Skip to main content

What is money?

Money is a a paper IOU note written by the bank which promises to pay the bearer the amount printed on the bill, right? Wrong, explains the MARX MEMORIAL LIBRARY

“The first form of appearance of capital is money” (Marx Capital, Volume 1)

MONEY appears on the surface a simple thing; a “token of exchange,” something whose value is convertible into commodities through purchase.

Without such an intermediary, commodity exchange — the acquisition and disposal of goods — would be based (as it was before money was “invented”) on barter and extremely complicated.

Gold, salt, cowrie shells, coins — anything that is sufficiently scarce (naturally or because it is protected by law and state power) and permanent (so that it won’t decompose and can therefore be accumulated as wealth) will do.

At least, that’s the story, and it’s one rehearsed in introductory economics courses as “fact.” And for many everyday transactions — your visit to the newsagent to buy your copy of the Morning Star, that ad you put on eBay to sell your unwanted gear — it seems to fit.

Money has no value “in itself” — its “value” lies solely in what it is able to purchase.

Unfortunately it’s not that simple. Within capitalism money is a commodity whose role is obscured by its function as a means of exchange and, as Marx declared not just of money but of all commodities, it is extremely complex.

Money is also “capital.” As Marx declares (in the first volume of Capital): “We have no need to refer to the origin of capital in order to discover that the first form of appearance of capital is money. We can see it daily under our very eyes.”

For a start you can save it, “accumulate” it — if it’s “cash,” in a sock, under the mattress. If you’ve enough of it you can use it as “productive” capital — to make more money. Maybe buy a machine of some sort (a “means of production)” which, with your own work (your “labour”) you can produce something to sell — to make more money.

For Marx money that is used solely as a means of exchange — the transformation of commodities (C) into money (M) that is then used to purchase commodities (in his notation C>M>C,” “selling in order to buy)” is the simplest form of commodity circulation. But in “buying in order to sell” (M>C>M,” the transformation of money into commodities and the conversion of commodities back again into money) — at a profit — money acts as capital.

Even here we have a problem — if everyone is doing this, where does the “extra” money come from? Who “makes” it?

Similarly if you “invest” it — in a savings account, maybe an ISA, to earn interest, where does the interest come from? And, of course as soon as you do that, your “money” is no longer physical “stuff” that you can count — it’s simply a promise (on your bank or ISA statement) based on digital records held somewhere you are unaware of to pay you at some point in the future.

Or, if you’ve bought something on your credit card (that’s how more people shop following the Covid pandemic) perhaps using “tap and pay,” the “promise” — the debt and credit relationship — is the other way around. You owe them (and if you don’t settle in full at the end of the month you’ll owe more).

Even in its most primitive form, capitalism couldn’t exist as a purely coinage-based system, and, paradoxically, credit existed long before coinage was “invented.”

The tally stick (initially an animal bone carved with notches) was an ancient memory device used to record numbers. As a wooden “split tally” cut lengthwise the notches could be used to record debts, each party keeping a matched copy as a record.

Fast forward from medieval times (though tally sticks were in use in the early 19th century — in 1834 the burning of the Exchequer’s stockpile virtually destroyed the Palace of Westminster, its replacement being the Houses of Parliament today) and money is something infinitely more complicated.

Within capitalism, money at its simplest is a “unit of account” — increasingly in digital form, dematerialised, on a computer; a means of facilitating credit and debt.

As earlier answers in this series have explained, credit and debt are central to capitalism — it could never have developed without them.

As the Bank of England declares: “Money is an IOU.” What the bank doesn’t tell you is that today credit is also capital — capital that is largely disembodied from actual physical production.

Capitalism is a mode of production dependant on the circulation of products as commodities. In capitalism the “use value” of commodities is secondary to their exchange value expressed by what Marx called “the money form.” And the unique feature of the “money form” is that it permits accumulation without limit.

Earlier economists treated money (as many non-Marxist explanations do today) solely as a valueless facilitator of exchange — something (including gold) with no value “in itself” other than what it can buy.

In pre-capitalist class societies — Greek and Roman city states, and under feudalism — this was its primary function as it is to some extent today at an individual level. If money has no value (ie it cannot itself be bought and sold) then it is potentially worthless.

That is why in a crisis (when money loses its value) hoarders try to translate their wealth into physical commodities — minerals, food or (increasingly) land.

But this process is itself contradictory because if money loses its value then it may prove impossible to sell the commodities at the price (exchange value) at which they were purchased.

Under capitalism promissory notes and paper money assumed increasing prominence. That form of money — issued by the state — is fiat money.

With no value in themselves they depend on the representation of their supposed equivalence in coinage. Still today your £5, £10 and (if you have any) your £50 notes feature a “promise to pay.” The state is able to issue fiat moneys without limit.

That wasn’t always the case. For the greater part of human existence and for good reasons, money was tied to scarce physical resources (salt, silver, gold), themselves closely regulated by the state.

Marx himself starts his analysis of money with “commodity money,” in principle at least convertible to gold. But when the “gold standard” –— the metallic basis of money — was, globally finally and totally abandoned in the 1970s, it put global capitalism in a potentially limitless world of money creation and accumulation.

If a bank “gives” you a mortgage, they’re not lending you money from the deposits of other savers; the monies they lend are vastly in excess of what they hold in cash. They are in effect “creating” money in the form of a debt — one that you will have to pay back from what you earn. And when they bundle that debt with others together with the interest they are expected to earn and sell it to a finance house as a “securitised asset” (yes, “money” is indeed a commodity) they are creating another set of credit and debt relationships.

Which work fine for their investors but not so well for those who lose their homes or their livelihoods (as many did in the crash of 2008) when those asset values (Marx called them “fictitious capital”) crumble.

The role of money as a commodity — recognised in practice at the highest level of finance capital — became transformed in post-Thatcher’s Britain into a trope that puts ordinary people into the role of an “employer” — “make your money work harder for you,” exhort investment company advertisements.

And at the same time it presents the state as a parent or head of household, managing the nation’s budget and justifying austerity — TINA — “there is no alternative.”

Thatcher’s declaration “there is no government money, only taxpayers’ money” is deeply embedded in popular perception and this perception contributed significantly to Labour’s defeat in the 2019 elections.

But it is untrue. We”ll explore this further in the next answer.

The next answer will address the significance of current government policies in relation to the Covid-19 pandemic, asking “Where does money come from?”

The Marx Memorial Library and Workers School promotes a wide range of lectures and classes, on site and online. Details of these together with previous “Full Marx” answers (this is number 70) can be found on the Library’s website


We're a reader-owned co-operative, which means you can become part of the paper too by buying shares in the People’s Press Printing Society.

Become a supporter

Fighting fund

You've Raised:£ 11,195
We need:£ 6,805
12 Days remaining
Donate today