Value of Fiat Money on the Basis of Marx in Light of MMT

In Marx’s theory, formulated in terms of the gold standard of his day, the value of commodity money is taken to be the amount of simple socially necessary labor required to produce gold. This treatment of the value of commodity money is consistent with Marx’s treatment of commodity value in general, which always represents amounts of socially necessary labor time. Since the value of the currency under a gold standard depends not only on the labor time required to produce gold but the rate at which gold is exchanged for currency, the question arises as to whether it is gold that is actually “real money” in such a system, or, rather, state currency, issued and exchanged at a fixed rate for gold, that is real money. If it is gold that is real money, Marx’s theory would seem to suggest that there is no value underlying fiat currency, since fiat currency takes zero (or negligible) labor time to produce. If, instead, state currency can be real money in Marx’s framework, then fiat currency can be conceived as having value in much the same way as currency under the gold standard. In either system, the currency is produced with zero (or negligible) labor, but obtaining a unit of the currency requires a definite amount of socially necessary labor time to be performed by non-government. From non-government’s perspective, it is as if that amount of labor is required to “produce” a unit of the currency. There is no suggestion, here, that this was Marx’s view, or that there is textual evidence for it. But it is suggested that taking this interpretation enables Marx’s notion of the value of money as an amount of socially necessary labor to be extended to fiat money.

In a fiat-money system, if the minimum wage is ten dollars per hour and minimum-wage labor is considered to represent simple labor, then it takes six minutes of simple labor time to obtain a dollar. Six minutes of simple labor will be the value of the currency. (Workers perform this labor. Capitalists induce it from others in exchange for a payment of wages.) Similarly, under a gold standard, a certain amount of labor is performed to produce a commodity that is exchangeable at a fixed rate for the state currency.

In a gold standard, the rate at which gold is exchanged for currency is fixed by the state. There is also always the possibility that the state will alter the fixed rate at which currency and gold are exchanged. This will cause the value of the currency to change. Likewise, in a fiat-money system, if the government changes the terms on which it issues its currency, such as altering the minimum wage, the value of the currency will change.

This, again, seems to raise the question of what is really money. Is money a commodity, or a social arrangement? And it raises the question, what is really behind money? Is it backed by a commodity, out of human hands, or backed by the state (or grouping of states) that sets the terms on which currency is issued?

Since the rate of exchange under a gold standard is determined by the state, just as the minimum wage and other terms of issue are determined by the state in a fiat-currency system, it seems plausible to suggest that money is ultimately social (fiat based), not natural (commodity based), even during periods in which a commodity standard is maintained. On this interpretation, there is a real basis (in Marx’s sense) to the value of a commodity money for the same reason that there is a real basis to the value of fiat money. In either monetary system, non-government performs a certain amount of socially necessary labor in exchange for the state currency.

If this reasoning is accepted, we arrive at the conception of the value of the currency proposed in Modern Monetary Theory (MMT). (Well, really, we arrive at an MMT-influenced interpretation of Marx’s conception of the value of money.) In this conception, it is not denied that gold is quite different to currency. Gold has intrinsic value. Currency does not. Gold may have some attraction to wealth holders that currency does not. But, from the MMT perspective, the reason for this difference in attractiveness would be gold’s property as a real, physical asset, not it’s (sometimes proposed) property as real money. Currency, unlike gold, is only a financial asset. Fiat currency, in particular, is only a nominal claim on real assets. Currency under a gold standard is, in principle, a fixed claim on a particular real asset, though a fixed claim that can ultimately be altered by the state.

Just as the value of the currency under a gold standard is contingent on the state-determined fixed exchange rate with gold, the value of the currency in a fiat-money system is contingent on the terms government specifies and enforces in issuing its currency. Ultimately, successful maintenance of the currency depends on the stability of government and, in particular, the government’s capacity to enforce a tax obligation sufficient to maintain a demand for the currency. If the state itself collapses, the currency likely collapses with it, yet gold remains a real asset. That is not to say that the attractiveness of gold, as a real asset, is completely immune from social upheaval. Like any real asset it might end up being confiscated. Still, gold and other real assets such as real estate might, at least under some circumstances, be a safer asset than currency, being physical rather than only financial.

Nevertheless, as long as a fiat currency exists, it seems that its value can legitimately be conceived in terms of socially necessary labor time, just as the value of a commodity money or commodities in general can be conceived in these terms, separate from their physical attributes and intrinsic value.

The value of gold (the commodity) depends on conditions of production in the gold industry. The value of currency (whether fiat or gold based) depends on conditions set down by government. The amount of labor required to obtain a unit of currency under a gold standard (assuming the fixed rate of exchange endures) typically varies only slowly (in contrast to its fluctuating price on the commodity market) as efficiency in the gold industry advances. The amount of labor required to obtain a unit of fiat currency also typically varies only slowly as the state allows gradual increases in the minimum wage or – in the absence of minimum-wage legislation – as the wage paid to simple labor gradually evolves. In both types of monetary system, the value of the currency will decline as the amount of labor necessary to obtain a unit of the currency declines. Needless to say, this does not mean, in either system, that total currency on issue commands less use values, nor necessarily that a unit of the currency commands less use values (this will depend on changes in productivity and inflation). A reduction in currency value simply means that it takes less socially necessary labor time to obtain a unit of the currency.

The underlying reason people agree, happily or otherwise, to sell their labor power in exchange for the government’s intrinsically worthless fiat money as opposed to some other money (whether a commodity money, a private money or another fiat money) is that the government has imposed – and enforces – a tax obligation payable only in its own money. At least, this is the chartalist and MMT view. The amount of labor time that has to be worked in exchange for the government’s money will determine the value of the currency. Again, this is the MMT view, but seems compatible with Marx’s reasoning if extended to fiat currency. Government can intensify or ease the tax burden, relative to its expenditures and lending conditions, thereby impacting on the degree to which there is necessity to obtain the fiat currency. For instance, tight fiscal policy (tight in relation to private and foreign spending levels in the domestic economy and potential output) results in unemployment. This indirectly affects the value of the currency by increasing the need to obtain currency while simultaneously making it more difficult to find or stay in employment. When, in this way, workers are made more “willing” to perform labor – the willingness of course being under duress – employers are given greater power in the setting of wages and the decline in the value of the currency is likely to decelerate.

The same considerations would seem to apply to gold and fiat currency when it comes to the notion of “world money”. Gold is in international demand, but so too are fiat currencies. The underlying reason a fiat currency is demanded by foreigners is the same as the reason it is demanded in the nation of issue. There is an enforced tax obligation that requires some people – citizens of that nation – to obtain the currency for the purpose of paying taxes. And the reason the currency has value, in Marx’s sense, is that a definite quantity of socially necessary labor must be performed by non-government to obtain a unit of the currency.