The reason for that is that gold itself, as money, is only a proxy for universal labour/social labour-time. If social labour-time, embodied in commodities, is 1 million hours, its equivalent cannot be 2 million hours. If a ¼ ounce of gold has a value of 100 hours, then the gold equivalent form of the value of commodities is 10,000 ¼ ounces, and so coins or notes, in circulation, as tokens representing this 10,000 ¼ ounces of gold cannot exceed, in their total nominal value, this 10,000 ¼ ounces of gold, which is itself merely a proxy for 1 million hours of social labour-time.
If these coins or notes, thrown into circulation, do exceed that limit, it cannot change the underlying law, as Law, the Pereire Brothers, or MMT believe, and the result is that the value of each coin or note is itself reduced, so that, in total, the sum of value remains the same. If 20,000 gold or other coins are put in circulation, then the value of each coin is halved, even if it is itself a full weight ¼ ounce gold coin. The result is that such full weight coins would be melted down into bullion, because their value as gold bullion would be double that of their value as coin.
However, any coin, containing less metal than ⅛ ounce of gold, could not be melted down into bullion of higher value than the coin. This is the basis of Gresham's Law that bad coin drives out the good. It is also the basis of the point that Marx made earlier. As far as all of the excess coin that remains in circulation they retain the name £1, and so the consequence is that money prices rise – inflation. Ultimately, the state has to establish a new mint price for coins based on this lower weight of gold represented by the coins, i.e. instead of a coin representing ¼ ounce of gold, it represents ⅛ ounce of gold. But, what if silver, or copper coins represent the amount of gold?
Suppose 14 million £1 gold coins should be in circulation, and these are replaced by 14 million silver coins. As Marx describes, for money tokens, which function as currency, not as money itself, it is not the actual value of the material content of the coin that matters but, merely, its quantity in circulation. If 14 million gold coins are in circulation, representing 14 million ¼ ounces of gold, it does not matter if these coins actually have a material content of ⅛ ounce of gold. They are tokens representing money, not money itself. So long as they do not purport to represent a greater total of value of money than they represent, they can function perfectly well. That is a function of the quantity of them put into circulation.
Its that which enables gold coins to be replaced with silver, copper and nickel, and paper tokens. But, what then, happens if any of these tokens are put into circulation in excess of the money they represent? In the same way that ⅛ ounce gold coins could not be turned into bullion (because the value of the material is less than the value of the coin), so that applies to these other metals and to paper. So, they would remain in circulation. That is why the realms in which they are allowed to circulate, as currency, is then restricted. If silver coins purporting to represent 14 million ¼ ounces of gold (which itself is proxy for, say, 1 million hours of universal labour) are actually in circulation to the extent of 28 million coins (nominally representing 2 million hours of universal labour) then each coin's value is halved, because, in total they cannot represent more money than the amount of universal labour (value of commodities) for which they are the equivalent form of value. The devalued coins/notes, however, cannot be driven out of circulation, because the actual material value of the coin/note, even at the full weight of ¼ ounce of silver, is only 1/15 of a ¼ ounce of gold. The coin would still have a value 7.5 times greater than its silver content.
So, these coins would remain in circulation, and, as each coin retains the name £1, the consequence is that prices double, wherever they are allowed to function as currency. If they operate as legal tender everywhere that gold coins would have circulated, then not only would prices in specific spheres double, but the general price level would double, and that would continue to be the case until such time that the coins were put into circulation in such excess that the value of each coin fell below the value of ¼ ounce of silver. But, in that event, as Marx describes, silver would then have replaced gold as the money commodity itself. The standard of price, £1, would no longer be defined as ¼ ounce of gold, but as ¼ ounce of silver. Or, put another way, if 1 million ounces of gold, as money, was the proxy for total social-labour-time, and its equivalent form, it is now 15 million ounces of silver that constitutes the proxy for this same amount of social labour-time, and is its equivalent form.
The same is true if copper then replaced silver as the material of coins. That is why the realms in which such coins are allowed to function, as legal tender, is limited by law. You cannot, for example, buy a car using a lorry load of 2p coins. But, what, then of paper, because, as Marx pointed out, unlike silver or copper, the paper has essentially no value whatsoever. As Marx pointed out, earlier, when copper coins were in excess, because they could not be used as legal tender, in other spheres, shopkeepers had to take them out of circulation, and melt them down. A few years ago, when the price of copper rose sharply, the metal value of some 2p coins, in Britain, was higher than 2p, so that if you had enough of them, it was profitable to melt them down so as to sell the copper.
But, that is not true of paper notes. Gold, silver and copper each have use value, as commodities, if coins are melted down, because they are commodities with use-value, when used in jewellery, electronic circuits and so on. But the paper in a note has essentially no use value. Theoretically, a huge quantity of notes could be mashed, and used to make new paper, but inflation would have to reach astronomical levels beyond that of Weimar before that would be possible. For some paper notes, such as Dollars, which act as reserve global currency, they can operate outside the borders of the issuing state, but that is not the case with most currencies, and, as seen in 1971, when De Gaulle demanded payment in gold, rather than Dollars, there are limits to its operation, even for a reserve currency.
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