Submitted by Noa Rodman on February 26, 2017


The present world monetary crisis has given rise to quite a few theories of money circulation used by bourgeois economists and financial tycoons for explaining its cause and exploring acceptable ways of coping with it. On closer scrutiny, however, some of the ``original'' theories often turn out to be a mere rehash of paper money ``theories'' known long ago. This applies particularly to the so-called quantity theory of money.

Its basic principles were formulated in the 1670s in the works of David Hume, an English philosopher and economist and the most outstanding exponent of this theory. In Hume's interpretation, the quantity theory of money proceeds from the premise that commodities enter the process of circulation without a price, while gold and silver, full-value money, are without value. The price of commodities and the purchasing power of money, as it were, arise in the process of circulation from the quantitative proportion of the mass of commodities and the quantity of money. Thus, gold and silver receive value to the extent to which they function as money. Their value is a result of their function as money.

This functional viewpoint of the nature of the value of money, gold and silver, with the development of paper money circulation, often helped to identify paper money with metallic money circulation and give preference to the former over the latter. If gold and silver receive their value from their function as money and the level of this value is determined by the proportion of their quantity to the mass of commodities, why not also carry this over to paper media of circulation? Hence the views of bourgeois economists who denied the objective laws of the value of money and began to replace them by subjective factors–- legislative acts of the state which determine the nominal value of a money unit.

This nominalist theory of money blossomed to the full before the First World War in the works of G. F. Knapp, a German economist, and some other bourgeois academics.

After the First World War this theory, in one way or another, was developed by the Keynesians, and after the Second World War by the apologists for American finance capital and the proponents of giving preference to the American dollar over gold.

All these theories are cognate with Hume's theory of money circulation because it underestimated precious metals and their role as money. Once labour value is not inherent in precious metals and their value stems from their money function and quantitative relations to the mass of commodities, this opens the way for further justifying a similar function for paper media of circulation.

When, however, credit and paper money began to play an essential part as substitutes for full-value metallic money, the functional quantitative theory of money circulation first led to an identification of all circulation media and then also to giving preference to artificial symbols of money. The wrong premises logically led to wrong conclusions.

In opposition to the functional quantitative theory of money other views of the nature of exchange value and money emerged in the 18th century. Views which contained rudiments of labour value were developed in classical bourgeois political economy and received their consummation in the works of Marx.

Recognition of the intrinsic labour value of commodities presupposes that the mass of commodities, entering into the process of circulation, has a definite sum of prices. These prices are merely specified by the supply and demand in the conditions of market competition. Thus, prices do not depend on the quantity of money in circulation. Money itself as the money metal enters into circulation having an immanent labour value. That is why, if it is a question of purely metallic money circulation, a definite quantity of money (gold and silver) is needed for the circulation of ' a given quantity of commodities available in the country. Just as the weight of a commodity is determined by weights because they themselves have weight, similarly the prices of commodities in the process of circulation are determined ! by full-value metallic money because this money has immanent value.

If there is more of monetary metal than is needed for circulation of the given mass of exchange values of commodities the surplus precious metals will assume the form of hoards, will be utilised for production needs, jewellery, and so on.

During a shortage of metallic money hoards, conversely, are turned into functioning money, as deferred payment arises and commodity credit and credit money are generated. The latter, discharging its function under normal conditions, returns to its starting point. If it was an ordinary ' bill, which circulated thanks to the endorsements, it ultimately returns to the person who issued it because upon maturity it will be presented to him for payment by the last holder of the bill. If it takes the form of bank notes, they will return to the bank by way of repaying the bill discounted by the bank.

The shortage of metallic money can also be alleviated by symbolic money tokens, paper money, if its quantity does not exceed the quantity of full-value money it replaces. It is necessary to differentiate the circulation of credit money as a medium of payment. It is determined by the sum of prices of commodities alienated or already transferred into other hands on which payments have been deferred. In that case the quantity of money as a medium of payment depends on variable factors, the terms of the commercial credits.

As for the direct circulation of commodities in the form of acts of purchase and sale, in this case the necessary quantity of money depends on the objectively existing sum of the prices of commodities divided by the number of turnovers of the same money units. During the existence of only metallic money circulation or during the free exchange of paper circulation media for full-value metallic money at their nominal value, say, under the gold monetary standard, money circulation has a tendency to regulate itself automatically.

The problem of the quantity of money begins to arise because the media of circulation, including metallic and paper money, are available in a quantity larger than necessary for commodity circulation. Then paper money, as was the case for a long time in Russia (from the 1770s and up to the mid-19th century) circulates at a rate considerably lower than its nominal value. This disagio from the nominal value of paper money in general corresponds to the surplus of substitutes for full-value money as compared with the quantity of metallic money needed with the given sum of prices of commodities in circulation. It should be emphasised that the comparatively high rate of paper money in Russia was maintained by artificial measures, like the fact that fiscal agencies were strictly ordered by the Manifesto of April 9, 1817 to collect taxes only in paper money. Consequently, for the payment of taxes it was necessary to obtain paper money, exchanging for this purpose silver coins or selling goods for paper money.

A case was recorded when the Penza treasury office was strictly reprimanded by the Finance Ministry on May 18, 1817 for the fact that the Penza and Insar uyezds of the Penza Gubernia made payments of taxes not in paper money but in silver coins at a definite rate. The order of the Finance Ministry on this score stated: "Henceforward only state paper money or copper coins shall be demanded and received in payment of all taxes, and as for silver and gold they shall not be accepted from anyone on the penalty of the severest punishment under the law.''1 Copper coins in this case were mentioned alongside paper money because their rate was also maintained by artificial measures to avoid a considerable disagio. In this case the Russian financial authorities displayed a certain far-sightedness and understanding of the nature of the mandatory circulation of paper and non-full-value metallic money.

For the circulation of paper money it is highly important to what extent the treasury itself accepts it in payment of taxes and state levies and also for other state services, e.g., the post and telegraph.

In the 18th century and in the pre-Marxian period in the 19th century most West European economists had an insufficient understanding of the nature of paper money as tokens of value of mandatory circulation. They confused their circulation with bank note circulation or the circulation of credit money. This was displayed both in the theoretical inability to find rational criteria for the issue of both and in the practice of government financial policy.

David Ricardo and a number of other economists criticised in the works of Marx introduced great confusion into the theory of money circulation.

In his study of money circulation Ricardo was inconsistent and also confused credit and paper money. He rightly held that the quantity of circulation media in a country initially depends on the value of the unit of measurement of money and the sum of exchange values. Inasmuch as both are objectively determined magnitudes, mere paper tokens of the value of money, in his opinion, could replace gold if they were issued in a proportion corresponding to the value of the replaced money metal. But, according to Ricardo's theory, as long as at the given value of gold or the money tokens replacing it the quantity of money in circulation is determined by commodity prices, the discrepancy between media of circulation and the commodity mass subject to circulation arises at once as soon as the sum of exchange values and, consequently, also of commodity prices begins to decline or rise.

Given a decrease of exchange values owing to a reduction in the commodity mass or a decline in its price as a result of an increase in labour productivity and a cutback of production costs, the amount of money in circulation will be greater than is necessary. Given an increase of exchange values owing to a growth of the commodity mass or a rise in its price, the quantity of money in circulation will be smaller than is needed. In both cases gold, discharging the function of a medium of circulation, in accordance with Ricardo's views, will stand as a symbol of value either below or above its real value. Thus, the original exchange value of gold as a commodity determined by labour time and its value as a medium of circulation constantly diverge. Naturally, the gold substitute, paper money, must follow the movement of the price of gold. During a period of a decrease in value it must be depreciated for the same reason as gold and also as a result of the fact that it is issued in excessive quantities. Ricardo ignored the fact that, besides its function as a medium of circulation, gold has other functions, including the possibility of becoming a hoard.

Proceeding from his theory of the functional fluctuations of the value of gold in one country, Ricardo held that in different countries these fluctuations in the value of gold arising from different quantitative proportions of their functioning as money may go in opposite directions. This served as the basis for his theory of the migration of gold from country to country. According to Ricardo's theory, gold should flow out of countries with depreciating media of circulation as compared with the exchange values of other commodities into countries where a reverse tendency occurs, namely, a rise in the value of circulation media.

The function of precious metals as world money serving as a means of settling balances of payments was thus ignored. The movement of gold from country to country was not made dependent on the payment balances but was, as it were, deduced from internal_functions of circulation in^different countries and in different quantitative proportions. In the final analysis, Ricardo's theory, like that of his follower James Mill, did not go far beyond the quantitative theory of David Hume. Mill associated the value of money with the quantity of it directly circulating in a country.

Ricardo elevated the ebb and flow of gold between countries into a kind of absolute of money circulation. And since this ebb and flow of gold quite frequently jolts the economy, it follows that preference should be given to paper money. Preserving all the positive functions of metallic money, paper money, rationally combined with metallic money, had to ``insure'' the bourgeois economy against all the adverse phenomena of a purely metallic money circulation based on gold.

In the first half of the 19th century Ricardo's theory of money adversely influenced government policy in money circulation in some countries.

Proceeding from Ricardo's erroneous theory, Robert Peel devised his well-known system for regulating bank circulation in the 1840s. Peel was the most influential follower of Ricardo's theory of money. The initial premise was the theory's proposition that the metallic part of the totality of circulation media, gold, shifts, as it fluctuates in value, from countries where its value is low to countries with a high value. Thus the value of gold is, as it were, automatically regulated: it rises in the gold-exporting country and becomes cheaper in the importing country. A general level of the value of gold is thus established. From this followed the idea of linking the issue of bank notes with gold in such a way that the issue of bank notes should be automatically regulated by gold. For this purpose, as assumed by the authors of banking legislation in England, the issue of bank notes had to be secured by gold which, with the free exchange of bank notes for gold, guaranteed bank notes from depreciation as compared with gold. The laws of the circulation of credit money in its higher form of bank notes were thus ignored. It is this idea that was embodied in the Bank Charter Act of 1844 put through by Robert Peel.

The Peel Act is repeatedly mentioned in the works of Marx as a striking example of the failure to understand the essence and possibilities of properly regulating the issue of bank notes. We shall therefore examine this Act before analysing the theoretical aspects of the question.

Under the Peel Act, the Bank of England was divided into the two departments of issue and banking. The first represented a simple printery of bank notes, while the second was the bank proper with all the intrinsic functions of such an institution. The essence of regulating the issue of bank notes was resolved in such a way that the issue department could put into circulation, i.e., hand over to the banking department for its operations notes totalling £ 14 million without any gold backing because it was assumed that money circulation in Britain could not actually fall below this sum. As for the issue of bank notes over and above this amount, the issue department was to provide security in the form of gold and silver for the full amount of the issue, i.e., the notes handed over to the banking department. The latter could utilise them in its operations or keep them as a reserve.

If for some reason (e.g., if gold were exported to cover an unfavourable balance of payments) the amount of monetary metal in the department of issue decreased, then the sum of bank notes at the disposal of the banking department had to be reduced. If this reduction coincided with an increase in the needs for means of payment during the economic cycle, it could become the cause of serious complications in the circulation process.

Marx and other economists were highly critical of Peel's Bank Charter Act. The discussion went beyond the bounds of money circulation as such and was carried over into the sphere of bank capital, interest-bearing loan capital.

In the first half of the 19th century problems of loan capital became particularly important in view of the efforts to normalise money circulation upset in a number of European countries by the Napoleonic wars.

Some economists of the so-called banking school, including Thomas Tooke and John Fullarton, assuming the viewpoint of the banker, turned the difference of the money form of income from the money form of capital into a delimitation between circulation media and interest-bearing capital. Tooke and Fullarton equated the bill and the bank note and considered it possible to limit the issue of the latter to the amount secured by bills. They assumed that the circulation of bank notes completes the cycle of circulation of capital and proceeds without a direct connection with the circulation of money as such. Yet in both cases when money as a medium of circulation services in general the spending of incomes (for example, the expenditure of workers' wages during purchases in retail shops), just as when it is used in acts of purchase and sale between merchants themselves in converting the commodity form of capital into the money form and vice versa, circulation media remain as such. They only perform different functions: in the first case they service the spending of incomes, in the second the conversion of one form of capital into another. To put it differently, we have a distinction between the money form of income and the money form of capital, and not a distinction between the media of circulation and capital.

In the broad sense, circulation media can act as a purchasing or payment means during the realisation of an income or the transfer of capital. This circumstance was not of a strictly theoretical, but of practical, significance during the periodically recurring industrial crises. Starting in the sphere of capital circulation, such crises inevitably affected the realisation of the income, in particular the income of the most numerous class, the wage-earners. Today this is vividly displayed during inflation. Originating in the sphere of capital circulation, inflation, intentionally or otherwise, hits the real incomes of wage-earners hardest of all. Their fixed income in the form of the wages fund is the chief source capital used to mitigate in some way the adverse effect of the monetary crisis on capitalist production and capital circulation.

The epoch following the Napoleonic wars in Europe created particularly favourable conditions for studying the movement of capital with the object of laying a theoretical basis for the actual development of capitalism. The point is that during the constant expansion of real accumulation in the form of elements of capitalist production, the accumulation of money capital, money designated for loans, proceeded at an accelerated pace. The accumulation of loan capital presupposed the expansion of credit and ultimately had to facilitate the real accumulation of elements of capitalist production. But the latter ran up against the bounds of individual ownership of capital.

The growing scale of production did not allow one person to accumulate a sum of capital corresponding to the colossally increased size of enterprises. This became especially clear during railway construction, the building of canals and ports because of the transition from sailboats to steamships, and so on. The same also applied to the increasing scale of industrial machine-based production. This predetermined the wide development of the joint-stock form of capital.

Capitalist joint-stock enterprises facilitated the unusual concentration of production in the 19th century. At the same time the joint-stock form in banking promoted the concentration of money capital and the wide expansion of bank credit. Up to a certain time both these processes went in parallel, interacting and accelerating capitalist development through the multilateral credit system.

At a certain point the spreading concentration of production and loan or bank capital inevitably brought into being gigantic monopolies and led to the merger of bank and industrial capital and, on this basis, to the emergence of finance capital and a financial oligarchy. Linked with this was the transition of capitalism to its highest stage, imperialism, at the end of the 19th and the beginning of the 20th century. Thus, the development of pre-monopoly capitalism was completed towards the end of the 19th and the beginning of the 20th century. Thus, the development of pre-monopoly capitalism was completed towards the end of the 19lh century.

Discussing the history of money circulation in general and in the last century in particular, Keynes painted a radiant picture. According to him, the high commodity prices of the period of the Napoleonic wars was replaced by the swift rise in the value of money. In the last 70 years of the 19th century, apart from brief interludes, commodity prices showed a tendency to decline and reached their lowest level in 1896. In his explanation of the phenomenon Keynes, in complete contrast to his general views of the role of money circulation, involuntarily stressed the role of gold: "The metal gold might not possess all the theoretical advantages of an artificially regulated standard, but it could not be tampered with and had proved reliable in practice.''2

We cannot but agree with such a conclusion. What is characteristic is the author's mention of tampering with an artificially regulated monetary unit. It is precisely Keynes's supporters who most often resort nowadays to tampering with paper money.

Within 10-15 years after the Napoleonic wars, the European countries' deranged money systems were put in order. Capitalism as a whole, notwithstanding periodic crises, was in the ascendancy. This, on the one hand, demanded stability of circulation media. On the other hand, the development of capitalism itself provided the basis necessary for the stability of money circulation. Hence the general tendency to stabilise media of circulation in capitalist countries in the second half of the 19th century on the basis of the gold or silver standard.

Since national precious metal coins could not be used easily in international circulation owing to the difference in the content of the precious metal and the inconvenience of recalculation caused by big deviations from the decimal system in the parities of national coinage, it became the practice of international monetary circulation to remelt coins into bullion. Subsequently, bullion often had to be reminted into national coins. All this involved a definite economic loss and complicated the mechanism of international currency circulation.

Hence it is not surprising that the idea of unifying coin circulation in different countries spread among economists and political leaders in the second half of the 19th century. The question was raised of organising an international monetary system of circulation, of a more convenient decimal relationship between various national coins, and so on.

An international association for introducing a uniform decimal system of measures of lengths, weights and coins was organised in Paris in 1855. The association had a branch in Britain. In 1858 a proposal on the reciprocal conformity of currencies was made in the United States. International congresses on these questions were held in 1860 and 1863 in London and Berlin. A number of other steps could be mentioned demonstrating the tendencies to consolidate national currencies in the second half of the 19th century and the exploration of ways of internationalising monetary coin circulation.

The idea of such internationalisation was embodied in the convention on the formation of a monetary union in 1865, which came to be known as the Latin Monetary Union and consisted of France, Italy, Belgium, Switzerland and later also Greece. Subsequently many other countries of Europe and even Latin America tried to keep in step, in one way or another, with the monetary system of this union.

In brief, the monetary union aimed essentially to establish unified standards of minting for the purpose of the free convertibility of various national coins within the bounds of every state that was a signatory to the convention or acceded to it. A single standard weight of coins melted from a kilogram of an alloy of a definite grade of gold and silver and also brass was established. For uniformity the weight of coins was fixed in grams and the diameter in millimetres. Their nominal value was also established. For example 3,100 money units were to be minted from one kilogram of a gold alloy. Each coin had to be of 100, 50, 20, 10 and 5 units and correspondingly its weight changed. From one kilogram of silver 20 money units were to be minted. Moreover, each coin had to contain 5, 2 or 1 money units. Correspondingly the weight of the first coin had to be 25 g, the second 10 and the third 5 g of silver, with a certain difference in their diameter.

Thus, with strict observance of these rules, different national coins could be fully interchangeable in international settlements and circulate within the bounds of every member state of the Monetary Union.

For all its shortcomings the existence of the Monetary Union for several decades up to the end of the last century undoubtedly exerted a stabilising influence on money circulation in Europe. Under its effect some states put their monetary systems in order.

Owing to the depreciation of silver, a transition from bimetallism to gold monometallism emerged in the 1870s. Gradually the gold standard was, in one way or another, introduced even in countries (as, for example, in Russia) where for centuries silver had been used as the principal money metal and paper money at a lower rate than metallic money had circulated for more than 100 years. By a decree of December 17, 1885, gold imperials and half-imperials in denominations of 10 and 5 rubles were minted and put into circulation on January 1,1886. The imperials and half-imperials corresponded to40 and20francs; this clearly demonstrates the influence exerted by the idea of the Monetary Union. But in Russia paper credit money in the last quarter of the 19th century was exchanged at the rate of 1.5 rubles per gold ruble. That is why, by the decree of January 3, 1897, the old imperials and semi-imperials were reminted with the same weight and gold content into coins with a nominal value of 15 and 7.5 rubles. This nominal value of gold coins corresponded to the actual rate of paper money at that time. Thus, a gold monetary standard in its pure form was introduced. One ruble contained 17.424 grains of pure gold. In view of the inconvenience for the population of the nondecimal system, gold coins were soon minted with a nominal value of 10 and 5 rubles but an unchanged content of gold of 17.424 grains. In August 1897 the transition to the gold standard was officially declared. At the same time as the declaration of the transition to the gold standard, the State Bank (transformed from the Commercial Bank in 1860) was entrusted with the issue of^credit notes secured by gold. The issue of up to 600 million rubles was secured by gold to the extent of 50 per cent and above that amount by 100 per cent.

Since the bank of issue in Russia, in contrast to some West European banks of issue, was not a joint-stock company but a purely government institution, its credit notes were exchanged for gold and, as it were, represented gold certificates.

The comparative stability of money circulation in European countries during the second half of the 19th century favourably affected the development of credit. Internal and international private and state loans were furnished on an ever wider scale. The absence of sharp perturbations in money circulation facilitated the investment of the savings of all strata of the population in state and other securities with a fixed income. The stratum of rentiers among the middle classes increased. Savings and deposits in banks were of a stable nature.

Keynes had some basis for commenting: "Thus there grew up during the nineteenth century a large, powerful, and greatly respected class of persons, well-to-do individually and very wealthy in the aggregate, who owned neither buildings, nor land, nor business, nor precious metals but titles to an annual income in legal-tender money. In particular, that peculiar creation and pride of the nineteenth century, the savings of the middle class, had been mainly thus embarked.''3

And so, the rentiers turned into the pride of the century. But it was at the end of the 19th century that capitalism entered its monopoly stage, one of whose features is the prevalence of the export of capital over the export of goods. The rentiers' capital, concentrated in powerful banks, was one of the preconditions for the gigantic increase in the role of the banks.

The coalescence of bank capital with industrial corporations led to the creation of powerful groups of finance capital which began to determine government policy aimed at a repartition of the world, which had been divided into colonies over the preceding 150-200 years.

A global war for a redivision of the world was imminent. Preparations for it were accompanied by an arms race and an unusual intensification of militarism. In this context a part of Engels commentary on the third volume of Marx's Capital merits special attention. It gives a by no means idyllic picture of capitalism on the threshold of the imperialist stage.

``Is it possible," Engels wrote, "that we are now in the preparatory stage of a new world crash in unparalleled vehemence? Many things seem to point in this direction. Since the last general crisis of 1867 many profound changes have taken place. The colossal expansion of the means of transportation and communication–ocean liners, railways, electrical telegraphy, the Suez Canal–have made a real worldmarket a fact. The former monopoly of England in industry has been challenged by a number of competing industrial countries; infinitely greater and varied fields have been opened in all parts of the world for the investments of surplus European capital, so that it is far more widely distributed and local over-speculation may be more easily overcome. By means of all this, most of the old breeding-grounds of crises and opportunities for their development have been eliminated or strongly reduced. At the same time, competition in the domestic market recedes before the cartels and trusts, while in the foreign market it is restricted by protective tariffs, with which all major industrial countries, England excepted, surround themselves. But these protective tariffs are nothing but preparations for the ultimate general industrial war, which shall decide who has supremacy on the world-market. Thus every factor, which works against a repetition of the old crises, carries within itself the germ of a far more powerful future crisis.''4

The words of Engels were fully corroborated in the epoch of imperialism which set in before long with its world wars and socio-economic upheavals.

  • 1Quoted from I. G. Tainoy, Zolotoye obrashcheniye t tsentralniye banki (Gold Circulation and Central Banks), St. Petersburg, 1910, p. 38.
  • 2J. M. Keynes, op. cit., p. 12.
  • 3J. M. Keynes, op. cit., p. 13,
  • 4Karl Marx, Capital, Vol. Ill, Moscow, p. 489.