“It is determined by the rate of exchange which expresses the standing of international payments and the interest rates in the different markets. The bullion trader as such acts merely as an intermediary of the results.” (p 320)
The quantity of money in circulation is a function of its value and the value of commodities to be circulated, and payments to be made plus the requirement for a certain quantity to be in the form of hoards and reserves. It is also a function of the velocity of circulation, but this in turn, depends upon the pace of commodity exchanges and payments.
If economic activity is brisk, more commodities will be sent to market, and will be bought more quickly. The money received will then more readily and quickly be utilised to buy inputs, so that the number and value of transactions will rise.
So long as the money required for this is in the form of some money-commodity such as gold, then as was demonstrated in Capital II, its supply is no different than the supply of other metals such as iron. The only difference is that the producer of iron is paid in money, whereas the gold producer is already the producer of the money-commodity. They cannot be paid for the supply of gold in gold. In return for supply of the money-commodity, they receive in return the commodities they require. Instead of C – M – C, their circuit is immediately M – C.
“However, so far as the movement of precious metals on the world-market is concerned (we here leave aside movements expressing the transfer of capital by loans — a type of transfer which also obtains in the shape of commodity-capital), it is quite as much determined by the international exchange of commodities as the movement of money as a national means of purchase and payment is determined by the exchange of commodities in the home market. The inflow and outflow of precious metals from one national sphere of circulation to another, inasmuch as this is caused merely by a depreciation of the national currency, or by a double standard, are alien to money circulation as such and merely represent corrections of deviations brought about arbitrarily by state decrees.” (p 320)
In other words, its not just the producers of precious metals who exchange them for commodities. Gold and silver in the possession of one country is transferred to another country to cover the difference between the value of commodities sold by one to the other, compared to the commodities it bought from them. This is just like in a national economy the value of all exchanges do not balance out as Mill, Say and Ricardo believed. A might buy £10 of commodities from B, whilst B buys £20 of commodities from A, and this is true as far as if there are millions of such transactions between many different people. The difference in all of these exchanges is made up by the payment of money, as universal equivalent form of value.
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