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Our presentation has shown that the coin form of gold as a token of value differentiated from the gold substance itself, has its direct origin in the process of circulation and not in any agreement or state interference. Russia offers a striking example of the natural origin of the token of value. At the time when hides and furs played there the part of money, the conflict between the perishable and bulky nature of the material and its function as a medium of circulation resulted in the custom of replacing it by small pieces of stamped leather which thus became a kind of draft payable in hides and furs. Later on they became under the name of copecs mere tokens for fractions of the silver rouble and remained in use in some parts until 1700, when Peter the Great ordered their withdrawal in exchange for small copper coins Pg 153issued by the state. Ancient writers who could observe the phenomena of exclusively metallic circulation, already took the view of coin as a symbol or token of value. That is true both of Plato81 and Aristotle.82 In countries where credit is not developed, Pg 154as e. g. in China, legal tender paper money is found at an early date83. Early advocates of paper money expressly point out the fact that metallic coin is transformed into a token of value in the very process Pg 155of circulation. So Benjamin Franklin84 and Bishop Berkeley.85

How many reams of paper cut up into bills can circulate as money? Put in that way, the question would be absurd. The worthless tokens are signs of value only in so far as they represent gold within the sphere of circulation and they represent it only to the extent to which it would itself be absorbed as coin by the process of circulation; this quantity is determined by its own value, the exchange values of the commodities and the rapidity of their metamorphoses being given. Bills of a denomination of 5 could circulate in a quantity five times less than those of 1 denomination, and if all payments were made in shilling bills, then twenty times as many shilling bills would have to be in circulation as are one pound bills. If the gold currency were represented by bills of Pg 156different denominations, e. g. five pound, one pound and ten shilling bills, then the quantity of these different tokens of value would be determined not only by the quantity of gold necessary for circulation as a whole, but also by that required in the sphere of circulation of each kind of bills. If fourteen million pounds sterling (this is the provision of the English Bank Law, not for the entire currency but only for credit money) were the level below which the circulation of a country never sank, then fourteen million paper bills, each a token of value of one pound, could circulate. If the value of gold fell or rose because the labor-time necessary for its production had fallen or risen, then, the exchange value of the same volume of commodities remaining the same, the number of one pound bills in circulation would rise or fall in inverse ratio to the change in the value of gold. If gold were replaced by silver as a measure of value, the ratio of the respective values of silver and gold being 1:15, and if each bill were to represent now the same quantity of silver as it represented gold before, then there would be 210 million one pound bills in circulation instead of the previous fourteen million. The number of paper bills is thus determined by the quantity of gold money which they represent in circulation, and since they are tokens of value only in so far as they represent it, their value is simply determined by their quantity. Thus, while the quantity of gold in circulation is determined by the prices of commodities, the value of the paper bills in circulation, on the contrary, depends exclusively on their own quantity.

The interference of the state which issues paperPg 157 money as legal tender—and we are treating of paper money of that kind only—seems to do away with the economic law. The state which in its mint price gave a certain name to a piece of gold of certain weight, and in the act of coinage only impressed its stamp on gold, seems now to turn paper into gold by the magic of its stamp. Since paper bills are legal tender, no one can prevent the state from forcing as large a quantity of them as it desires into circulation and from impressing upon it any coin denomination, such as 1, 5, 20. The bills which have once gotten into circulation can not be removed, since on the one hand their course is hemmed in by the frontier posts of the country and on the other they lose all value, use-value, as well as exchange-value, outside of circulation. Take away from them their function and they become worthless rags of paper. Yet this power of the state is a mere fiction. It may throw into circulation any desired quantity of paper bills of whatever denomination, but with this mechanical act its control ceases. Once in the grip of circulation and the token of value or paper money becomes subject to its intrinsic laws.

If fourteen million pounds sterling were the quantity of gold required for the circulation of commodities and if the state were to put into circulation two hundred and ten million bills each of the denomination of 1, then these two hundred and ten millions would become the representatives of gold to the amount of fourteen million pounds sterling. It would be the same as if the state were to make the one pound bills represent a fifteen times less valuable metal or a fifteen times smaller weightPg 158 of gold. Nothing would be changed but the nomenclature of the standard of price, which by its very nature is conventional, no matter whether such change takes place as a direct result of a change of the mint standard or indirectly owing to an increase of paper bills to an extent required by a new lower standard. Since the name would stand now for a fifteen times smaller quantity of gold, the prices of all commodities would increase fifteen times and two hundred and ten million one pound bills would now be actually as necessary as fourteen million had been before. To the same extent to which the combined quantity of tokens of value would increase now, the quantity of gold which each of them represents would decrease. The rise of prices would constitute but a reaction on the part of the process of circulation which forcibly equates the tokens of value to the quantity of gold which they are supposed to replace.

In the history of the debasement of money in England and France by their governments, we find repeatedly that prices had not risen in the same proportion in which the silver coinage had been debased. That was simply due to the fact that the proportion in which the currency was increased did not correspond to the proportion in which it had been debased; that is to say, because an inadequate quantity of coins of the poorer metallic composition was issued, if the exchange values of commodities were to be estimated in the future in the new coin as a measure of value and be realized in coins corresponding to this smaller unit of measure. This solves the difficulty left unsettled in the controversy between Locke and Lowndes. The ratio which a token of value, whetherPg 159 made of paper or of debased gold or silver, bears to certain weights of gold or silver estimated according to the mint price, depends not on its own composition but on the quantity in which it is found in circulation. The difficulty in understanding this is due to the fact that money in its two functions of a measure of value and a medium of circulation is subject to two not only opposite but apparently contradictory laws corresponding to the difference in the two functions. In the discharge of its function of a measure of value where money serves merely as money of account and gold only as ideal gold, everything depends on the natural substance of money. Estimated in silver or expressed in silver prices exchange values are naturally estimated quite differently than when measured in gold or as gold prices. On the contrary, in its function of a medium of circulation, where gold is not only imagined but is actually present side by side with other commodities, its substance is immaterial and everything depends on its quantity. For the unit of measure the determining factor is whether it consists of a pound of gold, silver or copper; while in the case of coin, no matter what its own composition is, it will become the embodiment of each of these units of measure in accordance with its quantity. But it goes against common sense that in the case of mere imaginary money everything should depend on its material substance, while in that of the palpably present coin all should be determined by an ideal ratio of numbers.