TOP 2017-03-21

Vouchers or Circulation, Money is Money

It is possible to distinguish two types of money system, which I will call circulation money and voucher money. Circulation money is the most common, and allows money to act as a medium of exchange between private producers. Voucher money is a system that was de facto implemented by many socialist economies of the past, and appears in many discussions of transitional socialist economies as well as anarcho-collectivist communes. In these contexts voucher money is often referred to as ‘labour credits’ or ‘labour certificates’.

Voucher money is created according to an economic plan and is only intended to be used for purposes outlined by the plan. The central bank (or central issuing institution) distributes the voucher money to enterprises, who then pass it on to workers who fulfill the plan. In theory, workers can only spend this money on products and services that are part of the plan, and when they do so, the money is not retained by the businesses or retail outlets that collect it; instead, it is returned in full to the central bank. Consequently, businesses have two accounts - one from which they can only withdraw money provided to them by the central authority, and one to which they can only deposit the money that they have taken from customers.

Karl Marx did not consider voucher money to be really ‘money’. In a footnote in Capital Vol. I, he says that it is “no more money than a ticket to the theatre”[1]. In theory, voucher money is intended only to certify that somebody has worked and to then allow them to claim the portion of wealth that they are entitled to in accordance with the plan. Theoretically, voucher money eliminates the profit motive, since nobody - not even the central bank - is able to retain surpluses in the form of money. Hence production is supposed to be only ‘for use’ and not ‘for profit’: a shoe factory is there to provide people with footwear, for example, not to enrich private investors.

All of this is how it goes “in theory”, how it is “intended” and “supposed” to work, but in practice, voucher money systems in Soviet-style economies had very similar properties to circulation money, and the circulation of this money could not be prevented, to the point where the Soviet black market became unofficially tolerated. Moreover, Soviet economic reforms starting in 1965 demonstrated the ease with which voucher money could be converted into circulation money with no major changes in the overall functioning of the system. In the reformed system, businesses retained individual accounts from which they paid wages, and could borrow short-term credit from the bank. In addition, profit was introduced as a target in the state plan. The reforms turned out to be largely ineffective at improving productivity or growth.

I will argue that voucher money indeed deserves to be classified as money due to its functional and structural similarities with circulation money, as well as the dynamics that encourage it to circulate. From this discussion it will emerge that hallmark features of capitalist economies - the growth imperative, wage labour, inequality - are inherent to money itself. Hence money as such, rather than specific types of money, should be problematised.

Structural Similarities between Voucher Money and Circulation Money

The standard economic equation MV=PQ reflects the fact that, in circulation systems, the money supply M can cover the sum of all priced goods and services, PQ, so long as it circulates enough times. This circulation is quantified by the factor V, the velocity of money, or speed of circulation. In a voucher money system, the money supply exactly equals the sum of all prices by design, hence M=PQ. We can therefore expect a voucher system to be structurally similar to a circulation system in the special case where V=1.

On the face of it, it seems a curious feature of voucher money that it is ‘created out of nothing’. Whereas a business in a market economy has to expect a profit in order to reinvest in the business, an enterprise in a planned economy does not have to wait for capital to accumulate - if the plan stipulates a reinvestment, then money is created to cover it.

But this difference is only superficial. In fiat currency systems - like those used in all market economies today - money is also created ‘ex nihilo’ by central banks and is ‘destroyed’ when it circulates back again. The money thus created is borrowed by private banks, which then lend it on to private enterprises. As a result, businesses in market economies don’t have to wait for capital to accumulate either - they can simply borrow money immediately from a private bank (so long as they are creditworthy).

However, in a market economy, the usefulness of a business has not been assured by a predetermined plan. Banks therefore expect money to be returned to them with interest in order to ensure that businesses won’t just spend the money indiscriminately. If there were no such expectation, then the money supply (M) would be inflated relative to the real size of the economy, causing prices (P) to rise. Thus, central banks and governments can exercise indirect control over the money supply via the interest rate in order to prevent unsustainable levels of inflation.

Now consider a voucher money system and suppose that a business fails to sell its products or services as expected. The voucher money will still be ‘out there’ since the workers were already paid, but now there is more money available than useful products to buy with it. In a market economy this would normally trigger inflation, but in Soviet-style socialism, where prices were strictly fixed, this instead led to shortages and the development of the black market.

While the consequences appear to be divergent, the same basic economic rules are in play regardless of which money system is used.

Functional Similarities

In any system where money is tied to labour, people can generally only obtain the means of life by working. Hence money acts as a ‘material incentive’ to work. Yet this rests on the key assumption that people would not want to work otherwise, despite the fact that work creates the use values that make up the means of life.

To explain this, we can refer to the Marxian concept of alienation. In a market economy, the requirements of profitability, competition and growth confront people as impersonal and external forces which they need to navigate in order to survive. In Soviet planned economies, the central plan has the same effect, since it is created externally and is not under the control of the people who are supposed to execute it. As a result, people do not identify with the goals of their workplace since those goals are dictated to them. The role of the worker is merely to conform to those dictates as a condition of obtaining money.

Alienation is also linked to the commodity. In a money system, the means of life do not appear to people as things to be built, hunted or gathered from the world - as they presumably do in ‘primitive’ societies - instead, they appear as commodities which have already been built and are available to buy in retail outlets, so long as they can be ‘unlocked’ with the correct amount of money. This leads again to people being alienated from their productive activity, since it is the only way of obtaining the ‘keys’, i.e. money.

Importantly, the discussion does not change, whether we are talking about voucher money or circulation money. In both cases, alienation arises out of the survival anxiety imposed by money, turning work into a necessary evil. As a result, labour in any money system still deserves to be called wage labour, regardless of who owns the means of production.

Then why did the Soviet model appear so different to the market economy? The reason is that money was simply not scarce enough in the Soviet system. Material incentives are necessary to motivate an alienated activity, whether this is working for a market-oriented firm or a Soviet state enterprise. But the price fixing of the Soviet system as well as its chronic labour shortage led to a situation where money was never scarce and work was always abundant. Since there was little point in earning extra money - because it was already fairly abundant - it was hard to motivate people to be more productive in their alienated activity. This resulted in productivity losses which created further commodity shortages. Just like with the structural similarities, it emerges that the differences between the market and Soviet socialist systems are merely variations on an underlying theme.

We should therefore analyse why there was a chronic labour shortage.

The Flexibility Problem

A modern economy - one with specialisations and division of labour - needs to be dynamic enough that it can respond to changes in people’s needs, disasters, irregular maintenance activities, the incorporation of new technologies into the production process, as well as the expansion and maintenance of required infrastructure. In other words the economy needs to be flexible: it needs to have a variety of skills available which can be deployed when they are needed in various changing areas.

In a market economy, flexibility is created by unemployment and weak labour protection laws. In the words of Noam Chomsky, flexibility is “not knowing if you’ll have a job tomorrow”, and in the words of Karl Marx, the unemployed are a “reserve army”, ready to be employed by whichever area of the economy is profitable next. However, unemployed people only have their status as a reserve army because of the alienation and survival anxiety we mentioned above: they will work in any suitable part of the economy because of survival anxiety (their need for money) and simultaneously, their lack of money while unemployed is the incentive needed to bring them into the remit of alienated production.

In the post-war years, most industrialised countries including the Soviet Union were able to achieve high rates of growth and low levels of unemployment at the same time. This was due to historically unique conditions[2], not least of which was the enormous amount of reconstruction that was necessary after the war. Combined with the availability of cheap petroleum, large-scale urbanisation, the mobilisation of women, colonial exploitation (in many cases), high agricultural productivity due to chemical fertilisers, and the ‘baby boom’ (high population growth), these economies were able to find new workers very easily.

In the mid–70s, however, these factors were losing their power. Urbanisation can’t continue forever; oil was no longer cheap; the reconstruction efforts were basically done. Despite their apparent differences, both the Soviet economies and the industrialised market economies experienced economic downturns at the same time, for these same reasons. But the market economies ‘solved’ the issue by abandoning investment-heavy Keynesian economics for the neo-liberal consensus: unemployment had to rise, and labour protection policies had to become weaker in order to give the economy its needed flexibility.

But the Soviet Union could not do the same thing. It began to suffer from low flexibility because everyone was guaranteed a job. At the same time, the low productivity made managers unwilling to lose their workers to other parts of the economy since it would jeopardise their ability to fulfill their plan targets. With full employment, it was now exceptionally difficult to find the workforce necessary to expand production or meet the changing needs of the economy.

Economists are correct to conclude from this experience that flexibile labour markets are essential - but this means that a money-based economy cannot function properly without the threat of unemployment and the threat of poverty, and the inequality that results from this.

As we saw above, money has to be scarce not just to create flexibility but also to drive productivity. Then why is high productivity so important?

The Growth Imperative

Any money-based economic system depends upon growth, and this follows again from the necessity of making money scarce[3]. Suppose that one area of the economy expands - more shoes are produced, for example. Yet the money necessary to buy these shoes now rests with the people who were employed to make them - not the people who wanted to buy them. If money is scarce, then the people who want the shoes will need to get a pay rise so that they can afford them. If the money were provided ‘ex nihilo’, money would no longer be scarce, and productivity would therefore go down, resulting in shortages - as the Soviet experience demonstrates. Hence the only way to provide this pay rise is by linking it to increased productivity, by expanding other parts of the economy even if there is no concrete need to do so.

Similarly, if there is unemployment, then there will be a demand for more jobs and hence increased production. And since an unemployed reserve army is permanently necessary for the economy’s flexibility, we can see that there will always be demands for the economy’s expansion and fear of its contraction.

When money is scarce, increased productivity is the only way of obtaining more of it, which is necessary in the face of survival anxiety, the fear of losing your livelihood. Conversely, having more money is an entitlement to increased consumption, which can only be achieved with increased production. And this entitlement is necessary because it is the material incentive to be productive in the first place.

The growth imperative creates a feedback effect on alienation. While labour is already alienated, the need for ever increasing productivity creates additional pressures on workers which are outside of their control. The economy demands growth in order to keep it stable, even in very rich economies where consumption levels are already unprecedentedly high. This pressure for growth creates health and social problems in workers and also necessitates the exploitation of more and more natural resources, destroying the ecological basis of production itself.

Radical Changes to Voucher Money

So far we have traced the problems of circulation and voucher systems back to alienation and survival anxiety. As a thought experiment, let’s imagine a system which attempts to eliminate these features but nevertheless retains a system of voucher money. In this hypothetical system, the economy is planned using a participative and largely decentralised process. Each person receives an equal amount of money which is entirely independent of the amount that they work, even if they do not work at all. Therefore survival anxiety would not exist in relation to money, and money would not be used as a material incentive because in theory production would not be alienated.

Nevertheless, even in this system - which must surely count as the most radical kind of money system imaginable - it is possible to see how the presence of money would distort it and probably lead to its demise.

Firstly, we can see that the amount that people buy is still limited by the amount of money they are given, but the amount of money people need for their lifestyle will still vary from person to person. If the economy expands, then everyone in the entire society will receive more money (on the assumption of equal incomes). If this amount of money adds up to the exact amount needed to buy the new products (i.e. M=PQ holds), then some people will end up with more money than they need, if they aren’t interested in these particular products, while people who are interested in the products will have less than they need to buy them.

One possible response to this situation is for people with a relative surplus of money to lend it to the people with a relative deficit and to charge interest on the loan. This would turn the voucher money into circulation money, and would start to create inequalities in wealth as it would allow some people to hoard money.

Engels recognised this possibility when discussing a similar proposal by Eugen Dühring[4]: “Both the Opportunity and the motive are present, on the one hand to form a hoard, and on the other to run into debt. The needy individual borrows from the individual who builds up a hoard. The borrowed money, accepted by the commune in payment for means of subsistence, once more becomes what it is in present-day society, the social incarnation of human labour, the real measure of labour, the general medium of circulation.”[5]

In addition to creating the catalyst for money to circulate, the inequalities in money and money requirements would encourage people to see their surplus money as an entitlement to increased consumption. Since money is by definition a universal equivalent, it will inevitably be seen as a means to obtain any other commodity. So it is possible that this would create additional demand in other parts of the economy to create different ‘rewards’ for people whose income has increased. This could potentially set up a new growth dynamic, since each new expansion will have the same effect as the first one, increasing the money supply and therefore giving people higher incomes which they will view as an entitlement to further material rewards.

Now consider what would happen in this hypothetical system if the economy contracted for any reason. The equal income provided to people would go down on the assumption that the equation M=PQ still holds. But this would affect different people in different ways. Some people would find it harder to buy everything they require. Their spending would probably slow down. Therefore, even though the economy is planned in a democratic process, it would genuinely appear as if demand had decreased, and therefore nobody would see the point in continuing to produce the things that people weren’t buying. So the economy would contract again, creating another feedback effect - this time, a negative feedback loop that could result in the whole economy collapsing. Just like in any other money system, growth is the only sure way to avoid the potential catastrophe of contraction.

This also reveals how the use of money could distort an otherwise democratic planning process[6]. Planning would not be based on need, even though it is not based on profit, because the demand in a particular area still depends on how people decide to spend the limited amount of money they have in the given conditions. Linking earnings to labour or to productivity would only magnify this effect, as the actual demand would only be known when people’s productivity is known, and after they have received their income: it would not be known at the planning stage. Needs-oriented planning is fundamentally at odds with monetary accounting.

What would happen if we threw away the equation M=PQ and gave people abundant amounts of money after expansions of the economy, and/or refused to decrease people’s incomes after a contraction of the economy? If prices were also fixed, then there would be more money than things to buy with it. In a market economy, this would cause shortages and black markets to develop, but it’s unclear if that would happen in a society without alienated labour or survival anxiety. Since we assumed that people’s motivation to work is independent of their monetary incomes here, it would theoretically be possible to avoid shortages despite the abundance of money. But then we would have to ask what the purpose of the money is. If it is abundant, then why charge money at all? If it isn’t for rewarding labour, then why do people need their monetary income?

This thought experiment reveals the fundamental uselessness of money when survival anxiety and alienation are eliminated[6]. Indeed, in a genuinely planned economy, the only reasonable way of distributing money is to give it directly to the people who wanted the planned products in exactly the correct quantity. This transfer of money would, of course, be pointless. A truly needs-based economy would have no need to charge money for products or services, since that would only get in the way of satisfying the needs in question.


Since the fall of the Soviet Union, the idea of voucher money or labour certificates has become obscure[7]. Nevertheless this discussion shows that even the most radically different kinds of money system are deeply problematic. Unemployment, inequality, the growth imperative and a divergence from real needs are all inherent features of economies based on money.

Only the elimination of survival anxiety and alienation could possibly remove the dynamics that give rise to these problems. However, such a system cannot still retain money. The thought experiment suggests that retaining money would introduce inequalities and subtle growth-oriented dynamics. This would either systematically distort the planning process until the economy reverted to an ordinary market economy, or it would result in the realisation that money was no longer necessary in this system at all.

  1. Karl Marx, Capital Volume I, Chapter III, fn 1  ↩

  2. See this article by Aaron Peters for other reasons why we cannot ‘go back’ to the conditions of the post-war years.  ↩

  3. There are many other drivers of the growth imperative in the case of circulation money, but I focus on these arguments because they apply to voucher money as well.  ↩

  4. Friedrich Engels 1877, Anti-Dühring, Part III, Chapter IV  ↩

  5. Like Marx, Engels insisted that voucher money (which he calls labour certificates, since in the proposals in question they are still linked to labour) is not really money unless it circulates. My own analysis suggests that this is not true. Even if a labour certificate had your name on it, so that it could not be transferred easily to someone else, the “opportunity and the motive” for circulation would still be present. People would try to find a way around it. Moreover, as soon as the certificates are tied to labour, survival anxiety and alienation will inevitably result, as discussed above.  ↩

  6. It’s important to realise that planning does not have to be central planning like in the Soviet Union. I favour decentralised, stigmergic processes and I only refer to ‘democratic planning’ because that is a common socialist demand.  ↩

  7. A recent discussion is included in Alfred Fresin’s work (German): Bedürfnisorientierte Versorgungswirtschaft (BVW) statt Kapitalismus  ↩