Total wages, in the UK, were around £250 million, Marx noted, but were circulated with only around £3 million of currency. Most of this currency, used for wages, took the form of metallic money tokens – silver and copper – whose value, in relation to gold, was fixed by law rather than their own metallic content, i.e. a fiat currency. If wages rose by 50%, £4.5 million would be required, but, because of the role of money tokens – both coins and paper notes – Marx sets out why not one single extra sovereign would be required.
Suppose of the additional £1.5 million, £1 million takes the form of gold sovereigns.
“One million, now dormant, in the shape of bullion or coin, in the cellars of the Bank of England, or of private bankers would circulate.” (p 29-30)
In other words, no additional sovereigns need be minted, only existing sovereigns, sitting idle, are activated.
“But even the trifling expense resulting from the additional minting or the additional wear and tear of that million might be spared, and would actually be spared, if any friction should arise from the want of the additional currency. All of you know that the currency of this country is divided into two great departments. One sort, supplied by bank-notes of different descriptions, is used in the transactions between dealers and dealers, and the larger payments from consumers to dealers, while another sort of currency, metallic coin, circulates in the retail trade. Although distinct, these two sorts of currency intermix with each other. Thus gold coin, to a very great extent, circulates even in larger payments for all the odd sums under 5 Pounds. If tomorrow 4 Pound notes, or 3 Pound notes, or 2 Pound notes were issued, the gold filling these channels of circulation would at once be driven out of them, and flow into those channels where they would be needed from the increase of money wages. Thus the additional million required by an advance of wages by fifty per cent would be supplied without the addition of one single Sovereign. The same effect might be produced, without one additional bank-note, by an additional bill circulation, as was the case in Lancashire for a very considerable time.” (p 30)
By bill circulation, Marx means an increased value of bills of exchange, i.e. commercial credit between firms. In other words, this is the point made earlier that a larger proportion of commodities may be exchanged on the basis of credit, reducing the amount of currency required. The inflation of prices that Weston and, today, Keynesians, blame on rising wages, is, in fact, a result of this expansion of the currency supply/credit that devalues the standard of prices. Marx illustrates this, in reverse, by looking at what happened in the crisis resulting from the US Civil War, and blockade of cotton supplies to Britain.
As a result of the crisis, UK textile wages fell by 75%.
“This, then, was a sudden change in the rate of wages unprecedented, and at the same time extending over a number of operatives which, if we count all the operatives not only directly engaged in but indirectly dependent upon the cotton trade, was larger by one-half than the number of agricultural labourers.” (p 31-32)
On the basis of Weston's argument (and the same applies to all those, today, like Larry Summers who looked to a 50% rise in unemployment, as the means to reduce US inflation) this reduction in wages should have resulted in a fall in demand for wage goods, which consisted largely of agricultural products, such as wheat, as bread comprised a large part of the workers' diet. It should, also, have meant a significant reduction in the currency supply. Today, the Keynesians, like Summers, make this argument for a 50% rise in unemployment, so as to put downward pressure on wages, to reduce demand-pull inflation.
In fact, as the US has shown, rather than unemployment rising, it has continued to fall, and employment continued to rise strongly. That has also fed into continued strong consumption demand, fuelling aggregate demand, and growth of the US economy. Yet, as the Federal Reserve, has continued its policy of Quantitative Tightening, as the value and volume of output has risen, bringing about a relative reduction in currency supply, US inflation has fallen faster than in other economies, which have grown much more slowly.
“Did the price of wheat fall? It rose from the annual average of 47 shillings 8d per quarter during the three years of 1858-1860 to the annual average of 55 shillings 10d per quarter during the three years 1861-1863. As to the currency, there were coined in the mint in 1861 8,673,323 Pounds, against 3,378,792 Pounds in 1860. That is to say, there were coined 5,294,440 Pounds more in 1861 than in 1860. It is true the bank-note circulation was in 1861 less by 1,319,000 Pounds than in 1860. Take this off. There remains still a surplus of currency for the year 1861, as compared with the prosperity year, 1860, to the amount of 3,975,440 Pounds, or about 4,000,000 Pounds; but the bullion reserve in the Bank of England had simultaneously decreased, not quite to the same, but in an approximating proportion.” (p 32)
In other words, the rise in wheat prices had nothing to do with wages, either in relation to demand-pull or cost-push, because, during this time, wages had fallen catastrophically. The rise in prices was the result of additional currency thrown into circulation, causing a reduction in the value of the standard of price. Similarly, the reduction in inflation – not in this case an actual fall in prices – in the US, over the last year, is not the result of a fall in wages – which have been rising on the back of continued strong growth of jobs, and labour shortages – but of the effect of QT.
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