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When Ricardo suddenly gets off the straight path of his presentation and takes the very opposite view, he does so to turn his attention to the international circulation of precious metals and thus brings confusion into the problem by introducing considerations that are foreign to the subject. Let us follow his own course of reasoning, and, in order to remove everything that is artificial and incidental, let us assume that the gold and silver mines are located in the interior of the countries in which the precious metals circulate as money. The only inference which follows from Ricardo's reasoning Pg 238as so far developed, is that, the value of gold being given, the quantity of money in circulation will be determined by the prices of commodities. Thus, at a given moment, the quantity of gold in circulation in a country is simply determined by the exchange value of the commodities in circulation. Let us suppose now that the sum total of these exchange values has declined either because there are less commodities produced at the old exchange values, or because, in consequence of an increased productivity of labor, the same quantity of commodities has a smaller value. Or, we may assume on the contrary that the sum total of exchange values has increased, either because the quantity of commodities has increased while the cost of their production has remained the same, or because the value of the same or of a smaller quantity of commodities has risen in consequence of a diminished productivity of labor. What becomes in either case of the given quantity of metal in circulation? If gold is money merely because it is current as a medium of circulation; if it is compelled to remain in circulation like government legal tender paper money (and that is what Ricardo has in mind), then the quantity of money in circulation will rise above the normal level, as determined by the exchange value of the metal, in the former case, and fall below that level in the latter. Although possessing a value of its own, gold will become in the former case a token of a metal of lower exchange value than its own, and in the latter, a token of a metal of higher value. In the former case it will remain as a token of value less than its own, in the latter greater thanPg 239 its own (again an abstract deduction from legal tender paper money). In the former case it is the same as though commodities were estimated in a metal of lower value than gold, in the latter, as though they were estimated in a metal of higher value. In the former case, prices of commodities would rise therefore, in the latter they would fall. In either case the movement of prices, their rise or fall, would appear as the effect of a relative expansion or contraction of the volume of gold in circulation above or below the level corresponding to its own value, i. e. above or below the normal quantity which is determined by the proportion between its own value and that of the commodities in circulation.

The same process would take place if the sum total of the prices of the commodities in circulation remained unchanged, while the volume of gold in circulation came to be below or above the right level: the former in case the gold coin worn out in the course of circulation were not replaced by the production of a corresponding quantity of gold in the mines; the latter, if the output of the mines exceeded the requirements of circulation. In either case it is assumed that the cost of production of gold or its value remain the same.

To sum up: the money in circulation is at its normal level, when its volume is determined by its own bullion value, the exchange value of commodities being given. It rises above that level, bringing about a fall in the value of gold below its own bullion value and a rise of prices of commodities, whenever the sum total of the exchange values of commodities declines, or the output of gold from the mines increases. It sinks below itsPg 240 right level, leading to a rise of gold above its own bullion value and to a fall of prices of commodities, whenever the sum total of the exchange values of the commodities or the gold output of the mines is not sufficient to replace the quantity of outworn gold. In either case the gold in circulation becomes a token of value greater or smaller than that it really possesses. It may become an appreciated or depreciated token of itself. As soon as all commodities would come to be estimated in gold of this new value and the general price level would accordingly rise or fall, the quantity of current gold would again answer the requirements of circulation (a consequence which Ricardo emphasizes with great pleasure), but would be at variance with the cost of production of the precious metals and, therefore, with their relation as commodities to all other commodities. According to the general Ricardian theory of exchange value, the rise of gold above its exchange value, i. e., above the value as determined by the labor-time contained in it, would cause an increase in the production of gold until the increased output of it would reduce its value to the proper magnitude. And in the same manner, a fall of gold below its value would cause a decline in its production until its value rose again to its proper magnitude. By these opposite movements the discrepancy between the bullion value of gold and its value as a medium of circulation would disappear, the normal level of the volume of gold in circulation would be restored, and the price level would again correspond to the measure of value. These fluctuations in the value of gold in circulation would to the same extent affect gold in the form ofPg 241 bullion, because by assumption, all gold that is not utilized as an article of luxury, is supposed to be in circulation. Since gold itself may become, both as coin and bullion, a token of value of greater or smaller magnitude than its bullion value, it is self understood that convertible bank-notes in circulation have to share the same fate. Although bank-notes are convertible, i. e. their real value and nominal value agree, "the aggregate currency consisting of metal and of convertible notes" may appreciate or depreciate according as to whether it rises or falls, for reasons already stated, above or below the level determined by the exchange value of the commodities in circulation and the bullion value of gold. Inconvertible paper money, has, from this point of view, only that advantage as against convertible paper money, that it may depreciate in a two-fold manner. It may fall below the value of the metal which it is supposed to represent, because it has been issued in too great quantity, or it may depreciate because the metal it represents has itself fallen in value. This depreciation, not of paper as compared with gold, but of gold and paper together, or of the aggregate currency of a country, is one of the principal discoveries of Ricardo, which Lord Overstone and Co. pressed into their service and made a fundamental principle of Sir Robert Peele's Bank legislation of 1844 and 1845.

What should have been proven was that the price of commodities or the value of gold depends on the quantity of gold in circulation. The proof consists in the assumption of what is to be proven, viz. that any quantity of the precious metal employed as moneyPg 242 must become a medium of circulation or coin, and thereby a token of value for the commodities in circulation, no matter in what proportion to its own intrinsic value and no matter what the total value of those commodities may be. To put it differently, the proof consists in overlooking all the other functions which money performs besides its function of a medium of circulation. When hard pressed, as in his controversy with Bosanquet, Ricardo, completely under the influence of the phenomenon of depreciated tokens of value caused by their quality, takes recourse to dogmatic assurances.138