Edgar Hardcastle
Source: Socialist Standard, August 1965.
Transcription: Socialist Party of Great Britain.
HTML Markup: Adam Buick
Copyleft: Creative Commons (Attribute & No Derivatives) 2007 conference "Be it resolved that all material created and published by the Party shall be licensed under the Creative Commons Attribution-NoDerivs copyright licence".
II. THE INFLUENCE OF GOLD
In our first instalment, we examined the commodity's value and we discussed two of the reasons for price fluctuations—the forces of supply and demand and the influence of monopoly conditions in supply. The examples were of fluctuations above and below what may be called the normal price and. as we have said, it would simplify matters if we could assume that the normal price is the value and that fluctuations due to supply and demand are variations above and below value.
In actual practice, the normal price is not always the same as value, and probably the great majority of commodities do not normally sell at their value, but at some point above or below it. Marx developed this question of what he called all the same thing as what the manufacturer calls his cost of production. It is arrived at from the labour theory of modifications to his theory and showed that the normal price of commodities in the market is not their value but what he called the price of production. The first thing to notice about this is that the Marxian price of production is not at value, but it takes into account the fact that there is a continuing tendency for the return on invested capital to be equalled in different industries so that if the average rate of profit for example is taken at 10 per cent, the capital invested in the oil industry or in agriculture or in shipping, will all tend to receive something approximating to the same 10 per cent average rate of profit.
The next point is that changes in the value of a commodity can cause changes in its price. The value of a commodity falls, for example, if through inventions and discoveries the amount of socially necessary labour needed for producing it is reduced. In that instance, the value would fall and the price would tend to fall with il. On the other hand, it is possible for the value of a commodity to rise because the amount of socially necessary labour required to produce it increases. This could happen to coal and other minerals. As the richer and more readily accessible seams of coal are exhausted and mines have to go deeper, more labour is required to produce a ton of coal than before, and the value rises, and as the value rises, the price will tend to rise with it. So, to take our example of 24 hours being the amount of socially necessary labour required to produce a bicycle, if it fell to 20 hours or rose to 40 hours, this would cause a fall or a rise in the price of bicycles.
So much for changes in the prices of individual commodities, but what about general changes of all prices? Why was it that in 1921 and 1922 the price level in Great Britain dropped by about a third and why is it that the present price levels are three or four times what they were in 1939? Why were prices rising at the end of the 19th century and in the early 20th century? To explain these movements, we have to come back to our example about the bicycle and the suit of clothes and one ounce of gold, which was by law cut up into four gold sovereigns each weighing about one-quarter ounce.
We have seen that gold has a value like all other commodities. So has silver or lead or brass or aluminium. The value of these and all other commodities are related to the amount of labour needed in their production. Because of this factor common to all commodities, the value of each commodity can be expressed in terms of any other commodity. In fact, historically, because of certain conveniences attaching to gold, the capitalist trading world came to accept gold as the universal equivalent, the money commodity and all commodities came to have their values expressed in terms of gold. We might imagine that the trading world could have made use of weights of gold and expressed the prices of all commodities in terms of a weight of gold—one-quarter, one-eighth or one-sixteenth of an ounce, etc., but this was obviously not so practical for purposes of internal trade as to have the gold turned into coins of legally fixed weights, although of course the particular weight differed in different countries.
In Great Britain, as already mentioned, gold coins were by law fixed at about one-quarter an ounce of gold. Actually the legal relationship was that one ounce of gold was priced at 77/10½d, but it is simpler to call it about one-quarter ounce per gold sovereign. Under the currency system as it was operated in Great Britain in the 19th century, and similarly in the U.S. with regard to the dollar, the value relationship between commodities in general and gold was preserved by what is called convertibility. Gold coins were in normal circulation alongside Bank of England notes, but there was a legal right at any time for a holder of notes to convert them into gold or to take gold bullion to the Bank of England for conversion into notes or coins. The gold bullion or coins were freely imported or exported.
Under these conditions there could never be any but minor variations between the purchasing power of Bank of England notes and the purchasing power of gold. Now we may ask how in such circumstances was it ever possible for the prices of commodities to undergo a general rise or a general fall. The answer is that, just as the value of commodities of any kind can rise and fall in certain circumstances, because more or less value is required to produce them, the same thing can happen to gold. The value of gold itself can undergo a change. If, for example, methods are devised which produce or refine gold more efficiently, then it is possible for the value of gold to fall, or, conversely, if it becomes more difficult to produce gold, then the value of gold would rise. The only thing to remember about this is that it operates in a sort of inverse direction, that is to say that a fall in the value of gold expresses itself as a rise in the price of all other commodities and vice versa.
Now let us come back to our examples of the bicycle and the ounce of gold. They had equal value because both of them take 24 hours of socially necessary labour for their production, but suppose that the labour required, to produce one ounce of gold was reduced from 24 hours to 12 hours. Twenty-four hours of labour would still be required for one bicycle, but 24 hours would now produce two ounces of gold instead of one ounce, so that one bicycle now has the same value as two ounces of gold. Under the requirements of the law in Great Britain, two ounces of gold were still divided into quarter ounces; so the bicycle now would equate with £8 instead of £4. Because the value of gold had fallen to one-half, the gold price of the bicycle would be doubled from £4 to £8, and of course the opposite could happen if the value of gold rose, that is to say, if more labour came to be required to produce one ounce of it than before.
A fall in the value of gold caused by new and more efficient production processes was in fact going on at the end of the 19th century and the beginning of the 20th century and, in accordance with the explanation already given, it showed itself as a general rise in the prices of other commodities. There is another circumstance in which, even with a convertible currency, you could have a general rise or general fall in prices. This is when booms and slumps occur. In a boom, every manufacturer is trying to buy raw materials, machinery and so on, with the result that the price of these things would rise and there would be a general rise in prices. In a slump on the other hand, the reverse takes place. Manufacturers and traders in a slump are all trying to sell goods at cut prices in order to get hold of money, and in these circumstances, you could have a more or less general fall in the price level.