If A, B, and C each trade with one another, on the basis of credit, the requirement for money will depend on the size of the trade between them, and the extent to which their mutual exchanges do not cancel each other. If A sells £10 of goods to B, who sells £10 of goods to C, who sells £10 of goods to A, no money is required, because their mutual debts cancel out. But, if A sells £10 of goods to B, who sells £50 of goods to C, who sells £100 of goods to A, then £90 in money is required. C is owed £50 net, whereas B is owed £40 net, whilst A owes £90 net.
Because, the amount of money that will be required to balance these payments, at any one time, is uncertain, an adequate reserve fund must be maintained, based on experience, to cover it, and this applies equally to balancing payments in the international economy, as with balancing international payments.
In Capital II, it was also described how various reserve funds were required, at minimum levels, because of the need to accumulate surplus value, for it to be used to buy additional productive-capital, or as depreciation funds, to cover the replacement of fixed capital. These form part of the general reserve funds of money in the national economy.
“It also follows from this that under certain circumstances a drain of gold from the Bank to the home market may combine with a drain abroad. The question is further complicated however by the fact that this hoard is arbitrarily burdened with the additional function of serving as a fund guaranteeing the convertibility of bank-notes in countries, in which the credit system and credit-money are developed. And in addition to all this comes 1) the concentration of the national reserve fund in one single central bank, and 2) its reduction to the smallest possible minimum.” (p 453-4)
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