What the hell is money?

What the hell is money?

part one:

part two:

We will start our investigation of money by looking at some of the basic problems of barter. We’ll see how money solves these problems but, in doing so, creates some problems of its own. As money evolves from, shells and salt to gold, to paper money, to bank notes and credit instruments, we will see a common theme reappearing over and over, taking different forms as money takes different forms: that money is always trying to resolve the contradiction between being a measure of value and a medium of circulation.

To begin with barter:

duck tales clip.

This clip is pretty accurate. The basic problem of barter is how to measure the values at which commodities exchange. We call this exchange value. Without some notion of exchange value we have no idea how many shoes to trade for how many potatoes, how many eggs for swords….

All commodities have two different aspects that relate to their exchange value: before they can be used they have to be made. Thus, all commodities have a use value and a labor value.

Use value tells us how much demand there is for something, and thus lets workers know how much of a commodity to produce. But it still doesn’t tell us how much of one commodity exchanges for another.

…Which is why we need a labor theory of value which states that commodities exchange for one another based around the amount of labor that went into making them. In early barter economies, when considering a trade the logic is always: “How long would it take me to make that myself?” Similarly, when I go into a store to buy something with my money, that money represents work I was paid for. When I exchange my labor with the labor of the person who made the commodity I am valuing my labor in relation to theirs.

And this is what money allows us to do that barter can’t: measure the amount of value in commodities so that we can exchange them.
Duck tales clip.

All sorts of commodities have been used as money. No matter what commodity is chosen by society as money, that commodity becomes a universal equivalent, meaning the values of all commodities are expressed relative to the money commodity.

So money solves the problem of exchange by internalizing the duality of use value and labor value. Money then does two different, yet connected things:

1. it measures value. (labor value)
2. it allows commodities to circulate. (its use)

Smarty-pants economists say money is a “measure of value” and a “medium of circulation”. It measures value because it is a commodity itself, made by human labor, and thus has a labor value. [In this day and age, when our paper money is no longer backed by the gold commodity we forget that for the vast majority of human history money has been a tangible commodity. For now, let's put aside the thorny question of non-convertible paper money, and just deal with money as a commodity.] Because money represents a clear labor value it is safe to use as a measure of value. In contrast, if we used something without a labor value- maple leaves, or dirt, or smiles, we would have no guarantee that this money would be valued by anyone else. If you sell a pair of shoes for a handful of dirt, you are screwed because nobody else wants your handful of dirt because they could just go get their own handful of dirt. Similarly, if the value of the paper dollar was to fall tomorrow, we’d all be screwed because paper has very little value. So what makes a money strong is its ability to represent the value of commodities in the economy, and this is usually a result of money being a commodity with a high value itself.

But money isn’t just used to measure value, its used to circulate commodities (it’s second property as a medium of circulation.) This means that it takes on an exchange value different from its labor value.[camera close up] Money expresses the value of all commodities as they relate to each other. Thus it becomes worth “what it will buy” instead of “what it took to make it.” We call this its reflex value, because its a reflection of the value of all commodities in relation to each other.

The reflex value is formed by the relation of the supply of money to its demand. If there is less of the money commodity than is needed to circulate goods in the economy then the price of the money commodity goes up (deflation). If the supply of the money commodity rises above the amount needed to circulate commodities then the price of the money commodity goes down (inflation).

Let’s take a look at a modern day example of a money commodity: the use of cigarettes as money in prisons. Here’s a 2006 Onion article:

March 31, 2004 Smoking Ban Collapses Fragile Prison Economy
SOLEDAD, CA—A pen-wide smoking ban instituted last week devastated the Salinas Valley State Prison’s fragile economy, inmate #67545 said Monday. “There were occasional fluctuations or recalibrations, but a bar of soap used to equal three cigarettes; a Snickers, four; a Percocet, 15,” said Kenneth Oglivy, a former WorldCom accountant serving 10 years for embezzlement. “After the ban, the value of a carton of Newports climbed to 50 times its 2003 value. Now that those cigarettes are gone, it’s total chaos.” Oglivy said Salinas Valley inmates will have to devise a new system of value based on some other commodity, such as assholes.

In order for money to do its job it needs to have a stable supply so that disasters like this don’t happen. If we used potatoes for money we’d be screwed because potatoes go bad after awhile, and every time there was a bad harvest there’d be a shortage of money, etc. Gold works well because it is a stable commodity with a stable supply.

But the demand for money is constantly changing. Production and consumption change pace as an economy grows and shrinks over the course of years, months and weeks. And so the reflex value is shifting. This destabilizes money, makes it less dependable, unable to send appropriate signals, or measure value over time. Thus the two aspects of money- that it is a measure of value and a medium of circulation- or, that is has a labor value and a reflex value- are in conflict with each other. Now, if the reflex value fluctuates only slightly above and below the basic labor value, then we don’t have much of a problem. This fluctuating value allows money to make quick adjustments to changes in production and consumption. But if the two values start to diverge radically from each other they express serious economic problems.

There are solutions to this conflict. Both attempt to equilibrate the demand and supply for money so that the reflex value of money is held closer to the the labor value of money. These two solutions are Hoarding and Credit.

Hoarding allows for the adjustment of the money supply- by taking money out of circulation and saving it, we shrink the supply of available money. We can then inject money back into circulation when it is needed. Personal savings are a type of hoarding. When we hoard money it becomes a “store of value”.

Credit allows us to forego the use of money until it comes time to pay the debt. This shrinks the current demand for money. It allows more buying and selling to happen than there is actually money for. But when it comes to settle accounts real money is actually needed. Thus money becomes a “means of payment”.

So these additional aspects of money- that it can be a “store of value” and a “means of payment”- both must be seen as ways of resolving the contradictions between money as a measure of value a medium of circulation. But they don’t ever actually resolve the contradiction fully- they just move the contradiction to a different level.

For instance- Credit creates a web of debt as people defer payment, sell debt, use more credit to pay debt. The amount of debt can actually become larger than the amount of money available to use as a means of payment. In the abstract, this lays the foundation for a speculative bubble- when prices are inflated above their inherent value- like we have seen in the recent real estate market. At some point the market has to be “corrected”- that is- the artificial credit values which are just based on a promise to pay in the future- must be brought back in line with their actual values. Another problem with credit is that it assumes that the value of money will stay constant until the time comes to pay a debt. But this is not always the case. I will deal more with credit in another video.

Hoarding creates its own problems: If everyone is storing value by hoarding money, people aren’t circulating money and thus buying and selling slows down. This can create crisis as well. duck tales- scrooge in vault.

Circulation is crucial.

Circulate! cartoon

I have discussed the way in which hoarding, credit and changes in the demand and supply of money can interfere with the circulation of money. But in economics, whenever we talk about what could go wrong, we also are implying that things do go right a lot of the time. So in addition to asking “what could stop money from circulating and measuring value smoothly?” we also have to ask “what keeps money circulating and measuring value?”

Essentially we need a mechanism which circulates money solely for the sake of circulating money. Only this can’t counter the effects of hoarding. And this same process must continually affirm money’s ability to measure value.

The capitalist mode of production does this. Capitalist production circulates money solely for the sake of circulating money. In so doing it reproduces value and reaffirms money’s role as a measurement of this value. And that is what my next video will be about.