Karl Kautsky

High Cost of Living

III. The Circulation of Money

We must now consider the question – how is it possible that changes in the condition of the production of gold make such tremendous changes in the entire economic life, seeing that the production of gold, as compared with the entire body of production in the world is only an insignificant factor? The entire annual production of gold is to-day about two billions of marks; Varga calculates the entire value of the world’s products at 124 billions. Therefore the ratio of gold produced is about one and one half per cent. of the total product. This is quite an insignificant factor.

Gold production seems to be small. But does the operation of the law of value on a commodity depend upon the relative position of that commodity to the total product? Why should gold be an exception? Is it because it is a commodity of a different kind?

There arc differences that cause changes in the production of gold to have a. greater significance for economic life than the proportion of its amount to the amount of the total product would lead one to expect.

One of the distinctive features of the commodity, money, we have already examined. It consists in this, that it is a commodity which has a use value for everyone under all conditions, as Varga announces in his statement that the central banks regularly corner gold.

But the money-commodity is not differentiated from all others only in this respect. There is another very substantial difference. If we ignore the factor of transportation, which merely obscures but does not alter our present problem, goods merely make a trip through the market, they change their owners, leave the market, cease to be commodities and are sooner or later consumed. The producer sells them to the consumer; they play no further role in the market for commodities.

It is otherwise with gold. Once on the market it does not leave it. Its movement inside the capitalist mode of production is therefore a double one. Some of the money is spent as revenue as the income of capitalists and wage workers, for the satisfaction of their personal needs. In this way the money expended does not return to its original source. Another portion of money is expended as capital by the capitalists, either for the forwarding of their own undertakings, or as loans to entrepreneurs. This money has the distinctive quality of returning to its original source, with an increase. Diverse as these two different, forms of the movement of money may be, they are constantly at work on the market. Disregarding waste, there is an unceasing process by which goods, once bought by their consumers, become means of production or consumption and are eternally withdrawn from the market.

It therefore does not happen that the yearly production of gold is set off against the yearly production of wares, and that the significance of the former can be measured by comparison of its size with that of the latter. The yearly production of gold, on the one hand, produces a much greater demand for commodities than its mere size would imply since the yearly production of goods is withdrawn from the market, in the course of the year, to make, way for new products, while the mass of money which caused the mass of goads to circulate remains on the market, increased by the year’s gold product.

Let us take an example of simple reproduction, that is, when the same amount of goods are produced, year by year. Here the production of new money would be entirely superfluous, if we disregard the insignificant amount required to make up for wear and tear of coins, jewelry, vessels, watches, and the like, with which we are not at present concerned. The yearly production of wealth would be so immense, and the yearly production of new gold for the making of money so diminished, that the increased demand for commodities would come into conflict with the static supply, and there would be a rise in the price of goods which would soon put an end to the production of gold.

Ignoring the industrial use of gold, and considering general production as static, gold must be reproduced in growing amounts from year to year in order to keep at the same value.

If one wants to compare the yearly production of gold with the yearly production of commodities, it would not seem that the annual production of gold is comparable with the mass of commodities produced in the same year, except by ignoring the amounts of gold hoarded or consumed industrially, and comparing the balance with the increase in the production of goods in the year under consideration over the preceding year. When this is done the yearly amount of gold produced ceases to appear as a vanishing amount in the world product.

It is impossible, under the present state of statistics, to calculate the yearly world-production of commodities, but merely as an illustration we can take the figures of the world trade, which are larger every year, and we can deduce therefrom that they grow in the same measure as the increase in production. The total trade of the world in 1910 was about 146 billions of marks. This number is double what it should be, as what appears as exports from one country appears also as imports into another. It must be halved. So that in the year 1910 the world’s trade was in the neighborhood of “l3 billions. In the year 1902 the world’s trade was about 48 billions. From 1902 to 1910 there was an increase of 25 billions, about three billions a year on the average. Varga reckons the world production to-day at 124 billions, a little less than twice the present world commerce. If we put it at twice the amount of world commerce we put it very high. We cannot put the yearly increase in world production at higher than six billions a year. Over against this is a yearly gold production of two billions, a third.

We are here, as we have said, simply calculating, and not making new illustrations, and so we reach these figures.

That the significance of the annual production of gold is quite other if it is compared with the yearly increase in production and not with the standard of the total yearly production is perfectly clear and needs no proof. But it cannot be denied that the proportionate significance of gold production may be made too much of by this comparison, as the figures furnished are quite uncertain.

So we do not make use of a comparison of the yearly increase in the world’s trade or the world’s production with the yearly production of gold. We know already that things are not so simple as appears according to the quantity theory of placing the mass of gold on one side and the mass of commodities on the other, and saying that price is a comparison between the two.

The market demand depends not merely on the amount of gold which comes with it, but also on the speed with which it changes hands. The total amount of gold will produce quite different effects where it makes a purchase ten times a year, than where it makes one only twice. A hundred marks will in the first case create a demand of a thousand marks a year, in the second case of only two hundred.

The increased demand for goods which arises from an increase in the production of gold is a very significant factor in establishing the total demand and the total amount of production, but it is not the only factor that works to that end.

Are there any peculiar circumstances in the course of the last twenty years which have tended to develop or weaken increased gold production?

We know already that the intensity of these conditions depends upon the speed of the circulation of commodities, a speed which, again, is dependent partly upon technique and partly upon economic causes. Means of transportation play a great role in this respect. Its late great developments require no demonstration.

A further movement, increased by the speed of circulation of commodities, is the use of money as a means of payment. Up to this point, we have proceeded upon the statement that commodities always exchange for money, that is are sold for a cash payment. But at another stage in the circulation of commodities other tendencies exist which allow me to buy another man’s goods and not pay until I have sold my own goods and got my money for them. I buy the other man’s goods for a mere undertaking to pay, the carrying out of which wilt occur at some future time, three or six months hence. It is clear that the circulation of goods can be accelerated very much in this way. It is true that when I make my final payment I again use money. But when numerous accounts are concentrated at a single point in the money relations it soon happens that they may offset each other and they can be canceled without any real money passing. However, one cannot at his pleasure separate very far from the metal money in circulation which remains steadily the foundation of payments. This is so because all obligations to pay are not of the same nature. He who has only to pay and has nothing to demand, or who has more to pay than he has to demand, must pay cash. Besides all this mechanism of obligation and offset militates against disturbance and tends to produce entire tranquillity in the circulation of commodities, which comes all the more easily the less the present stocks of gold are able to equalize the payments due. Business based on promises to pay and their offsets cannot therefore make cash money superfluous. But if we have up to the present discovered that the extension of the production and circulation of goods under similar circumstances produces a corresponding increase in the amount of gold in circulation, we now learn to know the other side. The more solidified and concentrated the obligations to pay, the more offsets there will be, and the less real gold is needed for the entire circulation of goods and the less can the existing mass of gold come within the circle of the circulation of commodities. The mass of gold declines not absolutely but relatively; the scope of the circulation of commodities can grow more rapidly and does grow more rapidly than the mass of money. The economic effect of the existing mass of gold will be increased, and thereby the impetus towards demand which every additional mass of gold lends to the production and circulation of commodities is strengthened.

It is well known that a great extension of the mechanism of credit has taken place in the latter decades.

Just as important are the conditions of the market. They, too, have been particularly favorable during the last twenty years. With the growth of the mass of gold and impelled by it, as we have seen, an era of prosperity has occurred in which the circulation of goods has been tremendously developed, and by which the fact of increased masses of gold has still more fully developed demand. The rapidity of the circulation of goods takes place as a result of increased gold production, not in opposition to it. It works in harmony with and intensifies its tendencies.

And the same has occurred with reference to the other conditions which influence the degree of the production of gold.

Not the whole product of the gold mines is converted into money. A portion enters industry as raw material and becomes not money, but goods. This portion develops no demand for commodities, it is itself a commodity which seeks a purchaser and will be exchanged for money. The greater the portion of the annual gold yield used industrially, the smaller the portion which will be made into money, and proportionately smaller, conditions being equal, the effect of gold production on the condition of the market and the rise in prices.

But that does not in the least imply that in the last twenty years a change has occurred which has lessened the share of the annual gold production converted into money. Quite the contrary.

Before the arrival of the production of commodities the working of gold and the money metals into articles of use was naturally their only use. This was predominant also at the beginning of the production of commodities. The function of gold as money proceeds from this, in that it has everywhere a desired use value, which is not transformed into use. The collection of gold and silver jewelry and utensils is, in the form of simple production, no mere luxury, but also a form of collecting treasure. The capitalistic method is the first to transform money into capital which brings profit, so that every piece of gold which one does not use as money is regarded as lost. So that the industrial employment of gold thus becomes exceedingly limited.

To-day the opening of new regions, particularly in Asia, with its pre-capitalistic method of production, goes on apace. That means nothing else than that the process of transforming the industrial use of gold into the money form is being accomplished.

There is a tendency against this on the other hand, namely, the increase in the exploitation of the proletariat, the increase in the mass of surplus value, and at the same time of the fund for consumption and of the revenues of the capitalists, which increases this demand for articles of luxury. But the capitalist does not live in a style so luxurious as to diminish the money-commodity, the life-giving blood of the capitalistic body.

Finally, there is still another movement to be observed. Gold as money is capable of indefinite employment and extension. Gold worked industrially is on the other hand a commodity whose sale is dependent upon desires which can for the most part be estimated by custom and are not quickly changed. A sudden extension of gold production will increase its use for industrial purposes less than its use for money, and on the other hand a diminution in the production of gold will diminish the quantity used for industrial purposes, less than that used as money.


Gold Production
Value in
millions of dollars

Industrial use
of gold in
millions of dollars

of industrial
use of gold





















































































All these considerations lead to the belief that the use of gold as money has developed in the last twenty years more than gold production itself.

The statistical proof of this is not easy to furnish, since, for this purpose, one must have the figures for the different kinds of use of gold in the world. There being none such, we are driven to estimates. These, However, substantiate our expectations based on the theoretical hypothesis.

Neumann Spallart has reckoned the gold production for the years 1881 to 188 at 746,000 kilogrammes, of which the greater portion, 44,000 kilogrammes, was destined for industrial use in the lands of capitalistic civilization. Soetbeer came to the same conclusion. The already frequently quoted report of the director of the United States Mint investigates the industrial employment of gold for every year since 1890; I have reckoned according to his figures the percentage of the amount of gold annually produced which is employed industrially.

Industrial use, therefore, grows unquestionably, but not at the same rate as the general production of gold. At the beginning of the eighties it was still the larger half, in 1890 still more than two-fifths, in 1907 only one-fifth. Since that time it has grown, a little, to one-fourth. While the production of gold has quadrupled, the industrial use of gold has only doubled. We can see that it has a much more conservative tendency than the production of gold increased .in 1900 and 1901 as it did earlier though at that time the Boer War conspicuously diminished the production of gold. In recent years the speed of gold production increased, but on the other hand its employment in industry showed no acceleration so that its proportion to the total production since 1908 remains about the same or even not so much as in 1900.

The proportion of its use as treasure or as circulating coins is no less important as regards the economic conditions of the annual production of gold, than the proportion of its use as industrial raw material or money.

At a certain stage it rests with the owner of money whether he will spend his money and thereby create a demand for goods or put it in his pocket and pile it up in his chest as treasure. The more that he does the latter just so much the less will the existing amount of gold stimulate the demand for commodities and raise prices.

Thus it does not depend altogether upon the wish of the owner of gold whether he will spend his money or not. It is an economically necessary tool. When the workman gets his wages he must spend his money or go hungry, however much the bourgeois economist may urge him to save. Even the entrepreneur has no freedom of choice as to whether he will spend the money which he pays to-day for commodities or save it. He must, like his workman, expend some to get the means of life. He must dispense another portion for tools and raw materials and wages and he must keep on producing and bringing new goods into the market if he is to keep on living.

The necessity of the rapid spending of money received is, on the whole, much less in the simple than in the capitalistic method of production, because where the former is dominant it is not the general method, but appears as an attendant circumstance to the predominating system of natural exchange. If the peasant for the most part produces the goods which he consumes, the artisan for the most part does some farming. Taxes paid to the government are mostly paid in natural products. The compulsion to spend money, gold or silver, for the consumption or for the development of production is not so great as in the capitalistic method of production; on the other hand, the possibilities of the profitable laying out of money are less. Still, the control of the money metal, even at that stage, gives great power. Hence under primitive conditions there is an eagerness to pile up treasure in the form of vessels and ornaments which can be converted into money or in the form of actual cash.

These are two ways of getting possession of such treasure, the one peaceful, by the exchange of goods for money which one does not spend, the other, the forcible one of robbery. In simple production the first method is as a rule slow since in simple production, the surplus which a man can get by his labor is small. Not only the worker but the man who robs him under such circumstances gets only the small sums saved. Plunder is quite different. The strong may get the accumulated treasures of numerous plunderers and accumulate great riches.

Under capitalistic conditions the reverse is true. The productivity of labor has so increased that the surplus which a single laborer produces over and above the cost of his maintenance is quite an item. At the same time, the opportunities for individual exploiters to get more and more from the workers are continually more numerous. By peacefully buying labor power it is possible to make an indefinitely large income.

In proportion as capitalism grows, the power of the state also grows, security of property grows, and the chance of getting treasure by violent means is diminished. Thereupon there comes change in the moral estimation of the two methods.

In the period of simple production of commodities the peaceful accumulation of treasure was despised as miserliness. Booty obtained by valor in war was highly regarded. To-day, he who relies on his personal physical prowess is considered a criminal, and the capitalist is highly respected who gets billions from the overworked and underfed workers.

Marx once justly remarked that theft is no method of production. But it has long constituted a strong economic factor, particularly where it has been carried on, not by individual highwaymen, but by the armies of whole nations. By war and plunder immense masses of money can be transferred from one country to another. In the sixteenth and seventeenth centuries enormous amounts of the precious metals overflowed Europe and caused a revolution in prices, but the discovery of very rich finds in America, of which we have already spoken, was only one of the causes thereof. The other, at times more important than the real cause, was the plundering of great treasures of gold and silver which had been piled up by the labor of centuries in certain places of the newly discovered districts.

If gold and silver production in South America depopulated Spain and reduced its industrial labor power, as we have already shown, it only lasted for the short time that the Spaniards were miners in America. The miners in the Spanish colonies were not the descendants of natives of the mother country, but were native Americans. But the occupying and mastering of the colonies, the plundering and the division of the booty, cost so many men that the rich stream of golden metal obtained in this fashion resulted in a diminution of industry and destroyed it, rendering it unfruitful.

We find numerous similar examples in the simple production of commodities. The most conspicuous example is furnished by ancient Rome, into which flowed the gold and silver treasure of the whole world. But they caused no extension of new industry in Italy. They flowed off after the most highly developed industries of the countries which profited thereby in the last instance. Roman spoliation deprived Spain and Gaul of their gold, not to hold it, but to buy Asiatic luxuries with as much of it as was not needed for the payment of German mercenaries.

After Rome’s power in arms was gone and its ability for fresh spoliation came to an end it quickly grew poor in precious metals.

It is quite otherwise if such treasures as have been collected under the pre-capitalistic industry are brought by robbery into states in which the capitalistic industry has been established. Then they become a means of developing these more quickly than the mere development of gold production would permit. The precious metals of Spain, gained in America, came by means of trade into France, England and Holland, so far as they did not get into the hands of the people of these countries by piracy. Again the spoliation of the East Indies was the means of bringing a vast amount of treasure into England. The Indian manufacturers of luxuries had ever since the time of the Roman Empire exchanged uninterruptedly their wares for gold and silver, and the Indian lords had for one and a half thousand years steadily piled up the money received into mighty treasuries which were now all at once brought back to Europe.

When Clive by the battle of Plassey, 1757, founded British power in the East Indies, the treasures of Bengal were as Macaulay describes exposed before him.

The Reformation and the French Revolution also transferred the gold and silver obtained from the plunder of churches and monasteries into money.

These methods of spoliation which created masses of circulating money out of the treasures and which thereby, by extending the demand for commodities, were a factor in establishing the capitalistic method of production, have ceased in the course of the nineteenth century. This is not because respect for the property of a nation defeated in war has increased, but because all the great stores of treasure to be found outside the capitalistic method of production have been plundered.

An affair like the spoiling of Pekin in the Boxer rising is insignificant since all it brought was a little pocket money to the robbers.

Big money indemnities today pass from one nation to another, the largest of which was the war indemnity which France had to pay Germany, in 1871. The five French billions gave a colossal impetus to German industry, but the mass of money which circulated in the world market was not much increased thereby. On the other hand French loans served to set in circulation the existing hoards of money. The old method in any case transferred treasures of the precious metals got by plunder into circulating money. Today this tendency is less and steadily diminishing.

In proportion as this method declines, on the other hand, the more does the peaceful capitalistic method draw the money treasures from their hiding places and throw them into the stream of circulation.

If the simple method of producing commodities develops a tendency towards the measureless storing of gold and silver, the capitalistic method of production produces a hunger for gold by means of a hunger for profits. Masses of idle treasure in money are now regarded as the sin against the Holy Ghost of capitalism. The first duty of the possessor of money appears to lie in the expenditure of money but only for purposes of production, by which the capitalist understands making profits.

But the capitalist dare not place all the money he has in the circulation-process of commodities. The production-process itself impels him to save some of it. Capitalism creates in place of the old eagerness to store up gold and silver new conditions and desires for creating stores of treasure.

Let us consider a factory. The machines in it cost 100,000 marks. Experience shows that they must be renewed after ten years’ use. In order to do this the capitalist must put away 10,000 marks a year for ten years out of his income.

Or let us take the agricultural industry. In autumn the farmer sells his crop. But he cannot expend the money received all at once. He must cultivate for the next crop, pay wages, etc. He must therefore store his money in the autumn to pay it out during the rest of the year. In other ways also savings for consumption on a smaller scale and of a less tangible nature are also necessary. The workman who buys a winter coat for fifty marks in the fall must set aside two marks a week for twenty-five weeks out of his weekly wages. If he gets his pay quarterly he must therefore make a “hoard” Owing also to the insecurity of his position it is in the highest degree advisable for him to save a hundred marks or so, so that in case of sickness or loss of employment he is not confronted by blank destitution so long as he has no union or sick benefit fund to protect him.

The more the capitalist method of production develops and destroys the exchange of natural commodities, so much the greater is the number of people and households needing a greater or less amount of savings. Thereby again great masses of gold would be drawn from circulation and prevented from developing the demand for commodities upon the market. But this new tendency is soon overcome and destroyed by a stronger one.

Let us again take the factory, for example, say a spinning factory which according to experience must buy 100,000 marks worth of machinery every ten years and for this purpose set aside 10,000 marks a year. Suppose that the factory owner has already been saving for five years when a neighbor, a brewer, needs money to extend his brewery. He borrows the 50,000 marks from the spinner who lends it to him on interest if the brewer undertakes to repay the loan in five years. All parties are helped by this plan. The brewer increases his trade and makes twenty per cent. a year on the 50,000 marks borrowed money, of which he pays five per cent. to the spinner. The latter gets five per cent. a year and has at the end of the ten years the whole of his capital to get new machinery. His accumulated store is for a portion of the time at least thrown into circulation and increases the demand for goods.

This use of savings is evidently only accidental. Not every industrial capitalist has the time and inclination for such incidental business. The method moreover cannot be used for small amounts.

But in the course of time there arise special enterprises, banks, for the purpose of collecting moneys of this sort and lending to entrepreneurs to start or extend their business. They are also a means of advancing state loans, the consideration of which we may pass by for the present. The collection of manifold greater and lesser savings and their conversion to the use of the capitalists are carried on by the banks as soon as credit is established.

Even the smallest sums of moneys are in capitalistic countries either as savings or shares – we called attention to the gold mine shares at two dollars each – invested with the expectation of earning interest. The expectation is frustrated in the matter of shares but there is no question about the fact of the transformation of savings into circulating money.

This development has made rapid strides in the last twenty years and has thus supported the great effect of the increased gold production upon the market. In a similar direction operates the improvement in intercommunication which permits a diminution in the amount of stocks which merchants need to carry and consequently the sums of money which they have to collect for that purpose.

Single banks indeed cannot exist without funds. If the outgo never exceeded the income at a given time the banking business, as far as it fulfills the function we are here discussing, could be carried on without any capital. As a rule there is an excess of receipts over payments made, if got by an individual bank, by the banking business as a whole, because the accumulation of capital and the collection of newer additional sums of money goes on uninterruptedly.

But there come times of stagnation when the movement of money takes an opposite course. The crisis comes which is bound up with a great mass of unemployment and the workers are compelled to draw on their savings instead of increasing them. At the same time those engaged in industry cannot dispose of their stocks. To live and to be able to produce still more they must withdraw their bank deposits or sell their shares. It is bad for the bank which under such conditions has put its capital into shares instead of having a stock of gold cash which admittedly draws no interest.

But even in good times periods come in which payments crowd and an unusual amount of ready money is needed. For such reasons the bank must have a large supply of cash in readiness.

But however much money the bank must keep to meet the sudden requirements and unexpected demands for money, the amount in hand is always much smaller than the amount of private savings which is taken and transferred into circulating money.

One must not imagine that the total amount o£ money which a bank collects functions as savings. The great amount of bank notes form an immense amount of money. For example according to the report of the American director of the Mint the amount of gold in millions of dollars was:


Bank of

Bank of

Bank of

Bank of
















But these great masses of gold are only to be regarded technically and not economically as mere treasure. Technically and economically are two very different things, just as is labor as a creator of values and as a maker of use values, a distinction of the greatest importance which Marx discovered but which up to the present has had no influence on bourgeois economy.

Money as gold technically remains in the bank vaults. But economically it circulates in the market in bills of exchange, in notes which the bank issues. The gold pieces function in the form of notes as money in circulation, indeed the employment of circulating money in the form of bank notes is much greater than that of the money metal in the banks.

The report of the American Director of the Mint gives the following figures for the 31st December, 1910, in millions of dollars:


Bank of

Bank of

Bank of

Bank of

Amount of gold





Circulating bank notes





The same report estimates the amount of gold in the great banks of Europe on December 31st, 1910, at 2,461 million dollars and the amount of circulating bank notes issued by them at 4,325 millions.

The significance of the bank note is peculiarly technical. It facilitates the transportation of very large sums of money. Besides it acts as a saving in so far as the gold coins lying in the bank are saved from the wear and tear of circulation.

But in addition to this technical function the bank note has also an economic function. It is regarded as a bank note or not according as it is realizable in gold or not.

The bank may issue notes representing much more money than it has treasure in the vaults. So long as they are the full representatives of the amount of money which they represent they fulfill the same functions and are actually of the same economic validity as real gold.

The gold treasure in the bank then serves substantially as a reserve fund for unusual occasions.

Marx distinguishes as follows:

1. Reserve funds for international payments. In a word reserve funds for world money. Reserve funds for the exchange of foreign and home-metallic currency. 3. What pertains to the function of banking and has nothing to do with money merely as money. 4. Reserve funds for the payment of deposits and converting of notes into money.

The gold stores of the great central banks therefore act quite differently than the private hoards which we have hitherto considered. The latter diminished the amount of money in circulation. The store of money in the banks increase it. The money in the banks grows ever more important in the development of the capitalist method of production but the economic importance of increasing gold-production is not thereby lessened but is immensely increased. The more money there is in the bank just so much more money is there in general circulation.

The tendency to banking has no more influence than any of the other factors which we have mentioned in weakening the importance of the increase in the production of gold. The contrary is true. It is true that the measure and conditions of gold production are not alone in marking the height of the economic effect of additional money. But all factors which are determinative of it – speed in the circulation of goods, the industrial employment of gold as an intermediate between hoarding and circulating money, finally the introduction of substitutes for gold in the different functions of money and credit, have all developed in the last twenty years so as not to weaken but to strengthen the influence of the increased production of gold upon economic life and the prices of commodities.


Last updated on 12.1.2004