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The significance of Marx’s theory on money: Marx's analysis of monetary phenomena has remarkable resonance in today's world

Originally published: Economic and Political Weekly on September 17, 2017 (more by Economic and Political Weekly)

Marx’s theory of money was integral to his analysis of capitalist dynamics. The rich potential of Marx’s analysis of money has, unfortunately, not received the attention it deserves both by political economists and by those who have been inspired by Marx’s political vision.

One problem is that Marx has for a long time been regarded simply as a “theoretical metallist” (Schumpeter 1954: 288). His highly abstract formulation of the origins of money in the commodity form, as “commodity-money,” has been seen as largely irrelevant to contemporary capitalism where money no longer takes the shape of a commodity like gold or silver but is tied/linked to the monetary liability of the state. But Marx’s copious notes from a wide array of sources from newspapers, journals like the Economist, to parliamentary reports on Commercial Distress and the Banking Act, are evidence that he engaged deeply not only with the monetary theorists of his time (including David Ricardo, Thomas Tooke and John Fullerton) but also with the concrete institutional workings and social foundations of the financial system. The precise link between money and the credit system in Marx’s framework thus needs elaboration.

A second difficulty arises in that Marx never fully fleshed out his analysis of the credit system. Part Five of Capital, Volume III, which brings together Marx’s writings on the credit system, was edited by Friedrich Engels posthumously. Engels bemoaned the fact that there was no “finished draft or even an outline plan to be filled in, but simply the beginning of an elaboration which petered out more than once in a disordered jumble of notes, comments and extract materials” (Marx 1981: 94). In this sense, Marx’s writings on the credit system in Volume III are as Brunhoff (1976) notes “more stimuli to thought than constituent elements of a completed theory.” Developing such a complete theory remains a challenge even today, 150 years after the first publication of Capital.

While this article does not quite take up this challenge, it does attempt to delineate the critical elements of Marx’s theorisation of money and highlight its continued relevance to contemporary capitalism. Marx’s theory of money, as will be evident from the presentation below, is inseparable from the rest of his analysis of capitalist dynamics. Nevertheless, for considerations of space and clarity of exposition, many significant pieces of Marx’s larger theoretical canvas will be ignored, along with the debates surrounding these. The presentation of Marx’s theory of money in this article has been influenced, in particular, by the work of Brunhoff (1976, 2005) and Duncan Foley (1983, 1985, 1986, 2005).

Structure of Marx’s Argument

If we are to understand Marx’s theory of money we have to first understand his methodological approach. He had a logical and historical analysis of the successive development of the role and functions of money, as a measure of value, a medium of circulation and finally as money proper. This last role itself included money’s role in hoarding, as a means of payment and as world money. This logical structure is integral to his analysis.

At the beginning of the first volume of Capital, Marx puts forward a “general” theory of money and traces the emergence of money as a general equivalent in the context of simplest relations of exchange of commodities. This abstract theory is the basis on which money’s role in capitalist economies is comprehended. However, it is quite clear from Marx’s writings that this abstract theory of money as a general equivalent was only the starting point of his analysis of concrete monetary phenomena. One can trace the arc of the evolution of his approach from Grundrisse through Contribution to the Critique of Political Economy to Capital. It is only in the later work that Marx derives the function of money as money proper in the context of simple commodity exchange where producers directly sell their products to each other, before he begins his analysis of capitalist commodity relations (Arnon 1984; Rosdolsky 1977).

This analysis of the origin of money in the commodity-form is critical to Marx’s development of the different forms and functions of money. The logical order in which these different aspects of the money form are developed is also the key to understanding the contradictions inherent to the money form (Brunhoff 1976). Even in its simplest form of “commodity-money,” his analyses bring out clearly that though money is produced like any other commodity, its laws of circulation are quite distinct. He went beyond the mere fact of the existence of commodity-money and sought to discover “how and why and by what means a commodity becomes money.”

Starting with how exchange produces the “doubling” of the commodity as use value and exchange value, Marx shows how this contradiction is resolved when the exchange value of the commodity acquires a separate, material existence in the form of money, alongside and in opposition to all other commodities. With exchange, products become commodities and the commodities appear as exchange values. Prices are thus the concrete expression of exchange values, in the money form. The social character of private labour is established through exchange so that the concrete expression of value in the form of money (as prices) emerges simultaneously with exchange value—abstract, socially necessary, labour. The money commodity, while being a commodity, is a commodity unlike all others.1 Money thus appears as the objective expression of general exchangeability. As long as exchange value remains the form of social product, and to the extent that the producer becomes more dependent on the exchange, the money relation develops. With this growing dependence of private producers on social relationships of exchange, Marx (1973: 146–47) argues that the exchange relation appears as a relation alien to the producers.

Marx introduces money’s role as a measure of value as a logical necessity emerging from exchange and a manifestation of the dual nature of commodities (1972: 64–76, 1976: 188–98). He also makes a distinction betwen money as a measure of value and as the standard of price, with the latter being institutionally determined by the state. He then goes on to elaborate how once money is established as a measure of value, the actual circulation of commodities through multiple acts of exchange implies a movement of money between producers and consumers; money actualises the prices of commodities and serves as a medium of circulation, mediating the process of circulation of commodities through exchange (Marx 1972: 76–106, 1976: 198–221).

As a medium of circulation, money both exposes and resolves the latent contradiction between use value and exchange value by the duplication of the commodity in the course of the circulation, as a commodity on one hand and as its polar opposite, money on the other (Marx 1972: 88–89). The moment of sale, which transforms the commodity into money, and that of purchase, which converts money into a commodity, is split and occurs at different points of time and space.

It is here that Marx first refutes Say’s law, by arguing that while every sale is a purchase and every purchase a sale, the circuit of commodity circulation can result in there being more buyers than sellers of one commodity—money—at the same time that there are more sellers than buyers of all other commodities. Holders of these commodities find themselves unable to sell and consequently cannot buy (Marx 1972: 96–98). Commodity circulation involves a whole network of relations of sales and purchases between private agents. The social cohesion of this network is outside the control of the individual agents. The separation of sales and purchase creates the abstract possibility of crisis as sale and purchase fall apart (Kenway 1980; Crotty 1985). The separation of purchase and sale also forms the basis, in Marx’s analysis, for the entry of commerce proper—the specialised function of buying and selling commodities on behalf of producers—into the circuit of commodity production in order to take advantage of this separation.

Contrary to Quantity Theory

As a medium of circulation, money is in constant flux, realising the prices of this network of sales and purchases. Marx contends, in direct opposition to the advocates of the quantity theory of money, that prices are given, independent of the process of circulation, and do not depend on the quantity of money in circulation. The quantity of money in circulation is determined by the sum of prices of commodities to be realised, and the velocity with which currency circulates and therefore rises and falls along with prices (Marx 1972: 103–07, 1976: 217–20). Causation thus runs from prices to the quantity of money—from the needs of circulation to the mechanism that meets these needs (Foley 1983, 1985, 1986; Brunhoff 1978).

Marx elucidates the complementary and contradictory relationship that these two functions (as a measure of value and a medium of exchange) bear to each other. In its aspect as a measure, in its “ideal” character as a unit of account, the actual quantity of money is irrelevant, though its material substance is essential. This role is the precondition for the circulation of commodities and for the emergence of money’s role in commodity circulation. The money commodity, however, as a produced commodity itself has a variable value here. In its functional form, as a medium of circulation, the quantity in which it is available is crucial, while its material substance is irrelevant so that its value is taken as fixed (Marx 1972: 120, 1973: 203–16). Thus commodity-money can be replaced by symbols or tokens, in circulation. This contradiction gives rise to the third function of the money form. Money finally reappears, at the culmination of the analysis of the different roles of money, as money proper, in the simplest form as an object of hoarding or a store of value, as a material representative of social wealth (Marx 1972: 122–37, 1976: 227–32).

The necessity of hoarding, the withdrawal of money from circulation emerges from the separation of sale and purchase within simple commodity circulation. While the act of hoarding marks an interruption in the process of circulation, it also becomes the means of preserving and reconstituting the process, and unifying and regulating the functions of money. Hoards act as conduits of contraction or expansion of quantity of money in circulation, allowing variations in the quantity circulating in accordance with demand. Thus, hoarding or the accumulation of money, proceeds from the mechanism of circulation itself, and preserves the money form as distinct from money, as well as the contradictory characteristics inherent in monetary circulation (Brunhoff 1976). Hoarding redistributes the monetary stock at the macro level between circulating and non-circulating money (Lapavitsas 1994).

The movement of money in and out of hoards was the second basis for Marx’s rejection of Say’s law and the dictum that supply created its own demand. Hoarding created the possibility that aggregate supply and aggregate demand of commodites may not match. It also explained how money supply could adapt and respond to the demands of circulation, further underlining why the quantity theory view to money was mistaken. Finally, in Marx’s approach, this aspect (of money as an object of hoarding) contained the seeds of its quality as capital (Marx 1973: 217).

As money develops through the process of hoarding and accumulation into “money proper,” it also assumes a special function in the process of circulation. It now enters the circulation process not as a medium of circulation but as a means of payment (Marx 1972: 137–48, 1976: 232–40). The relation between the seller and buyer here is transformed into that of creditor and debtor. The potential separation of purchase and sale, inherent in the metamorphoses of commodities, becomes a real separation in the form of claims to payment.

The compulsion to sell is now no longer an “individual” necessity but a “social” necessity, independent of the seller’s individual wants. The borrower is compelled to sell in order to repay her debt. Money from being a means of circulation now develops into its end or final result (Marx 1973: 190). The chain of payments that propel the circulation process reflects a deeper implication of producers in social relations of exchange.

As means of payment, Marx shows, money contains a new contradiction. As long as payments balance, the process of circulation can be mediated by money in its transient “chimerical” form as a medium of circulation, but when payments do not balance and actual payments have to be made, money enters as “the universal equivalent” or as “money proper.” Marx highlights how with the spread of such chains of payments any interruption in the flow of payments at any point in the chain of payments leads to ripple effects, as failures to fulfil obligations spread through the chain. The mechanism for balancing payments reciprocally is upset and money is demanded as the absolute material embodiment of wealth. This is the root of monetary crises, which erupt whenever this chain of payments is disturbed (Marx 1972: 145–46, 1976: 235–36).

At such times money transforms from its nominal or “imaginary” form into its solid, material form. Marx is thus able to argue that as long as the social character of labour appears in the form of money, and hence “as a thing outside actual production, monetary crises, independent of real crises or as an intensification of them are unavoidable” (Marx 1981: 649). This foreshadows Keynes’s postulation of a “liquidity trap” when the demand for money becomes insatiable, from a distinctively different perspective. Keynes’s argument was based on the conception of a demand for money for its own sake for speculative purposes. For Marx this crisis expresses the antithesis between commodities and money—an antithesis that develops most fully under capitalism.

Money as ‘World Money’

Finally, after going through these different functions of money, Marx puts forward his conception of world money, the form in which money functions to the fullest extent as the universal “embodiment of social labour in the abstract” (1972: 149–53, 1976: 240–47). The role of money as “world money,” as a means of settling international balances, arises with the development of trade and the world market, and the extension of the international division of labour. Money, however, does not assume any new or special functions as world money in the domain of international trade and finance that have not arisen in the domestic sphere. It serves as “the universal means of payment, as the universal means of purchase, and as the absolute social materialization of wealth as such” (Marx 1976: 242).

When payments have to be settled with a transfer of “world money,” money also serves as the means by which wealth is transferred from one nation to another and redistributed internationally. Nation states establish reserves of money, not only for the purposes of regulating internal circulation, but also to ensure the role as of world money in settling balance of payments. Such public hoarding implies that the monetary power of the state is circumscribed by the reserves accumulated by other states (Brunhoff 1976).

Marx had distinguished national spheres of circulation where the state would establish the standard of price from the international arena where, in the historical context in which he was writing, bullion functioned as world money. Marx’s analysis of the role and functions of money already contained the notion of money as an embodiment of power internationally. Such a conception of the acquisition of money in the form of reserves or hoards as “social power in a material form” is contingent on the international social relations—the international division of labour and the international financial system that mediate this division.

Within the logical structure of Marx’s theorisation, the analyses of the role of money as a hoard and a means of payment form, on the one hand, the basis for the analysis of world money, and, on the other, for his elaboration of the emergence of credit money and the financial system (Brunhoff 1976). While Marx’s analysis of the development of the credit system forms part of Volume III of Capital, the possible extension of his theorisation of world money to the analysis of imperialism and the relations between nation states, remained unfinished.2

Marx’s discussion of the distinct roles of money is not merely a listing of the variety of things money does. The different functions and forms of money are introduced as preconditions for comprehending the transformation of money into capital. The development of the analysis of these functions through successive steps reflects Marx’s understanding of the fundamentally complementary and contradictory nature of these different functions. What is noteworthy is that he develops his analysis of all these functions in the context of the circulation of commodities—what he calls simple commodity production—before discussing the role of money in financing capitalist production. This includes his analysis of world-money.

Joseph Schumpeter is said to have remarked that there are “only two theories of money that deserve the name… the commodity theory of money and the claim theory, which from their very nature were incompatible” (Schumpeter 1917 quoted in Ingham 2004: 6). In the former approach, a commodity—whether gold or even cowries and shells—performs the functions of money, and in the latter, debt or promises to pay serve as money. Even in the 19th century at the time when Marx was writing Capital, monetary debates were broadly divided along the lines of these two approaches—the currency school and the banking school.

One point of contention was the direction of causation between prices and quantity of money referred to earlier. The former saw the direction of causation going from quantity of money in circulation to prices, and money supply was seen as being exogenously determined. The latter theorised the supply of money as endogenously adapting to demand (and the price level). Further, the currency school advocated a strict control of note issue and for rules to enforce the separation of money creation from banking and financial intermediation. In contrast the banking school believed that the attempt to separate money issuance from financial intermediation were illusory and self-defeating (Goodhart and Jensen 2015). The banking school also argued that bank notes (as a means of payment) were a form of credit that would flow back to the point of issue as debts were repaid (what was called the law of reflux), so that the currency school preoccupation with “over-issue” of notes (in relation to gold reserves) was misplaced.

Knut Wicksell (1936) has argued that the pure cash (commodity-money) system and its antithesis, the pure credit (claim) system were both hypothetical constructs and concrete monetary phenomena were explicable as combinations of these two extreme cases. But the question of how to achieve “a viable synthesis” of these two cases was left open (Leijohnhufvud 1997). This difference in approach forms a fault line in monetary theory that continues to this day. It manifests itself in the form of the diametrically opposed approaches of monetarism on one hand and Post-Keynesianism on the other. Patnaik (2008) refers to this divide in monetary theory as that between monetarism and propertyism. Monetarism in contrast to propertyism subscribes to a kind of scarcity view where the value of money in terms of other commodities is determined by the forces of supply and demand. Within the tradition of propertyism, the value of money is fixed exogenously, independently of demand and supply. Thus it can be determined by production conditions in the case of commodity-money and by the institutionally fixed money-wage unit, a la Keynes, in the case credit-money.

A Monetary Theory of Credit

The novel structure of Marx’s argument, which is constructed as a sequence of successively more concrete determinations, allows him to position his theory between these two opposing camps in a unique way. While deriving his monetary theory from commodity-money, he takes issue with the proponents of the quantity theory of money and the currency school who focus only on money’s role as a medium of circulation and fail to acknowledge money’s role in hoarding and as a means of payment. Credit money belonged to a more developed and advanced system of capitalist production, but all the contradictions of the money form that were evident in this developed credit-money system were, as Marx demonstrated, explicable in the context of the commodity-form of money.

But while a line can be drawn from the banking school through Marx, to Keynes, Hyman Minsky and the Post-Keynesians, Marx went much further than the banking school in his analysis of the role of money in hoarding and as a means of payment by embedding his analysis in his conception of money as a universal equivalent, even before he addresses monetary circulation and the formation of hoards in the process of reproduction of capital (Brunhoff 1976; Lapavitsas 1994). Critical in his “correction” of the banking school’s argument is the starting point of his analysis in money’s role as a measure of value. His approach illuminates a logical relation between money and credit, but also affirms the contradictory character of this relation by postulating a monetary theory of credit as distinct from a theory of credit-money (Brunhoff 1976).

Marx explains how, even in the commodity-form, money was distinct from all other commodities, in that it embodied and helped establish social relations. It is in this fundamental sense that money is never neutral. One does not have to theorise money as a “claim” or as credit-money, to comprehend that money is a social relation. This analytical insight is what distinguishes Marx from the tradition of scholars like Ingham (1996, 2004), whose seminal work on the history and sociology of monetary relations is, nevertheless, aligned with Marx’s conception. His method of analysis allowed Marx to clearly distinguish money and commodities, and further between money and capital as distinct analytical categories when he integrates this theory of money into his analysis of capitalist production and the accumulation process of capital. While money does not, by itself, explain capital, it is a necessary precondition for its emergence.

Money and the Accumulation of Capital

Marx begins his investigation of capitalist accumulation in Volume II by laying out the unified process of circulation and production that constitutes the circuit of capitalist production. The simple form of circulation has been transformed to the capitalist form of circulation, with the establishment of capitalist social relations along with the market for wage-labour (Marx 1978). The circuit of capitalist production (Marx 1978) begins with the conversion of a sum of money into commodities with the purchase of labour power and means of production. This is the moment of transformation of money capital into productive capital—capital in the form that can produce surplus value. Money capital is thus the transitory form in which capital appears in the course of the circuit of capitalist production. It is both the precondition, and the ultimate aim of the circuit. The purchase of labour-power presupposes the existence of capitalist social relations and money enters the circuit not simply as a means of payment but as a form of capital. Marx was at pains to distinguish the analytical categories of money (constituted by all its functions) and capital (in its form as money capital).

The transformation of money capital into productive capital interrupts the circuit, as productive capital is transformed into a new inventory of commodities in the course of the capitalist production process, where surplus value is created and appropriated through the wage relation. The money relation, between the capitalist who buys labour power and the worker who sells, is embedded in production and production relations. At the end of the production process, capital appears as commodity capital. As commodity capital, capital must now re-enter the sphere of circulation as the capitalist realises the value of this capital only by selling the inventory of commodities. The value of the capital advanced is realised along with the surplus value it contains. The circuit is complete as capital once again assumes the form of money, but it now expresses both the outcome of capitalist social relations and also the point of its return. With this final metamorphosis, a new circuit can be launched. Money capital, productive capital and commodity capital are the different functional forms that capital successively assumes in the course of the circuit of capital. Marx (1978, Part 2) further elaborates how these different forms also coexist and function alongside each other as a given capital is divided into the different forms of capital.

Money capital performs monetary functions because of its form as money and not because it is capital. But as capital, it can perform only the monetary functions of capital and no other (Marx 1972: 112). On the one hand, it is the prime mover that propels the circuit of capital and on the other it is also the ultimate goal and motive force of the circuit. The appearance of this relation in the independent form of money also creates the illusion that money breeds money, without any acknowledgement of the intervening phase when capital is applied to production.

But the circuit can falter at any of the phases. If the stoppage occurs in the phase of productive capital, labour and the machinery remain unemployed. At the stage of commodity capital, the blockage created by a lack of demand results in unsold inventories. A breakdown in the first phase, and again at the point when the circuit is renewed, results in a withdrawal of money capital from the circuit of capital in the form of a hoard (Marx 1978).

Hoards also form when money capital is not immediately invested, either because the amount of accumulated money capital has not reached the minimum scale necessary for profitable investment or because the market is saturated due to stagnant demand. Variations in the length of the production process or of the period of turnover (the time taken to complete the full circuit) of capital in circulation also lead to the temporary accumulation of hoards. Hoards also serve as a reserve fund that allows the capitalist to deal with temporary disturbances (like rising input prices). Thus stagnant hoards are regularly created in the course of the circuit of capital in the form of temporarily idle profits, depreciation funds, and reserves that ensure continuity of turnover between production and circulation (Itoh and Lapavitsas 1999). The formation of such hoards, therefore, accompanies the accumulation of capital, “whether it is expedient or inexpedient, voluntary or involuntary, functional or dysfunctional” (Marx 1978: 158). Hoarding, however, preserves its ambivalent role as an instrument of capitalist reproduction and at the same time as an interruption of the process of circulation (Brunhoff 1976).

A Keynesian Flavour

What is significant is that Marx had first introduced his analysis of hoarding as a trade-off between commodities on one hand and money on the other, in the context of the simple commodity circulation, before the discussion of its role in the circuit of capitalist production. This framing is the logical precursor to analysing hoarding as a trade-off between money and financial assets in the context of a developed capitalist financial system, as Keynes does in his formulation of liquidity preference.3 Marx’s discussion of the circuit of capital encapsulates a dual movement—that of flows of value (in the form of commodities) created in production on the one hand, and that of flows of money released in the process of circulation on the other. From this dual movement there also occurs the possibility of incongruence between the structure of demand represented in the income flows produced and that of the concrete use-values produced in the course of the circuit.

Marx’s analysis has a very Keynesian flavour, and in many ways anticipates Keynes’s postulation of the principle of effective demand and the demand for money outside circulation. But the point of departure of Marx’s analysis is the contradictory unity of use value and exchange value, which is then reproduced in the contradiction between money and commodities (Rosdolsky 1977). Not only does he build his analysis of the circuit of capital, in Volume II, on the basis of metallic money, he also derives possibility of shortfalls of demand from capitalist behaviour—the compulsion to buy in order to sell—rather than on the role of speculation and volatile expectations, as distinct from Keynes (Foley 1985). The role of money as a general equivalent, distinct from other commodities, is thus preserved. Further, the accumulation of hoards is linked to the structure of capital accumulation in his analysis. The issue is that of financing accumulation in a capitalist economy where the circulation of money is combined with, and implies the circulation of capital (Brunhoff 1976; Foley 1983, 1985, 1986).

The fact that his analysis is conducted in terms of metallic commodity money does not, however, negate the role and significance of credit-money and credit systems in his analysis of capitalist economies. While Marx constructs his theory of credit as a secondary, concrete layer of his analysis, it plays an integral role in his analysis of capitalist dynamics. The structure of his argument is meant to clarify how “the credit system is simply a form of the money economy” (Marx 1978: 195).4 The formulation of the distinct and complementary roles of money remains valid if we extend the analyses from gold money to the modern forms of credit money, which are simply tradable promises to pay.

Credit-money and the credit system spring directly out of the function of money as means of payment, and monetary mechanisms that save on the use of commodity-money and cash reserves, are founded on credit. While credit-money plays a limited role where capitalism has not yet developed, Marx argues that the credit-economy develops, on the basis of the monetary economy, with the growth and spread of capitalism and further comes to dominate and replace it (Marx 1981). Credit-money, while different from commodity money, acquires the characteristics of money.5 It continues to obey the general laws of monetary circulation and undergoes the process of both dematerialisation and re-emergence as the material embodiment of social wealth that Marx observed in his discussion in the context of metallic money (Brunhoff 1976). In some senses, the spread of credit-money reflects the full fruition of the money form, and the opposition between the class of commodities, as a whole, and money, under capitalism. But in Marx’s analytical framework, money preserves its significance however much money may in practice be eliminated by credit (Brunhoff 1976).

We have already presented Marx’s argument explaining how the money-form arose from the contradiction between the dual existence of commodities as use value and as exchange, and further how the act of exchange then split into two mutually independent acts of purchase and sale. The contradiction of the commodity form is displaced in a manner that contains the possibility of crises. In the Grundrisse, Marx develops the analysis further, to elucidate how this separation engenders a third level of contradiction, when “the overall movement of exchange itself becomes separate from the exchangers.” The sphere of commerce, separate from the producers and concerned solely with exchange for the sake of exchange and not for consumption, interposes itself in the circulation of commodities. Production is subsumed to the imperatives of commerce—buying cheap and selling dear.

Dominance of Money-business and Credit

Finally, as the internal contradictions of the money form continue to unfold, they are manifested in the separation of credit and financial operations from real transactions and actual trade—the separation of “money business from commerce proper” (Marx 1973: 146–50). Money-business and credit arise in context of commerce, develop independently and finally acquire dominance over it. Commercial credit, therefore, lies at the border between the monetary system and the financial system (Brunhoff 1976). The circulation of credit-money itself breeds the development of financial intermediaries whose primary function is the mediation of these credit transactions.

These passages in the Grundrisse contain the core of Marx’s argument of the way which money evolves with the development of capitalism to become both a general equivalent and a financial asset (Marx 1973: 147–53). Marx planned to correct what he called the “idealist manner of presentation” through an elaboration of the institutionally concrete trajectory of the evolution of the role of money and finance with the development of capitalism. We find the beginnings of this elaboration in Capital, Volume III, where he presents his analysis of merchant capital (comprising both commercial capital and money dealing capital), interest-bearing capital and fictitious capital. In fact, the formulation in Grundrisse provides, in a sense, a road map to a path to integrating the concrete discussion of credit and finance in Capital, Volume III with the abstract theory of Capital, Volume I.

World trade and commerce (and its expansion through the 16th century) was the “historic presupposition” for the emergence of capitalism, and merchant capital was the original form in which capital takes root. With the development of capitalist production, however, Marx argues that commercial capital and money-dealing capital appear as particular functions of capital in the sphere of circulation, which have now been transfered to capital that exists separate and autonomous from industrial capital. The former mediates the trade of commodities, while the latter, money-dealing capital, performs the technical operations associated with commerce and monetary circulation, drawing up and settling accounts, management of reserve funds and money-changing in the market for bullion (Marx 1981: Chapters 19 and 20). Money-dealing capital develops more fully, once borrowing and lending, and the management of interest bearing capital, emerge as special functions of money-dealing capital, in the context of the development of the credit system under capitalism (Marx 1981: 528).

Money-dealing capital emerges from its roots in merchant capital to become an integral part of the working of the capitalist credit machinery, once it is incorporated within the banking system, which mediates between the suppliers of funds for lending and the borrowers. What is significant for Marx is how the banking system centralises and concentrates money capital for loans, so that the bankers take on the role of “the general managers of money capital” (Marx 1981: 528). This has implications for the circuit of capitalist production and the accumulation process, since now the money capital that initiates the circuit is no longer simply money advanced by the capitalist, but money capital that is borrowed (Marx 1981: 638). Marx had already established the source of profit in the exploitation of other people’s labour in Capital, Volume I. He now uncovers how the capital that launches this exploitation of labour in the production process is not the result of saving by the industrial capitalist but consists of other people’s property, capital that has been borrowed from financial capital.6 With the development of the capitalist financial system, the savings of others are transformed into a source of enrichment for financial capital. And so “the final illusion of the capitalist system, that capital is the offspring of a person’s own work and savings is thereby demolished” (Marx 1981: 640).

The estranged character of capital has been shifted outside the exploitation in production process by the credit system. The loan of money capital to the industrialist transforms it into interest-bearing capital. The capitalist who borrows has to repay this sum along with an interest payment, which is deducted from the gross profits earned. The quantitative distribution of gross profit between the financial capitalist who lends and the industrial capitalist who borrows money capital, gives rise to a qualitative distinction between interest and profit of enterprise, which appear as two mutually independent parts determined by their own particular laws. The competition among financial and industrial capital leads to the emergence of a market rate of interest.7 A part of profit is now “ossified” and externalised in the form of interest. Interest appears as something, which would be yielded even without productive application, fostering the illusion that it is the innate property of money to spawn more money. The result of the capitalist production process has thus acquired an autonomous existence.

Marx thus uncovers how the grounds for division of gross profits into interest and profit of enterprise in the split between industrial and financial capital are then turned into the grounds for the very existence of profits. Capital in its financial form appears as a “mysterious and self-creating” source of interest independent of its application in production (Marx 1981: 516). While this might be true for the individual capitalist, Marx argues that it is not true for social capital as a whole. Social capital cannot be transformed into money capital without the smooth functioning of the reproduction process. Money capital cannot yield interest, on the basis of the capitalist mode of production, without functioning as productive capital, that is, without creating surplus value (Marx 1981: Chapter 24).

When it is said that Marx saw money as a social relation (Ingham 1996), it is true only in the sense that money (and credit) obfuscates and mystifies the underlying social relations. It does not mean, as it did for the classical economists, that money is neutral. On the contrary, it is clear from the development of the Marx’s analysis that money is embedded in social relations, and helps mediate relations not only between capital and labour, but also between financial and industrial capital, and further between nation states (in the form of world money). However, Marx does emphasise the roots of these social relations in the organisation of production, so that money relations mediate forces set in motion and decisions at the level of production.

Money also reflects the contradictions embedded in social relations underpinning commodity exchange, and capitalist commodity production. Thus,

As long as the social character of labour appears as the monetary existence of the commodity and hence as a thing outside actual production, monetary crises, independent of real crises or as an intensification of them are unavoidable. (Marx 1981: 649)

Marx’s argument is that

money does not create these antithesis and contradictions; it is rather the development of these contradictions and antitheses which creates the seemingly transcendental power of money. (Marx 1973: 146)

While elucidating the monetary roots of credit, Marx also discusses how credit usurps the position of money as the social form of wealth. The dominance of credit is based on “confidence in the social character of production,” but this also makes the money form of products appear as “something merely evanescent and ideal,” and does not therefore do away with the clamour for money in its absolute sense when this confidence is shaken. This contradiction, common to all systems that are based on commodity trade, assumes its “most striking and grotesque form” under capitalism because production has been completely subsumed to the imperative of the market and profits and further because with the development of the credit system, capitalist production constantly strives to overcome the metallic barrier, “which is both a material and imaginary barrier to wealth and its movement, while time and again breaking its head on it” (Marx 1981: 708).

Finance and Accumulation

Having clarified the monetary roots of credit, Marx goes on to elucidate how the evolution of the system of credit, in the particular form of a banking system organised on capitalist lines, is crucial to the expansion and development of capitalism. However, what is pivotal in his analysis of the role of credit is its dual character. On the one hand it accelerates the expansion of the scale of production, development of technology and the creation of the world market. Thus the expansion of individual capitalist enterprises need not be limited to the reinvestment of their retained earnings. On the other, the credit system, which is grounded in the capitalist impulse to make profit, accelerates the violent outbreak of contradiction and crises. As the principal lever of overproduction and excessive speculation, the credit system “develops the motive of capitalist production, enrichment by exploitation of others’ labour, into the purest and most colossal system of gambling and swindling and restricts even more the already small number of exploiters of social wealth” (Marx 1981: 572).

The capitalist financial system under capitalism functions as a massive engine of centralisation and concentration. The hoards that accumulate in the course of the accumulation process—the portion of profit earnings of industrial capitalists that are meant for accumulation but not immediately reinvested in the same enterprise, and of revenues that are not immediately consumed, or used to replace the wear and tear of machinery and shortfalls in inventories, are all drawn into the banking system. Profits not reinvested in the sphere in which they were realised, are also now available for investment in other branches. Marx notes how both conditions favourable to accumulation (like the declining costs of machinery due to technological progress) and unfavourable to accumulation (like stagnation and saturation of the market) release funds into the banking system.

Similarly, all revenue streams, including “ground rent, and the income of unproductive classes and higher forms of salaried workers” (Marx 1981: 636), that are not immediately spent, also assume the form of deposits and can be loaned out by the banking system. The spread of banking thus transforms “private hoards” of different classes into loanable capital and concentrates them in the financial system. Even the idle funds of workers, that part of the wage income that is not spent as soon as it is received, but gradually over the period before the next wage payment becomes fodder for the growth of banking—“potential money capital” that can initiate the accumulation process.

Also highlighted in Marx’s discussion of the transformation of money into financial capital, is how more funds get concentrated with the banking system as the number of “those who have feathered their nests and withdrawn from the reproduction process; the number of retired capitalists and the rentiers” grows with the development of capitalism (Marx 1981: 643). Growing profits, the concentration of incomes and a rise in inequality promotes the growth of the banking system. With the concentration of wealth, Marx argues “the credit system must be further developed, which means an increase in number of bankers, money lenders, financiers etc” (Marx 1981: 643). But the banking system does not merely intermediate between the depositors (the original lenders) and the borrowers. Marx has a remarkably modern exposition of how banks also create money and deposits in the very process of extending credits.8

With the growth of the banking system, the volume of financial assets and securities also expand (Marx 1981: 643). This results in the proliferation of what Marx calls “fictitious capital.” Fictitious capital refers to tradable titles that constitute claims on future flows of income and surplus. Showing how any periodic income can be capitalised to represent the sum of money that would yield this income flow if lent out at the prevailing rate of interest, Marx argues that the capital so formed embodies “fictitious” capital, insofar as it represents a title to future revenues from real capital invested but not actual ownership of that capital. The value of the security is illusory since capital cannot exist twice, once as the discounted value of the title and then again as the capital actually invested (the actual source of the revenues to which the title grants a claim). The secondary trade and independent circulation of the financial asset strengthens the illusion that it is real capital. For the person buying the title the earnings appear as earnings from a sum invested, “confirming the notion that capital is automatically valorised by its own powers” (Marx 1981: 597).

A considerable portion of the capital of the banking system is constituted by such claims and interest-bearing paper, and is thus fictitious capital (Marx 1981: 600). Accumulation of such capital is not dependent on the supply of funds by depositors, but can proliferate and multiply as the same claim is traded multiple times (Marx 1981: 601–03). While the accumulation of such claims and titles can arise from genuine accumulation, and surges at certain phases of the business cycle, “it is still different from both the genuine accumulation from which it arises, and from the future accumulation … which is mediated by the lending of money” (Marx 1981: 641).

Thus titles, claims and even debt in the form of tradable assets, are transformed into commodities in the mind of the banker; however, they are valued in a fundamentally different way from produced commodities. The price of the security varies with revenues and the interest rate, and is partly speculative in that it is determined by anticipated revenue. This represents the kernel of a Marxian two-price approach, that posits two distinct methods for the valuation of commodities and financial assets, much before Minsky (1986) postulated his two-price model to analyse financial fragility.

Minsky (1986) posed the problem of instability, in terms of the divergent movements of the prices for current output and those of financial assets with speculation and entrepreneurial behaviour under uncertainty playing a pivotal role in the analysis. He conceived of capitalist enterprises as financial entities that used debt to acquire assets. He showed how the behaviour and stability of the economy would vary with the changing relation of debt commitments to the funds arising from investment. As long as commitments on past debts can be met from the income generated from investments, the process is sustainable. But enterprises become financially vulnerable once cash outflows due to such commitments persistently exceed the cash inflow due to their operations, and enterprises resort to further borrowing to fulfil the debt obligations precipitating bankruptcy, debt deflation and financial crisis. Profit opportunities and the prospect of capital gains propel the thrust towards financial fragility as the conditions of prosperity themselves fuel speculative behaviour, and the innovations in the forms of money and financial instruments. The “financial structure is the cause of both the adaptability and the instability of capitalism” (Minsky 1986: 175).

Monetary Crisis

Marx has a strikingly similar discussion of cyclical dynamics of accumulation and the variations in the interest rate in the course of the business cycle (Marx 1981: Chapter 30). In the early phase of the cycle, interest rates are low, there is an abundance of loanable capital, and industrial capital is expanding. This buoyant phase attracts and is further fuelled by financial traders and brokers, “operating without reserve capital on borrowed money” (Marx 1981: 645). This is a phase of overproduction and credit swindling, which fosters a growing pressure on interest rates further fuelling speculation. Marx notes how in this phase, interest payments are increasingly made out of borrowed capital rather than profits, in contrast to the initial recovery phase when borrowing finances purchases and investment. As interest rate rises and peaks, squeezing the profit of the enterprise, credit dries up, and a crisis breaks out (Marx 1981: 644–45).

The crisis is marked by an absolute lack of capital for loan, alongside a surplus of unoccupied industrial capital. The contraction of industrial capital launches a period of lower interest rates and a new recovery. The variation of the interest rate across the business cycle is explained not so much by the strong demand for loans in the period of prosperity as compared to that of stagnation, but rather to the greater ease with which this demand is satisfied in the period of the boom (Marx 1981: 582). The value of securities falls as the interest rate rises triggering distress sales and a downward spiral of asset prices (Marx 1981: 597–99). The crisis, which is a monetary crisis, is characterised by a paucity of money specifically as a means of payment and not by a lack of capital (Marx 1981: 620–22).

The implications of the speculative aspects of asset holding for investment, and the nature of the financial system that translates volatile “animal spirits” into effective demand is pivotal to Minsky’s approach to cycles. For Marx the financial cycle, in particular, the circulation of fictitious capital, moves relatively independently of the industrial cycle even though it is intertwined with it. Its impact is linked to the role of credit in facilitating accumulation, and how it helps establish the social relation between finance and enterprise. In his discussion of speculation, Marx is more focused on the distributive implications rather than the psychological propensities that might motivate speculation.

This process of concentration of money capital in the financial system also underscores the changing relation between financial and industrial capital. Marx discusses the role of credit in the formation of joint stock companies—the forerunners of the modern corporations (Marx 1981: Chapter 27). Ownership in joint stock-companies takes the form of ownership of tradable shares and stocks that grant the owner a claim to future profits of the company but do not embody actual control of the capital. They constitute another form of fictitious capital whose value is determined independently of the value of the real capital they represent.

The pervasive spread of the joint-stock structure (even to the banking sector) also implies the separation of ownership and control of capital, so that “social capital is applied by those who are not its owners, and who therefore proceed quite unlike owners” (Marx 1981: 568–70). This development has consequences for capitalist dynamics. It also further entrenches the significance of the banking system, which mediates the trade of these securities, in the overall structure of accumulation. It is also the motor of the process of centralisation and corporate restructuring through mergers and acquisitions, that is so integral to capitalist accumulation. Marx also highlights how in the wake of crisis, bankruptcies and takeovers further accelerate the process of concentration.

Finance is thus pivotal to capital accumulation, but at the same time exacerbates its contradictions and is a powerful engine for concentration. One dimension that is missing in this discussion so far of the development of the credit system and the elaboration of its monetary characteristics is the analyses of the role of the state.

Modern Money, the State, and Imperialism: Future Directions

Does Marx’s monetary theory, which was constructed on the basis of a commodity-money standard have relevance for the present day where the monetary standard is the monetary liability of the banking system (in the form of bank notes and deposits) and further where the forms of money are taking new and more varied forms?

The growing dominance of credit money in the financial system is fundamentally an expression of the separation of the sphere of finance and money-dealing from that of commerce that Marx alluded to in Grundrisse. Marx points to how this separation gives rise to a contradiction between the value of money as money and as a particular commodity that is “subject to particular conditions of exchange in its exchange with other commodities, conditions which contradict its general unconditional exchangeability” (Marx 1981: 150). This contradiction can be interpreted as the contradiction between the value of money as a produced commodity whose specific value is determined by production conditions like all other commodities and the value that expresses its role as a general equivalent. But it is also possible to translate this approach to the modern world where commodity-money has been superseded by credit-money, an eventuality that Marx did in fact foresee.

Foley (1989) points to how little difference there is in practice between systems with and without commodity-money. But as credit-money, money has features of both a general equivalent and a financial asset. The fact that credit-money does not receive explicit interest does not mean it is valueless paper, or that its value arises in a fundamentally different way from other financial assets. It remains a form of fictitious capital (Foley 2005). The question that is left “hanging theoretically” is the determination of the particular value of credit-money (Foley 2005). But the path to resolving this issue lies in the incorporation of Marx’s theorisation of a distinct method of valuation for fictitious capital.

The potential contradiction between money’s value as a general equivalent and its particular valuation as an asset is, in concrete practice, expressed and resolved through the workings of the money market, where short-term paper is traded.9 The monetary system is constituted by a structured hierarchy of claims and liabilities, and yet at each level of this hierarchy there is a higher form of money—as a means of payment—that can extinguish the debt (Mehrling 2013). In 19th century England, at the time Marx was writing, a hierarchy of different forms of credit-money substituted for commodity money in the form of bullion.10 He records in detail how bills of exchange and deposits were used to mediate trade and other transactions on a wide scale, substituting for Bank of England notes. Under buoyant market conditions such credit-money proliferated, but as conditions on the money-market got tighter, there was a rush to convert this form of credit money to Bank of England notes—a higher level of the monetary hierarchy. But the notes that the Bank of England issued were themselves convertible to gold—the apex of the monetary hierarchy.

Convertibilty between different levels of this hierarchy is established and confirmed in the everday transactions of the money market. It is when routine trades begin to falter in the market that convertibility is threatened. Such threats demand “large scale actions on the part of the bank” to reassert the terms of convertibility (Marx 1973: 133). Marx underscores why it becomes imperative for capital that the power of the state is deployed to preserve and guarantee the value and convertibility of credit-money at such times, precisely because the “devaluation of credit-money (not to speak of a complete loss of its monetary character, which is in any case purely imaginary) would destroy all existing relationships” (Marx 1981: 649). The variety of forms of money and the convertibility between these different forms is thus preserved and guaranteed through state intervention.

The modern financial system, with its pyramid of debt obligations and the spectacular growth of fictitious capital, depends in the final analyses on the role of the state as the ultimate arbiter of these debt obligations. The money market is a bridge between future claims and current cash flows (Mehrling 2013) but it is also the bridge between the state (through the actions of the central bank) and the private financial sector. Marx (1981) had undertaken a remarkably detailed and in-depth investigation of the functioning of the money market of his times (Vasudevan 2017). He highlighted the particular role that the Bank of England played as a quasi-state institution, and the fact that its note issue was backed by the credit of the state and “the entire wealth of the nation” (Marx 1981: 674). But he also stressed that the power of the Bank of England was limited not only by the magnitude of gold reserves in its vaults, but also by the power of private finance.

Even though Marx saw the central bank as “the pivot of the credit system,” he argued that “the metal reserve is in turn the pivot of the bank” (Marx 1981: 706). He also noted the limits of the central bank’s exercise of power to control the mechanisms of credit-money in normal times. In times of crises when the credit system tended to collapse back to its monetary basis, the central bank did exercise greater power over the money market, but if the crises coincided with periods when its reserves of gold had dwindled, its ability to intervene would remain circumscribed in the face of competition from the private financial system. With the evolution of the modern monetary system into a state-credit standard, where the monetary liability of the state functions as money, the pivot of the system is no longer metal reserves but the debt of the state (Vasudevan 2017). The valuation and management of public debt thus becomes central to the functioning of the monetary system.

This brings us to the other great divide in monetary theory—that between the “metallists” and “chartalists” (Schumpeter 1954; Goodhart 1989, 1998). The chartalists break with the metallists in delinking the monetary standard from any specific commodity, and instead trace the origin of money to the legal and fiscal authority of the state. In this view, money is a creature of the state and law, and all forms of money derive their acceptability from legislative validation and in particular on their use in the payment of taxes. In the hierarchy of money, proximity to the state is crucial in determining the position in the pyramid of debt obligations. The chartalist view presents a story of the origin of money that is embedded in social relations and history. Private exchange through markets takes a backseat to law and custom in this approach (Bell 2001; Wray 2014).

We have already outlined how Marx’s theorisation of a commodity-money standard was compatible with—and buttressed his conception of—money as a social relation, setting his views apart from the metallists. Commodity-money did not function simply as a numeraire, but was a vehicle for articulating social relations of exchange. But what is of essence, in Marx’s analysis, as distinct from the chartalist view, was the mediation of these social relations through private transactions in the market. His account of the logical origin of money did not rest on any parable of a barter economy that existed before money. Marx’s conception is closer to what is referred to as the money-view in seeking the origins of the origin of modern money in private money rather than the coercive power of the state (Mehrling 2000).

Role of the State

So where does that leave the role for the state in a Marxian theory of money? Marx indicated that the development of “commercial and banking credit” was linked to that of “state credit,” even if he did not explicitly spell out the precise manner in which these links took shape and evolved (Marx 1981: 525). We have noted the role of the state in the setting of the standard of price within the domestic economy. But Marx had also, as we have seen, accorded a central role to the Bank of England in the functioning of the credit system. He discussed how this power was exercised through the Bank’s ability to control the interest rate, but also emphasised that the power of the central bank was limited by the power of other large private banks and financial institutions (Marx 1973: 124). Through the crises of 1847, 1857 and 1866, it was already evident that while the Bank of England felt compelled to intervene to prop up the crisis-ridden banking system, it had yet to develop the tools and mechanisms of enforcing its will in periods of normalcy when the market was dominated by the private financial institutions.

But the Bank of England did learn in the last decades of the century to exercise greater control over the money market and the post-war world has seen an expansion of the state’s role both in providing a guarantee for the private credit system, and in regulating and disciplining it. With the introduction of the treasury bill at the end of the 19th century, short-term claims on the state also came to play a greater role in the money market. The evolution of the financial system in the advanced capitalist world after the Great Depression and World War II ushered in a period where the state played an even greater role in regulating the channels of private liquidity and the financial system. The scale and scope of state support to the banking system has also ratcheted up (Haldane 2009). Since the 1980s, with the adoption of inflation-targeting as the policy goal, central banks are directly intervening to pre-empt the possibility of rising wages eroding profitability. This shift can be seen, from a Marxian lens, as central bank “targeting of surplus value” (Foley 2005).

But as Leijohnhufvud (1997) underscores, the imperative to economise on the cash reserves continually propels the growth of private unregulated channels of credit and consequently the level of risk embedded in the financial system. At the same time as the betting of the banking system gets larger, the extent of state guarantee that is demanded also keeps increasing, so that the bets in the next round after the state has stepped in to save the failing financial markets are even larger. The state is bound to private finance in a growing doom-loop (Haldane 2009).

Since the 1980s the advanced capitalist world has seen a sharp expansion of parallel private monetary mechanisms—through what is called the shadow banking system—that lies outside the ambit of control of central banks. This private credit-money system represented precisely the “ever-lengthening chain of payments and the artificial system of settling them” which also made the system vulnerable to monetary crisis (Marx 1976: 235). The collapse of Lehman in 2008 that triggered an immediate collapse in these private monetary mechanisms and a breakdown of the credit machinery marked such a crisis. The increased demand for U.S. treasury bills, the only safe asset in the meltdown, was the hallmark of such a crisis when the only demand was for money in its absolute form. The crisis thus reinstated the power of the central bank—the U.S. Federal Reserve—over the money market as it stepped into the fray with bailouts and the Quantitative Easing programme to restart the credit engine. But in the end the main repercussion of this policy has been to further consolidate the power of private finance, as the banking sector has emerged even more concentrated than it was before the crisis, and has also resumed its pursuit of speculative profits. The interventions of the Federal Reserve have also, perversely, contributed to increasing inequality through their impact on asset prices and returns (Montecino and Epstein 2015).

But Marx had also pointed to another aspect of the power of the central bank—the constraint posed by the drain on its reserves in times of balance of payments crisis when gold reserves were also needed for settlement of international payments. The gold reserves of the Bank of England had a dual role, on the one hand, as world money, and on the other, as a security for convertibility of credit-money. Thus the monetary crises in 1847, 1857, and 1866 were compounded by the outflow of gold (which functioned as world money) that threatened convertibility. The effects of this drain of gold reserves are, Marx argues, a striking demonstration that “the social form of wealth exists alongside wealth itself as a thing” in the form of gold and also that “production is not subject to social control as social production” (Marx 1981: 707).

Marx has an insightful discussion of how balance of payments crisis spreads in succession from one country to another “like volleyball firing” (Marx 1981: 623–24). He demonstrates that while a balance of payments crisis may begin in one country—a creditor country like England, the drain of gold this induces along with the bankruptcy of importers, and the distress sale of exports and securities, transmits the crisis to its trading partners. Like Keynes after him, he recognised the inherent deflationary bias of the gold standard system. But as the preceding discussion has stressed, for Marx this contagion-like spread of deflation does not arise specifically from the use of a metallic standard, but rather from the contradictions of the money form.

Significantly, Marx’s discussion of the debt-deflation spiral places its effects within the developed commercial world. The implications of trade with the countries outside this commercial core, thus, bear investigation. Marx recognised how England deployed its role in mediating triangular patterns of trade to contain the impact of the drain of reserves (Marx 1981: 701–06).Thus India’s exports to North America and Australia were covered by drafts on England, which had the same effect as a direct export from India to England. The opium trade between India and China, similarly, helped finance England’s deficits with China. The East India Company’s drafts and later that of the British Indian government were in fact, Marx quipped, “brought into being by an import from India for which England does not pay an equivalent” and boiled down to “tribute exacted from India” (Marx 1981: 716).

The post-war world after the collapse of the Bretton Woods system has now come to rest on a floating dollar standard. It is based on the monetary liability of the U.S. state rather than on gold. But even by the last decades of the 19th century, the International Gold Standard was in effect a British pound–sterling standard with the “Bill on London,” a form of credit money, being used increasingly to finance trade and international transactions. The Bank of England was able to calibrate international liquidity through its manipulation of the discount rate, on the basis of relatively small gold reserves because it could draw on its surpluses with its colonies and other countries on the periphery, and shift the burden of adjustment and crises to these countries (Vasudevan 2009). The standard was the outcome of consensus (and Britain’s leading role in establishing this) and competition between the advanced capitalist countries (Brunhoff 2005). There is thus a link between Marx’s theory of world money and imperialism that needs to be fleshed out more fully.

Imperialism and Marx’s Theory of ‘World Money’

The imperial mechanisms embedded in the present-day floating dollar standard can be comprehended through the prism of Marx’s elaboration of world money, and a brief overview of how this has been attempted would give a flavour of the possibilities of this line of analysis. Patnaik (2008) provides a framework for analysing imperialism, in terms of the role of pauperised workers in the pre-capitalist sectors in the periphery, who form a continually recreated reserve army of labour, in stabilising the value of money in the core, by securing favourable terms of trade for the goods produced in the periphery, and by putting a lid on the wage claims of workers in the core. The crucial insight in this conception of world money is the link between world money and the international division of labour forged by the exercise of imperial power. It is however also necessary to situate this division of labour in a hierarchy of international credit relations and the emergence of the monetary liability of the dominant key-currency state as world money.

In this vein, Vasudevan (2009) elaborates on the role of parallel monetary mechanisms that enable the recycling of surpluses from and export of fragility to countries in the periphery. The unregulated euro-dollar market through the 1970s and 1980s, and in the post-1990s period, the profusion of new financial instruments and liberalised capital flows, were crucial to the workings of the floating dollar standard. Debtor countries served as a safety valve, facilitating the financing of the growing deficits of the US. This fomented the disproportionate growth of international financial flows. In Lapavitsas’ (2013) account of the dollar standard, the promotion of capital-market based private financial mechanisms served as the means for integrating countries in the periphery into the U.S. imperial system in what he calls a process of subordinate financialisation. He also thinks that the more recent stockpiling of reserves by countries in the periphery is an outcome and reflection of this subordinate status.

The evolution of the floating dollar standard based on the debt of the U.S. state—the U.S. treasury bill—also implies the emergence of an international monetary system based on fictitious capital since public debt is fictitious capital (Foley 2005; Brunhoff and Foley 2007; Vasudevan 2009). The U.S. treasury bill is not simply the link between the U.S. state and private capital markets. As world money, the dollar is the link between the U.S. state and a hierarchy of other national states and private capital in the international sphere (Vasudevan 2016). The challenge of developing an analysis of imperialism which would integrate Marx’s theory of money to a theory of the state, and build on Marx’s insights into the relation between public debt and private finance remains.

By Way of a Conclusion

Running through Marx’s notes and writings is the fundamental insight that money is a social relation and further that credit offers absolute command over the capital and property of others. This insight has profound political implications. It informs his critique of those who seek to overturn capitalist social relations by simply abolishing money or replacing its financial system with utopian credit and labour-money schemes. It explains how monetary policy can become a tool to promote the growth of finance. It also reveals quite clearly why the power of the state and of the central bank is drafted to the rescue of the financial system at the expense of the working class. The compulsion is even more acute as the banks get larger and larger and therefore “too big to fail.”

As one reads through Marx’s concrete discussion of financial markets in 19th century England, one is also struck, by the remarkable continuity between the world he was describing and contemporary capitalism. The incipient trends he identified have matured and ripened, and taken new forms but the trajectory remains that which Marx outlined in the Grundrisse—the separation of the sphere of finance from that of commerce.

Recent decades have witnessed a proliferation of new and complex financial instruments. For instance, multiple loans and mortgages are bundled together, then “sliced and diced” into novel kinds of securities that bear an extremely complex and opaque relationship to the original loans. Such securities have been central to the creation of vast financial machinery of wealth accumulation, driven disproportionately by profits acquired through financial channels. There has been a shift in the centre of gravity of economic activity from production to finance (Sweezy 1994; Foster 2007). Such accumulation represents an accumulation of claims and an accumulation of their market value from the capital gains of fictitious capital. The recent crisis revealed the illusory nature of this wealth most brutally.

Lapavitsas (2014) details how non-financial enterprises, banks and workers in the advanced capitalist world have, since the eighties, become increasingly implicated in the web of finance. The disproportionate growth of finance is driven by and also helps drive growing inequality and concentration of wealth. The discipline imposed by finance on production has bred the strategy of “rationalize, retrench and outsource,” leading to greater concentration and centralisation of all spheres of production on the one hand, and to a greater squeeze of the share of workers’ income on the other. Dos Santos (2009) has highlighted how both lending and money dealing services have been reoriented towards private wage income as source of revenues in contemporary banking. The subsumption of working class households into the realm of finance is not simply a measure of financial inclusion. It has a predatory aspect in enabling the financial expropriation of the incomes of working households.

The inroads made by profit-oriented microfinance companies in India, particularly in Andhra Pradesh, which saw a spate of suicides engendered by an unbearable burden of household debt, mirrors this pattern. The promise of financial inclusion that has spurred the push to “fintech” and the replacement of cash transactions in the context of the recent demonetisation decree, would in a similar vein help mobilise the incomes of working class households, petty commodity producers, and traders and farmers in the service of the big business houses and the “colossal system of gambling” that the rise of finance inevitably engenders.

The highly abstract formulation of Marx’s theory of money in Capital, Volume I is just the first step of a materialist analysis of concrete monetary phenomena. His concrete analysis of monetary phenomena in Capital, Volume III has remarkable resonance in today’s world. While Marx emphasised the primacy of production, he saw capitalist dynamics as being deeply entwined with money and finance. The importance of finance has only grown in the last 150 years. The dominance of finance, today, has profound political consequences in engendering inequality and shaping working class lives and livelihoods in deep and penetrating ways.


  1. Marx’s logical construction allows him to show the limitations of the proposals to use labour money or time-chits in place of money. He argues that since it is the social process of exchange which gives rise to money as a objective independent measure of value, labour-money cannot directly express this value (which is the abstract expression of social labour). The belief that money could be managed and subject to collective control without also managing and reorganising production was therefore utopian (Marx 1972: 85–86, 1973: 153–56).
  2. The analysis of the state, foreign trade and the world market were originally part of Marx’s plan for further three volumes of Capital, a project which was cut short by his death (Rosdolsky 1977).
  3. Brunhoff (1976) notes this analytical distinction in Marx and Keynes’s approach to the demand for money as a hoard. The formulation in Marx is grounded in money’s role as a general equivalent and serves to preserve this unique role, while that of Keynes is noted in psychological propensities and the speculative and precautionary motives. The need for a liquid store of wealth is driven by funadamental uncertainty about the future.
  4. He draws an analogy of the relationship between the monetary system and the credit system and that between Catholicism and Protestantism to make the point that “the credit system is no more emancipated from the monetary system as its basis than Protestantism is from the foundations of Catholicism” (Marx 1981: 727).
  5. Marx broke from the currency school in arguing that note issue and credit money bore no relationship to the quantity of gold reserves with the banks and also delineated how the flow of such credit money in circulation responded to the needs of circulation. In this framework the banking system cannot enforce the actual flow of credit money beyond the demands of circulation.
  6. I use financial capital instead of money capital or moneyed capital (as Marx does) in order to distinguish money capital functioning autonomously as an external agent providing the finance that launches the circuit of capital from its transitional form as money capital in the circuit of capital.
  7. The space of this article does not allow further discussion of how this interest rate is determined in Marx’s framework other than to highlight its dependence on relative bargaining power of industrial and financial capitalists and the phase of the business cycle and that for Marx there was no natural rate of interest.
  8. This approach is at odds with the standard textbook version of the money creation where banks simply lend out deposits received and further expand deposits through the money-multiplier process. Post-Keynesian economists have also been arguing against this interpretation of the banking system. What is interesting is that the Bank of England has recently come around to adopt the contrary view of Marx and the the Post-Keynesians (McLeay et al 2014).
  9. Brunhoff (1976) notes that in building the successive stages of his theory of money and credit, Marx does not speak of the price of money when discussing its role as a measure of value but only its value. However, Marx talks of the market price of money in the context of its role as a medium of circulation. Finally, while investigating the credit-system he introduces the price of money in the money market.
  10. Lapavitsas (2000) points to the connection between the form and function of money, with credit money reflecting money’s function as means of payment.


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