Guest post by Terry Coggan, a New Zealand Marxist and trade unionist.
Part One (of two parts): The implications of Marx’s theory of commodity money
Few of us will ever make an original contribution to economic science. We necessarily remain its consumers rather than its producers. Even Marxist parties, although they have the advantage over individual activists in that they can function as “collective thinking machines,” are to some extent reliant on professional “experts” in the field – government statisticians, academic economists, business journalists, market analysts of one sort or another. But revolutionary politicians must know enough to be able to approach critically the output of these specialists, including, or perhaps especially, the Marxist ones, to recognize what is useful and what is not.
Remembering Lenin’s injunction that “Without revolutionary theory there can be no revolutionary movement,” every serious workers’ party knows that it must educate its members in Marxist theory, including economic theory. But how much economics do its cadres need to know? Some, undoubtedly. For instance, every communist should be able to acquaint his or her fellow workers with what Marx regarded as his greatest scientific achievement, the theory of surplus value, i.e., to describe theoretically what many workers know from their life experience, that capitalist society is based on exploitation. More generally, while they avoid drawing up detailed blueprints for the society after capitalism, communists should be able to outline some of its broad features, and this already assumes an acquaintance with some basic economic concepts and their historical development. You can’t say, for example, that under communism there will be no money, without being able to explain the origin and functions of money in class society, in other words quite a chunk of Marxist economics.
What about the question of the crises that recur in the capitalist economy? Are there common causes for the Great Depression of the 1930s, the “stagflation” recessions of the mid 1970s and early 1980s, and the slump of 2007-09 and the subsequent “secular stagnation”? What is the connection between ten-year trade or industrial cycles, and longer term shifts in the curve of capitalist development? Do these “long waves” even exist?
Do such questions even have to be definitely nailed down before a successful socialist revolution can be made? Not necessarily, in my opinion. It is doubtful whether many members of the Bolshevik Party or the July 26th Movement solved these problems before the victory of the revolutions they led. But to be able to do so, or even to make substantial progress in that direction, would greatly strengthen the armature of the workers movement in its fight towards its ultimate goal. At the very least, communists need to be able to demonstrate that crises are lawful outcomes of the laws of motion of the capitalist system, and not just more or less accidental events which can be avoided if governments or central bankers adopt the correct economic policies, which is the assumption that all bourgeois or “mainstream” economists, from the left or right, start from.
I believe that in his blog A Critique of Crisis Theory (https://critiqueofcrisistheory.wordpress.com/), the subject of this article,1 Sam Williams has made a significant contribution in this direction. When commentators point to inadequacies or omissions in Marx’s work, the fault is usually theirs and not Marx’s, but it is undeniably true that Marx did not leave a complete crisis theory. This has left room for different schools of crisis theory to emerge under the general Marxist umbrella. The two most influential are the under consumption or lack of effective demand school, and the falling rate of profit school. Williams extensively reviews both and, while not rejecting either, considers them inadequate as they stand.
Overproduction of Commodities and Underproduction of the Money Material
His own theory is based on the understanding that he shares with Marx and Engels, that capitalist crises are crises of overproduction, which arise from the peculiar ability capitalism acquired, after about 1825, to increase production faster than it can expand markets. “If the expansion of the market,” Marx says simply, “had kept pace with the expansion of production, there would be no glut in the market, no overproduction.” (Marx-Engels Collected Works (CW) Vol. 32, p. 154.) But as Marx acknowledges, this just states the problem, it doesn’t explain it. Similarly, Engels writes “the enormous expansive force of modern industry” is not matched by “the capacity for extension, extensive and intensive, of the markets”, which is “primarily governed by quite different laws that work much less energetically”. (CW 24, p. 315.) Unfortunately, neither Engels nor Marx spelt out what these laws are. That is the task that Williams, ambitiously, has set himself. “Once we have solved the laws that govern the expansion of markets,” he declares, “we have developed a full theory of capitalist crises.”
Williams begins by recognizing the implications of the fact, ignored, he believes, by most Marxist and all of bourgeois economics, that Marx spends the whole first part of Volume One of Capital, his economic magnum opus, elaborating a theory of commodity money. He goes as far as to state at one point “I believe that without understanding the distinction between value and form of value, we not only fail to fully grasp Marx’s theory of value, we cannot fully understand either capitalist crises or the evolution and fate of modern capitalist society.” And understanding this distinction in forms of value is, “in plain language, … understanding the relationship between commodities and money.”
The value of a commodity can never be measured directly in terms of quantities of abstract labour, which are measured in units of time, but only through the form of exchange value. In its turn, a commodity’s exchange value, its price, (although not necessarily in the first instance its market price), must be measured in terms of the use value of another commodity, and when one particular commodity has come to perform this service for all other commodities, when it has become the independent existence of their exchange value, it has become money. The relevance of this analysis for crisis theory may not be immediately apparent – Marx wasn’t investigating capitalist crises when he developed it in Volume One – but Williams believes it is crucial.
Surplus value must not only be produced, it must be realised in real money terms on the market. And “real” money must be a commodity requiring labour to produce, since only that can perform all the functions of money, the most important of which is to measure the value of all other commodities in terms of its own use value – in quantities of gold, if gold is the money commodity. Capitalism, which allocate society’s total labour resources among the production of all the different commodities the society needs through price and profit fluctuations on the market, couldn’t work otherwise. The quantity of money, in terms of the purchasing power available to realize the value of all other commodities, is therefore limited by the quantity of real money – gold bullion – in existence. Other forms of money, token money and credit money, can only be understood in relation to this basic fact (more on this below). The development of modern currency systems, clearing houses, banks and credit allows the economising of the money material, but in the end expanded reproduction – and capitalism can only exist as expanded reproduction, a point Williams repeatedly makes – cannot proceed without a certain level of gold production.2
If gold is not produced in sufficient quantities, the circulation of commodities breaks down, and capitalist reproduction experiences a crisis – a general overproduction of commodities, or more precisely a general overproduction of commodities in relation to one special commodity, the money commodity. Gold in its role as money material can also be overproduced in proportion to other commodities. (Williams actually corrects himself on this point in the course of his blog). Gold mining is counter-cyclical. Williams writes “One of the great peculiarities of gold production — or the production of whatever commodity serves as money material — is that an under-production of gold bullion is by definition identical to an overproduction of all other commodities, while an overproduction of gold is identical to under-production of all other commodities. Capitalism is doomed to fluctuate between these two states. Under-production of gold, or what amounts to the same thing, a generalized overproduction of commodities, leads sooner or later to a crisis of overproduction, while an overproduction of gold — or a generalized under-production of commodities — leads sooner or later to a recovery and boom.”
Whether enough real money is produced depends on the profitability, both absolutely and relative to all other industries, of the gold bullion-producing industry. And this comes down to the relationship between the values (or more precisely, prices of production) and the market prices of commodities. During the expanding phase of the economic cycle, prices of commodities rise because demand outruns supply at existing prices. (It’s important to remember we’re talking prices in terms of gold at this stage of the exposition.) The costs of mining gold increase, the industry becomes less profitable – by definition, unlike other capitalists, gold-producing industrial capitalists are not in a position to raise the “price” of their commodity – and so the production of the money material declines. “The inevitable result,” says Williams, “is that the growth in the quantity of metallic money — which in the long run drives the expansion of the market — slows down, tending to grind towards a halt as prices keep rising. Or what comes to exactly the same thing, the more the production of commodities expands, the slower in the long run will be the expansion of the market for them. The tendency towards the generalized overproduction of commodities is thus built right into the commodity foundations of capitalist production.” (His emphasis)
The crisis when it inevitably comes lowers prices in relation to values, making gold production again more profitable. The subsequent rise in the quantity of metallic money swells bank reserves and forms the material basis for another expansion of the market. But how, exactly?
It has to do in the first place with the adverse relationship between profit of enterprise and interest, the two components of capitalist profit. If the rate of interest is low because the quantity of metallic money, potential money capital, has grown in relation to the quantity of real capital – Williams here bases himself on Marx’s basic explanation of what determines the rate of interest – the profit of enterprise will be high, giving industrial capitalists the incentive to undertake surplus-value-producing activity. On the eve of the expansion of the market, the growing mass of hoarded money is “burning a hole” in the collective pockets of the industrial and commercial capitalists. If the crisis/depression phase of the cycle has liquefied enough commodity capital and written off enough fixed capital (in other words, depreciated enough existing capital, a function of crises particularly emphasized by the falling rate of profit school), at some point they are ready to invest. As this occurs, what bourgeois economists call the “multiplier” and “accelerator” effects kick in. (These economists can sometimes get things right at the descriptive level, we must allow.) “The combination of the multiplier and accelerator effects at the beginning of the period of prosperity occurs at a time when there is a huge amount of idle money – potential demand – to draw on. Working together, the multiplier and accelerator effects transform this potential demand into actual demand. The market suddenly expands.”
The Gold Trail
Williams tests his theory by examining historic trends in gold production. He makes the general statement “Every major period of prosperity in the history of capitalism since the middle of the 19th century has been preceded or accompanied by a major rise in gold production, while every period of major crisis has been accompanied or preceded by major declines in gold production.” The two great international gold rush booms of the 19th century, (of which more below), are obvious cases in point. Williams also points to two more recent examples: a decline in gold production triggered by the rising prices of “the long boom” of the 1950s and and 1960s, preceded the slump of 1974-5. A similar decline in gold production, triggered by the rising prices of “the great moderation” of the 1990s, preceded the slump of 2007-09. Or conversely, the 1974-75 and 1981-82 recessions lowered prices (in gold terms), and led, after the necessary time lag, to the increase in gold production that underlay the 1990s expansion, just as the steeper fall in commodity prices during the 1930s had boosted gold production and made possible the post World War Two boom. (His explanation of the severity of the 1930s “super depression” itself is that the “contracted reproduction” of World War One had not allowed commodity prices to drop, the opposite in fact, so that they were already too high relative to labour values when the 1920s boom began, keeping the downwards pressure on gold production that had begun as the pre-war expansion was peaking unrelieved for decades).
This movement of market prices in relation to underlying values and its effect on gold production is the bare bones of Williams theory, but two other factors, not necessarily cyclical, are operating in the real world that might work in the same or in the opposite direction, and these variable interactions have to be taken into account. The first is the dollar price of gold, which has been subject to variations, sometimes wild variations, since the end of the last remnants of the international gold standard with the collapse of the Bretton Woods system in 1971; and the second is the physical capacity of the world’s supply of gold to increase (it never actually decreases), and the related question of the productivity of gold mining relative to other industries, i.e., changing labour values of gold relative to all other commodities.
Although, strictly speaking, the dollar price of gold is not a “price” at all, but rather a rate of exchange between two forms of money, its ups and downs also have an effect on the profitability and output of the gold mining industry. In the long run, the price of gold is determined by the ratio of the growth of dollar-denominated token money (and its satellite currencies) to the growth of gold bullion. That is the underlying reason gold has risen from $35 an ounce the last time the price was fixed in 1971 to $1,250 today – or, for that matter, why a Big Mac cost 50c then and $4 now. But the rise in the price of an ounce of gold, unlike that of a Big Mac, has not been a steady one. (This is just as well for capitalism because, as Williams points out, if the paper currency were continuously devalued, “the ‘bulls’ in the gold market would always win, the devaluation of the currency would very quickly get out of hand, and the currency would lose its ability to function as a means of payment, hoarding, or even as a means of purchase.”)
The “price” of gold reached $875 in 1980, fell to $253 in 1999, only to climb to an all-time high of $1905 in 2011. Speculation is clearly one factor behind these movements, but they are also influenced by the changing level of demand for gold at different points in the business cycle. When capitalists sense an approaching crisis they increase their demand for and holdings of gold. This happened in the 1970s and again in the run up to 2007-09. As Williams says, “the resulting depreciation of paper money against gold leads to a rise in the purchasing power of gold, or what comes to the same thing, a fall of the price of commodities in terms of gold.” This encourages gold production, i.e. after the time lag, it works in the same direction as the boost to gold production caused by the 1970s and 2008-09 recessions. But the very increased supply has “bearish implications for the dollar price of gold,” as happened after 2012, when the falling dollar price of gold – rising commodity prices in terms of gold – caused gold production to decline, after the recession conditions of 2007-09 had led it in the opposite direction.
The effect of changes in the relative productivity of the gold mining industry is especially evident during the two expansionary “long waves,” or upturns in the curve of capitalist development, which occurred after 1848 and 1895, when the opening up of new gold fields and improved mining techniques flooded the world market with gold, each ounce of which had also cost less labour time to produce. In both cases, for a prolonged period comprising more than one industrial cycle, prices, with profits following them, were pushed upwards to reflect the lowered relative value of gold money. Marx witnessed the first of these periods, and called it “a second sixteenth century.” Unfortunately for the capitalist class, there has been no similar golden bounty since. Today mines are yielding gold less readily, and it’s costing more labour time to bring each ounce to the surface, raising the value of gold relative to most other commodities, increasing the costs of mining gold, and causing a fall in the rate of profit in the gold producing industry relative to that in other industries. This factor acts as a brake on gold production even when recession-induced falls in the gold price of commodities encourages an increase, as in the 1930s, the 1980s, or after 2007-09. Similarly, notes Williams, the decline in gold production that occurred between 2001 and 2008 was not just cyclical but reflected a worsening in the natural conditions of producing gold, especially in South Africa.
Predictions that the world is approaching “peak gold” appear to be even more solidly founded than those that have it approaching “peak oil.” If this is the case, Williams argues, the implications for capitalism in the longer term are ominous. The rise of gold in value relative to other commodities will become permanent. “As present-day mines are depleted, the price of production of commodities will fall. Future crises will have to progressively lower market prices in terms of gold down to — and for periods of time below — the falling prices of production in order to stimulate new gold production from poorer ores — or in the more distant future maybe even from asteroids if capitalism were to last that long. A long-term downward trend in the prices of production, however, intensifies crises and prolongs the periods of stagnation that follow them: in other words it creates heavy headwinds for the process of expanded capitalist reproduction resulting in secular stagnation.” A new period of expanded capitalist reproduction without any revolution in the production of the money material, such as occurred after World War Two, is not in theory impossible, but it would require a “super-crisis” of such economic and social severity that the consequences for humanity are scarcely imaginable.
1. Williams began his blog in 2009, and to date (April 2017) there have been over 150 postings, covering all areas of economics, ranging from theories of international trade to the economics of post-capitalist societies. In this article I have concentrated more narrowly on crisis theory. Supporters of the blog have promised an eBook summarizing Williams’ theory, but in lieu of that any new reader can only select from the listed posts. The following posts might offer a good sampling of his views: https://critiqueofcrisistheory.wordpress.com/michael-heinrichs-new-reading-of-marx-a-critique-pt-1/michael-heinrichs-new-reading-of-marx-a-critique-pt-3/;
2. Williams’ argument follows that of Marx in Volume Two of Capital where he begins to discuss expanded reproduction: “The additional money required for the circulation of this greater quantity of commodities must be secured either by greater economy in the circulating quantity of money – whether by balancing the payments, etc., by measures which accelerate the circulation of the same coins – or by the transformation of money from the form of a hoard into that of a circulating medium…….To the extent that all these measures do not suffice, additional gold must be produced, or what amounts to the same, a part of the additional product exchanged, directly or indirectly, for gold – the product of countries in which precious metals are mined.” (CW 36, pp. 343-44)