The Currency Principle and the English Bank Legislation of 1844
Engels begins by referring to the critique of Ricardo's theory of money, in “A Contribution To The Critique of Political Economy”. Ricardo argues that the value of metallic money – gold and silver coins – is equal to the labour-time required for the production of the metal in the coin, but only so long as sufficient coins are put into circulation, as are required by the value of commodities to be circulated. If too many coins are issued, the value of money falls and the price of commodities rises, and vice versa. In the former case, gold will be exported, and commodities imported, and vice versa. As a result, both gold and silver coins can have a greater or lesser value than the value of the metal of which they are made.
Ricardo, and the Currency School, derived from this that bank notes, which equally represented a given amount of gold, must be governed by the same law. In “A Contribution To The Critique of Political Economy”, Marx sets out why this cannot be, precisely because the bank note has no value as paper, whereas the metallic coin does. Gold circulates because it has value, whereas paper has value because it circulates.
As a result, Marx sets out the natural mechanism which causes metal to be hoarded, and thereby withdrawn from circulation, when too much has been minted. But, this does not apply to paper money tokens, which thereby continues to circulate and so depreciates.
It was on Ricardo's theses, and its elaboration by the Currency School, which included people like Overstone, that Robert Peel's Bank Act of 1844 was based.
David Hume has elaborated previous falls in the values of precious metals, in the 16th and 17th centuries, which resulted from the discovery and plundering of South America. This had been one means of primary capital accumulation, and enrichment of capitalist farmers.
Similarly, there had been previous examples of the depreciation of bank notes, as individual banks issued them in excess of their own gold reserves to back them, in the 18th and early 19th centuries. But, the crises, such as 1825 and 1836, were of a different order. 1825 was the first crisis of overproduction of capital.
“... these were instead the violent storms in the world-market wherein the conflict of all elements of the capitalist production process discharges itself, and whose origin and cure were sought in the most superficial and abstract sphere of this process, the sphere of money circulation. The actual theoretical assumption from which the school of economic weather prophets proceeds, is actually reduced to the dogma that Ricardo discovered the laws governing the purely metallic currency. The only thing remaining for them to do was to subordinate credit and bank-note circulation to these laws.” (p 547)
Ricardo's theory of crisis could not take account of these kinds of events because they occurred too late for him, and so the experience of them added nothing either to his theory of money.
The problem is that this explanation of a rise or fall in commodity prices, relative to money, which is merely a description, is then used as an explanation for the general rise in prices that occurs during a period of boom, preceding a crisis, and likewise, the collapse of these prices, in the aftermath of the crisis.
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