So, its quite true that Marx, as Martin Thomas says, argued against the quantity theory of money put forward by David Hume and others, and which formed the basis of the 1844 Bank Act. Martin Thomas notes,
“Marx scorned the economists who argued in an economic crisis in 1857 against loosening the law linking the Bank of England's note issue rigidly to its gold reserves.
In Marx's day, there was already an "orthodox" theory of inflation, the "quantity theory". It said that the price level was determined by the quantity of the money-stock as compared to the level of output. Inflation was "too much money chasing too few goods".”
However, this misses the point on two scores. Firstly, whilst Marx scorned the quantity theory of money, as a cause of inflation, he most certainly did not scorn the idea that inflation was caused by injecting too many money tokens into circulation, in relation to the money they represented. On the contrary, that is precisely what he says does cause inflation, in such conditions. Marx notes, as cited above,
“The number of pieces of paper is thus determined by the quantity of gold currency which they represent in circulation, and as they are tokens of value only in so far as they take the place of gold currency, their value is simply determined by their quantity. Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity.”
The point is made also in “Anti-Duhring”, where Marx and Engels write,
“For some years now, the Russian government has been trying to raise the exchange rate of Russian paper money—which it is lowering in Russia by the continuous emission of irredeemable banknotes—by the equally continuous buying up in London of bills of exchange on Russia. It has had to pay for this pleasure in the last few years almost sixty million roubles, and the rouble now stands at under two marks instead of over three. If the sword has the magic economic powers ascribed to it by Herr Dühring, why is it that no government has succeeded in permanently compelling bad money to have the “distribution value” of good money, or assignats to have the “distribution value” of gold?”
So, if this quantity exceeds the money they represent, then, either, where the paper is redeemable in gold, the devalued paper (or other tokens) is redeemed for actual gold, whose market price rises above its mint-price, so reducing the notes in circulation, or, where it is not redeemable, as with fiat currency, it remains in circulation, and so prices are raised accordingly – inflation. But, secondly, Martin does not seem to understand Marx's argument in relation to the crisis of 1857, which was, essentially a repeat of that of 1847.
Marx's concern was that the restriction of liquidity might result in a deflation of prices, and that it resulted in money hoarding, as cash became scarce, and a consequent reduction in the provision of commercial credit between businesses, which led to a greater degree of discounting of commercial bills, an increase in demand for bank credit, and rise in interest rates. In short, it unnecessarily created a credit crunch and financial crisis, which then carried into the real economy. In 1847, more money was required in circulation, because of higher prices resulting from the crop failures, and that meant also more money tokens representing that money, not less!
Engels, makes that clear, in his comments on the 1857 crisis.
“By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.”
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