Marx begins by summarising Ricardo’s theory of the value of metal money (also dealt with by Marx in the 1859 Contribution), which formed the theoretical basis for the 1844-5 Bank Acts. According to Ricardo:

[T]he value of (metal) money is determined by the labour-time objectified in it, but only as long as the quantity of money stands in the right proportion to the quantity and price of the commodities to be exchanged. If the quantity of money rises above this proportion, its value falls and commodity prices rise; if it falls below the right proportion, its value rises and commodity prices fall – as long as other factors remain the same. In the first case, the country which has this surplus of gold will export the gold that has fallen below its value and import commodities; in the second case gold will flow into the countries where it is priced above its value, while the under-valued commodities from there will flow to other markets, where they can obtain normal prices. Since on these assumptions ‘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 banknotes that are in circulation must share the same fate. Although banknotes 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 determined by the exchange-value of the commodities in circulation and the metallic value of gold.’

This understanding of the relation between the value of money and commodity prices forms the basis of the banking legislation operative in Marx’s day in this way. If the remedy with regard to metallic currency and falling or rising prices is to import or export precious metals, then, in the case of paper money, banks have now to effect a similar influence on prices by adjusting the quantity of banknotes (convertible into gold) in circulation in function of the flow of gold into or out of the country.

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 banknotes must therefore be thrown into circulation in accordance with the newly imported gold. On the other hand, banknotes must be taken out of circulation in accordance with an outflow of gold from the country. In other words the issue of banknotes 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.

The school of thought associated with these theories confuses, first, the demand for money capital and the demand for ‘capital’ in general (i.e. commodities); two, the relationship between commodity prices and the presence of money, and, hence, three, the relationship between international flow of bullion and commodity prices; and, finally and therefore, what determines the prevailing rate(s) of interest.

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