Does Capitalist Production Have a Long Cycle? (pt 5)

History of gold production from the ‘gold rush’ to 1914

In the years 1840-1844, 146 metric tons of gold are estimated by the World Gold Council to have been produced worldwide. Between 1855 and 1859, estimated gold production rose to 1,011 metric tons. This is an increase of 590 percent in a 15-year period. In terms of percentages, this is by far the greatest increase in gold production in the period that reasonable data on world gold production is available.

The reason for this amazing increase was the discovery of gold in California in 1848 and in Australia in 1851. It was this huge mass of newly mined and refined gold that drowned the hopes of Marx and Engels for a socialist revolution in Europe during the 1850s.

When gold was discovered in California, much of it was near or even at the surface. In California, gold was discovered in stream beds, washed down from the Sierra Nevada mountain range into the streams of its western foothills. (1) The gold found in stream beds is known as “placer gold,” because it changed place when it was washed down from the mountains to the stream beds.

The individual value of the gold found in the stream beds was very low. It took relatively little labor to “pan” the gold nuggets from stream beds. (2) Indeed, in the case where somebody by accident discovered a large nugget of gold in a stream, the individual value of the gold was trivial. Once gold was discovered in California, swarms of people—known in history as 49ers—arrived in search of quick and easy wealth and began staking out their claims to promising stream beds in the Sierra foothills. (3)

The result was that this easy-to-obtain gold—gold with a very low individual value—was quickly exhausted. If this had not been the case, the value of gold—the amount of labor that it took on average to produce a given quantity of the metal—would have declined drastically. This would have led very quickly to the de-monetization of gold.

As the “panable” placer gold was quickly exhausted, capitalist-organized mining companies arrived and began to drill for gold in granite rock formations. At this stage, the individual commodity producers that panned for gold in stream beds had to give way to industrial capitalists who employed wage labor. The individual value of the gold produced by these industrial capitalists was already much higher than the placer gold panned from the stream beds but still considerably lower than the the previous value of gold on the world market. The result was a major fall in the value of gold money world wide.

When gold functions as the money commodity, prices are expressed in the use value of gold measured in terms of weight. Under the gold standard, various weights of gold are then given names such as pounds and dollars. Therefore, a decline in the value of gold relative to most commodities will lead to a rise in the general price level.

Bourgeois economists—and bourgeois economic historians—applying the quantity theory of money to metallic money claim that the great increase in the quantity of gold caused by the California and Australian gold discoveries led to the considerable rise in prices that occurred between 1848 and 1873. The latter year marked the peak of the rise in prices that had begun with the discovery of California gold.

However, as I explained in earlier posts, the quantity theory of money does not apply to metallic money. According to Marx’s law of labor value, it was the fall in the value of gold relative to the value of most other commodities that caused prices to rise. An increase of gold production with gold values unchanged can for a time bring about a rising trend of prices as well. For more on this case, see below.

To measure the decline in the purchasing power of gold after the gold rush, I will use the British wholesale price index. Britain was continuously on the gold standard throughout this period. That is, the gold value of the British pound did not change during this period. Therefore, changes in prices in terms of pounds were identical to changes in prices in terms of gold. The British wholesale price index rose from 86 in 1849 to 130 in 1873 (1913 = 100).

Prices in 1873 were not only well above the level of 1849, when the first California gold reached Europe, they were well above the level of 1913, reached after 17 years of rapidly rising prices. (4) Since Britain was continually on the gold standard during these years, this rise in prices did not reflect any depreciation of the British pound against gold but represented a real fall in the purchasing power of gold relative to commodities.

Some Marxists have expressed puzzlement at exactly how a fall in the value of gold relative to commodities actually leads to a rise in the price level. The industrial capitalists certainly do not calculate the value of gold in terms of the labor time socially necessary to produce it, then calculate the value of the commodities they are selling in terms of the labor time needed to produce them, and then set prices accordingly. (5)

In my opinion, it is precisely the industrial cycle—or a series of industrial cycles—that adjusts the actual market prices to the values of commodities. When a sudden fall in the value of real money—gold—occurs, such as occurred with the discovery of gold in California and Australia, a series of industrial cycles dominated by the boom phase of the cycle follows that ratchet up the general price level. Therefore, the industrial cycle is the instrument the law of value utilizes to keep prices more or less in line with actual commodity values over the long run.

While this value-price adjustment process was under way between 1849 and 1873, there were no prolonged depressions in the world capitalist economy.

Effects of increased gold production, the relative values of gold and commodities remaining unchanged

What would happen if new gold deposits were discovered that made possible a considerable rise in the production of gold, but the new mines were no richer than the existing ones? Here, too, an economic boom might be triggered as bank reserves swelled and interest rates fell, raising the profit of enterprise.

However, as soon as the general price level begins to rise, the cost price of the gold mining capitalists will rise, lowering their rate of profit to a level below the average rate of profit. As the rate of profit of the gold capitalists falls below the average rate of profit, capital will flow out of gold mining into other, more profitable branches of industry. (6) There will be a fall in gold production, rising interest rates and tightening money markets.

At some point, a crisis of overproduction will break out. The crisis leads to a situation where commodities are largely unsalable at existing prices. Prices are then slashed as the industrial and commercial capitalist sell off their overproduced commodities. In this way, the law of value prevents the general price level from rising permanently in a situation where the production of gold increases but there is no change in the relative value of gold and commodities.

Effects of increased gold production when the value of gold falls relative to commodities

Suppose the value of gold itself falls due to the discovery of new richer gold deposits. The mines that make it possible to produce a given quantity of gold will take less labor on average than before. This will mean the average cost price for the industrial capitalists involved in gold mining and refining will drop. The rate of profit in gold production will then rise both absolutely and relative to the average rate of profit. Capital always in search of super-profits—profit above and beyond the average rate of profit—will flow into the gold mining and refining industries causing the production of gold to climb.

This will lead to a situation of an accelerated rate of growth of the quantity of gold on the world market. Banks reserves will rise, the rate of interest will fall and the profit of enterprise will increase. In other words, more of the surplus value will go to the industrial capitalists and less to the money capitalists. This will encourage a portion of the money capitalists to convert themselves into industrial (and commercial) capitalists. The whole process of capitalist expanded reproduction will accelerate.

The resulting boom conditions will mean that demand will exceed supply of commodities at existing prices. Prices will have to rise to close the gap between supply and demand. At some point, however, prices will again reach the level where they will more or less directly reflect the values of commodities. As prices continue to rise above this level, the rate of profit in the gold mining and refining industry will fall below the average level, capital will begin to flow out of the gold mining and refining industries, and gold production will decline. The growth in the quantity of real money—gold—will begin to slow down.

As the growth rate of the world’s hoard of monetary gold relative to the rate of growth of real capital begins to slow down, the rate of interest will rise lowering the profit of enterprise. Sooner or later, a crisis of overproduction—or series of crises—will break out that will again lower the prices of commodities to—or below—their values.

At that point, gold production—all else remaining equal—will again increase. Prices will now fluctuate around an axis centered on value just like before the discovery of the rich gold deposits, but the axis of prices—or prices of production—around which market prices fluctuate will be higher than it was before the new richer gold deposits were discovered.

This long-term process of adjusting prices to values looks a lot like the proposed expansionary long cycles of Kondratiev or the “long waves with an undertone of expansion” of Mandel. The expansionary “long wave” will raise the general price level to its new higher level that reflects the new lower value of money—gold—relative to that of commodities.

What about the situation where the relative values of gold and commodities remain unchanged but market prices fluctuate around the values of commodities? Assuming that the relative values of gold and commodities remain unchanged but the adjustment process of prices to underlying values unfolds over several industrial cycles rather than a single industrial cycle, it might even be justified to refer to the process as a long cycle.

For example, when a boom phase of an industrial cycle drives prices above values, it will take awhile for gold production to begin to decline. Even as gold production declines, it takes a period of time before the ratio between the total quantity of monetary gold in the world and the total amount of real capital changes significantly. The longer the “depression” in gold production lasts, the greater the disproportion between money capital—gold—and real capital will become. Eventually this leads to a series of crisis/depression-dominated industrial cycles. This will represent the down phase of the “long cycle.”

Once the general price level falls below the value of commodities, it will take awhile for gold production to begin to increase in response to a rise in the absolute and relative rates of profit in the gold mining and refining industry. Again, the longer the “boom” in gold production lasts, the greater will be the quantity of money capital relative to real capital. Eventually, the growing quantity of money capital relative to real capital and the consequent fall in the rate of interest will result in a series of boom-dominated industrial cycles. (7) This would correspond to the up phase in the long cycle.

The mechanism for the long cycle?

The above cycle would be a true cycle and not just an accidental long wave. One phase of the cycle leads to the next phase of cycle. And there is indeed a mechanism for both the upper turning point and the lower turning point of the cycle. There is also a material basis for such a long cycle. If the material basis for the 10-year industrial cycle is the periodic renewal and overproduction of fixed capital—the commodities that make up fixed capital—and the overproduction of commodity capital forms the material basis of the “short Kitchin inventory cycle,” the material basis of the long cycle would be long-term cyclical swings in the production of money material—gold.

Changes in the level of gold production are not necessarily cyclical

However, to the extent that the value of gold falls relative to commodities due to the discovery of rich new deposits, or technological breakthroughs in gold production such as the use of cyanide to extract gold from ores containing only minute quantities of gold, the resulting periods of accelerated capitalist expanded reproduction that follow would be non-cyclical.

The same would be true if the depletion of existing gold mines leads to a rise in the value of gold relative to commodities. The resulting series of crisis/depression-dominated industrial cycles would also be non-cyclical. In the absence of the discovery of new rich gold mines or technological breakthroughs that would again lower the value of gold relative to commodities, the process of the depletion of the world’s gold mines might cause the value of gold relative to commodities to rise continuously. In that case, there would be nothing preventing the crisis-depression series of industrial cycles from lasting until the capitalist mode of production is finally transformed into socialism or the class struggle ends in the mutual ruin of the contending classes.

In the real world, we would expect the cyclical elements and the accidental elements to be intertwined, though one or the other may predominate in different historical periods. I will use this as a working hypotheses during this phase of my investigation of long cycles versus non-cyclical or quasi-cyclical long waves.

From the mid-Victorian boom to the ‘Great Depression’ of 1873-1896

During the mid-Victorian boom, two forces were working to bring the period of exceptional capitalist prosperity caused by the extraordinary jump in gold production in the wake of the California-Australian gold discoveries to an end.

First, although the value of gold fell with the California and Australian discoveries, there was still a limit on how far prices could rise before they would once again exceed the value of commodities. Here we see a cyclical force at work.

Second, as the gold nearest the surface in both California and Australia was exhausted, the industrial capitalists had to dig deeper driving up their cost prices. (8) This again raised the value of gold—the quantity of labor on average necessary to produce a given quantity of gold. Rising prices collided with what again would be the falling prices of commodities if the value of the commodities were expressed directly in gold. (9) Here we see a non-cyclical force at work, the depletion of the existing gold mines.

By the decade of the 1860s, the exceptional rate of growth of production was a thing of the past. While gold production remained at a high level relative to the levels that prevailed before 1848, the rate of increase in world gold production started to slow dramatically.

Gold production rose 211 percent in the years 1850-54 compared to the years 1845-49. In the years 1855-59, gold production rose by 170 percent over the amount produced in 1850-54. Gold production was still increasing at an astounding rate, but the rate of increase was beginning to slow down a bit. (“Central Bank Gold Reserves, An Historical Perspective since 1845,” by Timothy Green, World Gold Council Research Study No. 23, November 1999)

And then the rate of increase in world gold production came to a halt. It remained extremely high by pre-1848 standards, but it was no longer increasing. Between 1860 and 1864, gold production fell by 9.5 percent compared with the previous five-year period. Gold production increased about 7.2 percent in the period 1865-69 compared to the previous five-year period. But the overall trend in gold production was now one of stagnation.

In the five-year period that includes 1873 (10) the year in which the general price level peaked just prior to the financial crash in Austria, Germany and the United States of that year, world gold production was about 10.5 percent lower than it was in the previous five-year period. It was now no longer simply a question of stagnation in gold production, the trend was now definitely downward.

The two ways in which high prices undermine capitalist prosperity

High prices relative to underlying labor values undermine capitalist prosperity in two ways. First, everything else remaining equal, the higher the general price level the lower will be the quantity of monetary gold in terms of purchasing power. That is, if prices doubled, everything else remaining unchanged, this would have the same effect as reducing the quantity of monetary gold by half. (11)

Second, when prices rise above the values of commodities, gold production declines and with it the rate of growth in terms of weight—not purchasing power—of monetary gold. Such a situation when combined with expanded capitalist reproduction sooner or later leads to a severe economic crisis of overproduction—or series of crises—that again lowers prices. Prices will fall once again to—and for a awhile below—the price level that would directly express commodity values.

How low prices lead to prosperity

Prices that are below the values of commodities affect the capitalist economy conversely, though in this case the effects are favorable.

First, lower prices increase the purchasing power of the existing quantity of monetary gold. A drop of prices by 50 percent, for example, will have the same effect in terms of purchasing power as doubling the quantity of gold.

Second, lower prices in terms of gold mean higher profits for the gold mining industry, both absolutely and relative to the average rate of profit. This encourages an increase of production of gold. The purchasing power of the total quantity of gold money rises both due to an increase in its purchasing power brought about by lower prices and, over time, a rise in the quantity of gold in terms of weight due to increased production.

From 1873 to 1896

The years from 1873 to 1896 were called the “Great Depression” before the disaster of the 1930s usurped the title. They were characterized by a persistent downward trend of the general price level. There was great distress among indebted farmers in the United States, and periods of mass unemployment among U.S. workers. In Britain, industrial production at best increased slowly during those years, and unemployment was high.

Prices didn’t fall every year. During the boom phase of the industrial cycle, prices still rose. But booms were short-lived, while the periods of crisis-depression absorbed most of the industrial cycle. As a result, each price peak was lower than the preceding one, and each price trough was below its predecessors—until 1896, when the process reversed.

Virtually all supporters of Kondratiev “long cycles” consider that those years represented a downturn in the long cycle. After the Kondratiev “upturn” of 1848-1873 came the Kondratiev downturn of 1873-1896. Ernest Mandel also considers this period to have been a “long wave with an undertone of stagnation.” Since the increase in gold production that triggered the “mid-Victorian” boom of 1848-1873 was in this case clearly of a non-cyclical character, the 1849-1873 “boom” seems more of an “accidental wave” than a “cycle.”

Changes in gold production between 1873 and 1896

Unless the world was running out of gold—which was far from the case in those years as we now know in the light of the big rise in gold production that occurred in the course of the 20th century—we would expect the falling tendencies of prices to have stimulated increased gold production at some point.

At first, however, for whatever reasons, the falling price level failed to increase gold production. Production continued to decline through the first half of the 1880s. But starting in the second half of the decade, this began to reverse. In 1885-1889, gold production rose by 9.2 percent compared to the previous five-year period, a modest increase but still the first rise since the 19th century Great Depression began.

Over the next five-year period, 1890-94—the last full five-year period of the “Great Depression”—world gold production increased by 32.5 percent. Considering the great decline in prices after 1873, by 1896 British wholesale prices had fallen below the 1849 level, standing at index 72 compared to index 86 in 1849 (1913 = 100). (“An International Gold Standard Without Gold,” by Ronald I. McKinnon, Cato Journal, Vol. 8, No. 2, Fall 1988)

This fall in prices considerably increased the purchasing power of monetary gold. And the production of gold was increasing too, though it still remained below the previous peak of 1855-59. In the five-year period 1895-99, which marks the end of the “Great Depression” and the beginning of the prosperity that set in the during late 1890s, gold production increased considerably faster—up 67.4 percent compared to the preceding five-year period.

And for the first time, the five-year world record in gold production of 1,011 metric tons produced in 1855-1859 was broken with 1,851 metric tons produced in 1895-1899. (12)

The most important variable is not the changes in annual gold production as such but the rate of growth in monetary gold—measured in terms of weight—and the increase in the quantity of real capital—measured in prices—that is, also weights of gold.

According to the laws of arithmetic, if gold production remains unchanged, the rate of increase of monetary gold will progressively decline. Therefore, to avoid a falling price level with a given rate of economic growth, gold production must increase over time. If it doesn’t, either economic growth must slow down—implying that the process of expanded capitalist reproduction must also slow—or the general price level in terms of gold must decline.

What caused the increase in gold production after 1880-84? At some point, we would expect that the falling prices of the “Great Depression” would stimulate a rise in gold production as prices finally fell below values. But again, there were also new geographical discoveries as well as one major technical breakthrough that lowered the value of gold.

First, there was the discovery of gold in South Africa. Indeed, South Africa was destined to become the chief gold producing country during the 20th century. There were also the famous gold rushes in Alaska and northern Canada in the mid-1890s. None of this compared to the “gold rush” of 1848 but still brought a considerable rise in gold production after years of stagnant or declining production.

It was also during these years that the the cyanide process, which enables the extraction of minute amounts of gold from very poor ores, also helped to lower the value of gold. (13)

In 1900-1904, gold production rose an additional 21.0 percent. The Boer War in South Africa probably held back the rise in production somewhat in this period. In 1905-1909, the rate of increase in gold production picked up once again, rising 40.8 percent over the preceding five-year period. But during the years immediately preceding the outbreak of World War I, the rate of gold production decelerated dramatically, increasing during 1910-14 by only 5.9 percent.

Stagnation in world gold production returns

The return of stagnation to gold production was noted by Karl Kautsky on the eve of World War I: “So we may confidently enter upon the conflict which the new era of capitalism has for us, in which no rapid addition to gold production can longer interfere with the sharpening of class antagonisms, in which capital extends its domain only at the expense of the growing misery of the mass of the population, and the latter is more and more compelled to cause the overthrow of the capitalist system on pain of its own destruction.” (“The High Cost of Living,” by Karl Kautsky, 1913)

The fact that Kautsky proved personally unequal to the challenges of the approaching revolutionary era does not detract from his amazing prediction of a revolutionary era based on the stagnation in world gold production.

In fact, in light of the growing stagnation in gold production, if World War I had not shortly intervened the rise in prices in terms of gold that had been going on since 1896 would not have been sustainable much longer. Instead, either prices would have fallen in terms of currency, or a major devaluation of the world capitalist currencies would have occurred ending the international gold standard.

The roots of World War I

Great Britain had long been in relative economic decline. Younger capitalist countries such as Germany, but above all the United States, had outstripped her both in the quantity of industrial production and the productivity of their labor. A century earlier, at the end of the world war that had followed the French Revolution, Britain enjoyed an overwhelming economic superiority based on its pioneering of industrial capitalism. Compared to Britain, all other countries were underdeveloped agricultural countries. In today’s terms, they were “third world” countries.

But by 1914 this situation was only a distant memory. Britain’s continued dominant role in the spheres of finance, politics and military power no longer reflected economic reality. It had to be overthrown and it was. In addition to being a war for re-division of the world between rival imperialist powers, World War I marked the first stage in the collapse of the British Empire and its replacement by the rising empire of the United States.

War economy, values, prices and gold production

Between 1914 and 1918, the whole process of expanded reproduction came to a halt in war-torn Europe, though it continued in the United States and Japan. How does war economy affect capitalist expanded reproduction?

When all-out war begins, industrial production frequently rises sharply. This is especially true if, as is often the case, the economy is in state of recession when the war erupts. In fact, beginning in 1913 a worldwide recession had developed affecting both the United States and Europe. This recession was in full swing when war erupted in Europe in August 1914. (14)

As war sets in, governments embark on massive deficit spending, and demand soars causing a sharp rise in industrial production. Unemployment disappears. The “prosperity” of war begins.

All-out war means that many enterprises of Department I, and some of Department II as well, are obliged to shift from the production of capital goods—means of production—to machines of destruction that are purchased not by private industrial capitalists but by the military.

In addition, many producers of raw materials, also located in Department I, now produce for war purposes, and therefore these raw materials are not available for capitalist reproduction. Many of the productive workers—workers who produce surplus value—are shifted to the military, where their labor power is employed not in the production of surplus value but rather for slaughtering their fellow workers in uniform. The result is that a considerable number of potential producers of surplus value are killed in the war.

Contracted reproduction

Normally when industrial capitalists attempt to transform their money capital into machines, raw materials and labor power, they have no difficulty finding the machines, raw materials and labor power on the market. Generally, it is the sale of the commodities produced, not the purchasing of commodities necessary to carry out production and reproduction, that is the biggest problem for the industrial capitalists.

But in a war economy, these commodities are in short supply. As the war continues, the industrial capitalists find themselves increasingly unable to find means of production, raw materials and labor power on the market. Instead, they are forced to to purchase government bonds. So the longer the war continues, the more the capital of the industrial capitalists consists of government bonds—that is, promises by the government to pay in the future when the war has reached its victorious conclusion. (15) This suspends the process of expanded reproduction and transforms it into what Ernest Mandel called contracted reproduction.

Though Keynes-influenced economists often blur the difference between a war economy and the boom phase of the industrial cycle, the two are in many ways exact opposites. It is precisely during the boom phase of the industrial cycle that capital investment soars and the expansion of real capital reaches it peak. The productive forces experience a powerful advance. In a war economy, in contrast, the real economy is contracting. Increasingly, real capital is replaced with government bonds—fictitious capital. Far from increasing the productive forces—including the most important productive force, the workers—they are being destroyed.

The operations of war can also directly destroy capital though the physical destruction of industrial capital through military operations. The direct destruction of real capital was a much bigger factor in World War II than it was in World War I, since in World War I air power was only in its infancy and its destructive potential still quite limited.

The capitalists are willing to hold on to government bonds as long as they retain hope in victory. If their government emerges from the war victorious, it will be able to pay off the debts it owes to the industrial (and other) capitalists at the expense of the defeated powers. The government bonds of the losers generally lose most or all their value. Having exchanged real capital for fictitious capital, the industrial—and other—capitalists of the losing power end up with a dead loss. Therefore war, especially all-out world war, is a major business gamble.

The effect of war on prices

Even though industrial production soars at first and unemployment disappears, the quantity of real capital isn’t expanding; it begins to contract. Commodities are in short supply at current prices. Prices, therefore, must rise substantially in order to reduce demand to the supply. If prices are forcibly held down by wartime price controls, shortages lead to black markets where commodities are sold illegally at much higher prices that do reduce the demand to the supply. If the war goes on too long, industrial production begins to decline and shortages grow.

It’s important to emphasize that the rise in prices in wartime is a rise in terms of gold—real money. Of course, currencies are often devalued during wars, and if that happens, the rise in nominal currency prices is all the greater.

The effect of war on prices in terms of gold can be appreciated if we look at the U.S producer price index. Since the United States remained on the gold standard, the change in prices reflected changes in prices as measured in gold, not a depreciating currency. In August 1914, the month the war erupted in Europe, the U.S. PPI was at 12.0 (1982 = 100). In November 1918, the month the war ended, the U.S. PPI had nearly doubled to 23.5. (U.S. Department of Labor: Bureau of Labor Statistics)

Looked at in another way, in four years of war—in which the United States was not even an official participant until the last year and a half—prices increased dramatically more than British wholesale prices increased during the entire quarter of a century that followed the 1848-51 gold discoveries (95.8 percent versus 51.2 percent)!

And remember, since gold production was already stagnating before the war broke out, prices were apparently too high—relative to underlying commodity values—before the war even erupted. This is in sharp contrast to the situation on the eve of World War II, when, as I will demonstrate in future postings, prices on the eve of the war were well below the values of commodities.

The effect of wartime price increases on gold production

In theory, a sudden rise in prices should sharply increase the cost price and cause a sharp drop in the rate of profit both relatively and absolutely in the gold industry, causing production to drop sharply. This is the market’s way of reacting to a sharp rise of prices above the value of commodities. So much for theory, but what actually happened to gold production during World War I? (16)

In the years 1915-19, world gold production declined by 5.7 percent compared to 1910-14, the first overall decline in world gold production over a five-year period since the 6.7 percent decline between 1875-79 and 1880-84 during the Great Depression of the 19th century. The pre-war stagnation in gold production had been transformed into an actual decline.

But prices did not stop climbing at the end of the war. They kept right on rising until May 1920, when the U.S. PPI finally peaked out at 28.8, a rise of 140 percent from the start of the war. Therefore, in theory we wouldn’t expect gold production to hit bottom simply because the war ended.

And this is exactly what happened in fact. In the following five-year period, from 1920 to 1924, gold production declined 16.5 percent. (17) This far exceeded the greatest decline for a similarly defined five-year period registered during the the Great Depression of the 19th century (6.7 percent). (18)

In 1920-21, a very sharp economic recession occurred, which caused the inflated level of U.S. producer prices to crash. From 28.8 in May 1920, the PPI fell to 15.7 in January 1922, a fall of more than 45 percent. But this still left the index more than 30 percent above the pre-war level. And since gold production was already beginning to stagnate on the eve of the war, the implication is that even after the violent deflation of 1920-21, prices were still far too high relative to underlying labor values. Indeed, this proved to be the lowest point that the PPI reached before the onset of the super-crisis of 1929-33.

As economic recovery took hold after 1921, the PPI climbed somewhat, and then fluctuated. In August 1929, near the peak of the 1920-29 industrial cycle, the producer price index was at 16.6. This was more than 38 percent above the levels that prevailed in August 1914, when World War I began. Bourgeois economists, especially those of the “monetarist” school of Milton Friedman, emphasize how stable prices were in the period leading up to 1929. What they don’t understand—and cannot understand because of their false marginalist theory of value—is that though prices were not increasing, they were still too high relative to underlying values.

Therefore, as dramatic as the price deflation of 1920-21 was, it did not restore prices to their pre-war levels. And unlike the 1850s, or to a lesser extent the 1890s, there was no geographical finds or technological breakthroughs in gold mining that lowered the value of gold relative to that of commodities.

With gold production beginning to stagnate in 1913, we would expect that an epoch of longer crises and depressions would set in that would lower the general price level once again in a way that would stimulate gold production. But instead, World War I intervened and violently interrupted the whole process of expanded reproduction, causing the general price level to soar. Gold production, as would be expected, responded by plunging.

Here we find another powerful non-cyclical force affecting prices and gold production—war. The implication is that though war in the short run creates war prosperity and “full employment,” in the years following the war—all other things remaining equal—there will be a considerably increased chance of prolonged depression and mass unemployment.

All things, however, are never equal. The economic situation after a war will be very much dependent on the level of prices relative to underlying labor values, the consequent level of gold production, and the vigor of the process of expanded reproduction that prevailed in the years before the war broke out. The effects of war then interact will all the other forces that determine whether a particular group of industrial cycles is dominated by the boom phase or by the crisis-depression phase of the cycle. I will examine this question more fully in the posts that deal with the post-World II economic situation.

The deflation of 1920-21, by lowering prices by almost half, would be expected to partially relieve the pressure on gold production. And this is exactly what we see. In the years 1924-29, leading up to the super-crisis, gold production rose by almost 15 percent over the years 1920-24. Normally, this would be a respectable if not spectacular increase in gold production. But since it is calculated from the extremely low level of the previous five-year period, gold production was still well below the levels that prevailed before the war.

For example, in the years 1924-29, 3,021 metric tons of gold were produced worldwide. This was below the 3,154 metric tons produced in 1905-09, when overall worldwide commodity production and commodity prices were considerably lower. And it was even further below the 3,340 metric tons of gold that were produced in 1910-14.

Indeed, at 3,021 metric tons, world gold production was more than 9.5 percent less than that produced in the five years immediately preceding the war. This would not have been such a problem if prices had been similarly below the pre-war level, but they were actually substantially higher. The combination of lower gold production plus higher prices that reduced the purchasing power of existing gold, would seem to indicate a major conflict between price and value in the final years leading up the Depression.

Remember, one of the key functions of a crisis of overproduction is to keep the general price level in line with the values of commodities. If crises of overproduction never occurred, there would be no reason why market prices wouldn’t rise forever, losing all relationship with their labor values.

Indeed, if World War I had not occurred, such a massive divergence between prices and values would not have been able to develop. A crisis would have broken out and lowered prices once again before they got so completely out of line with underlying labor values. But war had broken out and interrupted the normal progress of the industrial cycle through which prices are equalized with values.

If the industrial cycle had continued to develop normally—without the war economy with its contracted reproduction and price rises—only “normal” crises would have been necessary to keep prices in line with values. But the war and its inflation had come. Perhaps nothing less than a “super-crisis” was required to bring prices back in line with values. Perhaps the super-crisis of 1929-33 was the law of value’s way of “undoing” the effects of World War I on prices and restoring a normal relationship between prices and values?

Before I proceed further along this line of inquiry, I should take a closer look at the super-crisis and examine what other forces were at work in those years that might have helped convert a crisis into a “super-crisis.” That will be the subject of next week’s post.


1 The western foothills of the Sierra Nevada mountain range is still known as the “gold country” in California.

2 The panning of gold from stream beds is actually an example of simple commodity production, not capitalist production. However, as the gold in the stream beds was quickly exhausted, capitalist production quickly took over.

3 During the 1930s Depression, desperate unemployed people returned to the California gold country hoping to find sizable nuggets of gold that had somehow escaped detection during the gold rush. This re-occurred during the economic crisis in the 1970s, when the purchasing power of gold increased sharply and is happening again since the outbreak of the current economic crisis in 2007. However, the chance of finding any significant amount of gold by panning the stream beds of the California gold country, unlike in gold rush days, is almost nil.

4 The period between 1896 and 1913, when the currencies of all the major capitalist powers were on the gold standard, I considered a highly inflationary period in light of the fact that currencies were tied to gold. Unlike some other inflationary periods, the rise in prices reflected not the depreciation of the currencies against gold but the fall in the purchasing power of gold itself. Inflationary as the years 1896 to 1913 were, they were not as inflationary as the years that followed the California and Australian gold rushes. Both these “gold inflations,” however, paled before the gold inflation of World War I.

5 Individual industrial capitalists are generally only aware of the direct labor that is necessary to produce their commodities. Industrial capitalists are not aware of the labor that is socially necessary to produce the elements of the constant capital or variable capital used to produce their commodities. As for the value of money—gold—leaving aside the industrial capitalists that produce gold as a commodity—other industrial capitalists have absolutely no idea of the value of gold measured in terms of hours of socially necessary labor.

6 It is quite possible, since there is no risk that gold will prove unsalable, that the gold mining capitalists will be willing to settle for a rate of profit below the average. However, whatever the minimum rate of profit they are willing to settle for, when their rate of profit falls below that level, capital will begin to flow out of the gold mining and refining industry towards more profitable industries. Therefore, whether the gold mining capitalists insist on the average rate of profit or are willing to settle for a lower rate makes no difference to the argument developed here.

7 In “Long Waves,” Ernest Mandel agreed that the sharp rise in gold production following the discovery of gold in California and Australia lay behind the “long wave with an undertone of expansion” that prevailed between 1849 and 1873. But he rejected this explanation for other “long waves” of accelerated capitalist expansion.

8 Remember, their cost prices were also rising due to the rise in the general price level during these years.

9 That is, the prices that would exist if changes in value were immediately reflected in price changes.

10 Did the crash of 2008 reflect a similar price peak? The general price level did fall briefly during the crash. But unlike in the 19th century, currencies are no longer on the gold standard. The so-called “quantitative easing” carried out by the U.S. Federal Reserve System and other central banks—a fancy word for in effect running the printing press—means that there is no inevitability about the fall in the general price level in terms of currencies representing a variable amount of gold, not a constant amount of gold as was the case under the gold standard. Or what comes to exactly the same thing, even if the general price level does decline sharply in terms of gold in the years ahead, the depreciation of paper currencies—token money—against gold can very well drive up the general price level in terms of paper currencies. That is exactly what happened during the 1970s.

11 Since gold functioning as money is never consumed, it sticks around. It is quite likely that gold produced thousands of years ago is still inside the gold bars stored at Fort Knox, for example. It is true that gold coins do tend to wear out in circulation, but hoarded gold coins and bars do not. Therefore, while the quantity of gold may decline relative to commodities, it never declines absolutely. Instead, it always increases but at variable rates.

12 That is, the five-year periods are taken as the be beginning of a year ending with zero to a year ending with a four, or from a year ending with a five to a year ending with a nine.

13 The use of the highly poisonous compound cyanide helps make modern gold mining the environmental disaster that it is.

14 With world gold production beginning to stagnate, there was the prospect that if the war had not intervened this recession might have been a particularly stubborn one.

15 Strictly speaking, the industrial capitalists are increasingly transformed into money capitalists, as their capital increasingly consists of interest-bearing government IOU’s—loan capital—rather than productive capital.

16 In fact, since World War I, gold production has begun to fall or stagnate whenever war has caused the general price level to increase. This occurred not only during World War I and World War II but to a lesser extent during the Korean and Vietnam wars, as well. This should be kept in mind whenever Keynes-inspired economists explain how deficit spending on war leads to capitalist prosperity.

17 Remember, by five-year periods I mean the five years between years ending in 0 and years ending in 4 and the years ending in 5 and the years ending in 9.

18 The overall decline in gold production over these five-year periods was slightly greater during the Great Depression of the 19th century (24.3 percent versus 21.3 percent). However, the peak in gold production during the 19th century was much higher relative to any previous peak than was the case with the gold production peak at the start of World War I. In addition, the collapse in gold production occurred over a period of about a decade, while the decline in gold production during the 19th-century Great Depression era was stretched over a much greater period of time. There was, therefore, a much greater time for prices to adjust to the changing relative values of gold and commodities.

For example, the trough in gold production associated with the 19th-century Great Depression occurred in the years 1880-84, 25 years after the gold production peak in the years 1855-59. Indeed, the Great Depression of 1873-1896 was much longer than the 1929-40 Great Depression, but the latter Depression was much more violent.

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