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The commercial crises of the nineteenth century, namely, the great crises of 1825 and 1836, did not result in any new developments in the Ricardian theory of money, but they did furnish new applications for it. They were no longer isolated economic phenomena, such as the depreciation of the precious metals in the sixteenth and seventeenth centuries which interested Hume, or the depreciation of paper money in the eighteenth and early nineteenth centuries which confronted Ricardo; they were the great storms of the world market in which the conflict of all the elements of the capitalist process of production discharge themselves, and whose origin and remedy were sought in the most superficial and abstract sphere of this process, the sphere of money circulation. The theoretical assumption from which the school of economic weather prophets proceeds, comes down in the end to the illusion that Ricardo discovered the laws governing the circulation of purely metallic currency. The only thing that remained for them to do was to subject to the same laws the circulation of credit and bank-note currency.
The most general and most palpable phenomenon in commercial crises is the sudden, general decline of prices following a prolonged general rise. The general decline of prices of commodities may be expressed as a rise in the relative value of money with respect to all commodities, and the general rise of prices as a decline of thePg 256 relative value of money. In either expression the phenomenon is described but not explained. Whether I put the question thus: explain the general periodic rise of prices followed by a general decline of the same, or formulate the same problem by saying: explain the periodic decline and rise of the relative value of money with respect to commodities; the different wording leaves the problem as little changed as would its translation from German into English. Ricardo's theory of money was exceedingly convenient, because it lends a tautology the semblance of a statement of causal connection. Whence comes the periodic general fall of prices? From the periodic rise of the relative value of money. Whence the general periodic rise of prices? From the periodic decline of the relative value of money. It might have been stated with equal truth that the periodic rise and fall of prices is due to their periodic rise and fall. The problem itself is stated under the assumption that the intrinsic value of money, i. e., its value as determined by the cost of production of precious metals remains unchanged. If it is more than a tautology then it is based on a misconception of the most elementary principles. If the exchange value of A measured in terms of B, declines, we know that this may be caused by a decline of the value of A as much as by a rise of the value of B; the same being true of the case of a rise of the exchange value of A measured in terms of B. The tautology once admitted as a statement of cause, the rest follows easily. A rise of prices of commodities is caused by a decline of the value of money and a decline of the value of money is caused,Pg 257 as we know from Ricardo, by a redundant currency, i. e., by a rise of the volume of currency over the level determined by its own intrinsic value and the intrinsic value of the commodities. In the same manner, the general decline of prices of commodities is explained by the rise of the value of money above its intrinsic value in consequence of an inadequate currency. Thus, prices rise and fall periodically, because there is periodically too much or too little money in circulation. Should a rise of prices happen to coincide with a contracted currency, and a fall of prices with an expanded one, it may be asserted in spite of those facts that in consequence of a contraction or expansion of the volume of commodities in the market, which can not be proven statistically, the quantity of money in circulation has, although not absolutely, yet relatively increased or declined. We have seen that according to Ricardo these universal fluctuations must take place even with a purely metallic currency, but that they balance each other through their alternations; thus, e. g., an inadequate currency causes a fall of prices, the fall of prices leads to the export of commodities abroad, this export causes again an import of gold from abroad, which, in its turn, brings about a rise of prices; the opposite movement taking place in case of a redundant currency, when commodities are imported and money is exported. But, since in spite of these universal fluctuations of prices which are in perfect accord with Ricardo's theory of metallic currency, their acute and violent form, their crisis-form, belongs to the period of advanced credit, it is perfectly clear that the issue of bank-notes is not exactly regulated byPg 258 the laws of metallic currency. Metallic currency has its remedy in the import and export of precious metals which immediately enter circulation and thus, by their influx or efflux, cause the prices of commodities to fall or rise. The same effect on prices must now be exerted by banks by the artificial imitation of the laws of metallic currency. If gold is coming in from abroad it proves that the currency is inadequate, that the value of money is too high and the prices of commodities too low, and, consequently, that bank notes must be put in circulation in proportion to the newly imported gold. On the contrary, notes have to be withdrawn from circulation in proportion to the export of gold from the country. That is to say, the issue of bank notes must be regulated by the import and export of the precious metals or by the rate of exchange. Ricardo's false assumption that gold is only coin, and that therefore all imported gold swells the currency, causing prices to rise, while all exported gold reduces the currency leading to a fall of prices, this theoretical assumption is turned into a practical experiment of putting in every case an amount of currency in circulation equal to the amount of gold in existence. Lord Overstone (the banker Jones Loyd), Colonel Torrens, Norman, Clay, Arbuthnot and a host of other writers, known in England as the adherents of the "currency principle," not only preached this doctrine, but with the aid of Sir Robert Peel succeeded in 1844 and 1845 in making it the basis of the present English and Scotch bank legislation. Its ignominous failure, theoretical as well as practical, following upon experiments on the largest national scale,Pg 259 can be treated only after we take up the theory of credit.151 So much can be seen, however, that the theory of Ricardo which isolates money in its fluent form of currency, ends by ascribing to the ebbs and tides in the supply of precious metals an influence on bourgeois economy such as the believers in the superstitions of the monetary system had never dreamt of. Thus did Ricardo, who proclaimed paper currency as the most perfect form of money, become the prophet of the bullionists.
After Hume's theory or the abstract opposition to the Pg 260monetary system was thus developed to its ultimate conclusions, Steuart's concrete conception of money was finally restored to its rights by THOMAS TOOKE.152 Tooke arrives at his principles not from any theory, but by a conscientious analysis of the history of prices of commodities from 1793 to 1856. In the first edition of his History of Prices which appeared in 1823, Tooke is still under the complete influence of the Ricardian theory, and vainly tries to reconcile it with actual facts. His pamphlet "On the Currency," which appeared after the crisis of 1825 might even be considered as the first consistent presentation of the views which were later given the force of law by Overstone. Continued studies in the history of prices forced him, however, to the conclusion that the direct connection between prices and the volume of currency, as it is pictured by the theory, is a mere illusion; that the expansion and contraction of currency which takes place while the value of the precious metals remains unchanged, is always the effect but never the cause of price fluctuations; that the circulation of money is in any event but a secondary movement; and that money assumes quite different forms in the actual process of production in addition to that of a circulating medium. His detailed investigations belong to a sphere outside of that of simple metallic circulation and can be discussed here as little as the investigations of WILSON and FULLARTON which belong Pg 261to the same class.153 None of these writers takes a one-sided view of money, but treat it in its various aspects; the treatment, however, is mechanical, without an attempt to establish an organic connection either between these various aspects themselves, or between them and the combined system of economic categories. They fall, therefore, into the error of confusing money as distinguished from medium of circulation with capital or even with commodity, although they are forced elsewhere to differentiate it from both.154 When gold, e. g., is shipped abroad, it practically means that capital is sent abroad, but the same thing takes place when iron, cotton, grain, or any other commodity is exported. Both are capital and are distinguished not as capital, but as money and commodity. The function of gold as the international medium of exchange springs, therefore, Pg 262not from its being capital, but from its specific character of money. Similarly, when gold, or bank notes in its place, circulate in the home trade as means of payment, they constitute capital at the same time. But they could not be replaced by capital in the form of commodities, as has been demonstrated very palpably by crises, for instance. That is to say, it is the fact that gold is distinguished from commodities in its capacity of money and not in that of capital, that makes it the means of payment. Even when capital is exported directly as capital, as, e. g., when it is done for the purpose of lending abroad a certain amount on interest, it depends on circumstances, whether it will be exported in the form of commodities or in that of gold, and if in the latter form, it is due to the specific destination of the precious metals as distinguished from commodities to serve as money. In general, these writers do not consider money in its abstract form, as it is developed within the sphere of simple circulation of commodities, and as it spontaneously grows out of the relation of the circulating commodities. As a result, they constantly Pg 263vacillate between the abstract forms of money which distinguish it from commodity and those forms of it beneath which are concealed concrete relations, such as capital, revenue, etc.155
