Capital III, Chapter 34 - Part 2

“Whence comes the periodic general fall in commodity-prices? From the periodic rise of the relative value of money. Whence the general periodic rise in prices? From the periodic decline in the relative value of money. It might have been stated with equal truth that the periodic rise and fall of prices is due to their periodic rise and fall. ...Once the tautology is admitted as a causal relationship, the rest follows easily. A rise in commodity-prices is caused by a decline in the value of money and a decline in the value of money is caused, as we know from Ricardo, by an over-supply of currency, i.e., a rise in the volume of currency over the level determined by its own intrinsic value and the intrinsic value of commodities. Similarly, a general decline in commodity-prices is explained by a rise in the value of money above its intrinsic value in consequence of under-supply of currency. Thus, prices rise and fall periodically, because there is periodically too much or too little money in circulation.” (Quoted from “A Contribution”) (p 547-8)

Where prices rise even when the currency has been contracted, or vice versa, it can simply be asserted that this must be due to the fact that the amount has risen or fallen relative to the quantity of commodities to be circulated, rather than this reflects either a change in the value of commodities, or an overproduction of commodities. It must be noted here that its not the case that prices generally may not rise or fall, because of a fall or rise in the value of money. Commodity price inflation has been muted since the late 1980's, despite a massive increase in the quantity of money tokens. The reason the inflation has been muted is because of a huge rise in productivity, which reduced the value of commodities. Had there not been money printing, and an expansion of credit, the prices of commodities would have actually fallen, as indeed in Japan they did. It is partly because of the problems that such deflation causes, that money was printed, and credit was created. The problem is that the explanation of rises and falls of prices solely on the basis of the value of money, which resolved itself into a pure quantity of money theory, was incomplete and inadequate.

As Marx sets out in “A Contribution”, with a metallic currency, according to Ricardo, if there is an under supply of currency, domestic prices fall. Commodities are exported to where prices are higher. Then gold flows in, in exchange for these commodities. This results in an increase in currency, and domestic commodity prices rise, and vice versa.

Marx comments in “A Contribution”,

“But, since despite these general price fluctuations which are in perfect accord with Ricardo's metallic currency, their turbulent and violent form, their crisis form, belongs to the period of developed credit system, it is crystal clear that the issue of bank-notes is not exactly regulated by the laws of metallic currency. Metallic currency has its remedy in the import and export of precious metal, which immediately enters circulation as coin and thus, by its inflow or outflow, causes commodity-prices to fall or rise. The same effect on prices must now be exerted artificially by banks through imitating the laws of metallic currency. If gold is coming in from abroad it proves that currency is in under-supply, that the value of money is too high and commodity-prices too low, and, consequently, that bank-notes must be put into circulation in proportion to the newly imported gold. On the other hand, notes must be withdrawn from circulation in proportion to the gold exported from the country. The issue of bank-notes, in other words, must be regulated by the import and export of precious metal or by the rate of exchange. Ricardo's false assumption that gold is only coin, and, therefore, all imported gold swells the currency, causing prices to rise, while all exported gold reduces the currency, leading to a fall in prices — this theoretical assumption is here turned into the practical experiment of putting an amount of coin in circulation equal in every case to the amount of gold available.” (A Contribution, p 165-8) (p 548-9)

It was this principle that advocates of the Currency Principle, such as Overstone and Torrens succeeded in getting passed into law, in the 1844 Bank Act, which caused the financial crises and credit crunches of 1847 and 1857.

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