

The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconvenience of such situations, every prudent man in every period of society, after the first establishment of the division of labor, must naturally have endeavored to manage his affairs in such a manner as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

Many different commodities, it is probable, were successively both thought of and employed for this purpose. In the rude ages of society, cattle are said to have been the common instrument of commerce; and, though they must have been a most inconvenient one, yet in old times we find things were frequently valued according to the number of cattle which had been given in exchange for them. The armor of Diomede, says Homer, cost only nine oxen; but that of Glaucus cost a hundred oxen.

Ghandi Salt Tax March to the Sea

Salt is said to be the common instrument of commerce and exchanges in Abyssinia; a species of shells in some parts of the coast of India; dried cod at Newfoundland; tobacco in Virginia; sugar in some of our West India colonies; hides or dressed leather in some other countries; and there is at this day a village in Scotland where it is not uncommon, I am told, for a workman to carry nails instead of money to the baker’s shop or the alehouse.

In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity. Metals can not only be kept with as little loss as any other commodity, scarce anything being less perishable than they are, but they can likewise, without any loss, be divided into any number of parts, as by fusion those parts can easily be reunited again; a quality which no other equally durable commodities possess, and which more than any other quality renders them fit to be the instruments of commerce and circulation. The man who wanted to buy salt, for example, and had nothing but cattle to give in exchange for it, must have been obliged to buy salt to the value of a whole ox, or a whole sheep at a time. He could seldom buy less than this, because what he was to give for it could seldom be divided without loss; and if he had a mind to buy more, he must, for the same reasons, have been obliged to buy double or triple the quantity, the value, to wit, of two or three oxen, or of two or three sheep. If, on the contrary, instead of sheep or oxen, he had metals to give in exchange for it, he could easily proportion the quantity of the metal to the precise quantity of the commodity which he had immediate occasion for.Different metals have been made use of by different nations for this purpose. Iron was the common instrument of commerce among the ancient Spartans; copper among the ancient Romans; and gold and silver among all rich and commercial nations.

Those metals seem originally to have been made use of for this purpose in rude bars, without any stamp or coinage. Thus we are told by Pliny, upon the authority of Timaeus, an ancient historian, that, till the time of Servius Tullius, the Romans had no coined money, but made use of unstamped bars of copper, to purchase whatever they had occasion for. These bars, therefore, performed at this time the function of money.

Marx’s Theory of Money

In the same way as his theory of rent, Marx’s theory of money is a straightforward application of the labor theory of value. As value is but the embodiment of socially necessary labor, commodities exchange with each other in proportion to the labor quanta they contain. This is true for the exchange of iron against wheat, as it is true for the exchange of iron against gold or silver. Marx’s theory of money is therefore in the first place a commodity theory of money. A given commodity can play the role of universal medium of exchange, as well as fulfil all the other functions of money, precisely because it is a commodity, i.e. because it is itself the product of socially necessary labor. This applies to the precious metals in the same way it applies to all the various commodities which, throughout history, have played the role of money.

It follows that strong upheavals in the ‘intrinsic’ value of the money-commodity will cause strong upheavals in the general price level. In Marx’s theory of money, (market) prices are nothing but the expression of the value of commodities in the value of the money commodity chosen as a monetary standard. If £1 sterling = 1/10 ounce of gold, the formula ‘the price of 10 quarters of wheat is £1’ means that 10 quarters of wheat have been produced in the same socially necessary labor times as 1/10 ounce of gold. A strong decrease in the average productivity of labor in gold mining (as a result for example of a depletion of the richer gold veins) will lead to a general depression of the average price level, all other things remaining equal. Likewise, a sudden and radical increase in the average productivity of labor in gold mining, through the discovery of new rich gold fields (California after 1848; the Rand in South Africa in the 1890s) or through the application of new revolutionary technology, will lead to a general increase in the price level of all other commodities.

Leaving aside short-term oscillations, the general price level will move in medium and long-term periods according to the relation between the fluctuations of the productivity of labor in agriculture and industry on the one hand, and the fluctuations of the productivity of labor in gold mining (if gold is the money-commodity), on the other.

Basing himself on that commodity theory of money, Marx therefore criticized as inconsistent Ricardo’s quantity theory. But for exactly the same reason of a consistent application of the labor theory of value, the quantity of money in circulation enters Marx’s economic analysis when he deals with the phenomenon of paper money.

As gold has an intrinsic value, like all other commodities, there can be no ‘gold inflation’, as little as there can be a ‘steel inflation’. An abstraction made of short-term price fluctuations caused by fluctuations between supply and demand, a persistent decline of the value of gold (exactly as for all other commodities) can only be the result of a persistent increase in the average productivity of labor in gold mining and not of an ‘excess’ of circulation in gold. If the demand for gold falls consistently, this can only indirectly trigger a decline in the value of gold through causing the closure of the least productive old mines. But in the case of the money-commodity, such overproduction can hardly occur, given the special function of gold of serving as a universal reserve fund, nationally and internationally. It will always therefore find a buyer, be it not, of course, always at the same ‘prices’ (in Marx’s economic theory, the concept of the ‘price of gold’ is meaningless. As the price of a commodity is precisely its expression in the value of gold, the ‘price of gold’ would be the expression of the value of gold in the value of gold).

Paper money, banks notes, are a money sign representing a given quantity of the money-commodity. Starting from the above-mentioned example, a banknote of £1 represents 1/10 ounce of gold. This is an objective ‘fact of life’, which no government or monetary authority can arbitrarily alter. It follows that any emission of paper money in excess of that given proportion will automatically lead to an increase in the general price level, always other things remaining equal. If £1 suddenly represents only 1/20 ounce of gold, because paper money circulation has doubled without a significant increase in the total labor time spent in the economy, then the price level will tend to double too. The value of 1/10 ounce of gold remains equal to the value of 10 quarters of wheat. But as 1/10 ounce of gold is now represented by £2 in paper banknotes instead of being represented by £1, the price of wheat will move from £1 to £2 for 10 quarters (from two shillings to four shillings a quarter before the introduction of the decimal system).

Keynes’s theory of surplus value

Over the last couple of weeks, we saw that Keynes denied that surplus value was produced by the unpaid labor of the working class. So how does surplus value—profit, interest and rent—arise, according to Keynes, if it is not produced by the working class?

“It is much preferable,” Keynes wrote in chapter 16 of the “General Theory,” “to speak of capital as having a yield over the course of its life in excess of its original cost, than as being productive. For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive—at least in the physical sense.”

The difference between the “aggregate value,” to use Keynes’s terminology, and the “supply price”—the cost to the capitalist of that asset—is the surplus value that “asset” yields—not produces, according to Keynes—to its owner. But where does this surplus value that is “yielded” come from if it is not produced—that is, if it does not arise in the sphere of production? As we saw over the last several weeks, Keynes accepted the “classical” marginalist postulate, or unproved assumption, that the worker does not produce any surplus value but simply reproduces the value of the worker’s wage.


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