Correspondence: Currency Illusions

To the Editor,

Dear Sir,

I am writing on a somewhat perplexing subject, that of Currency. The views of Noah Ablett which I present here, are in my opinion not Marxian, and I shall be obliged if you will give your comments and endeavour to throw some light on the question.

In “Easy Outlines of Economics” on pages 49 and 50, under the heading “The Paradox of Paper Money,” he states the following theory :—Given a certain amount of commodities the quantity of gold which can remain in circulation is definitely limited; but if gold is replaced by paper, the quantity of paper money which can circulate is not limited. Consequently, if the quantity of money required in circulation is one million sovereigns, and two million pound notes are introduced instead, then the commodity previously valued at £1 will want two one pound notes in exchange; if another million notes are introduced the £1 commodity will want three notes in exchange and so on. Ablett explains this by saying that the laws of currency have been violated. Now I understand him to mean that the prices of commodities are determined by the excessive number of notes in circulation, which to me appears to be a negation of the labour theory of value, on the basis of which alone I had thought prices understandable.

To illustrate this, let us take any two dissimilar commodities; for instance, a pair of boots and a bicycle. We know that both are useful and have shape, weight, and colour, but when we put them in exchange relation we find that none of the above attributes can determine how the value of one corresponds to the value of the other. Examination however shows that they have one thing in common, they are both the products of human labour. This provides the rod with which to measure their value, just as distance is measured with a foot rule.

The use of a universal equivalent, e.g., gold, as a measure of value, enables all commodities to express their value in exchange, in one substance; that is, it gives their price in money terms. This serves instead of expressing the value of each commodity in so many hours of labour, time necessary for their production. If in our example a pair of boots cost £l, and a bicycle £8, it is at once seen that these different prices represent different values.

Now, if on the introduction of an excessive issue of notes we have to give £2 and £16 for boots and bicycle, where previously we gave £l and £8 respectively, what will have happened? One of three things must have taken place. Either (1) the value of the boots and the bicycle have increased; also the value of the sovereign measured by Treasury notes, but the value of boots and bicycle to a far higher degree, or (2) the value of gold has fallen, while the values of the boots and the bicycle are the same, thus necessitating more gold in circulation and a higher price for the boots and the bicycle, or (3) the value of gold is the same, but the value of the boots and bicycle have increased.

While I agree that only a given quantity of gold can circulate, I do not see how an unlimited quantity of notes can remain in circulation. An excess of notes, like an excess of sovereigns over the quantity required for circulating the commodities, would lie idle in the banks.

Anyway, if the high cost of living is a result of the so-called excess of notes in circulation, how is it that the Treasury note will buy as much as the sovereign? Again, in the United States of America, where there is a gold medium, we find the cost of living as high as it is here.

Finally, I am told that Marx in “Capital,” volume I., page 144, (Kerr), under the heading of “Coins and Symbols of Value,” deals with Noah Ablett’s point .in this way :—If the quantity of paper money issued be double the amount required, then as a matter of fact, £l would be the money name, not of a quarter of an ounce, but of one-eighth of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of price. Those values that were previously expressed by the price of £l would now be expressed by the price of £2. I ask for information on this point : What does it all mean?

Yours for Socialism,



In no subject, except perhaps that of religion, is mankind so prone to accept statements without enquiry or examination, as in the matter of money. As Marx says, “the wildest theories” prevail upon the question. An illustration from present circumstances will show how easy it is to mislead people on this matter.

When prices were at their height, shortly after the war, one of the “explanations” put forward by the Capitalist Press, and repeated by Labour College writers and members of the Labour Party, was that the rise in prices was largely due to “the inflation of the currency.” In both articles and correspondence in the SOCIALIST STANDARD, we have pointed out the falsity of this claim, and have shown that, both from the quantity of currency notes issued compared with prices, and from the fact that the “Bradbury” is convertible, no inflation has taken place.

Money as a measure of value and a medium of circulation, is a necessity under a system of commodity production on a large scale. It is the “universal commodity,” set aside for the above purposes in a system where private ownership of the means of life is the ruling factor. Hence, the futility of all the schemes that attempt to solve the social evils by juggling with one item, the currency, while leaving the others intact. As money is a result of the private ownership of the means of life, it is obvious that it cannot be abolished until the cause is removed.

The commodity in general use as money, in the western world, is gold. On the average, the amount of gold exchanged for a given commodity is the quantity that has taken the same amount of social labour time to produce as the commodity has taken. To guarantee the unit of money as to quality, weight, etc., it is issued under Government control.

Inside any national boundary where social conditions are fairly stable, it is easy to replace gold with tokens or symbols for purposes of circulation. In fact, in every country with a “gold standard,” metal tokens, usually silver or copper, are used for purposes of small change. Paper notes may also be substituted inside a particular country. In general, this paper is issued under one of two systems.

In one system, such as prevails in this country to-day, the notes are “convertible” into gold upon demand at some central institution, like the Bank of England. It is easily seen that, so long as the promise to pay gold holds good—or is believed to hold good—the notes will exchange at their face denomination, and no inflation of such a currency can take place.

Under the second system, the notes are issued as “legal tender,” without any promise to redeem them in gold. This is called an “inconvertible” issue. Inside the national boundary, and for home produced commodities, these notes function similarly to the “convertible” ones, and their issue has no particular effect upon prices under normal circumstances.

Outside of the country issuing notes, the position will depend upon certain other factors. First of these is the confidence of the outsiders in the promise to pay gold in the case of the “convertible” notes. Where there is full confidence in this promise, the notes will circulate at their face denomination, less the amount required to cover the cost of carrying gold to the country in question. If this confidence is lacking, the degree in which it falls below “full” will be shown by the rate of exchange.

With “inconvertible” notes, the matter is somewhat more complicated. These notes will be taken at their power to purchase gold or goods in the world’s markets. It is at this point that a great confusion of thought exists on currency matters.

An examination will show that the power of purchase possessed by these notes is based upon the resources of the country issuing them. If the notes are issued in such quantities that their face denomination exceeds these resources, their power of purchase abroad will fall in a similar ratio. This brings forward the factor that has confused Mr. Ablett and so many writers in the Capitalist Press—the factor of Credit.

When Mr. Ablett states (p. 50): “Governments may easily inflate the currency by printing pieces of paper,” it is a pity he does not state what they could do with this paper when printed. Moreover, he has been refuted in principle, as long ago as 1682, when a certain writer stated :—

“If the wealth of a nation could be decoupled by a proclamation, it were strange that such proclamation have not long since been made by our Governors.”

This writer was the famous William Petty, and the above quotation from his work is given on p. 73 of “Capital.” (Sonnenschein.—ed.)

As Mr. Ablett, probably for quite good reasons, fails to give any description of the functioning of a paper currency, a short account may be useful here.

If the government of a country with an inconvertible paper currency requires certain commodities, such as guns or battleships, it may order firms in its own country to build them, or it may order them from abroad. In the latter case, it may offer to pay in its own currency—if necessary, printing the notes for this purpose—but this would not be inflation, as the currency would only be issued to the amount of the prices to be paid. To the firms supplying the commodities, the notes would be useful only so far as they would purchase gold or goods in the world’s markets at their face denomination. If the government were to order goods beyond the capacity of the taxes to meet the bill, then their credit would fall, and their notes—as they stood, without printing a single one extra—would fall below their face denomination outside of their own country. The printing of more notes to meet this fall would not alter the situation, or the price level of the notes. It is this extension of credit that the would-be experts confuse as an “inflation” of currency.

The government in question might purchase gold with its notes, to pay the bill, but of course the more usual way is to issue bonds for the amount, on the taxes of the country, and pass these bonds through the banks and financial houses.

The huge increase in demand, accompanied by an enormous extension of credit, that has taken place between governments and firms, during and since the war, has been the great cause of the rise in prices. Such rise has necessitated a large increase in the currency to’ meet the demands of
business. This obvious fact has been inverted in the minds of the shallow apologists for Capitalism, who claim the rise in prices has been due to “the inflation of the currency.”

J. F.

(Socialist Standard, June 1922)