In my previous post, I mentioned Karl Polanyi’s argument that early capitalism included an attempt to integrate money completely into the logic of a pure market economy, eventually through the introduction of a gold standard in which money was conceived as a ‘commodity’. I then suggested that the eventual breakdown of the gold standard, and the subsequent breakdown of Bretton Woods, opened up social possibilities that we have so far failed to make effective use of, even though (on the basis of MMT) a flexible exchange-rate fiat currency system seems to offer scope for greater economic democracy.
Money is Always Social
In response to my argument, JKH drew my attention to an interesting post written by David Andolfatto in March this year, in which he points out that money – irrespective of the particular system in place – is always what I have been referring to as a social relation and what Andolfatto describes more specifically as a ‘promise’. This raises the question – as JKH observes – of whether it makes sense to place so much emphasis, as I have done, on differences between a gold standard and a flexible exchange-rate fiat currency system. This interesting question provides a context for me to draw out some of the implications of Polanyi’s argument concerning the attempt to treat money as a commodity. But before that, I should summarize a point made by Andolfatto.
In his post, Andolfatto acknowledges that some economists (i.e. chartalists) point to the tax basis of demand for the currency. In his interpretation of money as a promise, he notes that this would make the basis of fiat money the government’s promise to extinguish tax liabilities. He does not, however, align himself with this view, instead stressing ‘scarcity’ as the determiner of money’s value, and notes that, on this interpretation, the currency issuer’s commitment to preserve the value of the currency by keeping it sufficiently scarce is the operative promise.
Both these aspects – the tax obligation and scarcity – are actually stressed in MMT explanations of the value of the currency. For instance, in the MMT view fiscal policy should be aimed at keeping money creation and destruction at levels consistent with full employment and price stability. This book chapter by Pavlina Tcherneva gives an accessible introduction to the neo-chartalist perspective, and of course Randall Wray’s influential book, Understanding Modern Money (no free link available), is an important presentation of the argument.
…. a point that I have been trying to make for some time now. The “gold standard” is nothing more than a promise made “out of thin air” by the government. Look at how easily Roosevelt abrogated that promise in 1933. What makes people believe that the same thing cannot happen again?
In relation to this, JKH raises “the radical idea that the gold standard itself is a form of self-imposed constraint ranking parri passu in logical terms with the type of self-imposed constraints categorized by MMT as applied to today’s fiat systems”.
I strongly agree with the observation that, at any time, a monetary system can break down or be ended. Money – as opposed to the ‘money thing’ (currency, etc.) – is a social relation, and this social relation only remains in a particular configuration for as long as it is considered viable, favorable or inescapable to those who are party to it. A particular construction of the social relation money is always contingent on it being adhered to, no matter what the monetary system. This is as true of a gold standard as it is of a common currency arrangement or flexible exchange-rate fiat currency system.
But, again, this raises the question of why I am stressing the distinction between a gold standard or commodity-backed money system in contrast to fiat money. This gives me the opportunity to elaborate on an aspect of my previous post.
Money is Not a Commodity
The main insight of Polanyi that I emphasized previously is that throughout history money had long been recognized as a social relation, or more specifically a debt relation, but that with the industrial revolution there was an attempt through the gold standard to tie money more closely to the market economy by making it a ‘commodity’. This is a difficult task, because money is not actually a commodity. In fact, Polanyi calls money under the gold standard a ‘fictitious commodity’, because (like labor and nature) it is not produced for sale in a market.
Since money was only a fictitious commodity, an attempt was made to equate it – a social relation – to an actual commodity, i.e. gold. So, under the gold standard, money’s value would supposedly be determined by the value of gold. It was an attempt to reduce a social relation to a thing, no less than the ‘money thing’ itself is merely a thing. This is the money fetish taken to a new extreme. The social relation is not merely signified by the ‘money thing’, but an attempt is made to objectify it in a thing (gold).
Even though gold is indeed a thing, this attempt to maintain a gold standard was still utterly a social decision. Society was still logically prior to money. However, society was attempting to behave as if this was not the case. It was an attempt by society to be guided by ‘natural’ market forces (which is another mystification, since markets are also a social construction) to the point that money was to be a thing found in nature (gold) rather than in a relation between people. Real money (the real social relation) was supposedly reduced to a thing (gold).
Since the gold standard was still unavoidably a social construction, I agree that it could have been ended at any time, and in fact was ended. Even so, for as long as it was in operation, it impinged on policy freedom.
This attempt by society to turn the social relation money into a thing with ‘natural’ properties seems to have contributed to the mystified view of money held by the gold bugs. It may also have contributed to confusion among some Marxists.
For Marx, the value of money under capitalism is the socially necessary labor time required to obtain it. Since, under the gold standard, money was to be defined as gold, the conditions of production in the gold sector therefore influenced the amount of socially necessary labor time required to obtain a unit of money. What this seems to obscure, for some Marxists, is that money in Marx’s theory is still a social relation, and its ‘commodity form’ merely a fetish. The social aspect of money, in Marx’s theory, is the equating of socially necessary labor time with the value of money. Gold plays no essential role in this, even under a gold standard, and it is still possible to argue today that the value of money, as it pertains to commodity production, is based on socially necessary labor time.
Academic MMTers do actually argue something similar: that a job-guarantee wage would determine the (domestic) value of the currency. In Marx’s terms, the job-guarantee wage would indicate the amount of ‘simple labor time’ necessary to obtain money.
Socially necessary labor time is, by definition, socially determined. It is not a thing and no inanimate object can determine how much labor time is required to obtain a unit of money. That is a social decision, made by real people acting in relation to each other.
Implications of the Social Nature of Money
In terms of the implications of this for the comparison between different monetary systems, I think the observation that all constraints on money are ultimately self-imposed (which I have expressed as “society is logically prior to money”) makes clear that the restrictions are only binding for as long as they are deemed viable, helpful or inescapable. Nevertheless, I think there will be a hierarchy in terms of how restrictive constraints are under different monetary systems for as long as those systems remain in place, and also a hierarchy in terms of how difficult (or costly) it is to relax or abandon the self-imposed constraints. For example, the period of the gold standard was interrupted by a world war, during which the monetary system proved untenable. The return to a gold standard was followed soon after by a Great Depression. And there was another world war not so long after the gold standard was abandoned. I’m not sure how much can be made of any of this – maybe I’ll have a better idea after reading the rest of Polanyi’s book – but to me it seems likely that abiding by and ultimately reneging on the gold standard held more far-reaching consequences than, for instance, the US Congress relaxing one of its self-imposed constraints (e.g. the debt ceiling).
The other implication I want to draw out of all this is that the breakdown of a gold standard and resumption of fiat money seems to represent a significant step forward in social terms. The attempt under a gold standard to reduce social relations (e.g. a promise) to a thing – an inanimate object, gold – suggests an incredible vote of no confidence in humanity. Of course, it was illusory. There was no escaping the fact that, ultimately, the success of social relations depend on people, not things. Attributing mystical powers to a thing as a safeguard against breakdowns in human relations is a superstitious act.
For this reason, I find it strange when some people (e.g. gold bugs) seem to view the break from a gold standard or commodity-backed money system with skepticism, and suggest that, being based on nothing ‘real’, it will not last, or cannot be sustained. This is unfortunate for at least two reasons. First, such notions are incorrect. Social relations (e.g. promises) are real. They are immaterial but real. Second, rather than doubting the sustainability of money (a social relation) that is not reduced to a thing, it makes more sense to consider what the abandonment of such a monetary system means in terms of democratic potential and the scope for human development.