1

PREFACE

The world monetary crisis is a striking display of capitalism's general crisis at its present state-monopoly stage. This crisis assumes diverse forms: so-called "gold rushes", abrupt speculative flows of capital from one country to another, extreme instability in the balances of payments, inflation, sharp and frequent fluctuations of discount and interest rates, instability of the exchange rates of national currencies, with the latter resulting in changes of currency parities–devaluations, revaluations, and the like.

All this tends to exacerbate the hidden and open competitive struggle between the gigantic monopolies and between the principal capitalist states and intensifies the socioeconomic instability of capitalist society.

The monetary crisis adversely affects the living conditions of the masses in capitalist countries and intensifies the class struggle. It has become a chronic malady of capitalism, alarming the monopoly bourgeoisie, which utilises the state machine in its own interests. With the help of the state and international financial and economic organisations, these circles have been vainly seeking to mitigate the monetary upheavals of capitalism and to find a way out of the crisis.

This monograph deals with the major aspects of the world monetary crisis of capitalism.

The main guideline in this study was Lenin's methodological proposition "...not to forget the underlying historical connection, to examine every question from the standpoint of how the given phenomenon arose in history and what were the principal stages in its development, and, from the standpoint of its development, to examine what it has become today".1

In examining the development of the world monetary crisis we have drawn on Western literature and relevant works published in the USSR. Particularly useful were: Imperialism and the Crisis of World Capitalism, edited by P. Y. Bregel, (1968); S. M. Borisov, Gold in the Economy of Contemporary Capitalism (1968); F. P. Bystrov, Terms of Payments in International Trade Transactions (1963); Currency Handbook (1967); I. D. Zlobin, Monetary-Financial Contradictions of Imperialism (1959); I. I. Konnik, Laws and Interconnections of Commodity and Money Circulation under Socialism (1968); F. I. Mikhalevsky, Gold in the Capitalist System After the Second World War (1952); K. Y. Chizhov, International Monetary and Financial Organisations of Capitalism (1968); L. I. Frei, The Credit and Monetary Policy of Capitalist Countries (1962).

The need for an historical approach is also dictated by the fact that attempts are made in Western literature to sever present-day monetary relations from their historical roots, to prove that earlier objective laws of currency circulation have either completely or largely lost their validity, claiming, for example, that gold as world money has become a "relic of barbarism". This is done to make the reader believe that the Marxist doctrine of money and money circulation is obsolete. Various bourgeois concepts of monetary circulation are put forward, mostly of Keynesian origin.

Roy Harrod, the well-known British economist, and some other Western researchers claim that a "Keynesian revolution" occurred in the interwar period in financial-economic theories and capitalist practices. In this way they are trying to sever the unity of the process of decay in capitalism's monetary system and the emergence of its chronic crisis.

In contrast, the purpose of this work is to demonstrate, from the standpoint of the Marxist doctrine of money and money circulation and in the historical perspective, how the entire development of currency relations in the capitalist world made the present crisis inevitable.

1. MONEY CIRCULATION AND ITS ROLE IN DIFFERENT SOCIO-ECONOMIC SYSTEMS

The present international monetary system is a result of the prolonged development of money and money circulation, with objective laws predetermining the similarity of stages in money circulation in different countries during the succession of various socio-economic systems.

Let us recall that money or the money form of value, for all its simplicity and use over the centuries, was for a long time elevated into a fetish and remained an incomprehensible riddle. Marx pointed out that "the value-form, whose fully developed shape is the money-form, is very elementary and simple. Nevertheless, the human mind has for more than 2,000 years sought in vain to get to the bottom of it, whilst on the other hand, to the successful analysis of much more composite and complex forms, there has been at least an approximation. Why? Because the body, as an organic form, is more easy of study than are the cells of that body. In the analysis of economic forms, moreover, neither microscopes nor chemical reagents are of use. The force of abstraction must replace both.''2

The approach to the contemporary international monetary system and its protracted crisis largely depends on a proper understanding of the essence of money and its role in different socio-economic systems. This is the more important because gold, which long ago became world money, plays a major role in the development of the present-day monetary crisis in the capitalist world.

So what is money? Studying the nature of the value form in acts of exchange, Marx established that in all cases two different commodities stand opposed to each other so that the value of the first commodity is in the relative form of value, while in the other it is in the equivalent form. Subsequently, when a wide range of commodities is drawn into exchange, one of the commodities assumes the form of the universal equivalent and as such is ``ousted'' by all other commodities from their midst. This is the objective process whereby the equivalent value form is developed. Lastly, the "particular commodity, with whose bodily form the equivalent form is thus socially identified, now becomes the money-commodity, or serves as money".3

There is no need to relate in detail how in different countries at the early stages of mankind's development various commodities, e.g., livestock among nomads, were used as money.

In the history of mankind the process of exchange is the process of the formation of money. Marx pointed out that "as they develop, the interrelations of commodities crystallise into distinct aspects of the universal equivalent, and thus the exchange process becomes at the same time the process of formation of money.''4 It should be noted that as early as several centuries B.C. precious metals, gold and silver, began to function as money. In some countries either gold or silver served as money and in others both were used. The first instance is called monometallism and the second bimetallism. There were cases when copper and its alloys (bronze) were used as a money metal for a long time but iiltimately gold became the principal monetary material, the measure of value and the main means of international payments–world money, in fact.

As a universal money material capable, as it were, of preserving its value when hoarded, gold passed through the centuries from the money-boxes and chests of satraps and slave-traders into the safes and armoured vaults of the tycoons of contemporary state-monopoly capital.

Gold is a measure of value because it itself has value. The relative magnitude of the value of gold is established at the site of its production and in direct trade. When gold goes into circulation as money, its value is already given as labour value, but to serve as a standard of prices a definite weight of gold must be fixed as the unit of measurement.

In actual circulation, however, the weight unit of gold cannot be established during every exchange or every purchase of a commodity. In ancient times coins were introduced, originally as pieces of metal of a fixed weight, converted by minting into a definite shape. The British pound sterling was the money name of a pound of silver. But when silver yielded its place as the money commodity to gold, the name "pound sterling" was applied to a smaller quantity of gold. The pound as a monetary unit and as a unit for measuring of gold did not coincide. The weight of precious metal in coins is usually fixed by law and thus becomes mandatory.

This was particularly important at the early stages in the development of commodity exchange, when precious metals, gold and silver, directly participated as money in acts of exchange, in the purchase and sale of commodities.

Coins, as a legislatively established money standard for prices, began to be used long before our era. This is confirmed by historical and archaeological evidence, in particular by the unearthing of coins themselves. Some authorities hold that metallic money appeared some 900 years B.C.5 and possibly even earlier because the role of coins could be performed not only by money in our understanding of the term (minted pieces of circular metal) but also by various rings, metal pins, and so on. Serving as ornaments, these objects were constantly carried on one's person, and participated in exchange, which at times assumed the form of a rite, an exchange of gifts concealing trade in commodities, and so on.

Metallic money is known to have existed in Libya in 600 B.C.

In the seventh and sixth centuries B.C. money circulation became widespread in Greece, thanks largely to the Greek colonies in the Mediterranean. This is demonstrated, alongside other remains of ancient Hellenic culture, by the coins of Greek cities with splendidly preserved "minted portraits or scenes.

Trade contacts between ancient peoples undoubtedly led to the gradual spread of minting know-how but at that time there could be no international monetary system, although exchange and mutual settlements were apparently made at a certain parity. More often, however, coins circulated only locally and, after conquest, the currency system of one people was imposed on another.

Be that as it may, the circulation of metallic money developed further. In Rome silver and copper coins depicting the two-faced god Janus and other deities and battle scenes were used in the third and second centuries B.C.

In the ancient world metallic money circulation in the form of coins serviced chiefly the commodity exchange of the surplus product created either on slave-owning estates or in the subsistence farms of peasants grouped into communities. Such trade was necessarily limited and irregular. During more or less prolonged interruptions of the circulation process money had to assume the form of hoards, and for this purpose money made of precious metals was the most suitable. Such money and precious articles were used for the payment of tribute in Asian countries several centuries before our era. In some countries, e.g., in Lydia under Croesus (560-546 B.C.), money circulation made great advances. Lydia is considered the first ancient country in which gold became the principal money metal.

Substantial quantities of coins had to be minted even in ancient times. That is why both oriental rulers and the authorities of ancient Greek city-states attached great importance to the minting of money. They introduced strict regulations governing the issue and circulation of coins. Persons who violated these regulations, especially counterfeiters, were punished severely. The most widespread method of counterfeiting coins in antiquity was to make coins out of base metals and then cover them with a thin layer of precious metal. The choice of a metal for minting money depended on its availability in the country. This explains why, in contrast to the prevalence of gold coins in the countries of Western Asia, copper coins were dominant in ancient Rome.

The money systems of individual countries appear to have been closed. Such concepts as stable parity or exchange rate did not exist as yet. In view of the prevalence of direct commodity exchange merchants who engaged in trade between countries did not need them, though a certain part of the commodities was probably paid for in local or foreign money. For local coins to gain the status of a means of payment beyond the bounds of their own country only one thing was needed–the establishment of their full value, i.e., the content of the precious metal. This was done by weighing, listening to their ring and even by testing their hardness with one's teeth or making an incision in the coin.

It was only in the Middle Ages that the exchange of metallic coins minted in different cities began in the trade centres of Italy. A definite correlation of currencies was gradually introduced in exchange practice according to their intrinsic value or precious-metal content (parity) and, possibly, also according to a rate based on the demand and supply. Shops of exchangers also began to discharge functions which remotely resembled the operations of contemporary banks, namely, transfer operations. This was done in a very simple way .

If a merchant had to buy goods in another city but did not want to take the risk of carrying on his person a considerable sum in coins, exchangers in different cities who maintained regular contact came to his^aid for a set fee. The merchant turned over to the local exchanger the money in coin and received a receipt and on his arrival at the other city he was paid the sum indicated on the receipt in another exchange shop. At times payment for the goods purchased was made directly by these receipts, especially if the seller himself wanted to travel and buy goods in the city where the exchanger who had issued the original receipt had his office. Thus, the receipts to some extent performed the function of credit money, which became widespread under capitalism. But just as the exchange shops themselves only remotely resembled banks unde. capitalism, the receipts issued by these offices can only vaguely be considered as the prototypes of modern bank notes.

The progress of money circulation observed in the Middle Ages in Italian trading centres was the exception under the conditions of feudal stagnation in terms of money circulation prevailing in the rest of feudal Europe. Under feudalism the fragmented economy engendered a corresponding proliferation in money circulation.

Many feudal lords issued their own money, which often had only a limited circulation within the bounds of a particular fief. The feudal rulers were not bound by any rigid rules in coinage, and if such rules were established for a certain time they were often violated, which greatly hindered trade.

The situation changed for the better only where centralised feudal monarchies arose through the forcible elimination of feudal fragmentation. Since they had an interest in the development of trade, such monarchies not only protected merchant trade, but also sought to normalise money circulation, organised minting offices, and so on. In this they were supported by the merchants and the artisans of the feudal towns.

The feudal towns were the mainstay of a stable money circulation. Indeed, in the Middle Ages the development of towns, inhabited primarily by artisans and merchants, reached a high level and the circulation of commodities on the basis of metallic money took on a large scale and improved forms.

The need to exchange the coins of one country for those of another, on the one hand, introduced into international trade the practice of settlements in precious metal bullion and, on the other, developed the money exchange business and improved its forms. The individual exchangers were replaced by exchange offices whose connections extended beyond the bounds of their own country. More frequent use was made of bills or receipts from exchange offices. The exchange of different coins according to a parity and rate was improved.

The exchange business was gradually combined with cash operations which the exchange offices performed on the instructions of their regular clients, the merchants. Lastly, more powerful institutions appeared which operated on the basis of definite statutes, e.g., the Amsterdam Exchange Bank (1609) and similar banks in Venice, Genoa, Stockholm and Hamburg. But the operations of these banks were still based on metallic money circulation, which depended on the financial policy of the state authority. This authority, particularly as feudal monarchies gained in strength, could either normalise or derange the money system. The latter happened during wars and financial difficulties resulting from other causes. This was done, as before, by deliberately debasing money, reducing its weight and decreasing the content of the precious metal in coins. Although in this way resources were temporarily obtained for waging wars and covering the expenses of the court, eventually the debasement of coins threw the money circulation into disarray and, after a certain time, order had to be restored. Most frequently this was done with the help of onerous taxes and levies.

When a state allowed the payment of taxes with nonfull-value coins6 , it could imperceptibly reduce the amount of them in circulation. An equilibrium was achieved even when non-full-value coins remained in circulation if this was required by the needs of commodity turnover. Thus, the conclusion was gradually drawn that a certain quantity of coins as tokens of value, although they were not of full value, was necessary for the exchange of full-value money of higher denominations. Such exchange (billon) money of small denomination has been preserved in the local trade of all countries up to the present. The circulation of nonfull-value metallic money led to the idea of using money made of another material, paper money. Nevertheless, metallic money circulation in the form of coins was the main type in Europe up to the epoch of the disintegration of feudalism and the emergence of capitalism, the epoch of the spread of colonial conquests and the expansion of world trade.

In the 16th and 17th centuries, which Marx named the period of the infancy of contemporary bourgeois society, worship of the money system based on precious metals gave rise to mercantilism as a system of views which proclaimed money with intrinsic value, gold and silver, as the only wealth.

The idea of using paper money tokens was applied in Asia much earlier than in Europe. In Asia the early Middle Ages witnessed the formation of colossal authoritarian empires which encompassed many nationalities. It was apparently the need for trade in such vast empires with a shortage of full-value metallic money and the difficulties of circulating it as the volume of trade expanded that acted as a stimulating factor in the introduction of paper money.

Paper money was^known in the 13th century in China during the empire of Ihe Mongol Kublai Khan. It is believed that it was used even earlier in China under the Sung dynasty defeated by the Mongols, but it is difficult to form a definite idea of the nature of the pre-Mongol paper money circulation owing to the lack of data. As for money circulation under Kublai, there is very definite information about it in the descriptions given by the Venetian merchant Marco Polo, who lived for a long time in China during the rule of Kublai in the second half of the 13th century.

Marco Polo gave such a detailed description of the issue of paper money and its circulation in Kublai's Mongol empire (the Yuan dynasty) in China that there can be no doubt about the sophistication of the money system which existed at that time.

From Marco Polo's descriptions we know that a special paper was made for the printing of money and that it was "cut into pieces of money of different sizes, nearly square, but somewhat longer than they are wide".7 These pieces were used for paper money of different denominations. The preparation of this paper money "is authenticated with as much form and ceremony as if it were actually of pure gold or silver", Marco Polo continues. We are also told that to each note a number of officers, specially appointed, not only subscribed their names but affixed their signets as well.

In conclusion "the principal officer, appointed by His Majesty, having dipped into vermilion the royal seal committed to his custody, stamps with it the piece of paper, so that the form of the seal tinged with the vermilion remains impressed upon it, by which it receives full authenticity as current money.''8 This established procedure for the issue of paper money with the participation of several officials maintained a strict system and mutual control during this process.

Unfortunately, Marco Polo does not reveal the principles by which the officials were guided in determining the volume of paper money to be issued. He only remarks that "in large quantities, this paper currency is circulated in every part of the Great Khan's dominions". The inquisitiveness of the Venetian did not go to such lengths as to be interested in this side, which is important for understanding the economic essence of paper money circulation during the rule of Kublai in China. But we learn that paper money not only had mandatory circulation ("nor dares any person, at the peril of his life, refuse to accept it in payment"), but, most important, it also had stable purchasing power, for it was possible to buy any commodity with it and it was freely exchanged for precious metals. "Should anyone be desirous of procuring gold or silver for the purposes of manufacture, such as of drinking-cups, girdles, or other articles wrought of these metals, they in the like manner... apply to the mint, and for their paper obtain the bullion they require.''9 Should a person happen to possess paper money which from long use became damaged he could take it to the mint where, by paying only three per cent of the value, he could receive new notes in exchange.

Pointing out that the troops of Kublai Khan received their pay in paper money which for them had the same value as gold and silver, Marco Polo makes a quite profound observation: "Upon these grounds, it may certainly be affirmed that the Grand Khan has a more extensive command of treasure than any other sovereign in the universe.'' 10 This remark shows that not only the power of the sword but also the financial basis supported the might of the Mongol Yuan dynasty in China.

Judging by the fact that the paper money of Kublai Khan could be freely exchanged for precious metals, it replaced the latter in circulation and saved precious metal from debasement and wear in the process of money circulation. The appearance of paper money in Europe belongs to the period of the disintegration of feudalism, the strengthening of trading capital and the expansion of the European countries' colonial possessions in America. Of the two types of paper media of circulation (paper money of mandatory circulation and credit money) credit money appeared first in European countries, in Britain in particular, while in the colonial possessions in America paper money of mandatory circulation came first.

The introduction of paper credit money was associated with the efforts of private bankers, who in Britain, for example, originated among the goldsmiths.

As for paper money of mandatory circulation, its appearance everywhere was linked with the activities of governments, although their power could not in the least be compared with that of Kublai Khan.

But whatever the differences between the two types of paper money and the chronological order in which they originated in various countries, there were common reasons which determined the emergence of paper media of circulation, alongside the circulation of full-value metallic money. These were the development of commodity circulation, the expansion of the market to an inter-continental scale in view of the settlement of the colonies of European countries in America by people from the metropolitan states and also the natural increase of the population in the colonies.

Moreover, both the geographical and the economic expansion of the world market (increase of purchasing power owing to the curtailment of the subsistence forms of the economy and their replacement by commodity forms) proceeded in an epoch when the means of transport remained unchangedsail boats on sea and horse-drawn carts on land. This meant that the increased mass of commodities in circulation with the exceedingly slow transportation facilities required a much larger volume of money. This applied particularly to overseas trade in view of the long time required for the shipment of goods.

The shortage of full-value metallic money in Europe apparently provided the main stimulus for mercantilism, a system of views which regarded money–gold and silver– as the only wealth. Essentially, it concealed the highly complex process of the development of commodity relations, on the one hand, and the disintegration of feudalism, on the other. This intricate process, growing in breadth and depth, demanded an ever greater stock of money. The quest for money was the determining motive in the activity not only of the trading strata of the population but also of the feudal elements who were cramped within the bounds of the subsistence economy.

Account should also be taken of the fact that the stratum of craftsmen, including wage workers, servants, apprentices, and so on, increased in the cities, and for them money earnings were the source of livelihood. Expansion of paid services had to be met by a corresponding increase in money to pay for the services and for the purchase of means of subsistence by those, who performed the services.

Last, but not least, money was also needed in the overseas possessions themselves, especially in the American continent, where European settlers in the colonies of Spain, Britain, France and Portugal reproduced commodity-money relations even faster than in the metropolitan states. All this created a new need for money, which corresponded to the extending process of commodity-money relations in the European metropolitan countries and in their overseas possessions.

Although at that time new silver mines and goldfields were discovered in the colonies, the production of precious metals was vastly insufficient to satisfy the need for fullvalue money. It is this that should be regarded as the main cause of the origin and development of various substitutes for full-value money, namely, paper media of circulation. To put it differently, the historical socio-economic process led mankind to the need to supplement the existing system of full-value metallic money with a system of paper money of mandatory circulation and credit money.

We have already touched on paper money of mandatory circulation in the description of Kublai Khan's 13th-century empire. In contrast to paper money, credit money is a category of circulation media which received adequate development together with the broader spread of commoditymoney relations and it merits a special analysis. Moreover, although the development of paper money and credit money often proceeded in parallel, the logical path of full-value metallic money can be traced primarily through non-fullvalue coins as tokens of value to paper money of mandatory circulation. This was the case in the early Middle Ages in Asia and the same happened later in Europe and the European overseas colonies; moreover, priority should evidently be given not to the metropolitan countries but to their colonies in North America.

Though precious metals, silver and gold, began to be mined in the European colonies in America soon after their formation, the acute need for full-value metallic money was the reason for the appearance of paper money in North America. The main cause was that precious metals from the colonies were exported mainly to the metropolitan countries. The royal governments in the metropolitan countries regarded the minting of coins as their own profitable prerogative. While paying lip-service to mercantilism, the ruling elite in some of the royal courts of Europe deliberately prevented the outflow of full-value metallic money to the overseas possessions, disregarding the economic interests of commodity circulation, which was growing in scale there.

It is not surprising that in Massachusetts, one of the oldest English colonies in North America, a mint producing silver coins was organised as early as 1652. But in 1684 it was closed by King Charles II "on the ground that it violated the royal prerogative of coinage".11

In the meantime the colonies began to trade not only with their metropolitan countries but also among themselves. Particularly important was the trade between the colonies of England and Spain and also of other states.

Foreign, some of them Spanish, vessels anchored at the coast of Massachusetts and other English possessions as early as the 1630s. It is not surprising that money of Spanish coinage penetrated local circulation which suffered from a shortage of money. The abundance of silver in the Spanish possessions in America, mined in newly discovered deposits, apparently enabled the Spaniards to coin money for circulation in the overseas possessions on a wider scale. It became more profitable to sell silver in coins than to market silver as a commodity.

In any case, during the 17th century the Spanish silver peso, weighing 423.7 grains, was quite widespread throughout the American continent. Gold coins from ``Portuguese'' Brazil, where the production of gold was extended were also imported into English possessions in North America. French and Venetian coins also turned up there. Quite frequently foreign coins were put into circulation by the pirates, who came ashore at the colonies to buy provisions.

It goes without saying that the wide circulation of foreign coins in England's North American possessions could take place only owing to the shortage of legal English currency. This applied equally to French possessions in present-day Canada.

The need for money rose during war periods, even deliveries from the treasuries of the metropolitan countries to pay officials and military men were delayed for various reasons. This, incidentally, further spurred on the introduction of paper money.

It is a fact that in 1685 paper money of different denominations was issued in the French colonies to pay the soldiers and it was to be exchanged for silver money immediately upon the arrival of a vessel from France.

But most definitely the initiative in the issue of paper money was displayed in the selfsame English colony of Massachusetts. In this colony, the lively trading centres of Boston were already functioning in the 17th century.

The direct reason for the issue of paper money was the need to participate in financing the protracted war (1688- 1697) which King William was waging against the French colonies. Owing to the shortage of metallic money credit notes of various denominations were issued in Massachusetts in 1690. They had to be accepted in all official payments on a par with full-value coins. In 1692 these notes, issued for a sum of not more than £7,000 in small denominations, were recognised as legal tender. As such they can be regarded as the first paper money of mandatory circulation introduced in North America on a more or less considerable scale.

In Europe paper money was introduced by the Bank of Stockholm in the 1660s. But nowhere did paper money become so widespread as in North America, especially during the War of Independence. It was also during this period that the economy was hit 'by inflation for the first time.

Without going into a detailed history of the spread of paper money, it may be said that at least a quarter of a century before John Law organised the notorious General Bank in France (1716) and its failure, the colonies in North America were subjected to the trials and tribulations of paper money circulation. It was in the 17th century that paper money really came into its own owing to the disintegration of feudalism, the emergence of capitalism and the formation of a truly world market.

The possibility of the circulation of paper money as tokens of value replacing metallic money was predetermined by the fact that non-full-value coins were already in circulation as substitutes for full-value money. "The fact that the currency of coins itself," Marx wrote, "effects a separation between their nominal and their real weight, creating a distinction between them as mere pieces of metal on the one hand, and as coins with a definite function on the other– this fact implies the latent possibility of replacing metallic coins by tokens of some other material, by symbols serving the same purposes as coins.''12

This is in fact achieved with the help of paper money. How paper money is introduced into circulation depends on the existing conditions. Since paper money is by its nature intended to replace metallic money with intrinsic value (gold and silver), in the classical cases of its use it must be freely exchangeable for full-value money. In this case its rate can be preserved theoretically and practically at the same level as metallic money. In the absence of free exchange the exchange rate of paper money usually declines. Metallic money of full value is preferred. This difference in favour of metallic money becomes greater as more paper money is put into circulation compared with the stock of full-value money really necessary for the current volume of commodity circulation.

If there is an excessive issue of paper money, e.g., during the financial difficulties of a state at war, it becomes so depreciated that its parallel circulation with full-value money becomes impossible. The latter is not put back into circulation by those in whose hands it finally lands, and full-value metallic money disappears. Paper money which cannot be exchanged, in turn, loses its purchasing power.

But let us recall that besides being a medium of circulation money also acts as a means of payment. In this function any liabilities can act as substitutes for full-value metallic money. Duly endorsed, they can circulate as a kind of paper money but of a different economic essence. This is money with the help of which liabilities ``circulate'' or are transferred from one person to another. In contrast to paper money of mandatory circulation, it is credit money, which circulates in the credit sphere. Marx pointed out that "credit-money springs directly out of the function of money as a means of payment. Certificates of the debts owing for the purchased commodities circulate for the purpose of transferring these debts to others.''13

Such credit money at the higher stage, e.g., present-day bank notes, do not differ outwardly from paper money as tokens of value which replace full-value metallic money. But at its initial stage such credit money was an undisguised liability, a receipt or bill, drawn up in a proper form, often on special blanks. They appeared in all countries at a comparatively high development level of commodity circulation. At first such bills circulated only with the endorsement of the holder.

Originally credit money was, as it were, the forerunner of oncoming capitalism; now it is the main medium of circulation of capital. It is not by chance that credit money was introduced and most developed in England, where capitalism gained its full stature sooner than in other countries.

Credit money in the form of commodity bills originated in private trade. The issue of a bill by one merchant to another presupposed that the buyer of the commodity would repay the bill as soon as the commodity was resold. But if the bill holder who had sold the commodity himself needed money to pay for another commodity or to redeem his debts, he could settle his accounts with the bill by endorsing it and transferring it to his creditor. The repeated transfer of bills represented their circulation as primary credit money.

The receipts of London goldsmiths to whom rich urban dwellers gave their money or jewellery for safekeeping acted as credit money even before the 17th century. But their circulation was limited.

The circulation of bills that goldsmiths issued to their creditors represented a big step forward in the development of credit money. The great trust enjoyed by the persons who issued these bills ensured them wider circulation, at first, apparently also with the endorsement of the creditors. Only the last step remained, to issue a bill payable to the holder (and not to a definite person as in a bill of exchange) and in certain amounts convenient for settlements, for these bills to turn into bank notes. This actually happened in the first decades of the 18th century.

As for the goldsmiths themselves, they even long before this, in fact, performed the functions of bankers, because they accepted money for safekeeping and furnished credits to private persons, especially to kings and the feudal nobility at quite high, usurious interest rates.

When paper money appeared, royal governments began to utilise it as an additional source of replenishing their treasury instead of the old method of debasing coins. That is why the policy of the English kings, from the 17th century onwards, amounted to manipulating paper money circulation. At the same time, for example, the first Romanovs in Russia were still compelled to resolve their financial difficulties with the help of the old methods, like reducing the weight of coins (Tsar Mikhail Fedorovich) or the issue of non-full-value copper coins (Tsar Alexei Mikhailovich).

The financing by goldsmiths of the English royal court which repaid them with tax revenue was profitable for the creditors and demanded an ever greater mobilisation of resources. To attract them, goldsmiths introduced the payment of interest for the money deposited with them for safekeeping. "Around 1645 they devised a method of placing this custom on a quite solid basis. They began to pay four per cent for the sums placed in their safekeeping.''14 This comparatively high interest for deposits was easily compensated at that time because the goldsmiths themselves furnished credits at 10, 20 and even 30-per cent interest. The burden of such usurious credit accelerated the disintegration of feudalism, while money capital, personified originally by ordinary goldsmiths, turned into bank capital.

The power and influence of private English banks in the second half of the 17th century rose to such an extent that the royal government could not but reckon with it. Forced to resort to their help, it was prepared, if the occasion presented itself, to wage a struggle against them. Thus, in January 1672, Charles II declared that his treasury was unable to pay the debts to the goldsmiths and temporarily closed it. This formal declaration of the treasury's bankruptcy triggered off a chain reaction. Some of the King's creditors went bankrupt but the majority of the bankers suffered only a partial loss of their capital. Apparently their accumulations were sufficient to withstand such a financial blow.

The high credit interest rates which depended on the discretion of the private London bankers were not only oppressive for the royal government, but also restrained the development of trade within the country and with the overseas possessions. The incipient world market demanded the organisation of banking and credit along wider public lines. Economic thinking in the 17th century persistently worked on these problems both in England and other European countries. Many schemes for organising banking and credit appeared, including some for setting up a central bank with the functions of a state bank (the chief credit institution of a country), the establishment of mortgage banks for supporting the feudal landowners who were being ruined, banks for financing trade, and so on.

For us it is important to trace the development of the principles for centralising credit and issuing credit money which subsequently received their consummate form in the activities of the central national banks which play the decisive part in the contemporary world monetary and financial system of capitalism.

• 1V. I. Lenin, Collected Works, Vol. 29, p. 473.
• 2Karl Marx, Capital, Vol. I, Moscow, pp. 7-8.
• 3Karl Marx, Capital, Vol. I, p. 69.
• 4Karl Marx, A Contribution to the Critique of Political Economy, London, 1971, p. 52.
• 5See W. Stanley Jevons, Money and the Mechanism of Exchange, London, 1899, p. 55.
• 6 There is no exact English equivalent of the Russian 'deubsu' and 'nenojiHoifeiiHbie denbsu'. We use the term 'full-value money' to designate specie which contains the full specified quantity of precious metal and 'non-full-value money' for worn, abrated or deliberately debased coins which do not contain the full specified quantity of precious metal.–(Translator).
• 7The Travels of Marco Polo, London, 1928, p. 174.
• 8 Ibid.
• 9Ibid.
• 10Ibid.
• 11Arthur Nussbaum, A History of the Dollar, New York, 1957, p. 7.
• 12Karl Marx, Capital, Vol. I, p. 126.
• 13Ibid., p. 139.
• 14I. I. Kaufman, Isloriya bankovskogo dela v Velikobritanii i Irlandii (History of Banking in Great Britain and Ireland), St. Petersburg, 1877, p. 165.