Theories of the Medium of Circulation and of Money

Just as in the sixteenth and seventeenth centuries, when modern bourgeois society was in its infancy, nations and princes were driven by a general desire for money to embark on crusades to distant lands in quest of the golden grail, so the first interpreters of the modern world, the originators of the Monetary System – the Mercantile System is merely a variant of it – declared that gold and silver, i.e., money, alone constitutes wealth.

They quite correctly stated that the vocation of bourgeois society was the making of money, and hence, from the standpoint of simple commodity production, the formation of permanent hoards which neither moths nor rust could destroy. It is no refutation of the Monetary System to point out that a ton of iron whose price is £3 has the same value as £3 in gold.

The point at issue is not the magnitude of the exchange-value, but its adequate form. With regard to the special attention paid by the Monetary and Mercantile systems to international trade and to individual branches of national labour that lead directly to international trade, which are regarded by them as the only real source of wealth or of money, one has to remember that in those times national production was for the most part still carried on within the framework of feudal forms and served as the immediate source of subsistence for the producers themselves.

Most products did not become commodities; they were accordingly neither converted into money nor entered at all into the general process of the social metabolism; hence they did not appear as materialisation of universal abstract labour and did not indeed constitute bourgeois wealth. Money as the end and object of circulation represents exchange-value or abstract wealth, not any physical element of wealth, as the determining purpose and driving motive of production.

It was consistent with the rudimentary stage of bourgeois production that those misunderstood prophets should have clung to the solid, palpable and glittering form of exchange-value, to exchange-value in the form of the universal commodity as distinct from all particular commodities. The sphere of commodity circulation was the strictly bourgeois economic sphere at that time.

They therefore analysed the whole complex process of bourgeois production from the standpoint of that basic sphere and confused money with capital. The unceasing fight of modern economists against the Monetary and Mercantile systems is mainly provoked by the fact that the secret of bourgeois production, i.e., that it is dominated by exchange-value, is divulged in a naively brutal way by these systems.

Ricardo draws the wrong conclusions from it. But he observes that, even during a famine, corn is imported because the corn-merchant thereby makes money, and not because the nation is starving.

Political economy errs in its critique of the Monetary and Mercantile systems when it assails them as mere illusions, as utterly wrong theories, and fails to notice that they contain in a primitive form its own basic presuppositions. These systems, moreover, remain not only historically valid but retain their full validity within certain spheres of the modern economy.

At every stage of the bourgeois process of production when wealth assumes the elementary form of commodities, exchange-value assumes the elementary form of money, and in all phases of the productive process wealth for an instant reverts again to the universal elementary form of commodities.

The functions of gold and silver as money, in contradistinction to their functions as means of circulation and in contrast with all other commodities, are not abolished even in the most advanced bourgeois economy, but merely restricted; the Monetary and Mercantile systems accordingly remain valid.

The catholic fact that gold and silver as the direct embodiment of social labour, and therefore as the expression of abstract wealth, confront other profane commodities, has of course violated the protestant code of honour of bourgeois economists, and from fear of the prejudices of the Monetary System, they lost for some time any sense of discrimination towards the phenomena of money circulation, as the following account will show.

It was quite natural that, by contrast with the Monetary and Mercantile systems, which knew money only as a crystalline product of circulation, classical political economy in the first instance should have understood the fluid form of money, that is the form of exchange-value which arises and vanishes within the metamorphosis of commodities. Because commodity circulation is looked at exclusively in the form C—M—C, and this in its turn solely as the dynamic unity of sale and purchase, the specific aspect of money as means of circulation is upheld against its specific aspect as money. If the function of means of circulation in serving as coin is isolated, then, as we have seen, it becomes a value-token.

But since classical political economy was at first confronted with metallic currency as the predominant form of currency, it regarded metallic money as coin, and coin as a mere token of value. In accordance with the law relating to the circulation of value-tokens, the proposition is then advanced that the prices of commodities depend on the volume of money in circulation, and not that the volume of money in circulation depends on the prices of commodities. This view is more or less clearly outlined by Italian economists of the seventeenth century; it is sometimes accepted, sometimes repudiated by Locke, and firmly set forth in the Spectator (in the issue of October 19, 1711) as well as in the works of Montesquieu and Hume. Since Hume is by far the most important exponent of this theory in the eighteenth century, we shall begin our survey with him.

Under certain conditions, an increase or decrease in the quantity of either specie in circulation, or tokens of value in circulation, seems to have a similar effect upon commodity-prices. If there is a fall or rise in the value of gold and silver, in which the exchange-value of commodities is measured as price, then prices rise or fall because a change has taken place in their standard of value; and an increased or diminished amount of gold and silver is in circulation as coin because the prices have risen or fallen. The observable phenomenon, however, is that with an increasing or diminishing volume of means of circulation, prices change while the exchange-value of commodities remains constant. If, on the other hand, the amount of value-tokens in circulation falls below the requisite level, or rises above it, then it is forcibly reduced to that level by a fall or rise of commodity-prices. The effect in both cases appears to be brought about by the same cause, and Hume holds fast to this appearance.

Any scholarly investigation of the relation between the volume of means of circulation and movements in commodity-prices must assume that the value of the monetary material is given. Hume, however, considers exclusively periods when revolutionary changes in the value of the precious metals take place, that is revolutions in the standard of value. The rise in commodity-prices that occurred simultaneously with the increase in the amount of specie consequent upon the discovery of the American mines forms the historical background of his theory, and its practical motive was the polemic that he waged against the Monetary and Mercantile systems. It is, of course, quite possible to increase the supply of precious metals while their costs of production remain unchanged. On the other hand, a decrease in their value, that is in the labour-time required to produce them, will in the first place be attested only by an increase in their supply. Hume’s disciples accordingly stated subsequently that the diminished value of the precious metals was reflected in the growing volume of means of circulation, and the growing volume of the means of circulation was reflected in increased commodity-prices. But there is in reality an increase only in the prices of exported commodities which are exchanged for gold and silver as commodities and not as means of circulation. The price of those commodities, which are measure in gold and silver of reduced value, thus rises in relation to all other commodities whose exchange-value continues to be measured in gold and silver in accordance with the scale of their former costs of production. Such a dual evaluation of exchange-values of commodities in a given country can of course occur only temporarily; gold and silver prices must be adjusted to correspond with the exchange-values themselves, so that finally the exchange-values of all commodities are assessed in accordance with the new value of monetary material. This is not the place for either a description of this process or an examination of the ways in which the exchange-value of commodities prevails within the fluctuations of market-prices. Recent critical investigations of the movement of commodity-prices during the sixteenth century have conclusively demonstrated that in the early stages of the evolution of the bourgeois mode of production, such adjustment proceeds only very gradually, extending over long periods, and does not by any means keep in step with the increase of ready money in circulation. [1] Quite inappropriate are references – in vogue among Hume’s disciples – to rising prices in ancient Rome brought about by the conquest of Macedonia, Egypt and Asia Minor. The sudden and forcible transfer of hoarded money from one country to another is a specific feature of the ancient world; but the temporary lowering of the production costs of precious metals achieved in a particular country by the simple method of plunder does not affect the inherent laws of monetary circulation, any more than, for instance, the distribution of Egyptian and Sicilian corn free of charge in Rome affects the general law which regulates corn prices. For a detailed analysis of the circulation of money, Hume, like all other eighteenth-century writers, lacked the necessary material, i.e., on the one hand a reliable history of commodity-prices, and on the other hand, official and continuous statistics regarding the expansion and contraction of the medium of circulation, the influx or withdrawal of precious metals, etc., in other words material which on the whole only becomes accessible when banking is fully developed. The following propositions summarise Hume’s theory of circulation. 1. Commodity-prices in a given country are determined by the amount of money (real or token money) existing therein. 2. The money circulating in a given country represents all commodities which are in that country. As the amount of money grows, each unit represents a correspondingly larger or smaller proportion of the things represented. 3. If the volume of commodities increases, then their prices fall or the value of money rises. If the amount of money increases, then, on the contrary, commodity-prices rise and the value of money falls.

“The dearness of everything,” says Hume, “from plenty of money, is a disadvantage, which attends an established commerce, and sets bounds to it in every country, by enabling the poorer states to undersell the richer in all foreign markets.” “Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad, taking a nation within itself; any more than it would make an alteration on a merchant’s books, if, instead of the Arabian method of notation, which requires few characters, he should make use of the Roman, which requires a great many. Nay, the greater quantity of money, like the Roman characters, is rather inconvenient, and requires greater trouble both to keep and transport it.”

If this example were to prove anything, Hume would have to show that in a given system of notation the quantity of characters employed does not depend on the numerical value, but that on the contrary the numerical value is determined by the quantity of characters employed. It is quite true that there is no advantage in evaluating or “counting” commodity values in gold or silver of diminished value; and as the value of the commodities in circulation increased, therefore, nations invariably decided that it was more convenient to count in silver than in copper, and in gold than in silver. In the proportion that nations grew richer, they turned the less-valuable metals into subsidiary coin and the more valuable metals into money. Hume, moreover, forgets that in order to calculate values in terms of gold and silver, neither gold nor silver need be “present.” Money of account and means of circulation are for him identical phenomena and he regards both as coin. Because a change in the value of the standard of value, i.e. in the precious metals which function as money of account, causes a rise or fall in commodity-prices, and hence, provided the velocity of money remains unchanged, an increase or decrease in the volume of money in circulation, Hume infers that increases or decreases of commodity-prices are determined by the quantity of money in circulation. Hume could have deduced from the closing down of European mines that not only the quantity of gold and silver grew during the sixteenth and seventeenth centuries, but that simultaneously their cost of production diminished. Along with the volume of imported American gold and silver commodity-prices rose in Europe in the sixteenth and seventeenth centuries; commodity-prices are consequently in every country determined by the volume of gold and silver which the country contains. This was the first “necessary consequence” drawn by Hume. Prices in the sixteenth and seventeenth centuries did not rise in step with the increased amount of precious metals; more than half a century elapsed before any change at all was noticeable in the prices of commodities, and even after this a considerable time elapsed before the prices of commodities in general were revolutionised, that is before the exchange-values of commodities were generally estimated according to the diminished value of gold and silver. Hume – who quite contrary to the principles of his own philosophy uncritically turns unilaterally interpreted facts into general propositions – concludes that, in consequence, the price of commodities or the value of money is determined not by the absolute amount of money present in a country, but rather by the amount of gold and silver actually in circulation; in the long run, however, all the gold and silver present in the country must be absorbed as coin in the sphere of circulation. [2] It is clear, that, if gold and silver themselves have value, quite irrespective of all other laws of circulation, only a definite quantity of gold and silver can circulate as the equivalent of a given aggregate value of commodities. Thus, if without reference to the total value of commodities, all the gold and silver that happens to be in the country must participate as means of circulation in the exchange of commodities, then gold and silver have no intrinsic value and are indeed not real commodities. This is Hume’s third “necessary consequence.” According to Hume, commodities without price and gold and silver without value enter the process of circulation. He, therefore, never mentions the value of commodities and the value of gold, but speaks only of their reciprocal quantity. Locke had already said that gold and silver have a purely imaginary or conventional value; this was the first blunt opposition to the contention of the Monetary System that only gold and silver have genuine value. The fact that gold and silver are money only as the result of the function they perform in the social process of exchange is thus taken to mean that their specific value and hence the magnitude of their value is due to their social function. [3] Gold and silver are thus things without value, but in the process of circulation, in which they represent commodities, they acquire a fictitious value. This process turns them not into money but into value: a value that is determined by the proportion of their own volume to the volume of commodities, for the two volumes must balance. Although then, according to Hume, gold and silver enter the world of commodities as non-commodities, as soon as they function as coin he transforms them into plain commodities, which are exchanged for other commodities by simple barter. Provided the world of commodities consisted of a single commodity, e.g., one million quarters of corn, it would be quite simple to imagine that, if two million ounces of gold existed, one quarter of corn would be exchanged for two ounces of gold or, if twenty million ounces of gold existed, one quarter would be exchanged for twenty ounces of gold; the price of the commodity and the value of money would thus rise or fall in inverse ratio to the available quantity of money. [4] But the world of commodities consists of an infinite variety of use-values, whose relative value is by no means determined by their relative quantities. How then does Hume envisage this exchange of commodities for gold? He confines himself to the vague abstract conception that every commodity being a portion of the total volume of commodities is exchanged for a commensurate portion of the existing volume of gold. The dynamic movement of commodities – a movement, which originates in the contradiction of exchange-value and use-value contained in the commodities, which is reflected in the circulation of money and epitomised in the various distinct aspects of the latter – is thus obliterated and replaced by an imaginary mechanical equalisation of the amount of precious metals present in a particular country and the volume of commodities simultaneously available.

Sir James Steuart begins his investigation of specie and money with a detailed criticism of Hume and Montesquieu. He is indeed the first to ask whether the amount of money in circulation is determined by the prices of commodities, or the prices of commodities determined by the amount of money in circulation. Although his exposition is tarnished by his fantastic notion of the measure of value, by his inconsistent treatment of exchange-value in general and by arguments reminiscent of the Mercantile System, he discovers the essential aspects of money and the general laws of circulation of money, because he does not mechanically place commodities on one side and money on the other, but really deduces its various functions from different moments in commodity exchange.

“These uses” (of money in internal circulation) “may be comprehended under two general heads. The first, payment of what one owes; the second, buying what one has occasion for; the one and the other may be called by the general term of ready-money demands… Now the state of trade, manufactures, modes of living, and the customary expense of the inhabitants, when taken all together, regulate and determine what we may call the mass of ready-money demands, that is, of alienation. To operate this multiplicity of payments, a certain proportion of money is necessary. This proportion again may increase or diminish according to circumstances; although the quantity of alienation should continue the same… From this we may conclude, that the circulation of a country can only absorb a determinate quantity of money.

“The standard price of everything” is determined by “the complicated operations of demand and competition,” which “bear no determined proportion whatsoever to the quantity of gold and silver in the country.” “What then will become of the additional quantity of coin?” – “It will be hoarded up in treasures” or converted into luxury articles. “If the coin of a country … falls below the proportion of the produce of industry offered for sale … inventions such as symbolical money will be fallen upon to provide an equivalent for it." “When a favourable balance pours in a superfluity of coin, and at the same time cuts off the demands of trade for sending it abroad, it frequently falls into coffers; where it becomes as useless as if it were in the mine.”

The second law discovered by Steuart is that currency based on credit returns to its point of departure. Finally he analyses the consequences produced by the diversity in the rate of interest obtaining in different countries on the export and import of precious metals. The last two aspects are mentioned here only for the sake of a complete picture, since they are remote from our subject, namely simple circulation. [5] Symbolical money or credit money – Steuart does not yet distinguish these two forms of money – can function as means of purchase and means of payment in place of the precious metals in domestic circulation, but not on the world market. Paper notes are consequently “money of the society,” whereas gold and silver are “money of the world.” [6]

It is a characteristic of nations with an “historical” development, in the sense given to this term by the Historical School of Law, that they always forget their own history. Thus although during this half century the issue of the relation between commodity-prices and the quantity of currency has agitated Parliament continuously and has caused thousands of pamphlets, large and small, to be published in England, Steuart remained even more of “a dead dog” than Spinoza appeared to be to Moses Mendelssohn in Lessing’s time. Even the most recent historiographer of “currency,” MacClaren, makes Adam Smith the inventor of Steuart’s theory, and Ricardo the inventor of Hume’s theory. [7] Whereas Ricardo improves upon Hume’s theory, Adam Smith records the results of Steuart’s research as dead facts. The Scottish proverb that if one has gained a little it is often easy to gain much, but the difficulty is to gain a little, has been applied by Adam Smith to intellectual wealth as well, and with meticulous care he accordingly keeps the sources secret to which he is indebted for the little, which he turns indeed into much. More than once he prefers to take the sharp edge off a problem when the use of precise definitions might have forced him to settle accounts with his predecessors. This is, for instance, the case with the theory of money. Adam Smith tacitly accepts Steuart’s theory by relating that a part of gold and silver available in a country is used as coin, a part is accumulated as reserve funds for merchants in countries which have no banks and as bank reserves in countries with a credit system, a part serves as a stock for the adjustment of international payments, and a part is converted into luxury articles. He quietly eliminates the question about the amount of coin in circulation by quite improperly regarding money as a simple commodity. [8] This not entirely artless slip of Adam Smith was with much pomposity fashioned into a dogma [9] by his vulgariser, the insipid J. B. Say, whom the French have designated prince de la science, just as Johann Christoph Gottsched calls his Schonaich a Homer and Pietro Aretino calls himself terror principum and lux mundi. The tension caused by the struggle against the illusions of the Mercantile System prevented Adam Smith, moreover, from objectively considering the phenomena of metallic currency, whereas his views on paper money are original and profound. Just as the palaeontological theories of the eighteenth century inevitably contain an undercurrent which arises from a critical or an apologetic consideration of the biblical tradition of the Deluge, so behind the facade of all monetary theories of the eighteenth century a hidden struggle is waged against the Monetary System, the spectre which stood guard over the cradle of bourgeois economy and still cast its heavy shadow over legislation.

Investigations of monetary matters in the nineteenth century were stimulated directly by phenomena attending the circulation of bank-notes, rather than by those of metallic currency. The latter was merely referred to for the purpose of discovering the laws governing the circulation of bank-notes. The suspension of cash payments by the Bank of England in 1797, the rise in price of many commodities which followed, the fall in the mint-price of gold below its market-price, and the depreciation of bank-notes especially after 1809 were the immediate practical occasion for a party contest within Parliament and a theoretical encounter outside it, both waged with equal passion. The historical background of the debate was furnished by the evolution of paper money in the eighteenth century, the fiasco of Law’s bank, the growing volume of value-tokens which was accompanied by a depreciation of provincial bank-notes of the British colonies in North America from the beginning to the middle of the eighteenth century; after which came the legally-imposed paper money, the Continental bills issued by the American Government during the War of Independence, and finally the French assignats, an experiment conducted on an even larger scale.