Chapter 2.C Theories of The Medium of Circulation and of Money - Part 14 of 20

In both the national and international scenarios, on the basis of Ricardo's argument, there is a self-correcting mechanism. In the first, gold production expands so as to reduce the price of gold, and, in the second, gold is exported or imported so that its price is adjusted accordingly.

“To put it in other words, money circulates in different countries only because it circulates as coin in each country. Money is simply specie, and the amount of gold present in a country must enter the sphere of circulation; as a token representing itself it can thus rise above or fall below its value. By the circuitous route of these international intricacies we have managed to return to the simple thesis which forms the point of departure.” (p 177)

Marx, then, analyses this argument put forward by Ricardo, and the selective and arbitrary nature of the examples he uses to justify it.

“He asserts, for instance, that in periods of crop failure, which occurred frequently in England between 1800 and 1820, gold is exported, not because corn is needed and gold constitutes money, i.e., it is always an efficacious means of purchase and means of payment on the world market, but because the value of gold has fallen in relation to other commodities and hence the currency of the country suffering from crop failure is depreciated in relation to the other national currencies. That is to say, because the bad harvest reduces the volume of commodities in circulation, the existing quantity of money in circulation exceeds its normal level and all commodity-prices consequently rise.” (p 177)

This was important, in 1847, when crop failures again led to the need to import food, which was paid for with gold. According to Ricardo's theory, which was the basis of the 1844 Bank Act, such a deterioration in the trade balance, and the higher price of British agricultural products, was the result of too much money/gold, so that the value of gold coins, and of paper notes representing them, fell below the value of gold bullion. In terms of reducing the amount of gold, this was being achieved by the export of bullion, but, to reduce the quantity of notes, the Bank of England had to reduce its note issue, and take notes in.

The consequence was that there was inadequate cash in circulation. Firms hoarded cash, and stopped commercial credit. They were led to discount bills of exchange to obtain cash, and the discount houses could not get cash from the Bank of England, so short-term interest rates spiked, causing a credit crunch. It was exacerbated by the fact that there was a financial bubble, based on railway shares, and speculators could not now raise the cash required to pay for calls on their shares. Many had the money to cover it, but it was tied up in illiquid assets, which they now had to liquidate in a fire sale, causing asset prices to crash. It was the 1847 equivalent of the financial crisis of 2008.

Unlike 2008, when the 1847 crisis was ended, by suspending the Bank Act, so that liquidity flowed again, the Bank did not continue to increase liquidity, so as to inflate asset prices to their bubble levels. The speculators, unlike 2008, remained burned, and money now flowed into the real economy instead. In fact, Marx says, basing himself on the historical research of Tooke,

“statistics show that in the case of crop failures in England from 1793 up to the present, the existing amount of means of circulation was not excessive but on the contrary it was insufficient” (p 178)

Marx notes that Ricardo makes the same argument that British commodities were expensive, and its gold cheap, to explain the export of gold, to Europe, at the time of Napoleon's Continental System, and the English Blockade Decrees. But,

“In 1810 – just at the time when Ricardo first advanced his currency theory, and the Bullion Committee embodied it in its parliamentary report – the prices of all British commodities slumped ruinously in comparison with their level in 1808 and 1809, whereas the relative value of gold rose. Agricultural products were an exception because their import from abroad was impeded and the amount available within the country was greatly reduced by bad harvests.” (p 179)

The same effect of higher prices has resulted from the NATO blockade and boycott of Russian energy and grain supplies to the world market.

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