A reader asks, what is the significance of the reported moves by the central banks of China, India, Russia and perhaps other countries to increase their gold reserves? Why are China, India and Russia moving to increase the percentage of their reserves held in gold as opposed to foreign currencies such the dollar and euro? Could the moves of these countries to increase their gold reserves point to a possible revival of the international gold standard in some form?
The answer to the first question is that these countries are nervous about the future of all paper currencies. During the first phase of the crisis of 2007-09, the dollar fell not only against gold but also against the euro. Naturally, countries increased the percentage of euros in their reserves, since it seemed like a good bet against the falling dollar.
Then came the sovereign debt crisis in Europe that assumed acute form just a month or so ago. The euro plunged against the dollar. But the dollar is not looking too good itself. While the dollar was soaring against the euro, it was slipping against gold, the money commodity. For the first time, the dollar price of gold inched above $1,200. Unlike paper currencies, gold is a commodity. And like all commodities, its value is determined by the amount of labor socially necessary to produce it under the prevailing conditions of production.
With the world’s gold mines facing growing depletion, the value of gold for the foreseeable future seems a little more certain than the future value of any paper currency, whether the dollar, euro or yen. (1) No matter how bad things get, gold cannot be “run off the printing presses.” New gold can be produced and the existing supply increased only by the slow process of the labor of workers in the gold mines and in the gold refining industry.
Does this mean that the international gold standard is about to be restored? The answer for the immediate future is a definite no. The three countries that are reportedly moving to increase their gold reserves are not imperialist countries. Indeed, these countries have few gold reserves. The great bulk of the gold that is held by governments or central banks is held by the governments of the United States and the European satellite imperialist countries such as Germany, France and Italy.
U.S. government by far the biggest holder of gold
According to the Bank for International Settlements, in the the third quarter of 2009 the U.S. government was by far the world’s biggest holder of gold with a hoard exceeding 8,000 tons. Germany was a distant second at a little more than 3,000 tons, followed by the U.S.-dominated International Monetary Fund, or IMF, which also held a little more than 3,000 tons of gold. Italy and France each had a little more than 2,000 tons of gold.
China, on the other hand, had only about 1,000 tons of gold, about the same as Switzerland. Russia, though it is a major gold producer, had a smaller gold hoard than tiny Netherlands, at well under a thousand tons. India, with a population of over a billion, had a smaller gold hoard than Portugal. Even Japan, despite the fact that its GDP is second only to the United States and it maintains a formidable position in world trade, had a gold hoard of well under 1,000 tons. (2)
We can be sure that Washington will strongly resist any move to transform its huge debt denominated in dollars, which the U.S. government can run off its printing press, into gold. If the U.S. debts including government debts that are now denominated in dollars were re-denominated in gold, not only would the chances of U.S. banks and corporations going bankrupt be greatly increased but the U.S. government itself could be threatened with bankruptcy.
China’s recent far more modest proposals to replace the dollar system with a market basket of currencies—the so-called Special Drawing Rights, or SDRs, issued by the International Monetary Fund—rather than the dollar alone quickly earned a thumbs down from Washington for much the same reasons.
Along the same line as China’s proposal, the U.N. Commission of Experts on International Financial Reform recommended that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies.
If Washington’s debts were denominated in SDRs—or some other currency issued by an institution not under the complete control of the U.S. government—rather than in dollars, it would have to win the approval of other governments to increase the quantity of the world currency. Under certain circumstances, Washington might not be able to obtain the extra world currency it desires.
For example, China would presumably be reluctant to increase the global currency supply if Washington planned to use the extra currency to prepare for a possible war against China. Therefore, the U.S. government is determined to maintain the current system whereby the U.S. dollar functions as the de facto world currency and the U.S. Federal Reserve System functions as the world’s central bank. Under the dollar system, the ability of the United States to create additional global currency—dollars—is only limited by the laws of economics that I have explored in the main posts.
Debtors dislike ‘hard money’
Today, the U.S. world empire, including not only the U.S. federal government but also its state and local governments, banks, corporations and consumers, are massively indebted. This is quite different from the early days of the U.S. empire when the United States was the world’s largest creditor. Neither the U.S. government nor U.S. banks or corporations would like to see these debts denominated in some other world currency that the U.S. government would not be allowed to print at will. Still less would they like to see these debts re-denominated in gold, which cannot be printed by anyone but only produced as a commodity and whose total quantity therefore can only grow very slowly.
Indeed, throughout history there has never been a case of a debtor who has been a champion of “hard money.” The U.S. empire—including not only the government debt but even more the private debts of both U.S. corporations and consumers—is by far the greatest debtor in history. As U.S industrial production has decayed, a high standard of living for a large if eroding “middle class”—including the now vastly shrunken “labor aristocracy” of highly paid industrial workers—is necessary in order to maintain the internal stability of the United States.
In recent years, this high standard of living for the U.S. middle class has only been maintained through the accumulation of debts that are denominated in dollars. Therefore, as long as the debt-financed U.S. empire remains intact it is hard to imagine a return to the international gold standard.
However, it has also been true historically that debt-ridden empires are empires in their final stages—for example, the British empire after World War I.
Could a new gold standard be established on the ruins of the U.S. empire and its dollar standard? This will be determined by what kind of “order”—or lack thereof—succeeds the U.S. world empire.
If the U.S. empire is succeeded by a worldwide socialist system, and we must all strive for this outcome, the answer to the question of whether the international gold standard will be restored is no. Under a socialist system—even an incomplete one under construction—labor is directly social. To the extent that labor is directly social, there is no commodity production and therefore there is no money commodity.
In his last major work, “Critique of the Gotha Program,” Marx explained that though it will be impossible to pay people according to their needs but rather according to the amount of the work they perform in the first stage of communism—sometimes called socialism—labor is already directly social, not indirectly social like it is under all forms of commodity production, including capitalism.
“Bourgeois right”—payment according to work done, with some modifications for those unable to work, rather than human need—will be expected to apply for some time after the overthrow of capitalism. This is the same principle that prevails under commodity production—but it is not commodity production. Under such a system, there might be a kind of “labor money” that indicates a person has performed a certain amount of work and is therefore entitled to draw in proportion to the labor they have performed a certain amount from the common store. Under these conditions, there is no role for any kind of gold standard.
But what might happen if the collapse of the U.S. empire is not immediately followed by a victorious worldwide socialist revolution, but instead U.S. domination is succeeded by capitalist political and military anarchy? Under these conditions, it is not impossible that an attempt might be made at some point to restore the gold standard. What would be the consequences of a return to an international gold standard?
What was the international gold standard?
To examine this question more closely, we first have to define what we mean by the gold standard. In the United States today, only supporters of the Austrian School of bourgeois economics such as the far-right Texas congressman Ron Paul support a return to the gold standard at some time. However, as a supporter of the Austrian School Paul supports a return to the gold standard in a very peculiar way.
The Austrian economists—along with followers of Milton Friedman—claim, in opposition to both Marx and Keynes, that capitalism is a stable economic system. Left to its own devices, these economists claim, capitalism will not generate any significant economic crises. Much like Friedman did, the Austrians blame the instability that has marked the actual history of capitalism on government interference and the system of credit money, which the Austrians along with followers of Friedman claim developed because of government interference and central banking.
Credit money in its various forms consists of IOUs—usually IOUs issued by a banking institution—that can be used to make purchases and pay debts. Because such IOUs can replace money in these functions—though not in money’s primary function as the measure of value—credit money was in the past sometimes called a money substitute.
Credit money must not be confused with inconvertible-into-gold token money that is issued either directly by the state or through a central bank that functions as an organ of the state power. When the government or central bank issues token money—also called paper money, or fiat money—the token money is declared legal tender for “all debts public and private.” (3)
The Austrians along with Friedman advocated the abolishment of credit money. Unlike Friedman, most if not all Austrian economists advocate that all currency be backed 100 percent by gold. For each dollar in bank deposits, there should be a dollar’s worth of gold sitting in the bank vaults.
Friedman, in contrast, like Keynes was opposed to the gold standard. He wanted all bank deposit currency to be backed 100 percent by state-issued paper money. (4) This, Friedman believed, would put the money supply completely under the state’s control, and thus would make it possible to centrally plan a steady rate of growth in the money supply. If this were done, Friedman held, the “business cycle”—industrial cycle—would all but disappear. Exactly how the creation of various forms of credit money by the business community would be eliminated—especially if so-called “libertarian” free market policies are to be followed—is not explained by either the Friedmanites or Austrians.
The Austrians accused Friedman of inconsistency. The University of Chicago economics professor who hated every other form of central planning advocated a most strict form of central planning of the money supply. The more consistent Austrian economists instead believe the quantity of money must like all other economic variables in a “free economy”—that is, a capitalist economy—be decided by profit-driven private initiative.
To do them justice, the Austrians actually have a point here. Marx explained that under capitalist commodity production, money must be a commodity before it can become money. This means that in order to function as money, the money commodity must be produced by industrial capitalists whose only motive is profit. The idea of planning the money supply while leaving production to the anarchy of the profit system is indeed a hopeless contradiction.
In contrast to the Austrians and their present-day supporters such as Congressman Paul who advocate abolishing the U.S. Federal Reserve System, the classical international gold standard largely depended on the central banks. If there ever is a a serious attempt to return to the gold standard, the central banks will again have a crucial role to play.
Before the gold standard
The original international gold standard evolved out of the system of varying currency values—in terms of gold and silver—that marked the early capitalist or “mercantilist” era. (5) In the mercantilist period that preceded the international gold standard era, governments often changed the amount of gold and sliver that a unit of their currency represented. Very often a currency unit, like the French livre for example, would not be coined but simply defined as a specific weight of gold or silver bullion by the government. The government would often announce changes in the exact weight of gold and silver that constituted a livre or whatever the currency unit was.
In contrast, under a gold standard the unit of currency is defined in terms of unchanging weights of gold. The “monetary authority,” whether the ministry of finance or the central bank, that issues the currency notes stands ready to redeem its currency to the bearer on demand in gold. This makes the currency notes a form of credit money.
There were various forms of the gold standard, such as a gold bar standard—where currency is redeemed in the form of bullion—or a gold coin standard—where the currency is redeemed in the form of full-weight gold coins. The gold coin standard was the “strongest” form of the gold standard, since even relatively small amounts of currency could be converted into gold in the form of gold coins that could be carried around in one’s pocket and used as currency to purchase commodities or discharge debts. When full-weight gold coins function directly as currency, they become in circulation symbols of themselves.
Under a gold bar standard, only large amounts of currency are convertible into gold and then in the inconvenient form of gold bars of considerable weight. Under a gold bar standard, the “average person in the street” cannot really convert currency notes into gold.
For example, after World War I capitalist governments with the exception of the U.S. government, which maintained a gold coin standard, adopted a gold bar rather than gold coin standard. Outside of the United States, the coinage of gold largely ceased as the central banks attempted to conserve the gold bullion in their vaults. The prevalence of gold bar as opposed to gold coin standards after WWI was a sign of the decline of the international gold standard.
The international gold standard at its peak
The international gold standard reached its peak in the first years of the 20th century. At that time, the currencies of Britain, the United States, France, Germany, and even Czarist Russia were convertible into gold, with most countries on the gold coin not gold bar standard. Only colonized or semi-colonial countries such as the countries of Latin America or China had paper currencies, or currencies that were convertible into silver—called the silver standard. The countries that were not on the gold standard were countries where without exception capitalist development was severely retarded and that were largely cut off from the system of international loans.
Last phase of the international gold standard
The last phase of the international gold standard was the post-World War II system of Bretton Woods, which was set up according to agreements reached at a conference held in Bretton Woods, New Hampshire, in 1944. Under this system, the convertibility by individuals and corporations of currency into gold, whether gold coins or gold bars, did not exist. Instead, only governments and central banks could convert U.S. dollars into gold in the form of bars—not coins. This was the weakest form of the international gold standard and foreshadowed its total collapse.
The end of the international gold standard
The Bretton Woods system entered into its death agony with the end of the international gold pool in 1968. The gold pool was set up by the United States and its West European satellites during the 1960s. It was a gold fund used to sell and buy gold for dollars at the price of $35 an ounce on the free market. The idea was to keep the free market dollar price of gold from either rising above or falling below $35 an ounce.
If the free market price of gold rose above $35, the gold pool sold gold running down its reserves of gold. And if the price of gold fell below $35 on the free market they bought gold building up their reserves. In March 1968, after the Tet offensive by the Vietnamese resistance, a panicky run on the gold pool-backed dollar developed—equivalent to a bank run—which threatened to exhaust the gold reserves of the U.S. government and the European central banks within weeks.
At the beginning of the March 1968 run, the U.S. government and its European satellites made solemn promises to defend the gold pool, or what comes to exactly the same thing the dollar’s fixed link to gold, down to the last gram. But within a couple of weeks they were forced to wind up the gold pool.
In theory, dollars in the hands of governments and foreign central banks remained convertible into gold bars at the rate of $35 for every ounce of gold. But it was pretty obvious that the United States would suspend the convertibility of dollars for gold if governments or central banks attempted to do this on a large scale.
The final crisis came in August 1971 when the dollar price of gold rose above $40 an ounce on the free market, indicating that the dollar was being devalued. When the central banks of France and other countries attempted to convert some of their dollars into gold, the Nixon administration responded by closing the “gold window.” The gold standard was now officially dead.
The peak of the international gold standard at the beginning of the 20th century coincided with a period of general capitalist prosperity and relative financial stability that was far greater than anything that exists today. Britain had not had a full-scale financial crisis since 1866, and Germany not since 1873.
Financial panics did continue in the United States, but this was because first the United States did not have a central bank and also because populist agitation for a silver standard—in effect a demand to devalue the dollar—kept the dollar under pressure. Fearing a devaluation of the dollar, money capitalists often demanded that dollars be converted into gold putting pressure on U.S. gold reserves. Unlike Europe with its central banks, the United States experienced financial panics not only in 1873 but a lesser panic in 1884, and bigger panics in 1893 and finally 1907.
Lacking a central bank, the U.S. banking system had no quick way to increase the issue of currency notes when a panic caused the demand for money as a means of payment to soar. However, after the panic of 1907 threatened to send the U.S. and world economy into a serious depression, the United States finally moved toward establishing a central banking system, which developed into today’s Federal Reserve System.
This was expected to end the periodic financial panics in the United States and in effect perfect the international gold standard. The gold standard seemed to have a bright future, but then came World War I. Attempts to reestablish the international gold standard after World War I ended with the Great Depression.
Why then are the (bourgeois) economists so opposed to a return to an international gold standard, which certainly worked a lot better than the current situation of currency anarchy with recurrent currency and banking panics that are becoming ever more threatening?
The legend of King Midas according to Paul Krugman
Paul Krugman writes: “The legend of King Midas has been generally misunderstood…. What the gods were really telling him is that gold is just a metal.” In the very first chapter of “Capital,” Marx explained how gold, though it is as a physical use value a metal, becomes the universal equivalent and thus the independent existence of exchange value. Value always takes the form of exchange value where the use value of one commodity becomes the measure of the value of another. Gold becomes the “thing”—which as a material use value is “just a metal,” in Krugman’s words—that mediates the money relationship of production among people. (6)
“If it sometimes seems to be more [than a metal],” Krugman explains, “that is only because society has found it convenient to use gold as a medium of exchange—a bridge between other, truly desirable, objects. There are other possible mediums of exchange, and it is silly to imagine that this pretty, but only moderately useful, substance has some irreplaceable significance.”
Krugman here only sees gold as a means of exchange C—M—C. Its role as a measure of value and the independent form of exchange value completely escapes him. The essence of capital M—C—M’ is therefore completely beyond him.
Krugman quotes the Reagan-era ultra-right journalist and amateur economist Jude Wanniski(1936-2005) as writing: “We must convert all wealth into the measure employed by mankind for 6,000 years, i.e., ounces of gold.” Though Wanniski cannot explain why the use value of gold has been used to measure wealth for 6,000 years, he at least recognizes that money functions not only as a means of circulation but is also a measure of social wealth under capitalist relations of production, which for Wanniski are eternal. What was true today was true 6,000 years ago and will remain true 6,000 years from now.
Since Wanniski was born into a family of coal miners and his grandfather was a communist, it is possible that he did read Marx, though if he did, it did not prevent him from embracing reactionary ideas. In any case, Wanniski does show a greater understanding of the measure of social wealth under capitalism than the professional Nobel Prize-winning economist Paul Krugman does.
Krugman thinks it is ridiculous to measure wealth in terms of the use value of gold—or some similar commodity. Doesn’t wealth consist of the use values of all commodities?
“What is fascinating about this passage,” Krugman observes, “is that Wanniski regards gold as the appropriate measure of wealth [my emphasis—SW], regardless of the quantity of other goods and services that it can buy.” Krugman is making the commonsense observation that wealth consists of material use values that satisfy our everyday wants, a fact that is obvious to every child.
Therefore, Krugman can’t figure out why we have to use the use value of a particular commodity that has rather limited uses outside its role as a measure of value as the universal measure of wealth. Why must capitalist wealth be expressed in terms of gold, the product of one particular type of concrete labor? Marx, beginning in the very first chapter of “Capital,” explains why this indeed must be so under all forms of commodity production including the capitalist mode of production.
Now let’s see what another economist—Brad DeLong, who like Krugman is actually one of the most progressive economists, by the standards of bourgeois economists—has to say about this subject. In an article entitled “Why not the gold standard,” DeLong writes: “Countries seeing downward market pressure on the values of their currencies are forced to contract their economies and raise unemployment. The gold standard imposes no equivalent adjustment burden on countries seeing upward market pressure on currency values. Hence a deflationary bias which makes it likely that a gold standard regime will see a higher average unemployment rate than an alternative managed regime.” (7)
How valid is DeLong’s objections to the gold standard?
The Currency School and the gold standard
In describing the workings of the late 19th- and early 20th-century international gold standard today, economists frequently describe it as though the claims of the 19th-century Currency School and its quantity theory of money were actually true. The Currency School, basing its work on Ricardo, applied a crude version of the quantity theory of money. (For more on the Currency School, see this post.)
Supporters of the Currency School claimed that a contraction of the money supply—by which they meant the quantity of coins and Bank of England notes but not checkable commercial bank accounts—would lead to a drop in the general price level, while an expansion of the money supply so defined would lead to a rise in the general price level.
The essence of the Currency School’s teaching was to tie the quantity of banknotes to the quantity of gold in the vaults of the Bank of England—then as now Britain’s central bank. Such a policy, according to the logic of the Currency School, would abolish balance of payments crises and the accompanying general economic crises—which Marx realized were actually generalized crises of overproduction and not just balance of payments crises—that were beginning to rage on the world market. The policy would also, they thought, allow the Ricardian law of comparative advantage to operate.
If a country has a balance of payments or trade deficit, the Currency School held this would cause gold to flow out the country. As long as the quantity of banknotes was tied to the gold in the reserves of the Bank of England, any balance of trade and payments deficit or surplus would automatically and promptly be corrected by a fall or rise in English prices relative to the prices on the world market. (8) If Britain had a balance of trade and payments surplus—implying offsetting deficits for its trading partners’ accounts—the reverse would be the case. The Currency School rule—that the supply of banknotes be tied to the actual amount of gold in the vaults of the central banks—is sometimes referred to by economic historians as the “rules of the game.”
The gold standard, however, does not actually require such “rules of the game.” It only requires the convertibility of notes into gold—whether coins or bullion—at a fixed rate. Marx, basing himself in part on the history of the Scottish banks, held that the gold standard actually worked best when the banks were left to their own devices when it came to maintaining the convertibility of their notes into gold. The gold standard actually worked better when the banks were allowed to maintain a variable rather than a fixed reserve behind every banknote they issued. The Currency School-inspired “rules of the game” based on the quantity theory of money actually interfered with the operations of the gold standard.
DeLong, who does not support the quantity theory of money but is rather a supporter of Keynes, claims that if the rules of the Currency School are applied, a country running a trade deficit would have to raise interest rates, which would cause a recession and unemployment in the country. The trade deficit would be corrected not by flexible prices but painfully through recession and unemployment. Instead, DeLong, echoing Friedman, believes that it is better to correct a balance of payments deficit through currency devaluations.
How did the gold standard really work?
But both the Currency School and DeLong ignore the effect of fluctuations in interest rates on the ebb and flow of gold under the international gold standard. Marx pointed out that when a country lost gold under the international gold standard and the quantity of banknotes in currency contracted, it was not prices nor even the general level of economic activity and employment that reacted but rather domestic interest rates.
True, if a country continued to lose gold, the process would end in a credit crunch—called in the 19th century a commercial crisis—leading to recession and falling prices that would correct the trade deficit but at the expense of mass unemployment.
However, unless the global industrial cycle was reaching its peak, a rise in interest rates in one country would attract more loan capital from those countries that were either running trade surpluses or were gold producing countries. This would often halt a gold drain before a crisis broke out. As long as a crisis was avoided, prices would not fall and there would be no adjustment of the country’s deficit. Instead, the debts of deficit countries owed to surplus countries would grow.
At the peak of the industrial cycle, interest rates would rise across the globe and money would become scarce, ending or limiting the ability of the deficit countries to continue borrowing from the surplus countries.
At this point, the countries running balance-of-trade deficits would be forced to reduce their imports and increase relatively their exports. Similarly, the countries that were running balance of trade surpluses, would find their exports falling while their imports would tend to rise—simply the reverse side of the coin of the rise in exports and the decline in imports of the deficit countries.
Therefore, the crisis stage of the global industrial cycle would bring international trade back more or less into balance, though at the expense of rising unemployment both in the deficit countries and the surplus countries. Contrary to the claims of the Currency School, crises were not abolished and Ricardian comparative advantage did not operate.
These global crises, however, were not primarily the result of trade imbalances but as Marx pointed out were caused by overproduction by both the surplus and deficit countries. Crises did, however, tend to wipe out trade imbalances—not through a painless mechanism of constant changes in relative price levels between nations but violently during global crises of overproduction and the resulting mass unemployment in all the capitalist countries.
Marx explained that these periodic global crises of overproduction are inevitable as long as capitalism exists—though he explained that the false polices advocated by the Currency School and legalized by the British Bank Act of 1844 made crises worse than they would otherwise have been.
Contrary to this understanding, Paul Krugman and Brad DeLong are searching for ways to eliminate or at least reduce crises while retaining the capitalist mode of production that breeds them. DeLong and Krugman find the cure for crises through abolition of the gold standard and abolition of any role for gold or any other commodity money. Again, we have to read no further than Chapter I of “Capital” to understand why the abolition of commodity money is impossible under the capitalist mode of production.
How trade is balanced under the system of paper money
Today there is no international gold standard but instead paper money. How is trade brought into equilibrium under the current system? Since currency is not convertible into gold, a country doesn’t automatically lose gold reserves or foreign exchange reserves when it runs a trade deficit. Today’s economists often claim that the falling and rising exchange rates lead to a painless adjustment of national price levels and balancing of world trade while allowing Ricardian comparative advantage to operate. These are exactly the same claims that the old Currency School made for the international gold standard as long as the their “rules of the game” were followed.
Milton Friedman’s ‘rules of the game’ for a system of paper money
The strongest supporter of floating exchange rates was Milton Friedman. Like the Currency School, Friedman was a supporter of the quantity theory of money. Unlike the Currency School, however, he counted as money not just banknotes but checkable commercial bank deposits.
In place of the Currency School advocacy of linking the supply of banknotes directly to gold reserves, Friedman advocated that the central banks and government should make no attempt to influence the exchange rates of their currencies by selling or buying foreign currencies or gold. There should be no “dirty float” where governments continue to buy or sell foreign exchange reserves or gold in an attempt to influence exchange rates. This is rule number 1.
Domestically, governments should see to it that there is a constant rate of growth in the money supply. They should pay no attention at all to changes in rates of exchange or the currency price of gold, whether up or down. This is rule of the game number 2.
Under a “clean float” where governments would not sell gold or foreign exchange reserves, what is the role of the reserve funds held by the central banks or government treasuries, whether in the form of other currencies or gold? None at all, according to Friedman. Therefore, rule of the game number 3: Neither governments or central banks should hold reserves of foreign currencies or gold.
According to Friedman, if these three “rules of the game” are obeyed, the rates of exchange that would emerge will be exactly the rates that are necessary to balance international trade and ensure the operation of the law of comparative advantage. (9)
What Friedman didn’t understand is that when you devalue the currency—reducing the quantity of gold that each currency note of a given denomination represents—prices in terms of the devalued currencies will sooner or later tend to rise. Conversely, if you revalue a currency—increasing the quantity of gold that a given unit of a currency represents, the revaluation will tend to lower the prices defined in the revalued currency.
Friedman assumed that changes in the general price level simply reflected changes in the quantity of currency including bank deposits relative to the level of commodity production. Therefore neither a devaluation—or revaluation—should have any effect on the general price level expressed in term of local currency.
In reality, there have been no attempts by capitalist countries to follow Friedman’s “rules of the game.” All countries continue to hold reserves of foreign currencies and gold, which they are willing to sell when there are “runs” against their currencies.
In reality, if a currency is falling rapidly against gold and currencies that are more or less stable against gold, inflation will accelerate forcing the central bank to print still more paper money leading to a race between rising prices and the money supply. This is what we saw during the devaluation- and inflation-ridden 1970s.
Eventually the only way out is for the deficit country facing a plunge of its currency against gold and the foreign currencies that are holding their own against gold to allow interest rates to rise—just like under the international gold standard. If the deficit country cannot borrow sufficiently from surplus countries—which will be the case if either its credit is exhausted or the international industrial cycle is peaking—then a recession and resulting unemployment will result. The history of Latin America provides many examples of this process.
This is all the more necessary if the currency of the country in question does not function as world currency—like the currency of the United States does—and if a large portion of the debts of its capitalists are denominated in a foreign currency like the U.S. dollar. If its currency suddenly plunges in value against the currency that functions as world currency—the dollar—its capitalists will find themselves unable to meet their debts and will be forced to sell off their assets to the capitalists of the country whose currency functions as world currency.
We saw this during the so-called Asian crisis that began in 1997. During this crisis, many of the assets held by the capitalists of the oppressed countries of Asia and Latin America were sold at fire sale prices to the capitalists of the United States and other imperialist countries.
Even if a country can borrow, it will likely have to borrow at higher rates and build up its debt to surplus countries that will cause problems for it when the international industrial cycle peaks—that is, when all countries have overproduced to a such an extent that an international crisis of overproduction erupts.
Just like under the international gold standard, world trade is not brought into equilibrium through painless fluctuations in relative price levels in different countries but only through the violent and destructive mechanism of crises and their resulting mass unemployment. Therefore, little is gained by replacing the gold standard with floating exchange rates, while the danger greatly increases that plunging currencies—against gold—will cause runaway inflation and then much higher interest rates that threaten the profit of enterprise.
Everything remaining equal, as long as the gold standard is maintained and is expected to continue, interest rates are overall lower and the rate of the profit of enterprise is relatively higher under the gold standard as compared to a paper money system of floating exchange rates.
Paper money and devaluation means a higher rate of exploitation of the workers
However, “flexible” paper money systems and floating exchange rates have one advantage for the capitalists over the international gold system. Devaluations have the effect of cutting money wages in terms of other currencies and gold when the devaluations lead to inflation. The powerful inflationary biases of paper money systems therefore create a downward pressure on real wages—and real (gold) money wages—that does not exist under the gold standard. The result is a tendency for the rate of surplus value—the ratio of unpaid to paid labor—to rise under a system of paper money compared to the situation under the international gold standard.
The consequences of abandoning the gold standard
The postwar Bretton Woods system was a greatly weakened version of the international gold standard, as I explained above.
Under Bretton Woods, if a country’s currency came under pressure it could borrow from the International Monetary Fund, though the IMF might impose certain conditions—such as insisting on a rise in interest rates and attacks against the working class.
Provisions were made for devaluations or revaluations of currencies against the dollar—and indirectly against gold—under certain conditions. However, the Bretton Woods system assumed that the U.S. dollar would continue to represent 1/35th of an ounce of gold. Therefore, the dollar itself would neither be devalued or revalued. But this system was doomed from the start. Why was this so?
As I explained in my main posts, the U.S. government, the Federal Reserve System and the great majority of academic bourgeois economists drew the conclusion that a new Great Depression could be avoided as long as the general price level was not allowed to decline. However, the gold standard in all its forms, including the post-World War II Bretton Woods system, requires periodic declines—as well as periodic rises—in the general price levels. (See this post for the reasons why.)
The dollar price of gold was to remain at $35 an ounce, while the prices of the great majority of commodities was supposed to be allowed to creep upward. The U.S. Federal Reserve System—and its satellite central banks in other capitalist countries—would issue whatever amount of currency was necessary to prevent prices from falling.
Eventually this was bound to make the production of gold increasingly unprofitable. When the production of a commodity—even the money commodity—became unprofitable, capital inevitably flowed to more profitable industries. (10) When this happened, the production of gold was bound to stagnate and then as it did in the early 1970s begin to decline. At that point, the growing shortage of gold would make the maintenance of the $35 an ounce price of gold impossible unless the general price level plunged, which was exactly what the U.S. government and the Federal Reserve System were determined to prevent.
South African apartheid delayed the process
The apartheid regime in South Africa, where most of the gold was produced in those years, enabled the gold producing capitalists to pay considerably less than the value of labor power to their African workers. This counteracted the negative effects of the gradually rising general price level on the rate of profit of capital invested in the gold producing industry. This is one of the reasons why the “free world” continued to support the apartheid South African regime.
Eventually the inflation caused by the economic boom of the 1960s, combined with the Vietnam War, brought these contradictions to a head. Washington basically had the choice of either allowing an old-fashioned financial panic and price collapse—never seriously considered for the reasons given above—or devaluing the U.S. dollar causing the collapse of the Bretton Woods system.
The official and semi-official Washington economists went on a big campaign claiming that gold was being “de-monetized” and that from now on it was the paper dollar that would be the “real money” of the world market. Anybody that has mastered the very first chapter of “Capital” would understand that there was no chance that this would work. However, since the Washington economists were trained not in Marxism but in marginalism, they couldn’t understand why a managed non-commodity money is impossible under capitalist production. Like Krugman, they believed that paper money is “backed” by commodities, not by gold.
After the gold standard
Almost 40 years have elapsed since the final collapse of the international gold standard. It’s as though a great economic experiment has been undertaken to determine who was right about value, surplus value and money—Marx or the marginalists. What have been the results of this “great experiment”?
The results have been pretty much those that were anticipated by Marx that can be found scattered about “Capital.”
The initial results of the devaluations of the dollar and the currencies linked to it that followed the final collapse of the Bretton Woods system in 1968-71 were first soaring inflation, falling real wages—which was a positive development from the viewpoint of the capitalists because it meant a sharp rise in the rate of surplus value—followed first by a rise in nominal interest rates—as measured in terms of depreciating currency—and then real interest rates as measured in terms of commodities—and even more so when measured in terms of gold, which is what really counts under the capitalist mode of production
In the wake of the Volcker Shock, the long-term rate of interest was so high that it pretty much wiped out the profit of enterprise. As Marx predicted in “Capital,” under these conditions a portion of the industrial and commercial capitalists converted themselves into money capitalists. Instead of the circuit M—C—M’, a portion of M was diverted into the circuit M—M’. Much of these funds were poured into consumer credit and real estate speculation, especially the residential housing market. As Marx predicted, the result was a fall of long-term interest rates that restored a positive profit of enterprise. A happy ending? Not exactly.
Liquidity trap is a necessary phase of the industrial cycle
Normally in the wake of an economic crisis, we have a combination of low profit rates and low interest rates. This is the liquidity trap that Keynesian economists complain about. While the liquidity trap is accompanied by depression and mass unemployment, periodic liquidity traps play a necessary role under capitalism. During the liquidity trap, credit contracts and massive cash reserves are built up in the banks. The economy shifts from a credit system back to a cash system.
Then as excess inventories and excess capacity are liquidated, the rate of profit rises while interest rates remain low because of the huge hoards of cash accumulated in the banking system. Cash is abundant and the credit system is deflated. This kicks off a new economic boom that at first relies on cash—and an increase in the velocity of turnover of the currency—as opposed to an inflation of credit. This represents the “sound phase” of an economic expansion that follows the crisis-depression phase.
The last time we saw the world capitalist economy in such a healthy state was immediately after World War II—or, we could say, immediately after the normal process of the expanded reproduction of capital resumed after decades of disruption caused by two world wars and the Great Depression. However, after the crisis of the 1970s there was no “liquidity trap” and therefore no sound phase of the expansion. Why not?
In the wake of the Volcker Shock, the climax of the prolonged economic crisis of 1968-82, we did not have a low level of interest rates and thus a liquidity trap. Instead, we had very high interest rates, as I mentioned above, which caused a portion of the industrial and commercial capitalists—corporations—to convert themselves into money capitalists, resulting in an abnormal inflation of credit. This indeed as Marx predicted would occur finally brought down the rate of interest to more normal levels that allowed a positive profit of enterprise.
But by the time the rate of interest had finally returned to “normal levels,” instead of a deflated credit system and a “healthy cash-based” economy, the economy was far more debt-ridden both absolutely and relatively than it had ever been before in the entire history of the capitalist system.
The long-terms results of the Volcker Shock and the massive devaluation-fueled inflation that preceded it is explained by the world’s leading expert on Volcker shocks, the man himself, Paul Volcker. Volcker explained the situation in an article published in the June 24 edition of the New York Review with the rather ominous title: “The time we have is growing short.”
“There was one great growth industry,” Volcker writes ironically. “Private debt relative to GDP nearly tripled in thirty years.” This is another way of saying that a portion of the industrial and commercial capitalists converted themselves into money capitalists in reaction to the extraordinary high rates of interest that prevailed in the wake of the Volcker Shock.
The “excesses” that preceded the panic of 2007-09 (now renewed by the panic that began in Europe in April-May 2010) are not just the results of the excesses of the last few years in the mortgage-granting market that are described by a mass of books that are now hitting the bookstores—but have been building for 30 years, just as Volcker points out in his New York Review article.
For example, if we look at a graph of the ratio of U.S. debt—whether corporate, consumer or government—to the total U.S. GDP, we see that the ratio rose very slowly during the generally prosperous years from the 1950s and the 1960s—a period that Volcker expresses considerable nostalgia for—staying under 150 percent of the U.S. GDP.
But starting with the Volcker Shock, the ratio of debt to GDP started to soar, approaching 350 percent on the eve of the first initial panic in August 2007. Never—not even on the eve of the Great Depression in 1929—had relative debt levels ever been anything like this. In effect, the normal rise in the relative debt levels that resulted from the prosperity of the 1950s and 1960s, which was rather modest, was added to the completely abnormal explosion of debt that followed the Volcker Shock.
If the gold standard had been adhered to in the 1970s—that is, if the U.S. government and Federal Reserve System had defended the $35 an ounce dollar price of gold by allowing commodity prices to fall as in the 1930s, the result would have been a “liquidity trap” and a much deeper depression and much higher unemployment than anything seen since World War II. But the high interest rates of the late 1960s would have fallen sharply during the depression. The resulting “liquidity trap” would have prepared the way for a healthy cash-based rather then credit-based economic boom after the depression had run its course.
Instead, after years of stagflation and the sharp crises of 1974-75 and 1979-82 with their mass unemployment came the rather anemic “Great Moderation” accompanied by an unprecedented credit balloon.
If this huge debt bubble is allowed to deflate, something like the second Great Depression will occur, though the resulting “liquidity trap” would presumably pave the way for a new economic boom once Depression II has run its course.
But the cause of this Depression—a Depression with a capital “D” as opposed to the normal cyclical depressions of the capitalist industrial cycle—will be quite different than Depression I. In my main posts, I suggested that the basic cause of the first capital “D” Depression was the huge inflation of commodity prices relative to their underlying labor values that resulted from World War I. (For more details, see this post.) These high prices relative to the underlying labor values sharply depressed gold production.
When the post-World War I boom unfolded during the decade of the 1920s, the abnormally low level of gold production forced the capitalists to rely on credit rather than cash to finance the expansionary stage of the 1920s industrial cycle. This created the up-to-then unprecedented credit bubble that ended with the massive credit deflation of the early 1930s, which transformed the cyclical recession-depression that inevitably followed the 1920s boom into Depression I.
Today, we have a credit bubble that far exceeds the credit bubble of the 1920s but with a different origin. Today’s credit bubble is, ironically, rooted in the desperate attempts of the upholders of capitalist class rule to avoid the nightmare of a Depression II. The capitalist rulers feared and still fear that a Depression II will finally discredit capitalism once and for all and lead to its revolutionary overthrow and transformation into socialism. (11) It would be ironic if history someday records that Depression II was caused by the very policies that were designed to avoid it!
A return to gold?
In theory, if the current credit bubble were finally allowed to deflate, after Depression II—perhaps involving more than a decade of unprecedented unemployment—a situation would finally arise where continued low interest rates would be combined with sharply rising profits. The credit economy would have given way to a cash economy.
As I mentioned above, the last time such a situation prevailed was in the immediate aftermath of World War II. Naturally for the sake of argument I am assuming that war and revolution don’t intervene—not necessarily a good assumption.
The way would then be cleared for a new “Great Boom” of capitalism, which of course would lead later on to new crises owing to the normal operations of the industrial cycle that I examined in my main posts. The problem is, how would capitalism politically survive Depression II?
But the Obama administration and the Federal Reserve System under Ben Bernanke—remember, Bernanke is an “expert” on the Great Depression—are still trying to find a way to avoid Depression II. But this is proving a lot harder than either Obama or Bernanke thought it would be, and they are fast running out of viable options.
After holding down the “monetary base”—the supply of token money as opposed to credit money—between the beginning of the crisis in August 2007 and the collapse of Lehman Brothers in September 2008, Bernanke reversed course and doubled the monetary base over a few months. Signs of a weak recovery began to appear last summer, and the Washington economists and Bernanke began to boast of how they had avoided Depression II, escaping only with the “Great Recession.”
When Obama boasts of this “achievement”—which means official unemployment of over 15 million in the United States alone—his poll numbers tend to plunge. Still, this is “much better” than official unemployment of let’s say 35 or 40 million people in the United States that Depression II would bring.
But as a result of Bernanke’s inflation of the monetary base, the dollar began to slip against gold, causing the dollar price of gold to rise at times to over $1,100 an ounce. If the rate of the dollar’s decline against gold were to accelerate, then it will be back to 1970s stagflation or worse. So far, however, the slippage of the dollar against gold has not been enough to trigger stagflation.
But then came the sovereign debt crisis in Europe—the obvious result of the massive deficit spending by governments aimed at preventing the “Great Recession” from turning into Depression II. As the euro fell against the dollar, the dollar slipped against gold—not plunging but slipping—causing the dollar price of gold to rise above $1,200 for the first time.
There are fears that as the European cuts in government spending take effect, and massive cuts by state and local governments continue in the United States, the already anemic recovery from the “Great Recession” will end in renewed recession leading into Depression II. Indeed, there are growing signs that in the wake of the European crisis the “recovery”—such as it is—is beginning to sputter. Is the “Great Recession” resuming its course, driving the world capitalist economy into the pit of Depression II?
There is still the printing press. The Bernanke Fed can balloon the U.S. monetary base again. But in that case, how will the Fed be able to stop capitalists from stampeding into gold triggering a new 1970s-style inflationary surge that would inevitably lead to soaring interest rates?
If this happens, then a new Volcker shock—which in itself would be bad enough—would not be the end of the story. A new Volcker shock—necessary to prevent hyper-inflation if money capitalists begin to lose what remains of their faith in paper money—would imply a new era of sky-high interest rates and a new inflation of credit.
But the ability to inflate credit relative to the GDP is not infinite. It reaches a mathematical limit when all income is used to pay interest on the total debt. Is it really possible now to repeat the cycle of stagflation, Volcker shock and new ballooning of credit on top of the current credit balloon?
Solution, a return to the international gold standard?
It is possible that Washington and the Federal Reserve, facing the horrible contradictions they now confront, will perhaps finally throw in the towel and admit in private if not in public that their attempts to avoid Depression II, whether through Keynesian or Friedmanite policies, have failed. In this case, they will allow the debt balloon to deflate and attempt to ride out the storm, hoping in this way to return the world economy to “health” and thereby saving the dollar standard and their world empire.
Or perhaps they will dodge the bullet this time, and the shaky economic recovery will continue for awhile. But even if it does, it seems that sooner or later they will face the choice between (1) Depression II, (2) a period of stagflation culminating in a new Volcker shock and an even larger credit balloon—if that is possible, which seems doubtful to say the least—or (3) a genuine hyper-inflation ending in an even greater economic collapse.
Perhaps Washington, closing its eyes to all the dangers, will “go for broke” and choose inflation once again in a last desperate attempt to stave off debt deflation and Depression II. Then more and more of the world capitalists will panic and start to convert their assets into gold, much like occurred in 1973-74 and 1979-80 but on a much greater scale. The dollar price of gold will soar once again, and the resulting inflation will drive up interest rates first in nominal terms but soon in real commodity terms as well as in gold terms.
The money capitalists will have been burned twice, once in the 1970s and now a second time. Faith in paper currency will collapse. The money capitalists will start charging interest rates—to consumers and industrial and commercial capitalists and even the U.S. Federal government—so high that the interest will in effect be unpayable.
But the money capitalists—the money market—might say in effect that if the debts are denominated in terms of gold rather than dollars or other paper currencies, they would be willing to charge payable rates of interest.
If governments agree to denominate their debts in gold—that is, issue gold bonds—they might be able to borrow at payable rates of interest. As the dollar standard crumbles, even the U.S. government and U.S. corporations might reluctantly be forced to issue gold bonds.
If this were to actually happen, governments would be under great pressure to halt any further devaluation of their currencies, since if they allowed their currencies to decline even modestly, their capitalists, and even the governments themselves, would be unable to pay their debts that would now be denominated in gold—leading to waves of bankruptcies.
Governments that agreed to take the next step and to once again agree to redeem their currencies in gold would be able to borrow at lower rates. Interest rates would be far lower in countries that returned to gold compared to those that clung to paper money. Country after country, including even the United States, would agree to once again redeem their currencies in gold bullion or coin at some fixed rate. A new international gold standard would emerge on the ruins of the dollar standard and the U.S. empire—somewhat in the way the original gold standard emerged from the chaos of the mercantilist period.
How it would work
Under our hypothetical new gold standard, central banks would buy gold from private hoarders who would as their “confidence” in the new gold standard increases be willing to sell their hoarded gold, which of course bears no interest, and use the proceeds to invest in interest-bearing securities at lower and lower rates of interest. Our money capitalists-turned misers would again be willing to function as money capitalists.
On the other side, the rate of surplus value would rise to all-time highs as the wages of the workers are depressed to the lowest levels by the preceding terrible inflation and unprecedented unemployment that would follow. After a perhaps prolonged “liquidity trap,” a combination of low interest rates, a very high rate of profit and a deflated credit system—the old debts having been wiped out through a combination of inflation and bankruptcies—would appear. Then the new gold standard would be off and running.
In addition, if the new gold standard is to last for any period of time, avoiding the fate of the Bretton Woods system, the general price level in currency as well as gold terms would have to be allowed to fall as well as rise. Gold mine depletion would likely mean that there would be a stronger deflationary bias than was the case under the old gold standard—barring unexpected gold finds or some revolutionary technological breakthrough such as the ability to mine asteroids for gold relatively cheaply.
In any case, Keynesian and Friedmanite policies of preventing deflation during recessions would have to be abandoned if the gold standard were to have any staying power. Experience and theory alike show that a gold standard is not compatible with bailing out debtors through permanent inflation.
If these considerable, to say the least, barriers to a new gold standard can be overcome, perhaps a few happy “golden decades” of stabilized capitalism will be achieved—before a new era of crises begins. (12) Even the most “sound” fiscal and monetary polices—such as a solid gold standard—cannot prevent the inevitable return of crises of overproduction with all their consequences.
All this is very speculative, of course. The future like the past will be full of surprises. The important point to grasp is that neither a return to gold or a continuation of the system of paper money can eliminate capitalism’s fundamental and growing contradiction that breeds the periodic crises of overproduction. That is the contradiction between the ever-greater socialization of the productive process and labor, on the one hand, and the continued private appropriation of the product of increasingly socialized labor, on the other.
As this contradiction grows over time, so in the long run does the intensity of the crises it breeds. No monetary reform can overcome this contradiction. Only the victory of the worldwide workers’ revolution and the transformation of capitalist production into the production of the associated producers, where socialized labor is directly recognized as social, can solve this contradiction.
Therefore, the only real solution will not be a return to the international gold standard or any other “reform of the international monetary system” but only the transformation of capitalism into socialism. Otherwise, civilization will not be able to continue much longer. Paul Volcker is right: “The time we have is growing short.”
1 Strictly speaking, paper currencies—token money—are symbols of a given quantity of the commodity in whose use value the exchange value of all other commodities are measured. For example, if the dollar price of gold is $1,200 a troy ounce, the dollar represents 1/1,200th of an ounce of gold. The use value of gold is measured in units of weight. Under prevailing conditions of production, 1/1,200th of a troy ounce of gold represents a given quantity of abstract labor time—the substance of value when embodied in a commodity—measured in terms of time.
while it is often said that paper money is a symbol of value, paper money cannot represent value—a given quantity of abstract labor measured in terms of time—directly but only indirectly by symbolizing a given quantity of the use value of the money commodity, which itself on average takes a given quantity of abstract human labor to produce.
2 Recently, the prime minister of Japan was forced to resign because he could not convince the U.S. government to remove its base from Okinawa. This shows that 65 years after the end of World War II—which ended with the dropping of two atomic bombs on Japan—Japan is still basically an occupied country whose government on all vital questions remains subordinated to the occupying power, the United States. When the government of Japan tried to negotiate a removal of the Okinawa base, the U.S. government said no and that was that.
3 U.S. dollar bills have printed on them: “This note is legal tender for all debts public and private.” This means that these bills cannot be legally refused if offered as payment for debt within the territory of the United States.
Old dollar bills used to say instead that this bill is payable in lawful money, reflecting the dollar bill’s past as a form of credit money. The current phrase reflects the dollar bill’s status as token—sometimes also called paper or fiat—money, whose actual gold value varies inversely with ups and downs of the dollar price of gold. If you want to see the actual gold value of a dollar at this moment on the world market, go to http://www.kitco.com. One divided by the dollar price of gold as reported at this Web site is the fraction of a troy ounce of gold that a dollar actual represents at this instant on the world market.
4 The Austrians point out the contradiction between Friedman’s hatred of all forms of “central planning,” which he shared with the Austrians, and his advocacy of the most rigid central planning of the “money supply.” In reality, as far as the production of the money commodity is concerned, not only can it be produced in an unplanned way as the Austrians advocate, it must be be produced in a unplanned way if it is to function as the money commodity. Before a any object can be money it must as Marx pointed out be a commodity. Therefore, when it comes to logic, the logic of the Austrians trumps Friedman.
5 During the mercantilist era, governments followed a policy of aiming at a surplus balance of trade—at the expense of other countries, which repeatedly led to war—in order to maximize the accumulation of gold and silver. This policy was strongly supported by the economists of the era, who are referred to as mercantilists. Indeed, despite claims of the supporters of the quantity theory of money to the contrary, this was the only way to build up the home markets in countries lacking gold and silver mines on their territories or at least in their colonies.
6 Even from the viewpoint of its material use value, gold is “not just a metal. It is a heavy metal that is not formed in the interior of average stars such as our sun, but only when giant stars go supernova through complex interactions of subatomic particles that scientists are still struggling to understand. These, of course, involve gold as material object and not as money, though its physical properties make it the closest thing there is to an ideal money commodity. Krugman—who is actually one of the better bourgeois economists—shows the total bankruptcy of what passes as “modern” bourgeois political economy. What a contrast to Marx!
7 Here we see the (bourgeois) economists’ horror that the cost of living might actually fall. In light of the current depletion of gold mines, and in the absence of the discovery of rich new gold mines or some technological breakthrough, a new gold standard would have a strongly deflationary bias.
8 A problem with this policy, as Marx explained in Volume III of “Capital” and other writings, was that the Bank of England could not expand the supply of notes to meet the extra demand for currency as a means of payment in a crisis. The very knowledge that the English central bank was barred—for legal not economic reasons—from increasing the issue of banknotes helped cause a panicky demand for its banknotes.
As a result, on three occasions (1847, 1857 and 1866) the British government was forced to suspend this law and allow the Bank of England to issue banknotes in excess of its gold reserves. However, on only one occasion—the crisis of 1857—did the bank actually have to issue any extra notes, and then only briefly. On the other two occasions, the mere granting of authority to the bank to issue the notes was enough to break the crisis, and no extra notes actually had to be issued.
It should be kept in mind that there was no question of suspending the gold standard during these crises, since it was banknotes and not gold that was demanded. Indeed, between the crisis of 1866 and the outbreak of World I in August 1914, during which it was realized that the limit on the note issue of the central bank would always be suspended in a crisis, there were no bank runs. And so there was no need to suspend the law that limited the right of the Bank of England to issue notes, and no runs on the Bank of England’s gold reserves occurred. Capitalism was never again to experience such a prolonged period of financial stability—not even during the “golden years” that followed World War II.
9 Friedman following this logic advocated that governments and central banks cease to hold reserves either in the form of gold or foreign currencies. Since, according to Friedman, the general price level is determined by the quantity of money, the devaluation of currencies—falling exchange rates against gold and other currencies—should have no effect on the price levels defined in terms of the devalued currencies. The same argument applies to the revaluation of currencies, only in reverse.
Therefore, ever-fluctuating exchange rates would keep international trade in equilibrium and in the bargain ensure the working of Ricardian comparative advantage. However, no government or central bank has ever taken seriously Friedman’s suggestions that they dispense with reserves—whether in the form of gold or foreign exchange reserves.
10 This is one of the reasons why gold can function as money. As prices in terms of gold rise, it becomes progressively less profitable to produce gold. That will prevent the market from being flooded with gold leading to a collapse in its purchasing power—unless the relative labor value of gold were to collapse, in which case gold would indeed becomes de-monetarized and be replaced by another commodity, probably another precious metal.
11 It is important to realize that even Depression II would not automatically lead to the automatic transformation of capitalism into socialism. Capitalism must be overthrown by a conscious act of liberation by the organized working class.
12 The depletion of the world’s gold mines might limit the duration of such a boom compared to similar “Great Booms” of the past. Also, in any genuine “multi-polar world” that might follow the global overlordship of the U.S. empire, the danger of a new inter-imperialist war would be very real as economic competition would lead to political and military competition—threatening not only the new gold standard but the “mutual ruin of the contending classes.”