Money as a Means of Payment

Credit relations split the act of buying from the act of paying. The development of credit, therefore, gives rise to a new function of money: money as a means of payment.

Credit allows me to purchase a commodity with credit rather than with money. But in doing so, I incur a debt that is payable in money. The capitalists actually purchase the commodity labor power with credit rather than money. When I sell my labor power to an industrial capitalist, I have to work for a week or more before I collect my wage in money form. It’s not unheard of for industrial capitalists to go bankrupt and fail to pay the debts they owe the workers for the labor power they bought with credit.

Not all debts payable in money are created by the purchase of commodities with credit. For example, tax liabilities payable to the state under conditions of capitalist production have to be paid for in money. In pre-capitalist times, taxes were sometimes payable in kind, but under capitalism they are almost always payable in money. Rent liabilities are also payable in money under capitalist conditions.

Under the feudal system of production that dominated Europe in the centuries before the rise of capitalism, feudal ground rents were either payable in labor, the inserfed peasants having to work on the lord’s lands for part of the workweek, or they were payable in kind. During the transition from feudalism to capitalism, rents payable in labor or kind were replaced by rents payable in money. (1)

The history of credit, Marx pointed out, can be divided into two stages. In pre-capitalist times, money lenders lent money to members of the property-owning classes for purposes of financing personal consumption, or to small commodity producers. These money lenders were known as usurers, and their capital was called usurers’ capital. (2) The interest rates they charged were far above the interest rates that prevailed later under the capitalist mode of production. The exploitation by usurers’ capital of small peasants and other small commodity producers was extremely brutal. That is why pre-capitalist money lenders were so widely hated.

Peasants, for example, often fell into debt to the landowners and had to borrow money either from the landowners themselves, who therefore doubled as usurers, or from a separate class of usurers who charged high interest rates that kept their victims continuously in debt. During the transition from feudalism or other pre-capitalist modes of production to capitalism, peasants were frequently reduced to debt slaves. In this way, usury capital helped to dissolve the pre-capitalist community and create the modern proletariat as a class with nothing to sell but its labor power.

Marx noted that with the rise of capitalist production, the credit system became subordinated to the needs of capitalism. This transition was marked by a considerable fall in the rate of interest and the rise of the modern banking system. The banks become the pivot of the new capitalist credit system, which from then on served the needs of capitalist production. (3) With the development of the capitalist credit system, the metallic hoard—and later the hoards of token money—were increasingly centralized in the banks. (4)

Credit money

The development of the modern credit system gave rise to a new form of money: credit money. Credit money is an IOU that can be transferred from one person to another to either purchase commodities or make payments. These IOUs are generally issued by the banks, and increasingly replace in circulation coins made of money metals such as gold, and later legal-tender token money issued by the state monetary authority.

Credit money combines credit relations with money relations. Credit money can replace gold and legal-tender token money as a means of purchases or payments. However, the basic function of money, the universal equivalent that measures the exchange values of all commodities in terms of its use value, can only be played by a special money commodity—such as gold. In the basic monetary function, gold cannot be replaced by either token money or credit money.

Credit money is always payable in another form of money, either in full-weight gold coins, bullion or nowadays in legal-tender “fiat money”—token money—issued by the state’s “monetary authority.”

In the days of Marx, credit was sometimes called “circulating credit.” It has generally taken two forms. (5) During the 18th and early 19th century, banknotes were widely used as credit money. Even before the 18th century, bankers sometimes issued a note to a depositor confirming that a certain sum of money in either coin or bullion had been deposited at the bank. (6) You could if you wished then use such notes to make purchases or pay off your debts in place of actual gold or silver.

The next, and far more important, step was when banks began to make loans or discounted commercial paper not in gold or silver coins but in their banknotes instead. This enabled the banks to create a supply of credit money in the form of banknotes above and beyond the actual amount of money that they had on hand in their vaults. This practice is called fractional reserve banking.

The bankers learned from experience that all owners of banknotes would not normally demand redemption of their banknotes at the same time. However, when a bank’s credit was shaken for one reason or another, a “run” would develop on the bank. The owners of the bank’s notes would attempt to convert the bank’s notes into “specie”—gold or silver coin. The bank would fail and the banknotes would then become worthless.

Originally, such banknotes were issued by private commercial banks. Gradually, the central banks—in the early days sometimes called national banks—achieved a monopoly on the issue of banknotes. (7) Since the government kept its own bank account at the national bank, these banks became increasingly intertwined with the state power. They were thus gradually transformed from corporate, for-profit banks into their modern incarnation as governmental monetary authorities. (8)

During this transition, the national cum central banks, instead of concentrating on making the maximum profit for their shareholders, aimed at stabilizing the currency and, insomuch as it is possible under capitalism, the economy. When the central banks acquired a monopoly on the issuing of banknotes, they became the sole “banks of issue.”

This made it very easy for the government to convert the credit money of the central banks into token money by simply ending the obligation of the central bank to convert their notes into gold on demand. This happened in England for the first time as early as the Bank Restriction Act of 1797, which converted the banknotes of the Bank of England into legal-tender token money.

After the world war that followed the French Revolution ended, the convertibility of the notes was restored. This renewed convertibility into gold of the Bank of England’s banknotes lasted for almost a century but was suspended again when the next world war broke out in 1914.

The evolution of banknotes into modern paper money leads to the illusion that token money evolved from credit money and represents an ultra-modern form of money. But the opposite is the case. As Marx demonstrated in the first three chapters of volume I of “Capital,” token money first arose out of coins that, though they were made of metals that functioned as money commodities, became worn down below their legal weight in circulation.

Credit money, in contrast, pre-supposes the rise of the modern capitalist credit system. The “banknotes” issued by today’s central banks are simply a form of token money. They will again become credit money only if and when their convertibility into gold is restored. (9)

The other main form of credit money is deposit money that can be transferred from person to person either by check or today through electronic methods. Like with banknotes, the banks make loans or discount commercial paper in their deposit money. The economists sometimes call the credit money that is created by the banks through loans and discounts, without actually issuing banknotes, “bank money.” (10)

These operations swell the mass of deposit or bank money far beyond the cash they have either in the form of vault cash or on deposit with the central bank. Like was the case with banknotes, a relatively small hoard of “hard cash” can be pyramided up into a much larger mass of credit money. Remember though, last week I showed that the amount of token money—measured in terms of gold, real money that token money actually represents—is limited by the amount of gold that physically exists within a country and on the world market.

However, a considerable “multiple” of credit money can be created on top of the token money created by the state monetary authority. This makes possible a development of the market far beyond that which would be possible with metallic and token money alone. This enables modern capitalist production with its tendency to expand production without limit to overcome the “metal barrier” at one level, which is built into the commodity foundations of capitalist production. Credit money, therefore, makes possible overproduction on a gigantic scale. (11) For this reason, modern crises of overproduction appear only after the modern capitalist credit system and its system of credit money has achieved a considerable degree of development.

Unlike token money, which is generally issued only by the state or its monetary authority such as the central bank, credit money is generally issued by private capitalists, whose aim like all other capitalists is profit. If such profit-motivated private capitalists attempted to issue their own token money, the token money would quickly become worthless, because the desire for profit by private capitalists can never be quenched. If they could issue token money, private capitalists would issue it in unlimited amounts leading to its complete collapse.

Limitations on the amount of credit money that can be created

If credit money were limited only by the amount of commodities in circulation, it would be able to banish crises of overproduction. But credit money cannot achieve this because it is payable in money, not commodities. Ultimately, the amount of credit money that can be created is limited by the amount of either metallic or token money in existence, although the maximum amount of credit money that can be created is much greater than the amount of metallic money or token money in existence. (12)

And since the amount of token money that can be created is itself limited through the operations of basic economic laws by the amount of metallic money in existence, in the final analysis so is the amount of credit money. The total quantity of credit money cannot exceed a certain multiple of the amount of metallic money.

What determines that multiple? Like all forms of credit, credit money runs into the limit that a piece of money—whether metallic or token—cannot discharge two debts at the same time. If the mass of credit money keeps on growing relative to the mass of either the metallic or token money it is payable in, it will implode sooner or later. At some point, the issuers of credit money will find themselves unable to raise enough metallic or token money to redeem all the credit money they have created.

The moment that owners of credit money begin to sense that the issuers of credit money can no longer meet all the demands to redeem the credit money, a panic develops. Such panics are sometimes called “monetary crises.” The owners of credit money attempt all at once to convert their credit money into hard cash—whether gold or legal-tender paper money. The end result is that a portion of the credit money is destroyed. Or as the bourgeois economists say, the money supply contracts.

How the modern credit system and credit money makes possible the economizing of metallic and token money

In last week’s post, I noted that the ability to economize on either gold coin or token money through increasing its velocity of circulation runs into the limit that a single coin or currency note can only make one purchase at one time.

“The fact that a number of sales take place simultaneously, and side by side,” Marx writes in chapter 3, volume I of “Capital,” “limits the extent to which coin can be replaced by the rapidity of currency.” However, Marx goes on to explain, this becomes a “new lever in economising the means of payment. In proportion as payments are concentrated at one spot, special institutions and methods are developed for their liquidation. Such in the middle ages were the virements at Lyons. The debts due to A from B, to B from C, to C from A, and so on, have only to be confronted with each other, in order to annul each other to a certain extent like positive and negative quantities. There thus remains only a single balance to pay. The greater the amount of the payments concentrated, the less is this balance relatively to that amount, and the less is the mass of the means of payment in circulation.”

These kind of clearing agreements, as they are known, enable the market to be extended beyond what could otherwise be supported by a given quantity of money. As capitalism develops, clearing agreements become centralized in the hands of the banking system. For well more than a century now, most payments in the business world have been settled by check, not by metallic or banknote money. Capitalist A has to discharge a debt to capitalist B. A writes a check that instructs his banker to pay B. B for his part rather than cash the check will deposit A’s check with his or her own banker. If A and B share the same banker, no money will actually change hands. The bank will simply debit A’s account and credit B’s, a purely bookkeeping transaction.

But the banks themselves take this one step further. They form clearing houses. Nowadays, these clearing houses are managed by the central bank. In any given day, many checks are written against a given bank, but on the same day many other checks are being deposited in the same bank. There is no need to for a bank to make a cash payment every time a check is written against it.

Instead, what the banks have to do is get together in the clearing house and calculate the overall net balances. The vast majority of checks will simply cancel each other out. Only the net balances have to be paid in cash. If the reserves of the bank(s) that need to come up with cash were to drop below the required level as a result of making the payments, they can borrow the money overnight from banks with a surplus of reserves at the “federal funds” rate of interest, further economizing on the need for actual cash on hand.

In this way, the banks can support a vast mass of transactions with a very small amount of cash. This makes possible a vast expansion of the market with a given base of metallic money.

But the market cannot overcome the ultimate limit set by the fact that a single piece of money, whether metallic or token, can only discharge one debt at a time. The whole system of payments becomes more and more artificial, shaky and unstable as the quantity of credit money grows relative to metallic and token money.

“The function of money as the means of payment,” Marx writes in chapter 3 of volume I of “Capital,” “implies a contradiction without a terminus medius. He continues: “In so far as the payments balance one another, money functions only ideally as money of account, as a measure of value. In so far as actual payments have to be made, money does not serve as a circulating medium, as a mere transient agent in the interchange of products, but as the individual incarnation of social labour, as the independent form of existence of exchange-value, as the universal commodity. This contradiction comes to a head in those phases of industrial and commercial crises which are known as monetary crises. (13) Such a crisis occurs only where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed. Whenever there is a general and extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed, from its merely ideal shape of money of account, into hard cash. Profane commodities can no longer replace it. The use-value of commodities becomes valueless, and their value vanishes in the presence of its own independent form. On the eve of the crisis, the bourgeois, with the self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now the cry is everywhere: money alone is a commodity! As the hart pants after fresh water, so pants his soul after money, the only wealth. In a crisis, the antithesis between commodities and their value-form, money, becomes heightened into an absolute contradiction. Hence, in such events, the form under which money appears is of no importance. The money famine continues, whether payments have to be made in gold or in credit money such as bank notes.”

The dollar system

I should make a few observations about the above quote. In Marx’s time, only gold or banknotes convertible into gold, such as the banknotes of the Bank of England, were widely accepted as a means of payment on the world market. However, in today’s world the U.S. paper dollar, though it is not convertible into gold, and is therefore token money, not credit money, is widely accepted as a means of payment. The world economy has become “dollarized.”

Some of the more brazen champions of U.S. imperialism have argued that the huge debt the United States has acquired since the late 1980s through its trade and balance of payments deficits is not a danger because “we—U.S. imperialism—can pay our debts in our own currency.” Don’t you wish you could use your computer printer to print money that you could pay your debts with? Since the U.S. government happens to own a printing press that prints dollars that “we can pay our debts with”—a privilege denied to everybody else—”we don’t have to worry about our foreign debt.”

This argument, though it contains an element of truth, goes much too far. Take the example of a government that issues its own paper currency. Does this mean that such a government doesn’t have to collect taxes because it can always pay for the commodities including labor power it must purchase through its newly printed paper money? It wouldn’t be able to get away with that practice for very long, however, since such paper money would quickly fall into disrepute and become worthless. (14)

The fact that so many debts are denominated in dollars, though the dollar represents a variable not a constant amount of real money—gold—on the world market, does give U.S. imperialism extraordinary power. (15)

This is shown by the evolution of the current crisis. The first phase of the crisis began in August 2007 when U.S. credit markets first froze up. The immediate reason for the freeze-up was the dawning realization by market traders that many of the “sub-prime” mortgages had been issued to home buyers who couldn’t possibly afford to pay them. This meant that the huge mass of securities that had been issued on the basis that these mortgages were collectible were in fact “toxic assets.” In reality, sub-prime mortgages were simply the weakest link in a huge chain of credit. Like all chains, it broke first at its weakest link.

In earlier times, a huge scramble for “hard cash” such as occurred in August 2007 would have caused world commodity prices to plummet! But “the markets”—that is, the capitalists that speculate on changes in the prices of stocks, bonds, commodities, and so on, assumed that the U.S. Federal Reserve Board would simply run the “printing presses” to prevent the international chain of credit from collapsing. That would have meant a serious global recession, after all, and the Fed certainly wouldn’t allow that to happen, they reasoned.

Instead, the speculators dumped dollars and bought gold and commodities, or rather contracts to receive them—such speculators have no intention of actually receiving the physical commodities. Where would they store the oil, for example? After only briefly plunging, commodity price quickly reversed direction and started to soar instead. As the dollar declined against gold—that is, as it depreciated—commodity prices in terms of dollars such as oil soared. Oil rose from a price of about $75 per barrel just before the initial panic of August 2007 to $147 at one point the following July.

But figures issued by the Federal Reserve Bank of St. Louis show that the Fed did not actually create the huge mass of new token money that the speculators were counting on. Instead, the Fed played a trick on the market. (16) It redirected credit to places where the chain of payments was breaking, much like the captain of a leaky ship tries to keep the ship afloat by patching the individual leaks. The actual growth rate of the quantity of dollar token money barely rose.

However, since the the market expected the Fed to create a huge new mass of token money, the dollar indeed depreciated: The price of gold bullion rose from about $672 when the crisis first broke out in August 2007 to over $1,000 at one point in March 2008 and remained generally around $900, sometimes higher, through August 2008. Commodity prices responded in the natural way. Since the U.S. paper dollar now represented less real money—gold—primary commodity prices in terms of paper dollars rose.

This, however, only made the credit strain worse. As prices rose, more dollars were needed to circulate the mass of commodities in the world market, and the debts payable in the U.S. dollars rose. But the amount of actual token money necessary to support the increased dollar prices of commodities and pay the rising dollar-denominated debt rose very little. When the market participants realized what was really happening, a panic far worse than the one of August 2007 hit the global credit markets last September triggering the current worldwide depression in industrial production and world trade.

When the panic broke out last September, the dollar, which had been sinking against other currencies such as the euro, pound and yen and against gold, suddenly reversed direction and started to soar. For example, the price of gold fell from over $964 on July 12, 2008, to less than $724 on October 31.

The dollar hadn’t completely recovered the gold value it had lost after the initial crisis of August 2007, but it had staged a considerable recovery all the same. Like is always the case in a crisis, “hard cash”—in this case in the form of the U.S. dollar—was king. (17) The hope expressed by some Marxists and anti-imperialists that the dollar system was finally on the way out proved once again premature.

At this point, the Fed itself panicked and began to create token money at a rate that in the absence of this extraordinary demand for dollars as a means of payment would imply a five- or six-digit annual rate of inflation! The Fed resorted to this desperate measure because it for good reason feared a bank run far worse than anything ever seen before in the storied history of capitalist panics, including ones that occurred during the great crisis of 1929-33 itself.

If such a bank run had developed, the hugely inflated mass of credit money, and credit on top of that, would have imploded. The “money supply” would have collapsed much like it did during the 1929-33 crisis. This would have led to a disaster far worse than anything that actually occurred in the early 1930s. Not only would there have been almost unimaginable levels of unemployment, but there would have been widespread starvation beyond anything that actually occurred in the early 1930s.

Why is this true? Society today is far more dependent on credit and credit money than it was back in the 1930s. Eighty years ago when the Great Depression began, there were neither credit cards or debit cards. In those days, people mostly used cash to purchase food and other essential daily commodities.

What would have happened last fall if retail businesses including grocery stores no longer accepted credit cards, debit cards or checks and instead demanded payment in paper dollars or coins, and you couldn’t withdraw money from your bank account because your bank had failed? Not only would you be out of a job, you would soon have nothing to eat! This is why the Fed had no alternative but to resort to the printing presses.

The temporary strength of the dollar based on the panic-driven demand for dollars as a means of payment has emboldened the new Obama administration to launch its so-called $800 billion “stimulus plan”—while at the same time continuing to spend more hundreds of billions on the occupations and wars against the people of Afghanistan, Iraq and other countries that began under the hated Bush administration. The Obama administration hopes the “monetarily effective demand” that will be created by this huge deficit spending will quickly end the current global depression in production and trade and start a new upturn in the worldwide industrial cycle.

The European Central Bank, in contrast, has been more cautious than the Fed, and the European governments are showing a marked reluctance to engage in the level of deficit spending the Obama administration is planning. Indeed, the Obama government has been complaining that the Europeans are not joining the effort to stimulate the world economy but are counting on the United States to carry the entire burden.

There has been some discussion on the Internet about this. What we have to remember is that far fewer debts are denominated in euros on the world market than are denominated in dollars. If the euro were to keep falling against the dollar like it did during last autumn’s panic, a lot of European capitalists who have assets denominated in euros but debts denominated in dollars will face bankruptcy. This is why I suspect the Europeans are resisting the demands of the Obama administration to borrow, print and spend more money than they already are.

The risk, however, that both the Fed and the Obama administration are running is that as the panic fades the dollar will resume its fall against gold and other currencies. If at some point the holders of dollars suddenly panic in the face of a huge explosion in the supply of U.S. token dollars along with the gigantic U.S. deficits now calculated in the trillions of dollars, combined now with the Fed’s move to “monetize” a good part this debt by buying long-term Treasury securities, the dollar might become so discredited that private capitalists will start to refuse to write contracts that are payable in U.S. dollars.

The Obama administration and Fed are not unaware of these dangers, as indicated by Bernanke’s recent statements to Congress about the need to quickly reverse course on expansion of the Fed’s balance sheet once dollar prices again begin to surge, and by Obama’s projected halving of the budget deficit over the next four years.

But such a policy reversal could easily dump the economy into another deep slump such as occurred when the Roosevelt administration reversed course leading to the downturn of 1937-38. In those days, too, there was a huge increase in bank reserves that led to fears in some circles about inflation. However, unlike today, the big increase in bank reserves in the mid-1930s represented an increase in the supply of gold money in the United States. Today, the explosion of the “monetary base” and bank reserves represents an explosion in the quantity of token money! There is more than “a little difference here,” which I will explore further next week.

No alternative to the dollar?

The supporters of the current dollarized international monetary system argue that there is “no alternative” to the dollar. The dollar system is safe, they say, no matter how much the Fed and the U.S. government abuse it.

They forget that there is an alternative to the dollar. Even if no other paper currency can replace the dollar as the medium in which international commodity prices are quoted, contracts are negotiated and payments are made, there is always the money commodity gold. (18) As the above quote from Marx illustrates, gold is after all the most “natural” medium to make payments. And it is always the “coin of last resort,” as Marx called it. Gold has fully retained its role as the universal measure of the exchange value of commodities in terms of its own use value for all the reasons that I have been examining in the preceding posts.

If the dollar becomes sufficiently discredited, private capitalists and lenders will start demanding that contracts be written that are payable in a certain fixed quantity of gold, not paper dollars. If this happens, U.S. imperialism will be in a position of a government that thought that it didn’t have to levy taxes because it could always meet it expenses through simply printing money.

Next week, I will examine the division of the profit between interest and the profit of enterprise. Readers will then be able to see that unfortunate consequences may well emerge from the Fed’s dollar-printing spree even if the dollar is not dethroned as the world’s main means of payment.

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1 Under the feudal system, the serfs would often have to work on the lord’s lands for a certain number of days a week leaving only a limited amount of time to work on their own land. Here the division of the working day into necessary labor, the time the serfs get to work for themselves on their own land, and surplus labor, the time that the serfs are forced to work on the lord’s land, appears right on the surface of economic life. However, under both slavery and capitalism this division of the workday into necessary labor and surplus labor is hidden, though in opposite ways.

Under slavery, it appears as though the slave isn’t paid at all. But this is an illusion. If the slave does not receive some means of substance, the slave will perish in a few days or at most weeks. So a certain amount of the slave’s labor is paid after all.

Under capitalism, in contrast, the workers’ labor appears to be fully paid for. But in reality, the workers sell the capitalists their labor power, not their labor. Even if the labor power is fully paid for, the difference between the amount of labor the wage worker performs and the value of the labor power, means that just like the serf, the workers must work part of the workday for the boss and only part of the workday for themselves.

2 In recent years, especially as U.S. capitalism and capitalism in the imperialist countries in general have entered a phase of accelerated economic decay, sometimes called “de-industrialization,” consumer credit outstanding has grown to an extraordinary extent. Most of the consumer credit consists of mortgage credit, including so-called “second mortgages,” auto loans, and credit card debt.

Interest rates—especially those charged on “late” credit card debt—more and more resemble pre-capitalist usury. The rates charged on consumer loans are much higher than the rate charged to more “creditworthy” industrial corporations—the so-called “prime rate.” U.S. banks have concentrated in recent years on consumer loans rather than industrial loans, since the usury-like interest charges they collect are highly profitable for banks—as long, of course, as these interest charges are collectible.

This whole phenomenon is sometimes called “financialization.” As the capitalist credit system enters into its senile decay, it combines elements of the credit system of rising capitalism with elements of pre-capitalist usury. While temporarily propping up of their standard of living in the face of industrial decline, financialization has increasingly turned millions of U.S. workers into debt slaves, who now face impoverishment through loss of income, foreclosures, evictions and repossessions.

3 Unlike today, in the 18th and 19th centuries, and well into the 20th century, the commercial banks only did business with their fellow capitalists, whether as depositors or borrowers. To the extent the workers had a relationship with banks at all, it was with specially organized saving banks. Today, the system of saving banks is being increasingly absorbed into the commercial banking system, and the commercial banks themselves are simply branches of universal banks that carry out investment banking and even insurance business as well.

Unlike in Marx’s day, especially in the imperialist countries, workers are quite likely to have bank accounts with and take out loans from the commercial banks. With the rise of the modern system of credit and debit cards, made possible by the revolution in computer technology, petty retail transactions, including the buying of morning breakfast and coffee, are increasingly carried out with credit cards. In effect, workers are taking out loans from the commercial banks that issue the cards to buy their morning java!

And if you don’t remain current on your credit cards—which the banks, just like the usurers in days of old, hope you don’t—you will have to pay double-digit interest rates on your bank loans. One of the features of the current crisis is that it involves a crisis of consumer credit to a much greater extent than past crises did. Indebted workers, in addition to the traditional layoffs, now have to face foreclosures, evictions and repossessions as well.

4 During the rise of the capitalist credit system, the precious metals were concentrated first in the hands of the commercial banks and then increasingly in the hands of central banks. Under the international gold standard that prevailed from the 1870s until 1914, the great bulk of the global metallic hoard was centralized in the hands of the central banks.

In recent decades, however, things have moved in the reverse direction. Under Washington’s pressure, the central banks, the finance ministries and the IMF have been selling off their gold reserves to private hoarders. Professional economists advising Washington and the IMF, who are trained in the marginalist theory of value, claim that these gold sales will progressively demonetize gold. By destroying its value as money, these economists claim, the value of gold will plummet and the U.S. paper dollar will establish itself as the universal measure of value in its place.

Nothing of the sort has occurred for reasons that should be apparent to the readers who have followed my—actually Marx’s—arguments this far. The U.S. paper dollar is simply a form of token money that represents real money—gold—in circulation. Therefore, the dollar can never replace gold as the commodity that in its material use value measures the exchange value of all other commodities.

The practical effect of these gold sales, combined with the failure of the central banks and finance ministries to rebuild their increasingly depleted metallic hoards, has been the increasing decentralization of the world’s metallic hoard. This has reversed the whole trend of increased centralization of the world’s metallic hoard that marked the evolution of capitalism from its beginning well into the imperialist epoch.

Since the metallic hoard centralized in the hands of states and central banks is their ultimate weapon against crises, the current crisis is likely to be only the first in a series of increasingly violent crises. Therefore, alongside modern consumer credit, which increasingly resembles old-time usury, we have the resurgence of the private gold hoarder, or miser, who was also characteristic of pre-capitalist societies.

5 In principle, any negotiable promissory note that can be used to either purchase commodities or make payments can function as credit money. In the past, bills of exchange, for example—a form of commercial paper—sometimes directly functioned as credit money.

6 In England, the forerunners of the commercial bankers were known as goldsmiths, because they evolved from craftsman who worked with gold.

7 In Britain to this day, a few Scottish banks retain limited note-issuing authority. These banknotes are convertible into legal-tender Bank of England notes on demand. Banks that have the right to issue notes are known as “banks of issue.” Today, the central banks, with the very limited exception noted above, have a monopoly on banknote issue. However, these modern banknotes are actually state-issued paper money that is thinly disguised as old-fashioned banknotes in an attempt to increase their none-to-great credibility.

8 Today, most central banks are owned by the state. The Bank of England was nationalized in 1946. In the United States, however, the 12 Federal Reserve Banks are private corporations owned by the commercial banks that function in the 12 Federal Reserve districts. However, since the New Deal, the control of the Federal Reserve Banks has been centralized in the hands of the Federal Reserve Board, officially called the Federal Reserve Board of Governors, which is an agency of the U.S. government.

This body is headquartered in Washington, D.C. Its members, including its chairman—so far, all chairpersons have been men—are nominated by the president and confirmed by the U.S. Senate just like U.S. cabinet members and Supreme Court justices. Unlike the Supreme Court justices, however, who serve for life, or cabinet members, who serve at the pleasure of the president, the Federal Reserve Board governors serve for fixed terms. This entire complex bureaucratic and financial machine is known as the Federal Reserve System. It is nicknamed “the Fed” for short.

9 The U.S. government is especially opposed to any suggestion to restore the international gold standard in any form. If the gold standard were to be reestablished under current conditions, the huge debt of the United States would then be denominated in gold rather than in the U.S. paper dollars the U.S. government can print and put into circulation through the Fed. For similar reasons, the U.S. government is unlikely to respond with any enthusiasm to the proposal of China’s central bank head, Zhou Xiaochuan, to establish an internationally controlled currency. If such a a currency system was created that was not controlled by the U.S. government, the United States would lose its cherished privilege of being able to pay its huge foreign debts in its own currency.

10 The bourgeois economists sometimes call deposit money “inside money,” as opposed to actual paper money and coins, which they call “outside money.”

11 Credit money is actually a powerful revolutionary force pushing capitalist production beyond its capitalistically determined limits and therefore towards its inevitable transformation into a higher mode of production. For this reason, both the Austrian school of marginalist economists and Milton Friedman hated credit money and demanded that it be abolished. Unlike many economists of the Austrian school, who want to restore the gold standard, Friedman advocated the replacement of both gold and credit money with state-issued token money.

The demand for the abolishment of credit money raised by these types of bourgeois economists is both reactionary and utopian. Even if the state attempted to suppress credit money through legislation, the business world would undoubtedly invent new forms of credit money. For example, in England after the Bank Act of 1844 progressively ended the right of private commercial banks to issue their own banknotes, the banks simply shifted over to the deposit system—the use of checks instead of banknotes. One form of credit money simply replaced another.

12 When I use the term metallic money, I mean either full-weight coins or bullion made of the money commodity, whether silver or gold. Or what comes to exactly the same thing, when I say metallic money I mean actual money material.

13 By industrial and commercial crises, Marx meant the periodic cyclical crises of the generalized overproduction of commodities. Last fall’s financial panic was the height of the commercial crisis, while the current global depression in industrial production represents the industrial crisis.

14 Token money that doesn’t have a “reflux” mechanism, a mechanism to take the money out of circulation, will quickly be “over-issued” and lose its value. Therefore, if the state prints paper money to finance its day-to-day activities, it must have a mechanism to remove the paper money from circulation as well. This is achieved through collecting taxes that are payable in the paper money.

15 One of the reasons that enables the U.S. paper dollar to continue to function as a means of payment on the world market is that it periodically rises and falls in value. For example, suppose I an industrial capitalist have to buy some sweet oil next month. I could buy and hold gold. But in today’s dollarized world economy, the price of oil is denominated in dollars, not gold. It is a good bet that in the long run the dollar will continue to depreciate against gold. But that does not mean the dollar will necessarily fall in value against gold over the next month. It might remain essentially unchanged, with daily fluctuations offsetting one another, or it might actually rise sharply against gold.

This is exactly what we saw during last fall’s panic when gold fell from about $950 per troy ounce in July to well below $750 at the end of October. In this case, I would not have fared all that badly if I had held gold instead of dollars, because oil fell considerably more in dollar terms than gold did.

But this isn’t always the case. If the dollar were to suddenly rise against gold over the next month, and this was not offset by a fall in the dollar price of oil—which happens on occasion—I could take a massive hit if I am holding gold instead of dollars.

This would change if OPEC and other primary commodity producers began to quote their commodities in gold instead of dollars. Washington, however, would consider this to be a very unfriendly act and would likely respond with military force.

A kind of vicious circle therefore supports the dollar system. The dollar remains in demand because commodity prices continue to be quoted in dollars. Commodity prices continue to be quoted in dollars in no small measure because countries are afraid if they don’t so quote them, they will face military attack from the United States. Because commodity prices are quoted in dollars, debts are denominated in dollars, and countries as well as private capitalists are forced to maintain their reserves in dollar-denominated assets such as U.S. Treasury notes.

The government of China is caught in this vicious circle. China is forced to hold and continuously increase its supply of U.S. Treasury notes, which are used to back its own currency, though in the long run gold rather U.S. Treasury notes would be a far more suitable asset to back the Chinese currency. Indeed, if the dollar suddenly plunges in value, the results could be disastrous for the Chinese economy. Much of China reserves would go up in smoke! Recently, Chinese Premier Wen expressed fears along these very lines. And now the Chinese central bank has made a proposal to replace the U.S. dollar with an internationally controlled currency—a proposal the U.S. government is hardly likely to take seriously.

The U.S. government uses the money it borrows from China to build up its military forces, which are then used to threaten China, as the naval confrontation that took place in Chinese territorial waters a few weeks ago freshly demonstrates. Against its will and interests, China is forced by the dollar system to finance the U.S. wars and occupations of Iraq and Afghanistan, therefore enabling the U.S. government to threaten China’s access to oil. In this way, China, not to speak of far weaker countries, ends up financing the U.S. war machine, which in turn forces them to hold U.S. Treasuries bills rather than build up gold reserves.

16 Figures on the supply of U.S. token money on the world market can easily be obtained from the St. Louis Federal Reserve Bank, one of the 12 banks that make up the Federal Reserve System. Using the St. Louis Fed’s figures, the rate of growth of the token money created by the Federal Reserve System can be easily calculated. Just type “monetary base” into a search engine, and a link to the St. Louis Federal Reserve Bank will appear.

The monetary base is defined as the total amount of currency in both paper dollars and coins, plus the accounts that U.S. commercial banks keep with the Federal Reserve Board. Since these accounts are convertible into newly printed green dollars and coins at the demand of the commercial banks, they are as much token money as actual crisp newly printed dollar bills and shiny new coins made of base metals issued by the U.S. Mint. The monetary base is therefore the total amount of U.S. dollar token money—not credit money—which is available on the world market. Most of the green dollars that actually exist do not circulate within the U.S. economy but in other countries that have suffered “dollarization.”

The St. Louis Fed provides a line graph that represents the growth of the monetary base. During the period covered by this graph, there have been three “official” periods of recession in the United States, one in 1991, one in 2001, and the one that began in December 2007 and continues up to the present.

During the first two periods of “official” recession in 1991 and 2001, the line representing the growth rate of the “monetary base” barely wiggles. It also barely changes during the first phase of the current recession. But starting last fall, the line goes almost straight up, nearly off the chart, as the Fed virtually doubled the supply of U.S. token money in just a few months.

It has since fallen back somewhat, though there is widespread expectation that it will soon soar again as a result of the announcement by the Fed that it will start purchasing long-term U.S. Treasury securities in a bid to force down long-term interest rates. This is an attempt to finance the huge Obama deficits and induce a recovery.

The explosive growth of the monetary base shows what an order of magnitude greater the current crisis is than the last two recessions that occurred during the “Great Moderation” of reduced cyclical instability in the world capitalist economy. Still, we shouldn’t forget the devastating impact of the “Asian crisis” that started in 1997 on so many countries across the globe, despite the “Great Moderation.”

17 Next time it might be gold itself, the ultimate form of “hard cash,” if the dollar becomes sufficiently discredited due to the Fed’s panicky move to “print money” in response to the crisis.

18 Many Marxists and other anti-imperialists who want for good reason to see the “dollar standard” end, speculate about the euro replacing the dollar. In my opinion, these hopes are unlikely to be realized. The euro is a paper currency much like the U.S. dollar. There isn’t even a real European central government. The euro is supported by a coalition of separate governments that make up the euro zone. In addition, the sovereignty of all euro zone countries is greatly impaired by the NATO “alliance” and the presence of U.S. military forces and bases in Europe. Exactly who are these forces supposed to be protecting the European countries against these days anyway? The recent decision of the Sarkozy government in France to rejoin the NATO command illustrates just how limited the “sovereignty” of the European governments is and has been since the end of World War II.

For these reasons, the euro is not all that much of a threat to the dollar, in my opinion. If the dollar should, all the same, begin to crumble as the universally acceptable means of payment on the world market, its only credible replacement under current conditions will be gold. If that happens, the world capitalist economy will face a panic far worse than last fall’s panic and, I think we can safely say, than any other panic in its history, including what the crisis of 1929-33 itself was able to dish up. This is perhaps the main reason why no country is showing any sign of rebelling against the dollar system in practice, no matter how much the end of the dollar system and the associated domination of the U.S. world empire would be in their long-term interests. For example, China has now proposed that the dollar be phased out and replaced by an internationally controlled currency, but in practice it continues to make huge purchases of dollar-denominated U.S. Treasury securities.