As previously described, money is the equivalent form of value of all the commodities to be circulated. If the total value of commodities is 1 million labour hours, and ¼ ounce of gold has a value of 100 labour hours, then 10,000 sovereigns are its equivalent. However, as coin, and because each coin circulates, the actual number of coins required is less than this. If each coin performs, on average, ten transactions, in a year, then only 1,000 sovereigns are required. Each sovereign retains the same value, but its velocity of circulation enables it to do the work of ten sovereigns.
“An ounce of gold, no matter how one may twist and turn it, will never weigh ten ounces. But here in the process of circulation, one ounce does indeed amount to ten ounces. In the process of circulation a coin is equal to the quantity of gold contained in it multiplied by the number of moves it makes. In addition to its actual existence as an individual piece of gold of a certain weight, the coin thus acquires a nominal existence which arises from the function it performs. But whether the sovereign makes one or ten moves, in each particular purchase or sale it nevertheless acts merely as a single sovereign.” (p 108)
This is the opposite of the other consequence of its circulation, which is to reduce its value, as a result of its wear and tear. But, again, each coin, even though it may have lost a quarter of its metal content, continues to function as though it were full weight.
“As a pseudo-sovereign, or pseudo-gold, the sovereign continues to perform the function of a legal gold coin. Although friction with the external world causes other entities to lose their idealism, the coin becomes increasingly ideal as a result of practice, its golden or silver substance being reduced to a mere pseudo-existence. This second idealisation of metal currency, that is, the disparity between its nominal content and its real content, brought about by the process of circulation itself, has been taken advantage of both by governments and individual adventurers who debased the coinage in a variety of ways. The entire history of the Monetary System from the early Middle Ages until well into the eighteenth century-is a history of such bilateral and antagonistic counterfeiting, and Custodi’s voluminous collection of works of Italian economists is largely concerned with this subject.” (p 109-110)
Here, we return to the debate between Lowndes and Locke, because, in circulation, a full weight sovereign has no more value than a light sovereign. However, if the light sovereigns are placed on the scales, to be converted to gold, its clear that their actual value, as gold, rather than as coin, is lower.
“When 4,672½ gold sovereigns placed on the scales weigh on the average only 800 ounces instead of 1,200, they will buy only 800 ounces of gold on the gold market: in other words, the market-price of gold has risen above the mint-price. All sovereigns, even those retaining the standard weight, would be worth less as coin than in the shape of bars. Sovereigns of standard weight would be reconverted into bars, a form in which a greater quantity of gold has a greater value than a smaller quantity of gold.” (p 110)
This is Gresham's Law that “bad coin drives out the good”. Anyone with underweight coins would seek to keep it in circulation, where it functions at its nominal value, but, anyone with full weight coins would seek to convert them into bullion. In other words, as a result of the depreciation of the sovereign by a third, the price of 1 pound of gold rises from 1200 full weight sovereigns to 1600. Those who have 1200 full weight sovereigns can convert it into 1 pound of gold bullion, which would now be worth 1600 sovereigns.
“When the decline of the metal content has affected a sufficient number of sovereigns to cause a permanent rise of the market-price of gold over its mint-price, the coins will retain the same names of account but these will henceforth stand for a smaller quantity of gold. In other words, the standard of money will be changed, and henceforth gold will be minted in accordance with this new standard.” (p 110)
This is what was referred to, in the previous chapter, where it was seen that the value of various currencies had fallen to small fractions of their initial value, because, over time, the actual weight of precious metal, represented by the standard, had been massively reduced, even though the name of the currency, originally derived from a weight of metal, remained the same.
“Thus, in consequence of its idealisation as a medium of circulation, gold in its turn will have changed the legally established relation in which it functioned as the standard of price. A similar revolution would be repeated after a certain period of time; gold both as the standard of price and the medium of circulation in this way being subject to continuous changes, so that a change in the one aspect would cause a change in the other and vice versa. This accounts for the phenomenon mentioned earlier, namely that, as the history of all modern nations shows, the same monetary titles continued to stand for a steadily diminishing metal content.” (p 110-11)
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