Economics, Politics and The Age of Inflation. Paul Mattick 1977
Money as a means of exchange and as a hoard of wealth appears in many forms; as such it is as old as commerce itself and is encountered in the most diverse kinds of societies. Under capitalism, in addition to these general functions, it also exercises the specific function of embodying the social relations of production. In capitalist commodity production the commodity of labor power is exchanged for money. The purchaser of this special commodity uses it to enlarge his capital, measured in money terms. The primary aim of production is, accordingly, not the creation of goods for use; rather, it is only a means, albeit an indispensable one, for transforming a given quantity of capital into a larger quantity. Production of this sort is possible because labor power, as a commodity, has the ability to produce more than capitalists must pay for it; the basis of production, then, is the social relation between wage labor and capital.
In the circulation process capital alternately assumes commodity form and money form as it accumulates. Commodities and means of production may be transformed into money and vice versa, so that possession of capital is expressed as possession of money. Therefore money must itself be a commodity and be comparable in value with other commodities. In commodity exchange based on capitalist property relations, the division of social production into paid and unpaid labor assumes the character of value relations expressed in money terms. Although profit derives from unpaid labor time expended in production, to the capitalist it appears as a gain won in the market; indeed, the profit acquired from production must pass through the market in order to be realized. A commodity must first be transformed into money in order to enter into production or consumption as an item of use. It is money that gives production based on private property whatever social character it has.
Since capital expansion determines the course of social production, if the latter is to proceed smoothly it must be profitable enough to permit accumulation. If the rate of profit is insufficient, the accumulation rate falls; on the market the effect of this is a deficient effective demand and shortage of money. Although these phenomena are but symptomatic of difficulties in actual production, they are real enough at the market level, and every economic crisis will appear as a market and a money problem at the same time.
Since the relations of production admit of no alteration, bourgeois economics cannot think beyond pure market and money relations. Bourgeois monetary theory, however, has undergone some changes in the course of capitalist development. In classical political economy and in Marx’s theory of value and surplus value, the value of money, like that of any other commodity, was determined by the average amount of labor time socially necessary to produce it. The value of money, in the form of gold or silver, was determined by the cost of producing it, and money itself served as the equivalent for all other commodities. Although through market competition commodity values take on the form of production prices, i.e., capitalist cost prices plus the average social profit, a commodity’s value in terms of the labor time required to produce it still remains, since the average rate of profit is determined by the size of surplus value in relation to the total value of all commodities produced. Thus price does not abolish the value nature of commodities or the equivalent form of money.
With the emergence of the subjective theory of value, which ultimately ended in a hypostatization of prices, the bourgeois theory of value cut itself loose from all its former ties with classical monetary theory. Clearly the theory of marginal utility is inapplicable to the exchange value of money, since it cannot be determined by the subjective needs of consumers, as can the exchange value of other commodities, but is in fact juxtaposed to these needs as an already given objective value. There have been attempts, most notably by Ludwig von Mises, to give the objective exchange value of money a subjective foundation by assuming that whatever the objective exchange value of money at the given moment, it always rested on prior subjective evaluations, which may be verified by tracing the development of money historically back to moneyless barter. But the derivation of money from a moneyless economy convinced few, and the attempt to define the value of money subjectively was given up.
It was not long until the entire theory of marginal utility was abandoned, since it obviously rested on circular reasoning. Although it tried to explain prices, prices were necessary to explain marginal utility. It was then decided that economic analysis did not need a special theory of value after all and could restrict itself wholly to the empirical magnitudes of money and prices. It would suffice, so it was claimed, to transform “marginal utility,” with its psychological underpinnings, into a logic of choices or marginal analysis to reduce all market relations to an all-embracing common denominator. Just as every individual presumably ordered his income and expenditures rationally by means of marginal calculations so as to achieve the greatest measure of satisfaction of his needs, so the universal application of this “economic principle” would not only ensure the greatest returns from the least investment, it would also lead to a general economic equilibrium in which social demand matched overall supply. If one abstracts from all other social relations and views human beings solely as buyers and sellers, one may in fact construct a price system in which an equilibrium between supply and demand is achieved by virtue of the relations existing among prices. However, that is all one would have – a construct having nothing to do with reality, and no more than a rehashing, by the device of marginal analysis, of Say’s discredited postulate that every supply produces its own demand. Say’s theory referred to a barter economy and not to a capitalist money economy; following suit, pure price theory also relegated money to a subordinate and incidental role, since, as merely the expression of price relations, it was already taken into account in the analysis of equilibrium.
There were other money and credit theories that existed more or less on their own account, dominated by the quantity theory of money, with its assumption that price levels were dependent on the quantity of money in circulation and its velocity, that is, that they derived from the application of supply-and-demand relations to money itself. But as capital developed, its monetary system underwent corresponding developments and transformations. In the mercantile period preceding laissez-faire capitalism, both personal wealth and the wealth of nations were measured in money, and money in turn was represented by the precious metals. Although the concept of capital presumes money, it embraces all commodities just as well, with any commodity having the capacity to take the place of money. This being so, the quest for riches became contingent on the possession of capital rather than of gold or silver.
For money to function as capital, it must have ceased to be money, i.e., it must be invested in means of production and labor power from which profits in turn accrue to whomever controls production. Accumulating capital represents money values in the form of more means of production and additional labor power. Over the long run the instruments of production transfer their own value to the commodities manufactured. Of course, the mass of commodities placed on the market must be converted into money; but since they embody only a portion of existing capital, only a portion of the capital acquires money form.
In general the total sum of money needed is determined by the prices of the commodities in circulation and by the velocity of money. Of course, in order to circulate, commodities do not themselves require money but human activity and means of transportation. It is not commodities but the property claims attached to them that cause money to circulate. Any number of different forms of money may exercise this function. Commodity money, i.e., gold and silver, seems to be an expensive and unnecessary expenditure as a medium of circulation. It subserves neither production nor consumption but represents the costs of the circulation process. To produce gold and silver requires labor and capital that if put to use elsewhere would bring in profits. Of course, for the producers of gold and silver their production is as profitable as any other; but from the standpoint of society as a whole, as a means of circulation commodity money is unproductive. For this reason capital has always striven to replace commodity money with symbolic money.
Two different sorts of money came to be distinguished: commodity money and symbolic money. But historically the various money surrogates, such as bank notes and credit money, did no more than money and hence remained tied to its value. Once gold-backed currencies and the international gold standard became universal, various means of payment came into use. The gold backing of paper currency was supposed to restrict its issue and hence prevent its depreciation. The gold standard also set limits on the proliferation of a nation’s currency in that a country stood to lose its gold reserves if it printed too much money. In the reserve system the money in circulation was a multiple of the amount that actually had gold backing, so that at any given time only a fraction of it could be converted into gold. But as long as the confidence prevailed that the conversion was guaranteed, payment in fiat money was as effective as gold itself.
Gold is not just commodity money; because it has industrial and other uses, it is also a commodity in the simple sense of the term. Its value (and hence its price) depends on the productivity of gold production and also on the supply and demand relationships of gold. For gold and the currencies based on it to remain stable, it was necessary to control the price of gold. Originally the money value of gold and its value as a commodity were the same, but at times the commodity value exceeded the money value, and money gold was converted back into commodity gold. To keep the price of gold at a given level, that price had to be stable not only in money terms but also on the gold market. This meant that wherever the supply of gold exceeded its market demand, the excess had to be bought up by monetary authorities, whether they had need for it or not. In this way the commodity value of gold was determined by its money value.
However, the fact that the commodity value and money value of gold could be made to coincide only through state interventions or on the basis of international agreements, and further, the fact that gold as commodity money was being used less and less as a medium of circulation, gave rise to the belief that capitalists could engage in their business activities just as well without commodity money. This view had already been anticipated in Georg Friedrich Knapp’s state theory of money, the burden of which was that money did not need to have a value of its own, and that whatever power it had derived from the value placed on it by state fiat. However, gold-backed currency and the gold standard were maintained not merely out of tradition but because commodity money was held to be more stable. Thus commodity money circulated because it had value, and paper money had value because it circulated.
The notion of an automatic self-regulating market mechanism which at that time prevailed needed a self-regulating monetary system to go with it, and the gold standard seemed to fill the bill. The values of the various national currencies were pegged to units of account representing a specified gold content. All currencies were tied together by their gold contents, for since the price of gold was expressed per unit weight, the same quantities of gold could always be exchanged for one another. If international foreign exchange transactions did not balance out a nation’s debits and credits, the outstanding payments balances between countries were cleared by gold shipments. It was presumed, or rather hoped, that these gold shipments would affect prices in the various countries in such a way that international trade relations would tend toward an equilibrium to the general benefit of all.
Under the gold standard gold flowed from countries with a negative balance of payments to countries with a positive balance. It was assumed that a gold drain from one country would lead to deflation and lower prices there, while the resultant inflation in countries acquiring gold would cause prices to rise. Sooner or later, therefore, the balance of trade of countries with low prices would improve, and that of countries with high prices would become worse, until an equilibrium in the payments balance would once again be restored. This is not the way things worked out, however. Whether the gold standard was maintained or not, capital accumulation depended on capital profitability, not on money and credit. Where expansion of money and credit boosts accumulation as a result of inflowing gold, and hence raises labor productivity, prices do not rise compared with those in countries losing gold and experiencing accumulation problems, with a consequent decline in labor productivity. The gold standard was no more an instrument of equilibrium and stability than the market mechanism, nor was it any more able to check the concentration and centralization of capital than was the domestic price system of any country.
The gold standard (like money) was not a physically necessary medium for international commodity circulation, but rather it expressed the property claims attached to commodities and capital. It seemed especially important for purposes of capital export (for loans and investments) to protect the interest and profits flowing back into a country from depreciation and losses. The capital market was concentrated in Western Europe, mainly England, and accordingly these countries were capital-exporting countries which saw to it that the gold standard retained general acceptance. It gave the different exchange rates a measure of stability and controlled national monetary and credit policies. International rivalry thus extended over money as well.
World War I spelled the end of the gold standard. Later attempts to restore it failed owing to new economic crises. With the gold standard abolished, the creation of money became the affair of each particular country. Those countries emerging defeated from the war availed themselves of inflation to cancel state debts, to divert a greater sum of surplus value into the hands of capital, to step up exploitation of the workers, and to give the capitalist economy a new boost. However, the difficulties that arose in the process eluded control, and inflation led to a total depreciation of money, sounding the imminent demise of the capitalist system. It was necessary to restore the buying power of money through the issuance of new money with no backing. The German Rentenmark, for example, had no other backing than the optimistic faith of the population in government promises to keep it stable. This was taken as patent proof that the buying power of money could be maintained even without reserves by government decree alone.
In Russia the Bolsheviks at first welcomed the inflation brought on by the war and accelerated by the revolution. For them it betokened the decay of the capitalist system. Although the issuance of paper money while the exchange rate was declining amounted to a kind of perpetual taxation, this necessity was transformed into the virtue of a monetary system that purportedly contained the seeds of its own abolition. Money, wrote Bukharin, “represents the material social weft, the fabric that holds together the whole developed commodity system of production. It is obvious that in a transitional period, as the commodity system itself is decaying, money too should lead a contradictory existence, in that, first, it undergoes depreciation, and second, the distribution of notes becomes dissociated from and independent of the distribution of products, and vice versa. Money ceases to be a universal equivalent and becomes a conventional and highly imperfect symbol of product circulation.”
Given the visions of a moneyless socialist economy current among the Bolsheviks at this time, the depreciation of money seemed to neatly fit their plans for reconstruction on the basis of a natural economy. But neither inflation nor barter proved to be viable solutions to the growing economic difficulties, and they were soon discarded to make way for a new monetary system. A series of currency reforms and the first steps toward a planned economy restored monetary stability, although not the relative independence money had enjoyed formerly. As a unit of payments money was transformed into an instrument of accounting and control in an economy keyed to use values and material balances. As a measure of value and a means of payment, it served the purposes of circulation only insofar as it steered commodity flows into channels specified by the plan. Its function as a medium of circulation was in general restricted to consumer income and outlays; the financial aspects of economic relations among enterprises were dealt with via the accounting procedures of the state bank.
The social regulation of production and distribution was no longer an unconscious process effected through market relationships or concretely through the circulation of money; production and distribution were henceforth controlled consciously through the medium of money, just as wage labor was used to maintain centralized control over the economy. Through the control of prices and wages, money too is controlled, inasmuch as money only expresses in figures what has already been stipulated in material terms. Money was henceforth denuded of its veil; no longer the abstract reified form of social relations, it had become a means for social control in the interests of the new modified form of capital production relations.
However, this new function of money was restricted to the domestic economy. Internationally gold continued to be required to square payments balances. According to Lenin the use of gold as building material for public conveniences was possible and appropriate only after a world socialist revolution. Until such time as that came about, it was necessary “to howl along with the wolves” and continue to produce and accumulate gold. But money gained a dual function in capitalist countries as well: an international and a domestic function; gold is considered necessary only as a universal means of payment to square outstanding payments balances.
The view has long been current that a gold-backed currency was not necessary for a nation’s domestic economy. But because of traditional thinking, and out of fear of currency depreciation, commodity money was still retained. Because the gold standard set prior limits to the creation of money, these limits could just as well be defined by monetary policy. In any event commodity money lost its former importance with the development of banks and the credit system, until in the end it came to be regarded merely as an accounting unit for balancing out debits and credits. Every purchase and sale, it was now argued, created a debt that could just as well be paid through the banks without the intervention of money. Thus cashless payment transactions came increasingly to be used instead of the state-issued currency, without, however, replacing the latter entirely.
The concept of money is entailed in that of a commodity; hence gold currency was a historical although not necessary phenomenon of commodity circulation. Since all commodities are potential money and money can command any commodity, any t payment medium can serve as a medium of exchange in a nation’s domestic economy. For the mass of working people, money is purely a medium of exchange enabling them to exchange the commodity labor power for the commodities their wages enable them to afford. For capital, on the other hand, money is a medium of exchange as well as a medium of accumulation. A given quantity of money must be enlarged for commodity exchange to become capitalist commodity exchange. Business is not transacted to square debits and credits but to obtain profits.
The modern credit system was an instrument of rapid capital development, and capital accumulation in turn served as a powerful stimulus to the expansion of the credit system. The monetary system grew more and more complicated, although the social relations on which it was based retained their unvarnished exploitative character of capital versus labor. Today it is the banking system which is charged with implementing government money policy. Bank lending depends on the state’s creation of money, which the state does by printing notes and issuing treasury bonds; it is also dependent on government-regulated reserve regulations for deposits, which, however, may vary. Though credit may be only partially covered by bank reserves, it is in general secured by the capital assets of the borrowed If there is no capital equivalent, there is also no credit. Thus it is the capital at hand, not money, which is the relevant factor.
The aim of capital accumulation is to transform a given mass of value into a larger one; accordingly, given a constant velocity, the money supply, in all its various forms, also increases. So long as capital accumulation encounters no obstacles, accumulation of value and accumulation of money take place side by side with no notable friction. But there is always a danger of a monetary crisis unfolding, since the social character of production has only one vehicle of expression, and that is the money relations of commodity production, which originate in but exist and function independently of commodity production. But aside from this ever-present possibility of a monetary crisis, a general crisis occurs only if the accumulation process is stopped or slowed; but then the crisis is always also a money crisis.
Even into the twentieth century bourgeois economics has never been able to explain crises; according to it the market mechanism should be sufficient in itself to allay any disturbances of equilibrium. But the duration and scope of the crisis between the two world wars dispelled this illusion and necessitated far-reaching economic interventions by the state. The means used were monetary and fiscal; and although they did influence the market, they did not call its existence in question. In the eyes of bourgeois businessmen and economists, the crisis was a reflection of insufficient demand, and they chose their means to combat it accordingly. Insufficient private demand had to be supplemented by public expenditures to alleviate unemployment and activate idle plant. At the same time, the profitability of private capital had to be improved so that the existing crisis and the state interventions it necessitated did not become perpetual.
Since the crisis was seen as a momentary disturbance, the measures taken to combat it were seen as something temporary as well, imposed by force of circumstances. Deficient demand caused by a reduction in new capital investments results in a lower buying power among the population or a shortage of money in general. The latter problem can be answered by inflationary means, which, however, cannot alter the accumulation difficulties that lay at the roots of the crisis. For capital inflation has a rationale only insofar as it contributes to expansion of profits on both domestic and foreign markets; it loses this rationale as the rate of inflation increases. Inflation must therefore be controlled, and this is done most effectively by deficit financing through state loans.
However, since it appeared that a growing state debt brought about by deficit financing was just as capable of expanding production as was capitalist accumulation, the notion of functional financing arose, the gist of which is that an economy with full employment could be regulated by state measures. This idea, which originated with John Maynard Keynes, became in various versions a universal axiom. Through a combination of fiscal and monetary measures, governments, it was claimed, should be able not only to ensure full employment but also to prevent inflation and deflation. Domestically the growth of the state debt had no significance, since its assumption and payment amounted only to income transfers that would not detract from total social consumption.
This was but a variation in the altered function of money such as we see in a planned economy. Money was henceforth to function as an instrument of state economic policy within the market system. Only when the market failed in its function as an equilibrium mechanism should a nation’s production be stimulated or cut back by injection or withdrawal of state-raised funds. The automatic price system would continue to be determined by consumer activity, but it would include in addition state-regulated and expanded public consumption. Since, however, increasing public consumption cuts into the amount of surplus value available for conversion into capital, a readiness to adopt this kind of economic policy required both the will and ability to disregard the accumulation needs of private capital as, however, this would in the course of time call the capitalist system itself into question, such an economic policy can only be a temporary one, applied out of necessity and sparingly.
But a state monetary policy aimed at influencing the economy signifies at least a partial elimination of commodity and money fetishism, and in this sense it reflects the general process of decline of a market economy. It indicates an acceptance in a sense of Knapp’s state theory of money and its adaptation to the mixed economic system of present vintage. But as long as the state-controlled profitless sector of the economy grows more rapidly than the private sector, the accumulation rate of the latter must fall, and such a policy of conscious, purposeful intervention into automatic market processes will not bring order into the system; its occurrence is rather a sign of decay regardless of any temporary economic relief it may bring. Ultimately any state monetary policy meets its limits in the contradictions at work in the sphere of private production.
If it was possible to bring a nation’s domestic economy out of depression by inflationary means, it was a reasonable expectation that if such means were used simultaneously in all countries no longer bound to the gold standard, the world economy as a whole would be given a boost. National monetary policies applied independently would in the process expand world trade by expanding domestic production, and international commerce could, at least in principle, be regulated just as well through international agreements without the intermediacy of gold. This idea was based on the belief, still unshaken, that under full employment the equilibrium tendencies of the market would again begin to operate at both national and international levels.
Before this could happen, however, a bitter, no-holds-barred international competition began in which every country pursued its own advantage at the expense of every other, and which finally led to World War II. The international monetary system, which had already begun disintegrating in the preceding crisis, had by this time totally collapsed and at war’s end had to be rebuilt from scratch. While the war was still in progress, the victor nations met in Bretton Woods to work out the monetary foundations for the reconstruction of world trade. The Central World Bank and the International Monetary Fund were created in the light of the lessons learned from the previous monetary crises, with the aim of providing credits to prevent balance-of-payments difficulties from jeopardizing world trade.
Implicit in these measures was the old hope that the inequalities in international economic relations would in the end balance themselves out on their own, even though that might take some time. Capitalist accumulation, however, both national and international, is at the same time a process of concentration and centralization. Internationally the effects show up in the uneven development of individual capitalist countries and in shifts in their relative positions of power within the world economy. This uneven development is further accented by imperialist rivalry, giving one nation, or even one continent, the advantage of power over another. Under such circumstances one country grows rich while another grows poor, and trade relations become an instrument of international capital concentration.
The two world wars broke the hegemonic position of European capital in favor of American capital. Creditor nations became debtor nations, and vice versa. Gold shifted en masse to America, and trade relations were resumed only on the basis of long-term credits. The postwar chaos of exchange rates was replaced by a system of fixed exchange rates in parity with the gold-backed dollar, and the dollar was appointed to the status of an international money and a reserve currency. Because the dollar could be exchanged for a gold equivalent, its function as a reserve currency gave it the same status as gold. There was, however, always the danger that the price of gold would rise, which would cause all currencies to depreciate. But as long as the postwar boom continued, the likelihood of this was negligible, and the new monetary system seemed to meet the needs of the world economy as well.
Appearances were deceptive. While the vast capital destruction that had taken place in Europe and Asia made reconstruction a necessity, with a long period of economic boom ensuing, capitalist accumulation in America continued to drag its feet; anything even approximating full employment could be achieved only on the condition of government-induced supplementary production in to form of military expenditures. The result was a creeping inflation accelerated by imperialist interventions in all parts of the world. The modest accumulation rate of American capital was a sign that the rate of profit was low; this, however, was compensated for by the exportation of capital to countries where profitability was higher. American capital export, pre-eminently to Western European countries, added more steam to the economic up swing already in progress and hence for some time encountered no opposition.
The monetary policies of American governments favored the export of capital and at the same time furnished the financial means for imperialist power politics. While American capitalists bought up or established whole industries in the European countries, paper dollars were being accumulated in these countries as reserves. The result was a steady flow of gold back to Europe, which meant practically that the dollar lost some of its gold guarantee. As other countries became more competitive, the U.S. positive balance of trade, which had persisted for a long time, vanished, and the negative balance that ensued could be remedied neither by trade, the return flow back into the country of profits on exported capital, nor by the export of European capital to the United States. Ultimately, if the U.S. payments deficit persisted, a breakdown of capital trade relations was inevitable.
Monetary crisis again became the catchword, and the need for a new monetary system was voiced. But these proposals were only reactions to the existing difficulties, not their solution. When the economy had failed under the gold standard, its abolition was sure, it was then said, to bring about an improvement. When floating exchange rates only deepened the chaos in world trade, fixed exchange rates were adopted again. Whereas once there was no question but that the world currency be tied to gold, now this need was disputed and free exchange rates were considered the correct policy. Monetary policy has thus invariably been but a reflex reaction to economic developments that had gone out of control. It was conscious steering of economic policy by monetary means only in the imagination of monetary theorists. If at the national level capitalist control over the economy proved to be an illusion, it turned out to be even less possible to bring international commerce under control by means of monetary arrangements. Just as state-induced full employment only conceals, but does not relieve, the crisis undermining the system, so as the capitalist system decays, it drags the monetary system along with it. And if full employment can only be achieved through inflation when accumulation is inadequate, so inflation leads through the general interdependence of the world economy to its disintegration by forcing each individual nation to try to unload its problems onto others.
Bourgeois theory tries to explain inflation with the wayward assumption that demand exceeds supply. But the number of unemployed continues to rise, more and more plant is shut down, and still inflation goes on; its cause, therefore, cannot lie simply in excessive buying power. The cause lies elsewhere: in the drive, namely, to secure capital’s continued profitability despite growing public spending and the decline of instruments. The quest for more profits is also a factor determining capital exports, which are subsidized by an inflationary monetary policy. Capital must expand, and this means also geographically, with national rivalries and imperialist competition the result. Power politics is backed up by inflationary monetary policies, which are perhaps the best way to justify growing public expenditures, since they contain the promise of potential future profits. Once an inflationary course has been set and it is claimed to be the key to a specious social stability, it becomes increasingly difficult to abandon this course and return to traditional crisis mechanisms.
All warnings to the contrary, inflationary monetary policies were adopted not out of conviction but in deference to necessity. Started in the United States, they became a general phenomenon. Since a negative balance of payments in one country means a positive balance in another, the money reserves of the latter increase, and the money supply and credits expand along with them. Had the export of capital to the United States or U.S. export of its products increased commensurately, payments balances overall could have been squared. But total American spending consistently exceeded American revenue from international economic trade. One way to meet this problem might have been to cut back on American capital exports, reduce the costs of imperialist politics, and improve competitiveness on the commodity markets at the cost of the working population; but these measures would have further undermined the already unstable American economy, which was even then dependent on inflation.
These discrepancies in capitalist economic relations are telling signs that profitability of capital is not sufficient to enable all world capitalist countries to achieve at the same time an accumulation rate permitting full employment.
Each country’s share in total accumulation is not constant and will fluctuate over time. Capital flows into countries with the highest profit and interest rates. Since it is the profit motive that regulates economic development, there is no way to change this process; with regard to the economic contradictions it creates, all that is left is the hope that the trend will sooner or later shift course.
If this hope is deceived, attempts are initiated to use political means to break the persistent one-sidedness of economic development; but if accumulation is insufficient, the only way this can be done is to use political force to effect a redistribution of world profit. No nation can afford in the long run to remain indifferent to the payments deficit of the world’s greatest capitalist power, the ultimate consequence of which would be the collapse of world trade. All countries are as committed, if not more so, as the United States to the expansion of world trade and are therefore prepared to put aside all their reservations and make concessions that will help rescue the United States from its payments deficit. This readiness is what enabled the United States to cashier the Bretton Woods monetary system and abolish dollar convertibility.
So what had long been a national reality was now achieved on the international level as well; commodity money ceased to exist. Reserve currencies had been only partially convertible by the procedure of gold exchange based on the gold standard; but to the extent they were convertible (and that extent, moreover, was continuously diminishing), it was sufficient to prevent a general flight from currencies into gold, despite an accelerating inflation. The illusion of convertibility was sedulously maintained, e.g., through support of the official gold price (now by selling rather than buying gold), by the creation of other supposedly gold-guaranteed credits, i.e., the special drawing rights of the International Monetary Fund, and by holding the money price of gold separate from its price as a commodity. Even after dollar convertibility was abolished, the state of affairs that then arose was considered a temporary one, until such time as a new currency system could be devised in which gold would continue to play some role, if only a limited one.
The abolition of dollar convertibility and the ensuing need for a new monetary system seemed to substantiate a tendency toward a capitalist re-organization of the world economy, although with the wrong means of monetary policies, designed to bring market conditions in conformity with the needs of a more regulated world economy. In both socialist and bourgeois literature, the internationalization of capital concentration had always been linked with the abolition of money in its capitalist form. For instance, according to Hilferding, “under finance capital, capital loses its special capital character,” since the ultimate outcome would be the creation of an international “general cartel.” Capitalist production will then be regulated by a central plan which determines the whole of production in all its particular spheres.
Price determination will then be purely nominal, implying the distribution of the social product between the cartel-magnates on the one hand, and between the working population on the other hand. Price is then no longer a result of material relations between men, but a mere accounting devise for the distribution of goods by persons to persons. Money no longer plays a role. It can now disappear completely, for the distribution concerns itself with products and not with values. With the disappearance of the anarchic character of social production disappears the value character of commodities and therewith also money. Ludwig von Mises was less captivated by, yet still was apprehensive about this development, for he too believed that a world cartel was a possibility, with the destruction of money as its consequence, since “a single world currency bank or the world cartel would be able to expand currency circulation without limit.” He saw here problems which “perhaps point beyond the individualistic organization of production and distribution to new forms of collective organization of the economy of the society as a whole.”
At the national level it has become apparent that the market cannot be stabilized through the indirect means of monetary and fiscal policy, and that only direct measures of administrative price and income regulations could put an end to inflation. There exists then a tendency to adopt the concept of money like the one that prevails in the planned economies for the market economies as well. Although actually incompatible with the latter, since an effective price and income policy presupposes centralized control of all production and distribution, still this way of thinking indicates the undesired transformation of capitalism from an individualistic into a collective system such as temporarily existed at times of war under the name of “war socialism.”
As capitalism is disintegrating from within, so too money is becoming otiose, although the system continues to be based on it. According to Marx the accumulation and concentration of capital, and its transformation from private into share-capital would lead to a progressive socialization of capital.
This is the abolition of the capitalist mode of production within capitalist production itself, a self-destructive contradiction, which represents on its face a mere phase of transition to a new form of production. It manifests its contradictory nature by its effects. It establishes a monopoly in certain spheres and thereby challenges the interference of the state. It reproduces a new aristocracy of finance a new sort of parasite in the shape of promoters, speculators, and merely nominal directors: a whole system of swindling and cheating by means of corporation juggling, stock jobbing, and stock speculation. It is private production without the control of private property.
In such a situation capitalist society has only its own demise ahead of it. The state is forced to intervene in the market mechanism in ways that can only paralyze it; in a word, it is constrained to apply political measures divorcing the relations of production from its market relations in order to maintain at least the former. On the other hand, as the market mechanism disintegrates, it requires on its own account government interventions to prolong its own existence, i.e., individual capital entities and corporations need the authority of the state to ensure their profitability. Economic and political measures therefore coincide; capital becomes the government, and the government spells capital. State authority, which had always been dependent on and at the service of capital, is now fully identified with capital, and its first function is to maintain the exploitative relations that market relations can no longer guarantee.
Under the hegemony of monopoly capital, the average rate of profit, which is mediated by competition, is no longer able to regulate the market mechanism. Pricing, which is done in a relatively arbitrary fashion, results in the transfer of profits from competing enterprises to the monopolies. Although this promotes capital concentration and centralization, by itself it effects no change in the total mass of profits, unless in the process the productivity of labor also increases commensurately with the needs of accumulation. If this does not occur, monopolization hinders the emergence of market relations advantageous to a progressive accumulation and gives rise to deepening contradictions on the money and commodity markets. Growing monopolization is the expression of both the rise of capital and its fall, just as accumulation heralds its beginning and its end.
Since monopolization is a product of competition, it cannot be arrested. Monopolistic pricing distributes social profits in accordance with the claims of monopolies. Thus monopolistic pricing is already the pacesetter of government distribution policy, and it is only a question of which is more appropriate: whether the state will choose the indirect way of monetary policy or the direct way of price and wage policy. However, centralized control over the entire economy, such as exists in the planned economies, cannot be achieved without the total abolition of private capital property relations. But that means a social revolution that would sweep away state monopoly capitalism. Hilferding’s “general cartel” is therefore an illusion on both the national and international scale. State-capitalism destroys the economic basis for class rule for both competitive and monopoly capital, but it gives rise to a new class that rules by political means alone to assume the required control over production and distribution. Present monetary policy reflects the double-faced nature of the mixed economy, its progressive nationalization of production within existing property relations, and the resulting sharpening conflict between the real needs of society and the accumulation needs of capital. On the one hand, money is supposed to function as an instrument of deliberate and conscious economic management, but on the other it must perforce reflect existing relations of production and the resultant distribution of the social product. It is expected to serve two masters, so to speak, and in doing so serves both inadequately, as is plain from the increasingly unproductive use of labor and capital and the resultant destruction of money as the incarnation of capital production as value relations.
Domestically a nation’s money is valued in terms of its buying power; it makes no difference if it is commodity money or symbolic money. Nowadays symbolic money is even coming to be regarded as superfluous, and a future is envisaged with electronic bank transactions effecting cashless and checkless payments. Internationally, however, the situation is different. At least some symbolic money must be convertible into commodity money to cover the balance of payments deficits that arise in international trade. The dollar was formerly used as a reserve currency because of its convertibility into gold. But when convertibility was abolished, with it went the fixed reference point to which all currencies had been pegged; henceforth the value of these currencies depended on the shifting supply and demand situation on the market.
If the world were a single nation, the national monetary system could become an international monetary system. Commodity money and gold reserves would then be superfluous, and the money market could be controlled by government regulations. In the real world of competitive capitalist nations, however, this is not possible, and any monetary policy based on international agreements has its limits in time. Thus the fixed exchange rates of the Bretton Woods system had a stabilizing effect as long as the real instability of the world economy as a whole made every nation a debtor to the United States. But the United States was unable to maintain its position of absolute hegemony by further rapid capitalist accumulation. The reaction against the developing crisis led to a dollar inflation, with the international monetary crisis as its product.
Capitalism has been plagued by economic crises, with their accompanying monetary repercussions, throughout its history. But still the illusion persists, stronger even than before, that the conflicting interests the crisis has brought to the surface can be managed through negotiations. In the many international conferences that have been called to discuss the world monetary system, the world seems to be viewed as if it were already one nation, and words about the need for international cooperation flow on endlessly as competition grows sharper, drawing monetary policy along with it. True, the international economy has for quite a while now exhibited a degree of integration and mutual dependence such that every rising trend is felt, if to an uneven degree, throughout the world, and every serious crisis becomes a crisis worldwide as well. There is a need, therefore, for co-operation; but the way capitalism is currently organized, i.e., predominantly on a national basis, precludes hammering out any common interests that go beyond the trivial.
Thus the world monetary crisis precipitated by the abolition of dollar convertibility showed that not only generally but in monetary policy as well, national needs take precedence over international ones. The United States was neither willing nor able to abandon its inflationary course and sought to resolve its balance of payments difficulties at the expense of other nations. To a point this was quite possible, since sometimes nations are willing to endure disadvantages to avoid even greater losses. The declining competitiveness of American capital contributed to the U.S. balance of payments deficit, but this could be alleviated to some degree by the up-valuation of other currencies. Under the Bretton Woods agreements, all currencies were at parity with the dollar inflation, manifested as a balance of payments deficit, reduced the dollar’s exchange rate against other currencies, To maintain the parity of their own currencies, the central banks of other nations were obliged to buy up surplus dollars, thereby adding fuel to inflation on their own territory. To keep inflation within bounds they had to up-value their own currencies with respect to the dollar, although this made their own exports less competitive with American export products. They had to choose, therefore, between two evils: inflation, or a decline in exports. In some respects the decision was theirs, but in others it was imposed on them.
The United States was able to force the revaluation of other currencies and to make arrangements that would allow exchange rates to fluctuate over a wider range. However, the net effect of all this was only a reapportionment of world trade, with one nation’s gain being another nation’s loss. The volume of the world economy and profitability remained as they were. The general view now is that the present monetary crisis will be with us for some time, with temporary measures applied here and there until a new world monetary system can be fashioned that will better meet the needs of the capitalist world economy than did the former one.
It is of course an illusion to assume that a monetary system can be found that will subordinate the interests of all countries to those of the United States. The acceptance of American monetary and trade policies, whether voluntary or not, has been contingent on the relative prosperity of Japan and the Western European countries compared with the United States, and it can only be continued as long as this prosperity lasts. But signs are multiplying that a decline is already beginning that will mean these countries will no longer be either willing or able to make concessions. As long as the United States stands firm on its position that autonomous national economic policy, with its objective of more or less full employment, cannot be sacrificed to the interests and ends of a balance of payments equilibrium, other nations will be forced to maintain social stability by means of inflation and deficit financing, while at the international level resuming their competitive battle of all against all.
Of course, how this new monetary system is going to be created without squaring payments balances remains a riddle, unless the countries with positive balances are willing to toss them down the drain by writing off the deficits of other countries. In a certain sense this was in fact what already had been happening when the American deficit was translated into the monetary reserves of other countries. And although surplus dollars, in contrast to gold, flowed back onto American money markets when other nations purchased interest-bearing government bonds, that interest is not an adequate compensation for the permanent danger of further depreciations of the dollar. With no gold backing the dollar represents a claim on the United States that must diminish in value as inflation continues, whereas gold retains its value, determined as it is by production costs. Although it has been assumed that the abolition of the gold reserves would reduce the price of gold on the gold market, which has only a limited demand, it has occurred to no one to try this experiment seriously. The United States was also not willing to stand firm on dollar convertibility down to the last gold bar, but instead abolished convertibility to save what gold remained.
Even with the dollar no longer convertible, gold retains its function as commodity money. Other commodities could also perform the same function, however, more and more, suggestions are being heard that dollar surpluses should be exchanged for shares in American companies, and the Japanese central bank is considering using its surplus dollars as loans to Japanese businessmen to invest in the United States. The American deficit would thus become an instrument of capital export for other countries, as it had been in the past for America, and a balance of payments equilibrium would be effected through the proliferation of multinational concerns. If, however, nothing is changed in the existing trade relations, more deficits would bring about a further drain on American capital and make its situation, already precarious, much more so, since the profits of the multinationals would flow back into the countries of their owners. Not much is to be expected, therefore, from measures in this direction. It is more likely that attempts will be made to find compromise solutions through the International Monetary Fund, which will maintain the convertibility of the dollar into other currencies even without gold backing. The hope is still sustained that the problem will solve itself given enough time. The mechanism of artificial reserves and special drawing rights helps by gaining time; the latter was devised to utilize existing gold and currency reserves to give deficit countries a chance to square their balance of payments under long-term conditions.
But any international agreements to this end assume that current economic difficulties will not degenerate into a new world crisis. If they do, any world monetary system devised will come tumbling down, as happened in the last great crisis. World money has already gone the way of commodity money, even though the dollar must perforce continue to perform he function of a world currency without in fact being so any longer. This demise of money in its traditional form is the inevitable consequence of the dissolution of the national and international autonomy of the market and the attendant progressive decay of the capitalist economic system. These are the woes and travails of the bourgeoisie, however, although they are borne on the backs of the workers. Capital can live neither with money nor without it, and its day, like that of money itself is long overdue. The final abolition of money will be a task for socialism to resolve.
1. Theorie des Geldes und der Umlaufsmittel, 1912.
2. Staatlichte Theorie des Geldes, 1905.
3. Ökonomik der Transformationsperiode, 1922, p. 167.
4. The General Theory of Employment, Interest and Money, 1936.
5. Das Finanzkapital, 1910, pp. 321.
6. Theorie des Geldes und der Umlaufsmittel, p. 476.
7. K. Marx. Capital, Vol. 3, Kerr ed. p. 519.
8. D. W. Richardson, Electric Money. Evolution of an Electronic Funds-Transfer System, 1970. “There is no question,” writes J. Flint in The New York Times of May 31, 1977, “that a revolution or at least an evolution is under way. The goal is to win by electronics the $1,000 billion that consumers keep in banks, savings and loan associations and credit unions, and to hold down always growing costs by eliminating paper processing. But arguments rage over the success or failure of electronic funds transfer systems – or F. F. T. as the process is known in bankers’ jargon – the directions taken and the benefits or dangers for consumers, ‘We have passed the point of no return,’ said J. J. Poppen, a vice president of Booz, Mien & Hamilton, management consultants. ‘We are reaching for the forms of full implementation, like it or not.’ But he sees a final F. F. T. victory as much as a quarter century away.”