In the first part of this series, I make the following statements:
- The role of a commodity money in labor theory analysis is not determined by the material the state designates as money in the territory under its control, but by society.
- Gold (commodity monies generally) still performs the function of measure of value and standard of price despite this function not being recognized by any state within the world market.
- It is critical to labor theory analysis that commodity money is recognized as the only money that can serve as measure of value in analysis.
- There is an institutional bias, however, within Marxist scholarship, produced by decades of empirical research based on the mistaken idea fiat dollars are money in the full sense of the term and can serve as money in labor theory analysis. This fallacy serves to block recognition of commodity money as the only measure of value appropriate to labor theory analysis.
- Thus there has been a complete failure on the part of Marxists academics to recognize the significance of the collapse of Bretton Woods in 1971.
- Even a cursory examination of the empirical data using gold as measure of value and nominal measures of economic activity produce starkly different results that have yet to be explained by Marxist academics.
These starkly different results demonstrate that state issued fiat money does not behave at all like commodity money and, moreover, there is no research (nor could there ever be research) that demonstrates state issued inconvertible debased fiat created out of nothing (“fiat” for short) can ever behave like commodity money for the ridiculously simple reason that while no institution in society determines what serves as money, the state alone creates fiat and forces it into circulation.
Money does not simply manifest the production relations of individuals engaged in a certain sort of social production, it implies those production relations are outside the control of the individuals creating them. Because the production relations individuals enter into are not mastered by them, these relation’s manifest themselves as an independent force standing over against them in the form of money.
It follows from this that gold did not formerly play a role in managing national or international transaction, as Caffentzis argues, but, rather, expressed the fact the relations of production and exchange were entirely unregulated.
1. Was Marx fundamentally wrong in his theory of money
Does the end of Bretton Woods and of the gold standard invalidate Marx’s argument on money? (When I say ‘gold’ in this case, of course, I mean any commodity serving in the role of money.) This is the question raised by George Caffentzis, in a 2009 paper, Marxism After the Death of Gold. Caffentzis writes:
“Marx clearly argues that gold is necessary for the functioning of capitalism; but since Nixon’s decision to “shut the gold window” on August 15, 1971, gold has played a peripheral role at best in the managing of national or international transactions. The last thirty-seven years have seen many crises in capitalism without, however, a crisis of capitalism (to use Lebowitz’s distinction) (Leibowitz 2003). Capitalism is surviving without the working class’s “cross of gold” in the same way it survived the end of chattel slavery. What might have seemed essential at one point in capitalist history has been shown to be a mere “accident” in the case of chattel slavery.(1) Does the same error apply to gold as money? I.e., does the end of gold (and indeed of any precious metal) as the money commodity constitute the crucial negative experimental test of Marxism?”
This begs a question for labor theory analysis of post-1971 economic events: Who said gold was no longer a commodity money? It is by no means unprecendented to have an entire territory where an inconvertible debased state issued fiat created out of nothing serving as the currency of that territory. Indeed, inconvertible fiat dates at least to 13th century China.
“The most famous Chinese issuer of paper money was Kublai Khan, the Mongol who ruled the Chinese empire in the 13th century. Kublai Khan established currency credibility by decreeing that his paper money must be accepted by traders on pain of death. As further enforcement of his mandate, he confiscated all gold and silver, even if it was brought in by foreign traders.”
Did the establishment of inconvertible paper currency in China displace gold as a money commodity? Of course not. So the argument Caffentzis makes in his paper must be that because all nations have dispensed with commodity money, somehow this makes gold no longer a commodity money. Nothing happened to gold in the interim, the only change was what nation states defined as currency in the territories they control.
Restated, the argument that gold is not money means the fascist state determines what is money. This proposition is not consistent with labor theory. Mr. George Caffentzis, however, thinks labor theory must be ‘stretched’ to include the possibility of non-commodity money. He does not explain why this has to be done, however.
5. Capitalistically Determined, Materially Determined and Superfluous labor times
If I understand Postone’s argument in his book Time, Labor and Social Domination, (and he can speak to this if I am misreading him) in the capitalist mode of production value (i.e., ‘socially necessary labor time’) appears in not one, but two distinct, historically determined forms. So far as I know, Postone is the first theorist since Marx and Engels to show how these two forms of labor time are embedded in the capitalist mode of production itself. He defines the two forms of value for us as,
“the total labor time determined as socially necessary by capital, on the one hand, and the amount of labor that would be necessary … were material wealth the social form of wealth, on the other”.
There is, as Postone explains, a duration of socially necessary labor time that arises from the material needs of the social producer, the combined body of all workers engaged in social production, and a distinct and separate duration of socially necessary labor time that arises from the needs of the capitalist mode of production itself. I will refer to the total labor time of society as the capitalistically determined labor time and the amount of labor that would be necessary if material wealth were the social form of wealth as the materially necessary labor time.
There is nothing to say that these two durations of socially necessary labor time must be the same. In fact, the recurrent crises of the capitalist mode of production is nothing more than the forcible adjustment of these two durations of socially necessary labor time. Moreover, as Postone shows in his reconstruction of Marx’s category of superfluous labor time, the aim of capitalist production is the constant and ever increasing extension of labor time beyond that duration required for the needs of the social producers. Which is to say, the aim of the mode of production is to maintain and increase, by all means at its disposal, an imbalance between the two durations of socially necessary labor time — to constantly generate labor that is completely superfluous to society.
3. The problem of identifying economic waste in a capitalist economy
As I argued in the previous section of this series, if we are going to set as our aim the complete abolition of labor, there is a big question posed by the problem of a capitalist economy. To reiterate it briefly: In an economy based on directly social labor, particular forms of concrete labor appear as abstract homogenous labor. The labor of the doctor, the janitor, the autoworker or the soldier do not appear in these concrete forms but only as wages, salaries, etc. The same is true for the various sectors of the economy — industrial, services, agriculture and the state. Finally, whatever waste might be present in the economy, and which would serve as the material basis for a reduction of hours of labor, appear in the economy as just another cost.
One expenditure of abstract homogenous labor is exactly identical in every way to every other expenditure of abstract homogenous labor
There is, therefore, no way to tell industrial production from industrial waste, medical care from murdering civilians simply by going through the North American Industry Classification System and cherry picking what labor is useful and what labor is not. If medical care is useful, is it still useful when it is being used to return a soldier to the battlefield? If industrial production is assumed to be useful, is it still useful when the product is military materiale? Is the industrial labor producing military boots more or less useful than the labor expended bussing a table in a restaurant? We can make moral judgments on this, but Obama’s morality is different than mine.
Tags: Chris Harman, commodity money, commodity production, currency, gold, Karl Marx, Labor theory of value, Moishe Postone, Money, socially necessary labor time, superfluous labor time, surplus value, value
The world market had been shaken by a series of financial crises, and the economy of Japan had fallen into a persistent deflationary state, When Ben Bernanke gave his 2002 speech before the National Economists Club, “Deflation: Making Sure “It” Doesn’t Happen Here”. Bernanke was going to explain to his audience filled with some of the most important economists in the nation why, despite the empirical data to the contrary, the US was not going to end up like Japan.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, economy, Federal Reserve, Federal Reserve Bank, financial crisis, gold, Gold Reserve Act of 1934, gold standard, Gold standard dollars, great depression, Henryk Grossman, inflation, international financial system, International Monetary Fund, Karl Marx, Milton Friedman, Moishe Postone, monetary policy, Money, National Bureau of Economic Research, overproduction, Presidential Executive Order 6102, recession, Robert Kurz, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis, william white
So I am spending a week or so trying to understand Ben Bernanke’s approach to this crisis based on three sources from his works.
In this part, the source is an essay published in 1991: “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison”. In this 1991 paper, Bernanke tries to explain the causes of the Great Depression employing the “quantity theory of money” fallacy. So we get a chance to see this argument in an historical perspective and compare it with a real time application of Marx’s argument on the causes of capitalist crisis as understood by Henryk Grossman in his work, The Law of Accumulation and Breakdown.
In the second part, the source is Bernanke’s 2002 speech before the National Economists Club: “Deflation: Making Sure “It” Doesn’t Happen Here”. In this 2002 speech, Bernanke is directly addressing the real time threat of deflation produced by the 2001 onset of the present depression. So we get to compare it with the argument made by Robert Kurz in his 1995 essay, “The Apotheosis of Money”.
In part three, the source will be Bernanke’s recent speech before the International Monetary Fund meeting in Tokyo, Japan earlier this month, “U.S. Monetary Policy and International Implications”, in which Bernanke looks back on several years of managing global capitalism through the period beginning with the financial crisis, and tries to explain his results.
To provide historical context for my examination, I am assuming Bernanke’s discussion generally coincides with the period beginning with capitalist breakdown in the 1930s until its final collapse (hopefully) in the not too distant future. We are, therefore, looking at the period of capitalism decline and collapse through the ideas of an academic. Which is to say we get the chance to see how deflation appears in the eyes of someone who sees capitalist relations of production, “in a purely economic way — i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself…”
This perspective is necessary, because the analysis Bernanke brings to this discussion exhibits all the signs of fundamental misapprehension of the way capitalism works — a quite astonishing conclusion given that he is tasked presently with managing the monetary policy of a global empire.
Tags: Bailout, Ben Bernanke, deflation, Depression, economic collapse, economic policy, Federal Reserve, Federal Reserve Bank, financial crisis, gold, Gold Reserve Act of 1934, gold standard, Gold standard dollars, great depression, Henryk Grossman, inflation, international financial system, International Monetary Fund, Karl Marx, Milton Friedman, monetary policy, Money, National Bureau of Economic Research, overproduction, Presidential Executive Order 6102, recession, stupid economist tricks, stupid Washington tricks, The Economy, Wall Street Crisis
This is very geeky, sorry. I posting it because I intend to revisit it sometime in the near future in the context of a review of the Euro-zone crisis.
My post on Moseley’s MELT paper (pdf) argues the so-called “price of gold” is actually the standard of price for a currency. I argued in the paper that dollars do not buy gold, gold buys dollars. Dollars are “sort of” a commodity necessary to convert gold into capital. I said “sort of”, because I really cannot describe it, except along the line of Marx’s argument on loaned capital:
M ==> M ==> C.
Where the first M is the bank’s money to be loaned, and the second M is the actual conversion of this loaned money into industrial capital. We could think of the movement of gold similarly as:
Mg ===> Mc ===> C.
Where Mg is a quantity of gold, Mc is a quantity of a particular currency, and C is the commodity.
The owners of gold, however, have a choice of currencies whose bodily form their gold can assume: euros, dollars, yen, yuan, reals, pesos, etc. And, each of these currencies have their own standard of price, i.e., their own specific exchange rate with gold. Each of these standards of price is an expression of the quantity of a given currency in domestic circulation to the quantity of domestic socially necessary labor time. Since, in each country, the relation between the total currency in circulation and total socially necessary labor time is different, the standard of price for each country currency must necessarily be different.It would seem to follow from this that the relation between currencies, their relative exchange rates, should be determined by the above. For instance, if country A has a standard of price with gold of 10 currency A units per ounce of gold, while country B has a standard of price of 20 currency B units per ounce of gold, the relation between the two should be:
one unit of currency A = 2 units of currency B
However, just as different industries have different composition of capital, so different nations have different compositions. The composition of capital in the US is far higher than that of the People’s Republic of China, or Zimbabwe. The movement of gold between currencies, I think, is determined much like the movement of capital between industries. On the one hand, the standard of prices in various countries arise from the domestic quantitative relation between the currencies and socially necessary labor time. On the other hand, for the owners of gold, these currencies are no more than forms gold must take if it is to become capital — and capital is self-expanding value, the production of surplus value through the consumption of labor power.
This suggests that although the standard of price of a currency is determined solely by the relation between the mass of currency and the mass of socially necessary labor time; it is also being determined by the rate of surplus value within each country as determined by their varying compositions of capital.
I think we are again face to face with Marx’s transformation problem, where the law of value confronts the law of average rate of profit. One law suggests the standard of price of a currency is determined solely by the relation between the total quantity of currency in circulation domestically and the total quantity of socially necessary labor time; the other law suggest the relative exchange rates among all currencies is determined by the law of the average rate of profit. The latter law suggests currencies are exchanging in the world market above or below their actual domestically determined standard of prices.
What use might this argument have?
- This might just offer an idea how, without violating Marx’s labor theory of value, imperialist super-profits are obtained.
- It could offer a way of modeling the emergence of world market prices, and the dollar as world reserve currency.
- It could also explain the empirical data, which shows neoliberal free trade policies produced a US expansion in the 1980s and 1990s.
- Finally, it explains why China’s currency appears undervalued on the world market and the US dollar overvalued against what we would expect.
I find it amazing that people will demand Washington create work, but will not demand freedom from unnecessary work created by Washington. The fixation on work is the principal lever of the fascist state. But, the fixation on work is only a reflex of the role fascist state issued currency plays as the mediator of the means of life. The very same means the fascist state employs to satisfy the demand for jobs, currency issue, increases the demand for jobs.
Money, in its function as medium of exchange, acts as mediator between a human need and its satisfaction. Fascist state issued ex nihilo currency takes over this role as mediator, displacing money and its token currency. Unlike state issued token currency, or even inconvertible token, this ex nihilo currency has no definite relation with commodity money. Having no definite relation with money, the ex nihilo currency has no definite relation with commodities in general.
Moreover, since commodities express their value as exchange value, i.e., as a definite sum of money their value is no longer expressed in an exchange involving ex nihilo currency. Value can only be expressed as exchange value; it cannot be expressed directly. If there is no medium for the expression of the value of a commodity in an exchange — an expression that requires the medium itself have a definite value — it is as if it doesn’t exist. Which is to say, in an ex nihilo currency regime value plays no role in the exchange of commodities.
Value, however, is created in the act of production, not exchange — which presents us with a conundrum: If value is created in the act of production, but not expressed in the act of exchange, how do we know it exists? In a commodity money system value created in the act of production imposed itself on capitals after the fact, during the act of exchange. This is because the capitalist has no way of knowing the value of his commodity until he takes it to the market and sells it. The imposition of value on production is only retroactively enforced during the act of exchange as socially necessary labor time.
If value plays no role in the exchange of commodities how can socially necessary labor time play role in the production of the commodities?
Here is a further perplexing problem: in Marx’s theory socially necessary labor time in production is also the term he employs to define the portion of the working day during which the worker produces her own wages. So, at base, when the laws of value regulates capitalist production, capital is indirectly being regulated by the wages of the working class. It follows from this that newly produced surplus value has to seek out new sources of labor power.
If the exchange of commodities is no longer determined by the law of value, the production of commodities is no longer determined by socially necessary labor time; and, the capitalist mode of production is no longer regulated by the consumption of the working class. All of this makes it appear as though the laws of the capitalist mode of production has been abolished under an ex nihilo currency regime.
In fact, this appearance is misleading. While capital is the ceaseless production of surplus value, or socially necessary labor time in its surplus form, and, therefore, the constant diminution of necessary labor time as a percentage of the working time of the laborer, it also requires the conversion of this newly created surplus labor time into necessary labor time — the constant expansion of socially necessary labor time. Even as socially necessary labor time in one form is diminished, so it is expanded in another form.
Marx argued, “the transformation of what was previously superfluous into what is necessary, as a historically created necessity.– is the tendency of capital.” The capitalist mode of production necessarily involves the “…transfer of its conditions of production outside itself…” At first, this involves merely expansion of markets, the creation of new needs in addition to existing needs, etc.
However, over time, the drive for ever greater profits leads to the expansion of activity that cannot be realized as value, as socially necessary labor time — that is entirely superfluous to society under any given existing basis of production and exchange. This is the necessary consequence of the profit motive itself. Moreover the expansion of entirely superfluous labor increasingly looms over all economic activity as the absolute condition for the realization of surplus value as profit itself. Eventually, capital runs into the limits of even these methods transfers outside itself; and, actually turns on the limits imposed by the law of value itself.
The first of those limits, it seems to me, is that imposed by the two-fold character of the commodity: to have value, a commodity must also be useful object to someone other than the producer. Which is to say, it must be the product of a particular useful expenditure of human labor. If the commodity is not useful, the labor is wasted. Even a commodity that has a use in the abstract (a pair of shoes) but is not presently needed by anyone falls into this category. A product that serves some need, but that is not presently required, is no more a commodity than one that is defective beyond repair.
But, here too, there is a distinction to be made: a product may be needed by someone else, but not in its capitalistic form: which is to say, it is useful as an article to be consumed, but has no use to the capitalist as a means of producing a profit. Just as value and use value are pulled apart, so use value itself has two entirely contradictory expressions: as an object needed for human consumption, and as a means of capital’s self-expansion. While human need can be satisfied by the useful qualities of a commodity, the needs of capital may not necessarily be satisfied by it. And vice versa: there is no law that says what is useful to capital as means of self-expansion must be useful from the standpoint of society. To be a commodity within the capitalist mode of production, the commodity must simultaneously meet both requirements — it must satisfy a definite human need, and it must satisfy capital’s need for constant self-expansion.
During periods of capitalist expansion these two follow as a matter of course, but not during periods of crisis. They follow so seamlessly during expansions, in fact, that it is not entirely obvious Marx had two distinct conceptions of usefulness — one based in the natural qualities of the commodity and another based in its social quality as a value. But, while the capitalist mode of production imposes its own unique expression of usefulness on the preexisting natural usefulness, the distinction between the two is not erased. While the natural usefulness of a commodity are the properties inherent in the object that satisfy some definite human need, the properties of the object that satisfy the needs of capital are general, and non-particular — but, I think, emphatically not abstract: the exchange value of the object is, for the capital, simply a use value employed to expand itself.
The electricity powering my laptop simultaneously must be useful to me as a consumption item, and to the capitalist as capital, as a means of creating profit. And, the exchange between the capitalist and me has to realize both expressions of usefulness at the same time. The fact that both of these things are accomplished in one act of exchange conceals the reality that two forms of usefulness are satisfied.
In normal (simple) commodity exchange value and use value confront each other in the form of buyer and seller. Value and use value appears as polar opposites that change position in the act of exchange. But, in this exchange use value appears on both sides of the exchange: the money, which is the expression of value in the exchange, is no more than a use value for the capitalist, an object to be employed in the expansion of his capital. The capitalistic use value of the money has simply changed form in the process of its self-expansion.
This fundamental alteration of the conditions of commodity exchange does not announce itself to the participants. The money does not jump up and down screaming, “I’m not just value; I am also a use value in capitalist production.” Money is living something of a schizophrenic existence: appearing in simple commodity exchange as value, and in capitalist commodity exchange as use value. This is the difficulty gold-bugs and their critics get into: money is not the aim of capitalist production — not even “more money”. The aim of capitalist production is itself, and money — gold — is only a means to this end.
In the capitalist mode of production money is just another use value, whose specific usefulness is it capacity to assume the form of any other use value. What is, for the mass of society, a condition of its existence and mediator of its necessary interchange with nature, is for capital, just another use value beside all the rest: condoms, trident missile submarines, farm tractors. Each is measured by the same standard: its particular usefulness to capital as means of self-expansion – it is indifferent to them as things.
Moreover, it is indifferent to the activities by which these things come into existence, are produced by particular human activity. It is indifferent as well to the needs of the human beings who produce them. Finally, it is indifferent even to the owner of the capital — who is merely its momentary personification.
The transfer of the conditions of production outside capital is the negation of those conditions of production within capital proper; that is, the negation of the law of value within the capital, as well as that of property relations generally. It seems to me goods circulate within the capital solely as use values, not as values. In the exchange between two capitals, money appears only as a use value on both sides of the exchange, and exchange simply is exchange of use values. However, between capital and worker, money appears on the capitalist’s side as a mere use value, while, on the worker’s side, it appears as exchange value, i.e., as a definite quantity of socially necessary labor time.
This obviously has implications when money is replaced by ex nihilo currency: it effectively annuls the exchange value of the worker’s labor power, while having no effect on the usefulness of this labor power in the operation of capital. The value of the worker’s wage no longer has an independent expression in the form of a money commodity. The worker is a simple commodity seller, and, like all simple commodity sellers, no longer has any idea of the value of her commodity. Far cry from the typical pap spread by Marxists, the abolition of the gold standard was a world historical defeat of the working classes of all countries — a defeat, I think, from which there is no possibility of a recovery within the capitalist mode of production.
Fascist state fiscal and monetary policy, which was enabled by debasing the currency, cannot be anything other than a weapon for beating working people into senseless submission. But, the implications of debasement are far more insidious. According to Nelson, very early in their writings Marx and Engels observed if a thing can’t be sold for money, it is not private property:
…money is ‘the most general form of property’. Money typifies the commodity as an exchangeable product. If it can’t be sold a personal possession is not private property, write Marx and Engels.
One way in which this is obviously true: legally I cannot sell myself into slavery. In view of the law, I am not my own property which ownership can be transferred to another in a monetary exchange. However, in the historical phase of ex nihilo currency this observation has another entirely contrary meaning: I am the common property of the capital class. The absence of a commodity money standard does not do away with property, however. Ex nihilo currency implies not just that I do not own myself, but also that I am owned by the fascist state, acting as manager of the total social capital. Having first been shorn of any independent means of life and now any independent means to express the value of my labor power, I am no more than an object held in common to be employed as necessary in the capitalist production process. Not simply my capacities and talents, but also my wants and desires are no more than the raw materials of the capitalist production process.
These needs, wants and desires have no form through which they might be expressed as an independent power in the act of exchange. Money is the universal commodity, i.e., the universal possibility of inherent in all use values — it is at once, all use values and capable of being converted into any and all use values, limited only by its quantity. The replacement of money by ex nihilo currency, therefore, replaces this universal form with a form fully adapted solely to the use to which it is put by capital. As mediator of the relation between the needs of individuals and nature, the needs of the individual can only be expressed through ex nihilo currency in this capitalistic form.
This is expressed mostly clearly and obviously in the demand for ever more job creation, and the incessant shrill demands for ever more fascist state expenditures. The worker exists only for capital. She is its special product and this product demands constant care and feeding. As a worker, she is fully and completely adapted to the logic of capital, which is the logic of unending wage slavery. She doesn’t demand this or that particular job — a hairdresser or office manager — but JOB itself; i.e., slavery abstracted from any need but that of capital. Her own real palpable human needs play no role in this unceasing whining for state generated employment.
Without the daily and detestable drudgery of labor, she has no existence at all. Merely by degrading the purchasing power of the worthless currency in her bank account, she can be compelled to throw herself into longer hours of work, at the expense of her own health, sanity, and family. In the end, she has been reduced to nothing more than another capitalist use value that eats, shits and reproduces its own kind. In the words of Marx, all the things that make her unique as social being have been transferred outside the conditions of production itself, while she remains a slave trapped inside.
Several things stand out from this argument:
- The problem is not economic policies but the fascist state itself
- The problem is not unemployment and job creation, but labor itself.
- The problem is not income inequality, but money itself.
The problem, in other words, is not the corruption of politics, but the corruption of what it means to be a human being.
I apologize for this part of the series, because it is hopelessly geeky. Unfortunately, I see no way to move forward without getting into the weeds of Marx’s unique contribution to the theory of money at this point. Please bear with me on this. As I really need to explain the difference, before 1933, between a token currency and the commodity money that underpinned its value. Without understanding this relationship, it is impossible to truly understand what happened when the dollar was removed from the gold standard in 1933. Nor is it possible to understand why ex nihilo dollars can’t tell us anything about anything.
As I explained in the previous post, to become capital, a quantity of gold must be exchanged for ex nihilo currency, but this exchange also strips the capital of the value it contained when it was in the form of gold. This requires a bit of digression: In Marx’s labor theory of value, when a currency of a state no longer has a fixed exchange rate with gold, the value contained in a unit of gold no longer has any definite relationship with the use value of the currency as medium of circulation. This has a radical implication for political-economy that has been long overlooked by both Marxist and bourgeois economists. I will try to explain the implications of going off the gold standard using as little jargon as possible.
Background: Prior to debasement dollars served in the United States both as a measure of value contained in an individual commodity, and the medium of circulation for commodities. By the term “value”, I mean the labor time required by producers on average to produce any object. If an automobile takes as much time on average as a ounce of gold to be produced, we can say that the value of the car is equal to one ounce of gold. Gold acts as a socially valid measure of the value of other commodities when it is used as money. Before money was debased, the value of any good was loosely bound to some definite quantity of money because both the money and the commodity were the product of some definite expenditure of socially necessary labor time. The movement of market prices over a period of time worked to align the socially necessary labor time of a good with the quantity of money containing the same amount of socially necessary labor time. The two functions of money are closely connected: the price of any commodity, when this price was denominated in a currency that observed the gold standard, followed the general rule that, on average and over a period of time, this price was also a measure of the value contained in the commodity.
A token (e.g., paper) currency only could serve as measure of value contained in the commodity if it was fixed to a definite quantity of gold — for instance, prior to the Great Depression law stated one ounce of gold could be exchanged for 20.67 dollars. Since an ounce of gold always had a definite quantity of value (socially necessary labor time required to produce it) fixing the token currency to this definite amount of gold served to fix the currency itself to a definite amount of socially necessary labor time. Token currency, therefore, could only serve as the material expression of socially necessary labor time, because it was itself tied to gold.
We could say the term “dollar” was not only the name of the official currency, it was also the “name” established by law of some definite quantity of gold.
On the other hand, when used directly in circulation, a gold coin served as medium of circulation of commodities in such a way that its actual use in any particular exchange for commodties was very brief; the coin constantly moved from one person to another in the course of commerce — rarely, if ever, staying in one hand for long, since it would almost immediately be used in the next transaction. Marx argued gold in this function was, for several reasons, merely a token of itself used to facilitate the circulation of commodities.
One particular example of this token role was the use of a coin that had been eroded by use over a period of time and was now no longer of legal weight. Although the coin carried a legal definition of one dollar, its weight now no longer adhered to the standard of legal definition of a dollar. Since the coin was legally a dollar, but did not actually contain a dollar’s weight, if it continued in circulation it had been reduced to a token of itself. As a practical matter, this meant, within certain limits, the gold coin could be replaced in circulation by a token currency provided this token was redeemable for a definite quantity of gold. Thus, a token currency like the dollar could serve as money only because it had a fixed and definite relation with some commodity money.
So, when the dollar was debased from gold, there was more at stake than a simple legal redefinition of money. The Roosevelt and Nixon administrations were severing the currency from the only thing that gave it the ability to express in price form the value contained in a commodity. This legal redefinition of what was officially called money, concealed within itself an unprecedented break in the role of prices in a modern economy. It would not be an exaggeration to say Roosevelt and Nixon, through their executive orders, chopped off Adam Smith’s invisible hand, and replaced it with the iron fist of Fascist State economic policy.
With the debasement of the currency, the two functions of money — measure of value contained in an individual commodity, and the medium of circulation for commodities — devolved on different objects whose relationship was no longer fixed and given. As the material to express the value contained in each commodity, gold no longer played a role as a medium of circulation of these commodities; while token currency, as medium for circulation of commodities, could no longer serve as the material to express their values in the prices we paid for goods.
But, the crises which produced this change offer an even more profound argument about why this debasement occurred. Every commodity is both a useful object and an object containing a definite amount of value (socially necessary labor time to produce it.) Debasement suggests that the routine exchange of commodities is now fundamentally at loggerheads with the routine production of these commodities. As an object containing value — i.e., a definite amount of socially necessary labor time — the commodity cannot circulate; as a particular useful object in circulation its value cannot be expressed. The solution adopted by the two administrations essentially severed rules governing exchange from the rules governing production.
On the one hand, this means commodities no longer circulate as objects containing value, but only as particular useful objects differentiated only by their particular useful qualities. This conclusion will be both startling and controversial, because it also implies Marx’s law of value no longer determines exchange. The fact that currency has been debased from gold must force the conclusion that prices no longer express the values of the commodities to which they are attached.
By exchange, we can only mean the exchange of qualitatively different objects having equal values — so many pairs of shoes for so many pairs of pants — but the ex nihilo currency now serving as the medium of circulation has no value of its own, and, therefore, the price denominated in units of the currency cannot express the value of either the shoes or the pants.
After the debasement of the dollar, in any transaction between the seller of a commodity and the buyer with an ex nihilo currency, the seller of the commodity gives it to the holder of ex nihilo currency and receives in return nothing but a piece of paper. She gives away not only the particular use value she has, but also the value contained in this particular use value as well. While receiving ex nihilo currency in return for her commodity, she receives nothing in return for the value contained in her commodity. Although it appears otherwise, the exchange is not determined by the quantitative equivalence of the values contained in the two objects, but by qualitative differences in their respective use values alone.
On the other hand, things having no value at all — for instance, Predator drones — can now circulate alongside shoes and pants, the latter of which have both use value and value. This is already given in the successive transactions involving an ex nihilo currency and commodities, or in the exchange between any two ex nihilo currencies. The state can, for instance, produce a quantity of ex nihilo currency simply by crediting it to the account of a defense contractor and receive in return Predator drones to kill kids in Afghanistan. While the purchase of the drone by Washington using newly created ex nihilo currency looks like just another simple market transaction, and even shows up in measures of gross domestic product side by side with purchases like groceries or a new car — this appearance is really quite deceiving.
The most significant implication of the debasement of the currency that is completely overlooked by Marxist and bourgeois economists is this: once gold was removed as the standard of price by the Fascist State, not only did the currency lose its capacity to express the value of an individual commodity, the market as a whole lost the capacity to distinguish between productive labor and wasted unproductive labor. Rather than limiting society to the productive and efficient employment of labor power, the stage was set for something truly unprecedented: the relentless expansion of superfluous labor time and the attendant secular inflation of prices.
“The mode of production is in rebellion against the mode of exchange.” – Frederick Engels, Socialism: Utopian and Scientific, 1880
Krugman confuses the superficial relations of exchange for a deeper analysis of the capitalist mode of production. This failing might help him when he wishes to ignore the likely results of this sort of examination, but when he actually tries to understand how capitalism works — for instance, why rising gold prices might be a warning sign of a deflationary event — his inability to get beyond the superficial appearances lead him straight into a dead end.
Had Krugman looked at data from the 1980s and 1990s, he would have immediately noticed the slide in the price of gold over that period, and the incongruity of this decline for his argument. His hypothesis turned things exactly upside down — associating a negative so-called real interest rate with a period of general expansion. This is at odds with historical evidence to the contrary: prior to 1934 rising prices and generally rising interest rates and profit have always been associated with economic growth.
Speaking of the impact of Fed’s current counter-cyclical strategy on the price of gold, Krugman writes:
…there has been a dramatic plunge in real interest rates…What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter: investors need less price appreciation to have an incentive to hold gold…if the price path is going to be flatter…it’s going to have to start from a higher initial level…And this says that the price of gold should jump in the short run…with lower interest rates, it makes more sense to hoard gold now…which means higher prices in the short run and the near future.
Krugman is arguing Federal Reserve policy over the last three years is responsible for more than a decade of persistently rising gold price. He wants to explain gold price movements by interest rates, when it is clear he should be explaining interest rates by the movement in gold prices. The data suggests he has the situation exactly reversed. Moreover, if the connection I have made between generally falling gold price and economic expansion is correct, logic suggests the Federal Reserve is not trying to reduce real interest rates, but working feverishly to raise them. The real interest rates is only the change in the price of dollars over a period of time measured in gold (or some other commodity serving as money). If, at the beginning of the year, the price of dollars is such that one ounce of gold can buy 1400 dollars, but at the end of the year this price has changed so that one ounce of gold can now only purchase 1260 dollars, the real price of dollars has increased by 10 percent — restated in conventional terms, the “price” of gold has fallen from $1400 an ounce to $1260 an ounce.
Since, as Krugman argues, the rising price of gold is a sign of a depressed economy, it follows that a falling annual average price of gold must be evidence, at least, that this depression may be lifting. When the price of gold is falling, as during the 1980s and 1990s, it is a sign that real interest rates are positive, not negative. Moreover, it is a sign that the purchasing power of gold, as measured in dollars, is falling. Which is just what I would expect based on Marx’s theory of value.
All of this forces me to conclude the question of whether there is a persistent inflation or deflation hinges not on the general price level as measured in dollars or some other ex nihilo currency, but on the real price level — the purchasing power of gold (the purest commodity money) as measured in the sum of dollars or other ex nihilo currency a definite unit of this commodity money can purchase. When the quantity of dollars a troy ounce of gold can purchase is increasing, deflation is positive; when the quantity of dollars a troy ounce of gold is falling, deflation is negative. But, from the standpoint of the ex nihilo currency the situation is reversed: as the price of a troy ounce of gold decreases, the so-called real interest rate is positive; when the price of a troy ounce of gold increases, the so-called real interest rate is negative.
Rather than removing the change in the general price level from the equation of nominal interest rates, so-called real interest rates are only a measure of the change in the price of ex nihilo currency.
As we stated in the previous part of this series, gold is money, dollars are not — this is also true for all ex nihilo currencies in the world market, they are not money. The object serving as money is the material expression of the value contained in commodities solely because it is itself a product of a definite quantity of human labor. However, the value contained in a single dollar bill is the same as that contained in a one hundred dollar bill — or that contained in $700 billion created with a few keystrokes in a computer terminal at the Federal Reserve Bank in Washington; namely, zero. Once this is understood, it is possible to see that holders of ex nihilo currencies do not buy gold — that dollars are not here serving in the exchange as the money pole in the transaction, but as something else. Rather the situation precisely is the reverse: the holders of ex nihilo currencies are sellers who auction off their currencies to the highest bidder, while the holders of gold buy these worthless currencies from their holders.
Although it appears otherwise on the surface — that we must explain why, and under what circumstances, the holders of currency will choose to place their savings in gold — the case is exactly opposite of appearances: the fact that gold is exchanged for a valueless currency requires us to explain not why the holder of an ex nihilo currency would want to get out of her holdings of dollars or euros, but why the holders of gold would want to exchange their gold for these worthless currencies.
To be sure, since the ex nihilo currencies have no value, they are not purchased for their value. If dollars are not purchased for their value, the motivation for the exchange on the part of the holder of gold cannot be the value contained in the ex nihilo currency but the use value of the currency to the holders of gold. While gold serves especially well as a store of value, as a form of riskless savings, these saving can only become capital if this gold can be turned into land, machinery, factories, and other elements of fixed and circulating capital, and, above all, into a mass of labor power that is the source of surplus value and what makes real capital out of capital. For the owner of a hoard of gold to actually become the owner of a mass of capital, this gold must be converted into one or another currency, allowing it to assume the form of money-capital. This conversion is nothing more than the conversion of money into capital once removed.
The conditions determining this conversion are established by laws in each nation, which determine what is and is not to be used as money within the borders of that particular nation. If the laws of a nation establish that its currency shall exchange with an ounce of gold for, say, $20.67 per ounce, then the owner of gold can use his hoard to purchase 20.67 dollars for each ounce of gold he is willing to give in exchange. If the laws of the nation should suddenly change, so that now an ounce of gold will exchange for $35, then the owner of gold use his hoard to purchase 35 dollars for each ounce of gold he is willing to give in exchange. Finally, if the laws of a nation establish that its currency will have no fixed exchange rate with an ounce of gold, then the owner of gold must search in the market for the best exchange rate for the currency concerned. All other things equal, in the first two cases, the capacity of the state to issue currency is more or less severely constrained by the need to maintain the proper balance between the quantity of currency in circulation and the quantity of gold it must represent. In the final case, this constraint is relaxed.
If the point of the exchange of an ounce of gold for any quantity of dollars was a mere commodity transaction, the owner of the gold would be giving her gold away for free, no matter the quantity of dollars she received in return. Since the dollars contain no value, were the exchange regulated by the law of value, it would require an infinite quantity of dollars to equal the value in one ounce of gold. It should be obvious that equal exchange plays no role in this transaction, but only the laws of the state concerned. The state has determined that its ex nihilo currency is money; should the capitalist wish to turn his hoard of gold into capital, and become a real not imaginary capitalist, he must purchase this ex nihilo currency. He, therefore, purchases not the value contained in the dollars, but the use value of the dollars: its capacity to become capital.
It is the use value of the currency — its capacity to become capital — that serves as the basis for determining the exchange ratio of an ounce of gold with the currency, i.e., that determines the price of dollars expressed in units of gold, or, in the eyes of simpleton economists like Paul Krugman — whose point of view is determined by the needs of Fascist State monetary and fiscal policies, as “essentially a capitalist machine” — determines the price of gold. The use value of currency consists entirely of its use as capital, as self-expanding value, as value set in motion for the purpose of creating more value. From the point of view of the owner of gold, the ex nihilo currency is but the form his gold must take on, before it can take the form of capital — of fixed and circulating capital, and of labor power. Far from being something mysterious, it is actually no more mysterious than the need to exchange dollars for euros in order to purchase fixed and circulating capital and labor power in the Eurozone. What motivates this latter exchange is not the exchange rate of dollars for euros, but the specific use to which these euros can be put as capital.
There is, however, a problem with this that might throw a monkey wrench into the gears of capitalist production: to assume the form of capital, our would be capitalist must exchange his gold, containing real value, for a currency containing no value of its own. To expand the value of his gold holding, the capitalist must first strip off the value of the gold. What does he get in exchange for this quantity of gold? He receives in return some quantity of use value in the form of so many dollars, which, despite their usefulness as capital, contain not a single jot of value. The capitalist places this quantity of dollars in motion as a capital, and, after some period of time, withdraws it plus an additional quantity of dollars which make up the profit on his activity. But, it is not until he has reconverted this quantity of dollars back into gold, and assured himself that, indeed, the new quantity of gold is greater than the original quantity, will he know that, in fact, his gold became capital.
When there is a fixed exchange rate between a definite unit of gold and a definite unit of dollars, it is not at all complicated to assess whether the capitalist currency profit is also a definite quantity of surplus value. However, when the exchange rate between a definite unit of gold and a definite quantity of dollars is subject to fluctuations within the world market, assessing whether some profit in currency form is actually surplus value is complicated by the fluctuations in the rate of exchange itself.
The capitalist exchanges 100 ounces of gold for dollars at a given rate of 1000 dollars per ounce of gold. He then places this total capital of $100,000 in motion as capital; later drawing out of it a new sum of $150,000 — $100,000 is his initial capital plus a profit of $50,000. However, upon reconverting his $150,000 back into gold, he is surprised to find that his 100 ounces of gold is now only 50 ounces of gold, or, alternately, has grown to 200 ounces of gold. In the first case, this is because the new exchange rate of gold has changed from 1000 dollars to an ounce of gold to 3000 dollars to an ounce of gold. In the second instance, the exchange rate has changed from 1000 dollars to an ounce of gold to 750 dollars to an ounce of gold. In the first instance, he has lost fifty percent of his capital; while, in the second instance, he has doubled his capital.
I have a simple hypothesis for how Krugman managed to reach the correct conclusion regarding the relationship between the price of gold and the general level of economic activity: he probably started with his conclusion and tried to work backward. He needed an argument for why the rising price of gold might signal deflation rather than inflation. So, he took his conclusion and looked for some argument on which he might hang this conclusion.
Hey, it happens sometimes — that is how intuition works. The problem in this case is that Krugman’s argument requires us to ignore so many facts it is clear he did not think the problem through completely.
The most vital empirical fact Krugman overlooks is the rather jarring upward slope of the demand curve for gold. This means increasing demand for gold is driven by its increasing price (if not completely insensitive to price altogether). If this seems bizarre, that’s because the actual relationship between gold and currency is reversed in the demand schedule. The demand schedule for gold can be restated thus: the quantity of dollars demanded in the market is the inverse function of its price in ounces of gold. In other words, if the observation of our gold-bug in China can be believed, ex nihilo dollars is the “commodity”, and gold is its price. I am not the first person to note this. The writer, FOFOA, often quotes another anonymous writer from 1998, who observed:
It is gold that denominates currency.
FOFOA, commenting on this argument, states:
Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero.
The upward slope of the demand curve for gold can be seen in the above chart for the years 2001 to 2010, using data, supplied by the World Gold Council, of demand for gold in the form of bars and coin plus gold purchased by exchange traded funds. The pronounced upward slope is unmistakable. This curve suggests that the story of gold as just another commodity is wildly off-base.
To put this in terms that might be less opaque, when CNBC states an ounce of gold is going for $1400, they are not telling you the value of an ounce of gold, but the value represented by 1,400 dollars, using an ounce of gold as the unit of measure. Gold is money by reason of its natural (physical) properties; while dollars are money only through the fiction of a state law that says they must be accepted as payment for transactions. Having no value of their own, the value represented by a quantity of dollars is solely dependent on the ratio between this quantity of dollars and a definite quantity of gold (or, some other commodity that can serve as money in the relationship). So, when Krugman proposes to explain the “real price of gold” in this situation, he is employing a meaningless term. Unbeknownst to him, he is merely asking what quantity of gold can be used to purchase that quantity of gold. If, instead, he had asked what determines the “real price” of a dollar in gold terms, it would immediately have been obvious that the price of a dollar is the physical quantity of gold that can purchase it. Moreover, it would have been obvious that the change in the price of the dollar is identical to the change in the quantity of gold with which it can be purchased — in other words, that the so-called “real interest rate” of dollars is equal to the change in the quantity of dollars that gold can buy over some period of time.
Now that we solved the riddle of the unusual demand curve for gold, we can resolve, as well, the paradox of ex nihilo currency real interest rates in the United States over the long period from 1980 until now. As I stated in the last post, Krugman’s argument implied interest rates were negative for most of the 1980s and 1990s, and that interest rates have been positive since 2001. Now, it is obvious that the case must have been the exact opposite of Krugman’s implicit argument: For most of the 1980s and 1990s, as the average annual price of gold fell, the real interest rate averaged +5% per year. This is because the quantity of gold necessary to purchase a given quantity of dollars — i.e., the real price of dollars — was increasing over that 20 year period by 5% per year. In 1980, an ounce of gold could purchase $595, but by 2001, it could only purchase $271. By the same token, as the average annual gold price has risen at an average rate of 15% per year for the entire period from 2001 to 2011, this implies the real interest rate has been -15% per year over the period.
Since, gold is money (a specific money commodity at least), we can explain its use as a store of value. When gold serves as a store of value, it is merely serving as a form of savings for its holders. In this case it becomes clear why gold is a preferred form of saving. First, it has an unlimited shelf-life; but, second, and more important, Washington cannot devalue gold as it can dollars, by printing dollars indiscriminately.
We can also explain the relation between gold and dollars: gold is money, and ex nihilo currency is not. Gold has value but no purchasing power — you can’t use it to buy groceries — since it is not legally recognized as money and it does not serve as the standard of prices. On the other hand, while ex nihilo currency has no value, it does have purchasing power, since it is officially recognized as money and serves as the standard of prices. However, despite the legal definition of the dollar as official money in the United States, money is not just whatever the state says it is. It is a real relation between members of society that exists independent of the thing government legally defines as money (or, even the commodity serving as money).
What else dollars might be is not our concern right now.
When a worthless ex nihilo currency has a floating exchange rate against gold, it doesn’t represent any real value itself but only that expressed in its actual exchange rate with gold over a period of time. Based on this, it is now clear that the “real price” of a good is not its ex nihilo currency price — as measured in so many dollars — but the definite quantity of gold that can purchase this quantity of dollars. Even if it is not obvious to us in our daily shopping activities, the “real price” of a commodity is derived from the quantity of gold that can be used to purchase the quantity of money listed as the price of the commodity.
We have examined the relation between gold and ex nihilo dollars, showing that gold is money while dollars are not. We also showed why the value represented by any quantity of dollars is only an expression of the value contained in a definite quantity of gold that can purchase this definite quantity of dollars.
So, for example, the value of the price of a 42 inch, wide-screen, high definition, plasma television at Best Buy, with a price of $1400, has the value of one ounce of gold when that ounce of gold can purchase 1,400 dollars. If that ounce of gold can purchase 2,800 dollars, then the television has the value equal to one half ounce of gold. And, if, If that ounce of gold can purchase only 700 dollars, then the television has the value equal to two ounces of gold. In any case, the price of the television only reflects the value of the quantity of gold that can purchase a quantity of dollars equal to that price.
It might appear, at first, that the value of the television could be doubled simply by doubling its price, but this would be an error. As we stated above, the dollars used in such a transaction have no value of their own, and, therefore, cannot express the value of either the television or gold. So, if the prices of all goods were suddenly doubled, this would not result in the doubling of the value of the total output; it would simply double the dollar price of the existing output — leaving the value of the output unchanged. The relationship between the value contained in the commodity and the corresponding value contained in a unit of gold is determined not by the price paid for the commodity, but their respective socially necessary labor times of production. As long as these respective socially necessary labor times do not change relative to each other, the change in dollar price of either is of no consequence.
This statement has implications for both calculating inflation and nominal interest rates, as we will see in the next post.
Paul Krugman manages to stumble Mr. Magoo-like to his analytical destination through a series of comical errors.
Krugman’s argument on gold and deflation is actually an argument on gold and depressions. Krugman begins by explaining that rising gold price has been popularly linked to the prospect of inflation created by the monetary policies of the Federal Reserve Bank. He has ignored this argument, because he thinks Fed policy is far too restrictive to create inflation — deflation is his worry. He has, in fact, brushed rising gold prices aside as something caused by gold-bugs and the like — until now.
Now, he thinks, he can explain why rising gold price may actually be an expected outcome of a deflation, not inflation. I know Krugman’s argument here is flawed, but coincidentally on the right side of the relation: rising gold price implies the economy is experiencing a depression but this real contraction of economic activity does not necessarily lead to a general fall of prices — the deflation Krugman thinks he can explain. So, I want to examine his argument to locate the fallacy in it.
In the model Krugman is using, gold is an ordinary commodity like oil or coal; i.e., without any significant monetary properties. Gold is used primarily for its industrial applications:
Imagine that there’s a fixed stock of gold available right now, and that over time this stock gradually disappears into real-world uses like dentistry. (Yes, gold gets mined, and there’s a more or less perpetual demand for gold that just sits there; never mind for now).
At this point, we need to make explicit what Krugman wants to dismiss in the set up of his argument: First, he is dismissing what is undeniably the most important use of gold: its use as money, as measure of value and as standard of prices. The use of gold as a way to store value — as gold “that just sits there” — does not consume the gold; it simply sits in a bank vault or some other storage facility and is rarely if ever moved, except to be transferred to the ownership of another person. What makes gold ideal for this is that it has a shelf-life that is unlimited — because it does not corrode or otherwise decompose. Even as standard of price gold does not necessarily get consumed. If it is used as currency it may be eroded during the course of circulation. But if it is not directly used as currency, this is not true — again, it simply sits in a bank vault until it is exchanged for paper tokens of itself.
Second, Krugman wants us to ignore the fact that the existing stock of gold is constantly being added to by production of new gold from sources deep in the earth. Most of this new gold also does not enter into production, but is used for its principal purpose as money — as a store of value (savings). Production of gold has to be important in any explanation because of a unique characteristic this gold production has: the production of gold does not appear to be significantly affected by the laws of supply and demand. While the price of gold may rise or fall, the amount of gold produced manages to remain in a very narrow band; rarely, if ever falling out of this narrow limit — e.g. between 2001 and 2010 production ranged between 2400 to 2650 tons per year, while prices quadrupled. As a commodity, gold behaves very curiously in a non-commodity fashion
These two objections are enough to raise serious questions about Paul’s entire model, but, for the moment, we will set them aside and continue to examine Paul’s argument:
The rate at which gold disappears into teeth — the flow demand for gold, in tons per year — depends on its real price
We have a fixed stock of gold that is gradually being consumed by various uses in production. Krugman argues that the rate this stock of gold is consumed will depend on its “real” price. What is the “real” price of gold, and how does this differ from the nominal currency price of gold? Krugman does not tell me. He simply throws the term out there and expects me to figure it out for myself. Since, I can only price gold in an existing currency, I assume by “real” price, Krugman means its currency, e.g. dollar, price. We will see why my assumption is not be correct — gold, it turns out, does not have a price, “real” or otherwise. For now, let’s continue:
Crucially, at least for tractability, there is a “choke price” — a price at which flow demand goes to zero. As we’ll see next, this price helps tie down the price path.
Krugman is arguing there is a price at which the “flow demand” (the money demand for a good over time) for gold in the market goes to zero. He slips this assumption into his argument without discussing it, but I am forced to wonder how he arrives at this statement. Certainly, for use as an ordinary commodity, as a commodity used in industrial processes, we can assume there is a point at which the price of gold might become prohibitive. But, as money — as store of value, or as the standard of prices — is there any evidence that gold has a price point at which demand for its goes to zero? Well, no and yes. One of the paradoxes of gold is that demand tends to increase along with the price. Here is just one example taken from a gold-bug (he even calls himself “Mr. Gold”) doing research on China’s demand for gold:
When at the beginning of this century I studied the elasticity of gold demand to incomes, I was stunned by how steep the demand curve was in China. PRC gold demand was unlike in any other country because, precisely, it was upward sloping – the more expensive the gold, the more the Chinese bought of it. The trend has not changed since then…
Note, how this gold-bug asserts the demand curve for gold is “unlike in any other country because, precisely, it was upward sloping.” This is hardly true, as we can see at least in the anecdotal evidence with demand for gold in the United States — the hysteria for gold increases as the price of the metal increases here as well. This pattern of behavior is not unusual if we assume gold is exhibiting the kind of money-like qualities associated with appreciating currencies. As a currency appreciates, demand for it increases. This suggests that price is driving demand, not vice-versa, that the demand curve for gold is upward sloping — which is to say, the higher the price rises, the greater the demand for gold. Moreover, there is no evidence of a price point, no matter how high, where the demand for gold goes to zero.
To argue this another way: In the real world, economists argue that deflation reduces the willingness of individuals to part with their money for commodities. They hold onto it as they anticipate even lower prices in the future. It is clear that gold is behaving in this fashion — as its price increases — which is to say, as its purchasing power increases — people want to hold onto it, and hold more of it. A hypothesis which does not account for this money-like behavior is not a hypothesis at all.
However, even if there is no price point where the demand for gold goes to zero, this does not mean there is no price point where “flow” goes to zero. If gold does indeed exhibit money-like qualities with an upward sloping ‘demand curve’, this would imply gold can fall to some price below which it no longer circulates as money. We can return to this point later as well.
Krugman now turns to the core question of his post:
So what determines the price of gold at any given point in time? Hotelling models say that people are willing to hold onto an exhaustible resources because they are rewarded with a rising price.
At this point we should say something about this “Hotelling model”. Harold Hotelling developed an economic model to describe how cartels act to restrain the supply of a commodity in the market in order to maximize profit, that is, the return on their investment in the production of the commodity. The Wikipedia has this to say about Hotelling’s Rule regarding scarcity rent — excess profit derived by creating scarcity in the supply of a product:
Hotelling’s rule defines the net price path as a function of time while maximising economic rent in the time of fully extracting a non-renewable natural resource. The maximum rent is also known as Hotelling rent or scarcity rent and is the maximum rent that could be obtained while emptying the stock resource. In an efficient exploitation of a non-renewable and non-augmentable resource, the percentage change in net-price per unit of time should equal the discount rate in order to maximise the present value of the resource capital over the extraction period.
Simply stated, if I have a commodity that will eventually be exhausted, I will manage its production so that, over the lifetime of its production, the amount of money I can charge for it will be maximized. Think about, for instance, OPEC, who wants to be sure they produce no more oil each year than is demanded by the market when the price of oil is the highest and the amount demand is the greatest.
The problem with applying this rule to a stock of gold is that, as we saw above, gold exhibits the characteristic features of a money, not of an ordinary commodity. This will seem to be a non sequitur to Krugman’s core argument — until you realize the aim of maximizing rent on the production of a commodity is to maximize the quantity of money one receives in return for that commodity. Essentially, Krugman is arguing that owners of a lifeless hoard of gold sitting in a vault seek to maximize rent on that lifeless hoard of gold sitting in a vault.
Since the gold never moves from the vault, never enters into circulation, never exchanges with other commodities, and, thereby, become the form of the profits sought by producers of commodities, its role in its own price appreciation or depreciation must be completely passive — it is a mere victim of circumstance, a bystander to events. Whatever the change in the price of gold that occurs must be the result of other processes in the economy that impose themselves on the price of gold, causing this price to vary over time.
So, whatever is happening with the price of gold is not the result of any change in the behavior of the owners of the commodity, nor of any rent maximizing effort on their part. In fact, from what we have seen above, there is no reason to assume the owners of gold do anything with this gold except hold onto it. The entire point of having the gold is to hold it irrespective of any change in its price. While there may be some fluctuations of willingness to hold gold at the margins — of interest in supplies of newly produced gold — the great bulk of gold is likely no more traded than do people trade their savings in any other form. The question raised by this is obvious:
What determines the preference of individuals to hold their savings in the form of gold as opposed to some other form? But, we will leave this to the side as well for now.
Krugman next states:
Abstracting from storage costs, this says that the real price [of gold] must rise at a rate equal to the real rate of interest.
As with the “real price” of gold, I am at a loss at to what the “real rate of interest” refers. So, I went looking for a definition of the term on Wikipedia and found this:
“The nominal interest rate is the amount, in money terms, of interest payable.
For example, suppose a household deposits $100 with a bank for 1 year and they receive interest of $10. At the end of the year their balance is $110. In this case, the nominal interest rate is 10% per annum.
The real interest rate, which measures the purchasing power of interest receipts, is calculated by adjusting the nominal rate charged to take inflation into account. (See real vs. nominal in economics.)
If inflation in the economy has been 10% in the year, then the $110 in the account at the end of the year buys the same amount as the $100 did a year ago. The real interest rate, in this case, is zero.”
Krugman is arguing that the price of gold will rise or fall to reflect interest rates once inflation has been stripped out of the equation. If the real interest rate is positive, gold will tend to appreciate relative to currency. If the real interest rate is negative, gold will tend to depreciate relative to currency. If, at the end of a year $100 in your savings account has increased to $110, and inflation that year is zero, an ounce of gold will appreciate by a proportional amount — say, from $1400 to $1540. If, at the end of a year $100 in your savings account has decreased to $90, and inflation that year is zero, an ounce of gold will depreciate by a proportional amount — say, from $1400 to $1260.
This latter example would likely cause some difficulties: you would go storming into your local bank branch to inquire why you were being charged an astonishing ten percent a year to keep your money in the bank. Once informed that the current interest rate charge by your bank was now -10% per year, you would promptly withdraw your funds — triggering what, in time, will grow into a run on the bank, as everyone withdraws their saving in the face of stiff new negative interest rates.
Why might this cause some difficulties? Between 1980 and 2001, the average annual price of gold fell on average by 5 percent per year; while, since 2001, the average annual price of gold has risen on average by 15 percent per year. The surprising result of Krugman’s argument is that, after accounting for inflation, real interest rates were negative for most of the 80s and 90s, but have been decidedly positive since then.
We will leave this for later examination as well.
Krugman concludes the recent jump in the price of gold is the result of the Federal Reserve Bank’s zero interest rate policy:
Now ask the question, what has changed recently that should affect this equilibrium path? And the answer is obvious: there has been a dramatic plunge in real interest rates, as investors have come to perceive that the Lesser Depression will depress returns on investment for a long time to come:
What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter: investors need less price appreciation to have an incentive to hold gold.
There are two things I question about this reasoning. First, the price of a troy ounce of gold has been increasing since 2001, when it hit bottom at an annual average price of $271. That means, for whatever reason having nothing to do with the Fed’s zero interest rate policy, investors have had an incentive to hold gold as its purchasing power, measured in dollars, has been rising for a decade now. Second, since in my argument, gold is playing only a passive role, the historical evidence suggests the Fed’s zero interest rate policy is being driven by the same forces that are also causing gold to appreciate in price and investors to hoard it.
Rather than driving events, the Fed’s zero interest rate policy is completely reactive. Simply stated, based on Krugman’s argument, the Fed’s zero interest rate policy is not sending capitals scurrying into gold and driving gold price higher, rather it is responding to whatever economic forces are doing this, and, driving real interest rates to an average 15% a year for the last decade — it is trying to drive real interest rates negative to reverse those forces, and to reverse the depressed return on investment.
We will show why this argument falls flat on its face as well
The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future.
The evidence is, in fact, the exact opposite: the behavior of gold indicates the Federal Reserve’s zero interest rate policy is a failure so far (along with all the fiscal stimulus and backdoor bailouts) since, despite the effort and unprecedented scale of the various policy actions, the price of gold indicates interest rates remain stubbornly high at levels not seen since the 1970s depression. And, moreover, still increasing.
Nevertheless his string of errors in reasoning, Krugman manages to end up, Mr. Magoo-like, at what is somewhat close to the right conclusion:
…this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.
Krugman is correct to state rising gold price is a sign of an economy in a depression, where returns on investment have fallen flat. He is also correct to state gold is not signalling future inflation. But, Krugman arrives the correct conclusion only by making a series of Mr. Magoo-like blunders that just manage to offset each other — blunders, which, when stripped out of his argument, allow a simpler explanation for the relation between gold and real interest rates.
In the next part of this series, I will show why Krugman’s model, although arriving at something close to the truth of the matter, is nevertheless wholly wrong.
I have been critiquing Barry Eichengreen’s unprincipled attack on Ron Paul and his demand for a return to the gold standard, but, so far, I have danced around the real question posed by this vicious hit piece. Eichengreen’s argument is not about whether or not Ron Paul’s ideas can be compared to the insanity of Glenn Beck, nor is it even about the criticism of the Fascist State proposed by the argument of Frederick Hayek, who plays in this venal attack only the role of betrayer — Ron Paul having based his argument on many of the insights of Hayek, is ultimately betrayed by him when the latter dismisses
the possibility of a return to the gold standard.
Hayek concedes, in other words, to the necessity of totalitarianism.
Ron Paul, having been deserted by Hayek, even before he begins his career as a politician, is left alone in the company of Glenn Beck, who (Beck) is trying to foist gold coin on you at an astounding markup. The implication of this being that if Ron Paul is not himself in cahoots with Glenn Beck, he is just another hopeless sucker to be played. Just another miser looking for a place to safely store up his accumulated wealth from the predations of the investment banksters.
All of this is nothing more than an attempt at misdirection, a ploy to distract you from asking the important question:
What is money?
Ask this question to Ron Paul, and he will tell you gold is money — honest money, not a fiction of money as is ex nihilo currency. When Ron Paul asked Fed Chairman Ben Bernanke if gold was money, the Chairman tried his damnedest to avoid giving a straight answer. The chairman knows that money can perform two useful functions: universal means of payment in an exchange, and store of value. Even if gold is not recognized as the official standard of prices in a country, it can still perform exceptional service as store of value. And, in this function, it entirely fulfills the definition of a money – moreover, it fulfills this function better than any other commodity. And, it certainly fulfills this function better than currency created out of thin air.
Yes. Gold is money. But, of course, that is not the question I am asking:
“What is money?”
Not what thing can serve as money, but what is money itself. No matter what serves as money, or the functions of money it fulfills; what is money itself, i.e., the functions to be filled by the things?
Simply stated: Gold is money, but money is not gold.
People always make this silly argument: “Why can’t dogs, or sea shells or emeralds be money?” Yes. Within limits, anything can serve as money; and, this fact makes the thing serving as money appear entirely accidental and arbitrarily established. So, for instance, whether gold or dancing electrons on a Federal Reserve terminal is money seems simply a matter of convenience and fit.
But, the real questions raised by this is why anything serves as money? That is, why money? This question appears to us entirely irrational. We take the existence of money for granted, and therefore, argue not about money itself, but the things to be used as money. Eichengreen wants us to believe the question, “What thing should serve as money?”, has no deeper significance but for a handful of scam artists and marks like Glenn Beck and Ron Paul. A fifty dollar gold coin (worth some $1900) is inconvenient for daily purchases; we should use dancing electrons on a Federal Reserve terminal.
But, why do we have to use anything at all when it comes time to fill up the SUV for a trip to the corner store? Why isn’t the gas free? In other words, what is money doing coming between us and the things we need?
“Because”, the economist Barry Eichengreen will tell us, “there is not enough of stuff to go around.” Well, how does Barry know this? Does he have some insight into how much of one or another thing is produced in relation to demand for that thing? No. He doesn’t. The function of money is to tell us which things are in shortfall relative to demand because those things have a price in the market place. Prices presuppose the existence of scarcity; of a relation to nature marked by insufficiency of means to satisfy human want. Money is not an attribute of a fully human society, but the attribute of a society still living under the oppressive demands of nature.
So, the question,
“What is money?”
really comes down to
“What is scarcity?”
And, this can now be answered: it is insufficient means to satisfy human needs. But, this answer is still insufficient, because we really have no way to know directly if scarcity exists, right? What we know is the things generally have a price, and we infer from this that things must be scarce. But, this too is a fallacy like “gold is money = money is gold”. I stated that prices presuppose scarcity — but I must now correct myself. Scarcity of means to satisfy human needs is necessarily expressed by prices, but prices do not of themselves necessarily express scarcity of means.
Catelization, monopoly pricing, false scarcity and the Fascist State
We know, for instance, near the turn of the 20th Century, certain big industries learned they could maintain artificially high prices on their products by creating entirely artificial scarcities. We know also how this expertise was put to use and the reaction of society to it. Or, at least, we think we do. Folks like Joseph Stromberg, Murray Rothbard, Paul Baran and Paul Sweezy tell a much different story than the official record. That alternative narrative is summed up brilliantly by Kevin Carson in his work here.
But merely private attempts at cartelization before the Progressive Era–namely the so-called “trusts”–were miserable failures, according to Kolko. The dominant trend at the turn of the century–despite the effects of tariffs, patents, railroad subsidies, and other existing forms of statism–was competition. The trust movement was an attempt to cartelize the economy through such voluntary and private means as mergers, acquisitions, and price collusion. But the over-leveraged and over-capitalized trusts were even less efficient than before, and steadily lost market share at the hands of their smaller, more efficient competitors. Standard Oil and U.S. Steel, immediately after their formation, began a process of eroding market share. In the face of this resounding failure, big business acted through the state to cartelize itself–hence, the Progressive regulatory agenda. “Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.”
In fact, these folks argue, cartelization and monopoly pricing wasn’t very successful until the state stepped in at the behest of industry to organize them. Carson again:
The Federal Trade Commission created a hospitable atmosphere for trade associations and their efforts to prevent price cutting. (18) The two pieces of legislation accomplished what the trusts had been unable to: it enabled a handful of firms in each industry to stabilize their market share and to maintain an oligopoly structure between them. This oligopoly pattern has remained stable ever since.
It was during the war [i.e. WWI] that effective, working oligopoly and price and market agreements became operational in the dominant sectors of the American economy. The rapid diffusion of power in the economy and relatively easy entry [i.e., the conditions the trust movement failed to suppress] virtually ceased. Despite the cessation of important new legislative enactments, the unity of business and the federal government continued throughout the 1920s and thereafter, using the foundations laid in the Progressive Era to stabilize and consolidate conditions within various industries. And, on the same progressive foundations and exploiting the experience with the war agencies, Herbert Hoover and Franklin Roosevelt later formulated programs for saving American capitalism. The principle of utilizing the federal government to stabilize the economy, established in the context of modern industrialism during the Progressive Era, became the basis of political capitalism in its many later ramifications. (19)
But, there’s a problem with this cartel argument by Austrians, like Hayek and Mises, and Marxist-Keynesians, like Baran and Sweezy: Following Rudolf Hilferding, they describe prices realized by cartelization as “tribute exacted from the entire body of domestic consumers.”
The “monopoly capital” theorists introduced a major innovation over classical Marxism by treating monopoly profit as a surplus extracted from the consumer in the exchange process, rather than from the laborer in the production process. This innovation was anticipated by the Austro-Marxist Hilferding in his description of the super profits resulting from the tariff:
The productive tariff thus provides the cartel with an extra profit over and above that which results from the cartelization itself, and gives it the power to levy an indirect tax on the domestic population. This extra profit no longer originates in the surplus value produced by the workers employed in cartels; nor is it a deduction from the profit of the other non-cartelized industries. It is a tribute exacted from the entire body of domestic consumers. (64)
The problem with this theory is this: if we assume a closed system where the wages of the working class are the overwhelming source of purchasing power for the goods produced by industry, with prices of commodities more or less dependent on the consumption power of the mass of workers who produce them, these workers are unable to buy what they produce. The problem cited by Marx that the consumption power of society is an obstacle to the realization of surplus value is only intensified by cartelization.
Cartelization, even if it could be achieved in one or two industries, could not be the principle feature of any closed economy. Moreover, Marx’s theory predicts as productivity increased, and the body of workers needed to produce a given output shrank, this imbalance worsens. Even with the full weight of the state behind it, monopoly pricing would result in the severe limitation of the consumption power of society. This wholly artificial limitation on the consumption power of society would be expressed as a reduced demand for the output of industry and generally falling prices. So, in any case, the attempt to impose a general scarcity on society through cartelization alone must, in the end, fail miserably.
At this point it is entirely necessary to again ask the question:
“What is money?”
But, this time, not in the fashion we previously addressed it,
“Why is money coming between us and the things we need?”
We now can ask it in the form Barry Eichengreen wants us to consider it:
“What thing should serve as the money?”
As we just saw, cartelization must fail, even if it is sponsored by the state, owing to the artificial limits on the consumption of society. The limited means of consumption in the hands of the mass of workers must place definite limits on the demand for the output of industry.
But, what if — and this is only a silly hypothetical — another source of “demand” could be found within society? What if, out of nowhere, government should suddenly find itself in possession of a previously untapped endless supply of gold? What if, no matter how much of this supply of gold was actually spent, the gold coffers of the state remained full to the bursting point. Indeed, what if, for every bar of gold the state spent, 2 or 3 … or one thousand bars took the place of the spent gold?
In this case, the consumption power of society lost by cartelization and monopoly pricing could be made up for by judicious Fascist State spending, for instance on the military or building out an entire highway system or leveling the industiral competitors of entire continents in a global holocaust or pursuing a decades long Cold War/War on Terror/War on Democracy, to offset the limited demand of society. Since all gold bars look pretty much the same, no one need know that the state had a secret vault that produced gold as needed. No one need know that gold had lost its “price” as a commodity, because it was so incredibly abundant as to exceed all demand for it.
Which is to say, no one need know that in gold-money terms, all other commodities, including labor power, were essentially being given away for free.
The only people who would know this would be the men and women who managed the vault. And, since they were getting a cut of every bar spent into circulation, they could be relied on to keep this a tightly held secret.
“What is money?”
Is it gold, a commodity in limited supply, and requiring a great deal of time and effort to produce? Or, is it the dancing electrons on a computer terminal in the basement of the Federal Reserve Bank in Washington, DC? Is it real gold, available in definite limited quantities? Or, is it “electronic gold”, available in infinite quantities? The first choice makes it impossible for state enforced monopoly pricing and cartelization; the second makes it entirely possible.
So far as I know, I am the only one making this argument — Marxist or non-Marxist. But, it is the entire point of Ron Paul’s campaign. It is what makes his campaign a potentially revolutionary moment in American society. Of far greater importance than he imagines, because, like any petty capitalist, he is only looking for a safe place to store his wealth. The radical potential of a demand for the return to the gold standard, even from the mouth of this petty capitalist, this classical liberal is a dagger aimed directly at the heart of the Fascist State, and of its globe-straddling empire.
Tags: Austrian Economics, Barry Eichengreen, Depression, ex nihilo pecunaim, Federal Reserve, financial crisis, gold, Hayek, international financial system, Joseph Stromberg, Karl Marx, Kevin Carson, Libertarianism, monetary policy, Money, Murray Rothbard, Paul Baran, Paul Sweezy, political-economy, Ron Paul, Rudolf Hilferding, Tea Party, Wall Street Crisis
Barry Eichengreen makes much of the role the theories of Friedrich Hayek play in Ron Paul’s world view for a reason that becomes immediately clear:
In his 2009 book, End the Fed, Paul describes how he discovered the work of Hayek back in the 1960s by reading The Road to Serfdom. First published in 1944, the book enjoyed a recrudescence last year after it was touted by Glenn Beck, briefly skyrocketing to number one on Amazon.com’s and Barnes and Noble’s best-seller lists. But as Beck, that notorious stickler for facts, would presumably admit, Paul found it first.
The Road to Serfdom warned, in the words of the libertarian economist Richard Ebeling, of “the danger of tyranny that inevitably results from government control of economic decision-making through central planning.” Hayek argued that governments were progressively abandoning the economic freedom without which personal and political liberty could not exist. As he saw it, state intervention in the economy more generally, by restricting individual freedom of action, is necessarily coercive. Hayek therefore called for limiting government to its essential functions and relying wherever possible on market competition, not just because this was more efficient, but because doing so maximized individual choice and human agency.
Yes, folks: Ron Paul is a follower of the very same theories recently endorsed by that cheap huckster of gold coin: right wing conspiracy theorist nut job, Glenn Beck.
Indeed, Ron Paul hails from that portion of the libertarian movement that is a reactive response to the growing role of the state in the economic activity of society. While Marxists predict this increasing state role — demanding only that state power must rest in the hands of the workers whose activity it is — libertarians of Paul’s type reject this role entirely and warn it can only have catastrophic implications for human freedom. Thus, these two streams of communist thought diverge less significantly in their respective diagnoses what was taking place in 20th Century than in their respective solution to it.
As Eichengreen points out, Ron Paul sees in the ever increasing interference by the state in economic activity a danger to individual freedom and a growing threat of totalitarian statist power, in which the state attempts to determine the individual and society rather than being determined by them. This has echoes among Marxists, who themselves had nothing but disdain for nationalization of industry, and by Marxist writers, like Raya Dunayevskaya, who, during the same period Hayek was developing his own ideas, observed an inherent tendency of the state to organize society as if it were a factory floor.
“At the same time the constant crises in production and the revolts engendered befuddle the minds of men who are OUTSIDE of the labor process… where surplus labor appears as surplus product and hence PLANLESSNESS. They thereupon contrast the ANARCHY of the market to the order in the factory. And they present themselves as the CONSCIOUS planners who can bring order also into ‘society,’ that is, the market.”
Paraphrasing Marx, Dunayevskaya points to the inherent logic of this process:
If the order of the factory were also in the market, you’d have complete totalitarianism.”
What Eichengreen wants to treat as an observation specific to the “loony right” turns out to be a view held in common by both the followers of Marx and the followers of the Austrian School. Moreover, it is not just the fringes of political thought who warned of growing convergence between the state and capital, the mainstream of political thought also recognized this inherent tendency, Eichengreen acknowledges, by citing President Richard Nixon’s famous quote, “we are all Keynesians now.” What emerges from this is a very different impression than the one Eichengreen wishes us to take away from his tawdry attempt to discredit Paul by noting his affinity with Glenn Beck for the writings of Nobel Laureate Friedrich Hayek and the Austrian School within bourgeois economics: As Engels predicted, the state was being driven by Capital’s own development to assume the role of social capitalist, managing the process of production and acting as the direct exploiter of labor power.
While mainstream bourgeois political-economy was treating the convergence of Capital and State power as a mere economic fact, the followers of Hayek and the best of the followers of Marx warn not merely of the effect this process would have on economic activity, but the effect it must have on the state itself — as social manager of the process of extraction of surplus value from the mass of society, the state must become increasingly indifferent to its will, must increasingly treat it as a collective commodity, as a mass of labor power, and, therefore, as nothing more than a collective source of surplus value.
Although lacking the tools of historical materialist analysis, that comes from familiarity with Marx’s own methods, libertarians, like Ron Paul, have actually been able to better understand the implications of increasing state control over economic life than Marxists, who, having abandoned Marx’s methods to adopt spurious theories propagated from whatever academic scribbler, still to this day have failed to completely understand the Fascist State.
Eichengreen, worthless charlatan that he is, deftly sidesteps this critique shared by both Austrians and Marxists of the political impact of growing Fascist State control over the production of surplus value, and instead directs our attention to the entirely phony debate of whether gold as money serves society better than ex nihilo currency to abolish the crises inherent in the capitalist mode of production itself. He begins this foray by admitting the failure of of monetary policy to prevent the present crisis, but poses it as a non sequitur:
Why are Ron Paul’s ideas becoming more popular among voters?
The answer, as is Eichengreen’s standard practice in this bullshit hit piece, is to blame Ron Paul’s popularity on Glenn Beck:
BUT IF Representative Paul has been agitating for a return to gold for the better part of four decades, why have his arguments now begun to resonate more widely? One might point to new media—to the proliferation of cable-television channels, satellite-radio stations and websites that allow out-of-the-mainstream arguments to more easily find their audiences. It is tempting to blame the black-helicopter brigades who see conspiracies everywhere, but most especially in government. There are the forces of globalization, which lead older, less-skilled workers to feel left behind economically, fanning their anger with everyone in power, but with the educated elites in particular (not least onetime professors with seats on the Federal Reserve Board).
Only after we get this conspicuously offensive run of personal attacks on Ron Paul’s reputation, does Eichengreen actually admit: Ron Paul’s ideas are gaining in popularity, because the Fascist State is suffering a crisis produced by a decade of depression and financial calamity:
There may be something to all this, but there is also the financial crisis, the most serious to hit the United States in more than eight decades. Its very occurrence seemingly validated the arguments of those like Paul who had long insisted that the economic superstructure was, as a result of government interference and fiat money, inherently unstable. Chicken Little becomes an oracle on those rare occasions when the sky actually does fall.
Ah! But, even now, Eichengreen, forced to admit, finally, the present unpleasantness, cannot help but label Ron Paul a broken clock for having rightly predicted it in the first place. Okay, fine.
So, it turns out that the banksters really do extend credit beyond all possibility of it being repaid; and, it turns out that this over-extension of credit plays some role in overinvestment and the accumulation of debt, and, it turns out prices spiral to previously unimaginable heights during periods of boom — and, finally, it turns out all this comes crashing down around the ears of the capitalist, when, as at present, a contraction erupts suddenly, and without warning.
This schema bears more than a passing resemblance to the events of the last decade. Our recent financial crisis had multiple causes, to be sure—all financial crises do. But a principal cause was surely the strongly procyclical behavior of credit and the rapid growth of bank lending. The credit boom that spanned the first eight years of the twenty-first century was unprecedented in modern U.S. history. It was fueled by a Federal Reserve System that lowered interest rates virtually to zero in response to the collapse of the tech bubble and 9/11 and then found it difficult to normalize them quickly. The boom was further encouraged by the belief that there existed a “Greenspan-Bernanke put”—that the Fed would cut interest rates again if the financial markets encountered difficulties, as it had done not just in 2001 but also in 1998 and even before that, in 1987. (The Chinese as well may have played a role in underwriting the credit boom, but that’s another story.) That many of the projects thereby financed, notably in residential and commercial real estate, were less than sound became painfully evident with the crash.
All this is just as the Austrian School would have predicted. In this sense, New York Times columnist Paul Krugman went too far when he concluded, some years ago, that Austrian theories of the business cycle have as much relevance to the present day “as the phlogiston theory of fire.”
(I think it is rather cute to see Eichengreen present himself as the disinterested referee between the warring factions of bourgeois political-economy, by gently chiding Paul Krugman for going too far in his criticism of the Austrians — after all, the Fascist State will have to borrow heavily from the Austrian School to extricate itself from its present predicament)
Where people like Ron Paul go wrong, Eichengreen warns, is their belief that there is no solution to this crisis but to allow it to unfold to its likely unpalatable conclusion — unpalatable, of course, for the Fascist State, since such an event is its death-spiral as social capitalist. Apparently, without even realizing it, this pompous ass Eichengreen demonstrates the truth of Hayek’s argument: Fascist State management of the economy, once undertaken, must, over time, require ever increasing efforts to control economic events, and, therefore, ever increasing totalitarian control over society itself.
Eichengreen pleads us to understand the Fascist State does not intervene into the economy on behalf of Capital (and itself as manager of the total social capital) but to protect widows and orphans from starvation and poverty:
Society, in its wisdom, has concluded that inflicting intense pain upon innocent bystanders through a long period of high unemployment is not the best way of discouraging irrational exuberance in financial markets. Nor is precipitating a depression the most expeditious way of cleansing bank and corporate balance sheets. Better is to stabilize the level of economic activity and encourage the strong expansion of the economy. This enables banks and firms to grow out from under their bad debts. In this way, the mistaken investments of the past eventually become inconsequential. While there may indeed be a problem of moral hazard, it is best left for the future, when it can be addressed by imposing more rigorous regulatory restraints on the banking and financial systems.
Thus, in order to protect widows and orphans from starvation, the Fascist State is compelled to prop up the profits and asset prices of failed banksters and encourage the export of productive capital to the less developed regions of the world market — not to mention, leave millions without jobs and millions more under threat of losing their jobs. Eichengreen even has the astonishing gall to state the problem of moral hazard identified by Austrians, “is best left for the future, when it can be addressed by imposing more rigorous regulatory restraints on the banking and financial systems.” Eichengreen takes us all for fools — did not Washington deregulate the banksters prior to this depression, precisely when the economy was still expanding? If banks are deregulated during periods of expansion, and they cannot be regulated during periods of depression, when might the time be optimal to address moral hazard?
The question, of course, is rhetorical — and not simply because Eichengreen is only blowing smoke in our face. Eichengreen actually argues that Fascist State intervention prevented a depression!:
…we have learned how to prevent a financial crisis from precipitating a depression through the use of monetary and fiscal stimuli. All the evidence, whether from the 1930s or recent years, suggests that when private demand temporarily evaporates, the government can replace it with public spending. When financial markets temporarily become illiquid, central-bank purchases of distressed assets can help to reliquefy them, allowing borrowing and lending to resume.
And, here we can see the role of the thing serving as money and its relation to the crises inherent in the capitalist mode of production. Ex nihilo currency does not abolish crises, it merely masks them from view: while ex nihilo dollar based measures of economic activity indicate the economy suffered a massive catastrophic financial crisis in 2008, gold indicates this financial crisis is only the latest expression of an even more catastrophic depression that has, so far, lasted more than a decade.
NEXT: The tale of two monies
Tags: Austrian Economics, Barry Eichengreen, Depression, ex nihilo pecunaim, Federal Reserve, financial crisis, gold, Hayek, international financial system, Karl Marx, Libertarianism, monetary policy, Money, political-economy, Raya Dunayevskaya, Ron Paul, Tea Party, unemployment, Wall Street Crisis
Washington has a problem, and Barry Eichengreen is doing his bit to save it. The problem’s name is Ron Paul, and this problem comes wrapped in 24 carat gold:
GOLD IS back, what with libertarians the country over looking to force the government out of the business of monetary-policy making. How? Well, by bringing back the gold standard of course.
Last week, Eichengreen published a slickly worded appeal to libertarian-leaning Tea Party voters, who, it appears, are growing increasingly enamored with Ron Paul’s argument against ex nihilo money and the bankster cartel through which Washington effects economic policy.
The pro-gold bandwagon has been present in force in Iowa, home of the first serious test of GOP candidates for that party’s presidential nomination. Supporters tried but failed to force taxpayers in Montana and Georgia to pay certain taxes in gold or silver. Utah even made gold and silver coins minted by Washington official tender in the state. But, the movement is not limited to just the US: several member states of the European Union have made not so quiet noises demanding real hard assets in return for more bailout funds for some distressed members burdened by debt and falling GDP.
No doubt, these developments are a growing concern in Washington precisely because demands for real assets like commodity money threaten to blow up its eighty year old control of domestic and global economic activity through the continuous creation of money out of thin air.
Although Eichengreen invokes the difficulty of paying for a fill up at your local gas station, “with a $50 American eagle coin worth some $1,500 at current market prices”; the real problem posed by a gold (or any commodity) standard for prices is that such a standard sounds a death-knell to a decades long free ride for the very wealthiest members of society, and would end the 40 years of steady erosion of wages for working people here, and in countries racked by inflation and severe austerity regimes around the world.
Make no mistake: Ron Paul is now one of the most dangerous politicians in the United States or anywhere else, because his message to end the Federal Reserve Bank and its control of monetary and employment policy has begun to approach the outer limits of a critical mass of support — if not to end the Fed outright, than at least to bring the issue front and center of American politics.
Eichengreen begins his attack on Ron Paul’s call for an end to the Federal Reserve by choosing, of all things, Ron Paul’s own writings as weapon against him:
Paul has been campaigning for returning to the gold standard longer than any of his rivals for the Republican nomination—in fact, since he first entered politics in the 1970s.
Paul is also a more eloquent advocate of the gold standard. His arguments are structured around the theories of Friedrich Hayek, the 1974 Nobel Laureate in economics identified with the Austrian School, and around those of Hayek’s teacher, Ludwig von Mises. In his 2009 book, End the Fed, Paul describes how he discovered the work of Hayek back in the 1960s by reading The Road to Serfdom.
For Eichengreen, Paul’s self-identification with Hayek is a godsend, because, as Eichengreen already knows at the outset of his article, Hayek ultimately opposed the gold standard as a solution to monetary crises:
At the end of The Denationalization of Money, Hayek concludes that the gold standard is no solution to the world’s monetary problems. There could be violent fluctuations in the price of gold were it to again become the principal means of payment and store of value, since the demand for it might change dramatically, whether owing to shifts in the state of confidence or general economic conditions. Alternatively, if the price of gold were fixed by law, as under gold standards past, its purchasing power (that is, the general price level) would fluctuate violently. And even if the quantity of money were fixed, the supply of credit by the banking system might still be strongly procyclical, subjecting the economy to destabilizing oscillations, as was not infrequently the case under the gold standard of the late nineteenth and early twentieth centuries.
Eichengreen pulls off a clever misdirection against Ron Paul by deliberately conflating the problem of financial instability with the problem of limiting Fascist State control over economic activity. Ron Paul’s argument, of course, is not primarily directed at eliminating financial crises, which occur with some frequency no matter what serves as the standards of prices, but at removing from Washington’s control over economic activity not just at home, but wherever the dollar is accepted as means of payment in the world market — and, because the dollar is the world reserve currency, that means everywhere. But, by conflating the question of Fascist State control over the world economy with solving the problem of financial and industrial crises that are endemic to the capitalist mode of production, Eichengreen takes the opportunity to foist an even more unworkable scheme on unsuspecting Ron Paul supporters: privatize money itself:
For a solution to this instability, Hayek himself ultimately looked not to the gold standard but to the rise of private monies that might compete with the government’s own. Private issuers, he argued, would have an interest in keeping the purchasing power of their monies stable, for otherwise there would be no market for them. The central bank would then have no option but to do likewise, since private parties now had alternatives guaranteed to hold their value.
Abstract and idealistic, one might say. On the other hand, maybe the Tea Party should look for monetary salvation not to the gold standard but to private monies like Bitcoin.
It is cheek of monumental — epic — proportion. Even by the standards of the unscrupulous economics profession — a field of “scholarship” having no peer review and no accountability — the sniveling hucksterism of Eichengreen’s gambit is quite breathtaking. However, not to be overly impressed by this two-bit mattress-as-savings-account salesman, in the next section of this response to Barry Eichengreen, I want to spend a moment reviewing his examination of the problem of financial instability, and the alleged role of gold (commodity) money in “subjecting the economy to destabilizing oscillations… under the gold standard of the late nineteenth and early twentieth centuries.”
Part Two: Money and crises
Tags: Austrian Economics, Barry Eichengreen, Depression, ex nihilo pecunaim, Federal Reserve, financial crisis, gold, Hayek, international financial system, Libertarianism, monetary policy, Money, political-economy, Ron Paul, Tea Party, unemployment, Wall Street Crisis
In part one of this series, I showed how inflation affects not only consumption but also production. In the former, inflation expresses itself in the fall of the consumption power of the mass of society. In the latter, inflation expresses itself as a fall in the actual realized rate of profit — a negative rate of profit arising not from a material change in the composition of capital, but from a depreciation in the purchasing power of money. The two of these effects are achieved by one and the same cause. The two effects do not simply exist side by side, but influence each other: in the circulation of capital, excess money-demand effectively reduces the portion of the output of productively employed capital that is realized in sales. With an inflation rate of ten percent, a capital with value of $100 now can be realized only if $110 is offered for it. On the other hand, a capital with the actual value of $110, is effectively purchased for $100.
The problem here is that between the production of the commodity and its realization in a sale the purchasing power of the money has depreciated. The problem can be better understood if we divide value and price and examine each separately. If we assume a capital with the value of $100, represents 10 hours of socially necessary labor time, we can make the following observation: The capitalist takes his capital with a value of $100 or ten hours of labor time and produces a quantity of commodities with a new total value of $110, representing 11 hours of socially necessary labor time. However, during this same period, the purchasing power of money has changed so that 1 hour of labor time no longer has a price of $10, but has a new price of $11. His capital now has the value of 11 hours of labor time with an implied expected price of $121 (11 times 11 = 121), yet he only realizes $110, or 10 hours of labor time under the new price conditions.
From the point of view of value, the capitalist has taken his capital with a value of 10 hours of socially necessary labor and produced a capital with a value of 11 hours of socially necessary labor. Yet, of this 11 hours of value he only realizes 10 hours, i.e., he realizes no more than his original investment. From the point of view of price, the capitalist has taken his capital with a money-price of $100 and produced a capital with a money-price of $110. He expects no more than $110 and is satisfied with this, despite the fact that this $110 in sales only has a value of 10 hours of socially necessary labor time.
The riddle of the divergence of prices from values
The riddle of this perverse situation can only be solved if we assume that a change occurred in the relationship between values and prices during the exchange of money and commodities — that the realization of the value of capital produced suffered from a defect such that a portion of the value this capital was lost in the act of exchange itself. This defect, as we showed in part three, is already inherent in the value/price mechanism itself. The value/price mechanism contains in itself a contradiction between the actual labor time expended on the production of a commodity and the socially necessary labor time required for its production; a contradiction between the value of the commodity itself and the expression of the value in the form of the price of the commodity; and, a contradiction between the price of the commodity denominated in units of the money and the socially necessary labor time required for the production of the object that serves as the money.
These contradictions exists only in latent form until crises bring them to the surface in a sudden divergence between prices and values of commodities. During periods of over-production of commodities — or, more accurately, over-accumulation of capital — these crises are expressed in the sudden collapse in the prices of commodities below their value, or socially necessary labor times. The divergence between prices and values of commodities only express the fact that for a more or less lengthy period of time wealth can no longer accumulate in its capitalistic form; and, as a result, the socially necessary labor time of society must contract to some point where the production of surplus value no longer takes place. Precisely because the circulation of capital requires not just the production of surplus value in the form of commodities, but also its realization in a separate act of sale of these commodities, the possibility exists for an interruption of the process of realization for a longer or shorter period of time until balance between production and consumption is restored — that is, until conditions exist for the total social capital to once again function as capital; for the process of self-expansion of the total social capital to resume.
If, for whatever reason, conditions are not established for the total social capital to resume functioning as capital — for the process of self-expansion of the total social capital to begin again — production itself must cease. The interruption of exchange — which, I note for the record, begins not with too much money-demand for too few commodities, but precisely the reverse — creates a sudden fall in the rate of profit to zero. If this occurs not as an intermittent breakdown, but as a permanent feature of capitalist production — which is to say, if the over-accumulation of capital is not momentary, but a now permanent feature of the mode of production — capital has encountered its absolute limit as a mode of production. From this point forward the production of wealth can no longer take its capitalistic form — can no longer take the form of surplus value and of profit.
Over-accumulation of capital and civil society
Moreover, since the production of surplus value is the absolute condition for the purchase and sale of labor power, the sudden interruption of its production affects not just the capitalist class, but the class of laborers as well — it appears in the form of a social catastrophe threatening the existence of the whole of existing society, and all the classes composing existing society without regard to their respective place in the social division of labor. Each member of society encounters the exact same circumstance: she cannot sell her commodity, whether this commodity is an ordinary one — shoes, groceries, etc. — or the quintessential capitalist commodity, labor power. The premise of all productive activity in society is that this activity can only be undertaken if it yields a profit; if, in other words, the existing socially necessary labor time expended by society realizes, in addition to this value, additional socially necessary labor time above that consumed during its production.
Marx argues in Capital Volume 3 that capitalist production presupposes a tendency toward the absolute development of the productive forces of society, irrespective of the consequences implied by this development for capital itself. What does Marx mean by this? As a mode of production, capital shares with all previous modes of production the feature of being founded on natural scarcity, on the insufficiency of means to satisfy human need. Yet, at the same time, it implies a tendency for the productive capacity of society to develop more rapidly than consumption power of society — a tendency for more commodities to be thrown on the market at any given time than society can consume under the given conditions of exchange. What society can consume at any given moment is not determined simply by the amount of commodities available to be consumed, but by class conflict between the mass of owners of capital and the mass of laborers; a conflict which presupposes the reduction of the consumption power of the mass of laborers to some definite limit consistent with the realization of profits.
That this conflict, absent a successful attempt on the part of the mass of society to end the monopoly over the means of production by an insignificant handful of predators, must be settled in favor of capital and, therefore, that production is constantly kneecapped by completely artificial limits on consumption, is already given by capitalist relations of production themselves — relations which nowhere figure in the description of capital by simple-minded economists, who instead ascribe this barrier to the gold standard, etc.
This contradiction — that the productive power of society tends toward its absolute development, yet the consumption power is constantly constrained by the need to produce commodities at a profit — implies that at a certain point in capital’s development production and consumption come into absolute conflict — a conflict which, on the one hand, cannot be resolved by simply increasing this productive power still further, nor by limiting consumption still more severely. It can only be overcome by such means as overthrow capitalist relations entirely, or, alternately, destroy both the productive and consumption power of society together in one and the same act of exchange.
Exchange and disaccumulation, or, the destruction of value through exchange
I have made the assumption that both the productive power of society and the consumption power of society are destroyed by one and the same act of exchange. Based on this assertion, I define inflation not simply as the increase in money-demand over the supply of commodities, but the actual destruction of the productive power of society and consumption power of society during the act of exchange. Or, what is the same thing, by the progressive reduction of the total social capital circulating within society, i.e., the reduction of the quantity of the existing total social capital which continues to function as capital within society, through exchange.
I have also made the assumption that this same act of exchange also expresses,
- the contradiction between the actual labor time expended on production of commodities and the socially necessary labor time required for production of these commodities — inflation, therefore, expresses itself as a declining portion of the total labor time expended by society that is socially necessary, or, alternately, the constant increase in the total labor time of society in relation to the social necessity for productively expended labor time;
- the contradiction between values of commodities and the expression of these values in the prices of commodities — inflation, therefore, is expressed as a decline in the value of commodities as a proportion of the prices of commodities, or, alternately, the constant increase in the prices of commodities in relation to their values; and,
- the contradiction between the prices of commodities denominated in units of the legally defined money and the price of the commodity that historically served as the money — inflation, therefore, is expressed in the constant depreciation of the exchange ratio of the money token against the commodity historically serving as the standard of price, or, alternately, as the rising price of the commodity historically serving as the standard of prices denominated in the money token, i.e., a secular rise in the price of gold.*
The conditions of this act of exchange, which destroys both the productive power of society and its consumption power — and which, on this basis, progressively reduces the quantity of the existing total social capital which continues to circulates as capital and function as capital on this basis — is fulfilled only by exchange of that portion of the newly created social capital representing surplus value with ex nihilo money, and the unproductive consumption of this newly created value by the Fascist State. Moreover, this unproductive consumption of the newly created surplus value is only fulfilled if it is entirely unproductive in all of its forms, i.e., whether this unproductive consumption takes the form of the unproductive consumption of commodities, of labor power, or, of the fixed and circulating capital.
Fascist State expenditures consist entirely of removing the surplus product of labor from circulation, consuming it unproductively, and replacing this surplus product in circulation with a valueless ex nihilo money that formally completes the act of exchange, but that in reality abrogates it. The total mass of capital circulating within society is thereby reduced by this exchange, while the total money-demand in society is simultaneously increased.
The chief symptoms of inflation, therefore, is (1.) the unproductive consumption of the existing total capital by the Fascist State, no matter what form this unproductive consumption takes; (2.) the constant secular increase in Fascist State expenditures, no matter how these expenditures are financed, but which is no more than the continuous exchange of every form of commodity (i.e., of capital in the form of commodities) for newly created valueless ex nihilo money; and, finally, (3.) the constant expansion of the total labor time of society beyond that duration required by the satisfaction of human needs. In tandem with the improvement in the productivity of labor, society is compelled to expend an ever greater amount of effort just to feed, house and clothe itself. In tandem with the reduction in the value of commodities, the prices of commodities soar still higher. In tandem with relentless expansion of Fascist State expenditures, the actual provision of necessary public services — education, health care, provision for the disabled and those no longer able to work, public infrastructure and communications — sink into decay and obsolescence.
The terminal trajectory of capitalist social relations is expressed precisely in the fact that at a certain stage of development the total social capital can no longer function as capital, can no longer realize the constantly increasing quantity of surplus value produced in the form of profits, that, to the contrary, this surplus value must be unproductively consumed in its entirety by the Fascist State and replaced by purely fictitious profits denominated in a purely fictitious money.
*NOTE: I need clarify from Part Three that this third contradiction implies gold tends to exchange with other commodities at some exchange ratio below its relative value, despite its rising nominal price. As is obvious, if commodities are priced above their values, the purchasing power of gold — the physical body of exchange value — is exchanged below its value. This situation, which once occurred only during periods of general capitalist expansion, is now a permanent feature of exchange. It is, however, expressed through the intermediary of the money token by commodities being priced above their values, while gold is priced below its value. An existing quantity of money token can buy fewer commodities, but more gold, than otherwise expected. This inevitably leads to charges by gold-bugs that the price of gold is being deliberately suppressed, but I think it is actually a natural consequence of over-accumulation of capital — a condition normally seen at the apex of an expansion. Commodities in general are devalued, but this devaluation is expressed most thoroughly in the devaluation of the former money commodity which serves little other function in society but to express value.
Tags: capital, commodity, consumption, ex nihilo money creation, ex nihilo pecunaim, exchange, fictitious profits, fiscal policy, gold, inflation, monetary policy, negative rate of profit, prices, production, public debt, purchasing power of money, socially necessary labor time, stupid economist tricks, wages
According to the Wikipedia entry on Executive Order 6102, the fine for hoarding gold was ten thousand dollars. At the same time, the executive order demanded all private holdings be turned in and exchanged for government issued ex nihilo dollars at an exchange rate of $20.67 per troy ounce of gold. Using this as our base measure, the fine for hoarding gold amounted to 483.79 troy ounces of gold.
So, like the authors of the Wikipedia entry I tried to update the purchasing power of the 1933 ten thousand dollar fine into an amount of money equal to it in 2011 dollars. I went to the Bureau of Labor Statistics Consumer Price Index website and found that according to its statistical measure of inflation it now takes $171,897.69 to purchase the same quantity of goods that the ten thousand dollar fine would have purchased in 1933. According to the Bureau of Labor Statistics, the purchasing power of the ten thousand dollar fine has fallen to just 5.82 percent of its purchasing power in 1933. This is a fantastic depreciation in the purchasing power of dollars. However, it is also a gross lie — the depreciation of dollars has been far more severe than even the BLS admits, as we will now show.
The Problem of the Consumer Price Index
The Consumer Price index has been the subject of continuing controversy, including charges that it overestimates inflation and charges that it underestimates inflation. But, this controversy does not concern us here, since it is, in part at least, a political disagreement. What does concern us is the index itself, which popularly purports to measure the depreciating purchasing power of money in relation not to a fixed standard, but against a multitude of standards — that is, against a so-called basket of consumer goods.
Upon deeper investigation, however, I found, according to the entry in the Wikipedia on the United States Consumer Price Index, that the CPI was never meant to measure inflation or the depreciating purchasing power of money:
The U.S. Consumer Price Index (CPI) is a time series measure of the price level of consumer goods and services. The Bureau of Labor Statistics, which started the statistic in 1919, publishes the CPI on a monthly basis. The CPI is calculated by observing price changes among a wide array of products in urban areas and weighing these price changes by the share of income consumers spend purchasing them. The resulting statistic, measured as of the end of the month for which it is published, serves as one of the most popular measures of United States inflation; however, the CPI focuses on approximating a cost-of-living index not a general price index.
Intrigued by this disclaimer, I went searching for the difference between a measure of inflation and a measure of the “cost of living”. Among the information I found was an admission by the Bureau of Labor Statistics that the Consumer Price Index not only does not measure inflation, but it is not even a true measure of the cost of living. It is limited to measuring market purchases by consumers of a basket of goods and services.
According to Wikipedia, the BLS states:
The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would constitute a complete cost-of-living framework.
Since, the BLS, by its own admission, incompletely measures the amount you must spend to achieve a presumed certain level of “utility” — the so-called Standard of Living — how do they define this “utility”? Further reading explains:
Utility is not directly measurable, so the true cost of living index only serves as a theoretical ideal, not a practical price index formula.
So, to sum up: the Bureau of Labor Statistics Consumer Price Index is a measure of a theoretical construct which cannot be defined, is difficult to determine, and, in any case, is not directly measurable: the so-called “Standard of Living“.
The hidden costs borne by society
If we go back to the first paragraph of the original definition of inflation proposed the the Wikipedia entry, we find this:
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[my emphasis] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.
Inflation is defined as the general rise in prices of goods and services, but also as the erosion of the purchasing power of money — i.e., the depreciation of money. Against what is this erosion of purchasing power to be measured? Here, the Wikipedia is silent, leaving us with the wrong idea that the “real value” of money is to be measured against the commodities we can purchase with it. As this “real value” erodes, we can purchase fewer goods and services. This implied method of measuring the depreciation of money, however, does not give us a general measure of the price level, as the BLS admits, but only a measure of the price level as expressed in a series of transactions in the market for so many individual commodities.
The war in Afghanistan, for instance, would not be captured by this implied method; nor, would the cost incurred by society as a result of the damage British Petroleum caused to the Gulf of Mexico; nor, the cost borne by society for the Fukushima nuclear disaster, or that created by the bailout of the failed banksters on Wall Street. Unless these costs actually entered into the prices of commodities in market transactions, they will not show up in the Consumer Price Index. And, a considerable period of time could pass between the events and their expression in the prices of commodities tracked by the Consumer Price Index. Moreover, the change in prices of the commodities tracked by the Consumer Prices Index are subject to innumerable factors arising from market forces within the World Market — making it impossible to trace any specific fluctuation back to its source. On the other hand, each of the events of the sort cited above materially affected either the necessary labor time of society or the quantity of ex nihilo money in circulation within the economy.
The question to which we seek an answer is not how much the purchasing power of ex nihilo money has depreciated with respect to some arbitrarily established concept of living ltandard, but how much it has diverged from the purchasing power of gold standard money? To answer this question, we must directly measure these changes by comparing the general prices level against the commodity that served as the standard for prices until money was debased and replaced with ex nihilo dollars.
Gold standard dollars more or less held prices to the necessary social labor time required for the production of commodities; the divergence between gold and dollars since the dollar was debased, provides us with an unambiguous picture of inflation since 1933. The divergence between the former gold standard money and ex nihilo money must be expressed as the depreciation of ex nihilo money purchasing power for an ounce of gold over time , or, what is the same thing, as the inverse of the price of gold over a period of time — as is shown in the chart below for the years 1920 to 2010.
Inflation since 1933 has been four times higher than BLS figures show
So, how does all of this relate back to the fine imposed on anyone found guilty of hoarding gold under Executive Order 6120? Remember, in 1933 the ten thousand dollar fine could have been exchanged for 483.79 ounces of gold. According to the BLS Consumer Price Index this translates into $171,897.69 in current dollars. However, 483.79 troy ounces of gold actually commands the far greater sum of $714,441.22, or 4 times as many dollars as the BLS Consumer Price Index states.
To put this another way, the Consumer Price Index is a complete fabrication by government to deliberately understate the actual depreciation of dollar purchasing power. The cumulative results of decades of false inflation statistics can be seen by simply comparing CPI statistics to the actual depreciation of dollar purchasing power against its former standard, gold. The extent of this fabrication can be seen in the chart below:
Moreover, for 2010, the annual average price inflation rate was a quite staggering 26%, when measured against the value of gold, not the paltry 1.6% alleged by the BLS.
If you didn’t receive a 26 percent increase in your wages or salary in 2010, you experienced a 26% loss in purchasing power — your consumption power was systematically destroyed by Washington money printing.
Using gold as the standard against which the depreciation of ex nihilo money is measured demonstrates how the Fascist State deliberately manipulates statistics for its own purposes to hide from the public the extent to which it manipulates exchange, and, therefore, the extent to which this manipulation has resulted in greatly increased prices for commodities.
But, gold does not only allow us to actually visualize the extent of this manipulation, as we shall show in the next post, gold also can demonstrate how this manipulation results in the needless extension of social working time beyond its necessary limit. That the Fascist State relentlessly extends working time beyond this limit, or, more importantly, that operates to maintain an environment of scarcity within society, which is the absolute precondition for Capital’s continuation.
To be continued
Tags: Bureau of Labor Statistics, capital, commodity, Consumer Price Index, consumption, ex nihilo pecunaim, exchange, Federal Reserve, fiscal policy, Franklin Delano Roosevelt, gold, Gold Reserve Act of 1934, gold standard, Gold standard dollars, inflation, monetary policy, negative rate of profit, Presidential Executive Order 6102, prices, production, purchasing power of money, Standard of Living, stupid economist tricks, the "real value" of money, Utility, value versus “real value”
In the bare bones sketch of Marx’s theory I argued that the value of the object serving as money played no role in its function as money. This was incomplete, of course, but it served to advance my argument until I could directly address the implication of debasement of money by the industrial powers during the Great Depression. In reality, the price (actually value/price) mechanism can only perform its function to coordinate the separate acts of millions of individual labor times if it shares with commodities the attribute of being a product of labor itself, and, for this reason, requires a definite socially necessary labor time for its own production. Because gold has value, it can express the value of the commodities with which it is exchanged.
On the surface, a commodity is exchanged for money, and this transaction is the exchange of two absolutely unlike objects: the money serves no purpose but means of exchange, while the commodity with which it is exchanged is eventually consumed; the money never leaves circulation, while the commodity disappears; the money can always find a new owner, while the commodity only finds an new owner where it is needed. They are as different as night and day. Although, the flows of money through the community are only a necessary reflex of the flows of commodities through the community as it engages in a more or less developed act of social production. But, by always being exchangeable for commodities throughout the community, always being in constant circulation within the community, and by serving only as means of exchange, money brings millions of isolated individual acts of production into some sort of rough coordination.
As the physical expression of socially necessary labor time money is a natural and spontaneous means by which the value/price mechanism regulates the activities of the community in absence of the community’s own planned management. However, I must emphasize, money is only the expression of socially necessary labor time; it is not and should not be mistaken for socially necessary labor time itself. And, it can only express the socially necessary labor time of society, because the community requires some definite socially necessary labor time to create it. What object serves as money for the community is, therefore, of general interest to the whole of the community, and has a very long history — most of which, since we take this history as our starting point, is of no interest to us here. I only note that since this General Interest must take some form, the form it takes during the period under discussion, from the Great Depression until the present, are the laws of the various States regarding the legal definition of money.
Breakdown of the law of value emergence of the Fascist State
On April 5, 1933, the Roosevelt administration issued Executive Order 6102. The Wikipedia outlines the scope of this executive order:
Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens. The bank panics of Feb/March 1933 and foreign exchange movements were in danger of exhausting the Federal Reserve holdings of gold. Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both.
This simple executive order, which was succeeded by several additional orders during 1933, and by the Gold Reserve Act of 1934, removed gold as the standard for the dollar, made it illegal to own more than a small amount of the metal, and compelled individuals under penalty of law to turn their gold over to the Federal Reserve in return for the then existing exchange rate of $20.67. On the surface this order just gave the State monopoly over the ownership of gold and reduced money to just a State-issued token. While this step was, in and of itself, fairly staggering, particularly when we consider that it was duplicated in all the big industrial nations at the same time, once we consider the full ramifications of the orders and succeeding law in terms of the various national economies, it quickly becomes apparent that a state monopoly over the ownership of gold, and the replacement of gold standard money by State-issued currency was only the most obvious effect. John Maynard Keynes, who examined the issue entirely from the standpoint of a bourgeois economist, had some inkling of the far reaching implication of State issued ex nihilo money. Fifteen years earlier, he argued that the inflationary consequences of excessive money printing amount to the confiscation of private property:
… By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
If excessive money printing raised the question of secret confiscation of property, the actual confiscation of gold, and the replacement of gold money by state-issued currency amounted to the explicit expropriation of monetary wealth. Yet, even this implied expropriation of social wealth in its capitalistic form was not the most significant implication of the state action: From the standpoint of Marx’s theory, the debasement of money was the abolition of the historically developed natural and spontaneously created value/price mechanism as the regulator of the social act of production. In place of a natural relation between the values of commodities and the prices of commodities, the relation between the two was, after this, to be established as a matter of state policy. This separation is the absolute development of the historical antithesis between the commodity and money, since paper money has no use except as medium of circulation of commodities — as means of exchange. Moreover, by this executive order severing gold from money, we see not only that the value of the commodity was severed from its price, but, further, that production was severed from consumption; labor power was severed from wages; surplus value was severed from profits. Finally, with the law of value no longer determining the social necessity of a given expenditure of labor time, the labor time expended by society was no longer limited by social necessity.
In place of the historical, spontaneous and naturally developed mode by which the separate activities of millions of members of Civil Society in every country had been hitherto regulated, social labor and its duration was now regulated by the State, and under conditions determined solely by the State. The abolition of the gold standard did not simply sever the connection between gold and money, and abolish the value/price mechanism, it also placed the total social capital of Civil Society at the disposal of the State — or, what is the same thing, announced the emergence of the Fascist State. Property, the classical thinkers argued, is the power to dispose of the labor of others, hence this total social capital was converted into the property of the State.
The Fascist State as regulator of production and consumption
The entire social capital of every nation was expropriated, precisely as Marx predicted, but in a fashion and under circumstances quite different than those which might have been welcomed by him. As I argued in another post, Marx’s differences with Bakunin came down to difference over whether the Proletariat would be compelled to effect management of social production according to the principle of “to each according to his work”, that is by replacing the existing Civil Society and the State with new rules enforcing labor equally on all members of society. Marx was not making this argument in a vacuum; his theory predicted a breakdown of the law of value as the regulating principle of social labor before the necessary conditions were established for a fully communist society. Society would be required by this breakdown to step in and manage social labor directly and according to a plan. Marx’s argument with the Anarchists essentially asked the question, “By what rules would this management be effected?” As is obvious from an investigation of history, this question was settled decisively in favor of the existing Civil Society, which rose to manage its General Interest — i.e., its interests as a mode of Capital — through the machinery of the Fascist State.
Within ten years of this act, more than 80 million people were dead and the Eurasian continent lay in ruins, as each nation state, finding itself in total control of the productive capacity of their respective nations, immediately put this productive capacity to good use by trying to devour their neighbors — unleashing a catastrophe on mankind. By 1971, with the collapse of the Bretton Wood agreement, a single fascist state, the United States, had imposed on the survivors the very same control over the other national economies, that it imposed on its own citizens.
As I stated in the previous post:
However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end.
I have now considered inflation from the standpoint of Marx’s labor theory of value and have come to decidedly different conclusions than those drawn in the Wikipedia entry on the subject. These conclusions, I argue, suggest a catastrophic breakdown of the conditions of capitalist production and exchange during the Great Depression; and, based on this, the assumption by the State of direct management of social production, the conversion of the total social capital into the property of the State — not by means of outright seizure of this capital, but by taking control of the conditions of exchange — and the extension of this relationship to the entire World Market.
With the assumption of management of social production by the Fascist State, the law of value, which served to limit the average price of the commodity to the socially necessary labor time required for its production, no longer imposed such limits on prices. Hence, prices could be determined by factors other than the value of these commodities. On the other hand, with the law of value — that is socially necessary labor time — no longer imposing a limit on the total labor time of society, this labor time could be expanded in a form that is completely superfluous to social necessity. We can, therefore, define inflation as the chronic general rise in the price level resulting from the further extension of hours of labor beyond their socially necessary limit; or, prices held constant, by the reduction of the ratio of socially necessary labor time to the actual hours of labor expended. Finally, we can see that inflation itself is no more than the result of Fascist State policy, which, acting as the social capitalist, seeks the ever greater extension of the working day even as the productive capacity of society reduces the necessary labor time of social labor.
In my next post, I will examine each of these conclusions in turn.
To be continued
Tags: Bakunin, capital, Civil Society, commodity, consumption, ex nihilo pecunaim, exchange, Federal Reserve, fiscal policy, Franklin Delano Roosevelt, gold, Gold Reserve Act of 1934, gold standard, inflation, Karl Marx, Lord John Maynard Keynes, monetary policy, negative rate of profit, Presidential Executive Order 6102, prices, production, stupid economist tricks, value versus "real value"
The Wikipedia definition of inflation includes this rather silly statement on the definition of the so-called “real value” of money:
…inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
In this statement the “real value” of money is reduced to the purchasing power of the currency, which is simply the inverse of the price of a commodity. If a commodity has a price of ten dollars, the “real value” of a dollar in relation to this commodity is one tenth of the commodity. By the same token, the value of the commodity can be said to be ten times the “real value” of one dollar. The value of the commodity is, therefore, only its price in some unit of the currency, and, in this way the economist can dispose of the nasty implications of Marx’s labor theory of value — that the classical notion of value amounts to a death sentence for Capital itself, and of the sum of relations of society founded on Capital.
It is typical of economics that its practitioners hold to the notion reality can be abolished merely by refusing to acknowledge its existence. Thus, tens of millions of unemployed women and men no longer exist simply because the Bureau of Labor Statistics’ data removes all evidence of their existence. Unemployment like the classical notion of value is no more than a conceptual construct which can be disposed of by replacing it with a new concept. However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end. The effort, however, is worth it.
Price and value
It may surprise you that, in Marx’s model, money can be thought of as something without any value at all. Value is a characteristic of a commodity, and, insofar as we consider money not as money, but as just another commodity (for instance, the gold in a necklace) it does indeed have value equal to the socially necessary labor time required for its production. But, when serving as money, gold’s value as a commodity never enters into the equation. As money, gold’s entire role in social production is to express the value of the commodity, not its own value; and this it does in its material body. Marx would never speak of the “real value” of money, because as money, its “real value” is not what matters — what matters is its physical material.
Simplified Marx’s model is this: When we speak of the value of a commodity, we are referring to the duration of labor time socially required to produce the commodity. This socially necessary labor time is expressed in a quantity of gold that requires the same duration to produce. The socially necessary labor time required to produce the commodity is the value of this commodity, while the quantity of gold equal to this socially necessary labor time is not the value of the commodity, but its price. Value and price are two different animals — in the market, where the commodity is exchanged for money, the the value of a commodity and its price in gold are just as likely represent two different quantities of socially necessary labor time as they are to agree. They will agree only on average. In its simplest form, Marx’s theory of value assumes not that the price and the value of a commodity are the same, but that they are NEVER the same — the price of the commodity and its value only coincide by innumerable transactions in which the two only coincide on average.
If the price and the value of a commodity never coincide, what is Marx’s point? His point isn’t to find the secret of prices of commodities, but to demonstrate how the millions of separate and isolated activities of the members of society are, through this mechanism of constant price fluctuations, converted into an embryonic form of social production. While the economist is trying to crack the great ‘mystery’ of price, Marx is showing how private productive activity naturally begins to inch its way along the long road to fully social cooperative productive activity.
The point of the exercise is to advance a theory showing how the labor time of the community, composed as it is of millions of separate labor times is regulated naturally through the pricing mechanism, since the community does not regulate this labor time consciously and according to a plan. In this sense, I think, Marx is not breaking any new ground in relation to the classical writers like Adam Smith. Marx’s unique contribution to this discussion is that in place of labor time generally, he posits socially necessary labor time — which is to say, he shows that productive activity is carried on under the conditions that are established generally in society and not directly arising from the decisions of the individual. The individual’s productive activity is, therefore, being constantly coerced by conditions that are entirely beyond her control, which impose on her the requirement to constantly reduce the amount of time she spends on the production of her commodity.
The conclusion Marx drew from his investigation, briefly stated, was this: If there is no connection between the socially necessary labor time of society and the prices of the commodities produced during this socially necessary labor time, the pricing mechanism could not effect a coordination of all of the millions of individual acts of production within society. We already know these millions of individual acts are not planned and consciously coordinated by the members of society; if we presume these millions of individual labor times are regulated naturally by prices, we have to accept the idea that price itself is doing what people are not, namely effecting regulation of millions of different labor times. So while, in the real world, a commodity requires so much definite time to produce, how much of this time is considered necessary, and how many of the items are to be produced, is determined by society in general, and this value is imposed on the individual in the very real form of the commodity’s price.
When too few of the commodity is produced, its price rises signaling a need to increase the amount of social labor expended on production of the commodity, when to many of the commodity is produced, its price falls signaling a need to reduce the labor time expended on production of the commodity. On the other hand, if the average amount of time need to produce to commodity falls, its price falls signaling a need to reduce the labor time expended on production of the commodity; and, if the average amount of time need to produce to commodity increases, its price increases signaling a need to increase the labor time expended on production of the commodity. This is not rocket science, folks. It is just common sense.
Capital and value
Capital introduces an additional complexity to what I have stated above: with capital the aim of production is not to produce the commodity, but to produce a profit on production of the commodity. The capitalist doesn’t care about the commodity in the least, he is totally focused on seeing that he ends with more gold in his pocket than he began with. To do this he begins with so much money-capital, which he lays out on labor power and the other necessities demanded by production of the commodity. Since he is bound by the same laws that govern production generally, he can only realize a profit if the labor power he purchases can produce more value than it costs for him to purchase it, that is if he can realize, in addition to the money-capital he advanced, this same quantity of money-capital plus an additional sum of money-capital.
However, there is a problem here: when we say the capitalist aims to produce more value than he laid out at the beginning, we are also saying the capitalist aims to produce more socially necessary labor time than is expended in the production process. Since, at every point in the development of Capital, the existing value of labor power in the form of wages is given, the new value created must result in still more labor power in the form of additional wages — the number of laborers under the direction of one capitalist constantly expands, fed by the millions of smaller, less productive, capitalists and property owners who a driven to ruin by the advance of Capital itself.
For our purpose in understanding inflation, what is important to note is that the very process of capitalist production itself presupposes that value, or, socially necessary labor time, exists in two contradictory forms: first, in the value of the wages paid out by the capitalist for labor power; and, second, in the form of additional value over these wages, which, having been newly created in the production process, can now reenter production as additional capital only if it is realized through sale. If we assume for purposes of this argument that the wages paid out are immediately realized by the existing mass of laborers in the form of food, clothing and shelter, we still have to consider how the additional sum of newly created value is realized.
Making a straight-line assumption for the sake of simplicity, this newly created value has to find a market beyond the existing social capital — i.e, it has to enlarge the market for the existing social capital. If this cannot be done, the newly created value cannot be realized, and further expansion of Capital cannot occur. The periodic crises when Capital momentarily out runs the conditions of its own process, is converted from its merely relative form into its absolute form as the capitalist can no longer realize profit on his production and ceases productive activity altogether — industry grounds to a halt, millions of laborers are idled, along ten of thousands of factories, prices of commodities collapse and lay unsold and the flows of money capital cease. While Capital presupposes the constant reduction of socially necessary labor time in the form of wages paid out, it simultaneously presupposes the expansion of socially necessary labor time in the form of additional wages for additional labor powers.
The contradiction inherent in value comes to the fore: to resume production socially necessary labor time must expand, but, since this socially necessary labor time is, in this example, limited to the wages paid out to the laborers, it can expand only on condition that wages increase. On the other hand, the increase in wages must reduce the profits of the capitalist, and the portion of existing socially necessary labor time that the capitalists claims as their rightful profits. Since, on no account are the capitalists willing to part with one additional cent in wages, they opt to maintain their profits by reducing wages still further; however, since this further reduction of wages only reduces still further socially necessary labor time, their actions only increase the problem. Wages are too high, yet, paradoxically, they are also too low.
Price and value reconsidered
Under the assumptions I am using of a very bare-bones description of the problem posed by the inherent contradiction in value, I need to sum up some of the characteristics of the contradiction. First, there is a contradiction between the actual labor time expended on the production of a commodity and the socially necessary labor time required for its production. Second, there is a contradiction between the value of the commodity itself — i.e., the socially necessary labor time expended on the production of a commodity — and the expression of the value in the form of the price of the commodity.
To these two already identified contradictions we must add a third: there is a contradiction between the price of the commodity denominated in units of the money and the socially necessary labor time required for the production of the object that serves as the money. While money denominates the price of a commodity, and thus express the value of the commodity, it does not necessarily follow that the money itself contains the same socially necessary labor time as is contained in the commodity. This much is already obvious, since prices fluctuate for innumerable reasons away from the value of the commodity, likewise this fluctuation is accompanied by corresponding fluctuations away from the socially necessary labor time contained in the money for equally innumerable reasons — for instance, a sudden discovery of a huge new source of gold which serves as the money, may force gold to exchange with commodities below its value for a time, which is to say, it takes a larger than “normal” quantity of gold to purchase a given commodity.
This is further complicated when we consider that gold was often not used directly in transactions, but substituted by a placeholder like paper money. In fact, Marx assumed that, for most transactions, gold was not even necessary even when it was formally designated as the money. The replacement of gold by paper tokens in circulation was entirely possible within certain limits. It was only a step from here for our economist to come up with the ‘brilliant’ idea that is didn’t matter what served as money. In this sophomoric reasoning, since money itself only played a token role when it served to facilitate transactions, anything could serve as money as long as it could fulfill this token role. The value of commodities could forthwith be expressed in units written down on paper or embedded in the dancing electrons on a computer terminal. As long as the State legally determined that these tokens were money, they could serve the role as effectively as any commodity money like gold.
This idea, although floating around in society for several decades, did not actually become the dominant view of money until conditions very much like those I described in the preceding section of the post burst into full bloom in the Great Depression. Those conditions brought all the contradictions inherent in value to the surface in a rather awesome fashion: to address the impasse created by the fact that wages were too high, and, at the same time too low; that socially necessary labor time in its wage form stood in complete contradiction with socially necessary labor time in its profit form; and, that, therefore, the value of commodities stood in direct conflict with the prices of commodities; within a short period of about five years every industrial nation devalued its currency and went off the gold standard. The contradictions inherent in value led society to sever the relation between value and price — not just in theory as previously, but in reality and throughout the World Market.
To be continued
Tags: capital, Civil Society, commodity, consumption, exchange, Federal Reserve, fiscal policy, gold, Gold Reserve Act of 1934, gold standard, inflation, monetary policy, negative rate of profit, prices, production, stupid economist tricks, value versus "real value"
Cross-posted from Re: The People
Gold prices have averaged $1218.57 for the year 2010, as of yesterday. For the whole of 2009, the average price of gold was $972.35. This was a change of some $246.22 year over year — a rise of 25.3% in the average price of gold.
We can assume, based on these figures, that the, so far, ten years long depression beginning in 2001 is still under way with a vengeance. The price of gold in 2001 averaged $277.99 per ounce. It has now risen to 426% of its 2001 price.
Between 1970 and 1980, during the depression of the 1970s — the so-called Great Stagflation — gold prices (once they were allowed to float by the Nixon administration) rose by more than 1700%, from an average for the year 1970 of $35.94 to the then unimaginable 1980 year average of $613.95.
Why does the price of gold rise during a depression?
It did not always do this. In 1932, the dollar was fixed at about 1/22 of an ounce of gold, which meant it took approximately 22 dollars to buy an ounce of gold. Because the price was fixed by Washington the price of gold did not vary as widely as it does now; during depressions money merely became scarce.
The gold standard was a form of government price fixing. (We know this is a silly way of looking at the problem, since the intention wasn’t to control the price of gold, but to anchor paper dollars to some real good having a definite value, however it serves our purpose for the moment.) During depressions, as the volume of transactions fell, less gold was needed in circulation. Thus significant quantities of gold fell out of circulation and into private hoards.
As gold was withdrawn from circulation during depressions, paper dollars followed, because buyers and sellers found the purchasing power of these dollars were dropping in comparison to the same good priced in gold.
The result would be fewer dollars available — creating a credit crunch, like the one we experienced in 2008 and since.
As you can imagine, gold-hoarding was a big problem for those who had accumulated debts during the expansion that they needed to service even though the economy was depressed. Think of our homeowners in today’s crisis: as fewer people are employed, fewer wages are paid out, and fewer people are able to meet their mortgage debt service burden. What appears as a credit crisis is simply the downstream effects of unemployment.
The response of the Roosevelt administration to this credit crunch was to devalue dollars against gold by 70%, — from 22 dollars an ounce to 35 dollars an ounce — and this devaluation allowed the economy to stabilize. However, this “stabilization”, like today’s bankster bailout — was purchased by a massive reduction in living standards of working families — it amounted to a 70% across the board cut in wages.
Yes. Despite FDR’s reputation as the hero of the working class, he “stabilized” the economy by ruthlessly slashing workers’ wages.
If we fast forward to 1970, when the Nixon administration ran into difficulties by printing dollars to stabilize the economy as it was contracting, the massive flood of worthless dollars tipped his administration into another devaluation — but this time, instead of simply fixing the dollar to a an even smaller quantity of gold, Nixon allowed the dollar to float against it.
The depression continued unabated, but dollars, no longer fixed to gold, simply lost their purchasing power. In turn, those with the means to do so sold their dollars and bought gold. They were still hoarding gold, but this hoarding was expressed not as the shortage of money, but in the depreciating purchasing power of now worthless dollars.
Since Nixon’s Roosevelt-style assault on society, gold hoarding is now expressed in the rise of its price; while the purchasing power of dollars evaporates. Today, the rising price of gold is one of the surest indicators that we are still in a depression.
Tags: Depression, economic collapse, economic policy, Federal Reserve, financial crisis, gold, gold hoarding, great depression, political-economy, recession, richard nixon, Roosevelt, stupid Washington tricks, The Economy, The Great Stagflation, unemployment, US Dollar