In the light of what was said previously, in relation to the Weimar inflation, Marx's comments here have to be read carefully.
“The sagacious Mr. Mill thinks that if one-pound notes are issued
"as advances to manufacturers and others, who pay wages ... the notes may get into the hands of others who expend them for consumption, and in that case the notes do constitute in themselves a demand for commodities and may for some time tend to promote a rise of prices" [2066].
Does Mr. Mill assume, then, that manufacturers will pay higher wages because they pay them in paper instead of gold? Or does he believe that if a manufacturer receives his loan in £100 notes and exchanges them for gold, these wages would constitute less demand than if paid immediately in one-pound notes? And does he not know that, for instance, in certain mining districts wages were paid in the notes of local banks, so that several labourers together received one five-pound note? Does this increase their demand? Or will bankers advance money to manufacturers more easily and in larger quantities in small notes than in large ones?” (p 556)
The argument of inflation as a monetary phenomenon is indeed that where too much paper is put into circulation, employers will be prepared to pay higher nominal wages, precisely because this same excess of paper enables that employer to charge higher nominal prices for their own commodities. In other words, the devaluation of the money tokens raises the prices of all commodities measured by it. In fact, without the mechanism of this “money illusion”, Fordism could not have worked. Fordism worked, because rising productivity resulted in a reduced value of labour-power, which meant that relative surplus value increased, even as real wages rose. But, workers would resist any fall in nominal wages this implied, even if their real wages rose. Money illusion meant that nominal wages could also be seen to rise.
Marx understood that an increased volume of money tokens meant that their value fell, and so led to inflation, but he is talking about something different here. What Marx is criticising is a form of commodity fetishism, which here takes the form of a fetish for gold as money. Mill seems to believe that there is something specific about gold which makes it money, as opposed to it simply being the money-commodity; a physical manifestation of money, i.e. the universal equivalent form of value.
This was the mistake of Ricardo, which confuses the commodity gold with money, even though not all gold does act as money. The requirement of circulation is that only sufficient currency is issued as is required to circulate the total value of commodities within the economy. It does not matter whether that currency is in the form of gold, silver, bank notes or whatever. However, if too much of whatever this currency is is put into circulation there will be inflation and speculation, and if too little, there will be deflation, money hoarding, and a credit crunch.
Engels comments,
“This singular fear which Mill has for one-pound notes would be inexplicable if his whole work on political economy did not reveal an eclecticism which shows no hesitation in the face of any contradiction. On the one hand, he agrees on many points with Tooke as opposed to Overstone; on the other, he believes that commodity-prices are determined by the quantity of available money. He is thus by no means convinced that, all other conditions being equal, a sovereign will find its way into the coffers of the Bank for every one-pound note issued. He fears that the quantity of circulating medium could be increased and thereby devaluated, that is, commodity-prices might rise. This and nothing more is concealed behind the above-mentioned apprehension.” (p 556)
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