The other problem with Ricardo's monetary theory, and with the Bank Act, was its confusion of money with money tokens/currency. The reason for that, as Marx describes in A Contribution To The Critique of Political Economy, is that it bases its analysis on an observation of the latter, rather than beginning with an analysis of what money actually is, and how it develops automatically, from commodity exchange. Ricardo saw money only in the form of currency, and, as Hume had observed, when the amount of currency in circulation rises, this seemed to always be associated with a rise in prices. Confusing correlation with causation, and confusing currency/money tokens with money, he, thereby, concluded that rising prices were a function of the quantity of money.
This was false for several reasons, as Marx sets out in A Contribution To The Critique of Political Economy. Price is only a name given to a specific exchange-value, i.e. the exchange value of a commodity as against a given quantity of the money commodity. The value of a kilo of cotton may be 10 hours labour, whilst that of a litre of wine is 20 hours labour. The exchange value of a kilo of cotton, expressed in wine is 0.5 litres, whilst similarly the exchange value of a litre of wine, expressed in cotton is 2 kilos.
We could as easily say the wine price of a kilo of cotton is 0.5 litres, and the cotton price of a litre of wine is 2 kilos. Exchange value can never be an absolute, as Marx described in Theories of Surplus Value, Chapter 20, because it is a relationship between two different commodities. The exchange value of cotton may rise or fall, not only because of changes in its own value, but also because of changes in the value of wine, and vice versa. If the value of cotton rises to 20 hours, whilst the value of wine remains constant, the exchange value of cotton will rise to 1 litre, i.e. its wine price will rise. But, if the value of cotton remains 10 hours, whilst the value of a litre of wine falls to 10 hours, the same is true, the exchange-value of a kilo of cotton will, now, also have risen to 1 litre of wine, i.e. its wine price will have risen. This is true, also, when it comes to money prices, measured in terms of the money commodity.
Part of what Hume, and others, observed was that, as new sources of gold and silver were discovered, the value of these metals that occupied the position of money commodities, fell. If, previously, the total value of commodities to be circulated was equal to 1 million hours of labour, and the value of a gram of gold was 100 hours of labour, the equivalent form of all these commodities was 10,000 grams of gold. However, if the value of gold falls to 50 hours/gram, it is 20,000 grams. If the gram of gold is given the name £1, then the total price of all commodities to be circulated will have risen from £10,000 to £20,000. This rise in prices is not a consequence of more money in circulation. It is a consequence of a fall in the value of gold as money commodity. That fall in value of money, i.e. of the £, is itself what necessitates more of it being thrown into circulation, as the equivalent form of value.
But, likewise, if there was no change in the value of commodities, or of gold, it was not possible for there to be too much money in the economy, as a consequence of there being an increased amount of gold, and vice versa. The amount of money is itself a social relation, i.e. 1 million hours of universal labour in the form of commodities equals 1 millions hours of universal labour in the form of money, which equals 10,000 grams of gold (£10,000), if the value of a gram of gold is 100 hours/gram. It is a social relation based upon equal quantities of social labour-time.
However, as Marx describes, in A Contribution To The Critique of Political Economy, this does not mean that excess currency may not be thrown into circulation. This shows the difference between money and currency/money tokens. If the equivalent form of value of commodities is £10,000 (10,000 grams of gold), and each £ circulates 10 times a year, 1,000 coins/currency tokens are required. If 2,000 are thrown into circulation, then, the value of each £1 coin/token is halved, because, in total, these 2,000 coins can only represent the same amount of money as was previously represented by 1,000 coins, i.e. 100,000 hours of labour-time, i.e. previously 1,000 m x 10 v = £10,000, and now 2,000 m x 10 v = £10,000, or, more correctly, equals 1 million hours of universal labour.
The price of a gram of gold was £1, but would, itself, now, rise to £2, because a gram of gold, still has a value of 100 hours of universal labour. Consequently, anyone in possession of full weight, 1 gram gold coins would melt them down into bullion and sell them. They would convert a £1 coin into 2 £1 coins by doing so. Only those with gold coins whose weight was significantly less than 1 gram would be unable to do this. This is the basis of Gresham's Law that bad coin drives out the good. But, as excess coins are melted down into bullion, so the excess currency is itself removed from circulation, and the value of the coins in circulation is restored, so that prices fall.
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