Consider this several part essay as an inadequate reply to Magpie's request for some comments about commodity money.
In this essay, I undertake to follow in the footsteps of Wile E. Coyote, the immortal antagonist in the Road Runner animated cartoons who, in episode after episode, races madly over the edge of a cliff, suspended for several steps by his sheer momentum, stops, looks down, realizes there is nothing under him, gets a look of chagrin on his face, and plummets to earth. I am going to launch a several-part rumination on money, fully aware that I do not know how to bring it to a satisfactory conclusion. For several days, it will seem that I am proceeding confidently toward a goal that is surely clear to me even if not to my readers, only at some point down the road to pause, notice that my argument lacks grounding, get whatever passes in the blogosphere for a look of chagrin [surely there is an emoticon for that], whereupon I shall plummet to earth. Why am I doing this? Wile E. at least is blessed with restorative amnesia, so each of his crashes is, from his point of view, his first. But though I am ancient, approaching my eightieth birthday, I can still recall what it is like to follow an argument all the way to its conclusion. My reason is simple: I am hopeful that when I pull up short and look down, one of you will hold out a hand, catch me, and offer a continuation of the argument beyond the point to which I am able to carry it.
Let us return to an elementary capitalist system of the sort analyzed by Marx and his Classical predecessors. In the little model I presented for examination, market transactions are treated as commodity exchanges, which is to say essentially as very sophisticated acts of barter. Competition, we supposed, establishes a consistent, complete set of exchange rations, and the arbitrary selection of one commodity as numeraire transforms those ratios into relative prices. That is to say, for those who may perhaps not have read the entire twenty part essay I just finished posting, traders swap linen for coats, coats for boots, boots for eggs, eggs for coal in such a way that the ratios in which these commodities exchange form a consistent system. If ten yards of linen exchange for one coat, and one coat exchanges for two pairs of boots, then five yards of linen will exchange for one pair of boots, and so forth. The ratio 5 yds linen/1 pr boots is a "relative price" -- it is the price of linen relative to boots, or, what is the same thing, the price of boots relative to linen.
In the simplest case, at the end of each cycle of production, each producer holds some non-zero quantity of the single commodity produced in his industry. There then ensues an interval of exchange before the next cycle of production commences. Each producer exchanges a portion of his gross output [possibly all of it] for the inputs required for another round of production at the same level of activity. The remainder, if there be any, is exchanged for some market basket [or vector if we are being mathematical] of surplus outputs which he consumes unproductively [on a lavish lifestyle, perhaps, or on an extension of his library of theology books.]
For an economy of a given size [the specification of which is actually a problem, once we treat labor as a produced commodity], there exists some vector of positive industry activity levels that guarantees a clearing of all markets at the prices determined by the technical coefficients of production, by a zero rate of return in the labor-producing industry, and by a uniform rate of profit in the rest of the economy. All of this can be stated using a variety of symbols with superscripts and subscripts in elegant fashion. I shan't try your patience by putting this on the page [thereby saving myself the effort of introducing Greek letters, subscripts, and superscripts in Microsoft Word which is a royal pain.]
Nothing essential is altered in this system by the emergence of a single commodity, such as gold, that functions as commodity money. So long as gold is a produced commodity [as it is], its ratio of exchange with other commodities will be determined by the technical coefficients of production, together with the condition of a uniform rate of return in all sectors save for the labor producing sector, in which a zero rate of return rules.
As soon as we undertake to introduce the concept of paper money, or bills of exchange, we are forced to recognize a certain inadequacy in our previous analysis. We have been speaking of the exchange of commodities as though capitalist A stands with a bolt of cloth in his arms, Capitalist B with a bushel basket of wheat in his, so that at a signal from the director of exchange they physically exchange burdens and turn about to look for new trading partners. But of course nothing like this is intended. In the image of physical exchange, we have suppressed the essential legal framework of exchange, and with it the central legal facts of ownership, entitlement, and alienation. In so doing, we have significantly misrepresented the truly social nature of exchange [and production] relations. At this point, we must bring these features explicitly into our discussion, for without them we have no hope of making sense of the phenomena of money and capital.
Let us begin with the notion of an economic agent's ownership of a commodity. It is the law that defines the social/legal category of economic agent. An economic agent is whoever, or whatever, may stand in a relationship of ownership to whatever or whomever is defined as an ownable and alienable good. A person can be an economic agent, but so too can a corporation, or an animal, or -- if the law so decides -- a tree or a river. "Economic agent" is thus an ascriptive term, not a descriptive term. "X is an economic agent" ascribes a status to X in a system of legal relationships. The agency legally empowered to decide whether or not a candidate for the status of economic agent possesses that status [which is to say the judge, or occupier of a bureaucratically defined office, or jury, or whatever] does not discover that X is an economic agent, but instead decides that X is an economic agent, by ascribing that status to X in accordance with the appropriate procedures and conformity with the applicable laws or regulations. In like manner, "X owns a" ascribes to X [and to a] a certain legal status, which includes or carries with it a variety of legal rights and duties concerning a [and other agents, goods, etc., possibly.]