There is, then, Marx says a contradiction between the money commodity – gold – as standard of prices/unit of account, as against its function as currency. As standard of prices, it is the value of gold for a given amount that is determinant. In other words, if the value of gold is 10 hours of labour per ounce, then it is this material content of the standard of prices that is determinant. If this ounce of gold has the name £1, and a metre of linen has a value of 10 hours labour, then the price of the metre of linen is £1. However, as currency, it is not the material content of the currency (whether of precious metal or paper) that is determinant, but merely the quantity of the currency put into circulation, i.e. the amount of total social labour it nominally represents.
“when money is not just imaginary but must be present as a real thing side by side with other commodities, its material is irrelevant and its quantity becomes the crucial factor. Although whether it is a pound of gold, of silver or of copper is decisive for the standard measure, mere number makes the coin an adequate embodiment of any of these standard measures, quite irrespective of its own material...
The rise or fall of commodity-prices corresponding to an increase or decrease in the volume of paper notes – the latter where paper notes are the sole medium of circulation – is accordingly merely a forcible assertion by the process of circulation of a law which was mechanically infringed by extraneous action; i.e., the law that the quantity of gold in circulation is determined by the prices of commodities and the volume of tokens of value in circulation is determined by the amount of gold currency which they replace in circulation. The circulation process will, on the other hand, absorb or as it were digest any number of paper notes, since, irrespective of the gold title borne by the token of value when entering circulation, it is compressed to a token of the quantity of gold which could circulate instead.”
In other words, if the total value of commodities to be circulated is equal to 1,000 hours of labour, its equivalent form/money is also 1,000 hours, and if the money commodity is gold, whose value is equal to 10 hours per ounce, 100 ounces of gold is its equivalent form. That can be represented by paper notes, but the total value represented by those notes cannot exceed 1000 hours of labour/100 ounces of gold. If 200 £1 notes are issued, or 100 £5 notes, this exceeds the money they represent. The value of each note, must thereby, be reduced accordingly – compressed to the value of money it represents – but the standard of prices, i.e. the £, remains constant, and so this reduction in value of the note can only be manifest in a rise in prices – inflation.
To the extent that such notes are redeemable against the money commodity, any such excess will result in them being exchanged for it, but that is why such exchangeability is restricted or ended.
“Gold circulates because it has value, whereas paper has value because it circulates. If the exchange-value of commodities is given, the quantity of gold in circulation depends on its value, whereas the value of paper tokens depends on the number of tokens in circulation. The amount of gold in circulation increases or decreases with the rise or fall of commodity-prices, whereas commodity-prices seem to rise or fall with the changing amount of paper in circulation. The circulation of commodities can absorb only a certain quantity of gold currency, the alternating contraction and expansion of the volume of money in circulation manifesting itself accordingly as an inevitable law, whereas any amount of paper money seems to be absorbed by circulation.”
(ibid)
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