Initial Response to Questions from ‘Charley’

Reader Charley asks two extremely important questions:

Question one (see his Comment on this post) involves the importance of realizing surplus value in terms of money and the question of the exchange of capital among capitalists.

Question two (see his Comment on this post) involves Gibson’s paradox. Marginalist economic theory claims that there is a natural rate of interest. The American marginalist economist Irving Fisher proposed that market interest rates are a combination of the natural rate of interest plus the expected rate of inflation.

Gibson’s paradox—a term coined by Keynes—notes that under the gold standard the highest rate of interest tends to occur at the peak of the industrial cycle when prices are at their highest. At the peak of the industrial cycle under the gold standard, the expected rate of inflation becomes negative. According to Fisher’s theory, shouldn’t the market rate of interest—the natural rate of interest minus the rate of deflation that can be expected during a cyclical downturn—be at their lowest rather than at their highest?

Similarly, at at the bottom of the cycle when prices have stopped falling or have started to turn upward, interest rates are at their lowest point. According to Fisher’s theory, shouldn’t market rates of interest be at their highest anticipating the rise in prices that will accompany the upturn?

Or, what comes to exactly the same thing, under the gold standard high prices coincide with high interest rates and low prices coincide with low interest rates. In other words, interest rates coincided with the absolute level of prices as opposed to the rate of change in the level of prices that is predicted by Fisher’s theory.

I must thank Charley for referring me to the Summers article, which I will be studying in coming days as my schedule allows.

I will prepare a further response to both of the questions raised by Charley as soon as time allows. They involve questions vital to crisis theory and will allow a further examination of questions that I have raised in my posts.

Other readers are encouraged to send in their own comments on these questions as well.

Sam

The Dollar Empire and the ‘Great Moderation’

During the “Great Moderation,” the United States became increasingly dependent on imports to maintain its standard of living. When we talk about the standard of living of a nation, we should always be careful to distinguish between the standards of living of the different classes and strata of the population.

The decaying U.S. industrial base and the consequent absolute decline in the level of factory employment during the Great Moderation devastated the standard of living of factory workers. Those industrial workers who did maintain their jobs often had to accept wage cuts and worsening working conditions. This was particularly true for the young generation of factory workers. The unions often accepted two-tier contracts that protected the wages and benefits of older workers at the expense of those of new young workers.

The younger workers who found factory jobs during the Great Moderation were lucky. Many young workers, especially workers of color in the inner cities often couldn’t find any jobs—let alone factory jobs. If they could, it was usually in low-wage, non-unionized “service” establishments such as MacDonald’s or Walmart. It is significant that the biggest U.S. corporation in terms of revenues is not an industrial giant such as U.S. Steel, as it was early in the 20th century, or General Motors, at mid-century, but rather a trading company, Walmart.

The growing mass of more or less permanently unemployed, or at most marginally employed, youth has encouraged the growth of inner-city street gangs engaged in the drug trade. This has swollen the U.S. prison population. At any given time, there are now considerably more than 2 million people, disproportionality young people of color, in U.S. prisons and jails. Many more people pass through jails or prisons in the course of a year, or are in other respects “in the system,” fighting criminal charges, on parole or on probation.

It remains important, however, for the U.S. ruling class to maintain a large percentage of the population in a relatively comfortable “middle-class” lifestyle. This is a key difference between the United States as the world’s leading imperialist country and an oppressed “third world” country.

From the Dollar-Gold Exchange System to the Dollar System

The Bretton Woods dollar-gold exchange standard began to unravel with the collapse of the gold pool in March 1968 and collapsed completely in August 1971, when Nixon formally ended the convertibility into gold of the U.S. dollar by foreign governments and central banks. The U.S. dollar, even dollars in the central banks or treasuries of foreign governments, was now a purely token currency and no longer a form of credit money. From now on, the dollar would follow the laws of token money, not credit money.

The question posed by Nixon’s August 1971 move was whether the U.S. dollar could maintain its position as the main world currency now that it was a token currency and not credit money. As long as the dollar had retained its convertibility into gold at a fixed rate by foreign central banks and treasuries—which also meant that the open market dollar price of gold could not move very far from the official $35 an ounce—commodity prices quoted in dollars and international debts denominated in dollars were in effect quoted and denominated in terms of definite quantities of gold.

But with the transformation of the dollar into token money, this was no longer true. The dollar no longer represented a fixed quantity of gold but a variable quantity. Its gold value could change drastically over a short period of time.

Reagan Reaction and the ‘Great Moderation’

After World War II, the Keynesians reformers took unjustified credit for the postwar economic upswing. Similarly, in the 1980s the extreme right-wing governments that came to power in Britain in 1979 and the United States in 1980 also took unjustified credit for the end of the protracted economic crisis of 1968-1982.

These right-wing governments attempted to take back as many concessions as possible that had been granted to the working class after World War II. At first, the policies of the new reactionary governments was called “monetarist,” but later they were called “neoliberal” for reasons that will become apparent below.

As I mentioned last week, the “monetarist,” or “neoliberal,” era in the United States actually began with the appointment of Paul Volcker as chairman of the U.S. Federal Reserve Board by the Democratic administration of Jimmy Carter in August 1979. The post-World War II reformist era had been made possible by the generally expansionary economic conditions that prevailed between 1948 and 1968. The collapse of the London Gold Pool in March 1968 marked the end of the early post-World War II era of capitalist prosperity.

Attempts to relaunch the post-World War II capitalist prosperity through Keynesian methods repeatedly failed during the 1970s. This was the economic basis for the new era of reaction that was symbolized by the election of Ronald Reagan in the November 1980 U.S. presidential election, as well as the rise to power of Margaret Thatcher in Britain with her “there is no alternative” slogan.

What Thatcher really meant was that there was no “Keynesian” alternative to her reactionary “monetarism” as long as the British pound was plunging in value both against gold and even against the dollar on world currency markets.

From the 1974-75 Recession to the ‘Volcker Shock’

As I explained last week, the devaluation of the U.S. dollar in terms of gold had temporarily halted by the end of 1974. After peaking at $195.25 an ounce on December 30, 1974, the dollar price of gold had fallen to $104.00 on August 31, 1976.

As a result, during 1975 the rate of U.S. inflation as measured by the government producer price index was “only” about 4.4 percent. Still, the official producer price index rose more in the recession-depression year of 1975 than it had in the inflationary boom year of 1965. This despite a slump that was considerably worse than that of 1957-58.

The U.S. workers—and workers in other capitalist countries—were hit in two ways. One, workers’ living standards were lowered by the rising cost of living in terms of the devalued currency their wages were paid in. In a more traditional type recession-depression, the cost of living would have been expected to fall.

Second, just like was the case in a traditional crisis-depression, wages were under downward pressure from the high rate of unemployment. In the case of U.S. workers, this was on top of the disastrous—for U.S. workers—wage and price controls that had been imposed by the Nixon administration.