Marx and Monetary Theory

In the context of the current crisis, with ‘quantitative easing’ to the tune of hundreds of billions of dollars on the one hand and the rush to liquidity that accompanies financial crises on the other, it may be useful to take a look at how Marx’s economic theory relate to issues of money and monetary policy. The aim here is to provide a clear and understandable overview of what Marx’s theory of money was, how it relates to our current-day monetary system internationally, and how this relates to his value analysis generally. I will not aim to say anything particularly new or original, nor go into everything in the depth it really deserves, but I will limit myself to providing a general popular overview, as much as the rather abstract nature of the subject allows.

Modern-day neoclassical economics has often been particularly criticized for the weakness, or really nonexistence, of a serious theory of money. For neoclassical economics, all that matters about money is the fact that it is generally accepted and functions to reduce transaction costs in exchange (when compared to barter). This is the story of money generally presented in high school economics textbooks, where eventually people get tired of having their goods spoil and having to carry heavy items around and decide to mutually accept something tangible and not particularly productively useful, like gold, in order to facilitate exchange. This allows division, savings, and so forth, and thereby is beneficial to this simple economy and helps make it sophisticated. Usually the bridge between gold as a measure and paper money is not even made, and the story boils down to nothing more sophisticated than saying that money is generally accepted because it is generally accepted. Even in more serious and academic neoclassical economics, it is rare to see any systematic attempt at drawing a theory of money into a larger framework of an economy; money usually is nothing other than a numeraire, i.e. a number for counting, considerations of its independent role limit themselves to theories of inflation and its consequences, and money and crisis theory are seldom related at all. As Dan Lavoie has pointed out:

Neoclassical models often employ so sterile a concept of money as to preclude the development of an adequate explanation of the gross macro-economic disorders we call crises. 

Most of neoclassical economics relies at the macro level on Walrasian general equilibrium theory, in which one way or the other all supply and all demand must match; but while Walras was quite aware that this reduced money to no more than a numeraire, without an independent role, and that this was unrealistic, the significance of this seems to have faded from view since.

The result of there being no seriously integrated theory of money in neoclassical economics has somewhat oddly been that this field has been ceded for the most part to the Austrian school of economics. Their most famous disciple in particular about monetary theory in recent years is the American libertarian politician Ron Paul, whose platform of isolationism in foreign policy is as unorthodox nowadays as is his explicit insistence in domestic policy on the return of the gold standard. Austrian economics makes much hay out of their positions on monetary theory, which I think its proponents themselves consider one of its foremost salient points; but other than such policy ideas as ‘free banking’ and the obsession with the gold standard, the core of the theory in fact is (as it is in most other respects) ‘more Romish than the Pope’ on the issue of general equilibrium. In fact, Austrian monetary theory really denies that there is or can be such a thing as a theory of money, stating that in reality there is only a theory of prices.(2) Hence their desire for the gold standard and their never-abating struggle against what they see as the evils of inflation consequent on the creation of central banks issuing fiat money – from their point of view, all they can do is drive up the numéraire, distorting the expectations in the market, without at all making any substantial difference. While for neoclassical economics the ‘neutrality of money’, i.e. its effective irrelevance in terms of playing an independent role in economic theory, is merely a long-run assumption, for Austrian economics this is an absolute necessity.

Yet crises occur, and if we are not to ascribe every crisis to a ‘no true Scotsman’ style failure to follow some necessary (but apparently avoidable) logic of the market, as the Austrians do, we must take the possibility of disequilibrium seriously. This applies to money supply as much as to anything else. The most influential current-day proponent of this viewpoint is of course John Maynard, the Lord Keynes. Although his theories were written off by most liberals as being proven wrong and/or hopelessly outdated after the ‘stagflation crisis’ of the 1970s, he has opportunistically come into vogue again as those same liberal bankers and economists now have been driven into the defensive in the wake of one of capitalism’s most serious crises since 1932. It makes sense in such times for theories that understand disequilibrium, or at least the possibility of disequilibrium, to become popular again. This is all the more so for Keynes since most people’s basic understanding of him is not at all based on knowledge of his actual economic doctrines, but rather on a perception of the man as an icon of social-democratic politics on the one hand, including state support to increase employment, and skepticism about laissez-faire in the finance ‘industry’ on the other hand. Neither are ideas to be sneezed at by any means, but it will not do to claim to be a Keynesian just because it happens to be politically convenient. One must also understand and address his economic theories, and compare them with other theories of disequilibrium.

Keynes made some major steps in moving toward a realistic analysis of capitalist monetary theory by abandoning Say’s Law (i.e., supply creates its own demand) and accepting the possibility of a ‘general glut’ of commodities, which when unrealized will cause capitalist crisis. By doing so, he more or less single-handedly unfettered the left hand of neoclassical economics, namely macroeconomics, which since then has not known what the right hand (microeconomics) has been doing. The former branch of economics has maintained the possibility at least of disequilibrium by emphasizing the need for ‘stabilizing the economy’ by means of monetary policy, which at least implicitly recognizes that instability would otherwise be inherent, while the latter branch is unconcerned with this.(3) However, we should not all now become Keynesians again, as Paul Krugman and others perhaps would have us. Keynes created a disequilibrium economics in which money plays an independent functional role, in other words, in which money is non-neutral even in the long term. More strongly, the post-Keynesian tradition, which has built on Keynes but also attempted to integrate to some extent ideas now truly heterodox in current economic literature such as those of Ricardo, Sraffa and some Marx, has even emphasized the importance of money as a social factor more generally. The point here is that it is simply not the case that a capitalist, modern economy can be represented as if it is an enormously complicated barter auction in the manner the Walrasian tradition presents it (although full well aware that this is a simplification). For the post-Keynesians, it is then of prime importance to analyze the economy by what has been dubbed ‘Monetary Analysis’, rather than ‘Real Analysis’, whereby money is an integral part of the system. Keynes’ analysis of money’s social role here however does not actually lead to very far-reaching conclusions, other than producing a monetary theory of price and wage stickiness, of inflation, and raising at least the very possibility of the substitution elasticity of money (i.e. the possibility of people, in times of crisis, deciding to do without it and replacing it with some other means of exchange).(4)

Yet it has so far only been Marx who has presented a truly integrated theory of money, one in which money is analyzed historically, as a commodity among other commodities in capitalism, and finally as a commodity with special properties, just like labour power is a commodity with special properties. Marx’s monetary theory is perhaps his least discussed and least appreciated sub-theory in the whole of Marxist economics, quite likely because monetary theory generally is often seen as too complicated, too abstract and too dry to sustain the interest of even those few who would want to read about economic theory in the first place. For this reason, I shall endeavour to keep it simple, although this comes at the expense of being able to fully address all the aspects of Marx’s theory and its pros and cons compared to the neoclassical and post-Keynesian one.

Marx sets out by rejecting the idea that there is no significant qualitative difference between a barter economy and a capitalist one, and ridicules the notion that money is just a “cunning device” for overcoming the “technical difficulties” presented by barter.(5) On the contrary, to understand the role money plays in a specifically capitalist economy it is essential to understand that such an economy is characterized by general commodity exchange, that is, that commodity exchange is the way people as economic actors relate to each other in such an economy. Now for any commodity to be exchangeable with another, it is necessary to compare their relative values; and if there are very many commodities, this means that when each commodity is the measure of value of all the others, there is a humongous amount of different standards of exchange value. It makes sense, therefore, that there be one commodity which functions as the measure of exchange of all the rest: this is the money commodity. (If not, one would obtain the same indexing problems economic historians have nowadays when attempting to create an equivalent measure of value for commodities at different historical periods.(6)) Money of course has existed for a very long time, and in pre-capitalist societies; but Marx sees the unfolding of the monetization of the economy exactly as the unfolding of the law of value in those economies, the gradual dominance of the commodity form as the means of reproduction of mankind’s social relations. As commodity exchange becomes dominant, and thereby exchange value the dominant measure (rather than the utility or use value of individual items), so too does money become the life-blood of commerce. As Marx puts it in Capital:

The historical progress and extension of exchange develops the contrast, latent in commodities, between use-value and value. The necessity for a giving external expression to this contrast for the purposes of commercial intercourse, urges on the establishment of an independent form of value, and finds no rest until it is once and for all satisfied by the differentiation of commodities into commodities and money. At the same rate, then, as the conversion of products into commodities is being accomplished, so also is the conversion of one special commodity into money. 

(7) This is Marx’s historical theory of money.

Here we have then money as an accepted measure of exchange value, a commodity produced for this purpose. Marx assumes throughout Capital that this commodity money exists and that it takes the form of gold, freely produced in the capitalist market, for which currencies are exchangeable at the central bank. Needless to say, this is not at all the case today in the world market nor in any specific national market. Does this then invalidate Marx’s theory as an outdated metallic one? The answer, of course, is no, as Marx then sets out to explain the different other functions and further development of money under capitalism, starting from the vantage point of its role as accepted measure of value. When the capitalist economy fully develops, the gold standard, this fetish of the Austrian economists, becomes a fetter on the full unfolding of the value economy. There will be times when the economy is growing and yet the private supply of gold is not, and over time the development of credit and thereby the finance industry will cause a tremendous expansion of the available capital at any given time, which a gold standard cannot match. Moreover, with money functioning as the measure of value, the point of capitalism for the capitalists becomes the accumulation of money, rather than the accumulation of wealth in the form of use values. The demand for money therefore massively increases as capitalism comes fully into being.(8) The result then is that the gold standard works as a strong deflationary drag on economic growth, i.e. capitalist accumulation, and on the credit system. It must therefore be overcome, and it is overcome.

Commodity money is replaced by symbolic money, i.e. credit bills and the like, which can overcome temporally the restrictions that gold convertibility imposes. Over time, as such symbolic money expands, the convertibility with gold becomes totally obsolete for the purposes of money and accumulation; soon, it is abandoned. The result is that one is left with two forms of money that prevail: the one is fiat money, which is (usually) worthless paper functioning as money because of the guarantee by a particular state that it shall be accepted as a measure of value, and the other is credit money, which takes the form of private claims on banks, i.e. banknotes. The state over time tends to take over this latter form, because for these private banknotes to function fully as money in a developed capitalist economy, they must be universalizable as a measure of exchange value, as we have seen; and private issuing of banknotes contradicts this. So one private issuer must take the form of the state authority as issuer, which then becomes the central bank to which all other banks are subjected. This does away also with the Austrian illusion of ‘free banking’. Again, the state entirely replaces the innate connection between money and commodity-value, by authorizing fiat money.(9)

How then does this work, however, at the level of the world market? After all, there is no single state there that sets price numéraires and authorizes fiat money. Marx, still assuming gold standards, states therefore that there can be no ‘world money’, since individual currencies lose their function as standards of local exchange value and become mere gold bullion, a commodity like any other.(10) This then also constitutes a barrier to capitalist expansion, to the universalization of the value logic (even though it can give ample opportunity for individual capitalists to make money on currency arbitrage). One possible solution is to have one currency remain controvertible with gold, and to make all other currencies effectively bound to this one currency on the basis of a controvertibility of their own; this combines the possibility of a world money with the gold standard. This system was historically the Bretton-Woods system, where the US dollar remained on the gold standard and all other major currencies were controvertible with the US dollar according to set (bandwidths of) exchange ratios. However, this still leaves the major currency with the problem of the gold standard as described above, something which will become in particular problematic during a crisis period when the gold standard’s severe deflationary effect makes itself felt. For this reason, the American President Nixon abandoned the gold standard in 1973. This then irrevocably forced world capital into the second solution, namely a world money as fiat money; and this then of course also implies a world state with the power to maintain its guarantees for this currency, just like national governments do for their own fiat money. Again, the United States has ever since endeavoured to play this role on the world stage, and some of the current crisis can be understood as a currency crisis, a crisis of the ability of the ‘world state’ to maintain its currency, both the US dollar and the new competitor world money, the Euro. But that is a subject for a separate essay.

In order to sum up Marx’s theory of money, we must finally consider what makes money so special within a capitalist economy, what makes it different from other commodities in Marx’s theory. We have noted that one such thing is the role of demand for money. But fitting Marx’s conception of commodities’ dual nature, money itself has a separate dual nature next to the ‘normal’ dual nature of all commodities. This special dual nature is the time factor in money, in other words, the ability to hoard and to dishoard money. Since in Marx’s conception capital is nothing other than value in motion, and capitalism only exists in and through constant movement to accumulate, any stock of money is nothing other than a hoard waiting to be thrown into circulation at a convenient time, i.e. as capital; and equally, any expenditure of money as capital is nothing else but a dishoarding of money, whether in cash or in credit, for the purpose of accumulation. As a result, money’s potential role as capital makes it contradictory in nature: it is always “held in order to be spent, and spent in order to be held by another”.(11) Since there exists uncertainty about future investment and future circumstances in the market, the hoarding-dishoarding role of money necessarily implies the possibility of disequilibrium; it is subject to changes in the expectations about future investment. This identification of uncertainty as inherent in money because of its role in private investment, nonneutralizable by any monetary policy, Marx and Keynes have in common.(12) All of these considerations apply to fiat money as much as to commodity money. However, it is important to note that Marx’s assumption of a gold standard, while as we have seen not strictly necessary within his theory, does play a real role when we look at the role gold plays as a reserve money. Whenever there is a time of crisis, the creditworthiness of the state and its backing of fiat money may come into question, especially if the crisis is severe and international in nature. It is in these times that the demand for the specific fiat money falls, and the demand for gold increases as a universal substitute for symbolic money, a commodity money that can play the role of universal exchange value in a time when fiat money’s value has collapsed. Here we see the fundamental contradiction that affects fiat money – it is by nature an attempt to dislodge money from its basis in commodity values, in order that capitalist expansion isn’t limited in boom times by the restricted nature of a gold or even silver standard, but as with any element of the capitalist economy it is impossible for the value connection to disappear entirely. As Park describes it so well, “even though the labour-value dimension as an anchor of the value of money is severed from the monetary system its effect seems to linger on behind the scene.”(13)

So although the move to fiat money overcomes the restrictive corsage of the gold standard, it also (as the Austrian economists never let us forget) introduces chronic inflation into the system. Since the only thing underwriting the value of the fiat money, and thereby its real usefulness as universalised exchange value, is state credibility, there is a constant risk of such credibility coming into question. Here, again, the psychology plays an important role. The central banks of the different capitalist states with fiat money are forced to hunt down and repress inflation more severely than the Medieval heretics ever were, in order that a vicious cycle be avoided where the expectation of inflation leads to a lower estimate of the credibility of the currency’s value, leading to more inflation, etc. The existence of the state and its role as guarantor of money and crusader against inflation then is, as Park has pointed out, completely endogenous to Marx’s theory of money. This puts it miles ahead of any competing theory in its ability to ‘link up’ money as a social phenomenon with other social phenomena such as the state, the private nature of investment, the psychology of expectations, and so forth, even beyond Keynes.(14) Marx’s theory of money besides is able to encompass both metallic and non-metallic money, and moreover analyzes each of them as a counterpart of the other, whereby the uniting aspect of both is the contradiction in capitalism between the need of capital to expand indefinitely and the need for money to be universalizable exchange value, i.e. bound to real value production and its realization in trade.

In this sense, fiat money plays an analogous role to credit in the theory of crisis: financial crisis occurs when the expansion of pure credit, functioning as fictitious capital, exceeds in a certain critical mass the real production of new value. Some exogenous or endogenous shock then causes a sudden reverse in the trend, a demand for liquidity becomes paramount, the fictitious capital evaporates, and a severe crisis occurs. Fiat money plays a similar role in that, as we have just explained, when the expansion of fiat money exceeds in a critical mass the real production and realization of value, this threatens the credibility of the state and the value of its money, and the result is severe inflation. Repressing this inflation then requires a contractionary approach, as would have occurred automatically under a gold standard system – the difference with the gold standard of course still being the ability to expand during boom times and the much greater freedom for states to choose and adapt policies to combat the threat of inflation and loss of credibility, even up to accepting certain high levels of inflation as a semi-permanent ‘feature’. Yet one important strength of Marx’s theory of money is exactly that it does not fully equate the two. Money is a medium of exchange, a measure of value, and a store of wealth, and all three of these are important and interdependent.(15)

What does this imply then in terms of monetary policy? We have seen that the romantic reactionary critique of fiat money by Ron Paul and other proponents of the Austrian school is beside the point. As with all their romanticism about the supposed unspoilt Paradise of the free market in the 19th century, they miss the reasons why capital has ‘moved on’ since then. A gold standard is highly deflationary, translates virtually any internal or external shock into crisis, and restricts the ability of capital to expand during boom times. At the same time, fiat money overcomes the latter restriction, but at the cost of running the risk that it ‘loses sight’ of the necessary connection between money and the real movement of value. This creates the problem of systematic inflation on the one hand, although how bad inflation actually is (especially as against unemployment) is a disputed topic, and more significantly the possibility of monetary crisis analogous with financial and credit crisis on the other hand. In both cases, it is capital’s own expansion that then causes it to run into the barriers it has set itself. This is Marx’s general theory of capitalist crisis, of which his theory of money is an essential part.

1) Dan Lavoie, “Some Strengths in Marx’s Disequilibrium Theory of Money”, in: Cambridge Journal of Economics 7:1 (1983), p. 56.
2) See e.g., Joseph Salerno, “A Simple Model of the Theory of Money Prices”, in: The Quarterly Journal of Austrian Economics 9:4 (2006), p. 39.
3) For this point, see
4) Allin Cottrell, “Post-Keynesian Monetary Economics: A Critical Survey”, in: Cambridge Journal of Economics 18:3 (1998):, p. 10, 16.
5) Karl Marx, A Contribution to the Critique of Political Economy (New York, NY 1970), p. 51.
6) Lavoie, p. 60.
7) Karl Marx, Capital Vol. I, (New York, NY 1967), p. 86-87. Quoted in: Steve Shuklian, “Karl Marx on the Foundations of Monetary Theory”. Marshall University Working Paper 00-02-A, p. 7.
8) For these and following points, see: Hyun Woong Park, “Endogeneity of Money and the State in Marx’s Theory of Non-Commodity Money”:, p. 9-10.
9) Park, p. 11.
10) Park, p. 12.
11) Lavoie, p. 63.
12) Lavoie, p. 64.
13) Park, p. 16.
14) Park, p. 16-17.
15) Lavoie, p. 60.


Nice exegesis. Makes me look forward to V2 and V3 of Capital.

Also, this, particularly as prefaced by some of your comments about disequilibrium:

“financial crisis occurs when the expansion of pure credit, functioning as fictitious capital, exceeds in a certain critical mass the real production of new value. Some exogenous or endogenous shock then causes a sudden reverse in the trend, a demand for liquidity becomes paramount, the fictitious capital evaporates, and a severe crisis occurs.”

Sounds very much like Didier Sornette’s complexity systems-inspired account, presented in “Why Stock Markets Crash,” of bubbles in financial markets:

“Most approaches to explaining crashes search for possible mechanisms or effects that operate at very short time scales… This book presents a radically different view: the underlying cause of the crash will be found in the preceding months, and years, in the progressively increasing build-up of market cooperativity, or effective interactions between investors, often translated into accelerating ascent of the market price (the bubble). According to this “critical” point of view, the specific manner by which prices collapsed is not the most important problem: a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. Think of a ruler held up vertically on your finger: this very unstable position will lead eventually to its collapse, as a result of a small (or an absence of adequate) motion of your hand or due to any tiny whiff of air. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. In the same vein, the growth of sensitivity and the growing instability of the market close to such a critical point might explain why attempts to unravel the local origin of the crash have been so diverse. Essentially, anything would work once the system is ripe.”

I’ve read Capital, but hadn’t really thought the monetary portions really all that interesting. Now I’m going to reread them and a few of the things you cited because I now realize their significance.

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