A Reply to ‘Anonymous’ on Gold’s Monetary Role Today

This is in response to a comment on my post entitled “From Money as Universal Equivalent to Money as Currency.” Scroll to the bottom of that post to read the comment.

I want to thank ‘A’ for taking my blog seriously enough to raise these interesting and important questions.

First, I should clear up some misunderstandings. It’s not correct to say that the amount of token money that can be issued “is limited (if it is to hold its value) by the amount of gold in circulation.” Token money replaces gold in circulation and implies that gold has fallen out of circulation and accumulated in hoards both official and private.

“It seems to me,” ‘A’ writes, that “if the assumption about gold underpinning token money was accurate in the past, I am unsure about its continued accuracy.”

This gets to the heart of the matter. Marx demonstrated that when social labor is broken up into independent private labors, labor embodied in the products must take the form of value. He also showed that value must, in turn, take the form of exchange value. The exchange value of one commodity must always be measured in terms of the use value of another.

With the development of commodity production, one or a few commodities emerge as the universal equivalent that measures the exchange values of other commodities in terms of its own use value. This is the essence of Marx’s theory of value and price.

Ricardo’s Theory of International Trade

Over the last few weeks, I have been examining a “typical” industrial cycle. For sake of simplification, I have assumed the world was a single capitalist nation. In order to do this, I have abstracted the effects on the industrial cycle of the division of the capitalist world into different countries and currencies. But in reality, the capitalist world has always been divided into many nations and currencies. Therefore, no theory of real industrial cycles and crises can be complete without a theory of international trade and exchange rates.

Our starting point will be the theory of international trade put forward by the great English classical economist David Ricardo (1772-1823). The Ricardian theory of international trade is called by the modern bourgeois economists the theory of comparative advantage.

The theory of comparative advantage dominates the theory of international trade taught in the universities to this day. It forms the basis of the claim of neoliberal economists that free trade operates to the advantage of every nation, the capitalistically advanced nations as well as the capitalistically underdeveloped or oppressed nations. It is, therefore, particularly popular among neoliberal economists such as the followers of Milton Friedman. For reasons that will become apparent in the coming weeks, bourgeois economists inspired by the theories of John Maynard Keynes tend to be more critical of “comparative advantage” and “free trade” in general.

The Phases of the Industrial Cycle (pt.4)

From boom to crisis

Marx sometimes called the stage of the industrial cycle just before the outbreak of the crisis the phase of fictitious prosperity. The economy is going gang-busters, the rate of profit appears to be high, and the mass of profit keeps growing. Unemployment compared to all other phases of the industrial cycle is very low and still falling. At long last, the balance of forces on the labor market are beginning to tilt in favor the working class.

But the continuation of the boom now depends on the increasingly unsustainable inflation of credit. As long as debts can be “rolled over” rather than paid, and terms of payment can be further extended, the boom can go on.

Later, after the boom’s inevitable collapse, the recriminations fly. Why was “regulation” so lax? Why were so many derivatives and exotic credit instruments created? How could so many loans have been extended to people who couldn’t possibly repay them?

But those questions will be asked later. While the phase of fictitious prosperity lasts, it can only be maintained by progressively eliminating regulations designed to prevent the reckless extension of credit and instead encouraging “financial innovation” to unfold without hindrance.

The Phases of the Industrial Cycle (pt. 3)

The real industrial boom begins

The boom phase of the industrial cycle is of particular interest for crisis theory. It is only during the boom that capitalist expanded reproduction develops with full vigor. Therefore, it is the boom that develops the contradictions inherent in capitalist production to the point where they can only be resolved—only temporarily as long as capitalist production is retained—by a crisis.

I explained in the last post that during the phase of average prosperity, excess capacity is whittled away at both ends, so to speak, by the closing down of factories that will never again be profitable, and the reopening of factories and machinery that after write-downs can once again yield to the industrial capitalists the average rate of profit.

As the margin of excess capacity shrinks, the percentage of industry that is lying idle is reduced to such an extent that the industrial capitalists are forced to undertake massive investments in new factories packed with state-of-the-art machinery. The industrial capitalists do not want to see their margin of excess capacity shrink to zero. They want to maintain a certain margin of excess capacity so production can be quickly increased to meet any sudden rise in demand.

The Phases of the Industrial Cycle (pt. 2)

How recessions end

During recessions, inventories—commodity capital—are run down as production declines faster than sales. At some point, therefore, industrial production will begin to rise, because the industrial capitalists have to rebuild their inventories. This is why all recessions eventually end.

The recovery begins first in Department II—the department that produces the means of personal consumption. The contraction in industrial employment more or less comes to a halt once rising industrial production caused by the need to rebuild inventories begins.

However, industrial employment rises very little during the first phase of the upturn. Many factories during the recession were forced to operate at levels far below their optimum level of productivity. As inventory rebuilding proceeds, more factories come closer to their optimum utilization levels. The resulting surge in productivity enables the bosses to increase production considerably while adding few, if any, workers. Therefore, for a considerable period of time after the recession proper ends, labor market conditions continue to favor the industrial capitalists over the workers. This remains true after the rise in the rate of unemployment begins to taper off.

The Phases of the Industrial Cycle

The crisis, sometimes called the “recession,” marks the end of one industrial cycle and the beginning of the next one. Recession is characterized by a decline in industrial production and employment. The decline in employment is most severe in the industrial sector but affects many other sectors of the economy as well. The recession, or industrial crisis, ends when industrial production reaches its lowest point.

The period between the lowest point of industrial production and when industrial production again reaches the highest point of the preceding cycle is known as the “depression,” or sometimes the phase of “stagnation.”

The phase of the industrial cycle that follows the end of the depression, or stagnation stage, is called the period of “average prosperity.” There is still considerable unemployment of both workers and machines, and capital investment is still weak. Stagnation and depression conditions therefore linger longest in the industries of Department I, the sector that produces the means of production.

After the period of average prosperity comes the boom. Industry is operating as close to “full capacity” as it ever does—outside of all-out war—under the capitalist mode of production. Unemployment sinks to its lowest level of the cycle. Conditions become more favorable to the sellers of labor power. This is the most favorable point in the industrial cycle for union organization and strikes.

The Rate of Interest and the Profit of Enterprise

The development of the credit system splits profit—total surplus value—less rent into two parts, interest and profit of enterprise. What determines the division of the relative shares of interest and profit of enterprise?

Suppose the rate of profit is 10 percent. Unless all the profit goes to interest, the rate of interest cannot be higher than 10 percent. Indeed, the rate of interest in the long run cannot be as high as 10 percent, because at a 10 percent rate of interest there will be no additional profit from carrying out an industrial or commercial enterprise. Therefore, an interest rate of 10 percent, assuming a rate of profit of 10 percent, will destroy the incentive to *produce* surplus value. And without production of surplus value, there is neither ground rent, interest nor profit of enterprise.

Therefore, the rate of profit establishes an *upper* limit to the rate of interest. But what then determines the lower limit? The rate of interest cannot fall to zero, because if it did the money capitalist would turn miser. There would be no advantage in loaning money. Why take a risk of not being paid back, or being paid back in devalued currency, for no “reward” whatsoever?

At an interest rate of zero, the money capitalist will simply hoard money in the form of bullion and gold coins. Therefore, the rate of interest must be somewhere above zero but below the the total rate of profit. It is quite possible to have a low rate of interest with a high rate of profit, though it is not possible to have a high rate of interest with a low rate of profit.

Money as a Means of Payment

Credit relations split the act of buying from the act of paying. The development of credit, therefore, gives rise to a new function of money: money as a means of payment.

Credit allows me to purchase a commodity with credit rather than with money. But in doing so, I incur a debt that is payable in money. The capitalists actually purchase the commodity labor power with credit rather than money. When I sell my labor power to an industrial capitalist, I have to work for a week or more before I collect my wage in money form. It’s not unheard of for industrial capitalists to go bankrupt and fail to pay the debts they owe the workers for the labor power they bought with credit.

Not all debts payable in money are created by the purchase of commodities with credit. For example, tax liabilities payable to the state under conditions of capitalist production have to be paid for in money. In pre-capitalist times, taxes were sometimes payable in kind, but under capitalism they are almost always payable in money. Rent liabilities are also payable in money under capitalist conditions.

Under the feudal system of production that dominated Europe in the centuries before the rise of capitalism, feudal ground rents were either payable in labor, the inserfed peasants having to work on the lord’s lands for part of the workweek, or they were payable in kind. During the transition from feudalism to capitalism, rents payable in labor or kind were replaced by rents payable in money.

From Money as Universal Equivalent to Money as Currency

Money as the universal measure of value

Last week, I demonstrated that as commodity production and exchange develop, one or at most a few commodities emerge as general equivalents. In their role of general equivalents, they measure the exchange value of commodities in terms of their own use values.

Originally, the commodities that played the role of general equivalents were those that were the main form of wealth of the given society. For example, in the Homeric poems, wealth is measured in terms of cattle. Cattle were indeed an early form of what Marx called money material, the physical material of the use value of the commodity that acts as the universal measure of value. Some societies even measured the exchange value of commodities in terms of slaves. In this case, the enslaved workers not only produced the surplus product for the exploiting non-workers, they served as money material as well!

But as commodity production and exchange developed further, slaves and cattle did not make very good money. Slaves can only be divided so far. A half a slave is a dead man or woman, not a slave. Slaves and cattle aren’t durable but live only a certain number of years. Enslaved humans generally had quite short lifetimes. As commodity production and exchange developed, a universal equivalent emerged whose main use value was its monetary function.

Money as the Universal Equivalent

Do crises originate in the real or the monetary economy?

Some Marxists have been arguing on the Internet that the current crisis shows the cause of capitalism’s periodic economic crises lies in the “real economy” as opposed to the “money economy.” They seem very pleased by the renewed interest in the theories of John Maynard Keynes. Keynes, it is said, realized that capitalist economic crises originate in the “real economy.” These Marxists are hoping that the star of “monetarist” theory, Milton Friedman, who is widely and justly hated by exploited people throughout the world, is setting at last.

The late Milton Friedman was the main ideologue of “neoliberalism” within the economic profession. He held, in opposition to the followers of Keynes, that capitalism is an inherently stable system. The only serious cause of cyclical instability in a capitalist economy, according to Friedman, is located on the monetary side of the economy. Therefore, Friedman opposed the kind of “stimulus packages” that are now being implemented by various governments around the world.

According to Friedman, the only thing that has to be done to make sure a recession does not get out of hand is for the “monetary authority”—such as the U.S Federal Reserve System, Bank of England or the European Central Bank—to keep the “money supply” growing at a slow and above all steady rate. As long as such policies are followed by the “monetary authority,” Friedman and his followers claimed, the industrial cycle of boom and bust would all but disappear. Until the current crash, this had been the reigning economic dogma in both Washington and London for almost 30 years.