A Contribution to the Critique of Political Economy · Karl Marx
4. THE PRECIOUS METALS.
Locke had already said that gold and silver had merely an imaginary or conventional value; the first brutal expression of opposition to the assertion of the monetary “system” that gold and silver alone have true value. That gold and silver owe their character of money to the function they perform in the social process of exchange is interpreted to the effect that they owe their own value and therefore the magnitude of their value to a social function.[123] Gold and silver are thus worthless things, which, however, acquire a fictitious value within the sphere of circulation _as representatives of commodities_. They are converted by the process of circulation not into money, but into value. This value of theirs is determined by the proportion between their own volume and that of the commodities, since the two must balance each other. Thus, Hume makes gold and silver enter the world of commodities as non-commodities; but as soon as they appear in the form of coin, he turns them, on the contrary, into mere commodities, which must be exchanged for other commodities by simple barter.
In that manner, if the world of commodities consisted of but one commodity, say one million quarters of grain, the idea would work itself out very simply; viz., one quarter of grain would be exchanged for two ounces of gold if there were altogether two million ounces of gold, and for twenty ounces of gold, if there were a total of twenty million ounces, the price of the commodity and the value of money rising or falling in inverse ratio to the quantity of gold in existence.[124] But the world of commodities consists of an endless variety of use-values, whose relative values are by no means determined by their relative quantities. How, then, does Hume conceive this exchange of the volume of commodities for the volume of gold? He contents himself with the meaningless, hollow idea that every commodity is exchanged as an aliquot part of the entire volume of commodities for a corresponding aliquot part of the volume of gold. The process of the movement of commodities due to the antagonism between exchange value and use-value which commodities bear within themselves, and which manifests itself in the circulation of money, becoming crystallized in different forms of the latter, is thus done away with, giving place to the imaginary mechanical equalization process between the quantity of precious metals to be found in a country and the volume of commodities existing there at the same time.
SIR JAMES STEUART opens his inquiry into the nature of coin and money with an elaborate criticism of Hume and Montesquieu.[125] He is really the first to ask this question: is the quantity of current money determined by the prices of commodities, or are the prices of commodities determined by the quantity of current money? Although his analysis is obscured by his fantastic conception of the measure of value, his vacillating view of exchange value and by reminiscences of the mercantile system, he discovers the essential forms of money and the general laws of the circulation of money, because he makes no attempt at a mechanical separation of commodities from money, but proceeds to develop its different functions from the different aspects of the exchange of commodities. Money is used, he says, for two principal purposes: for the payment of debts and for the purchase of what one needs; the two together form “ready money demands.” The state of trade and industry, the mode of living, the customary expenditures of the people, taken all together regulate and determine the volume of “ready money demands,” i. e. the number of “alienations.” In order to effect this multitude of payments, a certain proportion of money is required.
This proportion may increase or decrease according to circumstances, even while the number of alienations remains the same. At any rate, the circulation of a country can absorb only a definite quantity of money.[126] “It is the complicated operations of demand and competition which determines the standard price of everything”; the latter “does not in the least depend on the quantity of gold and silver in the country.”[127] What then will become of the gold and silver that is not required as coin? They are hoarded or used in the manufacture of articles of luxury. If the quantity of gold and silver fall below the level required for circulation, symbolic money or other substitutes take its place. If a favorable rate of exchange brings about a surplus of money in the country and cuts off at the same time the demand for its shipment abroad, it will accumulate in strong-boxes, where the “riches will remain without producing more effect than if they had remained in the mine.” The second law discovered by Steuart is that of the reflux of credit circulation to its starting point. Finally, he works out the effects which the disparity of the rates of interest in different countries produces upon the international export and import of precious metals. The last two points we mention here only for the sake of completeness, since they have but a remote bearing on the subject of our discussion.[128] Symbolic money or credit money―Steuart does not as yet distinguish between the two forms of money―may take the place of precious metals as a means of purchase or means of payment in the sphere of home circulation, but never in the world market. Paper notes are therefore “money of the society,” while gold and silver are “money of the world.”[129]
It is characteristic of nations with an “historical” development, in the sense in which the term is used by the historical school of law, to keep forgetting their own history. Although the controversy as to the relation of prices of commodities to the volume of the circulating medium has been continually agitating Parliament for the last half a century, and has precipitated in England thousands of pamphlets, large and small, Steuart has remained even more of a “dead dog” than Spinoza seemed to be to Moses Mendelson in Lessing’s time. Even the latest writer on the history of “currency,” Maclaren, makes Adam Smith the original author of Steuart’s theory, and Ricardo of Hume’s theory.[130] While Ricardo elaborated Hume’s theory, Adam Smith registered the results of Steuart’s investigations as dead facts. Adam Smith applied the Scotch saying that “mony mickles mak a muckle” even to his spiritual wealth, and therefore concealed with petty care the sources to which he owed the little out of which he tried to make so much. More than once he prefers to break off the point of the discussion, whenever he feels that an attempt on his part clearly to formulate the question would compel him to settle his accounts with his predecessors. So in the case of the money theory.
He tacitly adopts Steuart’s theory when he says that the gold and silver existing in a country is partly utilized as coin; partly accumulated in the form of reserve funds for merchants in countries without banks, or of bank reserves in countries with a credit currency; partly serves as a hoard for the settling of international payments; partly is turned into articles of luxury. He passes over without remark the question as to the quantity of coin in circulation, treating money quite wrongly as a mere commodity.[131] His vulgarizer, the dull J. B. Say, whom the French have proclaimed _prince de la science_―like Johann Christoph Gottsched, who proclaimed his Schönaich a Homer and himself a Pietro Aretino to the _terror principum and lux mundi_―has with great pomp raised this not altogether innocent oversight of Adam Smith to a dogma.[132] It must be said, however, that his hostile attitude to the illusions of the mercantile system prevented Adam Smith from taking an objective view of the phenomena of metallic circulation, while his views on credit money are original and deep. As in the eighteenth century petrification theories there is always felt the presence of an undercurrent which springs from either a critical or apologetic attitude toward the biblical tradition of the flood, so there is concealed behind all the money theories of the eighteenth century a secret struggle with the monetary system, the ghost which had stood guard over the cradle of bourgeois economy and continued to throw its shadow over legislation.
In the nineteenth century, inquiries into the nature of money were not prompted directly by phenomena of metallic circulation, but rather by those of bank-note circulation. The former was touched upon only in order to discover the laws governing the latter. The suspension of specie payments by the Bank of England in 1797, the rise of prices of many commodities which followed it, the fall of the mint price of gold below its market price, the depreciation of bank-notes, especially since 1809, furnished the direct practical occasion for a party struggle in parliament and a theoretical tournament outside of it, both conducted with like passion. 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 to the middle of the eighteenth century which went hand in hand with the increase in 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.
Most of the English writers of that period confound the circulation of bank-notes, which is governed by quite different laws, with the circulation of tokens of value or government legal tender paper money; and while they claim to explain the phenomena of this legal tender circulation by the laws of metallic circulation, they proceed, as a matter of fact, just the opposite way, viz., deducting laws for the latter from phenomena observed in connection with the former. We omit all the numerous writers of the period of 1800-1809 and turn directly to RICARDO, both because he embodies the views of his predecessors, which he formulates with greater precision, and because the shape he gave to the theory of money governs English bank legislation until this moment. Ricardo, like his predecessors, confounds the circulation of bank-notes, or credit money, with the circulation of mere tokens of value. The fact which impresses him most is the depreciation of paper currency accompanied by the rise of prices of commodities. What the American mines had been to Hume, the paper-bill presses in Threadneedle street were to Ricardo, and he himself expressly identifies the two factors at some place in his works.
His first writings, which dealt exclusively with the money question belong to the time of the most violent controversy between the Bank of England, which had on its side the ministers and the war party, and its opponents about whom were centered the parliamentary opposition, the Whigs and the Peace party. They appeared as immediate forerunners of the famous Report of the Bullion Committee of 1810, in which Ricardo’s views were adopted.[133] The singular circumstance, that Ricardo and his adherents, who held money to be merely a token of value, are called bullionists, is due not only to the name of that committee, but also to the nature of their theory. In his work on political economy, Ricardo repeated and developed further the same views, but nowhere has he investigated the nature of money as such, as he had done in the case of exchange value, profit, rent, etc.
To begin with, Ricardo determines the value of gold and silver, like that of all other commodities, by the quantity of labor-time embodied in them.[134] By means of them, as commodities of a given value, the values of all other commodities are measured.[135] The volume of the circulating medium in a country is determined by the value of the unit of measure of money on the one hand, and by the sum total of the exchange values of commodities, on the other. This quantity is modified by economy in the method of payment.[136] Since the quantity of money, of a given value, which can be absorbed by circulation, is thus determined and since the value of money within the sphere of circulation manifests itself only in its quantity, it follows that mere tokens of value, if issued in proportions determined by the value of money, may replace it in circulation, and in fact, “a currency is in its most perfect state when it consists wholly of paper money, but of paper money of an equal value with the gold which it professes to represent.”[137] So far Ricardo determines the volume of the circulating medium by the prices of commodities, assuming the value of money to be given; money as a token of value means with him a token of a definite quantity of gold and not a mere worthless representative of commodities as was the case with Hume.
When Ricardo suddenly gets off the straight path of his presentation and takes the very opposite view, he does so to turn his attention to the international circulation of precious metals and thus brings confusion into the problem by introducing considerations that are foreign to the subject. Let us follow his own course of reasoning, and, in order to remove everything that is artificial and incidental, let us assume that the gold and silver mines are located in the interior of the countries in which the precious metals circulate as money. The only inference which follows from Ricardo’s reasoning as so far developed, is that, the value of gold being given, the quantity of money in circulation will be determined by the prices of commodities. Thus, at a given moment, the quantity of gold in circulation in a country is simply determined by the exchange value of the commodities in circulation. Let us suppose now that the sum total of these exchange values has declined either because there are less commodities produced at the old exchange values, or because, in consequence of an increased productivity of labor, the same quantity of commodities has a smaller value.
Or, we may assume on the contrary that the sum total of exchange values has increased, either because the quantity of commodities has increased while the cost of their production has remained the same, or because the value of the same or of a smaller quantity of commodities has risen in consequence of a diminished productivity of labor. What becomes in either case of the _given_ quantity of metal in circulation? If gold is money merely because it is current as a medium of circulation; if it is compelled to remain in circulation like government legal tender paper money (and that is what Ricardo has in mind), then the quantity of money in circulation will rise above the normal level, as determined by the exchange value of the metal, in the former case, and fall below that level in the latter. Although possessing a value of its own, gold will become in the former case a token of a metal of lower exchange value than its own, and in the latter, a token of a metal of higher value. In the former case it will remain as a token of value less than its own, in the latter greater than its own (again an abstract deduction from legal tender paper money).
In the former case it is the same as though commodities were estimated in a metal of lower value than gold, in the latter, as though they were estimated in a metal of higher value. In the former case, prices of commodities would rise therefore, in the latter they would fall. In either case the movement of prices, their rise or fall, would appear as the effect of a relative expansion or contraction of the volume of gold in circulation above or below the level corresponding to its own value, i. e. above or below the normal quantity which is determined by the proportion between its own value and that of the commodities in circulation. The same process would take place if the sum total of the prices of the commodities in circulation remained unchanged, while the volume of gold in circulation came to be below or above the right level: the former in case the gold coin worn out in the course of circulation were not replaced by the production of a corresponding quantity of gold in the mines; the latter, if the output of the mines exceeded the requirements of circulation. In either case it is assumed that the cost of production of gold or its value remain the same.
To sum up: the money in circulation is at its normal level, when its volume is determined by its own bullion value, the exchange value of commodities being given. It rises above that level, bringing about a fall in the value of gold below its own bullion value and a rise of prices of commodities, whenever the sum total of the exchange values of commodities declines, or the output of gold from the mines increases. It sinks below its right level, leading to a rise of gold above its own bullion value and to a fall of prices of commodities, whenever the sum total of the exchange values of the commodities or the gold output of the mines is not sufficient to replace the quantity of outworn gold. In either case the gold in circulation becomes a token of value greater or smaller than that it really possesses. It may become an appreciated or depreciated token of itself.
As soon as all commodities would come to be estimated in gold of this new value and the general price level would accordingly rise or fall, the quantity of current gold would again answer the requirements of circulation (a consequence which Ricardo emphasizes with great pleasure), but would be at variance with the cost of production of the precious metals and, therefore, with their relation as commodities to all other commodities. According to the general Ricardian theory of exchange value, the rise of gold above its exchange value, i. e., above the value as determined by the labor-time contained in it, would cause an increase in the production of gold until the increased output of it would reduce its value to the proper magnitude. And in the same manner, a fall of gold below its value would cause a decline in its production until its value rose again to its proper magnitude. By these opposite movements the discrepancy between the bullion value of gold and its value as a medium of circulation would disappear, the normal level of the volume of gold in circulation would be restored, and the price level would again correspond to the measure of value.
These fluctuations in the value of gold in circulation would to the same extent affect gold in the form of bullion, because by assumption, all gold that is not utilized as an article of luxury, is supposed to be in circulation. Since gold itself may become, both as coin and bullion, a token of value of greater or smaller magnitude than its bullion value, it is self understood that convertible bank-notes in circulation have to share the same fate. Although bank-notes are convertible, i. e. their real value and nominal value agree, “the aggregate currency consisting of metal and of convertible notes” may appreciate or depreciate according as to whether it rises or falls, for reasons already stated, above or below the level determined by the exchange value of the commodities in circulation and the bullion value of gold. Inconvertible paper money, has, from this point of view, only that advantage as against convertible paper money, that it may depreciate in a twofold manner. It may fall below the value of the metal which it is supposed to represent, because it has been issued in too great quantity, or it may depreciate because the metal it represents has itself fallen in value. This depreciation, not of paper as compared with gold, but of gold and paper together, or of the aggregate currency of a country, is one of the principal discoveries of Ricardo, which Lord Overstone and Co. pressed into their service and made a fundamental principle of Sir Robert Peele’s Bank legislation of 1844 and 1845.
What should have been proven was that the price of commodities or the value of gold depends on the quantity of gold in circulation. The proof consists in the assumption of what is to be proven, viz. that any quantity of the precious metal employed as money must become a medium of circulation or coin, and thereby a token of value for the commodities in circulation, no matter in what proportion to its own intrinsic value and no matter what the total value of those commodities may be. To put it differently, the proof consists in overlooking all the other functions which money performs besides its function of a medium of circulation. When hard pressed, as in his controversy with Bosanquet, Ricardo, completely under the influence of the phenomenon of depreciated tokens of value caused by their quality, takes recourse to dogmatic assurances.[138] If Ricardo had built up this theory by abstract reasoning, as we have done it here, without introducing concrete facts and incidental matters which only distract his attention from the main question, its hollowness would be striking. But he takes up the entire subject in its _international_ aspect. It will be easy to prove, however, that the apparent magnitude of scale does not make his fundamental ideas less diminutive.
His first proposition was as follows: the volume of metallic currency is normal when it is determined by the total value of the commodities in circulation estimated in its bullion value. Expressed so as to apply to international conditions, it reads thus: in a normal state of circulation every country possesses a quantity of money “according to the state of its commerce and wealth.” Money circulates at a value corresponding to its real value or to its cost of production, i. e. it has the same value _in all countries_.[139] That being the case, “there could be no temptation offered to either for their importation or exportation.”[140] There would thus be established a balance of currencies between the different countries. The normal level of a national currency is now expressed in terms of an international balance of currencies, which practically amounts to the statement that nationality does not change anything in a universal economic law. We have reached again the same fatal point as before. How is the normal level disturbed? Or, speaking in terms of the new terminology, how is the international balance of currencies disturbed? Or, how does money cease to have the same value in all countries? Or, finally, how does it cease to pass at its own value in every country?
We have seen that the normal level was disturbed by an increase or decrease of the volume of money in circulation while the total value of commodities remained the same; or, because the quantity of money in circulation remained the same while the exchange values of commodities rose or fell. In the same manner, the international level, determined by the value of the metal itself, is disturbed by an increase in the quantity of gold in a country brought about by the discovery of new gold mines,[141] or by an increase or decrease of the total exchange-value of the circulating commodities in any particular country. Just as in the former case the output of the precious metals decreased or increased according as to whether it was necessary to contract or expand the currency and thereby to lower or raise prices, so are the same effects produced now by export and import from one country to another. In the country in which prices would rise or the value of gold would fall below the bullion value in consequence of a redundant currency, gold would be depreciated, and the prices of commodities would rise as compared with other countries. Gold would, therefore, be exported, while commodities would be imported, and vice versa.
Ideas discussed in this chapter
Text from Project Gutenberg, public domain in the United States.