People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 44

November 03, 2013


Capitalism and the Value of Money

Prabhat Patnaik


CAPITALISM is pre-eminently a money-using system. Commodity exchange in this system is necessarily mediated by money: between the sale of a commodity and the purchase of other commodities from the proceeds of this sale, these proceeds must be held for a greater or lesser length of time in the form of money. A certain proportion of their wealth, it follows, is always held by individual wealth-owners under capitalism in the form of money. Contracts for payments in the future are made in terms of money. All these become possible because of a pervasive general belief that the value of money in terms of the world of commodities is unlikely to experience any drastic decline.


Lenin was aware of the dangers to capitalism posed by a decline in the value of money vis a vis the world of commodities. John Maynard Keynes in his famous book, The Economic Consequences of the Peace, published in 1919, had this to say about Lenin: “Lenin is said to have declared that the best way to destroy the Capitalist System is to debauch the currency..As the inflation proceeds..all permanent relations between debtors and creditors which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless..Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”


The necessity to prevent such a debauchment of the currency increases as the volume of financial assets increases relative to that of produced commodities. Any decline in the value of money vis a vis commodities, entails, other things being the same, a decline in the value of financial assets as well, since their money value is independently determined and is not indexed to the prices of commodities. What some economists call “financialisation”, ie, the enormous growth in the size of the financial sector in modern capitalism, increases a myriad-fold the need to ensure that the value of money remains stable, so that the command over resources represented by financial assets does not diminish.


Since the preservation of the value of money is so important for capitalism, how is it actually achieved? The first and the most obvious means of doing so is the reserve army of labour. The reserve army is usually seen only as a means of restricting the real wages so that the process of appropriation of surplus value remains unimpaired. But the reserve army does not affect only the real wages; it plays the role above all of ensuring that the money wage claims of workers remain restricted. If the reserve army of labour becomes too small, ie, the unemployment rate falls below a certain level, then money wages and prices in the capitalist economy would shoot upwards. Joan Robinson the renowned Cambridge economist had called this an “inflationary barrier”; the imagery was of a wall of inflation which constituted a barrier, preventing the unemployment rate from moving any further in a downward direction.


But the perennial maintenance of a reserve army of labour is only one of the means for preserving the value of money. Such preservation also requires that there should be no inflationary pressures arising from a rise in the prices of the primary commodities which are produced in distant lands often by pre-capitalist producers and then imported into the capitalist metropolis. The prices of these commodities in terms of the currency of the capitalist metropolis must also not increase.


This latter was historically ensured through colonialism. Even after the end of formal colonialism it is ensured by a range of new devices, all of which constitute the architecture of imperialism More generally therefore one can say that one of the functions of imperialism, both in the past and now, is to ensure this stability in the value of money.




Since the first of these mechanisms, viz, the maintenance of a reserve army of labour is quite well understood, let us concentrate on the second mechanism, ie, the role of imperialism (used in a more inclusive sense than Lenin had done). And here there are two distinct issues. The first is that the money incomes of the producers of these commodities, the peasants and petty producers in the “outlying regions”, must not be allowed to increase; and this is ensured through the fact that they are themselves situated within a vast “reserve army” ( a second reserve army as it were) located in these “outlying regions” and created though the colonial processes of “drain of wealth” and “deindustrialisation”.


These processes created mass unemployment which never got eliminated through absorption into the capitalist sector, either in the metropolis (to which in any case the third world unemployed could not migrate at will owing to restrictions on migration that exist to this day), or in the third world itself. There is therefore a permanent pool of unemployed, underemployed, semi-employed, informally employed, and disguised-unemployed persons in the third world, which ensures that the bargaining power of the third world petty producers is never strong enough to impart an autonomous upward push to their money earnings.


Usually it is only the reserve army of labour existing in the metropolis itself that is recognised as such. The existence of the vast unemployed and underemployed mass that also acts as a labour reserve for capitalism, restricting the real wages and money wages not only of workers in their immediate proximity in the third world, but even of workers in the metropolis itself in a situation (as now) of free flow of goods and capital across borders, and also keeping down the money earnings of the petty producers who sell primary commodities to the metropolis, is often not recognised as such.


Metropolitan capitalism in fact has not only a local labour reserve but also a distant labour reserve, which, even when it exists as labour reserve, plays the role of keeping all workers, and primary commodity suppliers, in check, and which can be called upon periodically to even provide actual labour supply to the metropolis when needed, as in the post-war period. These local and distant labour reserves therefore have the important function of ensuring stability in the value of money in the capitalist metropolis.




Let us now move to the second issue. And this concerns the fact that as accumulation occurs, the demand for such commodities produced in the “outlying regions” increases; and if their prices are not to increase, for that again would jeopardize the value of money, then their supplies must keep increasing. But many of these commodities, for instance those produced from the tropical land mass, are such that their supplies cannot be augmented easily. The magnitude of the tropical land mass is given and cannot be augmented; unless substantial steps are taken to bring in multiple cropping, or to raise the land yield through technological progress, the output of commodities produced on this land mass simply cannot be augmented.


These steps however require State effort; and apart from a brief period after decolonisation when the dirigiste regimes in the third world undertook such effort, through public investment in irrigation, through research carried out in government institutions to develop high-yielding seed varieties, through erecting a massive network of extension services, through making inputs including institutional credit cheaply available to the peasantry, and through offering assured remunerative prices, this effort has been conspicuous by its absence. Under these circumstances, supplies of these commodities to meet the requirement of the capitalist metropolis have been ensured by squeezing their absorption within the “outlying regions” themselves.


This was blatantly done during the colonial period. Indeed the “drain” and “deindustrialisation” had the effect of reducing local purchasing power and hence local absorption of a variety of goods which then became available to the metropolis without any increase in their prices. And even if these were not the goods directly required by the metropolis, the land that was devoted to their production within the third world, could now be switched to the production of those goods which were demanded within the metropolis. We thus had a system of absolute impoverishment of the third world population to make goods available to the metropolis without any increase in their prices and hence without any threat to the value of money or any prospects of “debauchment” of currency.


In the more recent period, the neo-liberal dispensation, by restricting government expenditure through “austerity”, which also squeezes purchasing power in the hands of the people; by cutting down on subsidies directed to the petty producers and the people at large; by privatising essential services and hence making them more expensive; restrict the absorption of goods by the domestic population, which in turn makes possible larger supplies of such goods, or of others that compete for the same land mass, to the metropolis.


Notwithstanding all these measures of “income deflation” imposed on the people in the third world economies, however, these supplies sometimes may still be insufficient for the needs of the metropolis, in which case their prices rise relative to the money incomes of buyers within the third world economy itself, and supplies are released by what economists call “forced saving” by the third world buyers. They are forced in other words to absorb less, not because their money incomes are squeezed but because the prices they have to pay increase relative to their money incomes.


Such increase in prices of commodities however is not allowed to affect the metropolitan economy and the stability of the value of its currency, because the exchange rate in the third world goes down in tandem with the rise in prices, so that the dollar prices of such commodities do not increase. This does not even require any specific intervention: if there is inflation, then wealth holders expect the exchange rate to depreciate and they speculate against the third world currency, so that the exchange rate actually depreciates.


Capitalism in short has a whole array of measures in place to ensure that there is no debauchment of its currency. But an important fall-out of it, not often recognised, is that significant segments of the world’s population get absolutely impoverished in the process. Marx’s insight that the capitalist system creates wealth at pole and poverty at another is as true today as it ever was.