The Federal Reserve’s Open Market Committee Meets

On June 16, the U.S. Federal Reserve’s Open Market Committee concluded its two-day meeting and announced its decisions. The FOMC consists of the seven members of the Board of Governors, the head of the Federal Reserve Bank of New York, and (on a rotating basis) the heads of four of the 11 other Federal Reserve Banks that make up the Federal Reserve System. The four Federal Reserve Bank presidents serve one-year terms.

The only concrete decision announced was a rise in the interest rate Federal Reserve Banks pay on the deposits commercial banks keep with them, from 0.10% to 0.15% per year. This represents a very slight “tightening move.” However, as is usually the case, more attention was paid to the tone of the FOMC report than on any concrete decisions made.

Speculators in the gold market, commodities markets, bond market, and stock market hang on every phrase of Federal Reserve statements. The general reaction was that the FOMC indicated that it would move to “tighten” its stance sooner than had been expected. As a result, the price of stocks fell while the U.S. dollar rose sharply against gold.

The Fed’s leadership is nervous about the dollar’s recent weakness against gold and a surge in primary commodity as well as wholesale and consumer prices. Though the FOMC repeated its belief that the current surge in inflation will soon taper off, it no longer seems so sure. As I explained last month, Fed leaders cannot ignore the very real danger that dollar weakness and rising inflation could signal a return to “stagflation” over the next several years and the sharp rise in interest rates and deep recession that inevitably follow.

The Federal Reserve System’s leaders hope to guide the U.S. and world capitalist economies onto a path of a sustained rise in the global industrial cycle, which would normally be expected to last about nine years. They hope that the cyclical upturn will be stronger than the one that followed the Great Recession. But they have to reckon with the very real danger that the current apparent upturn in the worldwide industrial cycle will abort if the Fed allows the dollar to plunge against gold causing inflation and interest rates to rise.

This would make a deep global recession with soaring unemployment inevitable, perhaps before the end of Biden’s four-year term. Far worse from the viewpoint of U.S. imperialism, it would endanger the dollar system, which forms the foundation of the U.S. global empire.

Ultimately, the decisions of the Federal Reserve and its Open Market Committee are constrained by the economic laws that govern the circulation of money. This is why Pichit Likitkijsomboon’s article in Monthly Review critiquing what he calls the “anti-quantity theory of money” takes on special importance. Before we continue our examination of his critique, let’s take a brief look at the current economic situation.

The current economic situation

The U.S. media gives the impression that the U.S. economy is experiencing a tremendous boom. The story goes that a combination of massive fiscal and monetary stimulus measured in the trillions of dollars has unleashed the boom along with what is hoped will be only a “temporary” acceleration of inflation.

However, concrete government economic figures are painting a different picture. For example, Lucia Mutikani of Reuters reported that in May according to the U.S. Commerce Department overall retail sales declined 1.3% from April. Automobile sales dropped 3.7% from April, furniture sales dropped 2.1%, building materials were down 5.9%, and online sales were down 0.8%. Sales at clothing stores did rise 3% and at bars, restaurants and bars 1.8%. Not exactly “blow out” numbers though retail sales were up 28.1% from the previous year. This would be an impressive figure except that in May 2020 the U.S. economy was largely shutdown as the COVID-19 pandemic raged unchecked.

The reports were in line with the May employment report, which showed a rise of 559,000 new jobs, significantly below expectations for the second month in a row. Hopes that U.S. employment would rise at the rate of a million jobs per month as the economy reopened are falling short. The bosses claim that the disappointing employment figures are the result of a massive labor shortage. Unable to meet soaring demand, the capitalists claim they have no alternative but to raise prices. The Federal Reserve, and the Biden administration for its part, hope against hope that as production returns to normal price increases will taper off.

Despite the bosses’ complaints of widespread “labor shortages,” total employment is still about 7.6 million workers short of where it was in February 2020 just before COVID hit with full force. The solution prescribed by the capitalists for the alleged labor shortage is to slash or cancel unemployment benefits forcing people back into the labor market.

About half the of U.S. states have already moved to end the expanded unemployment benefits, and all states will do so by the end of the September. Liberal California, dominated by the Democratic Party, has announced that people not actively searching for work will — as was true before the pandemic hit — no longer be eligible for unemployment benefits at all.

This is an example of the classical capitalist logic that increasing economic desperation and competition among those seeking work will force the unemployed back into the labor market and make them willing to accept the meager wages the bosses are offering. Then, the capitalist expect that the ratio of unpaid to paid labor — the rate of surplus value — will soar and with it the rate of profit.

However, the shortfall of jobs — not a labor shortage — is not only a U.S. but a world problem. For example, the International Labor Organization estimates there will be 75 million fewer jobs this year (2021) than there would have been if the COVID-enhanced recession had not occurred, and there will still be 23 million fewer jobs next year (2022). There are still many millions of people in the United States who are not fully vaccinated — or vaccinated at all. On a world scale, especially in the countries of the “Global South,” where most of humanity lives, the numbers are far worse.

The Biden administration announced under mass pressure in May that it would “negotiate a suspension” of patent protection for big pharmaceutical companies to deal with the still-raging global pandemic. However, the administration claimed that it couldn’t suspend the patient protection on its own but would have to “negotiate” with other members of the World Trade Organization, and that will take time. In the meantime, especially in the Global South, people continue to die because the governments of their countries lack the money to buy vaccines at patent-protected monopoly prices.

Whether and to what extent patent protection will be lifted, allowing capitalists in other countries to produce vaccine without paying licensing fees to the patent holders, remains be seen. And even if the vaccines are sold to governments at market prices close to the price of production, as opposed to monopoly prices dictated by the U.S. government-run patent system, many of the poorer countries will find it difficult to buy enough vaccine.

Modern science, which has penetrated the secrets of the genetic codes that control both living cells and viruses, has armed our species with the tools to end pandemics once and for all. However, thanks to capitalism the COVID-19 pandemic and its devastating economic effects still rage virtually unchecked in many parts of the world.

Normally the modern world capitalist economy is held back by the limits of markets, not the physical limits on production. However, the COVID-19 shutdowns did create real physical limits on production as well contracting markets. These limits are gradually disappearing as the capitalists “reopen” the economy with or without the protections of COVID vaccines. This is the situation that the Federal Reserve System, under the dollar standard effectively the central bank of the world, is dealing with. However, the Fed, and indeed any capitalist central bank, is restrained by the economic laws that govern the circulation of money under the capitalist system. Let’s now return to Pichit Likitkijsomboon’s timely critique of what he calls Marx’s “anti-quantity theory of money.”

Different laws apply to gold coin currency, convertible-into-gold credit money, and inconvertible into gold legal-tender token money

Likitkijsomboon is confused by the distinction Marx makes between the laws that apply to inconvertible legal-tender token money and convertible-into-gold (or silver) credit money. He writes: “Marx’s discussion of inconvertibility is set in the context of simple commodity production in the early part of Capital I, not capitalist production in Capital III. For Marx, convertibility prevents inflation not by the risk of gold drains and the international specie-flow mechanism as in Ricardo’s theory, but by the law of reflux: namely, that notes are issued only when they are needed by capitalists. By contrast, inconvertible notes are ‘forced’ into circulation by the state to act as a symbol of value (Marx 1867: 128–9).”

Further: “If the state increases the amount of notes, each circulating unit will represent a smaller quantity of gold, smaller labour value and, hence, higher paper prices of commodities. However, Marx does not provide an analysis of the causal link from the increase in note issue to higher paper prices of commodities. Thus there remains a question of what renders the hoarding mechanism ineffective under inconvertibility (i.e., why the excess inconvertible notes are spent on commodities to boost the price level instead of being put into hoards).”

These are good questions. They can only be answered by getting rid of the notion once and for all that inconvertible paper money is “non-commodity money” rather than token money that represents commodity money in circulation. Once we get rid of the notion of “non-commodity money,” which will remain impossible as long as capitalist production lasts, the answer to Likitkijsomboon’s questions becomes clear.

Until relatively recently, currency units such as pounds, U.S. dollars, and so on were defined in terms of weights of precious metal, either gold or silver. Sometimes, but not always, the metal was coined and circulated as currency. An owner of gold or silver bullion could go to the government-run mint and have it coined into legal-tender gold and silver coins of a specific weight. Sometimes, however, the money metals were not actually coined but the currency units were still defined as weights of gold (or silver) bullion.

Indeed, legal traces of the definition of currency units as weights of gold still exist. The official “price of gold” by international agreement is still defined as $42 per troy ounce of gold. On the U.S. Treasury balance sheet, its gold holdings are valued at a gold price of $42 an ounce. Therefore, legally the U.S. dollar is defined as 1/42th of a troy ounce of gold. The difference between the price of gold bullion — again around $1,800 as I write these lines — and the official U.S. government “price” of $42 an ounce measures the depreciation of the U.S. dollar.

The British pound sterling is still “officially” defined as one gold sovereign, a coin still coined by the British mint. One gold sovereign contains 7.98805 grams of gold. Therefore, officially a British pound sterling is defined as 7.98805 grams of gold. However, gold sovereigns have not circulated since 1914. Since the Bank of England stopped redeeming pounds into gold bullion in 1931 (1), the British pound sterling has depreciated so much below its official gold value the fact that the British pound sterling even has an official gold value has been largely forgotten. This gives rise to the illusion that today’s British pound sterling is “non-commodity money.”

Today, the U.S. government coins gold and silver coins at varying and inconsistent mint prices. For example, if you have an ounce of gold bullion mined in the United States, you can go to the U.S. Mint and have it minted into a legal-tender $50 gold coin. This means if you need $50 to make an urgent payment, you can use a $50 gold coin, since it is legal tender. However, nobody in their right mind would use a $50 gold coin for this purpose. Instead, they would go down to the nearest gold and silver shop and sell the coin for just under $2,000 an ounce (at the current exchange rate). They would then peel off 50 paper $50 bills, also legal-tender, from the proceeds and still have almost $2,000 in paper-dollar bills left over. This is an example of Gresham’s Law, which states that bad money — in this case the paper dollars — drives good money — in this case gold coin dollars — out of circulation.

The laws of currency circulation under different currency systems

Let’s look at how the laws of currency circulation operate under different currency systems. We will begin with the simplest monetary system — a pure metallic circulation. We will then work toward the present-day monetary system that is commonly mistaken for a system of “non-commodity money.” Here we are interested only in money’s role as a means of circulation and not as a means of payment.

In a pure metallic circulation, full-weight coins, whether gold or silver, are the main circulating media. Assume that the prices of the total quantity of commodities that must be circulated in a year comes to 100,000 gold dollars. (To avoid larger and more realistic but clumsy numbers, we can assume any number of zero’s added to make them more realistic.)

The socially necessary quantity of coins that will be socially necessary for circulation will be $100,000 divided by the number of times a coin is used during a year. If the average coin is used four times a year, the socially necessary stock of currency will come to $25,000 of gold dollar coins. If the number of turnovers is only two times, the socially necessary stock of currency will rise to $50,000. If the turnover of gold coins were to rise to 10 times a year, the socially necessary stock of money drops to $10,000.

Under a pure gold coin currency system, the state (which we assume coins the gold) cannot “over-issue” the quantity of gold coins because it cannot coin gold that doesn’t exist. For now, let’s assume that the socially necessary stock of gold coins comes to $10,000. What will happen if the quantity of gold coins in existence exceeds $10,000? Merchants will find that they are collecting more gold coins than needed to purchase the commodities (commodity capital) they need to conduct their business and meet their personal expenses.

If there is as yet no banking system, the merchants will have to store the coins in a safe place such as a strong box or risk having their coins stolen. Once there is a banking system, the merchants will periodically deposit their accumulating coins in bank accounts for safekeeping. In this way, the banking system will form a centralized hoard of gold coins.

Here we have to distinguish between a developed capitalist system of production, based on expanded reproduction, and a pre-capitalist system of production. Under a developed capitalist system, where a large “free proletariat” has been formed — free in the double sense of not being slaves or serfs and thus free to sell their labor power to the highest bidder, but also “free” of ownership of any means of production — the chief barrier to production becomes the ability to sell the commodities being produced at profitable prices.

In contrast, under pre-capitalist and early capitalist conditions of production, the chief barrier to increasing production was the number of available workers, whether in the form of independent commodity producers, slaves, serfs, or wage workers. If a “free proletariat” was unavailable in sufficient numbers, the money owners were unable to transform their money into industrial capital. Under these conditions, more and more money would accumulate in hoards rather than be drawn into circulation. This situation developed in old India and China, which were the chief centers of production on the Eurasian landmass (2) in the pre-capitalist world and therefore attracted the lion’s share of the world’s gold and silver money.

The limit of the ability to mint gold and silver coins is set by the available quantity of gold and silver. This, however, sets only the maximum level of currency circulation but not its minimum level. When the potential quantity of gold and silver coins in the form of un-coined gold and silver bullion exceeds the socially necessary quantity needed for the circulation of commodities, the surplus is hoarded. It might be hoarded in the form of gold or silver coins, gold and silver bars, gold and silver jewelry, or other objects made of gold and silver.

If the quantity of commodities measured in terms of their prices — which, remember, are specific weights of gold or silver bullion in circulation — increases, some of the gold or silver contained in the bars, jewelry, or other objects will be melted down and sent to the mint to be coined. If, however, coins keep piling up in hoards, some of the coins will be melted down into bullion or fashioned into jewelry or other objects made of gold and silver.

Money becomes a symbol of itself in circulation

A key problem with a pure gold or silver coin currency system is that coins tend to wear out in circulation, become light. A “light” coin contains less gold or silver bullion than it legally represents. If the state minting the coins keeps an adequate reserve of gold or silver bullion, or such reserves exist in the hands of private hoarders, this is not a problem. However, the toleration of light coins in circulation by the government can lead to the issuance of coins in excess of the gold and silver bullion in a country. How do we know whether a gold or silver coin currency in fact is depreciated? If it is depreciated, how do we know how much?

We know the degree of depreciation by looking at the market price of gold or silver bullion in terms of the gold and silver coins. If the market price of gold and/or silver bullion rises above the mint price of the coins, the difference measures the amount of depreciation. (3) The greater the rise of the price of bullion above the official mint price, the more currency is depreciated.

Once the coins become depreciated, in obedience to Gresham’s Law any remaining full-weight coins will either be hoarded or melted down into bullion. Therefore, under gold or silver coin currency systems the government to avoid the depreciation of the coinage removes coins that have fallen below a certain weight from circulation. Those coins cease to be legal tender.

However, as we have seen, the existence of “light coins” in circulation does not necessarily lead to the depreciation of the currency. If the state keeps a reserve fund of bullion and the market price of bullion rises above the mint price, the state can always reduce the market price back to the mint or “official” price as long as it ready to sell bullion on the market in the necessary quantities. To be able to do this, however, the state must keep a sufficient quantity of bullion on hand.

The state — the monetary authority — is not the only hoarder. There are private hoarders of gold and silver as well. Assuming gold and silver are present in sufficient quantities in these private hoards, if the market price for some reason momentarily exceeds the official price of bullion, hoarders can make extra money by selling bullion for the depreciated coins at a price in excess of the official price. When the currency price of bullion falls again, the private hoarders can use the coins to not only rebuild their hoard of bullion but expand it.

For example, let’s assume that the official price of gold bullion is $100 per troy ounce. If the price of bullion on the market rises to $105, an owner can sell $100 worth of bullion in return for coins with a face value of $105. Then when the market price of bullion drops back to $100, our gold hoarder can use the coins to buy $105 worth of bullion.

Assuming there is a sufficient quantity of gold or silver bullion available for sale on the market, light coins become symbols of greater quantities of precious metal than they contain. Money in circulation has become, as Marx explained, a symbol of itself in circulation.

Indeed, coins do not even have to become light to become symbols of themselves in circulation. If a one-ounce gold coin turns over four times a year, it will represent in that year not one but four ounces of gold. It is therefore by no means necessary for the circulating tokens to be made of precious metal. They can be replaced by tokens made of either base metals or pieces of paper and later even electronic entries. (4) The advantage to this, in addition to saving bullion from being lost through the wear and tear of coins in circulation, is that there is no longer any need to remove light coins from circulation.

When currency tokens are made of cheap materials that represent real money material, it doesn’t matter how much a particular currency token is lightened or damaged in circulation as long as it remains recognizable. Even if the currency tokens made of base materials — paper money — are not convertible into either bullion or full-weight gold or silver coins, they will not depreciate as long as there is a sufficient quantity of actual money material available in the hands of the state or private hoarders to prevent their depreciation. In this case, the currency tokens will behave just like full-weight gold coins in circulation.

When the non-depreciated currency tokens made of base metals or paper are issued in excess of the needs of circulation, they will fall out circulation and be hoarded either in private hands or, once the modern banking and credit system has arisen, flow into the banking system. Marx called nonconvertible-into-gold (or in Marx’s time silver as well) monetary units token money. Today, all legal-tender currency issued by the various state-controlled monetary authorities (such as the U.S. Federal Reserve System) are examples of token money.

Token money and real money

Unlike “real money” — gold bullion — token money does not measure the value of commodities in terms of its own use value. It merely represents on the market a certain quantity of money material that possesses value. If I have 10 $100 bills, I can buy a new computer. However, there is no relationship between the quantity of socially labor necessary to print these bills and the quantity necessary to produce a computer of a certain quality under the present conditions of production. Assuming the computer sells at its value — direct price — what is being compared is not the quantity of labor necessary to produce the computer to the quantity of labor necessary under the present conditions of production to print 10 $100 bills. Rather, it is the quantity of labor socially necessary to produce 10 troy ounces of gold bullion, assuming that the dollar price of gold bullion is $100 an ounce.

A mistake often made is the belief that whatever quantity of currency the monetary authority creates it will automatically adjust itself to the quantity of currency necessary to circulate commodities — the sum of the prices of commodities offered for sale in a given period of time divided by the number of turnovers of a typical piece of currency in the same period of time. This mistake leads to the idea that currency is backed not by a specific money commodity — gold — but rather by all the commodities that are available for sale. While it is true that all the gold in the world can never buy a commodity that is not produced, the purchasing power of currency other than full-weight gold coins is limited by the quantity of hoarded gold bullion in a country. 0r in the case of the U.S. dollar, which
under the dollar system serves as a means of circulation and payments beyond the borders of he U.S., the limits beyond which the U.S. Federal Reserve System cannot issue additional dollars without the dollar depreciating is limited by the quantity of gold not only in the United States but in the world.

What happens when currency is depreciated

“If,” Likitkijsomboon writes, “the state increases the amount of notes, each circulating unit will represent a smaller quantity of gold, smaller labour value and, hence, higher paper prices of commodities.” This is quite correct. He continues: “Marx does not provide an analysis of the causal link from the increase in note issue to higher paper prices of commodities. Thus there remains a question of what renders the hoarding mechanism ineffective under inconvertibility (i.e.,why the excess inconvertible notes are spent on commodities to boost the price level instead of being put into hoards).”

The hoarding mechanism is not ineffective under inconvertibility as long as the currency does not depreciate. As we have seen, the depreciation of a currency occurs when the bullion price of a currency rises above the official price of bullion. If this persists, the price of primary commodities then rises, and the rise spreads to the wholesale and eventually the retail levels. As prices in terms of currency rise, currency flows out of hoards into circulation; the ratio of hoarded currency to circulating currency drops. Assuming everything else remains unchanged — no change in labor values of either gold money or commodities (5) — this adjustment continues until the prices of commodities in terms of the currency fully reflect its depreciation.

If the currency depreciation stops at this point and does not resume, currency will again behave as though it was a full-weight gold currency and the hoarding mechanism will again be effective.

The role of money as a means of payment

So far we have examined the role as money as a means of circulating commodities but have left out its role as a means of payment. The latter role develops with the rise of the modern credit system and its pivot the modern banking system. Once we take into account money’s role as a means of payment, the full formula determining the socially necessary stock of currency is: the sum total of the prices of commodities sold in a given period divided by the number of turnovers of currency functioning as a means of circulation in the same period plus the number of payments falling due in the same period divided by the number of turnovers of currency functioning as a means of payment minus the pieces of money that function successively as both means of circulation and means of payment.

The rate of interest equalizes the demand for gold bullion functioning as money material with the supply. The higher the rate of interest, everything else remaining equal, the lower the demand for gold bullion. In a system where gold coins are in circulation, this means the higher the rate of interest the more bullion will be sent to the mint and thrown onto the money market to earn interest. In a system of nonconvertible paper money, all things remaining equal, the higher the interest rate the lower will be the currency price of gold. (6)

Therefore, assuming all other variables remains unchanged, if the monetary authority increases the quantity of paper money, this will at first cause a drop in the rate of interest. The drop in the rate of interest will increase the demand for gold bullion causing the bullion price of gold to rise. Through the mechanism discussed above, this will cause the prices and eventually wages — the price of labor power — to rise until they fully reflect the depreciation of the currency.

As prices of commodities in terms of currency rise, interest rates will rise as the real quantity of state-issued legal-tender money — is again reduced, causing interest rates to rise. Eventually, nominal prices and wages will have risen, interest rates will have returned to their previous level, and the currency price of money material will stabilize at a higher level.

For example, if the state monetary authority doubles the supply of the currency it issues, everything else remaining unchanged, the first thing that will happen will be a drop in interest rates. This will cause the currency price of gold to rise by considerably more than 100%. Commodity prices in terms of the depreciated currency will start to rise causing the rate of interest to rise once again. As interest rates rise, the currency price of gold bullion begins to fall. Eventually, when everything stabilizes the currency price of bullion will have doubled, prices of commodities including the price of labor power in terms of the devalued currency will also have doubled, and interest rates will have returned to their previous level.

Currency depreciation and the demand for gold

When commodities measured in terms of their price tags grow faster than the quantity of gold bullion, gold becomes relatively more scarce relative to commodities. As a result, interest rates have to rise to equalize the supply and demand for gold. However, there is another factor that enters here, especially under “paper money“ systems. That factor is the likelihood of further currency depreciation. If further currency devaluation is considered likely, the demand for gold will be stronger than if further depreciation is considered unlikely.

If the belief spreads in the markets that currency depreciation will continue or even accelerate, interest rates will have to rise further to equalize the supply and demand for gold. The more “confidence” in the currency erodes, the higher interest rates will have to rise to equalize the supply and demand of gold bullion. Therefore, if the monetary authority creates more nonconvertible paper currency in an attempt to lower or at least prevent the rate of interest from rising, expectations for further currency depreciation will only increase.

The result is the rate of interest will have to rise to ever greater heights to equalize the rising demand for gold with the supply of gold. It was years of rising expectations of still further currency depreciation during the 1970s that explains the extremely high interest rates reached during the “Volcker shock” at the end of the 1970s and the beginning of of the 1980s.

At its just concluded Open Market Committee meeting, the Fed’s report on the meeting reduced expectations that the U.S. dollar will continue to depreciate, causing the dollar price of gold bullion and the dollar prices of other primary commodities to drop. If the Fed, however, does not in fact reduce the rate at which it is producing dollars, its credibility will sooner or later erode once again, causing the “bull market” in gold to resume — leading to not only higher gold bullion prices but also higher primary commodity dollar prices, and eventually higher wholesale and retail dollar prices and a sharp rise in interest rates.

The takeaway is that if there is not enough gold bullion available in the given economic situation to prevent a rise in interest rates, any attempt by the monetary authority to hold down interest rates by increasing the quantity of paper money (measured in terms of currency units such as dollars, pounds, euros, and so on) will only momentarily lower interest rates that will then lead to still more currency depreciation ending in still higher interest rates. As a result, the monetary authority — central bank — exercises little real control over interest rates despite the widespread belief to the contrary by the lay public, economists, and many modern Marxists, all of whom believe that today’s money is “non-commodity money.” (7)

If the monetary authority attempts to hold the rate of interest down by increasing its issue of paper currency — or the electronic equivalent — in the absence of an increase in the quantity of gold bullion, the rate of interest will drop only momentarily and then rise higher than it would have otherwise, reflecting a loss of confidence in the currency. This is what produced the astronomical interest rates that prevailed at the beginning of the 1980s, when long-term interest rates rose above the rate of profit.

What happens when the quantity of gold bullion, everything else remaining unchanged, rises? In the real world, the quantity of gold is always increasing and would only stop increasing if gold production fell to near zero, something hardly likely to occur as long as capitalism exists. A rise in the quantity of gold bullion — the real money supply — everything else unchanged, lowers the rate of interest. Since interest rates equalize the supply and demand for gold, the supply of gold will now exceed the demand for it. The rate of interest will have to fall until the supply and demand for gold are again equalized.

Now, continuing our “thought experiments,” let’s increase the quantity of (non-money) commodities while holding the quantity of money material unchanged. More currency will now be necessary to circulate the total number of commodities. As a result, more currency will flow out of the banking system and into circulation. The money in circulation will rise while the money held in hoards — the banking system — will fall. This will cause interest rates to rise.

We can look at things from another angle. As the quantity of commodities increases, the quantity of real capital increases and with it the quantity of stock and bond capital. Individual capitalists generally want to keep the percentage of gold they hold in their portfolios constant. Therefore, as capital increases their demand for gold increases as well. If the quantity of new gold provided by the gold-mining and refining industries fails to increase proportionally, the rate of interest will have to rise in order to equalize the supply and demand for gold as commodity circulation increases. (8)

We see here a limit on how far commodity circulation can increase in the absence of a sufficient increase in the quantity of monetary material. Since interest is only a portion of the profit, interest rates are in the long run upwardly bound by the total rate of profit. If the interest rate equals the rate of profit, the very incentive to produce surplus value — profit being nothing but the money form of surplus value — is destroyed. Therefore, the quantity of commodities measured in terms of their prices tags cannot increase beyond a certain point unless the quantity of money material rises proportionally.

Therefore, if capitalist expanded reproduction is to proceed smoothly, as it does in Marx’s Volume II of “Capital” reproduction schemes, the quantity of gold must increase in proportion to the quantity of commodities. This in turn can only happen if the rate of profit of the (regulating) capitals in the gold-producing industry remains the same as the rate of profit on the (regulating) capitals in other branches of industry. However, this is in fact impossible due to the contradiction between money’s role as a means of circulation and payments, on one side, and as the measure of value and the standard of price on the other. (9) As a result, expanded capitalist reproduction will inevitably be broken up into successive industrial cycles that pass through the stages of crisis, stagnation, recovery, average prosperity, boom, and back to crisis.

The role of currency as a means of payment is especially important during crises. When a crisis shakes the credit system — usually a crisis of overproduction but sometimes another disturbance such as the sudden drop in sales caused by the COVID-19 pandemic starting in March 2020 — creditors scramble to call in existing loans and stop granting new ones. Outstanding debts that are easily “rolled over” during normal times must now be paid. As a result, currency is drawn away from the circuits of circulation into the circuits of payments leaving less currency to circulate commodities. This situation, called a “debt deflation,” causes markets to temporarily contract. During periods of debt deflation, even a considerable expansion of the monetary base has little effect either on boosting monetarily effective demand or on raising prices. During a debt deflation — recession — the part of the money supply that acts as a reserve is growing at the expense of the part of the money supply in circulation.

Different laws apply to legal-tender token money and credit money

A common mistake is to describe today’s legal-tender paper money as credit money. In the past, true credit money often took the form of banknotes issued by central banks that were convertible into legal-tender gold and silver coins. Checkbook money that, since the middle of the 19th century beginning in Britain, became the chief form of currency replacing gold and silver coins and banknotes dominating large transactions. Commercial bank-created credit money must always be convertible into legal-tender money. If too many owners of credit money attempt to convert the credit money into “high-powered legal-tender money” at the same time, the banks fail and the system of credit money collapses.

If a particular private commercial bank fails, the uninsured credit money it has created becomes worthless unless another entity like the government or central bank agrees to honor it. The rest of the credit money in circulation remains unaffected. If a “run” on convertible banknote money issued by a central bank forces the central bank to suspend the convertibility of its banknotes into gold, the banknote credit money issued by the central bank is transformed into inconvertible legal-tender token money. Such inconvertible legal-tender “paper money” is often called “fiat money,” which is widely mistaken for “non-commodity money.”

Checkbook credit money is created when a commercial bank creates an imaginary deposit when it grants a loan. The imaginary deposit can then be transferred and used as a means of purchase or payment either by check — the traditional method — or today electronically. When debts are repaid, the imaginary account is retired. During a period of credit inflation that accompanies the upward phase of the industrial cycle, the quantity of credit money grows relative to the monetary base of legal-tender money. During a period of debt deflation — recession — the quantity of credit money contracts relative the monetary base.

If legal-tender token money is over-issued, the currency price of gold bullion rises, meaning that each individual currency token, whether it is a coin made of base metal, paper currency, or an electronic entry, will lose the same amount of gold value as every other monetary token denominated in the depreciated currency.

As a general rule, the credit money created by the commercial banking system must be convertible into either legal-tender token money, gold coins (not the case anywhere today) or into banknotes issued by the central bank that are convertible into gold (also not the case anywhere today), or convertible into legal-tender money (the case today).

There were brief suspensions of gold — specie — payments during crises by commercial banks that issued banknotes. However these suspensions were always short-lived. If the private for-profit commercial banks were allowed to issue legal-tender token money, the banks would issue currency in virtually unlimited amounts. The reason is that the more loans the commercial banks make the higher the profits for their stockholders. They therefore must be restrained by the threat that if they create too much credit money relative to the quantity of legal-tender money they hold in their vaults and on deposit with the central bank, the bank will fail.

A central bank or some other state-backed monetary authority’s job is not to maximize the profits earned by the central bank but rather is to safeguard the stability to the extent that this is possible in the capitalist economy. Unlike a for-profit commercial bank, a modern central bank is in a position to limit the amount of legal-tender money it creates even in the absence of a legal requirement that they maintain the convertibility of the currency into gold at a fixed rate.

A central bank or state Treasury like a commercial bank can also issue currency convertible into gold (or in the past) silver. If such a state monetary authority over-issues the currency, it will experience a drain of gold (like the U.S. Treasury experienced at the end of the 1960s and the beginning of the 1970s). If this happens, the state monetary authority either has to halt its over-issue, devalue its currency, or end its convertibility. In the latter case, the state-issued currency loses it character of credit money and is converted into token money. Unlike a private for-profit commercial bank that over-issues credit money, the state monetary authority does not, however, go into legal bankruptcy or liquidation.

International trade and token money

Last month, we saw that Ricardo using the quantity theory of money claimed that comparative advantage as opposed to absolute advantage prevails in international trade. He thought that the world’s gold supply would be distributed in such away among the trading nations that industries that are least behind the world average in terms of labor productivity in countries with lower-than-average productivity of labor will prevail in international competition. In countries with an above-average productivity of labor, Ricardo held only those industries that are most ahead of the average productivity of labor will prevail in international competition. Therefore, according to Ricardo, while absolute advantage reigns within the national market, comparative advantage prevails in international trade.

Ricardo’s reasoning depended on the the truth of the quantity theory of money. According to the Ricardian version, the general level of prices and wages depends on the ratio of gold — money — to commodities. Since gold would flow from countries with lower than average productivity to countries with higher than average productivity, prices would be higher relative to their national labor values in the latter countries than in countries with a lower productivity of labor. But how, according to the economists in today’s world, is comparative advantage supposed to prevail over absolute advantage?

According to bourgeois economists, the so-called law of comparative advantage under today’s paper money systems is supposed to work through exchange rates. While the international gold standard (including in its last form the Bretton Woods system) worked through fixed exchange rates, the current system features rates of exchange that vary according to supply and demand.

If a “clean float” prevails, there would be no movement of either currencies or gold between nations. However, many countries peg their exchange rates to the U.S. dollar, which leads to what is called a “dirty float.” In this hybrid system, the central banks other than the U.S. Federal Reserve maintain reserves of dollars and to a lesser extent euros. The U.S., however, keeps most its own reserves in the form of gold bars, which constitute the ultimate reserve of the international monetary system under the dollar system.

If the currencies of the lesser central banks come under pressure, these banks use their dollar (and sometimes euro) reserves to purchase their own currencies, running down their reserves of dollars or euros in the process. If, on the other hand, their currencies rise against the dollar, they can use their currencies to purchase additional dollar (or euro) reserves. Just as national currencies represent gold in circulation within a nation, the dollar (and euro) represent gold in circulation on the international level. Under the present international monetary system, movements of dollars (and euros) between countries therefore resembles the movement of gold under the international gold standard with similar effects on interest rates.

In contrast to the present international monetary system of a dollar-centered “dirty float,” neoclassical economists — and supporters of Modern Monetary Theory (10) — advocate a “clean float” where neither government treasuries or central banks deal in the currencies of other nations. In the clean float system imagined by Milton Friedman — and MMT supporters — treasuries and central banks would not maintain reserves of either gold or foreign currencies.

As the Bretton Woods system unraveled in the late 1960s and early 1070s, the neoclassical economist Milton Friedman advocated that it be replaced by a clean float. Friedman urged the U.S. Treasury to sell off all its remaining gold reserves since gold was no longer money, and the central banks of other countries should get out of the business of buying and selling foreign currencies. If this were done, Friedman held that exchange rates between currencies would be determined only by supply and demand set in private foreign-exchange-rate markets.

Under a clean float, neoclassical economists claim, comparative advantage will prevail just as it supposedly did under the international gold standard. International trade would balance with no country running either significant surpluses or deficits. Then there would be neither creditor nor debtor countries.

Suppose some countries are behind in terms of labor productivity in all branches of industries including agriculture but less in some branches than in other branches. Conversely, other countries are ahead in terms of labor productivity in all branches of industry and agriculture but again more so in some branches than others.

Here again the quantity theory of money plays a vital role. The modern quantity theory holds that under a system of fiat — paper — money, prices including the price of labor — wages — are determined by the ratio of money (measured in terms of some currency units such as dollars, pounds, yen, yuan, and so on) to the commodities the fiat money circulates. If we hold the quantity of commodities constant, the higher the quantity of dollars the higher the prices of commodities in terms of dollars. The fewer the quantity of dollars the lower the prices of commodities in dollar terms.

Now let international trade begin. The countries with the highest productivity of labor will initially prevail in all branches of industry. The rates of exchange of their currencies will rise relative to the countries with a lower productivity of labor. But as this happens, the rates of exchange of the currencies of countries with a high productivity of labor will rise relative to the currencies of countries with a lower productivity of labor. The result will be that the currencies of countries with a high productivity of labor will exchange for more units of currency of countries with a lower productivity of labor. However, according to the quantity theory of money the prices of commodities in terms of local currency will not be effected by changes in the exchange rates.

Suppose that we have two countries, one with a higher productivity of labor than the global average in all branches of industry, while the other country has a lower productivity of labor than the global average in all branches of industry. But our high productivity-of-labor countries are more ahead of our low-productivity-of-labor country in some branches of industries than it is in other branches of industry. If according to neoclassical economics global prices are calculated in terms of the currency of a third country, all other things remaining equal, the prices of countries with a high productivity of labor will rise in terms of that third currency, while the prices in countries with a low productivity labor will fall in terms of the currency of that third country.

According to neoclassical economics. the prices of commodities produced in our high productivity-of-labor country will rise in terms of the currency of the third country and in terms of the currency of our low productivity-of-labor country, just like they did in terms of a gold coin currency. Therefore, according to neoclassical economics, the law of comparative advantage will prevail in our free-floating currency system just like it does in the pure gold coin system, and in today’s hybrid dirty float system.

Keynesian economics and comparative advantage

Keynesian economists, unlike the pure neoclassical economists, reject the quantity theory of money. Keynesian economists believe that it is not the ratio of money measured in terms of currency units to commodities that determines the level of prices but rather the level of money wages. This reasoning is based on an old notion of Adam Smith. Smith claimed that all constant capital is really variable capital (to use Marx’s terminology) because all units of constant capital were produced by both variable and constant capital. If you keep going back far enough, you will reduce all constant capital to variable capital — wages.

Therefore Smith — and Keynesian economists — drew the conclusions that if you lower money wages — all other things remaining equal — the prices of commodities will fall. But if you raise money wages — again all other things remaining equal — prices will rise because in the final analysis all costs come down to wage costs.

Therefore, according to Keynesians, inflation occurs when higher money wages are not offset by higher labor productivity. During the 1970s, pure neoclassical economists led by Milton Friedman claimed the Federal Reserve System was creating too many dollars relative to the quantity of commodities in circulation and that was the cause of the decade’s stubborn and generally accelerating inflation. In contrast, Keynesian economists blamed the inflation on rising money wages, which they described as “cost-push” inflation as opposed to the “demand-pull” inflation that occurs only “in the vicinity of full employment.” Therefore, following the logic of Smith and Keynes, these economists reduced all costs to wage costs and blamed the unions for the inflation because they pushed for higher nominal wages to protect their members from the ongoing inflation.

The Keynesian economists who blamed “labor” for inflation were considered more progressive and “pro-labor” relative to the “anti-labor” reactionary Friedman. But how could anybody believe that the economists who blamed the trade unions for inflation be considered more pro-labor than economists who did not blame the trade unions for inflation?

The reason is that Friedman, correctly in this instance, pointed out that “the Fed” would have to tighten monetary” policy to slow inflation — which Friedman admitted would induce a “temporary” recession with rising unemployment. In contrast, Keynesian economists claimed that inflation would die down making “tight money” unnecessary if money wages were held down. Therefore, the Keynesian reasoning went, recession and higher unemployment could be avoided if only the trade unions moderated their wage demands. Because Keynesians opposed “tight money” policies to slow inflation, they were considered natural “allies” of the trade unions.

Neither school of bourgeois economists understood the real cause of the 1970s inflation, which was the growing depreciation of the U.S. dollar — and its satellite currencies — as measured by the rising U.S. dollar price of gold bullion. In reality, the 1970s inflation was ultimately caused by the failed effort to establish the U.S. dollar as “non-commodity money.”

What both the modern versions of the quantity theory of money supported by neoclassical and Keynesian economists have in common is the belief that exchange rates of currencies both with each other and against gold have little effect on the general level of prices measured in terms of the national currency within a country.

We have seen that, all other things remaining equal, according to Marx’s theory of value and price, a rise in the currency price of gold should lead to a proportional rise in the currency prices of all commodities, including the price of labor power — wages. Therefore, a country whose labor productivity is lagging behind other countries will not be able to improve its position in international trade by devaluing its currency, since the gains it will win in terms of exchanges rates with non-devaluing countries will be wiped out by proportional price and wage increases in terms of its national currency.

However, all things are not equal, especially in the short run. Unless a currency devaluation is immediately followed by an offsetting rise in money wages — and this virtually never happens — the effect of a currency devaluation is a wage cut in terms of universal money — gold. If two capitalists are competing against one another and pay equal wages — all other things remaining equal — the capitalists with a higher productivity of labor will be able to undersell the capitalists with the lower productivity of labor.

Within a single capitalist country, wages for the same type of work can vary only within certain limits. If wages are lower in one part of a country than another, workers will tend to migrate from the first area to the second. The capitalists will tend to move production in the opposite direction. This more or less equalizes wages for same type of work within a country. (11)

But internationally there are — measuring wages in terms of universal money, gold — huge wage differences between the countries of the global “north” and the global “south.” This means that capitalists operating in countries of “the south” can sometimes undersell capitalists producing in the “north” because though they produce commodities with a lower productivity labor they pay much lower wages calculated in terms of gold or dollars for comparable types of work.

The capitalist wins the war of competition who produces a commodity with a given use value and quality at the lowest cost price — constant capital used up plus wages — not necessarily the one who produces a commodity of a given use value of a given quality with the least quantity of labor. Looked at in another way, the capitalist who produces with the least amount of paid labor (12) wins the competition and not the capitalist who produces with the least amount of total labor.

Therefore, if a currency devaluation results in a cut of money wages reckoned in terms of gold — and other currencies — everything else remaining equal, and this is almost always the case in the short run, the competitive position of the capitalists of the devaluing country will indeed improve.

Indeed, the fact that currency devaluations are a form of wage cutting is so obvious that when during the recent economic crisis in Greece the Greek government (which under the euro system had lost its ability to issue its own currency) found itself unable to use currency devaluation to cut wages. Instead, the Greek capitalists had to use old-fashioned wage cutting, which they were able to do thanks to the massive unemployment created by the crisis. The economists coined a new term for this old-fashioned wage cutting — “internal devaluation”

What happens when a currency exchange rate drops due to a balance of trade deficit?

When the balance of trade turns against a country — all other things remaining equal — the rates of exchange between the currency of the country running the deficit and the currencies of other countries drop. Assuming the gold value of the currencies of the other countries remains unchanged, this will mean that the amount of gold represented by a unit of currency with the trade deficit currency will decline. A negative balance of trade will under a cleanly floating exchange rate system cause the gold value of the currency running a trade deficit to depreciate. The cause of this depreciation should not be confused with a drop in the gold value of a currency caused by an increase in the quantity of the currency relative to the quantity of gold or foreign currencies in the country or — in the case of the U.S. dollar, functioning as the world currency — in the world.

But a drop in the gold value of the currency caused by a trade deficit is still a drop. It will mean that the currency prices — within the country running a deficit — will rise in terms of the now devalued currency. To isolate the effect of a currency devaluation caused by a negative balance of payments, we must assume there is no change in the quantity of domestic currency in the country. As the currency loses value, prices within the country in terms of the domestic currency will rise.

Capitalist economists say these price rises occur because imports become more expensive in terms of the domestic currency due to the lower exchange rate. This is true. But the fall of the currency’s gold value even independent of imports will exert upward pressure on prices because each unit of currency represents less gold and, through gold, less abstract human labor — value.

What happens when prices in a country running a balance of payments deficit rise in terms of a its currency, again holding all other variables equal? The quantity of currency hoarded in the banking system — bank reserves — will fall since more currency will be necessary to circulate commodities. The result will be a rise in the rate of interest within the country running the balance of payments deficit.

The higher interest rates — assuming there is no ongoing general crisis of overproduction unfolding on the world market — will just as in the case of the gold coin example we examined last month — attract “hot money” seeking the highest rate of interest. This, however, will end the balance of payments deficit and reverse the depreciation of the currency. While the balance of trade deficit will continue uncorrected, it will now be offset by a balance of payments surplus on capital account. The result will be that our previously deficit country will fall into debt. Therefore, the movements of currency exchange rates will not balance trade but will balance international payments by offsetting trade deficits — balance of payments deficits on current account — with a positive balance of payments on capital account.

When a general crisis of overproduction does develop, the deficit country will not be able to cover a trade deficit by increased borrowing. At that point, the currency depreciation will resume, prices in terms of the domestic country will rise causing interest rates to rise and the domestic money market to tighten. This will continue until a financial crisis/recession develops with all the consequences on production, employment and unemployment.

Recession, just as in the case of the gold coin example, will force a portion of the domestic industrial capitalists to shift from domestic sales to exports. But since a global crisis is raging, many domestic capitalists will not be able to do this successfully. In addition, during a global downturn in the international industrial cycle the domestic capitalists will face increased competition in the domestic market as foreign capitalists try to get out of their difficulties by increasing their exports. At this point, the law of absolute — not comparative — advantage brutally exerts itself. Industrial capitalists across the globe whose cost prices are above the global average — whether caused by lower productivity of labor or higher wages calculated in terms of universal money (gold) — are driven into bankruptcy and liquidation.

To be continued.


1 The Bank of England was forced to suspend the convertibility of its banknotes into gold sovereigns shortly after Britain entered World War I in August 1914. In 1926, Britain returned the pound to convertibility into gold at the prewar rate. However, this time, unlike the case before the war, it was a gold bullion standard and not a gold coin standard. The Bank of England was willing to sell bullion for pounds at the pre-war rate but was still unwilling to cash in a five-pound note for five gold sovereigns.

While the return to limited gold convertibility at the pre-war rate was hailed by “the City,” which was locked in competition with Wall Street for deposits, the industrial capitalists were hit with what amounted to a wage hike in terms of universal money — gold. British coal mine owners, who were losing ground on the world market, tried to take back the “golden” wage-hike by cutting wages in pound terms. The coal miners went out on strike to fight the wage cuts triggering the famous General Strike of 1926. (back)

2 The General Strike is still considered the high-water mark of the British working class’s struggle against the British capitalists. Shaken by this development, John Maynard Keynes concluded that it is far safer — for the capitalist class that Keynes represented — to lower real wages through inflation as opposed to cutting wages in terms of currency.

Economists in general agree that the return to gold, especially at the pre-war rate, was a major blunder on the part of the British government. In 1931, a run on the Bank of England’s gold reserves forced Britain off the gold bullion standard and the pound’s long depreciation began — with ups and downs — that has continued to the present. (back)

3 A currency is depreciated when the market price of gold (and in the past silver) rises above the official price. If the official price of a precious metal is raised by the government, the currency is legally devalued. For example, the U.S. dollar was devalued when the official price of gold bullion in terms of the U.S. dollar was raised from $20.67 to $35 under Franklin D. Roosevelt.

The dollar was devalued again when the official price of gold was raised from $35 to $38 and then to $42, its current official price, under Richard Nixon. The rise of the market price of gold beyond $42 — now around $1,800 — measures the monstrous depreciation of the dollar in the years since. The huge gap between the official price of gold and the market price gives rise to the illusion that the U.S. dollar today represents “non-commodity money.”

Under the capitalist mode of production, even if a currency has no official gold value, the current market price of gold in terms of a given currency still represents the actual amount of gold that the given currency represents at any point in time. This is not a legal law established by and enforced by the state but an objective economic law that the state, central bank, or anybody else can ignore only at their own peril. (back)

4 In the U.S., retail businesses now want to get rid of the paper dollar bills and base metal coins that have long served as currency in retail trade because such currency can be easily stolen by street criminals. To avoid holding significant amounts of currency on their premises, an increasing number of retail businesses are refusing to accept dollar bills and coins. The U.S. Treasury is allowing them to do this under the pretext that “legal tender” refers only to payments and not to purchases (means of circulation).

However, many low-income people in the U.S. lack bank accounts and the debit and credit cards necessary to make purchases without paper bills and coins. The Federal Reserve System is considering establishing a system of bank accounts that will be available to people who are too poor to have bank accounts at a commercial bank or credit union. Perhaps the Federal Reserve Banks will issue debit cards or provide some other electronic means to use these accounts to make purchases and payments.

The commercial banks, however, are afraid this will allow the Federal Reserve Banks, which traditionally have done no business with the general public, to emerge as competitors for deposits. This is true despite the fact that the commercial banks actually own the stock of the 12 Federal Reserve Banks that make up the Federal Reserve System. Perhaps a way will be found to have some special private or semi-governmental institution other than Federal Reserve Banks hold the deposits. In the light of the conflicting interest of retail businesses and the commercial bankers, the question is now under “study” by the Federal Reserve System and no action is expected for several years. (back)

5 It is important to realize that in the real world things are never equal. Under today’s conditions, the temptation to devalue the currency is always strongest when market prices exceed the underlying golden prices of production, themselves ruled by the law of labor value. When faced with the danger of deflation, the capitalist central banking system headed by the U.S. Federal Reserve System creates enough additional “paper” dollars to prevent prices in terms of U.S. dollars from dropping. This causes the dollar price of gold to rise. What often happens is that commodity prices rise in terms of dollars but rise less than the dollar price of gold does. Though commodity prices end up higher in dollar terms, they end up lower in terms of gold. (back)

6 Again, things are never equal. However, if you follow changes in interest rates on a day-to-day basis, more often than not you will see that the U.S. dollar price of gold rises when interest rates fall and drops when interest rates rise. Again, things are never equal. However, if you follow changes in interest rates on a day-to-day basis, more often than not you will see that the U.S. dollar price of gold rises when interest rates fall and drops when interest rates rise. (back)

7 Anwar Shaikh’s often brilliant analysis in his “Capitalism” and elsewhere fails him when it comes to analyzing interest rates because he accepts the idea that “modern money” is non-commodity money. I hope to deal with this in detail when I review Shaikh’s magnus opus. (back)

8 This and not the policies of the central banks explains why interest rates always increase during the rising phase of the industrial cycle. (back)

9 As commodity prices rise, the cost of producing gold increases, which lowers the rate of profit in the gold mining and refining industry. This causes capital to flow out of this industry into other now more profitable branches of production. The result is that gold production lags behind other branches of production during the rising phase of the industrial cycle leading to a rise in interest rates.

As a result, during the rising phase of the industrial cycle more money is needed to circulate the rising quantity of commodities in circulation. Not only does the quantity of commodities rise in terms of their various use values but also in terms of their rising prices. However, the profit motive causes the industrial capitalists to produce less new money material as the need for more money in circulation rises. As a result, the hoards of idle money held in the banking system fall, interest rates rise, and eventually the expanding phase of the industrial cycle ends in an economic crisis of overproduction. (back)

10 The logic of the neoclassical economists and the supporters of Modern Monetary Theory is, however, different, though both groups of economists support a “clean float.” Neoclassical economists support the idea of a clean float because the role of the state (including the central bank) is held to a minimum. MMT supports a clean float because it believes that since the national currency is not legally convertible into either gold or another currency, the monetary authority will be free to “monetize” the national debt to whatever degree is necessary to maintain “full employment.” (back)

11 This general law is modified by racism and sexism, which dictate that certain jobs paying higher than average wages are reserved for white men and those that pay lower wages are reserved for white women. Other jobs are reserved for “non-white” men paying lower wages than jobs for white men, while other jobs are reserved for nonwhite women paying the lowest wages of all. (back)

12 On average, the industrial capitalists pay for the full value (embodied labor) of the commodities that make up constant capital. However, even if they pay for the full value of labor power, they are paying for only portion of the labor performed by the worker. The rest of the labor is performed free of charge. Everything else remaining equal, the capitalist who pays the lowest wage will be able to undersell the other capitalists and win the battle of competition. (back)


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