Questions about fiat currency.

[Broletariat]

So yea I understand the whole deal with how gold became the money commodity with the exchange-value of gold being the standard upon which all other exchange-values were compared against and stuff.

So uhh, how does fiat currency fit into this exactly? Do the problems with currency as a means of circulation and as a storage of value still exist or have they been moved?

[Black Sheep]

Wow, Fiat has its own currency?

[Broletariat]

Wow, Fiat has its own currency?
uhm

>_>

I was kind of hoping for some actual clarification here.

[Black Sheep]

What's the exchange rate from fiat currency to mazda currency?

[Red Commissar]

What is it you want to know exactly about Fiat Currency? The reasons that it came to be adopted by most nations or how it works?

[jake williams]

I'm fairly sure there's a part in Capital where Marx hints at the development of fiat currency, if you're curious, but there isn't a whole lot to it anyway. There's a bit of a difference, in principle and even in practice, between fiat money and gold money, but it gets really overstated by libertarian extremists who are actually considered pretty marginal by the more sophisticated bourgeois economists. Arguments about fiat money are really arguments that Keynesian monetary policy is a, or the, main source of problems in capitalist economies. It isn't. In cases where the value of fiat money is arbitrarily changed to some significant extent, it can cause problems, but otherwise it isn't actually that different in practice.

[Kotze]

The advantages of a currency not backed by gold are usually understated by economists, mainstream and Marxist.

There is a link between gold-backed currency, mercantilism, and war. How can a nation increase the amount of currency in circulation if the currency is at fixed parity with gold and that nation doesn't have access to gold mines? A similar question with a similar answer: How can a nation increase the amount of currency in circulation if they peg it to another currency? The answer is: Trade surplus, which requires others having a corresponding trade deficit. If you have a gold-backed currency, you get obsessed with having a trade surplus.

This was pointed out by Keynes ages ago, among other texts with his notorious bottle proposal.
It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly “wasteful” forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict “business” principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

The analogy between this expedient and the goldmines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilisation. just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress — failing something better.
Never in history was there a method devised of such efficacy for setting each country’s advantage at variance with its neighbours’ as the international gold (or, formerly, silver) standard. For it made domestic prosperity directly dependent on a competitive pursuit of markets and a competitive appetite for the precious metals.Terms to look up: Chartalism, Functional Finance/Modern Monetary Theory.

[ExUnoDisceOmnes]

So yea I understand the whole deal with how gold became the money commodity with the exchange-value of gold being the standard upon which all other exchange-values were compared against and stuff.

So uhh, how does fiat currency fit into this exactly? Do the problems with currency as a means of circulation and as a storage of value still exist or have they been moved?

It's interesting how the idea of fiat currency fits into the Labor Theory of Values... Essentially, in Capitalist society production is based around exchange value. Companies produce to maximize profit, which fosters waste at massive levels. Fiat currency helps to facilitate this. Many modern capitalist countries are run on expansionist economies. If new markets aren't constantly opened and if there isn't constant growth, the entire system collapses. Fiat currency allows the creation of an international exchange rate economy.

However, many communists and anarchists alike advocate for the abolition of such a currency. Fiat currency, as I've said, is based around an economy that wants to maximize profit through exchange rate. This causes overproduction, underproduction, artificial inflation, and many other problems that are detriments to national and international economies alike.

With the abolition of fiat currency, nations can produce according to use value. They produce what is needed when it is needed. The world has a limited amount of labor force, and use-value economics ensure that none of it is wasted, allowing for the most rapid economic and industrial advancement.

With greater economic advancement comes a raised standard of living, better education, and the ability for mankind to better itself.

In summation, fiat currency facilitates destructive capitalist economics and holds back economic forms that lead to greater equality.

[Broletariat]

It's interesting how the idea of fiat currency fits into the Labor Theory of Values... Essentially, in Capitalist society production is based around exchange value. Companies produce to maximize profit, which fosters waste at massive levels. Fiat currency helps to facilitate this. Many modern capitalist countries are run on expansionist economies. If new markets aren't constantly opened and if there isn't constant growth, the entire system collapses. Fiat currency allows the creation of an international exchange rate economy.

However, many communists and anarchists alike advocate for the abolition of such a currency. Fiat currency, as I've said, is based around an economy that wants to maximize profit through exchange rate. This causes overproduction, underproduction, artificial inflation, and many other problems that are detriments to national and international economies alike.

With the abolition of fiat currency, nations can produce according to use value. They produce what is needed when it is needed. The world has a limited amount of labor force, and use-value economics ensure that none of it is wasted, allowing for the most rapid economic and industrial advancement.

With greater economic advancement comes a raised standard of living, better education, and the ability for mankind to better itself.

In summation, fiat currency facilitates destructive capitalist economics and holds back economic forms that lead to greater equality.
This post was especially helpful in clarifying my question.

How does fiat currency fit into the LTV? You didn't really answer that I feel.

[Zanthorus]

It seems that the creation of a fiat currency would merely be the final abstraction of value from use-value. Marx notes that when a particular commodity becomes the money-commodity, it's use-value becomes not it's original use as a commodity, but rather it's use as the money-commodity, the commodity which represents a universal standard of value and a means of circulation. Insofar as Gold acts as money, it no longer acts as a precious metal which can be used in various ways. The invention of slips of paper whose particular use-value is to represent the value of commodities would seem to be the logical conclusion of the movement.


How does fiat currency fit into the LTV? You didn't really answer that I feel.

I'm not really sure where the problem with fitting it in comes from. It takes human labour to produce the end result of a bank note, yes? Moreover, this human labour takes time. As the universal measure of value, a certain amount of bank notes represents a certain number of hours of abstract labour-time in the number of bank notes which that amount of abstract labour-time produces.

[ExUnoDisceOmnes]

This post was especially helpful in clarifying my question.

How does fiat currency fit into the LTV? You didn't really answer that I feel.

Well, a fiat currency facilitates the idea of surplus labor. If exchange were made in... units of labor, it would be clear how much someones work is worth and how much they should get paid. However, a fiat currency creates an arbitrary value. Due to economic fluctuation, it makes it especially difficult for the worker to see exactly how much their work is worth and how much they're getting paid relative to the value of their work. It also makes it unclear to an individual that a commodity IS A DIRECT PRODUCT OF LABOR, and that the value of that commodity is based on the quantity and quality of labor put into the commodity. Thus, it makes them ignorant to "wage slavery" in that they're literally selling their own labor.

Fiat currency keeps people in the dark. Fiat currency not only facilitates the labor theory of values, but exploitation as a whole. On top of this (as I explained above) fiat currency is bad economically.

[ExUnoDisceOmnes]

I forgot to mention that fiat currency creates something called artificial devaluation of currency. China does this to compete in foreign markets, they make their currency artificially weak, effectively "ripping off" workers by making their labor artificially less valuable (resulting in lower wages, etc.).

[Kotze]

It takes human labour to produce the end result of a bank note, yes? Moreover, this human labour takes time. As the universal measure of value, a certain amount of bank notes represents a certain number of hours of abstract labour-time in the number of bank notes which that amount of abstract labour-time produces.A paper money bill certainly has not value according to how much work it takes to produce.

Here is the Chartalist take on money:

The state regularly threatens to take your stuff and/or put you in jail. Whenever it's time and the state knocks on your door, the state also tells you that your stuff being taken/you being taken to jail won't happen if you can give them a certain amount of anti-expropriation points. These transferable anti-expropriation points are issued by the state and more commonly known as currency. Tadaaaah.

[Die Neue Zeit]

That doesn't explain ExUno's question in Theory, or even mine. :confused:

[ExUnoDisceOmnes]

That doesn't explain ExUno's question in Theory, or even mine. :confused:

What do you mean?

[Broletariat]

I'm not really sure where the problem with fitting it in comes from. It takes human labour to produce the end result of a bank note, yes? Moreover, this human labour takes time. As the universal measure of value, a certain amount of bank notes represents a certain number of hours of abstract labour-time in the number of bank notes which that amount of abstract labour-time produces.
But we all know 1 dollar is worth less than 5 dollars, isn't it the same amount of labour involved in making each bill? There's also the fact that banks can essentially create their own non-printed money.

[ExUnoDisceOmnes]

But we all know 1 dollar is worth less than 5 dollars, isn't it the same amount of labour involved in making each bill? There's also the fact that banks can essentially create their own non-printed money.

Currency is very simple. According to Marx, it is an expression of the exchange value of a commodity.

if 10 linen=1 coat in exchange value, not everyone has that 10 linen. Also, it's difficult to equate every commodity to the value of the coat, then equate every substance to the value of every other commodity.

Thus, a very simple addition is made to the equation:
10 linen=1 coat= 50 dollars
Every substance is equated to the currency value, creating a medium for exchange.

However, currency can be manipulated in many ways that are detrimental to economies (as I've shown above)

[Broletariat]

Currency is very simple. According to Marx, it is an expression of the exchange value of a commodity.

if 10 linen=1 coat in exchange value, not everyone has that 10 linen. Also, it's difficult to equate every commodity to the value of the coat, then equate every substance to the value of every other commodity.

Thus, a very simple addition is made to the equation:
10 linen=1 coat= 50 dollars
Every substance is equated to the currency value, creating a medium for exchange.

However, currency can be manipulated in many ways that are detrimental to economies (as I've shown above)
So why is 50 dollars = 1 coat? Because we say so? Doesn't that kind of undermine the LTV?

[ExUnoDisceOmnes]

So why is 50 dollars = 1 coat? Because we say so? Doesn't that kind of undermine the LTV?

Capitalists use it as the most accurate expression of exchange value as possible within the system... However it is a contradiction of the LTV because it allows individuals to fix prices (as you said, because they "say so")... Fiat currency is shown to be another one of those damned inherent contradictions in capitalism that Marx and Engels talked about so much... (see dialectical materialism). Contradictions like this lead to the systems gradual collapse.

[Broletariat]

Capitalists use it as the most accurate expression of exchange value as possible within the system... However it is a contradiction of the LTV because it allows individuals to fix prices (as you said, because they "say so")... Fiat currency is shown to be another one of those damned inherent contradictions in capitalism that Marx and Engels talked about so much... (see dialectical materialism). Contradictions like this lead to the systems gradual collapse.
1. Fiat currency wouldn't be the most accurate expression of exchange-value, labour credits based on labour, which is what makes exchange value, would be.

2. I'm not sure if it IS a contradiction of the LTV or not, that's what the thread is for, hopefully Zanthorus can get back to us soon with some sort of an answer to our confusion. If it was contradicting the LTV, we would have to reject the LTV in order to find a better substitute that can account for this, and I'm quite sure I'm not the first person to think of this before so I'm doubting this disproves the LTV.

3. I don't buy into Dialectical Materialism.

4. Capitalism will not gradually collapse because of its own structural antagonisms, it must be brought down forcefully by the working class.

[Broletariat]

Could someone direct me to the specific part of Capital where Marx talked about fiat currencies?

[Die Neue Zeit]

I don't think he wrote anything at all about fiat currencies.

[ExUnoDisceOmnes]

Could someone direct me to the specific part of Capital where Marx talked about fiat currencies?

It's sort of extrapolated from his interpretation of values, specifically exchange and labor values.

[Broletariat]

It's sort of extrapolated from his interpretation of values, specifically exchange and labor values.

Toss me the link anyway?


I don't think he wrote anything at all about fiat currencies.

Dammit, now I've got to like think about this for myself instead of just reading it. Unless one of you guys can deprive me of the pleasure of course.

[ExUnoDisceOmnes]

http://www.marxists.org/archive/marx/works/1867-c1/ch01.htm

Have a wonderful time. Trust me, we did.

[ExUnoDisceOmnes]

If you have any specific questions, I can definitely answer them though... I don't know where to start with you just asking generalizations about fiat currency....

[Zanthorus]

But we all know 1 dollar is worth less than 5 dollars, isn't it the same amount of labour involved in making each bill? There's also the fact that banks can essentially create their own non-printed money.

I've been discussing this issue with the user ZeroNowhere. He has pointed out to me that although fiat currencies are not actually legally tied to any commodity such as gold, commodities such as gold are still actually used as measures of value for the same reasons they always have. So it is indeed possible that fiat money is merely a token which represents value but does not in fact have any value itself. Using google (Which is always your friend), I found the following interesting post on the 'Reading Marx' blog:


Last week all news media were crazy about the gold price skyrocketing over $1,250 per ounce, the highest price ever. Since the collapse of the Bretton Woods system, the connection between money and gold has officially disappeared. However, the demand for gold as a storage of value continued to exist; especially so at the time of crisis. And we have observed the price of gold soaring during the last couple of years marked by consecutive blows of financial crisis and sovereign crisis with tumbling of euro and stagnating dollar.http://readingmarx-group.blogspot.com/2010/06/rise-in-price-of-gold-and-marxs.html


Could someone direct me to the specific part of Capital where Marx talked about fiat currencies?


I don't think he wrote anything at all about fiat currencies.

Found this interesting comment by someone called 'James Devine' (Wonder if he is any relation to Pat) on a mailing list archive:


Early on in volume I, he talks about the "forced circulation" of fiat money within national boundaries even though (at the time) gold was the "world money."

[...]

In volume III, Marx discusses fiat money and it turns out (horrors!) that something amazingly similar to the quantity theory of money applies. If the quantity of fiat money increases rapidly, so do prices when stated in that money (though it doesn't happen to prices stated in gold). But that hypothetical event occurs only in war or civil-war type situations, when the power of the government collapses.http://www.mail-archive.com/[email protected]/msg82916.html

EDIT: I should probably point out the place in Volume I he is referring to is chapter three on the theory of money. It is under the section 'Coins and symbol of value' - search the page for 'paper money'.

[Dave B]

Marx did discuss it as below, including the critical feature of the velocity of money or the speed at which it circulates eg

Karl Marx: Critique of Political Economy
c. Coins and Tokens of Value





Let us assume that £14 million is the amount of gold required for the circulation of commodities and that the State throws 210 million notes each called £1 into circulation: these 210 million would then stand for a total of gold worth £14 million. The effect would be the same as if the notes issued by the State were to represent a metal whose value was one-fifteenth that of gold or that each note was intended to represent one-fifteenth of the previous weight of gold. This would have changed nothing but the nomenclature of the standard of prices, which is of course purely conventional, quite irrespective of whether it was brought about directly by a change in the monetary standard or indirectly by an increase in the number of paper notes issued in accordance with a new lower standard.

As the name pound sterling would now indicate one-fifteenth of the previous quantity of gold, all commodity-prices would be fifteen times higher and 210 million pound notes would now be indeed just as necessary as 14 million had previously been. The decrease in the quantity of gold which each individual token of value represented would be proportional to the increased aggregate value of these tokens. The rise of prices would be merely a reaction of the process of circulation, which forcibly placed the tokens of value on a par with the quantity of gold which they are supposed to replace in the sphere of circulation.

It is self-evident that their velocity of circulation stands in inverse ratio to the price they realise in each individual purchase and sale, or to the value of the fraction of the gold coin they represent


http://www.marxists.org/archive/marx/works/1859/critique-pol-economy/ch02_2c.htm (http://www.marxists.org/archive/marx/works/1859/critique-pol-economy/ch02_2c.htm)

The inflation theory, that includes velocity of money, and for which Milton Friedman got a nobel prize 100 years after Karl summed it up as above goes something like;


Ct = total value of commodities, in labour time, exchanged in a day

$ = exchange value of a dollar, or money, in labour time

Q = quantity or number of dollars in existence

V = average number of times each dollar in existence changes hands in a day.


Then

Ct = $ x Q x V


Or

$ = Ct/( Q x V)




Increasing Q (quantity or number of dollars in existence) decreases the buying power of a dollar.

However if V decreases (average number of times each dollar in existence changes hands in a day) then the buying power of the dollar will increase and can thus counteract an increase in Q the money supply and the inflationary effect which that increase can otherwise cause.


There are suggestions at present that the velocity of money is decreasing due to a hoarding of cash caused by low rates of return on investment ie interest rates, high risk in economic depression etc and the raising of banks capital requirements ie the amount of ready cash banks have to hold as a % of loans the have on their books etc.

[Broletariat]

He has pointed out to me that although fiat currencies are not actually legally tied to any commodity such as gold, commodities such as gold are still actually used as measures of value for the same reasons they always have.
Okay so this seems to me to be the most important lesson to take here. My mind immediately goes to how the law guarantees certain freedoms which we all know will fall apart at the first sight of civil unrest. This seems to be another example where law is quite actually totally unrelated to reality.

[Kotze]

However if V decreases (average number of times each dollar in existence changes hands in a day) then the buying power of the dollar will increase and can thus counteract an increase in Q the money supply and the inflationary effect which that increase can otherwise cause.I think a model where quantity and velocity substitute each other could be used for waiters. 3 waiters can serve the same number of customers as 6 waiters if the 3 work at twice the speed of the 6. But with money, halving the amount while doubling how frequent it changes hands is different, since this implies the corresponding stream of paid stuff moving in opposite direction to the money stream also going faster, no?