These circuits of money may be large or small. For example, Marx gives the case of a manufacturer who takes money from the bank on a Monday, to pay wages, which the workers use to buy goods from retailers, over the weekend, and the retailers pay the money back into the bank on a Monday.
“Hence, if we consider the process of circulation in a country during a definite period, for instance a day, then the amount of gold required for the realisation of prices and accordingly for the circulation of commodities is determined by two factors: on the one hand, the sum total of prices and, on the other hand, the average number of circuits which the individual gold coins make. The number of circuits or the velocity of money circulation is in its turn determined by, or simply reflects, the average velocity of the commodities passing through the various phases of their metamorphosis, the speed with which the metamorphoses constituting a chain follow one another, and the speed with which new commodities are thrown into circulation to replace those that have completed their metamorphosis.” (p 102-3)
So, in periods of more rapid economic activity, this greater quantity and speed of transactions, T, leads to more money being required in circulation, some of which is accomplished by a greater velocity of circulation, arising automatically from more frequent transactions. In Capital III, Marx also sets out how some of this increase in currency is effected by an automatic increase in commercial credit.
“Commodity circulation is the prerequisite of money circulation; money, moreover, circulates commodities which have prices, that is commodities which have already been equated nominally with definite quantities of gold. The determination of the prices of commodities presupposes that the value of the quantity of gold which serves as the standard measure, or the value of gold, is given. According to this assumption, the quantity of gold required for circulation is in the first place determined therefore by the sum of the commodity-prices to be realised. This sum, however, is in its turn determined by the following factors: 1. the price level, the relative magnitude of the exchange-values of commodities in terms of gold, and 2. the quantity of commodities circulating at definite prices, that is the number of purchases and sales at given prices.” (p 103)
In other words, as described previously, MV = PT. But, again, this applies with money not money tokens. And, Marx then explains why the amount of money required in circulation may decline, even as prices are rising. This is a lesson for central banks trying to reduce inflation, by seeking to create recessions, by raising rates, rather than reducing the supply of currency. Suppose a gram of gold (£1) has a value equal to 100 hours of labour. A hundred kilos of corn has a value of 10 hours of labour. The price of corn, P, is then £0.10 per kilo (0.10 grams of gold). If 1,000 kilos of corn are to be circulated, then PT = £0.10 x 1,000 = £100 = 100 grams of gold. If the value of corn rises to 12 hours labour = £0.12 per kilo, as a result of lower social productivity, and, for the same reason, the quantity to be circulated (which may be because less is produced, and/or because less is demanded at this higher price) falls to 800 kilos, then, PT is, now, £0.12 x 800 = £960 = 960 grams of gold.
When money takes the form of gold, or gold coins, then the amount put into circulation can be adjusted on the above basis, but, with money tokens, such as paper notes, this is no longer the case. So, £1,000 in paper notes might, now, remain in circulation, whilst, in reality, representing only £960 in money (social-labour-time). Each note would, thereby, be devalued by 4%, meaning that there would be inflation of 4% in the general price level. It may be the case that the reduction in transactions would cause a consequent reduction in the velocity of circulation, avoiding this problem, however.
“...the velocity of currency can make up for its quantity only to a certain extent, for an endless number of separate purchases and sales take place simultaneously at any given moment.” (p 105)
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