Finance Capital, Hilferding 1910


Money in the circulation process

The circulation process takes the form: Commodity–Money–Commodity, or C–M–C. In this process the social exchange of goods is completed. A sells a commodity which does not have use value for him, and then buys another which does. In this process, money simply furnishes the evidence that the individual conditions of production for any single commodity coincide with the general conditions of social production. The essential purpose of the process, however, is the satisfaction of individual wants through general exchange of commodities. A commodity is exchanged for another of equal value. The latter is then consumed and disappears from circulation.

While commodities are continuously disappearing from circulation, money continues to circulate without interruption. The place formerly occupied by a commodity is merely taken by a unit of money of equal value. The circulation of money, therefore, really consists of a rotation of commodities. The question then arises as to the quantity of money required in circulation. This involves asking what is the real relation between money and commodities. The quantity of circulating media is determined primarily by the aggregate price of commodities. Given the quantity of commodities, changes in the quantity of money in circulation follow the fluctuations of commodity prices, regardless of whether such price changes arise from real changes in value or only from fluctuations of market prices.[1] Such is the rule when sales and purchases take place in the same locale. If, on the other hand, they constitute a sequential series, the following equation holds good : the sum of commodity prices, divided by the velocity of circulation of a unit of money, equals the total quantity of money serving as a medium of exchange. The law that the quantity of the medium of exchange is determined by the sum of the prices of commodities in circulation and the average velocity of circulation of money can also be expressed by saying that "given the sum of the values of commodities and the average rapidity of their metamorphosis, the quantity of precious metal current as money depends on the value of that precious metal".[2]

We have seen that money is a social relationship expressed in the form of an object. This object serves as a direct expression of value. In the sequence C–M–C, however, the value of a commodity is always exchanged for the value of another commodity, and money is a transitory form or a mere technical aid, the use of which causes expense which should be avoided as far as possible. Simultaneously with money itself arises the effort to dispense with money.[3] Money provides circulation with a value-crystal into which a commodity can be converted, only to be subsequently dissolved into the equivalent value of another commodity.[4]

Money can be dispensed with as an expression of equivalence. But it is indispensable as a symbol of value because it is a necessary means of giving society's sanction to the value of a commodity. Thanks to money, it is possible for value to be reconverted from its monetary form into any other commodity. However, since the monetary expression of value is ephemeral, and unimportant in itself (except when the process C–M–C is interrupted and the money itself has to be stored for a longer or shorter time in order to make possible the completion of the M–C sequence at a later date), what is important for our purpose is the social aspect of money – its quality of being the value equivalent of a commodity. This social aspect of money finds its palpable expression in the substance used as money: for example, gold. But it can also be expressed directly through conscious social regulation or, since the state is the conscious organ of commodity producing society, by state regulation. Hence the state can designate any token – for example, a piece of paper appropriately labelled– as a representative of money, a money token.

It is clear that tokens of this type can only function as a medium-of circulation between two commodities ; they are useless for other purposes. Their entire work is done in circulation where money, as a form of value, is always a temporary transition stage to the value of a commodity. The volume of circulation is extremely variable because, given the velocity of circulation of money, it depends, as we know, upon the sum total of prices. This sum changes constantly, and is affected particularly by the periodic fluctuations within the annual cycle (as when farm products enter the market at harvest time, increasing the sum of prices), and by the cyclical fluctuations of prosperity and depression. Hence, the volume of paper money must always be kept down to the minimum amount of money required for circulation.[5] This minimum can, however, be replaced by paper, and since this amount of money is always necessary for circulation there is no need for gold to appear in its place. The state can therefore make paper money legal tender. In other words, within the limits set by the minimum required for circulation, a consciously regulated social relationship can take the place of a relationship which is expressed through an object. All this is possible because metallic money, although concealed in a material garb, is itself a social relation. Unless this is understood, we cannot hope to understand the nature of paper money.[6] We have already seen how the anarchy of the commodity producing society generates the need for money. The anarchy is more or less eliminated with respect to the minimum required for circulation. A certain minimum of commodities with a given value must be bought and sold whatever the circumstances. The exclusion of the effects of anarchic production manifests itself in the possibility of replacing gold by mere value tokens.

Nevertheless, the minimum of circulation places a definite limit on this kind of conscious control. The money token can serve as a full-fledged substitute for money, and paper can serve as a token for gold, only within the limits thus set. Since the volume of circulation fluctuates constantly, the use of paper money must be accompanied by a perpetual ebb and flow of gold in circulation. Where this is not possible a discrepancy arises between the nominal value of paper money and its actual value, or in other words, depreciation of the paper money.

In order to understand this process let us first envisage a system of pure paper currency (as legal tender). Let us assume that, at a given time, circulation requires 5,000,000 marks for which 36.56 pounds of gold would be needed. We should then have a total circulation as follows; 5,000,000 marks in C –5,000,000 marks in M –5,000,000 marks in C. If paper tokens were substituted for gold, their sum would have to represent the total value of commodities (5,000,000 marks in this case) whatever their nominal value. In other words, if 5,000 notes of equal value were printed, each note would be worth 1,000 marks ; if 100,000 notes were printed, each would be worth 50 marks. If the velocity of circulation remained constant and the sum of prices were to double without any corresponding change in the quantity of paper money, the value of the paper would rise to 10,000,000 marks; per contra, if the sum of prices were to decline by one half, the value of the paper would fall to 2,500,000 marks. In other words, under a system of pure legal-tender paper currency, given a constant velocity of circulation, the value of paper money is determined by the total price of all the commodities in circulation. The value of paper money in such circumstances is completely independent of the value of gold and reflects directly the value of commodities, in accordance with the law that its total amount represents value equal to the sum of commodity prices divided by the number of monetary units of equal denomination in circulation. It is obvious that paper money can appreciate as well as depreciate in relation to its original value.

Naturally, not only paper but a more valuable material, say silver, can also function as a money token. If a depreciation of silver results from a fall in its cost of production, the silver price of commodities will rise, but their price in terms of gold, other things being equal, will remain unchanged. The depreciation of silver would be reflected in its exchange rate with gold, and the degree of depreciation could be measured by the exchange rate obtaining between a silver currency country and a gold currency country. Under a system of free coinage, the depreciation of the legal-tender silver would be equal to the depreciation of the uncoined bullion. But this would not be the case if free coinage were suspended.[7] If, in the latter circumstances, there were an increase in the aggregate price of commodities in circulation, say from 5,000,000 marks to 6,000,000 marks, and if the silver used in circulation had a value of only 5,500,000 marks, the value of silver coins in circulation would appreciate until their sum was equal to 6,000,000 marks. In other words, their value as currency would exceed their bullion value. If we accept the foregoing explanation, phenomena which seemed inexplicable to such eminent monetary theorists as Lexis and Lotz – namely, the appreciation of the Dutch and Austrian silver guilder, and later of the Indian rupee, above their bullion value – cease to be a mystery.[8]

The proof that value is a purely social category is thus supplied by the fact that the value of paper money is determined by the value of the total quantity of commodities in circulation. A mere slip of paper, worthless in itself, but discharging the social task of circulating commodities, thereby acquires a value which is out of all proportion to its negligible value as paper. Just as the moon, long since extinguished, is able to shine only because it receives light from the blazing sun, so paper has a value only because commodities are impregnated with value by social labour. It is therefore a reflection of labour value which converts paper into money just as it is reflected sunlight which enables the moon to shine. The lustre of commodity value is to paper currency what the rays of the sun are to moonlight.

Austria had an inconvertible paper currency from 1859. Silver guilders were at a premium in relation to paper. More paper was issued than was required in circulation. A condition was thus brought about similar to the one described above. The purchasing power of a guilder no longer depended on the value of silver, but on the value of commodities in circulation. If the value of the quantity of commodities in circulation equalled 500,000,000 guilders but 600,000,000 paper guilders were printed, the paper guilders would then purchase the same volume of commodities as were formerly purchased by 5/6ths of that quantity of paper money. As a result silver guilders became, in effect, commodities. Paper guilders were used for most purchases while silver guilders were sold abroad; the latter fetched 6/5ths of a paper guilder and with the proceeds one could then repay debts previously contracted in silver. As a result silver disappeared from circulation.

A change in the ratio of silver to paper guilders may take place in two ways. If the value of silver guilders remains fixed, the ratio could change if the turnover of commodities were to increase as a result of the development of commodity circulation. If there were no new issue of paper money to meet the increased demand, the paper guilder could regain its former value as soon as the volume of commodities in circulation required 600,000,000 guilders for its disposal. The paper guilder could also appreciate above its former value if there were a continued increase in the volume of commodities. Thus, if they required 700,000,000 guilders and only 600,000,000 paper guilders were available in circulation, the paper guilder would appreciate to 7/6ths of the value of the silver guilder. If free coinage were in force, people would continue to coin silver until a quantity of silver guilders would enter circulation which, together -with the paper guilders, would amount to 700,000,000. If that happened, there would be a restoration of parity as between paper and silver guilders, and with a continuation of free coinage, paper guilders would no longer be governed by the value of commodities, but by the value of silver. In a word, they would resume their function as silver tokens.

The same result, however, can come about in another way. Let us assume that the circulation of commodities does not change. In that case, the paper guilder would be rated at 5/6ths of the silver guilder. Now let us imagine that there is a decline in the value of silver, say by 1/6th. Silver guilders would then have the same purchasing power as paper guilders. The silver premium having disappeared, the silver would now remain in circulation. If silver continued to decline, say by 2/6ths of its former value, it would be profitable to purchase silver and coin it in Austria. This would continue until the sum of both paper and silver had grown large enough for the requirements of circulation, in spite of the 2/6ths reduction in the purchasing power of silver. We assumed an original value of 500,000,000 guilders in commodities, and 600,000,000 paper guilders in circulation. The latter therefore had 5/6ths of the value of the original guilders. Silver guilders, rated at 4/6ths of their former purchasing power, then enter the process. To circulate commodities, we therefore need 6/4 times 500,000,000 guilders or 750,000,000 guilders. This would consist of 600,000,000 paper guilders and 150,000,000 newly minted silver guilders. If the state wishes to prevent any further depreciation of its currency it need only suspend the free coinage of silver. Guilders would then become independent of the price of silver. Their value would be pegged at the previous level, 5/6ths of the value of the original guilder. The decline in the value of silver would not be expressed in the silver currency.

This analysis contradicts the traditional theory according to which a silver guilder is only a piece of silver, weighing 1/45th of a pound, which must therefore have the same value under all circumstances. But this is easily explained by bearing in mind that, when coinage is suspended, the value of money simply reflects the total value of commodities in circulation. According to our assumption, silver declined by 2/6ths, but the Austrian guilder fell by only 1/6th as assumed at the beginning of our inquiry. Hence, the Austrian silver guilder still in circulation will stand 1/6th higher than the price of an equal quantity of silver bullion. In other words, it will be over-valued. Such a state of affairs actually occurred in Austria in the middle of 1878. It was caused, on the one hand, by the fact that the value of paper guilders was forced up by the expansion of circulation without any corresponding increase in the quantity of paper money: and, on the other hand, by the decline in the value of silver, evidenced in the fall of the price of silver in London.

Schematic though this analysis may be, it does full justice to the realities of the problem. Free coinage of silver was introduced in the Netherlands in May 1873. The coined silver money increased appreciably in value at the same time as silver bullion depreciated in relation to gold.

Whilst at the beginning in 1875 the price of silver in London fell to about 571 pence, the rate of exchange for Dutch money stood at only 11.6 guilder for one pound sterling instead of 12 guilder as heretofore. This showed that the value of the Dutch guilder had risen by about 10 per cent above the value of the silver it contained.[9]

The 10-guilder coin was first introduced as legal tender in 1875.

Already in 1879, the value of the silver in the guilder was only 95.85 kreuzer, and this figure fell further in 1886 to 91.95 kreuzer, and to 84.69 kreuzer in 1891.[10]

The development of the Austrian currency system is briefly described in the following passage:

The currency of the Monarchy was established by the patents of 19 September 1857 and 27 September 1858. From 1 November 1858 there existed legally, and at first also in practice, a silver currency based on a standard unit of 45 guilders per metric pound of fine silver (90 guilders or florins per kilogram). Conversion into silver through the bank of issue persisted only for a short while, until the end of 1858. Moreover, in consequence of the prolonged critical political and financial situation [Which had as a consequence an over-issue of notes–R. H.] prevailing until 1878, silver was at a premium against paper money, and silver coins were progressively driven out of circulation. In 1871, this silver premium exceeded 20 per cent but it diminished during the 1870s as a consequence of the extraordinary slump in silver prices on the world market. After 1875 the price of silver was so low that it frequently approached its legal price (45 florins per pound) and actually reached it in 1878. At times, in view of the London exchange rate on the Vienna exchange, it became quite profitable to deliver silver to the mints of Vienna and Kremnitz for coinage into Austrian currency. Indeed, the influx of silver into the Austro-Hungarian Customs Union reached extraordinary heights in 1878, and the coinage that year as well as in the ensuing one attained a volume never previously reached (on the basis of reports available up to this point).[11]

In order to prevent depreciation of the currency, free coinage of silver was suspended at the beginning of 1879. This suspension of silver coinage 

had the effect of relieving the purchasing power of the Austrian guilder from the almost mechanical pressure of silver prices, and allowing it to develop almost entirely independently of the value of the quantity of silver contained in the Austrian silver guilder. On the basis of the prices of silver in London, and of London exchange quotations, the average value of pure silver contained in 100 silver guilders was as follows :

1883 97 fl. 64 kr.
1887 91 fl. — kr.
1888 86 fl. 68 kr.
1889 82 fl. 12 kr.
1891 84 fl. 70 kr.

On these assumptions the value of 100 florins of Austrian currency in gold guilders should have been as follows: [12]

1883 82 fl. 38 kr.
1887 72 fl. 42 kr.
1888 69 fl. 34 kr.
1889 69 fl. 38 kr.
1891 73 fl. 15 kr.

But the actual quoted value of 100 such florins in terms of gold guilders for the respective years was, on the average, 84.08, 79.85, 81.39, 84.33, 86.33.[13]

In other words, Austrian silver guilders were overvalued in those years; that is to say, their purchasing power exceeded that of the silver they contained. The difference for every 100 florins of Austrian money was:

1883. 1 fl. 70 kr.
1887. 7 fl. 43 kr.
             1888. 12 fl. 05 kr. (in gold guilders)
1889. 14 fl. 90 kr.
1891. 13 fl. 18 kr.

It will be seen from this table that the price of silver guilders was not only nearly (as Spitzmuller suggests) but completely independent of the silver price in its fluctuations.

Spitzmuller calls this currency "credit currency", but he is unable to account for the manner in which its, price is determined. He says :

The purchasing and exchange power of the Austrian silver guilder, as well as the paper guilder, in the period 1879-1891, therefore, were not primarily determined by the value of bullion. Indeed, to go further, the Austrian guilder of the period; as Karl Menger has so cogently demonstrated (in the Neue Freie Presse, 12 December 1889) showed that the exchange value was not determined by the intrinsic value of any coin in circulation.

Actually, the Austrian currency was no longer a silver currency. Realistically considered, it could not even be called an emasculated silver currency. It could more aptly be called a credit currency, the international value of which depended on the Austro-Hungarian balance of payments, and the domestic value of which, in addition to this, was determined by other price-determining factors [sic!] within the Customs Union.[14]

His uncertainty is clearly shown in the following passage:

In spite of everything, it would be misleading to assume that the credit character of the Austrian currency was completely [!] independent of the price structure of the silver market. On the contrary, during the transition period from 1879 to 1891, the high valuation of silver was ascribable, in part, to the suspension of coinage of silver for private persons by an administrative decree which could be abrogated at any time, while coinage for government purposes continued. The aforementioned factors were thus responsible for the completely uncertain future of our currency. In particular, it was certainly no accident that the recent fall of silver prices, 1885 to 1888, paralleled the sharp rise in foreign exchange rates.[15]

It would be interesting indeed if it could be shown how purely conjectural opinions concerning the future of a currency could at any time be translated into a mathematically exact rise or fall in exchange rates. As a matter of fact, however, these subjective influences were of no importance, and the decisive factor was the objective configuration of the social requirements of circulation.

Helfferich comes much closer to the correct explanation when he says:

The premium on coin in currencies with restricted coinage is created by the fact that . . . only coined, and not the uncoined metal, can function as money; and that the state refuses to convert metal into coins on demand.

In the case of inconvertible paper money also, value attaches to the currency exclusively by reason of the state having declared it legal tender for the payment of all debts and taxes. The state thus, in fact, confers upon it the privilege of fulfilling all the economically indispensable functions of money.

Both these types of currency, therefore, derive their value not from that of their substance, nor again from any implied promise to pay, but solely from their acquired character as a statutory medium of payment.[16]

The suspension of free coinage in a silver currency system is a condition of, and an explanation for, the emancipation of coined silver from the value of bullion, as Helfferich correctly indicates. But this does not tell us anything about the crucial issue; namely, the amount of value that the coin retains. That value is determined, of course, by the quantity of circulating media required by society which, in turn, is determined in the final analysis by the value of the sum of commodities. Helfferich's subjective theory of value prevents him from recognizing this fact.

On the other hand, he is entirely correct in his criticism of Spitzmfiller's credit hypothesis :

In free currencies, with suspended coinage of the standard metal, in which the intrinsic value of all types of money is less than the actual value as money, the higher value cannot be ascribed to 'credit', if only because no standard coins exist into which the other coins are exchangeable and from which they derive their value by way of credit. In the Dutch monetary system between 1873 and 1875, in the Austrian between 1879 and 1892, and in the Indian from 1893 to 1899, there actually existed no money of full standard value. The money value of Dutch and Austrian silver guilden, and of the Indian rupee, a value which was in excess of the intrinsic value of these coins, was an absolutely independent thing, not based upon any other object of value. It was not even based on any rating in terms of standard money, and certainly not upon any claim to standard money, but sprang solely from the legal-tender power assigned to these coins and from the restriction of coinage.

How little, up to that time, monetary theory managed to free itself from the erroneous conception that overrated money must be credit money and must at least derive its value from that of some standard money is shown by the confused views widely held concerning the position of the Austrian currency from the year 1879 onwards. The phenomenon of the rise in the value of the coined Austrian silver guilden, after the suspension of the free coinage of silver, above the value of its silver content, puzzled people mainly because it was not apparent from which type of money of higher intrinsic value, the silver guilden derived a value exceeding that of its silver content. Recourse was had, therefore, to the extraordinary explanation that the value of the silver guilden had been raised above its metallic value only because of its connection with paper guilden ; but it was not explained by what kind of connection the paper guilden should have been kept at a higher value than its paper value.[17]

Similar phenomena were observable in India. In 1893 the free coinage of silver was discontinued. The object was to raise the rupee exchange to 16 pence. Under free coinage this rate corresponded to a silver price of about 43.05 pence. In other words, at that price, the silver content of the rupee, if melted down and sold, would have fetched a price of 16 pence on the London (world) market. The suspension of free coinage had the following effect: the price of the rupee rose to 16 pence after having previously stood at 14.87 pence. But a few days later the price of silver fell from 38 pence before the closing of the silver mints to 30 pence on 1 July. After that date the price of the rupee declined while the price of silver rose to 34.75 pence and remained around that price until the suspension of American silver purchases on 1 November 1893 (the monthly amount was 4,500,000 ounces fine). The price of silver then fell and reached the low point of 23.75 pence on 26 August 1897. On the other hand, the value of the Indian currency reached the desired level of 16 pence at the beginning of September 1897, when the bullion in the rupee was quoted at about 8.87 pence.

From the very beginning it was possible to observe the gratifying result that once the Indian mints were closed to private coinage, the price of the rupee always remained higher than the value of its metal content by an amount far in excess of the costs of coinage. From the middle of 1896 onward, there was also a severance of the last link between the price of silver and the price of the rupee. Any parallelism in their movements, however weak it may have been recently, has now completely disappeared.[18]

Monetary theorists are still plagued by the question: What constitutes the standard of value when coinage is suspended?[19] Obviously it is not silver (nor gold, when gold coinage is suspended).[20] The value of money and the price of bullion follow completely divergent courses. Further, ever since Tooke's demonstration, the quantity theory of money has been rightly regarded as untenable. Finally, it is impossible to establish a relation between a mass of bullion on one side and a mass of commodities on the other. What relation is supposed to exist between 7 kilograms of gold or silver, or even paper, and A million boots, B million cases of shoe polish, C bushels of wheat, D hectolitres of beer, etc? A reciprocal relation between money and commodities presupposes that they have something in common; in other words; it presupposes the value relation, which is precisely what has to be explained.

It is equally useless to invoke the power of the state as an answer to the question. In the first place, it remains a complete mystery how the state can possibly confer a purchasing power on a piece of paper or a gram of silver which wine, boots, shoe polish, etc., do not have. Furthermore, such attempts by the state have always come to grief. The mere desire of the Indian government to raise the price of the rupee to 16 pence did not avail it to the slightest degree. The rupee showed no regard for the government's desire in this matter, and the closest the government ever came to success in its undertaking was the complete unpredictability of the price of the rupee after it ceased to bear any relation to the price of silver. Again, the appreciation of silver guilders relative to their metallic content came as a complete surprise to the Austrian government. It came without warning, almost overnight as it were, without any previously prepared plan of intervention on the part of the government. What confounds the theorists is the circumstance that money has apparently retained its quality of being a standard of value.[21] Naturally, commodities are still expressed in money terms or 'measured' in money, as they were before the suspension of coinage. And as before, money continues to serve as a 'measure of value. But the magnitude of its value is no longer determined by the value of the constituent commodity, gold, or silver, or paper. Instead, its 'value' is really determined by the total value of commodities in circulation, assuming the velocity of circulation to be constant. The real measure of value is not money. On the contrary, the 'value' of money is determined by what I would call the socially necessary value in circulation. If we also take account of the fact that money is a medium of circulation, which I have so far ignored for the sake of simplicity, and shall deal with more thoroughly below, this socially necessary value in circulation can be expressed in the formula[21a]:

    total value of commodities     plus the sum of
velocity of circulation of money

payments falling due minus the payments which cancel each other out, minus finally the number of turnovers in which the same piece of money functions alternately as a means of circulation and as a means of payment. This is, of course, a standard the magnitude of which cannot be calculated in advance. Society itself is the only mathematician capable of solving the problem. It is a fluctuating magnitude and the value of the currency rises and falls in consonance with its movements. The changes in the value of the Indian rupee from 1893 to 1897, and the fluctuations of the Austrian currency, offer clear evidence in favour of this proposition. These fluctuations are eliminated as soon as a commodity of full-fledged value (gold, silver) resumes the role of money. As we have already seen, it is not at all necessary for this purpose that paper money or depreciated money disappear from circulation ; all that is required is that it be reduced to the minimum of circulation and that any fluctuations over and above that minimum be eliminated by the introduction of money of full value.

The remarkable history of currencies based on suspended coinage – the "silver currencies with golden borders" or the "gold margin system", as the Indian and similar currencies have been called – loses its mystery when it is examined in the light of the Marxist theory of money, while in terms of the 'metallistic' theory, it remains completely unintelligible. Knapp, although he exposed many of the latter's inadequacies with great acuteness (he takes no account of the Marxist theory and apparently confuses it with the `metallistic' theory) offers no economic explanation of his own for these phenomena and contents himself with a highly ingenious system of classification of the types of money, which neglects both their origin and their development. It is a specifically juridical analysis, characterized by an excessive attention to terminology, while the fundamental economic problem of the value and purchasing power of money is completely excluded from consideration. Knapp is, as it were, the Linnaeus of monetary theory, while Marx is its Darwin; but in this case Linnaeus comes long after Darwin !

Knapp is the most consistent follower of the theory which, because it cannot explain the phenomenon of a paper currency, and especially the obvious phenomenon of the influence of the quantity of paper issued in the case of legal tender paper money, treats it as an aspect of metallic money and of general circulation (including bullion, bank notes and government paper money). The theory takes account only of quantitative ratios and overlooks the factor which determines the value of both money and commodities. Its error originates in the experience with paper money economies, especially that of England following the suspension of specie payments in 1797.

The historical background for the controversy was furnished by the history of paper money during the eighteenth century: the fiasco of Law's bank; the depreciation of the provincial bank notes of the English colonies in North America from the beginning till the middle of the eighteenth century which went hand in hand with the increase of the number of tokens of value; further, the Continental bills issued as legal tender by the American government during the War of Independence; and finally, the experiment with the French assignats, carried out on a still larger scale.[22]

Even the penetrating mind of Ricardo could not escape this erroneous conclusion, and this furnishes an interesting example of the powerful psychological effect which empirical impressions can exert on abstract thought. For it is precisely Ricardo who, in other cases, always abstracts from the quantitative ratios which influence prices (supply and demand) in an attempt to discover the fundamental factors which underlie and dominate these quantitative ratios, namely value. Yet when he comes to a consideration of the money problem, he puts aside the very value concept he had previously formulated. He says :

If a mine of gold were discovered in either of these countries, the currency of that country would be lowered in value in consequence of the increased quantity of the precious metals brought into circulation and would, therefore, no longer be of the same value as that of other countries.[23]

Here it is quantity alone that reduces the value of gold, and gold is regarded exclusively as a medium of circulation, from which it follows quite naturally that the entire quantity of gold immediately enters into circulation. And since quantity is the only factor considered, gold can without further ado be equated with bank notes. It is true that Ricardo says expressly at the very outset that he is presupposing convertible bank notes, but later he gives the impression that convertible bank notes are similar to legal tender paper money under the conditions of the English currency system at that time. He can therefore say:

If instead of a mine being discovered in any country, a bank were established, such as the Bank of England, with the power of issuing its notes as circulating medium; after a large amount had been issued, . . . thereby adding considerably to the sum of currency the same effect would follow as in the case of the mine.[24]

The influence of the Bank of England is thus placed on a par with that of the discovery of a gold mine; both increase the medium of circulation.

This identification prevented any proper understanding of the laws of metallic money and bank note circulation alike. Knapp, for his part, was greatly impressed by the more recent developments described above: the stable 'paper currencies' and the divergence of silver money from its bullion value. The divergence is, of course, characteristic of silver money (or any metallic money) as well as of paper money. But the value of paper money nevertheless appears to be determined by the state which issues it; and since, in this sense, silver seems to approximate the position of paper money when free coinage is suspended, the illusion is created that paper money, like metallic money and money in general, is a creature of the state. A state theory of money, having nothing to do with economic theory, is then formulated. Marx criticized the illusion on which it is based as follows:

The interference of the state which issues paper money as legal tender . . . seems to do away with the economic law. The state which in its mint price gave a certain name to a piece of gold of a certain weight, and in the act of coinage only impressed its stamp on gold, seems now to turn paper into gold by the magic of its stamp. Since paper bills are legal tender, no one can prevent the state from forcing as large, a quantity of them as it desires into circulation and from impressing upon it any coin denominations such as £1, £5, £20. The bills having once entered circulation, cannot be removed since, on the one hand, their course is hemmed in by the frontier posts of the country, and on the other hand, they lose all value, use value as well as exchange value, outside of circulation. Take away from them their function and they become worthless rags of paper. Yet this power of the state is a mere fiction. It may throw into circulation any desired quantity of paper bills of whatever denomination, but with this mechanical act its control ceases. [And therefore Knapp's theory ceases to be useful precisely at the point where the economic problem begins – R.H.] Once in the grip of circulation, and the token of value or paper money becomes subject to its intrinsic law.[25]

The difficulty in understanding the matter comes from confusing the different functions of money with the different types of money (government paper money and credit, of which more later). It' was a defect of the quantity theory, from which not even Ricardo was free, that it confounded the laws of government paper money with those of circulation in general and the circulation of bank notes in particular. Today the opposite error is just as common. The quantity theory being rightly regarded as refuted, there is a reluctance to give due recognition to the influence of quantity on the value of money even where it really is the determining factor, as in the case of paper money and depreciated currency. All sorts of explanations are resorted to, and because no account is taken of the causal role of the social factor subjective explanations seek to ascribe the value of government paper to this or that credit evaluation. Since on the other hand, however, the intrinsic value of metallic money has to be vindicated, one cannot follow Knapp, because his theory would involve a general abandonment of all economic explanation. The result is that no satisfactory explanation has been advanced for overvalued money. Ricardo explained all changes in the value of money as a consequence of a change in its quantity. According to his theory such changes in the value of money occur very frequently, the value rising or falling inversely with the increase or decrease in its quantity. Every currency is therefore subject to depreciation or overvaluation; and overvaluation, as such, is not a problem for him. He says:

Though it [paper money] has no intrinsic value, yet by limiting its quantity, its value in exchange is as great as an equal denomination of coin, or of bullion in that coin. On the same principle, too, namely, by a limitation of its quantity, a debased coin would circulate at the value it should bear if it were of the legal weight and fineness, and not at the value of the quantity of metal which it actually contained. In the history of British coinage, we find, accordingly, that the currency was never depreciated in the same proportion that it was debased; the reason of which was that it never was increased in quantity in proportion to its diminished intrinsic value.[26]

Ricardo's mistake consists in applying without modification the laws which regulate currency in a system of suspended coinage to a currency based on a system of free coinage. The majority of German monetary theorists are also guilty of confounding the two types of currency, but in an opposite sense; hence they have a bad conscience with regard to the quantity theory and continually fall back upon the old notions of the quantity theory whenever they deal with the circulation of bank notes, while rejecting any quantitative explanation when they deal with problems arising in a system of suspended coinage.

In contrast, Fullarton offers an interesting and essentially correct formulation of the problem in a system of restricted coinage. He presupposes :

the case of a nation having no commercial intercourse with its neighbours, maintaining no mint establishment for the renewal of its coin, but transacting its interior exchanges by means of an old and debased metallic circulation, which preserves a high rate of exchangeable value merely by limitation of its amount – of a nation making use, nevertheless, of the precious metals on a large scale for the purposes of ornament and luxury, and exporting yearly the products of its industry, to the value, say, of half a million sterling, to some distant mining country, for the purchase of an equivalent in gold and silver, to replace the annual tear and wear of its stock, and to meet an increasing demand for consumption. Under these circumstances, let it be imagined, that by some extraordinary improvement in the method of working the mines, or by the discovery of some new and richer veins of ore, the cost of procuring the gold and silver in the mining country were reduced to one half of what it had been before; that, in consequence of this discovery, the annual production were doubled, and the price of the metals on the spot lowered in a corresponding proportion, and that, in consequence of this change in circumstances, the merchants of the country first mentioned were, in return for the same quantity of exported goods which had hitherto been merely sufficient for the purchase of gold and silver to the amount of the required half-million, enabled to procure and bring home a million of those metals – what would be the effect? I certainly am not aware that any effect would be produced, under such circumstances, differing materially from the effect of an oversupply of any other equally durable commodity. The previous annual consumption of gold and silver in the country, for plate, gilding, and trinkets having been fully supplied by an importation to the value of half a million, there would be no purchase for more until a new demand should be created by a reduction of price; the prices, accordingly, of the newly imported stock of metals, as estimated in the base currency, would decline with more or less rapidity, as the merchants might be more or less eager to realize their returns . . . . But, all this time, the price of every other commodity but gold and silver, as measured in the local currency of the country, would remain unmoved; and, unless some of the surplus stock of the metals thus acquired could be turned to account in commercial exchange with some third country less favorably circumstanced for procuring its supplies of gold and silver direct from the mines, the importing country would derive no advantage from these periodical accessions of metallic wealth, beyond such gratification as can be derived from the more generally diffused application of gold and silver to domestic uses.[27]

This, in theoretical form, is the case of overvaluation as found in the Austrian silver guilder. But Fullarton fails to show that the quantitative ratios are determined by the social minimum of circulation.

He then proceeds to investigate the fundamentally different conditions which would prevail under what we today would call a system of free coinage:

But let us next picture to ourselves the effect which a similar succession of incidents would produce in a country more advanced in its commercial relations, and with its monetary system on a more improved footing, possessing already a full metallic circulation of standard weight and fineness, an unrestrained traffic in metals, and a mint open for coinage of all the standard bullion which might be brought to it. Under such circumstances, the effect of a sudden duplication of the annual supply from the mines would be very different. There would, in that case, be no rise of the market price of bullion, for the price of gold, measured in coin of the same metal, of equal fineness, can never vary; they may both rise or fall together, as compared with commodities, but there can be no divergence. Neither would there be any unusual pressure on the bullion market in consequence of the increased importation, nor, at least in the first instance, any inducement to a larger consumption of the imported metals in the arts. The market would take off at par nearly such proportion of the importation as had hitherto sufficed for the purposes of consumption, and the rest would all be sent to the mint for coinage, yielding an enormous accession of wealth to importers, who, to the extent of the means thus placed in their hands, would immediately become competitors for every description of productive investment in the market as well as for all material objects which contribute to human enjoyment. But as the supply of such objects is always limited, and would in no way be augmented by this great inundation of circulating coin, the inevitable results would be first, a decline of the market rate of interest; next, a rise in the value of land and of all interest-bearing securities; and lastly, a progressive increase in the prices of commodities generally, until such prices should have attained a level corresponding with the reduced cost of procuring the coin, when the action on interest would cease, the new stock of coin would be absorbed in the old, and the visions of sudden riches and prosperity would pass away, leaving no trace behind them but in the greater number and weight of coin to be counted over on every occasion of purchase and sale.[28]

Still another characteristic type of overvaluation of money remains to be mentioned: characteristic because it occurs automatically, without any state intervention. During the last credit crisis in the United States, in the autumn of 1907, there suddenly appeared a premium on money; not merely on gold money, but on all types of legal tender (gold and silver coins, government paper greenbacks, and bank notes). Initially the premium amounted to more than 5 per cent. The facts are set forth in the following dispatch from New York to the Frankfurter Zeitung, 21 November 1907.

In a good many American commercial centres, cash payments have ceased completely and private money certificates are used there instead. In a few instances, payments are made partly in cash and partly in these certificates. In many places cash circulates only as small change. In 77 American cities, emergency money has been issued; either in the form of clearing house certificates or bank cheques specially issued for the occasion, mostly however, the former type. Before the crisis, perhaps only a dozen American cities had clearing house institutions, but they have now been established in some hundred places. As soon as the crisis broke out in New York, the money institutions in these places combined for common protection against the impending danger. Departing from the practice of New York, where clearing house certificates were issued only for large sums, these clearing institutions created emergency money intended for general use, in denominations of 1,2,5 and 10 dollars, suitable for use in small transactions. These money tokens circulate unhindered in the vicinity of the clearing houses. Workers accept them as wages, merchants in payment for goods, and so forth. They pass from hand to hand and usually there is only a small discount on them as compared with cash. How great the dearth of cash was even in New York, is shown, for example, by the fact that even the powerful Standard Oil Company has had to pay its workers in certified cheques. Only in transactions with government agencies is emergency money not used. Public agencies insist on legal tender payments, so that cash money has to be obtained. This is the main reason for the premium on cash money. During the last few days, when the American Sugar Refining company could not muster sufficient cash to clear a shipment of sugar through the customs, it had to close down several establishments for a day or two.

What is unique in this occurrence is that the quantity of means of circulation available became inadequate for the needs of commerce. The credit crisis provoked a strong demand for cash payments because there was a disturbance in the settlement of balances by credit money (bank drafts, etc.), and a passion for cash money ensued. At the very moment when circulation required more cash, it disappeared from circulation, to be hoarded as a reserve.[29] In place of the vanished money, an effort was made to create new money in the form of clearing house certificates which were actually notes issued under a common guarantee by the banks belonging to the clearing house. The legal restriction on the issue of notes was simply ignored contra, or at least praeter legem, just as, in a similar case in England, the Peel Act [The Cash Payments Act of 1819.Ed.] was suspended. But this credit money was not legal tender, and cash money was insufficient. Hence, the latter was soon overvalued and remained overvalued (it commanded a premium) until gold imports from Europe, the reestablishment of normal credit conditions, and the enormous contraction of circulation immediately after the crisis, eliminated the 'money famine' and transformed it into a condition of great cash liquidity. The amount of the premium varied, depending upon the social value in circulation. It is characteristic that the premium was the same both for paper and metal ; the best evidence that it had nothing to do with an increase in the value of gold.

The issue of legal tender paper money is a well-known and frequently used means for the state to meet its debts when no other means are available. Above all, paper money drove full value metallic money out of circulation,[30] the latter being sent abroad to meet, for example, war expenditures. Continued issues of paper money then led to its depreciation. The quantity theory, then, holds good for a currency with suspended coinage. After all, the theory was formulated as a generalization of the experience with unsettled currencies at the end of the eighteenth century in America, France and England. In such cases, one may also speak of inflation, of a circulation glut, and (in specific cases) of a shortage of the means of circulation. In contrast to this, under a system of free coinage inflation is impossible even when the minimum of circulation is amply covered by legal tender paper money. Convertible credit money, when present in surplus amounts, reverts back to the point of issue ; and the same happens to gold itself, which is accumulated in the coffers of the banks as a gold reserve. As a universal equivalent, gold is both a universally valid and always coveted form of value and wealth accumulation. It would be senseless to accumulate legal tender paper money, since it appears as value only in the domestic circulation of a country. Gold, on the other hand, is an international money and constitutes a reserve for all expenditures. Hence its accumulation is always a rational act. Gold is an independent bearer of value even when it is not in circulation. Paper money, on the other hand, acquires a 'rate of exchange' only in circulation.

An over-issue of paper money is indicated whenever there is a diminution of its value in terms of the metal it represents. At any given moment, however, the volume of paper money is neither larger nor smaller than is required in circulation. Let us assume that circulation requires 1,000,000 guilders but that state expenditures have put 2,000,000 guilders into circulation. This would cause a 100 per cent rise in nominal prices which would absorb the 2,000,000 guilders. They would, of course, constitute a depreciated paper currency because they have been issued in excess quantities; but once issued they are absorbed into circulation. Hence, they cannot automatically drop out of circulation. Given a constant volume of commodities, the quantity of such paper money can be reduced only if the state destroys part of it, thus increasing the relative value of the balance which continues to circulate. For the state this would naturally mean a loss, just as the previous issue of paper had yielded a profit The essential thing to bear in mind in this case, is that under a system of suspended coinage and a depreciated or worthless medium of circulation, the entire sum of money must remain in circulation because, regardless of the volume issued, it derives its value from the commodities in circulation. The case is entirely different with free coinage. Money, in this case, enters or leaves circulation according to the prevailing demand for it, and if an excess occurs it is accumulated in the banks as a store of value. The assumption of the quantity theory that changes in value are caused by either an excess or deficiency of money in circulation must therefore be ruled out at once.

Under a system of pure paper currency, then, given a constant velocity of circulation, the sum of prices denoted by the paper money varies directly with the sum of commodity prices and inversely with the quantity of paper money issued. The same is true in a system of suspended coinage when the metal in circulation is depreciated. In the latter case, however, the proviso should be added that the price of the metal on the world market constitutes the lowest limit to its depreciation, so that even if there were an increased issue of the coin, its value would not fall below that limit. Furthermore, even under a system of gold currency in which free coinage (that is, the right of individuals to have their gold coined at any time) has been discontinued, the value of coin can increase in terms of uncoined bullion.[31] In all such cases, the media of circulation are value tokens, rather than money or gold certificates. They do not acquire their value from a single commodity, as is the case in a system of mixed currency where paper is simply a gold certificate which acquires its value from gold, but instead the total quantity of paper money has the same value as the sum of commodities in circulation, given a constant velocity of circulation of money. Its value simply reflects the whole social process of circulation. At any given moment, all the commodities intended for exchange function as a single sum of value, as an entity to which the social process of exchange counterposes the entire sum of paper money as an equivalent entity.

From what has been said thus far, it also follows that a pure paper currency of this kind cannot meet the demands imposed on a medium of circulation for any extended period of time. Since its value is determined by the value of the circulating commodities, constantly subject to fluctuations, the value of money would also fluctuate constantly, Money would not be a measure of the value of commodities ; on the contrary, its own value would be measured by the current requirements of circulation, that is to say, by the value of commodities, assuming a constant velocity of circulation. A pure paper currency is, therefore, impossible as a permanent institution, because it would subject circulation to constant disturbances.

A system of pure paper currency might be envisaged in the abstract along the following lines. Imagine a closed trading nation which issues legal tender state paper money in a quantity sufficient for the average requirements of circulation, and further, that this quantity cannot be increased. The needs of circulation would be met, aside from this paper money, by bank notes etc., exactly as in the case of a metallic currency. By analogy with most modern legislation governing banks of issue, the paper money would serve as cover for these bank notes, which would also be covered by the resources of the banks. The impossibility of increasing the supply of paper money would protect it against depreciation. Under such circumstances, paper money would behave as gold does today; it would flow into the banks or be hoarded by individuals when circulation contracts, and would return to circulation when that expands. The minimum of circulating media required at any time would remain in circulation, while the fluctuations in circulation would be covered by an expansion or contraction of bank notes. The value of the state paper money would therefore remain stable. Only in the event of a collapse of the credit structure, and a monetary crisis, would there be any likelihood of an insufficiency in the amount of paper money. It would then command a premium, as was the case with gold and greenbacks during the recent monetary crisis in the United States.

In reality, however, such a system of paper currency is impossible. In the first place, this paper money would be valid only within the boundaries of a single state. For the settlement of international balances, metallic money with an intrinsic value would be required; and if this requirement is to be satisfied, the value of the money in domestic circulation must be kept on a par with the medium of international payments to avoid the disruption of commercial relations. This condition, incidentally, was fulfilled by the Austrian currency system and policy; and we may note that it is not necessary for this purpose to put metal into domestic circulation. Marx virtually foresaw this recent experience with currencies when he wrote:

All history of modern industry shows that metal would indeed be required only for the balancing of international commerce, whenever its equilibrium is disturbed momentarily, if only national production were properly organized. That the inland market does not need any metal even now is shown by the suspension of cash payments of the so-called national banks that resort to this expedient whenever extreme cases require it as a sole relief.[32]

But this type of currency can never succeed in practice for the simple reason that there is no possible guarantee that the state will not increase the issue of paper money. Finally, money with an intrinsic value – such as gold – is always needed as a means of storing wealth in a form in which it is always available for use.[33]

For this reason money and precious bullion, such as gold, can never be replaced completely by mere money tokens without introducing disturbances into the process of circulation. Hence, in practice, even under a system of exclusive paper currency, full value money is always available in circulation, if only for the purpose of making payments abroad. The paper currency can replace only the minimum quantity below which experience has shown that circulation does not fall. This is proof afresh, however, that the value of both money and commodities, far from being imaginary, is an objective magnitude. The impossibility of an absolute paper currency is a rigorous experimental confirmation of the objective theory of value, and only this theory can explain the peculiar features of pure paper currencies, and more particularly, of currencies with suspended coinage.

On the other hand, it is perfectly rational to substitute relatively worthless tokens for money of full value (gold) so long as it is done within the limits set by the minimum of circulation. For in the process C–M–C money is superfluous from the standpoint of its essential content, the social exchange of goods, and is only an unnecessary expense.[34]

If paper money circulates in this volume, it does not represent the value of commodities but the value of gold, it is not a commodity token but a gold token. Within these limits, Marx's conclusions remain valid:

In the process C–M–C, in so far as it represents the dynamic unity or direct alternations of the two metamorphoses – and that is the aspect it assumes in the sphere of circulation in which the token of value discharges its function – the exchange value of commodities acquires in price only an ideal expression and in money only an imaginary symbolic existence. Exchange value thus acquires only an imaginary though material expression, but it has no real existence except in the commodities themselves, in so far as a certain quantity of labor time is embodied in them. It appears, therefore, that the token of value represents directly the value of commodities, by figuring not as a token of gold, but as a token of the value which exists in the commodity alone and is only expressed in its price. But it is a false appearance. The token of value is directly only a token of price,

i.e., a token of gold, and only indirectly a token of value of a commodity. Unlike Peter Schlemihl, gold has not sold its shadow but buys with its shadow. The token of value operates only in so far as it represents the price of one commodity as against that of another within the sphere of circulation, or in so far as it represents gold to every owner of commodities. A certain comparatively worthless object such as leather, a slip of paper, etc., becomes by force of custom, a token of money material, but maintains its existence in that capacity only so long as its character as a symbol of money is guaranteed by the general acquiescence of the owners of commodities, i.e. so long as it enjoys a legally established conventional and compulsory circulation. Paper money issued by the state and circulating as legal tender is the perfected form of the token of value, and the only form of paper money which has its immediate origin in metallic circulation, or even in the simple circulation of commodities.[35]

Thus our hypothesis of a pure paper currency which exists without a gold complement has merely demonstrated once again that it is impossible for commodities to act as direct expressions of each other's value. On the contrary, it serves to demonstrate the need for advancing to a universal equivalent which itself is a commodity and therefore a value.

Obviously, if concerted action by producers is required to guarantee the validity of coined money, this is all the more true of paper money. The natural agency for this purpose is the state, for it is the only conscious organization known to capitalist society, which possesses coercive power. The social character of money then appears directly in the regulation of society by the state. At the same time, the limits of circulation for coins and paper money are set by the frontiers of the state. As international money, gold and silver function in terms of their weight.


[1] Capital, vol. I, p. 134. [MECW 35, p129]

[2] ibid., p. 139. [MECW 35, p133]

[3] When Wilson declares that idle money entails a loss to the community he judges matters from the standpoint of bourgeois society. It is possible to go further and say that the whole mechanism of circulation, to the extent that it involves an outlay of value, is a faux frais. A mature bourgeois attitude regards gold, used as a circulating medium, as an unproductive outlay, as an expenditure which does not produce a profit, and therefore looks for ways to avoid it. This idea was an obsession with the champions of the mercantilist system. See James Wilson, Capital, Currency and Banking, p. 10.

[4] Capital, vol. I, p. 125. [MECW 35, p121]

[5] The law holds good that "the issue of paper money must not exceed in amount the gold (or silver, as the case may be) which would actually circulate, if not replaced by symbols". Capital, vol. I, p. 143. [MECW 35, p139]

[6] Having begun with the mistaken notion that money was originally only a piece of metal of specific weight, Knapp is subsequently surprised to find that it can be replaced by a mere token acceptable to society. Had he recognized (and failure to do so still prevents economists from formulating a fruitful theory of money) that money is a social arrangement in material form, he would not have found it the least bit puzzling that in certain circumstances this economic relationship takes the form of socially acceptable tokens, chosen by deliberate agreement, namely, government legal tender paper money. Of course it is true that a real problem results from any such arrangement, namely, the limits of this conscious social regulation by the state. But precisely this economic problem is excluded by Knapp from his inquiry.

[7] As is well known, free coinage means the right of an individual to take whatever quantity of the money substance he pleases to the government mint of a country and have it coined according to the fixed standard of the mint. Coinage is suspended when the government refuses to accept bullion for coinage.

[8] Strictly speaking, monetary appreciation was no problem at all to these authors. Writing under the influence of the English restrictions on the issue of bank notes, they showed boundless naiveté in applying the laws of paper money to metallic currency. See William Blake, Observations on the Principles which Regulate the Course of Exchange, etc., (pp. 68 – 9): "It is obvious, that as the nominal price of commodities will be increased by the over issue of currency, so, for the same reasons, the contraction of it below the natural wants of circulation will diminish the nominal prices in the same proportion . . . . Bullion will then be of less value in the market than in the form of coin, and the merchant will carry it to the mint to obtain the profit attending its conversion into specie."

[9] K. Helfferich, Money, vol. I, p. 73.

[10] ibid., p. 76.

[11] D. Spitzmuller, 'Die österreichische-ungarische Wahrungsreform', Zeitschrift fur Volkswirtschaft, Sozialpolitik und Verwaltung, XI, 1902, p. 339.

[12] The gold guilder, worth 1/8th of an 8-guilder piece, which was coined only for foreign trade and not for domestic circulation, was equal to 20 francs in gold content.

[13] Spitzmuller, op. cit., p. 311.

[14] ibid., p. 341.

[15] ibid., p. 311.

[16] K. Helfferich, op. cit., vol. I, p. 77.

[17] Helfferich, vol. II, p. 393.

[18] A. Arnold, Das indische Geldwesen unter besonderer Berücksichtigung seiner Reformen seit 1893, p. 227.

A friend who returned from a visit to India once told me the following story. He had observed some Europeans buying silver ornaments at an Indian bazaar. The Indian merchant, in an effort to prove that he was not defrauding them, offered to weigh the silver objects and suggested payment in silver rupees according to the weight of these objects. The Europeans agreed with the greatest pleasure, delighted at the prospect of paying for the metal only and obtaining the benefits of the workmanship gratis. Obviously, they were unaware that, thanks to the currency legislation, they were paying a price 100 per cent in excess of the value of the metal. It was a fit punishment for economic ignoramuses and the pity is that it cannot be inflicted more generally.

[19] It may indeed be doubted whether, since the new system of the Bank of England payments has been fully established [meaning the suspension of bullion payments and the beginning of legal tender for notes of the Bank of England — R.H.], gold has in truth continued to be our measure of value; and whether we have any other standard of prices than that circulating medium, issued primarily by the Bank of England, and in a secondary manner by the country banks, the variations of which in relative value may be as indefinite as the possible excess of that circulating medium'. Report of the Select Committee of the House of Commons on the High Price of Gold Bullion, June, 1810. [Reprinted in J. R. McCulloch, Scarce and Valuable Tracts on Paper Currency and Banking, p. 418. Ed.]

The Report leaves its own question unanswered.

[20] Lindsay quite correctly stated before the Committee on Indian Currency in 1898: 'Under the present currency system the rupee is nothing but a special type of non-negotiable metal with legal tender, subject to all the laws of non-negotiable paper money.' Lindsay credits Ricardo with the original formulation of these laws. (Cited by M. Bothe, Die indische Währungsreform, p. 48.)

[21] M. Bothe, op. cit., pp. 44 ff. The way Bothe poses the question is quite characteristic: 'What was the standard of value in India after June 26, 1893? Clearly . . . silver ceased to be the standard of value once the gold value of the rupee exceeded the gold value of the pure silver content of the rupee. Or perhaps, the rupee has become the standard of value in India in the sense implied by Professor Lexis in his article "Paper Money" in the Handwörterbuch der Staatswissenschaften; that is to say, in the sense that non-negotiable legal tender bank notes become money in their own right, and consequently, a standard of value? Being legal tender, they must always be accepted as a valid means of payment, and thus acquire a value in terms of commodities. Or again, perhaps, gold became the standard of value in India when coinage was discontinued? To credit the rupee with the characteristics of a standard of value is tantamount to saying that an abstraction can be a standard of value; for after June 26, 1893, the value of the rupee ceased to depend on the use value [!] of the material from which it was coined. The material only supplied the minimum limit to the ceaseless fluctuations which depended on the accepted notions of the usefulness of the rupee and had nothing to do with the material as such.

In the same vein, John Lubbock is of the opinion that, since the closing of the mints "exchange" had become a standard of value, which is but another way of saying, not without some hesitation [!], that an abstraction can be a "standard of value".' Voila tout! It is evident that only a high regard for the authority of Professor Lexis prevents the author from criticizing the lack of a capacity for theoretical 'abstraction' which Lexis exhibits in his famous abstraction! But the word 'confidence' always manages to crop up at the right moment when a concept of value is lacking! See Arnold's cogent polemic against Lexis, op. cit., pp. 241 et seq.

[21a] [So, the "socially necessary value in circulation" formula is:


    Total value of commodities      +  Sum of
payments due
  Payments which
mutually cancel
 -  Currency in
Velocity of circulation of money


[22] Karl Marx, A Contribution to the Critique of Political Economy, p. 234. [MECW 29, p400]

[23] David Ricardo, 'The High Price of Bullion', in The Works of David Ricardo, ed. J. R. McCulloch, p. 264.

[24] ibid., p. 264.

[25] Karl Marx, A Contribution to the Critique of Political Economy, pp. 156-7. [MECW 29, p353-4]

[26] David Ricardo, Principles of Political Economy and Taxation, chapter XXVII, pp. 238-9.

[27] J. Fullarton, On the Regulation of Currencies, pp. 60-61.

[28] ibid., pp. 61-2.

[29] In a report presented to Congress in mid January 1908, the American Secretary of the Treasury, Cortilyon, estimated the total sum of cash money hoarded by the public from the time the Knickerbocker Trust Company suspended payments until confidence was restored, at about $296,000,000. This sum represents about 10 per cent of the money in circulation in the United States.

[30] In accordance with the old law that bad money drives good money out of circulation. As Macaulay noted: 'The first writer who noticed the fact that when good money and bad money are thrown into circulation, the bad money drives out the good money, was Aristophanes. He seems to have thought that the preference which his fellow citizens gave to the light coins was to be attributed to a depraved taste such as led them to entrust men like Cleon and Hyperbolus with the conduct of general affairs. But if his political economy will not bear examination, his verses are excellent:

"I'll tell you what I think about the way
This city treats her soundest men today:
By a coincidence more sad than funny,
It's very like the way we treat our money.
The noble silver drachma, that of old
We were so proud of, and the recent gold,
Coins that rang true, clean-stamped and worth their weight
Throughout the world, have ceased to circulate.
Instead, the purses of Athenian shoppers
Are full of shoddy silver-plated coppers.
Just so, when men are needed by the nation,
The best have been withdrawn from circulation.
Men of good birth and breeding, men of parts,
Well schooled in wrestling and in gentler arts,
These we abuse, and trust instead to knaves,
Newcomers, aliens, copper-pated slaves,
All rascals – honestly, what men to choose!"

[From Aristophanes, The Frogs. English translation by David Barrett, Penguin, 1964, pp. 182-3.]

Lord Macaulay, History of England, vol. V, p. 2563 in the edition by C. Firth, London, Macmillan, 1913-15.

[31] Its explanation by modern economists is still awaited with great impatience. The idea of suspending free coinage was under discussion in England in the middle of the 1890s when gold production rose rapidly, the supply of money increased, and interest rates were low (the market discount in London was less than 1 per cent).

The same problem occupied Tooke. The occasion was the controversy about the desirability and effects of the introduction of a charge for coinage (seignorage). Ricardo had already expressed himself in favour of a fee of 5 per cent. "A debased coin, or one subject to seignorage, if not accompanied by a principle of limitation as to the total amount of money in circulation, will, naturally, not be of the same value in exchange as if the coin were perfect or if a principle of limitation were strictly enforced or maintained." As an illustration, Tooke then assumed the following case: "Suppose the circulation of the whole country be confined to gold, and to consist of twenty millions of sovereigns of the present weight and standard; if, by some sudden process, each piece were reduced by 1/20 or 5 per cent, but the whole number of pieces strictly confined to the same amount of twenty millions; then, other circumstances being the same, the relation of commodities, etc., to the numerical amount of coin being undisturbed, there would not, it is evident, be any disturbance of prices; and if gold bullion in the market were previously at £3 17s 101d per ounce, it would, other things remaining the same, continue at that price; or, in other words, £46 14s 6d in gold coin, weighing 19/20 of a pound, would purchase in the market a whole pound of uncoined gold of the same standard. But if the quantity of gold taken out of each individual coin is coined into an additional quantity of coins and thrown into circulation, the 21 millions would then exchange for no more than the original 20 million. All commodities will rise 5 per cent in price, and with them, the gold bullion, which would then cost £4 1s 9 1/4d. Or, in other words, £46 14s 6d minted will exchange for 19/20 of a pound of uncoined gold.

"This is the keystone to all reasoning on the subject of currency, and the application of it is clear enough as to the power of the state, by the monopoly of issue to raise the nominal, as compared with the intrinsic value of the coin, in a currency wholly metallic." T. Tooke, A History of Prices, vol. I, pp 120-21.

[32] Capital, vol. III, p. 607. [MECW 37, p514] Incidentally, when one reads Marx, certain passages dealing with monetary problems leave the impression that the conclusions which follow from his theory of money clashed in his thinking with ideas suggested by the empirical facts of his day, a conflict which could not be reconciled satisfactorily in purely logical terms. The most recent experiences do in fact confirm the ultimate conclusions which are deducible from Marx's theory of value and money.

Marx emphasizes that there can be only as much paper in circulation as the amount of gold required; but it is important to remember, in order to understand modern currency, that since the value of gold is given, its quantity is determined by the social value of circulation. If the latter falls, gold flows out of circulation, and vice versa. In a system of paper currency or suspended coinage, however, this flow in and out of circulation cannot take place because the non-circulating paper certificates would depreciate in value. Here one must revert to circulating value as the determining factor, and it does not suffice to regard a money certificate simply as a symbol of gold, as Marx does in A Contribution to the Critique of Political Economy.

It seems to me that Marx formulates the law of paper currency (or any currency with suspended coinage) most correctly when he says: "The worthless tokens are signs of value only in so far as they represent gold within the sphere of circulation, and they represent it only to the extent to which it would itself be absorbed as coin by the process of circulation; this quantity is determined by its own value, the exchange value of the commodities and the rapidity of their metamorphosis being given" (A Contribution to the Critique of Political Economy, p. 155. [MECW 29, p352-3]). The detour by which Marx proceeds – first determining the value of the quantity of coins and then, from that, the value of the paper money – seems superfluous. The purely social character of that determination is far more clearly expressed when the value of paper money is derived directly from the social value in circulation. The fact that, historically, paper currency had its origin in metal currency is not a reason for regarding it in this way theoretically. The value of paper money must be deducible without reference to metallic money.

[33] Hence, Helfferich is wrong when he says: "Theoretically, it would be possible completely to adapt the issue of a pure and simple paper currency to the fluctuations of the country's economic demand for money and to obviate thereby certain disturbances which may occur in the case of a metallic standard currency through displacements in the equilibrium between money supply and demand." K. Helfferich Money, vol. II, p. 491.

[34] Paper money as such, therefore, is not 'defective' or 'bad' or 'debased' money. When present in circulation in the correct amount it does not do violence to any economic law. Only lack of clarity on this point leads most `metallists' to blame all paper currencies for abuses which are committed deliberately or out of ignorance of theory. Hence, they are left in a state of superstitious panic by an inconvertible government paper certificate, and even by the most harmless small convertible bank note. Goliaths, though not in theory, they fear David; and the smaller the bank note, the greater is their panic.

[35] A Contribution to the Critique of Political Economy, pp. 150-51. [MECW 29, p350]