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One of the most discussed points of economic theory at the present time is whether changes in the production of gold have any connection with the present rise in prices. It is no mere academic question, since anticipations as to the continuance of the rise in prices, as well as the operation of their causes, are very evidently dependent upon the point of view as to the reason of the rise in prices.
In our own party this matter is also much argued. This discussion, considering the importance of the question, would be much more keen if it were not for the fact that a popular presentation of the matter is very difficult. I hope, however, to make the main points generally clear. If the reader, however, in spite of my efforts, meets with difficulties, it will be for the most part at the beginning of the work. The closing chapter is intelligible in itself without knowledge of the matter preceding it.
Comrade Varga published, more than a year ago, an article in the Neue Zeit on Gold Production and the Rise in Prices, in which he set forth the theory that changes in the production of gold are not accountable for the present in prices, and furthermore that such change would never cause a fall in the value of gold but only a rise of ground rents in mining.
He has recently sought to support this view, which was contested by Otto Bauer, J.V.G. and myself. Whatever one may think about Varga’s views, they have unquestionably presented an important problem which had not been formerly stated. The statement of a new problem, moreover, constitutes a service to science, when, as in this instance, it is not haphazard, but proceeds from a complete knowledge of the subject.
Varga said in his first article: “In Capital we find no analysis of the method by which changes in the method of the production of gold affect prices.”
Otto Bauer undertook an investigation of the entire modern production-process, but in it he took up a problem which is peculiar to the simple pre-capitalistic handicraft method of production and which must therefore be solved by itself.
Varga declares the system of banking to be the reason why changes in the production of gold do not automatically operate to produce changes in the value of gold. Because the central banks corner all the gold which comes into the world market no lowering of the value o£ gold can take place. So it would appear from this as if the problem were a different one under the modern capitalistic system than under a system in which goods are simply produced. But in reality the banks play no part in the economic role of gold in connection with this question, as I have already shown in a former article.
But in the simple system of producing commodities there is no limit to the hoarding of gold and silver respectively and particularly cash, because money is a commodity, and the only commodity of which one can never have enough. As for the simple method of production of commodities, Marx said: “The impulse to collect treasure is measureless.” (Capital, Vol.I. Charles H. Kerr & Company, Chicago.) The existence of banks was not necessary to develop this, and the capitalistic method of employing money makes no change in the immeasurability of the tendency to accumulate.
In its very notion money seems to be a commodity different from all other commodities, in that it can be used in every case and under all circumstances. Thus the money-commodity becomes money.
If Varga concludes from this that changes in the method of producing gold cannot make changes in the prices of commodities, he proves too much, since such changes have been of frequent occurrence in history, and conspicuously so in the sixteenth century, after the discovery of America.
The fact established, the problem remains merely to discover in what fashion the change in the value of gold appears in the market and expresses itself in prices.
In mere commodity-exchange without the intervention of gold, each of the two commodities to be exchanged, for example a table and a coat, represents a supply and a demand. The owner of the table offers it to acquire a coat. He only effects an exchange when a tailor appears on the market who offers a coat and wants a table far it.
As soon as a commodity becomes a money-commodity a change tales place. The table, the commodity, represents only an offer. It may find no one who wants it. At the other pole of wares is money, which is the thing desired, and not the thing offered.
The amount of demand for a given commodity depends upon the mass of the owners of money who feel a desire to acquire it for a given price, and upon the quantity of money which they have. The mass of money at a given time on the market constitutes the maximum possible demand, for commodities at that time – we are here investigating simple cases, merely, and take no account of credit. The more money people have, the greater the demand for commodities under the same circumstances. The greater the demand, the higher the price of commodities under the same circumstances.
One may picture the matter naturally as the whole mass of money, on the one hand, and, on the other, as the whole mass of commodities, and prices as being fixed by their mutual relations; or as if the owners of money and the owners of commodities were two different classes face to face.
But the former owner of a commodity becomes the owner of money when he has sold his wares, and the demand for commodities which he is now able to make becomes all the greater. The more goods he formerly sold the greater his ability to demand. Inside the circle of the production of goods none can buy unless he has first sold, and no one can demand without first having offered. On the other hand, no one who has made a sale is compelled to expend the money, so set free, in the purchase of new commodities. He can hoard it, and when he chooses he can buy a commodity directly with the money which he has saved, without selling anything in the interval.
The conditions of supply and demand may be exceedingly varied in the beginning of the production of commodities, depending upon manifold conditions.
A certain step in the extension of the production of commodities requires a certain amount of money – gold or silver – to bring about the circulation of wares – buying and selling. A further development of the production of commodities goes hand in hand with a corresponding production of the precious metals, which increases the amount in existence. But the conditions of the amount of money offered and the amount of goods demanded at a given time, and therefore the height of the price of commodities, depends not on the total amount of available money-metal, but upon the numerous circumstances which cause, sometimes, a larger, and, sometimes, a smaller amount of this money to be offered on the market.
There is, however, a point in the production of commodities which may be quite independent of these conditions; that is, the production of gold. I am speaking now of the production of gold alone. Where the use of silver predominates, the same is implied of silver.
If the producer of gold does not sell his product as industrial raw material, but transforms it into money, he is the only producer in the realm of commodities who enters the market, not with an offer, but with a demand. The demand which he makes is quite independent of the conditions of the market in so far as he is the only producer who does not need to have sold in order to be able to buy.
Increase of its production implies under all conditions increase of demand on the commodity market. And this increase is by no means limited to the amount of its production. If the producer of gold buys wares with his product, these possessors of wares are thereby placed in a position to buy wares themselves, and so on. Additional gold becomes the starting-point and the impetus to an additional circulation of commodities in which again arise new demands and commodities. This additional circulation is involved in the circulation already existing, influences it, and is influenced by it. Its speed is therefore to a great extent dependent upon the same circumstances as those on which the old circulation depends. However it may shape itself, the amount of demand which the additional gold develops is on every occasion a multiple of the sum of values of the gold itself.
If, for example, the yearly gold production is one hundred thousand pounds of gold, one hundred and forty million marks, this sum forms, if entirely transformed into money, an increased demand for commodities to the extent of 700 million marks a year. This occurs if the entire circulation of commodities is such that each piece of gold on an average makes five purchases a year. On the other hand, if circulation is so rapid that each piece of gold makes ten purchases, the additional demand will be 1,400 million marks. Every time it will be much higher than the sum of the values of the gold produced.
According to what has been said, it will not be very difficult to estimate how a change in the conditions of producing gold will result.
Let us take a society, in the next place, with simple, that is to say, pre-capitalistic, production of commodities, such as handicraft shows, for example. Every worker owns his own means of production. No one produces for himself, but each makes wares for the market. There are no machines and no industrial reserve army. All the forces of labor are at work and distributed through various branches of production, so that none of these branches can push ahead of the other unless labor leaves the latter to go into it.
This does not mean, by any means, that the same amount will be produced every year (simple reproduction). An enlargement of production is possible and very necessary, even in the simple production of wares to provide for increased population. But a sudden increase of production is, under the conditions of simple production of commodities, impossible. It can only grow steadily and evenly from year to year. The circulation of commodities follows the rule of the law of value. The product of an hour of labor is bought with gold to whose production an hour of labor is necessary.
Now let us consider the increase of gold production in the given society. For example, suppose it is possible by means of gold discoveries to double the production of gold in the same mines with an equal expenditure of labor, instead of one hundred thousand pounds (140 million marks), 200,000 pounds a year.
Productivity in other branches remains the same, therefore the amount of commodities for the market does not grow in proportion to the amount of gold. The demand for commodities therefore grows stronger than the supply. The prices for commodities must therefore necessarily rise, even if there is not the least change in the disposition of the social labor forces.
How high the prices will rise is, however, not solely fixed by the yearly increase in the production of gold. We have seen that the additional demand for commodities arising through every increase is dependent upon many varying conditions in the circulation of commodities.
In the extreme cases which we have taken, that the productivity of gold production is suddenly doubled, there will arise a violent new demand for commodities, which cannot be satisfied at the old prices. Every commodity which comes into the market can find a buyer as the circulation of commodities is accelerated, but thereupon also the demand for commodities is still further increased in proportion to the newly furnished increase in the amount of gold.
The result will be a doubling of the prices of commodities. If this is not so, gold production will have a particular power of attraction for the labor-force of society. The gold digger could then buy for the product of an hour’s labor more than the product of an hour’s labor. He would have to work less hard than the laborers in other pursuits in order to live as well, or he could live better with the same expenditure of labor-power. So that numbers of workers in other branches of industry would leave these and take to gold mining. That means that under given conditions the production of commodities would be limited, and that of gold increased still further. Again, the demand for commodities would be increased until workers in the gold mines cannot live any better than those in other branches of labor and until the compelling force to gold digging ceases, that is, until with the product of one hour’s labor the product of one hour’s labor can be bought, and the law of values has been realized.
A diminution of industry and of agriculture through excessive direction of labor power into the production of the precious metals in the simple stage of the production of commodities is no merely theoretical hypothesis, but can be observed many times in history.
In Spain, after the discovery of rich gold and silver fields in America in the sixteenth century, the forces of labor flocked to them. A mass of precious metals was thrown upon the Spanish market, and at the same time the industry of the country went backward. The old historian Anderson, in his history of trade, has cited a set of Spanish statistics for the year 1588, according to which there was then in Spain not more than a million male adults, and therefore a total number of five millions of people. As causes of depopulation and economic decay, he cites the driving out of the Moors and the Jews, the numerous European wars of Charles V and Philip II, and. finally the emigration of the stronger elements to the American Lands.
Where mere increase of demand for commodities does not operate to restore the equality of exchange of similar values which have been disturbed by a change in the value of gold in the simple production of commodities, the limitation of supply accomplished the same result.
It is probably an obvious objection that a mere increase in the amount of gold money will have the effect of increasing demand, and therefore raise the prices of commodities even without any diminution in the value of gold.
I have already postulated that the yearly production of gold is doubled by reason of an improvement in technique which has allowed as much gold to be produced by half an hour’s labor as formerly took an hour’s labor to produce. One might now take an instance of the discovery of new gold fields which were not richer but just as rich as those hitherto existing, and which, with the same amount of labor, produced the same amount of gold as before. In this case, too, the yearly amount of gold is doubled, and the demand for commodities and their prices are enormously increased without any changes in the value of gold.
This would be correct if gold fields alone, and not men, were necessary to the production of gold. According to the first hypothesis, the production of gold required no more labor power than formerly in order to double the production of gold. In the case we are now considering, twice as many men would be necessary. Whence will they come? Simple commodity production has no industrial reserve army. They must be taken from their present occupations. But what will induce them to take up the production of gold? They earn no more in their new occupation than in the old. Indeed, since the increase in the amount of gold brought about an increase in the price of commodities, while the amount of gold which each miner produced remained the same, they would be better off by engaging in the production of other commodities than mining gold. There would therefore not be the least inducement to put additional labor power into the production of gold and to double that production.
Still new discoveries of gold lead to an increase in the production of gold. The condition remains stable provided that all gold fields are equally productive. This is well known not to be the case. Some are enormously rich and yield great returns for little labor, and there are others whose product barely maintains the miner. Similar differences mark both the new and the old gold discoveries. The richest would be sure to attract the greatest amount of labor power. The increased production increases prices and thereby does away with the possibility of maintaining the old gold fields. Their workers can no longer buy the same amount of commodities with the product of their labor, cannot live, in fact.
The result would not be a doubling of the labor time in gold mining, but a shifting of the time heretofore spent in the labor of gold mining. Only the rich mines would be worked and so the same amount of labor time would then produce an increased amount of gold, whose sum would be of the same value as that of the gold formerly produced. The value of a given amount of gold, e, g., of a pound of gold or a specific piece of gold coin, has therefore fallen.
Here we find a mutual adjustment between the value of gold and the prices of commodities, though the method of adjustment is here different. Both are mutually dependent, and cannot remain independent of each other.
This does not mean, however, that the prices of commodities always reflect the relation of commodity value and gold value. This is not true for single market transactions. Also it is not true, as an average, if we disregard the modification of the law of value by the adjustment of the rate of profit where we consider the pre-capitalistic methods of production. Marx says of gold: “Jacob doubted if gold was ever paid for at its full value. This is still more true of diamonds.” (Capital, I)
In other words, the commodity prices expressed in gold are always higher than should correspond with the full value of the gold. Marx has, unfortunately, not told us how this happens.
I see the under-valuation of gold, particularly in this, that it not merely displays a great amount of value in a small compass, but that the creation of such an amount of value is frequently a disturbing element.
In a diamond or gold district a worker may find a rich diamond or a gold nugget without much seeking; he will then be hailed by the opponents of the Marxian theory as the complete demolisher of that theory. The critics forget, however, that many other diamond and gold seekers, who have sought the desired treasure vainly, or with trivial success, have been repaid poorly, or not at all. But the gold seekers are like the vulgar economists; they see only the nuggets of the one and not the failures of the others, and they go off to the mines in which, as a whole, they expend more labor than they get values. That means that, as a whole, their standard of living is poorer than that of the generality. We are not speaking of wages. It must be remembered that we are still concerned with the period of simple production of commodities, in which the worker works with his own tools and is the master of his product, not yet being a wage worker. In the production of gold this stage lasts a long time. Even in the middle of the last century the gold miners in California and Australia were independent producers. In the Klondyke they are for the most part so to-day. This has been in part the cause and in part the result of the long technical backwardness in getting gold. The great privations which the mass of miners endure are well known. In spite of this, it is the hunt for the fabled nuggets which impels them. It is the same with the production of silver.
Adam Smith, in The Wealth of Nations, in the eleventh chapter of the first book, says
“Neither are the profits of the undertakers of silver mines commonly very great in Peru. The same most respectable and well-informed authors acquaint us that when any person undertakes to work a new mine in Peru, he is universally looked upon as a man destined to bankruptcy and ruin, and is upon that account shunned and avoided by everybody. Mining, it seems, is considered there in the same light as here, as a lottery, in which the prizes do not compensate the blanks, though the greatness of some tempts many adventurers to throw away their fortune in such unprosperous projects.”
The fact that lotteries which do not pay find a ready market does not abolish the rule that all money capitalists are in pursuit of interest, neither does the fact that gold does not exchange for its full value do away with the law of value. This law not only says that all goods at a given time exchange for the amount of socially necessary labor incorporated in them, but that the value of a commodity and, therefore, its exchange value, as compared with other goods, changes when the amount of social labor necessary to its reproduction changes, that is, rises and falls proportionately.
In this sense the law of value applies to such goods as for one reason or another regularly exchange above or below their real value.
Varga says that the improvement in the methods of getting gold must result in an increase in the differential rent of gold-mining. If, at the present time, in the poorest mines, two pounds of gold can be got with the same amount of labor, let us say one week’s labor, per man where formerly only one pound could be had people will now exploit gold mines which formerly did not pay. A mine which only produced half a pound of gold for a week’s labor would now yield a pound with a similar amount of labor and thus be worth working. Mines which up to the present produced only a pound a man per week and so yielded no differential rent, could now pay the rent of a pound of gold per man per week. The least productive mine, costing the most to operate, is, however, the one which fixes the value of gold. This, therefore, will not sink, while the least productive mine produces a pound per man per week. The socially necessary amount of labor for the production of the gold and therefore its value remains the same.
This method of proof would be unimpeachable, save for the fact that it merely states that which it seeks to prove, namely, that prices do not rise because of the increased production of gold. Varga says:
“owing to the cheaper working of ores a kilogramme of gold metal can now be had by the expenditure of a smaller quantity of minted gold.”
But gold is not produced by means of gold, out by the expenditure of human labor.
When, as a result of the increased demand which the increased gold production causes, the prices of commodities rise, the cost of the means of life and the tools required by the gold miners also rise. These will rise first and to the greatest extent, because the increase in gold production especially increases the demand for them. The higher the price of these the greater the tendency to save labor power in gold mining, and the less the possibility of taking up new mines.
If Varga’s theory were correct, the ground rents for mining the precious metals would, in the course of time, become higher than in any other method of exploiting land. But Adam Smith declares that in no other form of industry are ground rents so low, and Marx supports him. He quotes the following extract from Smith’s Wealth of Nations, in his Theories of Surplus Value:
“The price, therefore, of the coarse, and still more that of the precious metals at the most fertile mines in the world, must necessarily more or less affect their price at every other in it.
“The price of every metal, at every time, therefore, being regulated in some measure by its price at the most fertile mine in the world that is actually wrought, it can, at the greater part of mines, do very little more than pay the expense of working, and can seldom afford a very high rent to the landlord. Rent, accordingly, seems at the greater part of mines to have but a small share in the price of the coarse, and a still smaller in that of the precious metals. Labor and profit make up the greater part of both.
“As the price, both of the precious metals and of the precious stones, is regulated all over the world by their price at the most fertile mine in it, the rent which a mine of either can afford to its proprietor is in proportion, not to its absolute, but to what may be called its relative fertility, or to its superiority over other mines of the same kind. If new mines were discovered, as much superior to those of Potosi as they were superior to those of Europe, the value of silver might be so much degraded as to render even the mines of Potosi not worth the working.”
Ricardo differs from this opinion, but Marx, on the other hand, agrees with it. He only thinks Smith makes a mistake in that he attributes the special combinations of the market to the general market. But as he expressed himself: “His reasoning is on the whole correct, and Ricardo is wrong.”
The “special combinations” under which the Smith proposition proceeds is that development is not from the exploitation of richer mines to poorer, and therefore just the combination which our investigation overturns.
Thus, according to Marx, there is no rise in differential rent, but an increase in the yield of a few rich mines following on the discovery of new rich gold and silver fields.
This is not a mere theoretical conclusion. In the sixteenth century, when the great stream of precious metals, gold and silver, from the newly discovered lands of America, came to Europe, there were gold mines in the Alps. Will anyone declare that they all became exhausted simultaneously? Why was not the rise in prices, due to the precious metals of America, the universal reason which transformed the working of all these mines at one and the same time into a losing business? Ground rents, as far as concerns the gold mines of the Austrian Alps, were at that time not only not raised, but for the most part entirely destroyed.
Of the silver mines, Smith says in this much quoted chapter:
“After the discovery of the mines of Peru the silver mines of Europe were the greater part of them abandoned. The value of silver was so much reduced that their produce could no longer pay the expense of working them or replace with a profit the food, clothes, lodging and other necessaries which were concerned in that operation. This was the case, too, with the mines of Cuba and St. Domingo, and even with the ancient mines of Peru.”
The same fate happened to the gold and silver mines of Europe, at least in Germany. They had brought into being quite an important Protestant power in Saxony and Bohemia and the Alpine countries. The decline in the mining of silver weakened Saxony, the cradle of Protestantism, and Bohemia, where Calvinism was followed by the Hussites. In the Alpine countries again the discontinuance of gold mining lost Protestantism its position.
“The downfall of mining, following the competition of the precious metals from America, broke the resistance of the miners in the mountains. In the Alpine countries, Tyrol, Salzburg, Steiermark, etc., mining was completely stopped, and with it was lost the only progressive thinking element in those regions. The districts which had, in 1525, risen victoriously against the noble and the priest, became the stronghold of ecclesiasticism and absolutism; some districts of Austria which had taken a vigorous part in the revolution of 1525 became an Austrian Vendée, in which changes the decline of the mines was in each instance the preponderating factor.” (Kautsky, The Miners’ and Peasants’ War, Neue Zeit, 1889).
Thus even religious reform is dependent upon gold. One can see how transformations in the methods of producing gold cause transformations in price, in the method of producing goods, and finally in the relative strength of classes.
What has been said hitherto applies only to the condition of the simple production of commodities. How do these matters stand as regards the capitalistic method of production?
Last updated on 12.1.2004