Can Gold Ever Be Overproduced?

Reader Julio Huato quotes me as writing, “Gold as money cannot be overproduced.”

“Do you,” Julio writes, “mean that somehow the commodity money abolishes the laws of the relative value form? I think not.”

He continues: “For a given period of time, the demand for gold is the sum of the demand for gold as object of use plus its demand as money — i.e. as a means of circulation, payment, and value storage. And that total is never an infinite figure. Gold has to be ‘purchased’ with other commodities, which are not produced in infinite amount, since the productive force of labor is always finite. You seem to be conflating the qualitative determination of money as universally desirable (vis-a-vis other commodities) and its quantitative determination, which is necessarily bounded.

“Marx’s critique of the view that the inflows of gold into the New World led to price inflation do not imply that an oversupply of gold above and beyond the size of the social stomach for gold will not lead to a fall in the relative value of gold in terms of the other commodities. His view is that, on average, that relative value is determined by the requirements of social labor producing, respectively, gold and the other commodities. But fluctuations around that average are allowed. The aim of Marx’s critique is the misunderstanding that gold makes the commodities valuable, rather than their being products of labor.

“I suggest that you re-check that section on the quantitative determination of relative value in chapter 1. And also this, from Marx:

“‘The expression of the value of a commodity in gold — x commodity A = y money-commodity — is its money-form or price. A single equation, such as 1 ton of iron = 2 ounces of gold, now suffices to express the value of the iron in a socially valid manner. There is no longer any need for this equation to figure as a link in the chain of equations that express the values of all other commodities, because the equivalent commodity, gold, now has the character of money. The general form of relative value has resumed its original shape of simple or isolated relative value. On the other hand, the expanded expression of relative value, the endless series of equations, has now become the form peculiar to the relative value of the money-commodity.'”

Julio is asking, if too much gold is produced relative to other commodities, won’t what Marx calls the expanded relative form of the value of gold—in plain language, price lists read backwards—fall? Or what comes to exactly the same thing, won’t an overproduction of gold cause prices in terms of gold to rise?

And therefore, isn’t it true that in fact gold can be overproduced?

If we stop the analysis at the end of Chapter I of Volume I of “Capital,” there seems to be no reason why this won’t be so. David Ricardo, basing himself on his own predecessors, reasoned just this way.

Suppose shoes, for example, are overproduced. Won’t the price of shoes fall below the value or price of production of shoes? This will cause the rate of profit for capital invested in shoe manufacture to fall below the average rate of profit. Capital will flow out of shoe production where the rate of profit is low relative to the average—or even where outright losses are being incurred—to other branches of production where the rate of profit is above the average.

Shoe production will decline leading to an under-production of shoes. The under-production of shoes will cause the price of shoes to rise above the price of production causing the rate of profit in shoe production to rise once again above the average rate of profit. This will attract additional capital to the shoe industry, which will end in a new overproduction of shoes, causing profits and prices in the shoe industry to fall, and the cycle repeats itself once again.

It is exactly through this mechanism that industrial capitalists, each working for his or her own private account without any central planning or guidance by any kind of central authority, are able to produce commodities in proportions that meet the needs of capitalist society. This is Adam Smith’s famous invisible hand.

Ricardo extends Smith’s ideas to the fields of money and international trade

According to Ricardo, if gold is overproduced, the rate of exchange between gold and other commodities will drop—or in Marx’s language the expanded relative form of value of gold, price lists read backwards, will drop—much like the price of shoes will drop if too many shoes are produced. Or in plain language, prices in terms of gold will rise.

Such a situation, Ricardo reasoned, will cause the rate of profit in gold mining to drop below the average rate of profit causing capital to flow out of gold mining. Less gold (and in Ricardo’s time silver as well) will be produced. Since the total quantity of commodities will now be growing faster than the quantity of money (gold and/or silver), prices will once again fall to and then below their labor values. (1) When this happens, the rate of profit in the gold mining industry will again rise above the average rate of profit, causing the cycle to reverse.

Therefore, Ricardo reasoned, over time the general price level will be ruled by the relative values of commodities and money (gold and/or silver). He also saw these adjustments occurring gradually without any sharp breaks or crises. In order to probe more deeply into the laws of capitalist production, Ricardo abstracted the fluctuations of prices around values, both in terms of individual commodities like shoes, and in term of the general price level that would arise, he believed, out of fluctuations of gold (and silver) production.

Keynes strongly complained that Ricardo’s abstract analysis was divorced from reality. However, Marx also used the method of abstraction. For example, Marx’s entire analysis of surplus value assumes that commodities always sell at their values—or direct prices, to borrow Anwar Shaikh’s terminology. Keynes’s complaint against Ricardo is actually the complaint of the vulgar economists against the scientific aspects of classical political economy represented by Ricardo.

Comparative advantage—the Ricardian theory of international trade

Ricardo extended these basic ideas to the field of international trade. Suppose in an underdeveloped country the productivity of labor in all branches of industry is below the average level of productivity of labor prevailing on the world market. But some branches of industry will lag less behind the world average than others.

At first, the more advanced countries will be able to undersell all branches of industry in the underdeveloped country where the productivity of labor lags behind the world market average in all branches of production.

However, Ricardo argued, as this happens our underdeveloped country will run a massive trade deficit. Gold—here we assume a gold standard—will flow out of the underdeveloped country and things will look very bad. But as gold flows out, Ricardo claimed, the money supply in the underdeveloped country declines causing the general price level to fall in that country. This will continue until the money supply and prices have fallen so much that the underdeveloped country will find itself in a position to undersell more developed countries in those branches of industry where its productivity lags least behind the world market average.

The converse will be the case in a country where the productivity of labor exceeds the world market average in all branches of industry. At first, our advanced country will run a massive trade surplus. Gold will flow into the advanced country. This according to Ricardo’s quantity theory of money will cause prices to rise in the advanced country until that country finds those industries uncompetitive in which it enjoys the least advantage relative to the world market average.

Eventually each country will specialize in what it is best at, even though in some cases this will mean what it is least bad at. In an industrially highly developed country, this specialization will be in what it is most good at relative to the world market average.

This is the famous theory of comparative advantage, still taught to economics students today and the rationale behind such “free market” trade agreements as NAFTA. The theory of comparative advantage claims, in contrast to the mercantilist theories that preceded it, that free trade is to the advantage of the developed and underdeveloped countries alike.

I will not write anything further here about the false theories of comparative advantage and the Currency School that arose on the basis of the Ricardian theory of money and world trade here, because I dealt with it in considerable detail in my main posts, especially this one. Here I want to approach the question from a somewhat different angle.

We know that Marx was very critical of Ricardo’s theory of money and international trade. Marx, who unlike Keynes greatly admired Ricardo’s work, held that Ricardo’s theory of money and international trade was largely mistaken. Marx, however, did credit Ricardo for always striving for the greatest logic and consistency in all his work, even when he drew wrong conclusions.

In order to explore this question, we first have to recall the method that Marx used when he wrote “Capital.”

Marx’s method

If we stop economic analysis with Chapter I of “Capital,” there doesn’t seem to be anything wrong with Ricardo’s arguments, though of course Marx’s analysis of the two-fold character of human labor—concrete labor that produces use value and abstract labor that creates value and the various forms of value—is far superior to anything that Ricardo was able to achieve. Marx’s arguments are more profound because he was a student of both Hegel and Ricardo. But why should Marx’s conclusions have been any different than Ricardo’s conclusions when it comes to monetary theory and international trade?

Simple commodity production versus capitalism

In the first three chapters of “Capital,” Marx is not dealing with capitalist production—the main subject of Volume 1—at all. Rather, he is dealing with another mode of production—simple commodity production. (2)

The dynamics of simple commodity production are actually quite different than capitalist production. Under simple commodity production, the workers own their own means of production—we ignore merchants who exploit the simple commodity mode of production and assume that all commodity producers function as their own merchants. There is neither wage labor, surplus value or profit, and hence no interest and profit of enterprise, and no ground rent either.

Most importantly, there is no class of non-workers—capitalists—who monopolize the means of production. The workers own their own means of production on an individual basis, and there is no class of wage workers—proletarians—who must sell their labor power to a class of non-working capitalists. There is no capital—just commodities and money.

Instead, the workers—and in Chapters 1-3, all people of working age are workers though none are proletarians—retain the ownership of their labor power and never have to sell it to another. (3) Labor power is neither bought nor sold and is not a commodity in the system of simple commodity production that Marx is analyzing in the first three chapters of Volume I of “Capital.”

Only in Chapter 3, did Marx mention credit arising from money’s role as a means of payment and the possibility of credit crises. But even here the lenders and borrowers could just as easily be simple commodity producers themselves rather than separate classes.

Why didn’t Marx begin with capitalist production?

But why does Marx begin his examination of capitalism with another mode of production rather than plunge right into examining capitalist production? Marx has indeed been criticized for this. Over almost the century and a half since “Capital” was first published, Marx has lost countless readers who started with Chapter I and found it so abstract and boring that they gave up. (4) Marx certainly must have been aware of this danger but still felt he had no alternative if he were to get his book right.

The basic formula of capital is M—C—M’. The (industrial) capitalists begin with a sum of money, purchase commodities such as factory buildings, machines, raw and auxiliary materials and labor power, produce commodities of a certain type—shoes, for example—and then sell them for a greater sum of money than they began with.

Why doesn’t Marx start his analysis right here? Wouldn’t it be much more likely to catch the reader’s attention? Why bother with a different mode of production—simple commodity production? After all, in “Capital” Marx is not interested in examining the laws that apply to all modes of production but only those that apply to capitalist production.

The reason is that Marx first has to explain what commodities and money are and what they are not. Capital (M—C—M’) consists of both money M and commodities C. If we don’t know what money and commodities are, we will never understand how the combination of money and commodities forms capital. We have no chance of understanding what capital is—and isn’t—if we don’t understand commodities and money, which make up capital, any more than we can understand complex biological organisms like plants and animals if we don’t know what a cell is.

Chapter 1 of Volume I of ‘Capital’

At the beginning of “Capital,” in the very first chapter, Marx explains how products of human labor are transformed into commodities through exchanges. The exchange of privately produced products gives rise not only to value but the form of value—exchange value. The developed form of value is nothing other than money.

Marx explains in Chapter I that a commodity is an object of utility that is produced by human labor that must be exchanged for another product that is an object of a different utility and is also a product of human labor. Therefore, a commodity is a unity of both its exchange value—for its producer—and use value—for its consumer. Marx shows that what we commonly call the “monetary value” of a commodity is simply the generalized equivalent form of value—the use value of another commodity in which the value of a commodity is measured.

For example, x yards of linen exchange for y coats. Since we are measuring the exchange value of linen in terms of the use value of coats, linen is the relative form of value, while coats are the equivalent form of value—the measuring stick. Here lies in its embryonic form the money relationship of production that plays such an important role in capitalist expanded reproduction.

But what lies behind this exchange value and its two primary forms, the relative form and the equivalent form? How can we relate linen to coats, though linen and coats have completely different use values?

Marx finds the common quality that not only linen and coats but all commodities share—whether linen, gold or iPads—they are all products of human labor. Not the specific quality of the different concrete labor powers—concrete labor is the expended labor power of a specific type—that produces linen on one side and coats on the other. Rather, he finds the common quality to be that all are products of expended human labor powers—labor—as such.

Though the human labor that produces linen, coats, gold and iPads differs in many ways, all these types of human labor have one thing in common. They are examples of human labor. Marx called expended human labor powers in the abstract, with all specific features that differentiate the labor of one person from another left out, abstract labor. Abstract human labor when congealed in a material commodity or service is value.

Therefore, under commodity production—whether simple commodity production, the subject of the first three chapters of Volume I of “Capital,” or capitalist production, where labor power itself has become a commodity that is the subject of the rest of “Capital”—human labor has a dual character. As concrete specific forms of labor, human labor produces use values; as abstract human labor, it produces value—abstract human labor congealed in a commodity.

Unlike concrete labor, abstract human labor is homogeneous and in principle subject to infinite quantitative divisions and additions without in any way changing its quality. In terms of value, different commodities differ quantitatively but are qualitatively identical.

The commodity is therefore a unity of opposites. Each commodity possesses a use value—it is an object of utility that meets some particular human need, whether real or imagined, measured in a unit that is appropriate to it—in pre-metric times, yards of linen, for example. The commodity also possesses a value, a representative of a definite quantity of abstract homogeneous human labor measured in terms of time (minutes, seconds, hours, and so on). (5)

Numerous commentators on Marx have explained this quite well over the many years since Volume I of “Capital” was first published. But most of the commentators have missed a few quite vital things that at first seem very abstract but in fact have extremely important consequences not only for crisis theory but for politics as well.

Value and the measure of value—a unity of opposites

Before I wrote this reply, I naturally re-read Chapter I of “Capital.” When reading profound material, I find that I almost always see things that I had forgotten, missed or perhaps not understood the previous time I read it. I found this was true this time as well.

I noticed that Marx stressed the unity of value—a definite quantity of abstract labor congealed in the relative form of the commodity and the specific use value of the equivalent form of the commodity—in terms of its appropriate units—for example, weights of precious metal—which serves as the measuring stick or independent equivalent form of value of the commodity (relative form) whose value is being measured.

For example, gold bullion is a definite use value that is produced by particular types of concrete human labor necessary to mine and refine it. Remember that use value is produced by concrete and not abstract human labor. Yet abstract human labor—value—must be measured by an independent value form. And that value form must be a specific use value produced by particular type(s) of (concrete) human labor.

This forms a unity of opposites. This unity of opposites—value of one commodity measured by the use value of another—implies that contrary to Adam Smith not all commodities can be money. As simple commodity production developed, one—or at most a few—commodities emerged as the universal equivalent(s), the commodities that in their material use values become the independent value forms that measure the value of all other commodities. This universal equivalent we call money.

I have emphasized throughout my blog on crisis theory that exchange value of one commodity must be measured by the use value of another commodity—a point usually ignored by most Marxist commentators. What I had overlooked was that this forms quite a unity of opposites!

Now I will make an assertion that on the face of it sounds absurd: Much of the opportunism and revisionism that has dominated the workers’ movement throughout the last century with such dismal results—insomuch as it has reflected human error and not material interests—rests on failing to grasp this very point!

Aren’t I making a mountain out of a molehill? Isn’t Marx simply playing with Hegel here? What importance does this have for the practice of the workers’ movement in the concrete class struggle?

I think I demonstrated in my main posts that if we ignore the fact that the value of one commodity can only be measured in terms of the use value of another commodity, we pay a heavy price, especially when it comes to crisis theory, the main subject of this blog.

Once we “overlook” the fact that value must always take the form of exchange value in which the value of one commodity is measured in terms of the use value of another commodity, the way is opened up for all the theories of “non-commodity” money that unfortunately are accepted by most—though not all—of today’s Marxists. And as I have shown in my main posts, once you accept “non-commodity” money, you have a hard time explaining why general crises of overproduction continue to occur in today’s capitalism, especially after the work of John Maynard Keynes and Milton Friedman.

Indeed, in my blog posts I explain that most of today’s Marxists avoid the term overproduction of commodities when they deal with the periodic crises of capitalism, because they don’t understand how generalized crises of overproduction can occur in a world of “non-commodity” money where the state and its central banks can create money at will.

During a crisis of overproduction—for example, the one that began in the fall of 2008—money, or “ready cash” as Engels put it in “Socialism Utopian and Scientific,” seems to disappear. (6) As a result, commodities pile up in factories unsold, workers are laid off in droves and world trade plunges. Isn’t this exactly what we saw in 2008 and 2009?

But if there is a shortage of money, why can’t the monetary authority—like the U.S. Federal Reserve Board—simply print enough money to make sure there is always enough available to circulate the total quantity of commodities, while at the same time taking care not to print up too much in order to avoid severe inflation? It shouldn’t be so hard to do should it? The whole “genius” of Milton Friedman for which he won the Nobel Prize in economics boils down to this very point.

And Keynes, though he is somewhat more subtle than Friedman, also believed it. If there is inadequate demand—or a generalized overproduction of commodities—just print more money, and if that is not enough to quickly “restore full employment,” have the government borrow and spend the money that the “monetary authority” has just created.

Therefore, crises of overproduction such as that which began in the fall of 2008 should be easy to avoid, particularly with today’s statistics and information technology. As recently as two years ago, the professional economists proclaimed that big capitalist crises would not recur in the future thanks to today’s scientific “monetary policy” made possible by the work of Keynes and Friedman. (7)

Children and the economists on money

Ask a child what money is. I will assume that our child is not a child prodigy who has mastered Chapter 1 of Volume I of “Capital” but an ordinary child. Won’t the child say something like money is what you buy things with? Our modern marginalist economists cannot improve on this definition.

But what happens if money is not simply what you buy things with—a means of circulation—but is a relationship of production that must be represented by a commodity with a particular use value. That is, it must be a product of particular concrete types of human labor.

If that is the case, then neither capitalist governments nor their monetary authorities will be able to create money and monetarily effective demand at will. In this case—though it takes further analysis to demonstrate why this must be so—it becomes not only possible but at a certain stage of development inevitable that the production of commodities will grow faster than monetarily effective demand—the market—for them. Or as Engels put it in “Socialism Utopian and Scientific,” it is the market itself—an institution so lionized by the (bourgeois) economists—that forms the barrier to the drive of capital to expand production without limit.

Both Keynes and Friedman “hated” gold. Both economists advocated a system of “non-commodity” fiat money—Keynes called it a “managed currency”—because they believed that if the “monetary authority” was freed of its obligation to redeem its currency in gold, the capitalist governments and their “monetary authorities” would be able to expand “effective monetary demand” until Keynes’s “full employment” or Friedman’s “natural rate of unemployment” was reached. If these bourgeois economists were right, we would be living in a very different world.

Keynes wrote in Chapter 24 of his “General Theory”: “Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonizing at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets [emphasis added—SW] its prosperity would droop and fail. But if nations can learn to provide themselves with full employment [emphasis added—SW] … there need be no important economic forces calculated to set the interest of one country against that of its neighbors. … International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbor which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.”

But if “non-commodity money” is not possible—and isn’t this exactly what Marx proves in the very first chapter of “Capital”?—then the hopes that Keynes expressed here are a utopian pipe dream. International trade can only be what it is—a cutthroat competition that not only has winners but losers as well. Instead of “full employment,” we have periodic crises, unemployment and imperialist wars. Instead of free trade, we have so-called “mercantilist policies” where countries use international trade as “a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases,” as Keynes puts it.

These “mercantilist” policies led to such things as World War I, World War II and then the world empire of the United States, which keeps international competition for now from leading to a new world war that in the nuclear age threatens the very existence of civilization. (8)

And what will happen after the world empire of the United States meets the inevitable fate of all earlier empires? Yes, we would live in a very different world if non-commodity money and “full employment” were possible within the capitalist mode of production.

A crucial difference between simple commodity production and capitalist production

Unlike today’s bourgeois marginalist economists, Ricardo assumed that money must be a commodity—in his time, gold or silver. Unlike today’s versions, Ricardo’s version of the quantity theory of money was based on the Ricardian law of labor value. Despite the fact that Ricardo understood the law that the values of commodities—including the money commodity—are determined by the quantities of labor that are socially necessary to produce them, Ricardo made grave errors in his theory of money. But what exactly were these errors?

Both classical political economy and Marx’s critique of it—after the first three chapter of “Capital”—deal not with the mode of simple commodity production but with the capitalist mode of production.

But why would the replacement of simple commodity production with capitalist production invalidate the quantity theory of money, which would seem to be more or less valid for simple commodity production?

The circuit for the circulation of commodities that describes the dynamics of simple commodity production is C—M—C. This formula describes the dynamics of simple commodity production but plays a subordinate part in capitalist production.

The starting point of simple commodity production and exchange is C, a commodity with a particular use value. A simple commodity producer produces a particular commodity, let’s say shoes. He or she exchanges the shoes for M, a sum of money that is then exchanged for C, a commodity or rather a group of commodities of equal value with the first C but with different use values. In order to live and reproduce the next generation, our shoemaker must exchange all the money (s)he obtains by selling shoes for the commodities the shoe producer’s family needs to stay alive and raise the next generation—food, furniture, clothing, shelter, fuel to keep warm during the cold months and so on.

Under simple commodity production, the sellers of shoes will measures their inventories both in use value terms—pairs of shoes—and in terms of money, the price of the shoes they hope to realize on the market. The aim is to use the market to transform the shoes into the full assortment of specific use values that our producers and their families need or desire.

The aim of capitalist production is quite different. The (industrial) capitalists do not begin with C but with M. They must use the M to purchases means of production and labor power, all measured in terms not only of their particular and varied use values but in terms of money. If our capitalists are shoe manufacturers, they produce commodity capital in the form of shoes. But they are valuing the shoes in terms of another commodity—money, or rather in terms of the particular use value of the particular commodity that functions as money—a certain weight of gold, for example.

In the minds of our shoe manufacturers—but only in their minds—the shoes that contain surplus value are already a sum of money. The capitalists must then realize the value of their commodity capital by selling the shoes on the market for money, and the sum of money must be greater than the sum of money they started out with. And they must repeat the process again and again.

While the simple commodity producers are aiming at maintaining their wealth measured in terms of the particular values of the commodities they consume, the capitalists are aiming at increasing their wealth measured in terms of the use value of the money commodity—measured in terms of its appropriate unit of measurement—alone, not in terms of the use values of the commodities they consume, whether personally or productively.

This sometimes leads to the confusion that the capitalists aim at the maximum of accumulation of money capital. This is wrong. Actually only a small portion of the total capital consists of money capital. The capitalists aim at the maximum possible rate of accumulation of capital as such, not money capital.

However, all forms of capital—money capital, fixed capital, raw and auxiliary materials, commodity capital, as well as fictitious capital (unimproved land, stocks, bonds, derivatives and so on that are mere claims to a portion of the surplus value produced by the working class)—are measured quantitatively in terms of the use value of the money commodity. Capital in all its various forms can only be capital when it is convertible on the market into the money commodity.

Too much money?

Can a capitalist have too much “money” in the sense of too much capital measured in terms of money? The answer is no. Unlike previous ruling classes that accumulated use values and at a certain point could consume no more, the capitalist class can never be satisfied. No matter how rich it becomes in capital—measured by its very nature in terms of the use value of the money commodity—it is never satisfied. It must accumulate still more capital measured in terms of money—or what comes to exactly the same thing, in terms of the use value of the money commodity.

Overproduction of capital and commodities

The capitalists can never have too much “money”—capital measured in terms of money. But they can have so much commodity capital and productive capital that is used to produce the commodity capital that they will not be able to transform it all into money on the market.

Indeed, at a certain point a greater quantity of capital whether measured in terms of the particular material use values that represent the capital, or even in terms of value—congealed human labor measured in terms of time—will represent less, not more, money—measured in terms of weight of the money commodity—on the market than a lesser quantity of capital would. If they cannot convert all the commodities they have produced—steel, autos, iPods, iPads, smart phones, shoes, wheat, and so on into money, they have too much real capital.

All the factories, raw materials, labor power, mountains of steel, iPads, wheat, clothing and so on in the world are worthless to a capitalist if they cannot be converted into money at profitable prices. In contrast, a pile of gold, even if the gold cannot be converted immediately into capital, is still gold—money—and always represents wealth to the capitalists—even though it is stagnating wealth. A pile of gold is really only potential capital—it is not producing surplus value—but unlike a mass of unsaleable shoes, or iPads, or factories and machines used to produce the shoes or iPads—it is still to the capitalist social wealth.

Certainly it is possible, for example in a war economy, that an industrial capitalist might not be able to find a particular means of production or type of labor power on the market for awhile. But the money capital that for a moment cannot be converted into productive capital, under the given conditions, remains even under these conditions social wealth.

The demand for gold and the demand for capital in the course of the industrial—business or trade—cycle

As I explained above, gold bullion—or its representatives in the form of token or credit money—does not produce surplus value. The only way for capital to actually grow—that is, be capital—is to put in motion living labor power that actually produces surplus value, a portion of which must be transformed by the capitalist under pain of ruin into new capital.

To do this, the (industrial) capitalist must purchase not only labor power but the machines and raw and auxiliary materials that are necessary to put into motion the labor power that actually produces the surplus value. Ideally for the capitalists, the less of their capital is in the form of stagnating money the better. If money passes through their hands, their aim is to throw it immediately back into circulation—transform it back into the elements of real capital in order to produce still more surplus value, a portion of which must again be transformed into still more capital.

To the extent that capitalists act as pure industrial capitalists—and in reality no capitalist can ever act as a pure industrial capitalist—they throw the money that flows through their hands immediately back into circulation. Or to speak in the language of mathematics, the period of time that our pure industrial capitalists hold on to a piece of money approaches the limit of zero. (9)

However, because money is available in finite amounts the industrial capitalists when the process of capitalist expanded reproduction is flourishing will inevitably experience growing shortages of money capital. There is only so much gold in the world, not simply because nature only produced so much of the stuff but for economic reasons that I dealt with in my posts.

This enables money capitalists—who unlike industrial capitalists don’t own the means of production but rather are owners of money—to pocket a part of the surplus value extracted by the industrial capitalists from the unpaid labor of the working class. The portion of the profit—total surplus value minus rent—that the money capitalists extract from the industrial capitalists is called “interest.”

Interest and the profit of enterprise

This causes the total profit to be split into fractions: interest and the profit of enterprise. The exact division of the total profit into interest and profit of enterprise is determined as I explained in my main posts by the competition between the industrial capitalists on one side and the money capitalists on the other.

To what extent the competition favors the money capitalists or the industrial capitalists is determined on one side by the vigor at which expanded capitalist reproduction is proceeding—is the economy booming or is it stagnating or even contracting in recession—and on the other by the quantity and level of production (the rate of change in the quantity) of money material, the particular commodity that in terms of its use value is the measure of all capitalist wealth.

As I explained in my main posts, the more vigorously the process of capitalist expanded reproduction proceeds, the higher prices in terms of the money commodity rise relative to the values of commodities and the money commodity. Therefore, the more expanded reproduction flourishes—the economy booms—the more unprofitable both relatively and absolutely the production of the money commodity becomes. Therefore the stronger the demand for money as a means of circulation, the less incentive there is to produce it.

In this case, far from producing its own supply, the increased demand for money as a means of circulation actually relatively reduces the rate of growth of the supply. This process must end in a crisis of the general overproduction of commodities.

Therefore, the more a boom gains momentum the scarcer will be the supply of money relative to demand for it. The competition between the money capitalists and the industrial capitalists will increasingly favor the money capitalists. Therefore, the longer the boom goes on, the more this will be so. The crisis is inevitable if only because the rate of interest cannot in the long run exceed the rate of profit, which must be finite because the total quantity of surplus value—unpaid labor performed by the working class—is finite. This is shown by the rise in interest rates that occurs to a greater or lesser extent during every capitalist boom. (10)

In the crisis and its aftermath, the reverse occurs. The demand for money as a means of circulation declines, but the demand for money as a means of preserving capitalist wealth—as opposed to expanding it—increases. The industrial capitalists themselves are forced to act less like industrial capitalists and more like money capitalists—or even misers. During the period of stagnation that follows the crisis, the growing mass of money relative to the demand for it leads to a fall in the rate of interest. The longer the stagnation continues the more interest rates fall.

Under these conditions, the rate of profit both relatively and absolutely of the industry that produces the money commodity—money material—rises. As fewer commodities are produced, more gold is produced. As the supply of money expands relative to that of productive capital and commodity capital, the battle of competition shifts in favor of industrial capitalists at the expense of the money capitalists. This is one of the reasons why as Marx put it “there are no permanent crises.” Sooner or later, every crisis-depression is followed by a new upswing of the industrial cycle. See the main posts on the phases of the industrial cycle for a more detailed examination of this process.

The industrial cycle and the gold producing capitalists

The gold producing capitalists—miners and refiners—are a special fraction of the industrial capitalists. They differ from other industrial capitalists in only one respect. The particular commodity they produce functions as money. The formula of capitalist production is M—C—P—C’—M’. But for the gold producing capitalists, it is M—C—P—M’. For the industrialists who produce the money commodity gold, the C’ and M’ are identical. No act of sale is necessary to transform the C’ into M’.

While the process of capitalist reproduction is threatened by disruptions at every point, the most common type of crisis occurs when C’ is not converted or fully converted into M’—a crisis either of partial overproduction affecting a particular commodity or of general overproduction. The capitalist has found the necessary means of production and labor power on the market and succeeds in producing the commodity that contains surplus value but then cannot sell the commodity at anything but a ruinously low price relative to the cost price.

The gold capitalists do not have this problem. As soon as they have produced their commodity, they also have their money. The worst that can happen to them is that they may produce an insufficient amount of gold and end up with less gold than they used to purchase their mining machinery, energy and labor power. The more the prices of the mining machinery, energy and labor power rise, the more likely this is to occur.

In this case, they can incur a loss and face the loss of all or a part of their capital. Like all other capitalists, industrial capitalists who produce and refine gold can go bankrupt. But they face ruin not because they have produced “too much” gold but rather because they have not produced enough gold. Gold can never depreciate against itself. (11) As long as they produce a sufficient quantity of gold—more gold than they spent on the purchase of mining machines, energy, labor power and so on—the gold mining and refining industrial capitalists are fine. (12)

In contrast, the “old” General Motors—a collective industrial capitalist—did go bankrupt, not because it couldn’t produce enough cars but rather because it could not sell the cars at profitable prices. If there had been a greater monetarily effective demand for cars—a larger market for cars—General Motors would not have gone bankrupt. The gold producer never faces this problem.

Therefore, gold—or whatever commodity functions as money—under the capitalist system can never be overproduced.

I hope this clarifies this question.


1 As I explained in the main posts, Ricardo overlooked the effect of changes in the quantity of money on the rate of interest. In a capitalist economy with a highly developed credit system, a decline in the quantity of gold relative to commodities will lead to a rise in the rate of interest and, all things remaining unchanged, a fall in the profit of enterprise. However, prices will be little affected unless the rising interest rate leads to a general crisis of overproduction. Only when a general crisis of overproduction breaks out will there be a fall in the general price level.

2 Needless to say, there has never been a “pure form” of simple commodity production at any place or time—what Marx ironically called the “paradise lost of the bourgeoisie.” In this purely imaginary paradise lost, the “thrifty” capitalists had not yet been separated out from the “spendthrifts” who lost their means of production and fell into the proletariat. In actual history, Marx emphasized, force and violence in separating the producers from their means of production played a very large role.

However, in Chapters 1 through 3 of Volume I of “Capital,” Marx assumed a “pure” system of simple commodity production where everybody owns their own means of production, just like from Chapter 4 onward Marx assumes a pure capitalism where everybody is either non-working industrial capitalists or proletarians who own nothing but the labor power they are forced to sell to the capitalists in order to live and raise the next generation.

3 While the terms worker and proletarian are often used interchangeably in the Marxist movement, in reality there are many people who work who are not proletarians just like there are proletarians who do not work—the chronically unemployed. Peasants and working farmers who own their own means of production can work very hard. Small business people also work hard though they own their means of production and sometimes employ wage labor.

People who are not proletarians but must work all the same are in a broader sense workers. Even industrial, commercial and financial capitalists sometimes work very hard, though since they are capitalists their work is voluntary. They have enough capital to, if they wish, hire professional managers and retire from active business. For example, Steve Jobs works at Apple overseeing the development of innovative new products because he enjoys it, not because he needs the money. Indeed Jobs’ salary is only a dollar a year.

Mr. Jobs real income is his stock options, dividends and, no doubt, his interest and dividends from other investments. Therefore, while Steve Jobs is a “worker,” he is no proletarian!

In his ideal society of simple commodity producers, Marx assumed for the first three chapters of “Capital” that everybody is a worker and nobody is a proletarian. Unlike Mr. Jobs, for example, they have to work in order to live. However, unlike proletarians they own their means of production and therefore do not have to sell their labor power. In a society of simple commodity production, labor power is not a commodity.

In a communist society, just like Marx’s ideal society of simple commodity production, every normal person of working age is a worker but nobody is a proletarian. The only difference is that in the ideal society of simple commodity production every worker owns his or her individual means of production, while in a communist society the means of production are operated socially and therefore must be owned collectively by the “associated producers.”

4 All the more so, because simple commodity production is highly abstract and never existed in anything like a pure form in the real world.

5 Only the United States refuses to adopt the metric system, clinging to old English measurements like miles, pounds, yards and so on.

6 The pamphlet “Socialism Utopian and Scientific” is an excerpt from Engels’ book “Anti-Duhring.”

7 If in the future there should be a few decades without a really severe crisis, the bourgeois economists will no doubt proclaim that this time crises have really been banished forever, and the crisis of 2008 was due to “mistakes” that “we” have learned from and will not be repeated. Perhaps some future economist will win a Nobel Prize by explaining exactly what those mistakes were. Then a new violent crisis will hit and back to the drawing board it will be. Then a new Nobel Prize may be awarded to some lucky professor of economics at some eminent university who explains the “mistakes” that “caused” the new crisis.

To end this cycle of “Nobel Prizes in economics” is a secondary reason to hope for an early socialist revolution!

8 In an age when weapons have become so destructive, a case can be made that a global empire like that of the United States is a necessary feature of imperialism to prevent cutthroat economic competition from quickly leading to world war.

Isn’t the United States referred to as a world “policeman” that is necessary to prevent the world capitalist system from blowing itself up in a mushroom cloud? However, the law of uneven development, not to speak of the inevitable struggles of the oppressed nations, are working to end the U.S. world empire. So we arrive once again at the conclusion that the choice facing modern society is either socialism or the mutual ruin of the contending classes and consequent end of civilization.

9 This explains why later liberal economists like Smith and Ricardo were generally inferior in theorizing on purely monetary matters compared to the mercantilist economists. The mercantilists lived in the age when capitalist expanded reproduction was still proceeding sluggishly and the primitive accumulation of capital—especially money capital—was central.

The liberal economists—from the Physiocrats and Adam Smith onward—lived in an age when capitalist expanded reproduction was beginning to stand on its own two feet and was proceeding with ever-increasing vigor. The liberal economists saw that the more quickly money was thrown into circulation the faster capitalist reproduction grew. Therefore, to the liberal economists money was simply a means of circulation, where it seems to exist only momentarily and hardly seems real at all.

10 During capitalist booms, the capitalist media often “explain” that the central banks raised interest rates in order to reduce the “threat of inflation.” In reality, the central bank’s action only reflects the growing overproduction of commodities relative to money material, which is the inevitable product of every capitalist boom and must end in a crisis of overproduction.

11 Currency that represents gold in circulation gives rise to the illusion that the producers of gold bullion sell their commodity for money—currency—just like any other type of industrial capitalist does. When it was simply a matter of bringing gold bullion to the mint, what was really happening was obvious. Gold bullion was simply physically transformed into the more convenient form of coin—it was not “sold” to the mint.

But as banknotes began to supplement and partially replace gold coins, the illusion arose that the gold bullion was sold to the central banks for “money”—the banknotes. However, the banknotes were not “real money” but simply promissory notes issued by the central bank in exchange for actual money, gold bullion. No real exchange of commodities was taking place here.

This illusion is magnified further when banknotes are replaced by legal tender paper money. It now appears that gold bullion is “just another commodity” sold for fiat notes that are declared to be money by the state. But this is also an illusion. In reality, the gold bullion is simply being exchanged for tokens that represent it in circulation—the paper money issued by the “monetary authority,” whether the ministry of finance or the central bank.

Nowadays, of course, the gold bullion produced by the gold producing industry is actually exchanged for credit money—checkable bank deposits—payable on demand in legal tender paper money. Even the paper money is paper money of account here. The actual currency that the newly produced gold bullion is exchanged for is the credit money—checkable deposits—on the commercial banks.

But again, no real exchange of commodities is occurring here. Instead, we are still only exchanging one form of money—gold bullion, which is a clumsy form of currency—for a more convenient currency—checkable deposits on a commercial bank.

However, the bourgeois economists take this appearance of the sale of gold bullion for money created either by state monetary authorities or the commercial banks at its face value, and so unfortunately do many of today’s Marxists. The first three chapters of Volume I of “Capital” enable us to get behind this illusionary surface appearance.

12 It often happens that if gold production rises—like it did during the 1980s and 1990s—the currency price of gold will fall, which increases the debts of the capitalists including the gold producing capitalists in terms of gold—real money. In reality, that currency price of gold is not a real price—the value of one commodity measured in the use value of another commodity—but is simply a rate of exchange between two forms of money—real money and its representatives in circulation.

However, changes in the gold value of the debts of gold mining companies can indeed lead to the bankruptcy of gold mining capitalists just like it can lead to the bankruptcy of other types of capitalists and indeed debtors in general. This possibility further increases the illusion that gold is just another commodity that can be overproduced bringing ruin to its capitalist producers.

However, if the international gold standard should ever be restored in some form or another—by no means impossible in light of the tremendous instability that currencies of variable gold value lead to on top of the basic underlying instability of the capitalist economy—it would again become impossible for any gold producing capitalist to go bankrupt by producing “too much gold,” though they could go bankrupt because they are not producing enough gold.


4 thoughts on “Can Gold Ever Be Overproduced?

  1. It was recently reported that the central banks of Russia, China and India have been adding substantial amounts to their gold reserves. You also mention in this reply that capitalists during a crisis often increase their gold holdings in order to preserve their capital as opposed to expanding it.

    Why are the central banks of some countries expanding their holdings of gold, since gold earns no interest, the monetary authorities themselves are not engaged in capitalist production, and most primary commodities are priced in dollars? And could you also compare and contrast the impacts on the world’s real money supply of expanded gold reserves held by government monetary authorities and expanded private hoards?

    Lastly, what is the chance that the moves of some central banks to increase their gold reserves could lead to a return of the gold standard in some form in the future?

  2. There are two thoughts on this post:

    1. I agree that non-commodity money is not a substitute for commodity money. Despite the fact that it can serve as means of circulation. I am glad to see you have come to this same conclusion as well.

    2. The use of non-commodity money has implications for crises, and for the absolute breakdown of capitalism:

    a. Since non-commodity money can only serve as means of circulation, it is not withdrawn from circulation during economic contractions. Deflation, therefore, takes the practical form of stagflation – the simultaneous occurrence of inflation and depression. We saw this in the exceptional circumstances of the 1970s, and in this depression since 2000. (It is only apparent if you look at gold prices)

    b. There is a general divergence between economic activity as measured by the price of gold price and as measured in dollars. Since “fiat” cannot serve as measure of value, it is, therefore, possible to depress the wages of the worker behind the veil of stable or even rising “fiat” wages. (Keynes)

    c. The inability of “fiat” to serve as a measure of value also implies the possibility for the general emergence of labor expended in its superfluous form. It allows, in other words, for the emergence of quantitative disparity generally between socially necessary labor time (value) and actual labor time.

    d. Thus, capital can avoid the need to reduce hours of work.

    This is the entire secret of non-commodity money, I believe. It emerges as a means to reduce the value of wages, and, simultaneously, to avoid the reduction of hours of work imposed on capital by depressions.


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