Gold, Paper Currency and Commodity
Source: Karl Kautsky Gold,
Papier und Ware, Die Neue Zeit,
Vol.30 No.1, Nr.24 & Nr.25 (1912), pp.837-47 and 886-93.
Translated, transcribed, edited and introduced by Daniel Gaido for the Marxists’ Internet Archive.
Proofread by Ted Crawford.
Marked up by Steve Palmer.
Introductory essay: Introduction to Gold, Paper Currency and Commodity by Daniel Guido.
The high cost of living has become such a long-standing and conspicuous phenomenon that the investigation of its causes occupies economists from the most different tendencies and schools. Among other things, the revolutionizing of gold production has been mentioned as one of the causes of the high cost of living. Otto Bauer, in his work on the high cost of living , has accepted this view, and I myself have done the same, at least conditionally. However neither Bauer nor myself, nor, as far as I know, any other socialist theoretician, has considered the reduction in the production cost of gold as the only cause of the high cost of living, or even the basic one. In my article on the mass action I identified as causes of the high cost of living:
“[...] the inflationary effects of private property on land in America, which was strengthened by the consequences of the exhaustive cultivation of the soil in Russia and America, by the rise of syndicates of producers and merchants, and perhaps also the revolutionizing of gold production. Technical improvements and the finding of new gold mines have perhaps caused the production costs of gold, and with them its value, to fall more rapidly than the value of consumer goods, because as a consequence of the obstructions created by private property on land, the preservation of technically backward small farms, and the migration of agricultural workers, the productivity of agriculture grows slowly. If we add to this the growth of protective tariffs as well as the tax increases of the last years, one has a pretty exhaustive description of the causes of the high cost of living. They are all of a lasting nature. The ruling classes will not give up willingly even the agrarian tariffs and the tax hikes, because they are the necessary consequence of the imperialist colonial and arms fever that has taken possession of capitalism.” 
Varga, in his recent article on gold production and the high cost of living in Die Neue Zeit, argued against the view that the value of gold has sunk as a consequence of the reduction in its production costs.  He believes not only that the value of gold has actually not fallen, which is perhaps correct, but also that it is impossible that the value of gold could fall. The changes in the conditions of production of gold could not therefore in any case be a cause of the high cost of living.
Hilferding accepts this argument and seeks to give it a deeper theoretical foundation in his article on gold and commodity.  His theory is bold and apparently very well thought out, but also so paradoxical, that it requires further verification. This investigation must first all cover the theory of paper money, which Hilferding developed in his Finance Capital, and which he now turns into the foundation of his theory about the unchangeable value of gold.
I pointed out already in my review of Hilferding’s Finance Capital that his theory of paper money seemed to me untenable.  I thought I had to confine myself to that appraisal and abstain from a detailed refutation, first because my review was already so extensive, and also because I should have had to enter into the details of the theory of money, which most of the readers would easily have mistaken for hair-splitting. One does not deal with a subject like that in a popular journal without a good reason. There seemed to be no pressing need for a debate on that issue, because paper money plays no role in Hilferding’s book, and therefore does not impair its great merits. Hilferding himself declared it to be unrealizable in practice. I therefore felt entitled to consider it as a purely “academic whim.”
Hilferding’s latest article however shows that the notions out of which he developed his ideas on paper currency can have greater significance. He made them the basis of an analysis that could have crucial significance for answering the most important economic question of our time—the high cost of living—but that in addition, if it is indeed true, strikes at the heart of our theory of value.
We will now attempt to investigate if that is the case.
Let us first of all hear Hilferding himself. He says in his Finance Capital:
“Let us first envisage a system of pure paper currency (as legal tender). Let us assume that, at a given time, circulation requires 5,000,000 marks for which 3600 pounds of gold would be needed.  We should then have a total circulation as follows: 5,000,000 marks in C—5,000,000 marks in M—5,000,000 marks in C. If paper tokens were substituted for gold, their sum would have to represent the total value of commodities (5,000,000 marks in this case) whatever their nominal value. In other words, if 5,000 notes of equal value were printed, each note would be worth 1,000 marks; if 100,000 notes were printed, each would be worth 50 marks. If the velocity of circulation remained constant and the sum of prices were to double without any corresponding change in the quantity of paper money, the value of the paper would rise to 10,000,000 marks; per contra, if the sum of prices were to decline by one half, the value of the paper would fall to 2,500,000 marks. In other words, under a system of pure legal-tender paper currency, given a constant velocity of circulation, the value of paper money is determined by the total price of all the commodities in circulation. The value of paper money in such circumstances is completely independent of the value of gold and reflects directly the value of commodities, in accordance with the law that its total amount represents value equal to the sum of commodity prices divided by the number of monetary units of equal denomination in circulation. It is obvious that paper money can appreciate as well as depreciate in relation to its original value.” 
Hilferding then refers to the experiences of different countries in which, with the cessation of free coinage of silver, the value of the silver coins exceeded their metal value, which is supposed to corroborate his views, and finally comes to the following conclusion:
“Money continues to serve as a ‘measure of value.’ But the magnitude of its value is no longer determined by the value of the constituent commodity, gold, silver, or paper. Instead, its ‘value’ is really determined by the total value of the commodities in circulation, assuming the velocity of circulation to be constant. The real measure of value is not money. On the contrary, the ‘value’ of money is determined by what I would call the socially necessary circulation value. If we also take account of the fact that money is a medium of circulation…this socially necessary circulation value can be expressed in the formula:
+ the sum of payments falling due − the payments
which cancel each other out, minus finally the number of turnovers in which the same piece of money functions alternately as a means of circulation and as a means of payment.” 
Let us look more closely into those remarks. The first sentence already contains the seeds of a misunderstanding. He says:
“Let us assume that, at a given time, circulation requires 5,000,000 marks for which 3600 pounds of gold would be needed.” 
According to this idea one could suppose that 5 million marks and 3,600 pounds of gold are two different things. Gold would be the means for bringing 5 million marks into circulation. Actually 5 million marks are nothing but 3,600 pounds of gold. The former is identical with the latter, and can be nothing else. What circulation required were the 3,600 pounds of gold. The fact that people call 1/1395 pounds of gold a mark, and that 3,600 pounds of gold are called 5 million marks, is circumstantial.
Hilferding’s sentence is not yet false, but carries the seed of potentially mistaken views. The following sentence is more significant:
“We should then have a total circulation as follows: 5,000,000 marks in C—5,000,000 marks in M—5,000,000 marks in C.” 
Marx employed the formula C–M–C to denote the circulation of commodities. The commodity producer comes to the market with a commodity C, which represents a certain amount of value.
He sells it, exchanging it against a certain amount of bullion M, with has the same value as commodity C, and buys with that amount of money other commodities of the same value, which is why Marx called that commodity also C, although as use value it represents something completely different from the first commodity.
It is clear that C does not represent in Marx’s formula a determined amount of money, but of commodities. Had he wanted to denote C concretely, he would have written down a certain weight or number of commodities, such as 40 pounds of coffee, 2 meters of fabric or half a ton of iron. It would not have occurred to him to denote 5 million marks with C. Five million marks denote, as we know, only a certain amount of a particular commodity, gold, measured by weight. It would be senseless to say that in the circulation of commodities for instance 1,360 pounds of gold in coffee are exchanged against 1,360 pounds of gold in gold, and again against 1,360 pounds of gold in iron.
Even more critical however is the following thing. C–M–C is the formula for the circulation of particular commodities. What Hilferding wants to represent by it, however, is not the circulation of particular commodities but the circulation of the entire mass of gold and commodities in society. But that is the result of numerous circulation processes, which are intertwined in the most diverse ways, and which cannot be collectively represented by the formula C–M–C. In that formula, the value of C must be always equal to M. In contrast, the total value of the money in circulation is almost never equal to the total value of the commodities in circulation.
Hilferding knows all that as well as I do. A few lines later he mentions Marx’s formula for the amount of money in circulation. When, despite that, he employs the formula (5 million in) C–(5 million in) M–(5 million in) C, that is apparently only a mistake, which could be overlooked if it were not the foundation for further errors. Hilferding continues:
“If gold were replaced by paper notes, their sum would have to represent the total value of commodities (5,000,000 marks in this case) whatever their nominal value.” 
This is the first serious mistake resulting from his inexact wording. Hilferding’s unusually confusing style is already striking: “whatever their nominal value.” Why does he not express himself more clearly? What can then be printed on the paper signs? Surely not quotations from the German classics, like in modern toilet paper? Only one thing can be printed on them which matters here: how much gold they represent. On each note is always printed which weight in gold it represents. Let us not forget that.
No less confusing than the expression “whatever their nominal value” is the following one: “their sum would have to represent the total value of commodities.” The sum of paper notes? But they cannot represent any value. It is not a question of a sum of notes but of the sum of gold quantities that they represent. Hilferding is clearly attempting, by means of clumsy and vague phrases, to detach paper money from its connection to gold. Then he takes nonchalantly the decisive step by claiming with the greatest calm, as a self-understood thing, that “their sum [of paper notes] would have to represent the total value of the commodities ... whatever their nominal value.”
“If gold were replaced by paper notes,” paper money would always serve as a representation of gold, a certain amount of gold, not as a representation of commodities. The sum of value that the total amount of notes represents must always be equal to the sum of gold they supersede. In Hilferding’s example that sum is admittedly equal to the sum of values of commodities in circulation. Still, that does not mean that the sum [of values of the total amount of notes] also represents the sum of value of commodities, when the former deviates from the sum of value of gold required for commodity circulation.
If gold were replaced by paper notes, these would denote certain amounts of gold, not of commodity values. They denote M, not C. Whatever amount of gold they may nominally represent, it can actually be no greater than the amount required by the needs of circulation.
Hilferding can argue that all this is pure pedantry. The amount of gold required by the needs of commodity circulation depends on the sum of values of the commodities thrown into circulation. The larger this sum, the greater will be the amount of gold required. All other circumstances being equal, both sums stand at a fixed ratio.
Marx himself said in Capital:
“On this supposition then, the quantity of the medium of circulation is determined by the sum of the prices that have to be realised.” 
Does not what Hilferding said amount to the same things? Not at all, because Marx said that his proposition is true under certain circumstances. The purpose of Hilferding’s argumentation is precisely to remove that premise, which Marx formulated as follows:
“Henceforth we shall consider the value of gold to be given, as, in fact, it is momentarily whenever we estimate the price of a commodity.” 
In contrast, Hilferding wants to demonstrate that the value of paper money is independent of the value of gold, and that the total value that paper money represents is determined directly, immediately by the value of the mass of commodities confronting it (with the same velocity of circulation).
According to Marx the value of paper money is determined by the value of the mass of commodities confronting it, but this process is mediated in Marx’s analysis by gold, which is indeed replaced bodily by paper currency, but that still functions as measure of value and therefore as represented gold.
The opposition between the analyses of Marx and Hilferding emerges clearly in this footnote to Finance Capital:
“It seems to me that Marx formulates the law of paper currency (or any currency with suspended coinage) most correctly when he says: ‘Worthless tokens become tokens of value only when they represent gold within the process of circulation, and they can represent it only to the amount of gold which would circulate as coin, an amount which depends on the value of gold if the exchange-value of the commodities and the velocity of their metamorphoses are given.’  The detour by which Marx proceeds—first determining the value of the quantity of coins and then, from that, the value of the paper money—seems superfluous. The purely social character of that determination is far more clearly expressed when the value of paper money is derived directly from the social circulation value. The fact that, historically, paper currency had its origin in metal currency is not a reason for degrading it in this way theoretically. The value of paper money must be deducible without reference to metallic money.” 
Here the contradiction between Marx and Hilferding becomes clear. Hilferding thinks that the value of paper currency must be derived from the value of the commodities, with no connection to gold. “Must” is a hard nut to crack, but in science there is no “sic volo, sic jubeo” [‘this I will, this I command’].  There only ratio decides. And there Hilferding’s attempt to get rid of gold is not very convincing. He wants to disconnect gold from the determination of the value of paper money, and determine the latter directly through the value of commodities. But, without noticing it, he only succeeds in doing that by implicitly presupposing the measurement of the value of commodities through gold—in other words, by equating value and price. His entire deduction is erected on the presupposition that so many marks are not a determination of price but of value. But Marx did not dispute that the value of paper money in circulation is determined by the sum of prices of commodities. The way from value to price is precisely the “detour” that Marx adopted. Hilferding spares himself that “superfluous” detour by regarding price and value as equivalent. This error leads him to argue that 5 million marks and 3,600 pounds of gold are different things, and to replace the formula C–M–C for the formula (5 million marks in) C̵(5 million marks in) M–(5 million marks in) C.
Marx said: Under the presupposition of a given value of gold, the mass of means of circulation is determined by the sum of prices of commodities to be realized. Hilferding, in contrast, declares that the sum of money notes “must always represent the sum of value of the commodities, and therefore in our case must be equal to 5 million marks.” Those 5 million marks are not a sum of values, but of prices. Value is determined by the socially necessary labour time. If a socially necessary labour time of 5 million hours of work goes into the production of a given mass of commodities, its value will be accordingly high. If an hour of labour produces 1/1395 pounds of gold, and if one calls that amount of gold a mark, one can also say that the sum of value of the mass of commodities amounts to 5 million marks. Strictly speaking, however, this is not a sum of values but of prices, i.e. a determined quantity of values expressed by a certain amount of gold, against which it is exchanged. Value and price are by no means the same thing, although to simplify matters one can sometimes equate one with the other. But one must not forget that the expression of the value of a commodity in money presupposes the value of the latter, and that it is senseless without this presupposition. It is always more accurate to call such an expression price.
Why does then Hilferding talk about a sum of values rather than a sum of prices? The sum of value of commodities is given; it is independent from the value of gold. The sum of prices, by contrast, presupposes not only a certain value of commodities, but also a certain value of gold. Equating the sum of values to the sum of prices enables Hilferding to make the price as well as the value of commodities independent from the presupposition of a given value of money.
This equation of value and price is the basis of Hilferding’s theory. He continues:
“If 5,000 equal notes were printed, each would be worth 1,000 marks; if 100,000 notes were printed, each would be worth 50 marks. If the velocity of circulation remained constant and the sum of prices of commodities were to double without any corresponding change in the quantity of paper money, the value of the notes would rise to 10,000,000 marks; per contra, if the sum of prices were to decline by one half, the value of the notes would fall to 2,500,000 marks.” 
Here apparently every connection between money and gold has disappeared. We have on one side a mass of commodities, and on the other a mass of paper notes. The value of the paper notes depends on the value of the mass of commodities and on the amount of paper notes. Gold seems to have been totally eliminated. And yet the im7portunate metal intrudes again and again also into this nice paper economy.
What do we have according to Hilferding’s presuppositions? A mass of values, a heap of commodities representing perhaps 5 million working hours, and an amount of nicely printed paper notes. The paper notes are in themselves valueless; they acquire their value through the monopoly that the state accords them for the circulation of commodities. The value of each note is determined by the value of the commodities that it has to circulate. If only 5,000 notes are available, each one accounts for 1,000 working hours. If 100,000 notes are thrown into circulation, each represents 70 working hours.
In that form paper currency would be nothing but an inferior copy of the Utopia of “labour-money.” On the latter Marx said:
“The question: why does not money directly represent labour-time, so that a piece of paper may represent, for instance, X hours’ labour? is at bottom the same as the question: why, given the production of commodities, must products take the form of commodities? This is evident, since their taking the form of commodities implies their differentiation into commodities and money. Or, why cannot private labour—labour for the account of private individuals—be treated as its opposite, immediate social labour?” 
Hilferding avoids answering that unpleasant question by presenting the sum of values in marks rather than in working hours. But he may twist and turn as much as he wants: a mark means a certain amount of gold.
As soon as gold is introduced, the whole thing once again makes sense. Hilferding assumes a value of commodities of 5 million marks. That is a definite amount of represented gold; if we understand by a mark 1/1395 pounds of gold, it means approximately 3,600 pounds of gold. Let us assume that for the circulation of that amount of commodities an equal amount of gold is required: we have then 3,600 pounds of gold, but in all their corporeality. If those 3,600 pounds of gold are replaced by notes representing them, their total sum will amount to 3,600 pounds of gold, whatever their quantity. Each note will be printed with the explanation, that it is equal to a certain amount of gold. That is the meaning of the explanation that it is worth 50 or 100 or 1,000 marks. It does not have and cannot have any other meaning. If more notes were thrown into circulation than required by the circulation needs, there would be more representations of gold than the amount of gold that would circulate in their place, and they would be therefore worth only as much gold as required by the circulation process. If it requires 5 million gold marks and there is an amount of paper money representing 10 million gold marks, each note will be worth half its nominal value, and it will buy no more commodities than that.
Otherwise it is impossible to understand the phrase: “If 5,000 equal notes were printed, each would be worth 1,000 marks; if 100,000 notes were printed, each would be worth 50 marks.” What mark can here be understood but a gold mark? Besides the paper marks (or mark notes of 50, 100 and 1,000) there are only gold marks, or at least marks in represented gold. Now, a paper mark is always worth a paper mark. The statement that 100 paper marks are worth 50 marks can only mean that they are worth 50 gold marks.
If more paper money were thrown into circulation than required by the needs of circulation of gold money, the legal tender will produce double prices: gold prices and paper money prices. Gold always remains the basis of value measurement; it cannot be eliminated as a measure of value.
Hilferding denies that. He arrives at this law:
“In other words, under a system of pure legal-tender paper currency, given a constant velocity of circulation, the value of paper money is determined by the total price of all the commodities in circulation. The value of paper money in such circumstances is completely independent of the value of gold and reflects directly the value of commodities.” 
The value of money would accordingly be determined by the sum of commodity prices. But how will the sum of commodity prices be determined? Apparently by means of the value of money. It is impossible to say that a commodity is worth 10 marks before I know what value those 10 marks represent. According to Hilferding the value of money with paper currency is determined by the value of commodities compared to the value of money. He fell into this nice vicious circle because he confused value and price. So could the appearance emerge, that commodities have not only a certain value before they are confronted with money, but also a certain price, that is to say a certain exchange ratio with money, whose value is however still totally unknown. If that were true, then the value of money could really originate in the value of commodities and money would “directly reflect the value of commodities.”
Hilferding does not explain the crucial question: how can commodities get a price before determining the value of money? Without answering it, he reaches the conclusion that with legal tender the value of money as a measure of value is not determined by the value of the money-commodity but by what he calls the “socially necessary circulation value,” which is given by the formula:
= total value of money
(irrespective of payments, which we do not want to include here in order to avoid unnecessary complications).
The formula is constructed in imitation of Marx’s formula, which reads: “The quantity of money functioning as the circulating medium is equal to the sum of the prices of the commodities divided by the number of moves made by coins of the same denomination.” 
Both formulas outwardly say the same, yet they are fundamentally different.
Marx starts from the sum of prices of commodities, that is to say their sum of value, expressed in a certain amount of coins, for instance marks. Let us suppose that the sum of prices of the commodities turned over daily in a market amounts to 5 million marks. That number must be divided by the average number of daily moves of coins of the same denomination. Since the sum of prices of commodities is assessed in marks, we are considering here only marks, because it is irrelevant how many particular one-mark coins, twenty-mark coins, etc. circulate. If each one-mark coin changes hands five times a day through purchase and sale, a million mark coins will be required to accomplish those transactions.
But in Marx the value of money, the value of a mark, is presupposed as given. What changes with the sum of prices of the commodities and the velocity of circulation of money is not the value of particular coins, but the number of coins in circulation at the same time.
All this is clear and simple. In contrast, in Hilferding’s formula we have, as already remarked, the sum of values of commodities, which must be transformed into their sum of prices even before the value of money is determined. But in order to determine the value of the sum of money and with it the value of the particular coins we must take into consideration the velocity of circulation of money, which is determined by the number of purchases accomplished within a certain period. That is to say, according to Hilferding’s formula money must function first as a measure of value and then as a means of circulation before determining its value, which turns it into a measure of value and a means of circulation. First the vendor determines the price of his commodities, then they are sold against a certain amount of money, and only then emerges, as a result of these transactions, how much a particular coin is worth! The value of money, which must be determined so that the circulation of commodities (that is to say the exchange of commodities and money) can begin, is made the result of this exchange!
If I understand Hilferding correctly, and I do not see how his theory can be understood otherwise, then it is certainly quite astonishing, but not incomprehensible. It was not made out of thin air, but represents an attempt to explain certain phenomena about which the theorists of money have belaboured for decades. Those phenomena are close to Hilferding because the experiences which his fatherland had with the gold standard played a prominent role among them. A theory of the determination of the value of money by the socially necessary circulation value, the complete independence of the value of money from the value of gold, is a genuinely Austrian theory. Since the 1870s the value of silver has fallen very rapidly. That created severe disturbances in the currencies of all the states that had not adopted the gold currency. Among those countries where silver currency still prevailed were Austria and India. Both countries sought relief in the discontinuation of free silver coinage. They reduced the number of silver coins in circulation to a certain amount. The result in both cases was that the price of the silver coins was detached from its metal value and rose above it. Hilferding explains that by arguing that the amount of silver money available at the given metal value was not enough for the needs of commodity circulation. He argues that when the sum of commodities required 700 million silver florins, and there were only 600 million in circulation, a silver florin was worth 7/6 of its silver value.
For Hilferding this proves that the value of money with unredeemable currency is not determined by the intrinsic value of money, but by the socially necessary circulation value.
The fact to which he refers is undeniable. By abolishing the free coinage of silver it was indeed possible to raise the rate of exchange of the silver coins above their metal value.
But under what circumstances did that happen? It happened at a time when the adoption of a gold currency was inevitable. The trade of the countries with a silver currency with those with a gold currency grew in the course of economic development. Next to silver, gold became increasingly important for the former countries as well. The situation became more and more intolerable for them as the previously pretty constant ratio between the value of gold and the value of silver was upset by the constant fall of the latter. It became indispensable to confront that situation and that is why the free coinage of silver was abolished.
Hilferding says for instance about the suspension of free silver coinage in India:
“The object was to raise the rupee exchange to 16 pence. Under free coinage this rate corresponded to a silver price of about 43.05 pence. In other words, at that price, the silver content of the rupee, if melted down and sold, would have fetched a price of 16 pence on the London (world) market.” 
When the mints for private coinage were closed, the silver price was 38 pence; the rate of the rupee was 147/8 pence. After silver coinage was discontinued in 1893, it finally succeeded in bringing the price of the rupee up to 16 pence in 1897, while the silver value it contained was merely 8.87 pence.
Now, pence are English money, gold money. The rate of exchange of the Indian rupee is its price expressed in gold. Therefore one cannot say that silver money, any more than paper money, is “completely independent from the value of gold and a direct reflection of the value of commodities.” It is independent from its own metal value, but only because silver as a measure of value was displaced by another precious metal. It was therefore a question of fixing the ratio between Indian silver money and English gold money, which they sought to accomplish by limiting the amount of Indian silver money in circulation. This measure, however, would have occurred to nobody, and would indeed have been impossible, had silver money been the only money. It became possible and desirable because gold increasingly pushed silver back, especially as a measure of value, leaving silver to function merely as means of circulation, and basically confining it to the role of token coins. But token coins function merely as means of circulation, not as a measure of value. The value of the silver token coins stood above their metal value, but nobody would affirm that because of that money needs to have no intrinsic value, and that this intrinsic value does not determine commodity prices and with them the amount of money required for the circulation of commodities. To be sure silver money did not become completely a token coin with the discontinuation of free coinage. But this discontinuation was only the first step for Austria and India to go over to gold currency. In both countries gold is the legal measure of value.
The experiences with unredeemable silver currency therefore do not at all show that the value of money as a measure of value is determined by the socially necessary circulation value rather than by its own value, which as a metal it has like any other commodity. In order to be able to prove it, those experiences should have lasted longer without causing serious disturbances in the circulation of those countries where the unredeemable metal was the only measure of value. As long as there is no example of a longer lasting irredeemable gold currency I do not feel compelled to revise the analysis of gold as a measure of value developed by Marx in Capital, where he wrote:
“although the money that performs the functions of a measure of value is only ideal money, price depends entirely upon the actual substance that is money.” 
Marx poked fun on the representatives of the “absurd hypothesis that commodities are without a price, and money without a value, when they first enter into circulation, and that, once in the circulation, an aliquot part of the medley of commodities is exchanged for an aliquot part of the heap of precious metals.”  Hilferding repeats that opinion, but is it not suitable to his theory about the socially necessary circulation value? Also in his theory money enters into circulation without a value. To be sure he lets commodities enter into circulation with a value, but he is only able to do that by calling their value price.
Finally Hilferding himself becomes uneasy about his theory and therefore remarks:
“A pure paper currency of this kind cannot meet the demands imposed on a medium of circulation for any extended period of time. Since its value is determined by the value of the circulating commodities, constantly subject to fluctuations, the value of money would also fluctuate constantly. Money would not be a measure of the value of commodities; on the contrary, its own value would be measured by the current requirements of circulation, that is to say, by the value of commodities, assuming a constant velocity of circulation. A pure paper currency is, therefore, impossible as a permanent institution, because it would subject circulation to constant disturbances.” 
In other words: the socially necessary
circulation value, when closely looked at, is nothing but a socially
harmful, constant disturbance to circulation. Let us thus rather remain
with Marx’s “detour.”
In his article on money and commodity  Hilferding applies the law of socially necessary circulation value advanced by him to gold currency, after having applied it in Finance Capital only to irredeemable currency and to paper currency. He claims that under the gold standard that law determines the value of the sum of money employed for circulation purposes.
According to Hilferding, the sum of money employed for circulation purposes is today regulated by central bank, which absorbs all the gold for sale. “The demand is therefore unlimited.” This gold disappears in the central bank’s vaults and is distributed from there to the extent required by the changing circulation value.
“Let us suppose that the circulation value grows from 1,000 to 1,500. If there were no gold hoard, the exchange ratio of the gold coins would have to change. 1 mark would be now worth 1½ marks and vice versa.”
But thanks to the gold hoard [of the central bank] there will always be as much gold available as required by the circulation value. The central bank will absorb superfluous gold or add gold to circulation if it is lacking.
“A change in the value ratio (between money and commodity) cannot therefore develop at all, because for the changes in the value of gold to manifest themselves, money must remain in circulation. Only when commodities and means of circulation face each other directly can they determine each other’s value. Money out of circulation—as hoard in the central bank’s vaults—stands in no relationship to the sum of commodities in circulation.
“The actual sequence is therefore this. The producer of gold receives 1 kilogram of gold coins for 1 kilogram of gold. The new gold lies in the central bank’s vaults. If circulation needs increase, gold flows from the vaults into circulation. Thus the rate of exchange between gold coins and commodities always remains as it was at the beginning of the process.”
In other words, the law of value is abolished for gold as money. Though that might sound amazing at first sight, Hilferding does not find it surprising.
“The law of value requires total economic freedom for its operation, but this freedom is modified for the rate of exchange between money and commodities by the operation of the central banks. The specific nature of money makes it difficult to offer an illustrative example, but let us imagine the following situation: in a completely closed, autarchic economy the state introduces a monopoly of oil trade. Let us say that it keeps a reserve of 100 million litres. It sells oil at a price of 30 marks every 100 litres to everyone, and is always ready to buy back the oil it sold at a price of 29½ marks. The result would naturally be a constant oil price of 30 marks. This price would decide what other oil fields would be exploited, which oil fields would yield rents and how high those rents would be. A growing demand for oil would be met from the reserve, and the ‘policy of the oil bank’ would always be to secure an adequate quantity. If the demand decreases or production is especially abundant, the reserve also increases, which would be considered an especially favourable circumstance by the bank clerks. The sequence of events with gold is entirely analogous, only in this case the constant rate of exchange [between money and commodities] can also be theoretically accounted for more certainly.”
The central banks are today a sort of gold monopoly. Formerly gold had “no unlimited demand,” today by contrast the central bank absorbs all the gold and besides at a fixed price.
“The decisive thing is the fixation of the coins as a certain weight in gold, and the absorption of all gold by the central bank at this fixed ‘gold price.’”
Then again “the central bank is committed, and it cannot be otherwise, to satisfy immediately the needs of circulation as soon as they arise.” In this way a “social regulation of circulation” was established through the central banks, which did not exist as long as gold, coming from private mines, was bought by private persons, who also accumulated the gold hoards. Under those circumstances, the value of money was indeed determined by its production costs. Today it is determined by the ratio between the amount of money in circulation and the socially necessary circulation value, and since that ratio is always kept at the same level by the central bank, we have a constant gold value. The production conditions of gold may change as much as they want, but the value of gold remains always the same.
Hilferding triumphantly reaches this conclusion:
“This is then the effect of the ‘unlimited demand’ for gold. It brings about the stabilization of the rate of exchange of the gold coins and with them of the gold ingots, as long as the conversion of gold into coins is legally guaranteed. But in that way we also have since the general introduction of the modern gold standard system an actually fixed measure of value, which the economists looked for so long but which they still did not recognize, because they already had it for a long time.”
I regret having to stay even today, after this clarification, among the ranks of those economists.
First of all the example of the state monopoly of oil trade must be disposed of. If a state attempts, according to Hilferding’s example, to introduce a monopoly of the oil trade, the result would be not a constant oil price, but the bankruptcy of the state, no matter whether it is a closed commercial state or not. Let us suppose, in analogy with the contemporary development of gold production, which we are trying to explain, that the conditions of production of gold change, partly as a result of the finding of new, richer fields, partly through technological improvements in its extraction. A vast mass of oil becomes available, but consumption does not change. The retail price remains the same and does not change as [the constant] consumption would require it. The state does not sell more oil than it formerly did, but it is pledged to buy at the old price all the newly offered oil. Hilferding thinks that this would increase the reserve. He also believes that the bank clerks would consider that “an especially favourable circumstance,” though he does not explain why. It is clear that the state will finally run short of money to buy new oil, if it constantly buys more than it sells. The monopoly of the oil trade can be introduced, with constant prices, only when the state itself owns all the oils fields and production can be maintained always at a certain level. But if the monopoly remains a purely commercial monopoly, as the analogy with gold production requires, the state must have the possibility of reducing the price when production, and with it supply, exceeds a certain level. Hilferding says:
“The conditions with gold are completely analogous, only in this case the constant rate of exchange can also be theoretically accounted for with greater certainty.”
Now, with the “completely analogous conditions” of the oil monopoly one can demonstrate with “greater certainty” the impossibility of a “constant rate of exchange” [between money and commodities].
Hilferding would perhaps object that his remarks must be taken with a pinch of salt. The analogy between gold and oil would apply if there were an unlimited supply of oil. Then its price could always be kept at the same level, whatever the production conditions. But now the central banks have developed an unlimited demand for gold.
What does that unlimited demand for gold consist of? One must not understand by it, for instance, that everybody needs gold and nobody has too much of it. That is an old story, even if it remains always new. According to Hilferding the unlimited demand exists since “the creation of the central banks that absorb unlimitedly all the gold brought to the market.” How does that happen?
“That means nothing more than that 1 kilogram of gold coins is always given for 1 kilogram of gold. That new kilogram at first disappears in the central bank’s vaults, where it is guarded as a hoard.”
If Hilferding handed over a ten-mark note and received a gold crone, he should not think that he received “new gold” that he can deposit as “hoard.” His “treasure” [Schatz means both “hoard” and “treasure”] remains exactly as it was before, only its form has changed.
The same happens with the central bank when it absorbs gold. It gives for 1 kilogram of gold ingots 1 kilogram of gold coins and owns after this transaction not a single penny more gold than it did before. It can let the gold ingots be minted again, and then exchange once again the coins for ingots, and then repeat this process indefinitely. But since when is that an “unlimited demand for gold”? That “demand” is nothing but the unlimited willingness of the central bank to exchange all the gold that comes to it against another money form. Nobody will want to argue that the money changers generate an “unlimited demand” for the money that they exchange.
However, not all the gold has to be exchanged against coins. The gold can actually increase the central bank’s hoard and disappear in its vaults, if it is not exchanged against coins but against paper money, i.e. against a money order. In that case a new amount of gold is added to the one already existing [in the central bank’s vaults]. Through this process all the gold that comes into the market can be absorbed. Does perhaps the unlimited demand for gold consist in that?
New gold comes into the central bank’s vaults, but it does not belong to the central bank. It actually belongs to those who own the money orders [Anweisungen: also payment orders]. When they present the money orders, they must be redeemed. That gold was therefore not acquired by the central bank; it is a deposit of the owner of the money order, of the central bank note. Here the “unlimited demand for gold” reveals itself as the willingness of the central bank to store every amount of gold coming into the market. The gold hoard of the central bank is nothing but the union of the gold hoards of the money owners in the country, which was previously split into countless cash boxes and cellars and is now centralized. This centralization has its advantages, but is only achievable when the central bank accepts every gold hoard that it is asked to take in.
That is the whole secret of the “unlimited demand for gold” that the central banks allegedly generate. It changes nothing in essence, but just a little in the mechanism of hoarding, which already functioned under developed commodity production before the establishment of those banks. And the same is true of the “social regulation of circulation” which the central banks supposedly introduce instead of the former anarchy of circulation. Hilferding says:
“The introduction (of money) into circulation was (previously) not as mechanic a process as it is today. Gold had then no unlimited demand. It had to be exchanged for commodities, and so entered directly into circulation and there remained, as long as private hoardings did not develop. Hoarding, however, was not dependent on the circulation of commodities, but on the private fortunes of individual economic actors.”
Why previously gold had to be exchanged by the gold producers immediately after its production is not clearly evident. On the other hand, the gold producer has even today every reason for exchanging his gold directly against commodities. Hilferding believes that the central bank absorbs the gold and only releases it when the needs of circulation require it. But, as we have seen, the gold that the central bank exchanges for coins is not a new hoard. And the gold producer wants the coins in order to put them into circulation, for instance in order to buy means of personal consumption or means of production. He employs his money in the same way, when he exchanges his gold against bank notes or other paper payment orders. If he is a capitalist, he does not let his gold lay idle, but buys, for instance, shares from whose proceeds rails and locomotives are bought for Chinese railways. In any case he seeks to put his money into circulation. The establishment of the central bank makes no difference at all. Whether the newly produced gold remains in circulation or is temporarily hoarded never depends on the central bank’s will but on the needs and wealth of the private money owners—today as in the past.
And the same is true of the “regulation of circulation” by the inflow of gold [into the central bank]. Hilferding says:
“The central bank’s hoard serves directly as reserve for circulation, because the bank is bound (and it cannot be otherwise) to satisfy the circulation needs as soon as they arise. The situation was completely different when that regulation did not exist. If from the circulation needs resulted that the gold exchanged for commodities grew in value, there was no reason for private persons to throw money into circulation.”
How do people throw money into circulation? In no other way than by buying commodities (I am abstracting here, as elsewhere in this work, from the function of money as a means of payment, in order to avoid unnecessarily complicating the analysis). Circulation is always commodity circulation, the buying and selling of commodities.
The buying of commodities by particular persons depends on their needs as consumers and producers. The central bank does not change them in the least. It does not increase the amount of needs. Admittedly, the buying of commodities does not depend on necessities only, but also on the amount of money that we dispose of, as we all sometimes painfully feel. If the amount of money available as hoard is not enough for the purchases required by the household or the business, then one must draw on credit, and try to borrow money from others who have accumulated hoards. Circulation is created by those money expenditures by particular persons.
What does the appearance of the central bank change? Does it give money to people so that they can buy commodities? Unfortunately that kind of social regulation of circulation does not exist. It is always particular persons who create the circulation through their purchases, either with their own or with borrowed money. The change consists simply in the fact that part of their money lies as deposits in the central bank, which must first release it, and further in the fact that the central bank becomes their first credit provider. Only in that way, through money advances and credits to particular physical or juridical persons, does the central bank throw money into circulation. Actually it almost does not intervene directly into circulation—except in as much as the central bank buys commodities itself. It is the private persons that throw into circulation the money borrowed from it, according to their needs and their means.
The modern method of putting money into circulation differs only in form from the method used before the advent of central banking, but not in essence. As previously we have no social regulation of commodity circulation, and therefore also no regulation of the circulation of money, which is determined by commodity circulation. Like before commodity circulation is effectuated by the needs and means of private persons. The central bank can, thanks to its huge machinery and greater insight into the circumstances of private persons, overcome more easily many circulation stoppages and grant credit more suitably and quickly than many isolated money capitalists could possibly do. But the circulation process of commodities is only a part of the entire production process; it is therefore determined by the needs and results of the production process, and as long as private property in the means of production holds good for the process as a whole, a social regulation of part of it is out of the question, even in a metaphorical sense. Of course Hilferding did not mean to use his proposition about social regulation in a literal sense.
But no matter what may be understood by social regulation, the establishment of the central banks by no means changed the essence of the circulation of commodities and money, as Hilferding believes.
The unlimited capacity of society to absorb gold—and therefore the unlimited demand for the latter—is not a discovery of the central banks; it has existed ever since there was commodity production, because gold became the commodity regarded as social material expression of wealth and gained the form of direct general convertibility. That is why it became money. A commodity that people will not receive gladly at any time and in any quantity cannot become money. And the hoarding of gold is just as little a discovery of the central banks. Reading Hilferding’s comments, one might get the impression that money hoards were first regularly accumulated in the central banks, and that, before them, accumulation was a matter of chance, left to the arbitrary will of particular persons, which might just as well not have happened. An actually uninterrupted, regular commodity production is almost impossible without the accumulation of sums of money at different times and places, from which the owners again throw money into circulation according to their needs. The lack of such money pools would not, as Hilferding argues, “change the exchange ratio of the gold coins” owing to the law of circulation value; it would rather make the continuation of commodity circulation and commodity production impossible.
“The central bank absorbs every superfluous gold piece in circulation and adds it to its hoard; a change in the value ratio [between money and commodities] cannot therefore take place at all.”
The situation is different when no gold hoard exists [in the central bank]:
“Let us suppose that the circulation value grows from 1,000 to 1,500. If no gold hoard were available, the rate of exchange of gold coins would change. One mark would be now worth 1½, and vice versa.”
In other words: if the circulation value drops from 1,000 to 1,500, each mark will be worth 50 pfennigs if there is no central bank to absorb the superfluous gold coins. That is the real meaning of “vice versa.”
Such a situation is naturally completely unimaginable, because if coins of twenty marks containing 20/1395 pounds of gold were worth only 10/1395 pounds of gold, everybody would transform them into full-valued gold by melting the undervalued coins. But generally speaking, did not a situation ever arise where more gold money circulated than was required by the needs of circulation? Was then anyone forced by the lack of a central bank to give away his money? What he did not need for the purchase of commodities, and therefore for commodity circulation, he kept in his pocket if there was no central bank in whose vaults he could deposit it.
Hilferding’s formula for the circulation value, as we have already seen, was built upon the model of the law that Marx advanced for determining the amount of money in circulation, which reads:
“The quantity of money functioning as the circulating medium is equal to the sum of the prices of the commodities divided by the number of moves made by coins of the same denomination.” 
“This law holds generally” says Marx. It is not some sort of ideal that was first realized by the central banks. For Hilferding however the law only applies since the establishment of the central banks, and under those conditions no changes can take place in the value of gold.
“Because for changes in the value of gold to take place, gold would have to remain in circulation. Only when commodities and means of circulation confront each other directly can they mutually determine their value.“
What is this again but the “absurd hypothesis that commodities are without a price, and money without a value, when they first enter into circulation, and that, once in the circulation, an aliquot part of the medley of commodities is exchanged for an aliquot part of the heap of precious metals”?  The only difference between the vulgar quantitative theory [of money] and Hilferding’s circulation value is that the former includes in the heap of precious metals all the extracted gold (and accordingly silver) while Hilferding understands by the heap of precious metals only the part of gold in circulation, which in his view can always be kept by the central banks in a certain ratio with the medley of commodities. Provided that the heap of precious metals maintains always the same ratio vis-à-vis the medley of commodities, increasing and decreasing in the same way, then the same aliquot part of the medley of commodities will always be exchanged for the same aliquot part of the heap of precious metals. That train of thought lies at the basis of Hilferding’s statement:
“If the circulation needs increase, gold flows from the [central bank’s] vaults into circulation. Thus the rate of exchange between gold coins and commodities always remains as it was at the beginning of the process.“
However Hilferding proves here more than he wanted to prove. He wanted to show that under those circumstances the value of gold remains the same. But the rate of exchange between gold coins and commodities is not the value of gold, but the price of commodities. If Hilferding were right, then commodity prices would remain unchanging.
Here the basic error of his whole theory of circulation value becomes evident. It leaves aside completely the fact that commodities are furnished with prices, and that they have therefore measured their value with gold before entering into circulation. In order for gold to accomplish that function as a measure of value it just has to be imagined [visualized], but it must previously have a certain value. Whether the actual gold circulates or remains in the central bank’s vaults or in the stocking of a peasant’s wife, does not concern in the least its function as a measure of value. Commodities come to the market provided with prices, and therefore as representatives of a certain amount of gold. How much gold is required to buy all the commodities depends on their sum of prices as well as on the velocity with which the different purchases and sales follow each other and the money changes hands. It is not the amount of money in circulation that determines the “rate of exchange between gold coins and commodities,” that is to say the sum of prices of the commodities, but on the contrary, it is the sum of prices of the commodities that determines the amount of money in circulation—a sum of prices, which presupposes the values of the commodities as well as the value of gold.
Hilferding believes that if always as much gold is in circulation as is required by the needs of circulation, the rate of exchange between gold coins and commodities remains unchanging. But one of the factors that determine the circulation needs is precisely the rate of exchange between gold and commodities.
Just as little as Hilferding’s remarks in Finance Capital does his article on money and commodities give cause for revising the view developed by Marx in Capital, according to which gold enters into circulation with its own value, which is ultimately determined by the socially necessary labour time, and commodities enter into circulation with certain prices, thereby determining the amount of gold required to accomplish their sales. I do not see the slightest reason for assuming that anything changes therein when the central banks centralize the function of hoarding and control the distribution of money from those hoards.
Hilferding’s theoretical comments, despite their ingenuity, are wrong because at their origin value and price were not sufficiently kept apart. But with purely logical deductions, just as with mathematical calculations, an insignificant error at the beginning suffices to falsify all further logical consequences and calculations and to bring them increasingly into contradiction with the correct result the further they are carried forward, no matter how correct and faultless they may be in themselves. The brilliance of the thinker only serves in this case to make the mistake more difficult to recognize.
Finally, the conclusion of Hilferding’s analysis, if he were right, would be that the advent of the central banks resulted in the immutability of commodity prices. But even if we understand Hilferding’s “value ratio” [between money and commodities] or “rate of exchange of gold” not as commodity prices, but as gold value, we come no less into contradiction with the facts. Because it is certain that the value of bullion, gold no less than silver, has changed at different times in the course of developed commodity production. Not only did a great revolution in the conditions of production of the money market take place in the seventeenth century. As recently as a few decades ago a similar revolution took place in the production of silver, and its natural consequence was a definite fall in the value of silver, even in countries with a silver standard. And there were already then central banks with great metal hoards that received in their vaults every silver penny withdrawn from circulation.
Neither practical experiences nor theoretical considerations give us any plausible ground for accepting Hilferding’s theory about the determination of the value of money by the socially necessary circulation value, and for assuming that the law of the determination of value by socially necessary labour is abolished by the appearance of the central banks precisely for “the commodity whose bodily form is also the immediate social incarnation of human labour in the abstract.”  On the contrary, the fact that even such a sharp thinker and solid student of our mode of production as Hilferding failed as soon as he departed from that theory of value is a new proof of its correctness—for gold as well as for any other commodity.
1. Otto Bauer, Die Teuerung. Eine Einführung in die Wirtschaftspolitik der Sozialdemokratie, Wien: Verlag der Wiener Volksbuchhandlung Ignaz Brand & Co., 1910.
2. Karl Kautsky, Die Aktion der Masse, Die Neue Zeit, Vol.30 No.2 (October 1911), reprinted in Antonia Grunenberg (ed.), Die Massenstreikdebatte: Beiträge von Parvus, Rosa Luxemburg, Karl Kautsky and Anton Pannekoek, Frankfurt: Europäische Verlagsanstalt, 1970, pp.260.
3. Eugen Varga, Goldproduktion und Teuerung, Die Neue Zeit, Vol.30 No.1 (1912), pp.212-20.
4. Rudolf Hilferding, Geld und Ware, Die Neue Zeit, Vol.30 No.1 (1912), pp.773-82. Reprinted in Cora Stephan (ed.), Zwischen den Stühlen: oder über die Unvereinbarkeit von Theorie und Praxis: Schriften Rudolf Hilferdings 1904-1940, Berlin: J.H.W. Dietz, 1982, pp.43-54.
5. Kautsky, Finanzkapital und Krisen (Rudolf Hilferding, Das Finanzkapital), Die Neue Zeit, Vol.29 No.1 (1911), p.771.
6. A misprint in the original reads: 36.56 pounds of gold. (Note by Kautsky) The figure 36.56 pounds of gold was kept in the English translation. (ed.)
7. Hilferding, Op. Cit., p.39.
8. Hilferding, Op. Cit., pp.47-48.
9. Hilferding, Op. Cit., p.39.
10. Hilferding, Op. Cit., p.39.
11. Hilferding, Op. Cit., p.39.
12. Marx, Capital, Vol.I, p.133, Chapter Three: Money, or the Circulation of Commodities, Section 2 — The Medium of Circulation, B. The currency of money.
13. Ibid., pp.133-34.
14. Marx, A Contribution to the Critique of Political Economy, New York: International Publishers, p.118. Chapter 2: Money or Simple Circulation, 2. Medium of Exchange, c. Coins and Tokens of Value.
15. Hilferding, Op. Cit., p.383, note 32. Hilferding’s emphasis.
16. [The first part of the sentence is a German proverb: Muss ist eine harte Nuss. The last part is a quotation from Juvenal, Satire VI (against women), line 223. The full saying is Sic volo, sic iubeo; sit pro ratione voluntas: ‘This I will, this I command: let [my] will takes reason’s place.’]
17. Hilferding, Op. Cit., p.39.
18. Marx, Op. Cit., Chapter Three: Money, Or the Circulation of Commodities, Section 1: The Measure of Values, p.106, note 1.
19. Hilferding, Op. Cit., p.39.
20. Karl Marx, Capital, Vol.I, p.135, Chapter Three: Money, or the Circulation of Commodities, Section 2: The Medium of Circulation, B. The Currency of Money.
21. Hilferding, Op. Cit., pp.46.
22. Marx, Op. Cit., Chapter Three: Money, Or the Circulation of Commodities, Section 1: The Measure of Values, p.108. The original reads vom reellen Geldmaterial: upon real money material
23. Marx, Op. Cit., Chapter Three: Money, or the Circulation of Commodities, Section 2: The Medium of Circulation, B. The currency of money, p.139.
24. Hilferding, Op. Cit., pp.56-57.
25. Rudolf Hilferding, Geld und Ware, Die Neue Zeit, Vol.30 No.1 (1912), pp.773-82. Reprinted in Cora Stephan (ed.), Zwischen den Stühlen: oder über die Unvereinbarkeit von Theorie und Praxis: Schriften Rudolf Hilferdings 1904-1940, Berlin: J.H.W. Dietz, 1982, pp.43-54.
26. Karl Marx, Capital, Vol.I, p.135, Chapter Three: Money, or the Circulation of Commodities, Section 2: The Medium of Circulation, B. The Currency of Money “(Preissumme der Waren)/(Umlaufsanzahl gleichnamiger Geldstücke) = Masse des als Zirkulationsmittel funktionierenden Geldes.” Karl Marx, Das Kapital, Bd. I, I. Ware und Geld 3. Das Geld oder die Warenzirkulation 2. Zirkulationsmittel b) Der Umlauf des Geldes.
27. Marx, Op. Cit., Chapter Three: Money, or the Circulation of Commodities, Section 2: The Medium of Circulation, B. The currency of money, p.139.
28. Marx, Op. Cit., Chapter Three: Money, or the Circulation of Commodities, Section 3: Money, C. Universal Money, p.139.
Last updated on: 3.2.2009