The most common and conspicuous phenomenon accompanying commercial crises is a sudden fall in the general level of commodity-prices occurring after a prolonged general rise of prices.A general fall of commodity-prices may be expressed as a rise in the value of money relative to all other commodities,and,on the other hand,a general rise of prices may be defined as a fall in the relative value of money.Either of these statements describes the phenomenon but does not explain it.Whether the task set is to explain the periodic rise in the general level of prices alternating with a general fall,or the same task is said to be to explain the alternating fall and rise in the relative value of money compared with that of commodities --the different terminology has just as little effect on the task itself as a translation of the terms from German into English would have.Ricardo's monetary theory proved to be singularly apposite since it gave to a tautology the semblance of a causal relation.What is the cause of the general fall in commodity-prices which occurs periodically?It is the periodically occurring rise in the relative value of money.What on the other hand is the cause of the recurrent general rise in commodity-prices It is the recurrent fall in the relative value of money.It would be just as correct to say that the recurrent rise and fall of prices is brought about by their recurrent rise and fall.The proposition advanced presupposes that the intrinsic value of money,i.e.,its value as determined by the production costs of the precious metals,remains unchanged.If the tautology is meant to be more than a tautology,then it is based on a misapprehension of the most elementary notions.We know that if the exchange-value of A expressed in terms of B falls,it may be due either to a fall in the value of A or to a rise in the value of B;similarly if,on the contrary,the exchange-value of A expressed in terms of B rises.Once the transformation of the tautology into a causal relationship is taken for granted,everything else follows easily.The rise in commodity-prices is due to a fall in the value of money,the fall in the value of money,however,as we know from Ricardo,is due to excessive currency,that is to say,to the fact that the amount of money in circulation rises above the level determined by its own intrinsic value and the intrinsic value of commodities.Similarly in the opposite fall of commodity-prices is due to the value of money rising above its intrinsic value as a result of an insufficient amount of currency.Prices therefore rise and fall periodically,because periodically there is too much or too little money in circulation If it is proved,for instance,that the rise of prices coincided with a decreased amount of money in circulation,and the fall of prices with an increased amount,then it is nevertheless possible to assert that,in consequence of some reduction or increase --which can in no way be ascertained statistically --of commodities in circulation,the amount of money in circulation has relatively,though not absolutely,increased or decreased.We have seen that,according to Ricardo,even when a purely metallic currency is employed,these variations in the level of prices must take place,but,because they occur alternately,they neutralise one another.For example,an insufficient amount of currency brings about a fall in commodity-prices,the fall of commodity-prices stimulates an export of commodities to other countries,but this export leads to an influx of money into the country,the influx of money causes again a rise in commodity-prices.
When there is an excessive amount of currency the reverse occurs:commodities are imported and money exported.Since notwithstanding these general price movements,which arise from the very nature of Ricardo's metallic currency,their severe and vehement form,the form of crisis,belongs to periods with developed credit systems,it is clear that the issue of bank-notes is not exactly governed by the laws of metallic currency.The remedy applicable to metallic currency is the import and export of precious metals,which are immediately thrown into circulation as coin,their inflow or outflow thus causing commodity-prices to fall or to rise.The banks must now artificially exert the same influence on commodity-prices by imitating the laws of metallic currency.If gold is flowing in from abroad,it is a proof that there is an insufficient amount of currency,that the value of money is too high and commodity-prices too low,and bank-notes must therefore be thrown into circulation in accordance with the newly imported gold.On the other hand,bank-notes must be taken out of circulation in accordance with an outflow of gold from the country.In other words the issue of bank-notes must be regulated according to the import and export of the precious metals or according to the rate of exchange.Ricardo's wrong assumption that gold is simply specie and that consequently the whole of the imported gold is used to augment the money In circulation thus causing prices to rise,and that the whole of the gold exported represents a decrease in the amount of specie and thus causes prices to fall --this theoretical assumption is now turned into a practical experiment by making the amount of specie in circulation correspond always to the quantity of gold in the country .
