Capitalist Economists Debate ‘Secular Stagnation’ (Pt 4)

How gold production drives expansion of the market

Here I assume that gold bullion serves as money material unless I indicate otherwise.

In a previous post, I indicated that there cannot be an overproduction of gold in its role as money material. This has been more or less the received view among Marxist writers over the years.

However, in thinking about this question more carefully I think my earlier post was incorrect on this point. I was correct in stating that from the viewpoint of capitalists as a whole there cannot be “too much” gold as far as the realization of value of (non-gold) commodities is concerned. The more gold there is relative to the quantity of other commodities, everything else remaining equal, the easier it will be for industrial and commercial capitalists to sell their commodities at their prices of production and thus realize the surplus value contained in them in the form of profit.

But what is true for the non-gold producing capitalists is not true for the gold producing capitalists. Indeed, from the viewpoint of an individual industrial capitalist there can never be too much of the commodities produced by their suppliers. As a productive consumer, industrial capitalist A can hope for nothing better than that supplier industrial capitalist B overproduces as much as possible. When B overproduces, all other things remaining equal, A gets to pocket some of the surplus value contained in B’s commodities. But from B’s point of view, the overproduction of B’s commodity is an absolute disaster.

True, the (non)gold producing capitalists do not consume gold, insomuch as gold serves as money material as opposed to raw material. But it is absolutely essential for them that gold is produced in adequate quantities if the value, including the surplus value, contained in their commodities is to be realized.

Even if gold bullion played no role whatsoever as raw material, a certain level of gold production would still be necessary for capitalist expanded reproduction to proceed. And capitalism can only exist as expanded reproduction.

How much gold capitalism needs—with the development of the credit system, banking, clearing houses, and so on being given—depends on the level and vigor of expanded reproduction at a particular time. The greater the possibilities of exploiting wage labor and the higher the rate of surplus value and the potential rate of profit in value terms, the higher the level of gold production must be if the process of expanded capitalist production is to proceed unchecked.

Advantages of investment in the production of gold for industrial capitalists

Investment in gold mining and refining has a particular attraction to industrial capitalists precisely because they need not carry out the dangerous C’—M’ step of the (re)production cycle. It is here that the surplus value contained in commodities is realized in the form of profit. If this step is not carried out successfully, there is no profit no matter how much surplus value is produced. However, commodity capital consisting of money material is already money as soon as it is produced, so no additional act of selling the surplus value-containing commodities is necessary.

The (re)production cycle for industrial capitalists producing money material

Like all other industrial capitalists, gold-mining capitalists begin with a sum of money M. The formula for capitalist reproduction of all non-gold producing capitalists is M—C..P..C’—M’. For gold producing capitalists, however, it is M—C..P—M’. How the gold capitalists obtain the initial M does not matter. It could be borrowed, stolen, obtained by selling illegal drugs, inherited, or acquired in some other way.

The gold producing capitalists must now exchange the gold for other commodities that make up productive capital, both constant and variable. They now no longer possess the gold but rather the commodities that make up constant capital and variable capital—labor power. The gold producing capitalists then carry out the act of production and once again possess a quantity of gold. As far as capitalist society as a whole is concerned, there is more gold—M—than before. Money in the most literal sense of the word has been made.

But do our gold capitalists as individual capitalists have more or less gold than before? If they have less gold bullion—M—than they spent on acquiring the commodities necessary for the production of the bullion, then they have made a loss, not a profit. There are many cases of capitalists investing in gold mining but finding very little or even no gold and going bankrupt. There is a long history of swindles involving fake gold mines.

Considering the advantages of producing money material, what actually prevents the industrial capitalists from producing only gold? One reason is that there are only so many rich mines. (1)

But there is another, far more fundamental, economic reason. In order for the initial M—gold—to function as capital, it must find sufficient quantities of commodities, including labor power, on the market to extract a still greater quantity of gold—make a profit for the gold producing capitalist. If these non-gold commodities are not to be found on the market, or they are not to be found in sufficient quantities, no additional gold can be produced, and no surplus value will be produced by the gold producing capitalists. As is the case with all other industrial capitalists, if no surplus value is produced, there is no profit.

Gold could hardly carry out its primary use value to serve as the measure of value of other commodities in terms of its own use value unless there were other commodities with different use values whose values need measuring. If gold production were to keep on expanding at the expense of the other branches of production, the whole process of capitalist production would sooner or later be radically disrupted and would eventually collapse. Like all other commodities, money material must be produced in certain definite proportions, not too much and not too little. Just like textiles, automobiles, steel, computers, and smart-phones, gold can be both under-produced and overproduced.

As more and more capitalists shift toward the production of gold—as they do when market prices fall below the prices of production—fewer and fewer commodities other than gold are produced. This is exactly what we see in periods of recession. During recessions, the production of commodities other then gold declines while gold production rises. As the quantity of other commodities declines relative to gold, at some point commodity prices begin to rise toward their prices of production.

When this happens, the rate of profit in the money material-producing industry begins to fall, at first relative to other branches of production and then absolutely. Gold in its role as money material must be produced in certain definite proportions relative to other commodities if capitalist expanded reproduction—the unity of production and circulation—is to continue.

When not enough gold is produced relative to the needs of capitalist expanded reproduction, sooner or later there will a crisis of the generalized overproduction of commodities. Under these conditions, capitalist circulation is thrown into crisis, which then disrupts capitalist production, which cannot proceed without circulation. When gold is produced in excessive quantities, the profitability of the gold-producing industry is undermined. And like is the case for all other commodities, production of gold—or whatever commodity serves as money material—will not proceed without profit.

Since there is no central plan—if there were, there would be no need for money material—how does capitalism see to it that gold is produced in the proper proportions? There is only one way, through the fluctuations of the industrial cycle during which under-production and overproduction regularly succeed one another.

One of the great peculiarities of gold production—or the production of whatever commodity serves as money material—is that an under-production of gold bullion is by definition identical to an overproduction of all other commodities, while an overproduction of gold is identical to under-production of all other commodities. Capitalism is doomed to fluctuate between these two states.

Under-production of gold, or what amounts to the same thing a generalized overproduction of commodities, leads sooner or later to a crisis of overproduction, while an overproduction of gold—or a generalized under-production of commodities—leads sooner or later to a recovery and boom. This is why “stabilization policies,” whether inspired by the work of John Maynard Keynes or Milton Friedman, or some combination of the two, to iron out the industrial cycle are doomed to failure.

Changes in the quantity of money, prices, interest rates and ‘liquidity traps’ under the gold standard

Why begin with the assumption of a gold standard when the world today is in a system of paper money? The reason is that the laws that govern the relationship between the quantity of money and prices are somewhat modified when a gold standard is replaced by a paper money standard. However, we cannot study what these modifications are unless we understand how things work under a gold standard. Therefore, I am forced to begin with a gold standard.

First, does the fact that gold is periodically overproduced as well as under-produced mean that the quantity theory of money as regards metallic money is correct? If this were the case, as soon as gold was overproduced prices that are reckoned in gold would immediately or very quickly rise. Conversely, as soon as gold was under-produced, prices would quickly fall. This was exactly Ricardo’s assumption and is absolutely essential to his theory of comparative advantage.

As a general rule, debts are denominated in currency units, like U.S. dollars, pounds and euros. Under a gold standard, however, the currency unit is defined as a fixed weight of gold (or silver under a silver standard). Dollars, pounds and so on are simply names for specific weights of gold. The quantity theory of money holds that changes in the quantity of money will quickly be reflected in changes in the prices of commodities and wages (the price of the commodity labor power) in terms of that currency. The quantity theory of money assumes that gold-backed currency and money in general function only as a means of circulation. It ignores the role of such currency as a means of payment and hoarding.

Ricardo knew that capitalists get rich by investing money at a profit M—C—M’. He was also well aware that there is no limit on the desire and indeed the need of the capitalists to enrich themselves. Therefore, the great English classical economist reasoned that it would be completely irrational for capitalists to hoard M, since they would incur a huge “opportunity cost” by failing to invest their money in profit-making undertakings.

This is why Ricardo assumed that every rational industrial capitalist would always produce as much as the material conditions of production would allow. To use Marxist terminology, Ricardo believed that the more surplus value is produced the greater the profit. If these assumptions are true, then any increase in the money supply, even if the money supply consists exclusively of full-weight glittering gold coins, will drive market prices higher with very little time lag because production of commodities is already maximized.

In reality, capitalists, except under extremely unusual situations—such as war economy or extreme boom, none of which can be sustained—produce considerably less than the physical conditions of production allow. Or to use the modern term, there is always “excess capacity,” not to speak of unemployed potential workers. Any increase in the quantity of money—even if the velocity of circulation remains unchanged, which is very far from being the case—will under normal conditions lead to a rise in production and fall in excess capacity. This means that there will be far less upward pressure on the general price level than Ricardo assumed for any given increase in the supply of money.

Our study of the industrial cycle throughout this blog shows that, leaving aside gold discoveries and technological breakthroughs in gold production, periods of accelerated growth in the quantity of money tend to be periods of stagnation in the process of capitalist reproduction. The reason this is true is that crises lead to falling prices, causing market prices to fall below prices of production. When this happens, the rate of profit in the money material-producing industry rises above the average rate of profit, encouraging capital to shift from other branches of production to the production of money material.

Therefore, periods of accelerating growth in the quantity of metallic money, as a rule, will coincide with periods of declining velocity of circulation. This is exactly what we find with post-crisis “liquidity traps,” to use Keynesian terminology. When this happens, the upward pressure that an increasing quantity of money puts on prices is entirely negated.

The converse is also true. The more the quantity of money in circulation declines relative to the quantity of commodities on the world market—or an absolute decline occurs within a country due to an unfavorable balance of payments (2)—the more the velocity of circulation will increase. This increase continues until a crisis intervenes.

Again, the potential downward pressure on prices in this case is more often than not completely negated by a rise in the velocity of circulation as well as an increased rate of growth in the quantity of credit money created on a given monetary base. Therefore, prices are very insensitive to fluctuations in the quantity of money as long as they do not lead to crises, extreme booms or war economies. (3)

What is highly sensitive to changes in the quantity of money under a gold standard is the rate of interest. The more plentiful the quantity of capital that exists in the form of money as opposed to the form that exists in the form of other commodities, the more the balance of forces in the struggle within the capitalist class over the division of the profit between interest and the profit of enterprise will favor industrial and commercial capitalists at the expense of money capitalists.

Conversely, the scarcer the quantity of money becomes relative to real, non-money capital, the more the competitive struggle will shift in favor of money-lending capitalists. In Volume III of “Capital,” Marx provides figures illustrating these laws empirically.

The figures show that changes in the quantity of gold held in the vaults of the Bank of England had little effect on prices of representative commodities, but they did have a strong effect on interest rates. Declines in the quantity of gold in the Bank of England’s vaults meant higher interest rates, while increases of gold in the bank’s vaults meant lower interest rates.

What is true is that an increase in the quantity of gold bullion relative to other commodities will lead sooner or later, often after a considerable time lag, to a boom. It is the boom that raises market prices above the prices of production. Conversely, an under-production of gold bullion relative to the prices of other commodities will end in a generalized crisis of the overproduction of commodities, again after a more or less considerable time lag. It is the crisis that then drives market prices below prices of production.

Crises under the gold standard

When a crisis breaks out, the role of money—here we assume that the currency notes are convertible into gold at a fixed rate by the monetary authority—as a means of payment comes to the fore. It is not the amount of capital but the amount of capital in the form of money—whether gold or currency convertible into gold—that a capitalist owns or controls that makes the difference between capitalists surviving and even increasing their capital at the expense of fellow capitalists, or losing their capital and maybe ceasing to be capitalists altogether. The capitalists cannot pay off their debts in idle factories, idle rails, rolling stock or ships. On the other hand, during a crisis the capitalists with money are always king. They can buy up the real capital of their cash-short rivals for a song and emerge richer in capital than they were before the crisis.

This is one way that successive crises accelerate the centralization of capital and thus the formation of monopolies. For these reasons, when a crisis strikes, the capitalists will attempt to increase the portion of their capital that consists of money—again whether actual gold or banknotes doesn’t matter because we are assuming a gold standard. Therefore, a crisis brings a large increase in the demand for money not only as a means of payment but as a means of hoarding.

Crises under the paper dollar standard

While Marx wrote a lot about paper money, he was primarily interested in the laws that govern the movement of prices and interest rates under the gold standard. Britain was on the gold standard, as was the U.S., during much of Marx’s active life, while the European continental powers were in the process of moving from the silver standard to the gold standard.

Marx did, however, formulate a law that governs the effects of prices in terms of non-convertible—into gold—paper money. He explained that the value of each unit of paper money in terms of real money—gold or silver—is determined by its quantity. All other things remaining equal, if the quantity of paper money is doubled, prices in terms of paper money will double. Conversely—all things remaining equal—if the quantity of paper money is halved, prices will drop by 50 percent.

In other words, Marx seems to support the quantity theory of money as far as paper money is concerned though not for metallic money or credit money. However, experience proves that the movements of paper money prices are more complicated than this simple rule implies.

The basic difference between a gold standard and a paper money system is this: While under a gold standard currency units like dollars, pounds, and so forth represent fixed quantities—weights—of gold, under a paper system currency units represent variable amounts of gold. If the dollar, pound, euro and so forth fall in terms of gold value, all things remaining equal, the price of commodities expressed in them will rise. Conversely, if the quantity of gold that a dollar, pound or euro represents rises, prices will decline in terms of those currency units.

Remember that gold itself—or whatever commodity serves as money material—represents the social substance of money—a definite quantity of abstract human labor measured in some unit of time that unlike the abstract human labor represented by other commodities is directly social. If a U.S. dollar, for example—all else remaining equal—represents less directly social abstract human labor than before, prices expressed in it will rise. Conversely, if it represents more directly social abstract human labor than before, prices expressed in it will fall.

In addition, and this is very important, under the dollar system world debts are denominated in U.S. dollars—variable amounts of gold. As the dollar falls, debts in term of real money—gold—are reduced. When the dollar rises in gold value, debts in terms of real money—gold—rise.

While this in no way modifies the fact that gold remains the measure of the value of commodities, it does mean that when a crisis hits, dollars rather than gold are demanded as a means of payment and of hoarding. It is extremely important for the U.S. world empire that the U.S. dollar retain it position as the medium in which international debts are denominated and payable.

Under the dollar system, as it has evolved and operated since the end of the Bretton Woods system, the dollar/gold market is extremely speculative. This is in contrast to the gold standard, where the currency price of gold never varies and speculation is almost entirely absent—unless the gold standard is in crisis and facing the prospect of imminent collapse.

During periods of strong “bull” movements in gold in terms of U.S. dollars, the dollar price of gold will rise much faster than the actual increase in the dollar monetary base. The most extreme example of this was the period between August 1979 and January 1980 when the dollar price of gold more then doubled, from under $300 per troy ounce at times in August 1979 to $875 at the peak in January 1980, though the actual size of the dollar-denominated monetary base only increased by a few percentage points in that period.

However, the rising price of raw materials, and to a lesser extent wholesale prices, and to a still lesser extent retail prices—as well as increased reserve requirements against consumer loans imposed by the Carter administration in a panicky move to halt the plunging value of the dollar and its satellite currencies —caused a huge increase in interest rates. The extremely high interest rates caused money capitalists to begin to dump gold in order to take advantage of these unprecedentedly high rates. If the Fed had moved to double the size of the U.S. dollar monetary base—like they did after September 2008 under quite different conditions—prices would have doubled in a short time and triple-digit U.S. dollar inflation would have set in.

If this had happened, the attempt to impose the dollar standard in place of the gold standard would have failed and international debts would once again have been denominated in terms of gold bullion—not U.S. dollars. The political history of the last 40 years would have been entirely different. The “Volcker shock” represented the refusal of the Federal Reserve System under Paul Volcker to double the monetary base in a bid to hold down dollar-denominated interest rates. The jump in interest rates and subsequent deep recession was the price that had to be paid to save the dollar system, the financial foundation of the U.S. empire.

The general law under the dollar system—and in general all paper money systems—is that a fall in the amount of gold that the U.S. dollar actually represents will only be fully reflected at the retail level if it reflects an actual increase in the U.S. dollar monetary base. If the monetary base does not increase—or increases much more slowly after a sharp devaluation of the paper dollar—a rise in dollar-denominated interest rates will cause the dollar to recover much of its gold value before retail prices can fully reflect a momentary fall in the paper dollar’s gold value.

However, the fact that sharp devaluations of the dollar against gold lead to sharp rises in interest rates means that the U.S. Federal Reserve System—which under the dollar standard acts as the world’s central bank—cannot avoid the outbreak of economic crises by “printing” paper dollars. This was the lesson of the 1970s. However, the Fed has vastly more room—though not unlimited—to increase the quantity of U.S. dollars after a crisis breaks out. It can do this because of the sharp increase in the demand for U.S. dollars as means of payment and as a means of hoarding that the crisis creates.

At a deeper level, the crisis lowers interest rates by reducing the quantity of commodities relative to gold. Therefore, just as was the case under the gold standard, under the dollar standard interest rates fall in the wake of a crisis.

Under the dollar standard, as also under the gold standard, the mechanism of periodic crises keeps the average rate of interest below the average rate of profit in the long run. In the wake of a crisis under the dollar standard, the extra demand for U.S. dollar lingers for a time. The greater the crisis the longer the extra demand for dollars will last. The extra demand for U.S. dollars after the crisis is generated by businesses and banks rebuilding their dollar liquidity during the post-crisis period of stagnation and “liquidity trap.” This has been the lesson of the “Great Recession” of 2007-2009 and its aftermath.

Retail prices and the quantity of gold under the dollar standard

Ironically, because of the great lag between changes in the gold value of the U.S. dollar and its full reflection in retail prices, prices calculated in terms of gold rather than in terms of U.S. dollars have become highly sensitive to changes in the rate of growth of the quantity of gold. Imagine what it would be like not to have any idea what the dollar—or satellite currency—price of your morning coffee would be before you checked the morning dollar gold quote on your smart-phone. Paper money prices, therefore, reflect the actual amount of gold that a given paper currency represents on the market not at that particular moment in time but a kind of average amount of gold that the given currency represents over the preceding period. This is generally true not only under the dollar standard but paper systems in general.

Only in the final stages of hyper-inflation do retail prices immediately reflect changes in the gold value of paper currency. The classic example if this was the German hyper-inflation of 1923, when retailers checked the exchange rate of U.S. dollars—then representing a fixed quantity of gold—against marks several times a day and adjusted their prices accordingly.

Changes in gold production and the value of the U.S. dollar under the dollar standard

The U.S. dollar acts not only as a national but also a global currency under the dollar system and its associated world empire. Therefore, the quantity of gold bullion that actually “backs” the U.S. dollar located both in government and private hoards never falls but always increases. But the rate of increase in gold bullion does change as a consequence of changes in the level of gold production. Relatively small changes in the rate of increase of the global gold hoard, while they have little effect on the present quantity of gold, has a great effect on the future quantity of gold. This is a law of exponential functions—the power of compound interest.

Since the end of the Bretton Woods system, experience has shown that bull markets in gold in terms of paper currencies have coincided with periods of declining or stable gold production—when the rate of increase in the global quantity of gold bullion is declining—while bear markets in gold coincide with rising gold production.

For example, from 1970 to 1980—during which the dollar price of gold rose from $35 an ounce to $875 in January 1980—gold production initially fell (from 1970 to 1975), and then was roughly constant (from 1975 to 1980). The whole period was therefore marked by a declining rate of increase of the world’s total quantity of money material that backed the U.S. dollar as the world currency. The bear market in gold that followed, which saw the dollar price of gold—with many fluctuations—drift downward from $875 at the peak in 1980 to well below $300 in 2000, was a period of rising gold production.

The period between 2001 and 2008, which saw gold rise from below $300 to about $1,000, was again a period of declining gold production. The current bear market in gold has coincided with a rise in gold production since 2008. We therefore see that the dollar standard and consequently the U.S. world empire is in deep trouble when the production of gold declines.

This doesn’t mean, however, that the U.S. dollar cannot lose gold value even if the rate of increase in the world supply of gold bullion is rising as long as the U.S. dollar monetary base grows at a faster rate. Until about a year ago, the Federal Reserve System was increasing the U.S. dollar monetary base at an annual rate of about 30 percent. Even this rate of increase was well below the rate of growth of the monetary base during the crisis in late 2008, which ran into the thousands of percent on an annualized basis. But it is still far higher than the 2 to 3 percent rate of growth of the total global quantity of gold bullion. The 30 percent rate of increase in the world’s dollar monetary base implied sooner or later a considerable fall in the dollar’s gold value and an eventual double-digit inflation.

Such an inflation would seriously endanger the continued role of the dollar as the chief international medium in which debts are denominated and paid and therefore the U.S. world empire, as already pointed out. This is why the Federal Reserve System has over the last year halted the growth in the dollar monetary base altogether, which is having a considerably negative effect on the rate of economic growth in the economies of many countries—Greece being only the most extreme example at the moment.

Because of the highly speculative nature of the gold-dollar market, most of the daily and even monthly changes in the dollar price of gold more or less cancel themselves out, which is one of the reasons why retail prices are insensitive to daily fluctuations in the dollar price of gold. However, a persistent change in the dollar price of gold will sooner or later be reflected in retail dollar prices.

For example, Franklin D. Roosevelt’s devaluation of the dollar in the 1930s, which raised the dollar price of gold bullion from $20.67 to $35 a troy ounce, did not raise retail prices at that time. But by the 1960s, retail prices in terms of dollars, though not in terms of gold, were far higher than they were even in the inflationary year of 1920. Similarly, today’s dollar retail prices are a far cry from the retail prices of the 1960s, when the dollar price of gold bullion was still $35 per troy ounce.

In the long run, the devaluation of the U.S. dollar—rising dollar price of gold—will be reflected in retail prices. The history of prices and currency values confirms that the permanent devaluing of the U.S. dollar—or any paper currency—in terms of gold is highly inflationary.

Finally, as a rule the Federal Reserve System allows the gold value of the dollar to fall when prices in terms of gold are under downward pressure, not when they are under upward pressure. As our study of crises has shown, prices in terms of gold are under downward pressure when crises loom—such as during the 1970s and again in the period leading up to the Great Recession.

Prices are under upward pressure during periods of prosperity such as after World War II and to a lesser extent the 1980s and 1990s. Under the gold standard, prices calculated directly in gold bullion and prices in terms of currency are identical because the currency units like dollars, pounds and so on are fixed weights of gold. However, under a system of paper money, a decline in prices in terms of gold bullion can be accomplished by devaluing the currency as opposed to allowing prices in terms of currency to drop. It is therefore quite possible for prices in terms of a devalued currency to rise while they are actually falling in terms of gold bullion. During the 1970s, prices fell sharply in gold terms while they rose considerably in terms of devalued U.S. dollars and its satellite currencies.

During the 1970s, as a result of the constant devaluation of the debts they owed, many capitalists—corporations—were able to hang on longer than they would have if the debt had not been devalued. The huge devaluation of the U.S. dollar and its satellite currencies nominally drove interest rates to unprecedented levels as the money capitalists responded to the devaluation of the debts owed them by insisting on higher interest rates in currency terms. At first, the “real interest rates”—interest rates in terms of commodities—were actually negative. Old debts were being wiped out by inflation though new debts were created.

Many bankruptcies that were postponed during the 1970s occurred as the high inflation ended. U.S. manufacturing employment in 1979 reached its highest level in history. Before 1979 the historic rising trend in U.S. manufacturing employment that was only interrupted during the Great Depression and dipped only briefly in earlier crises ended with the Volcker shock. At the beginning of the Volcker shock, U.S. manufacturing employment stood at an all-time high of 19.6 million. In April 2010, it bottomed out at 11.5 million, wiping out virtually all the gain since the end of the Depression. Since then, there has been a modest cyclical recovery, with the July 2015 manufacturing employment estimated at 12.36 million, well below the level that prevailed 35 years ago.

The same thing occurred in Britain as the aging industry of the former “workshop of the world” was unable to hold on once the value of the pound was more or less stabilized under Margaret Thatcher.

The rate of growth in the quantity of gold and the rate of expansion of the market under the paper dollar system

When at the beginning of the 1970s the last form of the international gold standard—the Bretton Woods system—was abandoned, economists—both Keynesians and Friedmanites—explained that there was not enough gold in the world to support continued economic growth. By replacing money material made up of a real commodity, the limit placed on the growth of the market by the rate of growth of the quantity of gold bullion would be removed.

However, this policy is false not only in terms of Marxist theory; it failed the supreme test of practice. Marx’s theory of value, surplus value, money, interest rates and prices was confirmed not only in the pages of “Capital” but by reality. The experience of the last 40 years has now been long enough for us to observe the basic economic laws that govern the dollar system—and any similar “paper” money system that may replace it in the future. After a certain period during which gold loses purchasing power against most other commodities, the rate of growth of gold bullion begins to decline and a bull market tends to develop in the gold market.

While a bull market in gold bullion does not immediately raise retail prices, it does quickly raise primary commodity prices in terms of U.S. dollars and its satellite currencies. If this rise in primary commodity prices continues, it is only a matter of time before they spread first to wholesale prices and then to retail prices.

This phenomenon exerts an overwhelming and irresistible recessionary pressure on the entire world capitalist economy. To prevent runaway inflation and the collapse of the dollar system—and the U.S. world empire—the Federal Reserve System has little choice but to allow interest rates to rise. If the Federal Reserve tries to resist the upward pressure on interest rates brought about by the dollar’s depreciation against gold like they did in the 1970s, interest rates will rise even more in the end. This was the lesson of the 1970s. Only recession can reverse such rising interest rates.

Thanks to the unprecedented levels of interest rates at the end of the 1970s’ inflation, a large portion of the industrial capitalists—corporations—converted themselves into money capitalists. This eventually lowered interest rates but at the cost of an unprecedented explosion in debt as a percentage of GDP. The high level of debt that was created has limited the room the Federal Reserve System has to maneuver since even a modest rise in interest rates would make the current mountain of debt very difficult to service.

During the first phase of the 2007-2009 crisis, from August 2007 to July 2008, the Federal Reserve System, contrary to expectations of many “bulls” on Wall Street, resisted the pressure to stave off the crisis by increasing the size of the global dollar monetary base. If the Fed had flooded the banking system with newly created monetary base dollars, the rate of inflation would have surged. We know this because between the summer of 2007, when the initial panic hit world credit markets, and July 2008, primary commodity prices soared in dollar terms, and the dollar price inflation spread to the U.S. producer price index. If this inflation had not been nipped in the bud—which it was by the Fed’s refusal to expand the monetary base significantly for a year after the initial crisis erupted—there would have been a major rise in nominal interest rates.

Rising inflation would have wiped out old debts—debtors would have repaid creditors in depreciated dollars and other paper currencies—but it would have created new debts as soaring dollar costs would have forced businesses and consumers to borrow still more money. Deflation, unlike inflation, wipes out old debts through either bankruptcy or repayment without creating new ones.

Under pain of the collapse of the dollar’s role as the main means of payment and hoarding, the Fed could not have allowed such inflation to continue for long. And because debts levels were relatively much higher than they were in the 1970s, the economy would have been far less able to service a new, still higher level of debt than it was at the end of the 1970s inflation era. This means that even a short period of 1970s-style inflation would only have postponed the Great Recession at the price of making it far worse than it was.

The growth of the world market and the growth in the quantity of gold under the dollar system

Under the dollar system, just as was the case under the gold standard, the growth in the quantity of gold—the level of gold production—continues to play the decisive role in the growth of the world market. The faster the quantity of gold grows the faster the U.S. Federal Reserve System can create dollars, which in turn serves as the main reserve supporting its satellite paper currencies, including the euro, the Chinese yuan, and all other paper currencies in the world.

When market prices are above the prices of production, which means that the rate of profit of gold production is below the average rate of profit, the ability of the Federal Reserve to create additional liquidity is far less than when the converse is true. It therefore runs into the gold/inflation barrier much faster when market prices are above the prices of production and gold production is declining than when prices are below the price of production and gold production is rising.

Recently, some Keynesian economists have been congratulating themselves because the extremely rapid rate of growth of the U.S. dollar monetary base since 2008 has not—or rather not yet—led to a sharp rise in retail prices in dollar terms. First, this ignores the fact that the biggest crisis since the Great Depression did not actually lower the dollar cost of living. Under the gold standard, recessions far milder than the the 2007-2009 crisis always lowered the cost of living.

The failure of the cost of living to decline shows that that devaluation of the dollar against gold indeed influenced retail prices by preventing the sharp crisis followed by prolonged stagnation from actually lowering the dollar cost of living. Of course, Keynesian economists believe this a good thing because a continued record high level of retail prices—in terms of U.S. dollars and most other paper currencies—continues to put downward pressure on real wages. Holding down real wages, according to Keynesian theory, is necessary if “full employment” is to return.

This year has seen the dollar price of gold slip, or what is the same thing, the gold value of the dollar has been rising. The general trend of the dollar price of gold has been downward since 2011. But it isn’t only the dollar price of gold that has been declining. Indeed, the dollar prices of most other primary commodities has fallen even more than the dollar price of gold. If this trend continues, it will be only a matter of time before wholesale and then retail prices decline. This would crack the current credit system, which is based on the assumption that the authorities will never allow a major deflation at a thousand and one places leading to deep Depression.

The determination never to allow retail prices to fall significantly is a basic lesson the Federal Reserve has drawn from the Depression of the 1930s. But if the Fed relaxes its current freeze on the size of the U.S. dollar monetary base, it risks a major run on the currency sooner or later as it tries desperately to prevent deflation by devaluing the dollar. That would put the dollar’s role as the main means of payment and hoarding on the world market in question and threaten the collapse of the U.S. world empire.

The dollar system, the U.S. empire, and the coming U.S. recession

The current “strong dollar”/weak gold phase makes it difficult for the Federal Reserve System to raise interest rates. Higher interest rates imply lower commodity prices, first primary commodity prices but then wholesale and finally retail commodity prices. Falling prices imply depression and much higher unemployment.

Even from a purely technical point of view, interest rates almost always rise when inflation accelerates and fall when inflation fades or gives way to deflation. The reason is that if the dollar prices of commodities were to fall, all things remaining equal, the quantity of dollars in terms of purchasing power relative to commodities increases, which exerts a powerful downward pressure on interest rates.

With Russia and Brazil in recession and China either in recession or at least entering a much slower phase of growth, the U.S. trade deficit seems set to grow rapidly in the next year or so. This plus the fact that money capital in the U.S. will soon be flowing abroad to take advantage of cheap assets in Greece, in Russia and Ukraine (politics allowing), in Brazil, and most importantly in China finally allowing U.S. interest rates to rise. Relatively slow growth if not outright recession in China along with other industrializing nations like Brazil will oblige these countries to increase exports to the U.S. where business is still good due to abundant money and low interest rates.

The flow of commodities into the U.S. will cause money capital to flow out of the U.S., which will then weaken the dollar and finally allow the Fed to raise interest rates. This flow of commodities into the U.S. will inevitably flood the U.S. market, and rising interest rates will then usher in the next U.S. recession

This recession seems likely to arrive sometime around 2017—since industrial cycles tend to last 10 years, give or take a year or two, and the last recession began in 2007. (4)

Whatever the exact timing, the challenge for the Fed will be to get through the recession without resorting to “quantitative easing.” This may explain why the Fed wants to raise the federal funds rate before the end of the current year, though the current strong dollar and the associated falling prices of primary commodities make this extremely difficult.

The Fed is hoping to fight the coming recession through the traditional methods of lowering the federal funds rate—and perhaps the new interest rate on deposits held in the Federal Reserve Banks by the commercial banks—without resorting to massive quantitative easing. If the coming recession does force them into quantitative easing, the consequences for the dollar system and U.S. world empire, which has maintained “peace” among the imperialist states for the last 70 years, will be severe.

Whatever the exact form the capitalist international monetary system takes in the future, it is the level of gold production that will continue to play a crucial role in the rate of expansion of the market. The level of gold production is profoundly cyclical. Weak gold production leads to crises, which stimulate gold production. Economic booms, in contrast, weaken gold production, which triggers more intense crises, which again stimulate gold production.

Secular stagnation and long-term trends in gold production

However, not all changes in the level of the production of money material are cyclical. Changes in technology and the natural levels of production also influence gold—and in early times, silver—production. The 15th century saw an acute shortage of money metals as trade expanded and European silver mines were facing exhaustion. The increasing shortage of cash encouraged governments of the time to finance expeditions to Africa in search of new gold and silver mines. The Far East—India and China—were also known for their huge accumulations of gold and silver and represented large markets for European commodities by the standards of the time.

This is why the Spanish government financed Columbus’s voyage in hopes of finding new markets in India. As it turned out, the Americas got in the way. But the Americas were themselves rich in money material; the market exploded—called by historians the commercial revolution—and the capitalist system was born. Europe’s developing money-commodity economy therefore escaped the fate that had befallen its Roman predecessor, and over the following centuries developed into the modern capitalist system.

During the 19th century, there were two periods that saw two non-cyclical huge expansions of gold production. One followed the discovery of gold in California and Australia in 1848-1851 and the other in South Africa, Alaska and Canada at the end of the 19th century, plus the discovery of the cyanide process, which considerably reduced the cost of producing a given quantity of gold bullion from a given amount of ore of a given grade.

What happens when there is a discovery of rich new gold mines or a new way is discovered of producing more gold bullion from existing mines? If at the time of discovery, market prices coincide with the prices of production, the fall in the value of gold relative to other commodities will mean that market prices will now be below the price of production even if there has been no preceding economic crisis. In order for them to again equal the prices of production, market prices must rise. The first thing that will happen is that gold production and the quantity of money material increases. The banking system is flooded with gold—or increased paper money reserves that can be now be created by the central banks due to their increased ability to create reserves without their currency depreciating against gold.

Independently of the industrial cycle, the rate of interest will fall, increasing the profit of enterprise, all else remaining equal. This will encourage an investment boom and a rise in demand relative to the existing supply of commodities. As long as there is excess capacity and unemployed workers, production will increase rapidly. Eventually, however, boom conditions—unusually low levels of excess capacity and growing scarcity of at least skilled labor—will cause prices and wages to rise in money terms. However, the production of gold will not decline until market prices reach and then exceed the new higher prices of production.

The result will be a period—perhaps extending over several decades—of faster than average economic growth—capitalist expanded reproduction proceeding with greater than usual vigor. The demand for the commodity labor power will be high. There is plenty of money available for the capitalists to pay additional workers to produce additional surplus value, which can now be realized as profit. This combined with a rising cost of living encourages unionization, and the growth of workers’ parties that draw their strength from the unions. However, higher profits also increase the possibility of the capitalists sharing the rise in profits with the best organized workers. This encourages a growth of the labor aristocracy and increased opportunism. This is exactly what we saw, for example, from the second half of the 1890s until the outbreak of World War I, and earlier with the British trade unions in the mid-19th century.

In the absence of new gold discoveries, existing mines are gradually exhausted. Unless there are dramatic advances in mining technology, gold will rise in value relative to other commodities. This means that in gold terms the prices of production of commodities will decline putting long-term downward pressure on market prices in gold terms. Capitalist expanded reproduction will therefore face strong head winds leading to more severe crises and longer periods of post-crisis liquidity traps. Under these conditions, the demand for the commodity labor power will be weak and unionization will be far more difficult. The bosses will be encouraged to take a “tough stand” and bust unions altogether. Doesn’t this describe the situation that has prevailed since the 1970s?

A non-cyclical element in the Great Recession

In the late 20th century, the gold mines of South Africa, which had been the chief source of money material during the 20th century, faced massive depletion as miners had to go ever deeper to reach the gold deposits. The severe depletion of the South African gold mines caused gold production to decline starting in 2001 even though global prices when calculated in terms of gold were below the levels that had led to such a global production decline previously.

As a result, a new bull market in gold started in 2001 before prices in terms of gold had reached the levels of the late 1960s and early 1970s or 1920—the previous peaks in prices of commodities when reckoned in terms of gold. The decline in gold production that occurred between 2001 and 2008 was not just cyclical but reflected a worsening in the natural conditions of producing gold. The Great Recession was the market’s way of correcting this situation.

During the recent bull market in gold, which ended in 2011, a lot of relatively small capitalists—particularly in China where capitalism has been developing at a breakneck rate—tried their luck and opened new gold mines making China the world’s top gold producer. Bad as the Great Recession and the secular stagnation has been, without this rise in gold production economic conditions would be far worse. The rise in gold production has helped stabilize the capitalist economy in the wake of the Great Recession, but it has also resulted in a new bear market in gold, which is now hitting these new gold miners hard in terms of the bottom line.

Since there have been no great gold discoveries comparable to 1848-1851 or the 1890s, it remains to be seen how long the current rise in gold production can be maintained in the face of gold’s current decline in purchasing power. If it ends in the near future, perhaps as early as this year, prospects for the capitalist economy in the immediate years ahead will be grim. A renewed decline in gold production, whenever it arrives, will make it much more difficult to maintain the dollar system and the U.S. world empire. (5)

In any case, the chance of finding new mines on the relative scale of 1848-1851 and the 1890s, not to speak of the 16th century, seems unlikely in the decades ahead. Unlike the situation in the 19th century, the world is thoroughly explored by resource companies now armed with powerful satellites and computer technology. It therefore seems unlikely that there are any huge sources of gold in the Earth’s upper crust that are unknown to the mining companies.

It is always possible that some great discovery will be made that enables gold bullion to be produced from much poorer ore than ever before. But this is far from certain, though there will undoubtedly be improvements in mining and refining technology in the decades to come. It may in the more distant future be possible to mine gold from asteroids, and someday the mining of asteroids might even become the basis of a future socialist economy—though such an economy would not need gold for money material. But it will take many decades—if ever—before it will be profitable to mine asteroids for gold.

It has been more than a century since the boom triggered by the last great gold rush in the 1890s tapered off. Only one great period of accelerated capitalist expanded reproduction occurred after the one that followed the 1890s. That occurred after World War II and was rooted in the super-crisis of 1929-1932 and the unprecedented cessation of capitalist expanded reproduction that followed. Unless a great geological discovery of gold is made, which seems highly unlikely, at least until asteroid mining comes on-line, or a breakthrough in the production of gold from poorer ores, an acceleration of capitalist expanded reproduction such as followed the gold discoveries of 1948-1851 and the 1890s seems unlikely.

That leaves the possibility of a great acceleration of capitalist expanded reproduction, following a breakdown of capitalist expanded reproduction, such as the period of prosperity that followed World War II. This seems perfectly possible in theory and is hardly inconceivable given the increasingly unstable character of the world economy since the 1970s and the tendency of recessions to worsen over time.

Indeed, we might define a super-crisis as a crisis that is so severe it can give birth to a period of greatly accelerated capitalist expanded reproduction without any revolution in the production of money material. But before that can occur, there would have to be an economic and social disaster of such scope that it would be doubtful our modern civilization could survive. It now seems the post-World War II boom was only an interruption in a trend toward growing secular stagnation that began a century ago.

Paper money, the dollar system and secular stagnation

When paper currency is devalued, it not only tends to trigger inflation, it tends to cause interest rates, first nominal and then real, to rise when the inflation ends, which it must if the paper currency is to continue to function as a means of payment and hoarding. Everything else remaining equal, high interest rates tend to slow down the process of expanded reproduction by increasing the portion of surplus value that goes to the money capitalists as opposed to the industrial capitalists. But the problems with paper money don’t end here.

If a paper money system such as the current dollar system is to last for any period of time, the paper currency must not be devalued continuously. If it were, the “bulls” in the gold market would always win, the devaluation of the currency would very quickly get out of hand, and the currency would lose its ability to function as a means of payment, hoarding and even as a means of purchase. Therefore, in order to maintain a paper currency over a prolonged period of time, periods of devaluation must be followed by periods of appreciation. This way the “gold bears” win occasionally and the long-term devaluation of the paper currency is held in check.

When a paper currency appreciates against gold, the nominal rate of interest tends to decline. The reason is that as the currency price of gold declines, currency notes in effect bear a positive rate of interest when interest is calculated in terms of gold. Currency notes, even if they are held inside a mattress or a safe, become to a certain extent capital. Therefore, a 2 percent rate of interest under an appreciating currency—a falling currency price of gold—is a much higher rate of interest than a 2 percent rate of interest under a stable gold standard system.

This transformation of notes into capital, however, gets in the way of the notes’ role as currency. It encourages the hoarding of notes—which lowers the nominal rate of interest—but gets in the way of expanded capitalist reproduction, which requires that the capitalists get rid of the notes—or bank money that is payable on demand in these notes—as fast as possible if expanded capitalist reproduction is to proceed with maximum vigor. Appreciating currency encourages liquidity traps and stagnation.

Therefore, the attempt to escape from growing secular stagnation by replacing the final stage of the international gold system—the Bretton Woods system—has not only failed, the paper money system itself is a secondary cause of stagnationist tendencies.

Next, secular stagnation, technical innovation, and the rise of new industries.


1 Gold is an element—not a compound—that was present in the dust cloud out of which the sun and the other bodies of the solar system formed some 4.6 billion years ago. Gold is therefore present in minute amounts in virtually all rocks and soils on Earth and in seawater. There has been speculation that someday gold might be produced from seawater. Given present prices of production that are measured like all prices in terms of gold, it is not profitable and will not be profitable in the near future to produce gold from such poor “ores.” However, as long as capitalist expanded reproduction exists, the need for still more gold will continue. As present-day mines are depleted, the price of production of commodities will fall. Future crises will have to progressively lower market prices in terms of gold down to—and for periods of time below—the falling prices of production in order to stimulate new gold production from poorer ores—or in the more distant future maybe even from asteroids if capitalism were to last that long.

A long-term downward trend in the prices of production, however, intensifies crises and prolongs the periods of stagnation that follow them. It in other words creates heavy headwinds for the process of expanded capitalist reproduction resulting in secular stagnation. As we saw last month, capitalist production was born out of the opposite process. The discovery of very rich mines in the New World that were put in reach of bourgeois Europeans due to the advances in shipping technology by the end of the 15th century meant rising prices of production, which launched the capitalist mode of production. (back)

2 An absolute decline of the quantity of gold on the world market is virtually impossible. As long as gold coins circulate, a certain amount of gold is lost due to the wear and tear on the coins that gradually grow “light” in circulation. Gold bullion can also leak into non-monetary uses such as dentistry and electronics, which is more likely to happen when market prices in terms of gold are making gold cheap. When gold is overproduced relative to its role as money material, more of the gold is freed up to function as raw material.

However, the reverse also happens. When the demand for gold booms, old electronics are “mined” for their gold. And during the gold boom of that ended in 2011, there were reports of people removing gold fillings from their teeth. And there are the gruesome stories of the Nazis removing gold from the teeth of concentration camp victims, melting it down into gold bars, and depositing them at the Reichsbank in order to build up Germany’s gold reserves.

Gold production would have to fall to almost nothing before there would even be a slight absolute decline in the quantity of gold serving as money material—or very easily convertible into money material—that exists on the world market. In practice, therefore, on the world market the quantity of gold measured in terms of weight can only grow, but its rate of growth varies. The quantity of gold within a given country can fall, but such a decline in the quantity of gold will always be offset by a rise in gold in other countries. (back)

3 Liquidity traps, where large amounts of money seeking investment is lying idle, make it much easier for governments to finance large deficits and therefore wars. We are in such a period at present, which means that there is a heightened danger of war. (back)

4 All predictions on the timing of shifts in the phases of the industrial cycle are highly tentative, because each industrial cycle has unique features. The most unique feature of the current industrial cycle is the extremely weak rate of growth despite the massive monetary inflation that occurred during the crisis and continued to a lesser extent until about a year ago. The weak growth implies that the boom phase of the current industrial cycle has been postponed. There is still time for a boom between now and 2017-2018 when the current cycle is due to end, assuming a regular 10-year cycle. But time is running out.

This implies that the current cycle may therefore be longer than the normal 10 years or so. Optimistic Wall Street economists making the case for investment in stocks make exactly this point. They claim that the next recession can be postponed to 2020 or even later. And it is possible that they will be proven correct on this point.

However, the Federal Reserve decision to end quantitative easing is already having a strong recessionary effect on the global economy, especially for raw materials-producing countries like Russia, but also industrializing Brazil, already in recession. China is running into more and more barriers to continued high growth as slow global expansion makes it difficult to find the new markets necessary for it to maintain anything like the growth it has become accustomed to.

One place where China and other either newly industrialized or older industrial countries like Germany may find a relatively strong market is the U.S., where the flow of money into the U.S. dollar is keeping interest rates low and credit abundant. Recent reports of strong car sales in the U.S. reflect this fact. But unless world economic growth picks up, the U.S. trade deficit will almost certainly grow as the U.S. home market becomes flooded with imports.

All this implies a recession around the time it is due in 2017 or 2018, with an earlier recession in 2016 a possibility. This recession would likely be postponed if the Federal Reserve System returns to some form of quantitative easing, and perhaps this is what will happen. But this would increase the chances of a run on the dollar that could destroy the financial underpinnings of the U.S. global empire in the not too distant future. This puts considerable pressure on the Fed to continue “tightening” until the U.S. economy is obviously in recession and then try to avoid the kind of quantitative easing it engaged in between 2008 and 2014. (back)

5 I will take a closer look at this particular question in a coming post when I examine the relationship between the United States and Germany. The point is that the U.S. world empire is in no small degree based on the continued political and military subordination of Germany to the U.S., a relationship that would be completely undermined if the U.S. dollar should lose its role as the world currency. (back)

2 thoughts on “Capitalist Economists Debate ‘Secular Stagnation’ (Pt 4)

  1. I am not so certain that a weak recovery, or to be more precise, a weak industrial cycle, means that said industrial cycle will last longer. In fact, the industrial cycle of the 90s in the US was quite strong and at the same time, the longest in the history of US capitalism. The industrial cycle of the naughties, was significantly weaker than the previous one, and at the same time much more brief. Considering that the current industrial cycle is even weaker than the one that led to the Great Recession and even more reliant on easy money than ever before, it would seem more likely that it would be shorter in duration as well. But of course, that remains to be seen.

    While the industrial cycle of the previous decade was enabled to a very large degree by a massive speculative bubble in real estate, the current cycle is enabled by a series of smaller but far more numerous speculative bubbles. One can point to new excesses in the housing market (especially in places like San Francisco and New York) the subprime auto loans, the stock market and especially a new tech and biotech bubble, the Healthcare sector, record student debt and above all (and strategically more importantly) the shale oil and gas boom. It is indicative that the oil and gas companies that have sprung in recent years in North America were not turning profits even when oil prices were at the 100 dollar mark.

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