 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. Although drawing the wrong conclusions from it, Ricardo observes somewhere 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.  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. 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.  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.  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.  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. 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.  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.  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.  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.  This not entirely artless slip of Adam Smith was with much pomposity fashioned into a dogma  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. Most English writers of that period confuse the circulation of bank-notes, which is determined by entirely different laws, with the circulation of value-tokens or of government bonds which are legal tender and, although they pretend to explain the phenomena of this forced currency by the laws of metallic currency, in reality they derive the laws of metallic currency from the phenomena of the former. We omit the numerous writers whose works appeared between 1800 and 1809 and turn at once to Ricardo, because he not only summarises his predecessors and expresses their ideas with greater precision, but also because monetary theory in the form he has given it has dominated British banking law up to the present time. Like his predecessors, Ricardo confuses the circulation of bank-notes or of credit money with the circulation of simple tokens of value. The fact which dominates his thought is the depreciation of paper money and the rise in commodity-prices that occurred simultaneously. The printing presses in Threadneedle Street which issue paper notes played the same role for Ricardo as the American mines played for Hume; and in one passage Ricardo explicitly equates these two causes. His first writings, which deal only with monetary matters, originated at a time when a most violent controversy raged between the Bank of England, which was backed by the Ministers and the war party, and its adversaries around whom were grouped the parliamentary opposition, the Whigs and the peace party. These writings appeared as the direct forerunners of the famous Report of the Bullion Committee of 1810, which adopted Ricardo's ideas.  The odd fact that Ricardo and his supporters, who maintained that money was merely a token of value, were called bullionists was due not only to the name of the Committee but also to the content of Ricardo's theory. Ricardo restated and further elaborated the same ideas in his work on political economy, but he has nowhere examined money as such in the way in which he has analysed exchange-value, profit, rent, etc. To begin with, Ricardo determines the value of gold and silver, like the value of all other commodities, by the quantity of labour-time materialised in them.  The value of other commodities is measured in terms of the precious metals, which are commodities of a determinate value. The quantity of means of circulation employed in a country is thus determined by the value of the standard of money on the one hand, and by the aggregate of the exchange-values of commodities on the other. This quantity is modified by the economy with which payments are effected.  Since, therefore, the quantity in which money of a given value can be circulated is determined, and within the framework of circulation its value manifests itself only in its quantity, money within the sphere of circulation can be replaced by simple value-tokens, provided that these are issued in the amount determined by the value of money. Moreover So far, therefore, Ricardo has assumed that the value of money is given, and has determined the amount of means of circulation by the prices of commodities: for him money as a token of value is a token which stands for a determinate quantity of gold and is not a valueless symbol representing commodities, as it was for Hume. When Ricardo suddenly interrupts the smooth progress of his exposition and adopts the opposite view, he does so in order to deal with the international movement of precious metals and thus complicates the problem by introducing extraneous aspects. Following his own train of thought, let us first of all leave aside all artificial and incidental aspects and accordingly locate the gold and silver mines within the countries in which the precious metals circulate as money. The only proposition which follows from Ricardo's analysis up to now is that if the value of gold is given, the amount of money in circulation is determined by the prices of commodities. The volume of gold circulating in a country therefore is simply determined by the exchange-value of the commodities in circulation at the given time. Now supposing that the aggregate amount of these exchange-values decreases, because either a smaller amount of commodities is produced at the old exchange-values, or the same amount of commodities is produced but the commodities represent less exchange-value as a result of an increase in the productivity of labour. Or let us assume by contrast that the aggregate exchange-value has increased, because a larger volume of commodities has been produced while production costs's remain constant, or because either the same or a smaller volume of commodities has a larger value as a result of a decline in the productivity of labour. What happens to the existing quantity of metal in circulation in these two cases? If gold is money only because it circulates as a medium of circulation, if it is forced to stay in the sphere of circulation, like paper money with forced currency issued by the State (and Ricardo implies this), then the quantity of money in circulation will, in the first case, be excessive in relation to the exchange-value of the metal, and it will stand below its normal level in the second case. Although endowed with a specific value, gold thus becomes a token which, in the first case, represents a metal with a lower exchange-value than its own, and in the second case represents a metal which has a higher value. Gold as a token of value will fall below its real value in the first case, and rise above it in the second case (once more a deduction made from paper money with forced currency). The effect would be the same as if, in the first case, all commodities were evaluated in metal of lower value than gold, and in the second case as if they were evaluated in metal of a higher value. Commodity-prices would therefore rise in the first case, and fall in the second. The movement of commodity-prices, their rise or fall, in either case would be due to the relative expansion or contraction in the amount of gold in circulation occasioning a rise above or a fall below the level corresponding to its own value, i.e., the normal quantity determined by the relation between its own value and the value of the commodities which are to be circulated. The same process would take place if the aggregate price of the commodities in circulation remained constant, but the amount of gold in circulation either fell below or rose above the proper level; the former might occur if gold coin worn out in circulation were not replaced by sufficient new output from the mines, the latter if the new supply from the mines surpassed the requirements of circulation. In both cases it is assumed that the production cost of gold, or its value, remains unchanged. To recapitulate: if the exchange-values of the commodities are given, the money in circulation is at its proper level when its quantity is determined by its own metallic value. It exceeds this level, gold falls below its own metallic value and the prices of commodities rise, whenever the aggregate exchange-value of commodities decreases or the supply of gold from the mines increases. The quantity of money sinks below its appropriate level, gold rises above its own metallic value and commodity-prices fall, whenever the aggregate exchange-value of commodities increases or the supply of gold from the mines is insufficient to replace worn-out gold. In these two cases the gold in circulation is a token of value representing either a larger or a smaller value than it actually possesses. It can become an appreciated or depreciated token of itself. When commodities are generally evaluated in conformity with the new value of money, and commodity-prices in general have risen or fallen accordingly, the amount of gold in circulation will once more be commensurate with the needs of circulation (a result which Ricardo emphasises with special satisfaction), but it will be at variance with the production costs of precious metals, and hence with the relations of precious metals as commodities to other commodities. According to Ricardo's general theory of exchange-value, the rise of gold above its exchange-value, in other words above the value which is determined by the labour-time it contains, would lead to an enlarged output of gold until the increased supply reduced it again to its proper value. Conversely, a fall of gold below its value would lead to a decline in the output of gold until its value rose again to its proper level. These opposite movements would resolve the contradiction between the metallic value of gold and its value as a medium of circulation; the amount of gold in circulation would reach its proper level and commodity-prices would once more be in accordance with the standard of value. These fluctuations in the value of gold would in equal measure affect gold bullion, since according to the assumption all gold that is not used as luxury articles is in circulation. Seeing that even gold in the form of coin or bullion can become a value-token representing a larger or smaller value than its own, it is obvious that any convertible bank-notes that are in circulation must share the same fate. Although bank-notes are convertible and their real value accordingly corresponds to their nominal value, the aggregate currency consisting of metal and of convertible notes may appreciate or depreciate if, for reasons described earlier, the total quantity either rises above or falls below the level which is deter mined by the exchange-value of the commodities in circulation and the metallic value of gold. According to this point of view, inconvertible paper money has only one advantage over convertible paper money, i.e., it can be depreciated in two ways. It may fall below the value of the metal which it professes to represent, because too much of it has been issued, or it may fall because the metal it represents has fallen below its own value. This depreciation, not of notes in relation to gold, but of gold and notes taken together, i.e., of the aggregate means of circulation of a country, is one of Ricardo's main discoveries, which Lord Overstone and Co. pressed into their service and turned into a fundamental principle of Sir Robert Peel's bank legislation of 1844 and 1845. What should have been demonstrated was that the price of commodities or the value of gold depends on the amount of gold in circulation. The proof consists in postulating what has to be proved, i.e., that any quantity of the precious metal serving as money, regardless of its relation to its intrinsic value, must become a medium of circulation, or coin, and thus a token of value for the commodities in circulation regardless of the total amount of their value. In other words, this proof rests on disregarding all functions performed by money except its function as a medium of circulation. When driven into a corner, as for instance in his controversy with Bosanquet, Ricardo entirely dominated by the phenomenon of value-tokens depreciating because of their quantity, resorts to dogmatic assertion.  If Ricardo had presented his theory in abstract form, as we have done, without introducing concrete circumstances and incidental aspects which represent digressions from the main problem, its hollowness would have been quite obvious. But he gives the whole analysis an international veneer. It is easy to show, however, that the apparent magnitude of scale can in no way alter the insignificance of the basic ideas. The first proposition, therefore, was: the quantity of specie in circulation is normal if it is determined by the aggregate value of commodities in circulation estimated in terms of the metallic value of specie. Adjusted for the international scene this reads: when circulation is in a normal state, the amount of money in each country is commensurate with its wealth and industry. The value of money in circulation corresponds to its real value, i.e., its costs of production: in other words, money has the same value in all countries.  Money therefore would never be transferred (exported or imported) from one country to another. A state of equilibrium would thus prevail between the currencies (the total volume of money in circulation) of different countries. The appropriate level of national currency is now expressed in the form of international currency-equilibrium, and this means in fact simply that nationality does not affect the general economic law at all. We have now reached again the same crucial point as before. In what way is the appropriate level upset, which now reads as follows: in what way is the international equilibrium of currencies upset, or why does money cease to have the same value in all countries, or finally why does it cease to have its specific value in each country? Just as previously the appropriate level was upset because the volume of gold in circulation increased or decreased while the aggregate value of commodities remained unchanged, or because the quantity of money in circulation remained constant while the exchange-value of commodities increased or decreased; so now the international level, which is determined by the value of the metal, is upset because the amount of gold is augmented in one country as a result of the discovery of new gold mines in that country, or because the aggregate exchange-value of the commodities in circulation in a particular country increases or decreases. Just as previously the output of precious metals was diminished or enlarged in accordance with the need for reducing or expanding the currency, and in accordance with it to lower or raise commodity-prices, so now the same effect is achieved by export and import from one country to another. In a country where prices have risen and, owing to expanded circulation, the value of gold has fallen below its metallic value, gold would be depreciated in relation to other countries, and the prices of commodities would consequently be higher than in other countries. Gold would, therefore, be exported and commodities imported. The opposite movement would take place in the reverse situation. Just as previously the output of gold continued until the proper ratio of values between gold and commodities was re-established, so now the import or export of gold, accompanied by a rise or fall in commodity-prices, would continue until equilibrium of the international currencies had been re-established. Just as in the first example the output of gold expanded or diminished only because gold stood above or below its value, so now the international movement of gold is brought about by the same cause. Just as in the former example the quantity of metal in circulation and thereby prices were affected by every change in gold output, so now they are affected similarly by international import and export of gold. When the relative value of gold and commodities, or the normal quantity of means of circulation, is established, no further production of gold takes place in the former case, and no more export or import of gold in the latter, except to replace worn-out coin and for the use of the luxury industry. It thus follows, The import or export of gold is invariably brought about by the metal being underrated or overrated owing to an expansion of the currency above its proper level or its contraction below that level.  It follows further: since the output of gold is expanded or diminished in our first case, and gold is imported or exported in our second case, only because its quantity has risen above its proper level or fallen below it, because it is rated above its metallic value or below it, and consequently commodity-prices are too high or too low, every one of these movements acts as its own corrective, for, by augmenting or curtailing the amount of money in circulation, prices are reduced again to their correct level, which is determined by the value of gold and the value of commodities in the first case, and by the international level of currencies in the second. To put it in other words, money circulates in different countries only because it circulates as coin in each country. Money is simply specie, and the amount of gold present in a country must enter the sphere of circulation; as a token representing itself it can thus rise above or fall below its value. By the circuitous route of these international intricacies we have managed to return to the simple thesis which forms the point of departure. A few examples will show how arbitrarily actual phenomena are arranged by Ricardo to suit his abstract theory. He asserts, for instance, that in periods of crop failure, which occurred frequently in England between 1800 and 1820, gold is exported, not because corn is needed and gold constitutes money, i.e., it is always an efficacious means of purchase and means of payment on the world market, but because the value of gold has fallen in relation to other commodities and hence the currency of the country suffering from crop failure is depreciated in relation to the other national currencies. That is to say, because the bad harvest reduces the volume of commodities in circulation, the existing quantity of money in circulation exceeds its normal level and all commodity-prices consequently rise.  As opposed to this paradoxical explanation, statistics show that in the case of crop failures in England from 1793 up to the present, the existing amount of means of circulation was not excessive but on the contrary it was insufficient, and therefore more money than previously circulated and was bound to circulate.  At the time of Napoleon's Continental System and the English Blockade Decrees, Ricardo likewise asserted that the British exported gold instead of commodities to the Continent, because their money was depreciated in relation to that of continental countries, the prices of their commodities were therefore higher and the export of gold rather than commodities was thus a more profitable commercial transaction. According to him commodities were dear and money cheap on the English market, whereas on the Continent commodities were cheap and money dear. In 1810 just at the time when Ricardo first advanced his currency theory, and the Bullion Committee embodied it in its parliamentary report the prices of all British commodities slumped ruinously in comparison with their level in 1808 and 1809, whereas the relative value of gold rose. Agricultural products were an exception because their import from abroad was impeded and the amount available within the country was greatly reduced by bad harvests. So completely did Ricardo misunderstand the function that precious metals perform as international means of payment that in his evidence before the Committee of the House of Lords (1819) he could declare: His death occurred in time before the onset of the crisis of 1825 demonstrated the falsehood of his forecast. The time within which Ricardo's literary activity falls was in general hardly favourable to the study of the function which precious metals perform as world money. Before the imposition of the Continental System Britain had almost continuously a favourable trade balance, and while the System was in force her transactions with the European continent were too insignificant to affect the English rate of exchange. The transfer of money had a predominantly political character, and Ricardo seems to have completely misunderstood the role which subsidies played in British gold export. Among the contemporaries of Ricardo, James Mill was the most important of the adherents of his principles of political economy. He attempted to expound Ricardo's monetary theory on the basis of simple metallic currency, omitting the irrelevant international complications, which conceal the inadequacy of Ricardo's conception, and all controversial references to the operation of the Bank of England. His main propositions are as follows.  Mill's whole wisdom is reduced to a series of assumptions which are both arbitrary and trite. He wishes to prove that it is the total quantity of the money in any country which determines the price of commodities or the value of money. If one assumes that the quantity and the exchange-value of the commodities in circulation remain constant, likewise the velocity of circulation and the value of precious metals, which is determined by the cost of production, and if simultaneously one assumes that nevertheless the quantity of specie in circulation increases or decreases in relation to the volume of money existing in a country, then it is indeed evident that one has assumed what one has pretended to prove. Mill, moreover, commits the same error as Hume, namely placing not commodities with a determinate exchange-value, but use-values into circulation; his proposition is therefore wrong, even if one accepts all his assumptions. The velocity of circulation may remain unchanged, similarly the value of precious metals and the quantity of commodities in circulation, yet they may nevertheless require sometimes a larger sometimes a smaller amount of money for their circulation as a result of changes in their exchange-value. Mill notices that a part of the money existing in a country circulates while another part stagnates. By means of a very odd rule of averages he assumes that all the money present in a country is actually in circulation, although in reality it does not seem to be so. If one assumes that in a given country 10 million silver thalers circulate twice in the course of a year, then, if each thaler were used in only one purchase, 20 million could be in circulation. And if the total quantity of all forms of silver in the country amounted to 100 million, it may be supposed that the 100 million could be in circulation if each coin performed one purchase in five years. One could as well assume that all the money existing in the world circulated in Hampstead, but that each portion of it performed one circuit in 3,000,000 years instead of, say, three circuits in one year. The one assumption is just as relevant as the other to the determination of the relation between the aggregate of commodity-prices and the amount of currency. Mill is aware of the crucial importance of establishing a direct connection between the commodities and the whole stock of money not just the amount of money in circulation in a particular country at a given time. He admits that the whole of the goods of a country are not exchanged at once against the whole of the money, but says that separate portions of the goods are exchanged for various portions of money at different times throughout the year. In order to remove this incongruity he assumes that it does not exist. Incidentally, the whole concept of a direct confrontation between commodities and money and their direct exchange is derived from the movement of simple purchases and sales or from the function performed by money as means of purchase. The simultaneous appearance of commodities and money ceases even when money acts as means of payment. The commercial crises of the nineteenth century, and in particular the great crises of 1825 and 1836, did not lead to any further development of Ricardo's currency theory, but rather to new practical applications of it. It was no longer a matter of single economic phenomena such as the depreciation of precious metals in the sixteenth and seventeenth centuries confronting Hume, or the depreciation of paper currency during the eighteenth century and the beginning of the nineteenth confronting Ricardo but of big storms on the world market, in which the antagonism of all elements in the bourgeois process of production explodes; the origin of these storms and the means of defence against them were sought within the sphere of currency, the most superficial and abstract sphere of this process. The theoretical assumption which actually serves the school of economic weather experts as their point of departure is the dogma that Ricardo had discovered the laws governing purely metallic currency. It was thus left to them to subsume the circulation of credit money or bank-notes under these laws. The most common and conspicuous phenomenon accompanying commercial crises is a sudden fall in the general level of commodity-prices occurring after a prolonged general rise of prices. A general fall of commodity-prices may be expressed as a rise in the value of money relative to all other commodities, and, on the other hand, a general rise of prices may be defined as a fall in the relative value of money. Either of these statements describes the phenomenon but does not explain it. Whether the task set is to explain the periodic rise in the general level of prices alternating with a general fall, or the same task is said to be to explain the alternating fall and rise in the relative value of money compared with that of commodities the different terminology has just as little effect on the task itself as a translation of the terms from German into English would have. Ricardo's monetary theory proved to be singularly apposite since it gave to a tautology the semblance of a causal relation. What is the cause of the general fall in commodity-prices which occurs periodically? It is the periodically occurring rise in the relative value of money. What on the other hand is the cause of the recurrent general rise in commodity-prices It is the recurrent fall in the relative value of money. It would be just as correct to say that the recurrent rise and fall of prices is brought about by their recurrent rise and fall. The proposition advanced presupposes that the intrinsic value of money, i.e., its value as determined by the production costs of the precious metals, remains unchanged. If the tautology is meant to be more than a tautology, then it is based on a misapprehension of the most elementary notions. We know that if the exchange-value of A expressed in terms of B falls, it may be due either to a fall in the value of A or to a rise in the value of B; similarly if, on the contrary, the exchange-value of A expressed in terms of B rises. Once the transformation of the tautology into a causal relationship is taken for granted, everything else follows easily. The rise in commodity-prices is due to a fall in the value of money, the fall in the value of money, however, as we know from Ricardo, is due to excessive currency, that is to say, to the fact that the amount of money in circulation rises above the level determined by its own intrinsic value and the intrinsic value of commodities. Similarly in the opposite fall of commodity-prices is due to the value of money rising above its intrinsic value as a result of an insufficient amount of currency. Prices therefore rise and fall periodically, because periodically there is too much or too little money in circulation If it is proved, for instance, that the rise of prices coincided with a decreased amount of money in circulation, and the fall of prices with an increased amount, then it is nevertheless possible to assert that, in consequence of some reduction or increase which can in no way be ascertained statistically of commodities in circulation, the amount of money in circulation has relatively, though not absolutely, increased or decreased. We have seen that, according to Ricardo, even when a purely metallic currency is employed, these variations in the level of prices must take place, but, because they occur alternately, they neutralise one another. For example, an insufficient amount of currency brings about a fall in commodity-prices, the fall of commodity-prices stimulates an export of commodities to other countries, but this export leads to an influx of money into the country, the influx of money causes again a rise in commodity-prices. When there is an excessive amount of currency the reverse occurs: commodities are imported and money exported. Since notwithstanding these general price movements, which arise from the very nature of Ricardo's metallic currency, their severe and vehement form, the form of crisis, belongs to periods with developed credit systems, it is clear that the issue of bank-notes is not exactly governed by the laws of metallic currency. The remedy applicable to metallic currency is the import and export of precious metals, which are immediately thrown into circulation as coin, their inflow or outflow thus causing commodity-prices to fall or to rise. The banks must now artificially exert the same influence on commodity-prices by imitating the laws of metallic currency. If gold is flowing in from abroad, it is a proof that there is an insufficient amount of currency, that the value of money is too high and commodity-prices too low, and bank-notes must therefore be thrown into circulation in accordance with the newly imported gold. On the other hand, bank-notes must be taken out of circulation in accordance with an outflow of gold from the country. In other words the issue of bank-notes must be regulated according to the import and export of the precious metals or according to the rate of exchange. Ricardo's wrong assumption that gold is simply specie and that consequently the whole of the imported gold is used to augment the money In circulation thus causing prices to rise, and that the whole of the gold exported represents a decrease in the amount of specie and thus causes prices to fall this theoretical assumption is now turned into a practical experiment by making the amount of specie in circulation correspond always to the quantity of gold in the country. Lord Overstone (Jones Loyd, the banker), Colonel Torrens, Norman, Clay, Arbuthnot and numerous other writers known in England as the currency school have not only preached this doctrine, but have made it the basis of the present English and Scottish banking legislation by means of Sir Robert Peel's Bank Acts of 1844 and 1845. The analysis of the ignominious fiasco they suffered both in theory and practice, after experiments on the largest national scale, can only be made in the section dealing with the theory of credit.  It is obvious however that Ricardo's theory, which regards currency, the fluid form of money, in isolation, ends by attributing to increases and decreases in the amount of precious metals an absolute influence on bourgeois economy such as was never imagined even in the superstitious concepts of the Monetary System. Ricardo, who declared that paper money is the most perfect form of money, was thus to become the prophet of the bullionists. After Hume's theory, or the abstract opposition to the Monetary System, had been developed to its extreme conclusions, Steuart's concrete interpretation of money was finally restored to its legitimate position by Thomas Tooke. Tooke derives his principles not from some theory or other but from a scrupulous analysis of the history of commodity-prices from 1793 to 1856. In the first edition of his History of Prices, which was published in 1823, Tooke is still completely engrossed in the Ricardian theory and vainly tries to reconcile the facts with this theory. His pamphlet On the Currency, which was published after the crisis of 1825, could even be regarded as the first consistent exposition of the views which Overstone was to set forth later. But continued investigation of the history of prices compelled Tooke to recognise that the direct correlation between prices and the quantity of currency presupposed by this theory is purely imaginary, that increases or decreases in the amount of currency when the value of precious metals remains constant are always the consequence, never the cause, of price variations, that altogether the circulation of money is merely a secondary movement and that, in addition to serving as medium of circulation, money performs various other functions in the real process of production. His detailed research does not belong to the sphere of simple metallic currency and at this stage it is accordingly not yet possible to examine it or the works of Wilson and Fullarton, who belong to the same school of thought.  None of these writers take a one-sided view of money but deal with its various aspects, though only from a mechanical angle without paying any attention to the organic relation of these aspects either with one another or with the system of economic categories as a whole. Hence, they fall into the error of confusing money as distinct from currency with capital or even with commodities; although on the other hand, they are occasionally constrained to assert that there is a distinction between these two categories and money.  When, for example, gold is sent abroad, then indeed capital is sent abroad, but this is also the case when iron, cotton, corn, in short when any commodity, is exported. Both are capital and the difference between them does not consist therefore in the fact that one is capital, but that one is money and the other commodity. The role of gold as international means of exchange is thus due not to the distinctive form it has as capital, but to the specific function it performs as money. Similarly when gold or bank-notes which take its place act as means of payment in domestic trade they are at the same time capital. But it would be impossible to use capital in the shape of commodities instead, as crises very strikingly demonstrate, for instance. It is again the difference between commodities and gold used as money and not its function as capital which turns gold into a means of payment. Even when capital is directly exported as capital, e.g., in order to lend a definite amount on interest abroad, it depends on market conditions whether this is exported in the shape of commodities or of gold; and if it is exported as gold this is done because of the specific function which the precious metals perform as money in contradistinction to commodities. Generally speaking these writers do not first of all examine money in its abstract form in which it develops within the framework of simple commodity circulation and grows out of the relations of commodities in circulation. As a consequence they continually vacillate between the abstract forms which money assumes, as opposed to commodities, and those forms of money which conceal concrete factors, such as capital, revenue, and so forth.  
Economic Manuscripts: Theories of the Medium of Circulation and of Money 1859