A Contribution to the Critique of Political Economy

by Karl Marx

Under certain assumptions, an increase or decrease in the quantity either of the metallic money in circulation, or of the tokens of value in circulation seems to affect uniformly the prices of commodities. With each fall or rise of the value of gold or silver in which the exchange values of commodities are estimated as prices, there is a rise or fall of prices, because of the change in their measure of value; as a result of the rise or fall of prices, a greater or smaller quantity of gold and silver is circulating as coin. But the apparent phenomenon is the fall in prices—the exchange value of commodities remaining the same—accompanied by an increased or diminished quantity of the medium of circulation. On the other hand, if the quantity of tokens of value rises above or falls below its required level, it is forcibly reduced to the latter by a fall or rise of prices. In either case the same effect seems to be brought about by the same cause, and Hume holds fast to this semblance.

Every scientific inquiry into the relation between the volume of the circulating medium and the movement of prices must assume the value of the money material as given. Hume, on the contrary, considers exclusively periods of revolution in the value of the precious metals, i. e. revolutions in the measure of value. The rise of prices which occurred simultaneously with the increase of metallic money after the discovery of the American mines forms the historical background of his theory, while his polemic against the monetary and mercantile system furnishes its practical motive. The importation of precious metals can naturally increase while their cost of production remains the same. On the other hand, a decrease in their value, i. e. in the labor-time required for their production will reveal itself first of all in their increased imports. Hence, said the later followers of Hume, a decrease in the value of the precious metals, reveals itself in an increased volume of the circulating medium, and the increased volume of the latter is shown in the rise of prices. As a matter of fact, however, the rise in price affects only exported commodities, which are exchanged for gold and silver as commodities and not as mediums of circulation. Thus, the prices of these commodities, which are now estimated in gold and silver of lower value, rise as compared with the prices of all other commodities whose exchange value continues to be estimated in gold or silver according to the standard of their old cost of production. This two-fold appraisement of the exchange values of commodities in the same country can naturally be only temporary, and the gold and silver prices must become equalized in the proportions determined by the exchange values themselves, so that finally the exchange values of all commodities come to be estimated according to the new value of the money material. The development of this process, as well as the ways and means in which the exchange value of commodities asserts itself within the limits of the fluctuations of market prices, do not fall within the scope of this work. But that this equalization takes place but gradually in the early periods of development of bourgeois production and extends over long periods of time, never keeping pace with the increase of cash in circulation, has been strikingly demonstrated by new critical investigations of the movement of prices of commodities in the sixteenth century.[117] The favorite references of Hume’s followers to the rise of prices in ancient Rome in consequence of the conquests of Macedonia, Egypt and Asia Minor, are quite irrelevant. The characteristic method of antiquity of suddenly transferring hoarded treasures from one country to another, which was accomplished by violence and thus brought about a temporary reduction of the cost of production of precious metals in a certain country by the simple process of plunder, affects just as little the intrinsic laws of money circulation, as the gratuitous distribution of Egyptian and Sicilian grain in Rome affected the universal law governing the price of grain. Hume, as well as all other writers of the eighteenth century, was not in possession of the material necessary for the detailed observation of the circulation of money. This material, which first becomes available with the full development of banking, includes in the first place a critical history of prices of commodities, and in the second, official and current statistics relating to the expansion and contraction of the circulating medium, the imports and exports of the precious metals, etc. Hume’s theory of circulation may be summed up in the following propositions: 1. The prices of commodities in a country are determined by the quantity of money existing there (real or symbolic money); 2. The money current in a country represents all the commodities to be found there. In proportion “as there is more or less of this representation,” i. e. of money, “there goes a greater or less quantity of the thing represented to the same quantity of it”; 3. If commodities increase in quantity, their price falls or the value of money rises. If money increases in quantity, then, on the contrary, the price of commodities rises and the value of money declines.[118]

“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.”[119] “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.”[120] In order to prove anything, Hume should have shown that under a given system of notation the quantity of characters used does not depend on the magnitude of the numbers, but that on the contrary, the magnitude of the numbers depends on the quantity of the characters used. It is perfectly true that there is no advantage in estimating or “counting” values of commodities in depreciated gold and silver, and that is the reason why nations have always found it more convenient with the growth of the value of the commodities in circulation to count in silver in preference to copper, and in gold rather than in silver. In proportion as the nations became richer, they converted the less valuable metals into subsidiary coin and the more valuable ones into money. Furthermore, Hume forgets that in order to count values in gold and silver, it is not necessary that either gold or silver should be “on hand.” Money of account and the medium of circulation are identical with him and both are “coin.” Hume concludes that a rise or fall of prices depends on the quantity of money in circulation, because a change in the value of the measure of value, i. e. of the precious metals which serve as money of account, causes a rise or fall of prices and, consequently, also a change in the amount of money in circulation, the rapidity of the latter remaining the same. That not only the quantity of gold and silver increased in the sixteenth and seventeenth centuries, but that the cost of their production had declined at the same time, Hume could know from the closing up of the European mines. In the sixteenth and seventeenth centuries the prices of commodities increased in Europe with the influx of the mass of American gold and silver; hence the prices of commodities in every land are determined by the mass of gold and silver to be found there. This was Hume’s first “necessary consequence.”[121] In the sixteenth and seventeenth centuries prices had not risen uniformly with the increase of the quantity of precious metals; more than half a century passed before any change in prices became perceptible, and even then it took a long time before the exchange values of commodities came to be generally estimated according to the depreciated value of gold and silver, i. e. before the revolution affected the general price level. Hence, concludes Hume, who, quite contrary to the principles of his philosophy, generalizes indiscriminately from imperfectly observed facts, prices of commodities or the value of money depend not on the total amount of money to be found in the country, but rather on the quantity of gold and silver which is actually in circulation; but in the long run all the gold and silver in the country must be absorbed by circulation in the form of coin.[122] It is clear that if gold and silver have a value of their own, then, apart from all other laws of circulation, only a definite quantity of gold and silver can circulate as the equivalent of commodities of a given value. If, therefore, every quantity of gold and silver which happens to be in a country must enter the sphere of exchange of commodities as a medium of circulation without regard to the total value of the commodities, then gold and silver have no intrinsic value and are in fact no real commodities. That is Hume’s third “necessary consequence.” He makes commodities enter the process of circulation without price and gold and silver without value. That is the reason why he never speaks of the value of commodities and of gold, but only of their relative quantities. 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 banknote 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.