Guest post by Terry Coggan, a New Zealand Marxist and trade unionist. Part two of a two-part article entitled A Complete Theory of Capitalist Economic Crises? An Appreciation of the Work of Sam Williams. (See Part One here).
Does this focus on the central economic role of gold make Williams a gold bug? The gold standard may have gone through a long drawn-out death agony in the middle years of the last century, but surely it has been consigned to history? One of the most useful aspects of William’s work is his debunking of the idea, shared implicitly by some Marxists, that gold had been demonetized. He does this by extensively describing the nature and role of the other two forms of money, token money and credit money, and by showing that the very fact there are economic laws which limit the quantity of both forms of money that can be created is proof that while they can represent the money commodity gold in circulation, neither can replace it.
The Forms of Money
Token money is state-issued paper currency and its electronic equivalent, commercial bank reserves on deposit at the central bank (that’s why it’s legitimate to refer to state “quantitative easing” policies which expand these deposits as “printing money.”) If too many tokens are created they devalue in relation to gold, in other words commodity prices in terms of the depreciated currency rise. Credit money, although it makes up the vast bulk of what economists call “the money supply” and in many countries has almost completed its invasion of retail trade, is in reality only a promise by the banking institutions that issue credit to pay in another more basic form of money, in the first instance token money, but ultimately gold bullion. If an excessive amount of credit is issued in relation to a smaller and smaller base of “hard cash,” a banking crisis will occur, destroying a portion of the credit money. There has been proof enough of this internationally in recent years.
The law that a doubling in the quantity of token paper money in relation to the stock of gold money will lead to a doubling of nominal prices has been seemingly contradicted by the fact that in the aftermath of 2007-2009 governments and central banks in many countries indulged in massive “quantitative easing” exercises without unleashing inflation. To explain this, Williams invokes the “all things remaining equal” caveat. In times of crisis things are not equal, and the demand for cash as a means of payment or hoarding has allowed the authorities to get away with running the presses. But Federal Reserve Chair Janet Yellen and her equivalents internationally are aware of the lessons of the 1970s,1 and know they can’t carry on indefinitely with these programmes without undermining trust in the currency and causing a run on the dollar. Hence the recent moves to wind them down.
The Failure of Keynesianism
For confirmation of the fact that the laws which apply to metallic money do not apply to paper money, Williams, like Yellen and her colleagues, often returns to the lessons of the 1970s, the experiments in “monetary Keynesianism” then so confidently embarked upon, and their necessary outcome in the “Volcker Shock” at the end of the decade. An increase in the quantity of metallic money relative to commodities, all other things remaining equal, lowers interest rates and sooner or later leads to an expansion of the market.
The Keynesian orthodoxy of the time expected that once the role of gold in the international monetary system was eliminated, the same results could achieved by having the monetary authorities expand the quantity of the paper money, and indirectly the credit money created on the basis on the increased supply of monetary tokens. Instead the decade was market by currency depreciation, and rising interest rates, imposed by money capitalists seeking to compensate themselves for the perceived “devaluation risk,” at the same time as they were fleeing into gold. A situation arose where simply hoarding gold was more “profitable” than actually carrying out production, a state of affairs that had it continued would have called into question the viability of the capitalist system. The only way to stop the rot and restore a positive rate of profit in terms of gold was to end the depreciation of the dollar, which the Federal Reserve under Volcker could only do by ending its resistance to rising interest rates, paradoxically allowing them to rise for a time even further, to the point where money capitalists were induced to dump gold in favour of dollar-denominated securities to take advantage of the unprecedentedly high interest rates.
The strong medicine administered by the Volcker Fed was not without its side effects (also explored by Williams), but was also necessary from another point of view: to persuade capitalists outside the U.S. to accept what has come to be called Bretton Woods II, an international monetary system still based on the U.S. dollar, albeit a paper one, to replace the abandoned Bretton Woods I.2
Williams is not convinced all of his fellow Marxists have learnt one basic lesson of the 1970s as well as Paul Volcker did. Williams writes “When the monetary authorities allow the quantity of paper money measured in terms of U.S. dollars, pounds, euros, and so on to grow faster than the quantity of the money commodity, sooner or later the paper money depreciates against the money material. When the process progresses to a certain point, inflation eats up the very purchasing power that the monetary authorities are attempting to create “out of thin air” instead of out of solid gold produced by human labor. It is the inability to grasp this that has prevented most present-day Marxists from fully solving the riddle of modern capitalist crises.”
Williams’ presents an extended critique of not only the doctrines of “monetary Keynesianism,” but also those of “fiscal Keynesianism,” and the work of underconsumptionist Marxists like Paul Sweezy influenced by them. Essentially this involves demonstrating that crises of generalized overproduction occur not just because “workers cannot buy back their product” – the crude version of underconsumption theory – but because “periodically there is a generalized overproduction of commodities relative to the market so that the combined purchasing power of the workers and the capitalists, as well as all possible “third persons,” including the state, is periodically insufficient to purchase the total commodity production at profitable prices.” A consequence of this basic reality is that any move by the state to increase its expenditure, whether financed by current taxes or borrowing, will ultimately prove ineffective, although the degree of efficacy of the move may vary according to the stage of the industrial cycle at which it is undertaken.
Keynesian monetary and/or fiscal policies may ameliorate the severity of the recession/depression phase of the cycle, but there is a catch. Marx explained that one necessary function of an economic crisis was deflation of credit. According to Williams “This cyclical transformation from a credit to a cash system is simply the reflection in the financial sphere of the liquidation of overproduction that occurs in the real economy, just as the previous inflation of credit was the reflection of the previous industrial overproduction that caused the crisis in the first place … However, Keynesian policies, by cutting short depressions, have greatly limited the transformation of a credit system back to a cash system during and after recessions. … Under Keynesian policies, the overproduction that occurred during the boom was therefore not completely liquidated during the recession/depression phase that followed, as was more or less the case before Keynesian stabilization policies were adopted by capitalist governments. The result has been a gradual growth of cumulative overproduction across the industrial cycles. The problem is that this cannot go on forever. A powerful trend has been unleashed towards a “super-crash” that will forcibly liquidate decades of overproduction and force a return to a “monetary system.”
The Falling Rate of Profit
Williams acknowledges that Marx called the tendency of the average rate of profit to fall the most important law of political economy. So how does the course of the rate of profit fit into Williams’ theory of capitalist crises?
To begin with he points out that when Marx set out the law in Part Three of Volume III of Capital, he wasn’t trying to account for capitalism’s periodic crises, but rather to explain why its development as a whole leads inexorably to its breakdown. In this regard, Marx’s law retains its full force and validity. But to analyze the evolution of the rate of profit in the way that he did in Volume III, Marx had to focus on the technical conditions of production in isolation, abstracting from all fluctuations in business activity, “including,” says Williams, “the most dramatic of all fluctuations—crises. This is why the study of the historical tendency of the rate of profit is by no means the same thing as crisis theory.”
That is not to say that the tendency of the rate of profit to fall is just background noise. Williams agrees, for instance, that a rise in the organic composition of capital putting downward pressure on the rate of profit was an important factor in bringing to an end “the long boom” following World War Two. But there is not necessarily an immediate link with any particular crisis. A temporary collapse in the rate and mass of profit as a result of a cyclical crisis, or the losses caused by the fact that capitalists have to subtract from their profits any depreciation of the existing elements of their fixed capital that occurs in the course of a cycle, should not be confused with the permanent fall in the rate of profit caused by the rise in the organic composition of capital.
The latter phenomenon is necessarily gradual, manifesting itself over longer periods of time. Although this process has been periodically halted or even reversed by the operation of various combinations of counteracting influences, the net result has been that the rate of profit is now much lower than it was in capitalism’s early days. To compensate themselves, capitalists are forced to increase the mass of profits by carrying out production on a vast scale. That from a technological point of view, and at this stage in history, they are able to do this, brings us back to Williams’ under-scoring, mentioned earlier, of capitalism’s peculiar ability to increase production faster than it can grow markets. It was in this general sense that Marx was talking, according to Williams, when he said that falling profit rates “breed” (“promote” in the Penguin translation) crises of overproduction.
“The main problem for Marxist crisis theory,” writes Williams, “is to what extent the collapse in the rate of profit that occurs at the beginning of the crisis is caused by the growing difficulties of producing surplus value versus the increasing difficulties of realizing surplus value.” He is in no doubt that “the cause of the fall or even the complete disappearance of profits as a result of overproduction arises from the fact that the value of commodities cannot be realized in money form.” Or, in other words, capitalist production, represented by the formula M-C…P…C’-M’, breaks down at the last point, C’-M’.
Williams appeals to economic history for evidence to demonstrate the correctness of this assertion, and concludes “In most real world cyclical crises, the crisis begins in the means of personal consumption – Marx’s Department II – not Department I.” Here he seems to be in opposition to the falling rate of profit school. Michael Roberts, a prominent member of this school, holds that crises are caused by a prior fall in the rate of profit which aborts investment. He writes in a recent blog: “In all US economic recessions since 1945, it is investment that has fallen one year before the slump in GDP begins, while in nearly every recession consumption spending continues (in the few exceptions where there was a fall in consumption prior to a recession, it was small).”
Roberts would actually appear to be on the more solid ground. The U.S. Bureau of Labor Studies, for instance, notes in relation to the 2007-2009 slump that consumer spending peaked in the last quarter of 2007, while “private fixed investment” – which includes spending on structures, equipment, and software related to production – peaked in 2006. But perhaps the apparent contradiction between the facts cited by the two authors is resolved if we keep in mind two factors. Williams’ points out firstly that the building of homes belongs in Department II not Department I, and that everybody agrees it was the slump in the housing market which triggered the crisis; and secondly that any crisis of general overproduction of commodities is at the same time a crisis of the overproduction of real capital – the “private fixed investment” referred to by the government statisticians.
But Williams is in definite agreement with Roberts and his co-thinkers when he describes the role that crises play in restoring capitalist economies to health by administering an increased dose of profit – the only medicine they respond to. Crises raise the rate of profit by allowing capitalists to use unemployment to force the working class to accept a rise in the rate of surplus value, (and if this leads to an increased investment in variable as opposed to constant capital, to a slowing for a period of the rise in the organic composition of capital); and by lowering or destroying the value of the elements of existing capital. Thus crises act as the mechanism for setting in motion the counteracting influences to the tendency of the rate of profit to fall. Short term phenomena become part of the long term evolution of capitalism.
Working out how short term economic trends interact with longer term ones in capitalist development has proved a challenge for all exponents of Marxist economics. The ten-year time periodization of industrial cycles suggested by Marx based on a putative replacement period for fixed capital, has been something of an albatross around their necks, even if it very roughly corresponds to the comings and goings of recessions in the history of capitalism. Certainly, any attempt to fit a crisis theory inside this time frame soon runs into difficulties. Michael Roberts gives his “profit cycles” a 30-36 year duration from trough to trough. Williams himself admits “I assumed for the purposes of simplification that the period of which the quantity of money material is brought into line with the needs of capitalist expanded reproduction is exactly one 10-year industrial cycle. But is it? I note in footnotes that empirical data does not in fact support this…”
So Williams is more comfortable discussing his theory on a larger time scale. This also allows him to more readily integrate his position with that of the falling rate of profit school. He writes “in my opinion, the theories that link long waves to long-term fluctuations in the rate of profit caused by the rise in the organic composition of capital and changes in the rate of surplus value, and the theory of long-term fluctuations tied to the level of gold production can be combined.” He proceeds to do so, to summarize briefly, by arguing that as the up phase of the cycle begins to peak, “The capitalist system will face increased difficulty in the production of surplus value at the very moment it is becoming more difficult to realize surplus value. Soon a major economic crisis – or series of economic crises – develops.” And conversely, “At the bottom of the long cycle, a combination of the growing ease of producing surplus value coincides once again with the increased ease of realizing surplus value … and the cycle – or wave – is repeated.”
The danger for any theorist wanting to discover “long waves” in the curve of capitalist development is that they don’t sufficiently appreciate the impact of accidental or non-cyclical events like wars, revolutions, or major new gold discoveries. That was the essence of Trotsky’s criticism of Krondratiev, one of the original long wavers. Williams is aware of this danger, and tries to reconcile it with his theory, for instance in his description outlined earlier of the influence of the fortuitous gold discoveries in California and Australia in the 1850s, and in South Africa and Alaska in the 1890s.
Conclusion, and Politics
I should add a word of caution about politics. Williams’ voluminous postings are interspersed with political comment. This is no doubt inevitable because as he himself says at one point “as Marxists, we cannot really separate economics from politics.” Yet in some ways I hope this is not true, as some of his political views – which stem in my opinion from a failure to grasp the fundamentally counter-revolutionary nature of Stalinism – might strike some readers as more contentious than his economic ones. But perhaps they can put Williams’ politics aside, at least in the first instance, in order to make use of his valuable contribution to economics.
He set out to provide a more complete theory of capitalist economic crises than those previously advanced by demonstrating that not only must surplus value be produced, it must also be realized in the form of real money – “the second act in the process” in Marx’s words. In this he largely succeeds.
- Former Governor of the Reserve Bank of New Zealand and leader of the National Party Don Brash shares this new conventional wisdom. He writes in a recent column in The New Zealand Herald “… in both countries [the U.S. and Australia] the legislation covering their central banks dates back to an era when economists (or at least politicians) believed that monetary policy could deliver both low inflation and full employment. We now understand monetary policy has no effect on the level of employment in the long run, and attempts to deliver a higher level of employment through easy monetary policy leads only to higher inflation.”
- Bretton Woods I, a gold-exchange standard, was the international monetary system imposed by US imperialism after its victory in World War II, in which the US dollar was established as the international reserve currency, which the US Treasury would convert to gold at a rate of $35 per ounce. All other currencies were fixed in relation to the US dollar. Under Bretton Woods II, a paper-dollar exchange standard which came into effect after 1971, the convertibility of the dollar into gold was ended and a system of floating exchange rates was established.