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Hard Money Placement : Karl Marx adds a distinction that is often confused with David
Ricardo's. In Marxian theory, variable capital refers to a capitalist's investment in labor-
power, seen as the only source of surplus-value. It is called "variable" since the amount of
value it can produce varies from the amount it consumes, i.e., it creates new value. On the
other hand, constant capital refers to investment in non-human factors of production, such
as plant and machinery, which Marx takes to contribute only its own replacement value
to the commodities it is used to produce. It is constant, in that the amount of value
committed in the original investment, and the amount retrieved in the form of
commodities produced, remains constant.
The money supply is the amount of financial instruments within a specific economy
available for purchasing goods or services. The money supply is usually measured as
three escalating categories M1, M2 and M3. The categories grow in size with M1 being
currency (coins and bills) and checking account deposits. M2 is currency, checking
account deposits and savings account deposits, and M3 is M2 plus time deposits. M1
includes only the most liquid financial instruments, and M3 relatively illiquid
instruments.
When gold and silver are used as money, the money supply can grow only if the supply
of these metals is increased by mining. This rate of increase will accelerate during
periods of gold rushes and discoveries, such as when Columbus discovered the new
world and brought back gold and silver to Spain, or when gold was discovered in
California in 1848. This causes inflation, as the value of gold goes down. However, if the
rate of gold mining cannot keep up with the growth of the economy, gold becomes
relatively more valuable, and prices (denominated in gold) will drop, causing deflation.
Deflation was the more typical situation for over a century when gold and paper money
backed by gold were used as money in the 18th and 19th centuries.
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