In the previous post, we encountered the views of a small subset of Internet Marxists who appear to adhere to a rather hard-line, Chicago-like neoclassical understanding of the capacities of the state. There is another small subset, the Austrian Metalist Internet Marxists (or Austrian Marxists, for short), who appear to believe that a state currency not “backed” by gold must surely have zero value or, at the very least, command a level of acceptance likely to crumble at any moment. In reality, the choice between a gold standard and fiat money changes little of significance when it comes to the value of the currency or its acceptance, although it does of course affect the policy space a state leaves open to itself for as long as the currency arrangement remains in place.
Whether a state decides to make its currency convertible into a commodity at a fixed rate or instead issues it by fiat, it is always the state that dictates the terms on which its currency is to be issued. Under a gold standard, the state decides how much gold will be represented by a unit of its currency. It can also alter that conversion rate. This imposition is by fiat just as much as fiat money is by fiat, so in a sense the distinction between “commodity-backed” and fiat money could be considered a misnomer.
Acceptance of a state currency – whether linked to gold or not – is ensured by the state enforcing a tax obligation. The need to pay taxes in the state’s unit of account guarantees this acceptance, at least to the extent necessary to enable the state to perform its various functions. The tax obligation should certainly be in sensible proportion to state spending. Too much spending relative to tax revenue will be inflationary. (There is an inflation risk in all spending, private or public, if it causes overall spending to outstrip the capacity of the economy to respond with an expansion of output at more or less stable prices.) But, generally, for the global economy taken in aggregate, it will make sense for governments as a whole (though not necessarily every single one simultaneously) to spend somewhat more than they tax because of the private-sector tendency, also in aggregate, to desire a financial surplus.
Under a gold standard or a gold “backed” currency system, the state could dramatically reduce the amount of gold represented in a unit of its currency without undermining acceptance of it, provided it continued to enforce taxes.
The abandonment of the gold standard and the subsequent breakdown of Bretton Woods serve as illustrations of this point. With the end of Bretton Woods, the amount of gold promised in exchange for a unit of the state currency dropped to zero. Yet, there was no noticeable change in the capacity of the state to enforce acceptance of its currency. A reason for this is that the tax obligation remained in force.
It might be objected that the acceptance of fiat currency is only guaranteed by compulsion, whereas under a gold standard acceptance would be guaranteed without compulsion. But is this likely to be true? Where is the guarantee that the state will convert its currency into gold at the rate it promises independent of that state promise itself? It would be safer to opt for actual gold if it were really the case that only gold is “real money”.
The value of a state currency should really not be such a mystery, as Modern Monetary Theory (MMT) makes clear. Applying Marx’s basic argument, the value of a state currency can be considered the amount of socially necessary labor needed to obtain a unit of the currency or, equivalently, the amount of labor power commanded by it.
Just because the state can produce its currency without cost – surely a social advance over shipping quantities of gold around the place for no sensible purpose – this does not mean that a member of the population can “produce” a unit of currency for him or herself at zero cost, at least beyond some minimal level dictated by the specifics of state policy. What really matters, for currency value, is the average amount of labor required to obtain a unit of the currency, even though in some individual cases a dollar may be received with the sale of less labor power than the average amount.
Members of the private sector have to find a way to obtain the currency. For many, the method will involve selling labor power to a capitalist or capitalist government in exchange for a wage, or to depend upon somebody who does. For a few, the capitalists, the method will involve appropriating the surplus labor of others.
Whether the amount of socially necessary labor required to obtain a unit of the currency is influenced by the state through the implementation of a minimum wage and/or centralized wage determination procedures, collectively bargained, mediated through the vagaries of “the market” (a market, incidentally, that is shaped and kept operative by the state) or set equal to the labor time necessary to produce an amount of gold, it will make little difference. Irrespective, the state will set the terms on which its currency is issued and use the same basic mechanism to ensure its acceptance – taxation.
In this context, the minimum wage serves as a policy variable in relation to other wage rates in a similar way to how the short-term interest rate is a policy variable in relation to longer interest rates. Just as the monetary authorities could dictate longer rates, the state could dictate all wage rates. More often, the monetary authorities limit themselves to directly controlling the short-term rate and leave it for arbitrage to adjust longer rates. Similarly, the state often chooses simply to set the minimum wage and public-sector pay and conditions and leave it to competition, collective bargaining and so forth to influence other wages.
Value of the currency, as understood by MMT, is a distinct concept from the monetary expression of labor time, or MELT. In relation to state currency, however, the MMT conception of currency value does lend support to the notion of a positive MELT and the view that a unit of the currency will represent a positive amount of socially necessary labor. The reciprocal of the MELT can be regarded as the amount of labor commanded by a unit of the currency, where that labor is represented in commodities. (Money does not command an amount of labor directly, in Marx’s theory, because labor itself is not a commodity.) The value of the currency, in contrast, relates to the commodity labor power. It can be defined as the amount of labor power commanded by a unit of the currency. In short, a unit of the currency can command a worker’s capacity to labor for a certain amount of time (equal to currency value) and a certain amount of labor actually performed and represented in commodities (equal to the reciprocal of the MELT).
Unless surplus value is negative, in which case capitalists will hardly persist with commodity production for very long, a unit of the currency will command more labor power than labor. This is possible – indeed probable – because some labor is unpaid. Capitalists benefit from the performance of more labor than they pay for, with the difference amounting to surplus labor.
To illustrate, suppose all labor is simple and paid the same wage. Suppose also that the MELT is constant, which amounts to assuming for simplicity a constant price level and productivity. If workers are paid a wage of $10/hr (i.e. currency value = 1/10 hours/dollar) and an hour of socially necessary labor creates $20 of value (i.e. MELT = $20/hr), a dollar will command 1/10th of an hour of labor power but only 1/20th of an hour of labor represented in commodities.
Critically, even though labor power is distinct from labor performed, in aggregate the total amount of labor power purchased by capitalists will actually determine the total amount of average labor performed, which will be indicated by the aggregate level of employment L. The reason for this is that, according to Marx, an hour of average labor always creates the same amount of new value, irrespective of variations in productivity. Since a portion of this average labor is unpaid, the MELT exceeds the average wage rate (or reciprocal of the value of the currency) and the capitalists appropriate surplus value.
Under capitalism, a system in which capitalists will not continue to initiate productive activity in the persistent absence of positive profit, the value of the currency sets a floor under plausible values for the MELT, other than temporarily.
Under our simplifying assumption of a constant MELT, surplus value per hour for the economy as a whole is equal to the MELT m minus the wage rate w, or m – w. Equivalently, surplus value per hour equals m – 1/z, where z is the value of the currency. Since, under capitalism, currency value is positive (a unit of the currency commands a positive amount of labor power), and since the reciprocal of the value of the currency places a practical floor under the MELT, the MELT will not only always be positive but will normally be greater than the reciprocal of the value of the currency.
So long as the state can enforce taxes, it is in a position to guarantee, for capitalists, that a unit of the currency will command a positive amount of labor power. (This point is emphasized in the previous post.) If the capitalists’ ability to command a positive amount of labor power with a unit of the currency was ever remotely in question, the state could remove any doubt in the matter by imposing and enforcing an exogenous tax on members of the working class. As emphasized in the previous post, private property (enforced by the state) ensures that workers have little choice but to participate in the “voluntary” labor exchange. More specifically, taxes ensure that workers have no choice but to accept wages denominated in the state’s unit of account.
None of this is to deny that Marx often considered money in terms of gold. But perhaps that was mainly because there happened to be a gold standard in his day, and Marx was trying to understand the system as it actually existed at the time. The attempt to maintain a gold standard was really a failed attempt by the ruling class to turn money – a non-commodity and social relation – into a (fictitious) commodity. This foolish and socially destructive attempt to turn money into a commodity merely succeeded in making the monetary system as unstable as capitalist commodity production itself. In any case, if we consider Marx’s basic approach to the value of a currency, it depends on labor time in a way that in no way needs to be linked to gold.
Besides, isn’t it the great sin of commodity fetishism to be equating money – a social relation – to the money thing? In the case of gold, it is not even the money thing, but just any old thing.