On October 5, an article by Shawgi Tell appeared in the online publication “Dissident Voice” titled “The Rich and their Media Offer No Solutions to Economic Problems.”
Tell writes: “False choices, bad options, and mixed messages abound. Week after week, one news source claims that everything is great while another says that the economic forecast looks gloomy for the next decade. Economic concepts like inflation, interest rates, costs, prices, and unemployment are rendered in the most tortured manner over and over again, with different representatives of the rich constantly making unscientific and confusing claims about what is ‘the real problem’ and how to ‘get us back on track.’”
Anybody trying to make sense of what is happening in the economy by reading the analysis in the media will be hopelessly confused. For example, we are told the Labor Department reported that 263,000 jobs were created in September. While reported as fact, this figure is only an estimate. The media indicates that job creation slowed last month from the month before but not enough to prevent the stock market from falling sharply on the day the unemployment figures came out. Wall Street knows that under current circumstances, as long as employment continues to rise, so will interest rates.
Rising interest rates are bad for stock market prices for two reasons.
Reason number one: stock prices are determined by dividends paid divided by the long-term interest rate. If dividends are unchanged, the higher the interest rate, the lower the prices of corporate stocks.
Reason number two: rapidly rising interest rates are usually followed by recession. During recessions, profits fall, leading to lower dividends; lower dividends mean lower stock market prices.
The bear trend that has prevailed on stock markets this year reflects both the negative effects of higher interest rates on stock market prices and the fear of an impending recession. So unemployment not rising in September, though good news for workers, is bad news for stock market prices and profits in the current economic conjuncture.
This shows the conflicting interests of society’s two main classes: the capitalist class and the working class. The working class needs more jobs, but the capitalists see more jobs as a threat to profits.
The capitalist media explained that the Federal Reserve System would again increase interest rates next month because the economy is strong. It also explained that the Fed is being forced to take action that could result in a recession next year because of the economy’s ongoing resilience and strength. If the economy is doing so well, why does its central bank have to take action that will result in a recession and rising unemployment? There must be something wrong with the economy despite its strength that makes such action necessary. But what is it?
The problem is described as inflation. Of course, anybody who has been in a supermarket lately will agree that inflation is a big problem. But if the economy is strong and resilient, why can’t the government just use its powers to impose price controls to halt inflation — like some progressives advocate — without the Federal Reserve having to take actions resulting in rising unemployment?
The mystery of what is wrong with the capitalist economy was resolved long ago. Marxists call it the contradictions of capitalism. Karl Marx and Frederick Engels believed that overproduction was an important contradiction of capitalism and would play a crucial role in its downfall. This overproduction is not in the sense of overproduction relative to human needs but relative to the ability of the market to absorb commodities at profitable prices.
Marx and Engels believed capitalism can, and at a certain stage of development, inevitably does increase commodity production at faster rates than markets can grow. This leads to glutted markets, production cuts, bankruptcies, and mass unemployment at periodic intervals. In Marx and Engels’ times, these crises were called commercial crises. They were later called depressions because the term commercial crisis had acquired sinister connotations. Today we call them recessions because, after the 1930s, the term depression acquired an even more sinister connotation than commercial crisis.
Today’s Marxists do not recognize overproduction as a source of crisis
Today most Marxist economists never refer to capitalist economic crises as overproduction crises. Why? I believe the reason is that we live in the shadow of the collapse of the Second and then the Third Internationals and of the Soviet Union, the world’s first workers’ state. The old generation of Marxist economists, dead now for decades, were shaped by these two internationals and employed by workers’ organizations. These workers’ organizations included the most powerful of all that have existed until now, the Soviet state and its ruling Communist Party.
Today’s Marxist economists have grown up outside the workers’ movement. Unlike previous generations, they are mostly professionally trained, taught by bourgeois economists, and employed by various colleges and universities rather than by the international workers’ movement. (1) As a result, in the West, maybe less so in Russia, where memories of the USSR remain strong and the Communist Party remains somewhat influential, a real break in the continuity of Marxist economics has occurred.
Today’s academic Marxists — even the best of them, such as Anwar Shaikh — do not mention the term overproduction when discussing the causes of current or past economic crises. Today’s bourgeois economists deny overproduction as the cause of capitalist crises. That is how they teach it in the university. Since almost all — certainly in the English-speaking world — of today’s academic Marxists believe modern money is non-commodity money, they do not see how crises of overproduction can occur under the present monetary system.
This is because overproduction means too many commodities chasing too little money. Most academic economists believe modern money is created by state fiat through organs called central banks, the most powerful of which is the U.S. Federal Reserve System. Why can’t the central banks create enough money to buy all the commodities that can be physically produced? Often young Marxists are forced to make some sense of what bourgeois economists and their popularizers writing for the Associated Press, Reuters, the Wall Street Journal, or The New York Times are saying. But they conceal more than they reveal.
The current economic situation
Some things about the current economic situation are clearer than others. This year, 2022, has seen the war between Russia and Ukraine, a proxy war between Russia and what its president and his supporters call the collective West — they do not call it imperialism. I think Vladimir Putin and his older supporters have concluded that what they gleaned from their youthful required readings of Lenin and Soviet textbooks was correct, after all, in explaining imperialism’s aggressive nature. But they do not repudiate the political and social counterrevolution they enthusiastically supported 35 years ago. (2) After all, it was the capitalist counterrevolution of 1985-91 that allowed them to accumulate fortunes impossible under the Soviet system, even with its bureaucratic degeneration.
Putin and his friends now realize that Western (primarily U.S.) imperialism was not the benevolent force perestroika economists claimed. They now understand that U.S.-NATO imperialism, having successfully broken up the Soviet Union, aims to break up Russia into a collection of smaller countries that will be reduced to the status of colonies of U.S.-NATO. Despite a geographical location in the higher latitudes of the northern hemisphere, Russia, as well as Ukraine, is now part of the Global South.
The course of the war
After months of relative stability on the war fronts, the Kiev puppet government has been heavily armed by U.S.-NATO imperialism. Starting in August 2022, it launched an offensive that took back most of Kharkov province, previously occupied by Russia, though Kharkov city had remained under Ukrainian control. The offensive has taken back part of Donetsk province. In addition, it has been chipping away at the territory in Kherson and Zaporizhzhia province in the south that Russia occupied last spring in order to build a land bridge to the Russian Crimea.
The Crimea includes the strategic city of Sevastopol, Russia’s only warm water port. There is little doubt that if Kiev’s Euromaidan government captures Crimea, it will hand Sevastopol over to U.S.-NATO imperialism. The Ukrainian offensive appears to be bogging down as autumn rains turn fields into mud, making further offensive action difficult before winter’s temperatures freeze the mud, making large-scale offensive operations feasible again. (3) Despite this, there are hints that at Washington’s urging, Kiev may try to capture the city of Kherson in the coming weeks.
Kiev’s offensive caused much alarm in Russia. Putin has been under pressure to counter the offensive, and he has. First, he announced a partial mobilization calling up 300,000 reserves. Then a series of referendums were held in the provinces of Lugansk, Donestk, Kherson, and Zaporizhzhia asking for and receiving admission into the Russian Federation. Russia is now committed to driving the Ukrainian forces out of the Donbass and securing its land bridge to Crimea, in turn safeguarding Sevastopol. Everything points to a Russian offensive later this year once the ground freezes to drive Kiev’s forces out of the Donbass and secure the land bridge to Crimea.
Russia has not claimed Kharkov province and, for now, allows it to remain Ukrainian. No movement developed in Kharkov province to declare independence from Ukraine on the scale of those in neighboring Donestk and Lugansk. Nor does the region have the same strategic significance to Russia as Kherson and Zaporizhzhia. For now, Russia appears willing to allow Ukraine control of Kharkov province. While many Russian nationalists believe Russia should rule the entire Ukraine like Czarist Russia did, establishing rule over Ukraine has not been a goal of the special military operation. If the Putin government attempted to conquer the entire Ukraine, it would have had to send many more troops than it has until now.
Instead, Putin has limited himself to complaining about Lenin and the Bolshevik revolution that created the Ukrainian nation. In his view, the Ukrainian nation had not existed before the 1917 Revolution, outside the heads of a few intellectuals. (4) As a Russian nationalist, Putin believes that the Ukrainian people will one day realize they are part of the Russian people and return to Russia. But returning Ukraine is not a goal of the current special military operation. Instead, it has pursued the limited goals of freeing ethnically Russian Donbass and securing Russian Crimea and the port of Sevastopol, obliging Kiev to loosen its ties to U.S.-NATO and curbing the activity of neo-Nazi organizations that preach hatred of the Russian people.
Thanks to the U.S.-NATO arming of Kiev, the Kremlin is finding out that it’s costing Russia in lives and money far more than it had hoped. At the beginning of the special military operation, (5) Washington launched an economic war against Russia that included freezing Bank of Russia dollar and euro bank accounts held in Western banks as well as demanding that its West European satellites — including the most important satellite, Germany — end its dependence on Russian oil and natural gas.
Instead, Washington demands Germany and its European satellites buy more expensive natural gas shipped in liquid form either directly from the United States or Arab oil monarchies. As a result of the economic war with Russia and the decline of Ukrainian grain production, combined with a poor U.S. harvest, Germany and other European nations are facing cold and hunger unlike anything since the bleak post-World War II years. As a result, mass demonstrations have occurred in the Czech Republic, Germany, and France demanding the end of the economic war and the withdrawal of these countries from NATO.
German industrial capitalists, and trade unions, have complained that purchasing oil and natural gas from the United States or the Arab oil monarchies will put German industry at a competitive disadvantage. This is not a problem from Washington’s point of view. On the contrary, it will give U.S. industry a chance to improve its position relative to its German and other European competitors. German corporations may even have to relocate some industrial production to the United States to be closer to their sources of auxiliary and raw materials, helping the United States to re-industrialize itself. U.S. imperialist leaders realize that if it continues to become de-industrialized, it will be only a matter of time before it loses its hegemonic position within the world capitalist system. Both the Trump and now the Biden administration have attempted to use tariffs and other methods to re-industrialize.
When the economic war against Russia was launched in March, the Biden administration hoped the Russian ruble would crash on world currency markets. As a result, money would flow out of Russia, causing runaway inflation and mass unemployment. Washington hoped the Putin government would then fall into a “color revolution” and be replaced by the Russian equivalent of Ukraine’s Euromaidan government. Russia would then withdraw from the Donbass and Crimea and Sevastopol’s port would fall into U.S.-NATO hands.
The war has not gone the way Putin or Biden hoped. This is shown by the movement of the price of oil. During the COVID shutdown, the price of oil had dropped almost to nothing as travel all but ceased. But during the COVID aftermath boom following the shutdowns, the price of oil rose to over $90 a barrel on the eve of the Russo-Ukrainian war. The war, and Washington’s insistence that its Western European satellites stop purchasing oil, natural gas, and fertilizer from Russia, meant that Europe had to purchase these vital commodities out of a smaller pool not produced in Russia. This distorted the market for these commodities. There are also fears that the war in Donbass and Ukraine could lead to a larger war between Russia, the United States, and the NATO satellite countries, whose numbers now include previously neutral Sweden and Finland. Fear of war brings fear of shortages. As a result, the price of oil rose from $91.66 a barrel on February 19 (a few days before the Russian special military operation was launched on February 24) to $120.47 a barrel on June 11.
The rise in the price of oil—and similar movements in other key exports of natural gas, grain, and fertilizers despite Washington’s blockade caused the balance of payments to shift in favor of Russia. China, India, and many other countries continue to trade with Russia and Europe has not been able to completely halt trade despite U.S. pressure for it to do so. Instead of flowing out, money flowed into Russia. The Russian ruble did not crash as Biden hoped, it’s risen on foreign currency markets. The ruble is the only major currency besides the dollar that’s done well in 2022. Runaway inflation has not developed in Russia, and despite problems caused by the unavailability of many imports, unemployment has remained low. And the Russian government has not had any problems financing its military operations.
Since June, the price of oil has reversed direction. By September 24, the price of oil dropped to $79.43 a barrel, lower than before the special military operation was launched. Why has the price fallen? The answer is found in the developing world recession. During the trading week of October 3 to 7, the price of oil recovered to $93.20. This happened because Russia made a deal with the Saudi Arabian oil monarchy and other OPEC countries to cut oil production. Washington is furious with Saudi Arabia’s bloc with Russia. The Saudis are just following their own business interests in maintaining a high price as long as possible, but by doing so they are making it easier for Russia to continue financing military operations against Ukraine. If previous experience is any guide, Saudi production cuts will not be able to maintain the price of oil in the face of a deep global recession.
The Russian government is now under pressure to finish military operations before oil prices fall more. This means clearing Ukrainian forces from the new Russian territories of the Donbass and the land bridge of Kherson and Zaporizhzhia provinces to Crimea before a global recession lowers oil, natural gas, fertilizer, and grain prices. Grain prices may prove more resilient than oil and gas prices due to poor U.S. harvests and reduced grain production in Ukraine. But the global recession puts downward pressure on prices as millions of people face unemployment and hunger, not because of a grain shortage, but because they lack money to buy the food they need.
When will the Federal Reserve Board pivot?
The financial press has been increasingly preoccupied with the question of when the Federal Reserve will stop raising interest rates. It’s hoped the Fed can bring off a soft landing, where economic growth slows enough to reduce inflation without throwing the world economy into a recession. If inflation is too much money chasing too few goods and recession is too many goods chasing not enough money, why can’t the Fed balance the two: just the right amount of money chasing goods being churned out by industry worldwide? Or as the economists put it, why can’t the Fed make the supply and demand equal at existing prices?
In early 2022, economists were optimistic that the Fed could pull off such a soft landing. But inflation has remained high, and interest rates have risen, reducing the chance of a “soft landing.” So a recession is all but certain by next year. But how bad will it be? There are even fears in some Wall Street circles that it might be more than a recession, more like 1929-33 than 2007-09. The latter recession was major enough. Nobody knows how bad the coming recession will be. But as Marx would say, bourgeois society is already trembling at the mere prospect of what is coming.
The Federal Reserve raised its target for federal funds by 0.75% at each of its last two monthly meetings. It says this is to lower inflation from the current level of over 8% to its target of 2.00%. Signs have appeared that the demand for labor power is cooling, but establishment economists like Larry Summers complain that unemployment is still too low. These economists believe rising money wages force price rises. The only way they see to reduce inflation is to reduce commodity demand to the point that business is forced to slow hiring and instead start worker layoffs. This allows a rise in unemployment. The reduced demand for labor power increases worker competition for jobs while reducing the bosses’ competition for labor power. This slows the rise in money wages, slowing the rise in prices to the 2% annual increase rate. While wages have risen, hourly real wages have fallen at rates rarely seen in the history of capitalism. According to the Economic Policy Institute, 54% of the rise in prices has gone to corporate profits, with only 8% to wages. So, haven’t profits, rather than wages driven inflation?
Yet it is the workers who are being asked to sacrifice while corporations have been enjoying record profits. Progressives say there must be a way to stem inflation besides the Federal Reserve raising interest rates, throwing the economy into recession, or worse. During what I call the COVID aftermath boom, corporations raked in record profits. Instead of increasing unemployment through tight money and higher interest rates to stop the rise in wages, progressives say the government should levy an excess profit tax on corporations. Those most able to sacrifice — the rich — would be asked to sacrifice rather than those least able — the workers. Fair play demands nothing less. But capitalism is not about fair play; it’s about making profits. An excess profits tax, even in the unlikely event the Democrats maintain control, appears unlikely to get through Congress. Even if it did, the taxes would have to be so high to curb inflation that capitalists would just cut production and lay off workers as they do in the face of tight money by the Federal Reserve.
Another remedy suggested is price controls. During World War II and under Richard Nixon in 1971, the government made raising prices illegal, and those corporate officials violating the law would go to jail. To be fair to the capitalists, wage freezes were also instituted. The only problem was that wage and price controls didn’t stop inflation. Instead, the rise in official prices was only briefly checked. Shortages developed as commodities were withdrawn from the market by capitalists unwilling to sell at the controlled prices. Widespread illegal markets developed, selling goods at higher prices, which was called suppressed inflation by economists.. Suppressed inflation ends up with price rises as inflation can only be suppressed for a limited time, as during World War II. Inflation then exploded in 1945-46. Nixon’s 1971 controls briefly paused the rise in the official price index, but inflation was only getting started. It didn’t peak until 1980-81, while real wages sank throughout the decade.
Overproduction
Though disruption of world trade caused by U.S.-NATO imperialism’s economic war against Russia has caused an artificial shortage of commodities such as natural gas and oil, especially in Europe, today the real problem facing the capitalist economy is not shortages. By far, the bigger problem is the overproduction of commodities that developed during the COVID aftermath boom. While profits have been stellar, overproduction has reached a level that now threatens profits. To safeguard capitalist profits, this overproduction must cease.
A general overproduction of commodities is usually a cyclical phenomenon that develops during the boom phase of the industrial cycle. Today’s boom is not an ordinary cyclical boom but is the result of the shortages of commodities caused by the COVID shutdowns. This boom was bought about by the commodity shortages produced by the COVID shutdowns, which have led to booming production and soaring prices as normal business inventory management broke down. (See “COVID’s Long Economic Shadow” and “How the COVID aftermath boom breeds inflation.”)
As long as capitalism lasts, the only solution to periods of overproduction is that of underproduction to allow glutted markets to clear. Under capitalism, underproduction with its associated mass unemployment, today is called a recession, which brings mass unemployment. Recession always follows overproduction with its low unemployment.
It’s claimed capitalists want increased production without limit. In reality, capitalists want it only as long as it’s profitable. When profit ceases, production stops, even if in terms of use values it’s still below the level necessary to meet human needs. During overproduction, the appearance of profits can be maintained for a while by inflating the amount of credit. Commodities, instead of being sold for cash, are sold on credit.
Marx called this period of credit inflation fictitious prosperity. Commodities have been produced and their value appears to have been realized because they have been sold, but for credit, not cash. The value and surplus value contained in those sold on credit has not been realized until the debts created by the credit sales are paid. When overproduction and associated credit inflation reach a certain stage, the money to pay the debt sales cannot be found.
A crisis then breaks out that initially takes the appearance of a credit crisis, also called a financial crisis. Economists conclude that the crisis occurred because the banks recklessly extended credit. But — and here is where the claim that modern money is non-commodity money comes in — why can’t the central bank(s) create enough new money so the debts created by the sale of commodities on credit can be paid? That way there’d be no overproduction crisis.
For reasons explained elsewhere throughout this blog, money is a commodity. (See “Commodity Money Versus Non-Commodity Money” and “Analyzing Currency Circulation”)
The commodity gold has long been the chief money commodity. Prices and profits have to be measured in terms of the use value of the money commodity, gold. The period of fictitious prosperity can be extended if the central bank can issue paper money not backed by gold. The debts created by sales can then be converted into this paper money — or its electronic equivalent. But if too much paper money not backed by gold is created, the paper money drops in value against gold. Commodities are sold on credit and the credit can be paid with paper money. But paper money begins to lose its convertibility on the open market into real money, gold. The problem is not the convertibility of debts into money, but commodities into real money. Debts lose their convertibility into money as commodities lose their convertibility into money.
If paper money depreciates against gold, the currency price of gold rises, and profits in terms of gold get wiped out. And making profits in terms of gold (real money) is the whole point of capitalist production. When profits in terms of gold are wiped out by a rise in the currency price of gold, the capitalists think it is more profitable to hoard gold than to engage in surplus value production. Under these conditions, capitalists’ demand for gold explodes upward as holding gold is the most profitable investment. Inflation rises. To avoid a collapse of the currency-credit system, the central bank must allow interest to rise to whatever level necessary to break gold demand. This is what the Federal Reserve was forced to do during the 1979-82 Volcker Shock, and only then did the 1970s inflation finally end This was the only way it could be ended under the capitalist system. To restore profitable — in gold terms — production, the Federal Reserve had to act to force underproduction and mass unemployment. This allowed markets to clear enough to allow a resumption of profitable production in gold terms, not just dollars.
The current inflation isn’t present only in prices or credit, that is only a symptom of the disease. It’s inflation of production — overproduction — not relative to human needs but relative to protected profits which is the real problem. In the words of the Communist Manifesto, the problems aren’t shortages but that “there is too much civilization, too much means of subsistence, too much industry, too much commerce.”
The ruling class has assigned the Federal Reserve the job of ending overproduction with the least possible damage to profits. By making the dollar scarce on the international money market, its convertibility into gold on the open market is being successfully safeguarded. But the convertibility of commodities and debt instruments into dollars is endangered. That is the price that must be paid under capitalism to minimize the damage to profits. That is inevitable in the face of the COVID-aftermath-boom overproduction. By ending ongoing overproduction, including “over-employment” — relative to the needs of profit-making, not the interest of the workers — and allowing markets to clear, the Federal Reserve is paving the way for more profits.
The current Fed leader is being criticized for allowing the dangerous (to capitalist profits) inflation of production, and employment, to go as far as it has. Capitalist critics point out that if they had acted earlier to curb the boom, the chances of avoiding a recession would have been far greater. But as the expression goes, no use crying over spilled milk. The damage to employment lives, the dreams and aspirations of millions of people as a result of “too much civilization, too much means of subsistence, too much industry, too much commerce,” is, as the Pentagon says, so much collateral damage.
Progressives say, surely there’s a better way even under the present system. Government price controls, taxes on excess profits, and the devaluation of the dollar, must be better ways than recession and mass unemployment to deal with capitalist overproduction. But on these occasions, Marxists must speak the truth. There is a better way: a socialist planned economy. If you retain capitalism, the only alternative to global recession and mass unemployment is a world war that destroys productive forces and kills billions of people,.
Capitalist critics say the Fed moved much later than it should have. The role of the dollar as the international means of payment is coming to the fore and is now showing its fangs. The credit system is strained, and the chain of payments will break into a thousand places when the crisis arrives. As most of these debts are dollar-denominated, the demand for the dollar is soaring against other currencies, except for the Russian ruble, even against gold. Under the dollar system, strengthening the dollar against gold and other currencies after a long period of weakness has been observed before every crisis.
If the Fed eases prematurely, before adequate liquidation of overproduction is assured, the result will not be the much hoped for soft-landing. Since World War II, such premature pivots occurred in 1958-59, 1967, 1970, 1975 and 1980. A premature pivot would mean a new fall in the dollar’s exchange rate against gold and other currencies. That would bring a new wave of inflation which in today’s highly charged political atmosphere among the governments of countries that are not mere U.S. satellites (such as those of the Peoples Republic of China, the Russian Federation, and others) there is talk of creating a replacement for the dollar system. Another premature pivot by the Federal Reserve could lead to the dollar system’s downfall, which forms the financial bedrock of the U.S-.NATO world military empire.
So when will the Federal Reserve know that the time to pivot has arrived? In an October 11 article in the online journal “Business Insider” reporter Matthew Fox provides the answer. He quotes Ned Davis Research: “We used to think that meant core PCE [Personal Consumption Expenditures Price Index] inflation falling below 4.0%, but making monthly progress toward that level may be sufficient.”
But it’s no longer viewed as sufficient. That is correct because, as I just explained above, the problem confronting the Federal Reserve is not inflation but overproduction. In Ned Davis Research’s opinion, in addition to falling inflation, there has to be “an unemployment rate of 4.0% or more with fewer job openings and rising unemployment claims (that) could indicate the economy is starting to feel the pain the Fed has been inflicting.” In other words, a rise in unemployment enough to show that the liquidation of overproduction and the end of the high level of employment that goes with it is underway. Or, in Ned Davis Research’s words, “The liquidity and functioning of the markets deteriorate to the point that companies can’t get funding, or something breaks in the financial system.”
In other words, a financial crash — as last occurred in September 2008 — that leaves little doubt that a recession will quickly follow. If this happens soon, there’ll be little doubt that the COVID aftermath boom overproduction is on its way to being liquidated and it’s time for the Fed to pivot to save what it can. Only then can the Fed pivot to prevent things from getting even worse than the economic laws ruling capitalism dictate that they have to stabilize — for a while — the profit system.
In this lead-up to a recession, money markets are getting tighter. The British government just got a lesson in this. A few weeks ago, Liz Truss’ new Tory government announced a mini-budget featuring large-scale regressive Reagan-style tax cuts for the rich combined with cuts in medical spending. Truss claimed it would boost British economic growth. Usually, the financial markets would applaud, but not this time. Instead, the bond market, including government bonds, plunged as the prospect of rising borrowing by the government ran into a shrinking supply of loan money on the world market.
The Bank of England was forced to bail out the bond market and indicated it couldn’t support it under present circumstances for more than a few days. After being publicly spanked by the IMF, the Truss government was forced to backtrack. British Finance Minister Kwasi Kwarteng, who presented the mini-budget a few weeks ago was forced to resign and days later Lizz Truss resigned as well, making her the shortest-serving prime minister in the entire history of British prime ministers.
When the recession arrives and the mountains of unsold commodities built up during the COVID aftermath boom are finally on the way to liquidation (at the cost of millions of jobs) the banks’ reserves of hoarded money will again swell as money drops out of circulation, allowing interest rates to fall. The world money market will once again be flooded with loan money-seeking investments. Then there will be plenty of room for governments to borrow. Proposals for tax cuts for the rich, as made by the unfortunate Lizz Truss, will be applauded by the financial markets. Herein lies a looming danger. The ability of governments to wage war that’s being held in check by the growing global credit squeeze will be removed. A historic example: The austerity policies of the German government under Chancellor Heinrich Bruning and U.S. President Herbert Hoover gave way to the Keynesian deficit spending policies of Adolf Hitler and Franklin Roosevelt after the 1929-33 economic crisis had liquidated the overproduction of the 1920s at the cost of tens of millions of jobs around the world, resulting in the slaughter of World War II.
Anwar Shaikh and world trade
I now return to my critique of Anwar Shaikh. This month I continue to examine the important question of world trade.
Here we examine how world trade and the dollar-centered international monetary system operate in the absence of general crises of relative overproduction. These crises take the world market as their arena, though each successive crisis affects individual countries to different degrees. How these crises affect world trade will be the subject of a future post.
Last month we saw that under a system that is inconvertible into gold paper currency, money flows into and out of currencies. I want to examine what happens when money flows out of a given currency. We are interested in what happens when a given currency’s exchange rate drops against other currencies, but the other currencies’ exchange rate remains unchanged against gold. A currency’s exchange rate against gold is the pivotal exchange rate. Since we assume that the exchange rate remains unchanged, the fall of the rate against other currencies means a fall in its exchange rate against gold.
Last month we saw that a country’s exchange rate falls for two reasons. One reason is an increase in the quantity of the currency relative to other currencies and gold. The second reason is a negative balance of payments. Here we examine the case where a currency depreciates (6) against other currencies and gold because of a negative balance of payments brought on by a negative balance of trade.
The most important consequence of a depreciation is that each unit of currency represents less real money (gold) than before. Economists agree that a fall in a currency’s value raises prices in the terms of the devaluing currency because the price of imports in the devaluing country’s currency rises. Many economists say that the less a given nation depends on imports, the less the price-rising effect of the devaluation.
Economists are divided on what variable determines the general price level. According to the quantity of money theory supporters, it’s changes in the quantity of money relative to commodities that leads to changes in the general price level, not changes in exchange rates. John Maynard Keynes’ disciples believe that variables other than changes in the quantity of money play a crucial role in determining the changes in the general price level. The most important of these variables is the level of money wages. As long as wages in terms of the local currency remain unchanged, a fall in the exchange rate will cause imported commodity prices to rise. There should, according to the follower of Keynes, otherwise be little effect on the general price level.
On the morrow of a currency depreciation, before any other adjustments take place in terms of universal money (gold), the effect of a devaluation is a drop in commodity prices of the devaluing country in gold terms. If price measured in Anwar Shaikh’s golden prices remain unchanged, there is an offsetting price rise in the local currency of all commodities, including the commodity labor power. We assume the currency depreciation was caused by a deficit in the balance of trade. The trade balance deficit indicates that commodity prices were too high relative to commodity prices produced in other countries before depreciation or devaluation. There is downward pressure on the commodity prices of those produced in the devaluing country in terms of universal money.
In what medium are world prices calculated?
Since most of today’s economists, including Anwar Shaikh, believe that legal tender currency — paper notes and base metal coins — constitute the most basic form of money, they have difficulty imagining what world prices are. We usually think of prices in terms of U.S. dollars, British pounds, European euros, Japanese yen, Chinese yuan, Russian rubles, Indian rupees, etc., depending on the country we’re in. In practice, world market prices are calculated in terms of the national currency that serves as the chief reserve asset. Since the end of World War I, that currency has been the dollar. Shaikh’s “Capitalism” speaks of commodities having two prices, one in local currency, the other in dollars.
We know (and Shaikh half knows) that Marx’s theory of value requires that behind prices quoted in terms of any national currency (including the world’s chief reserve currency, the dollar), there lurk prices in terms of quantities (weights) of gold. Shaikh calls these golden prices. In comparing prices of commodities produced in nations with different currencies we must measure prices in terms of the same medium. This medium that Marx calls world money, consists of money material that is itself a commodity — gold.
The relationship between wages and prices
Ricardo and Marx showed that a general rise in wages doesn’t result in a general rise in prices. Prices rise only in industries with lower-than-average organic composition of capital. This is offset by price reductions in industries with a higher-than-average organic composition of capital. On the morrow of the general rise in wages, though the profit rate will fall in all industries, profits will be lower than average in industries with lower-than-average organic capital composition and higher than average in industries with higher-than-average organic composition.
Competition between capitalists restores an equal profit rate. Capital moves from lower-than-average organic composition industries to those with higher-than-average composition until profit rates are again equalized. As capital moves away from industries of lower-than-average organic composition, their output declines, causing commodity prices to rise. This is offset by a fall in commodity prices in those produced by the higher-than-average industries as capital flows into them raising their output. The rise in some commodity prices in some branches of production is offset by a fall in others leaving the general price level unchanged. This effect was discovered by Ricardo and is explained in Marx’s “Value, Price and Profit.”
Here we assume we are dealing with prices in terms of universal money, gold. Ultimately prices in national currencies translate into prices in universal money—gold. If a rise in wages in national currency coincides with a devaluation or deprecation of the currency, the devaluation may cause a rise in the devalued or depreciated currency. The rise in prices in local currency is the result of the devaluation or depreciation of the currency and not the rise in wages.
If the rise in wages is general it must be world-market wide. Assuming wages rise equally across the market, this lowers the profit rate in all industries including that of the money material, gold. Marx assumed capital’s organic composition in the mining industries (including gold) had a below-average capital organic composition because the raw material — ore — is not produced by human labor but by nature. Ore in the ground has no value and doesn’t contribute to the total value of constant capital.
If we assume the gold industry has a lower-than-average organic composition, it will have a below average profit rate, in the event of a general world market-wide wage rise. Following this, capital flows out of gold production into other industries. As less gold is produced, it appreciates against other commodities. As prices in terms of universal money are measured in gold, the appreciation of gold lowers commodity prices. In this case, higher wages on a world market level lowers prices.
In the real world, things are more complicated. No nation is cut off from the world market. This doesn’t mean the world market operates as if it was a single national market. While some commodities, including gold, have the same value throughout the world, others have different values in different national markets.
It’s said that consumers, including the workers in imperialist nations, benefit from the low wages of the Global South in the form of the low prices of commodities produced in these countries. Is this true? Behind this claim is the assumption that the rise and fall of wages govern the rise and fall of prices in general. But as Ricardo already knew, this is false.
What happens if wages were to rise in a particular branch of industry but not generally? Assuming that on the eve of the rise in wages, profit rates are equal in all industries. The wage rise in wages in one industry lowers the profit rate in that branch. On the morrow of the wage rise in one branch, the profit rate of that branch will have fallen while the profit rate in others remains unchanged. If such conditions persist and nothing changes, capital will begin to move away from the industry where wages have risen to other industries where they remain unchanged. The flow of capital out of the increased wage industry causes commodity production to fall. This is offset by a slight fall in the prices of other commodities as capital moves into those industries, causing their production to rise and their prices to fall until profits are again equalized. There is no change in the average level of prices but there will be a fall in the profit rate of all industries.
If we look at the effect of a rise or fall in wages limited to a particular commodity, it seems like Keynesian claims are valid that changes in wages rule changes in prices. As wage changes become more generalized among all industries, the less the commodity prices produced by particular industries are affected, and the more the average profit rate falls. A rise in the wages of one industry is a threat to the profit rate profit of others.
It’s claimed that the capitalists in industries producing commodities consumed mostly by workers have an interest in higher wages because that expands demand for the commodities they produce. The problem is that even if a rise in wages increases their profits while lowering the average profit rate, capital invades their industries, which again lowers the profit rate to the average for the industry. In the end, the capitalists producing commodities for workers experience a fall in their profit rate despite the expansion of the market for their commodities. Capital as a whole has an interest in keeping wages as low as possible in every industry, even when some capitalists temporarily benefit from an increase in buying power of workers.
The price of bananas
Let’s take the case of the commodity bananas. The banana is a tropical fruit that can only profitably be grown in countries with a suitable tropical climate. The term “banana republic” refers to certain oppressed countries — traditionally those of Central America — where wages are low because of the low value of labor power. Because of the low value of labor power, workers’ wages in the banana growing industry are low in real terms as well as in terms of world money, gold.
What happens when a wave of (bourgeois) democratic revolutions sweeps the banana republics? Trade unions and working-class political parties are legalized. The value of labor power rises, leading to higher wages. In the Global North, the imperialist politicians and media explain to their workers that if these revolutions are not defeated, there will be no more cheap bananas, and their standard of living will fall. If the revolutions affect only the banana-producing countries and bananas are their only export, the price of bananas will rise. Workers of the Global North will be able to buy fewer bananas with their wages than before. Capital will flee from the banana-growing sector, and the price of other commodities will fall. Unless these workers are addicted to bananas, their overall standard of living will remain unchanged though they might buy bananas less often.
The Global North’s politicians, media, and economists will say that allowing these revolutions to spread throughout the Global South would mean there would not only be fewer bananas but fewer other commodities produced there, causing their prices to rise. But the more the rise in wages caused by a rise in the value of labor power is generalized, the less those commodities’ prices will rise, and the more the general profit rate worldwide will fall. So the claim that prices are generally kept down by low labor power value and, consequently, low wages is false. What is true is that the low wages of the Global South, as more and more of the world’s total industrial and agricultural production moves there, the more the worldwide profit rate will rise at the expense of the world working class.
Effects of currency devaluations on international trade
With this in mind, let’s return to the example of a country experiencing a fall in its exchange rate with the currencies of other countries and gold due to a negative balance of payments caused by a negative trade balance. The negative trade balance shows that prices were too high relative to those of other countries. To correct the negative trade balance (as opposed to just having it fall into debt) we must lower the golden prices of commodities in our country relative to those of other countries. This is true whether we have an international monetary system based on the gold standard or a system of paper money with floating exchange rates.
Whenever a country’s currency is devalued or depreciated, money wages (in terms of universal money, gold) are cut. If one capitalist pays lower wages than the competition, the capitalist paying the lower wage will, all things remaining equal, have a lower cost price and can undersell the competition. This is true in international competition as well. If a currency’s exchange rate against gold depreciates, the capitalists improve their competitive position.
The fall in the exchange rate of a currency against gold, we assume will improve the competitive position of a country’s capitalists relative to those of other countries.
Currency exchange rates and the theory of comparative advantage
Economists of the comparative advantage school often recommend currency devaluations when their country experiences a negative balance of trade and payments. These are seen as an alternative to tight money deflationary policies which induce recessions and unemployment. The complaint is that the local currency is overvalued. The law of comparative advantage applied to a paper-money international monetary system says that if exchange rates are correct, world trade balances out with no nation running a trade surplus or a trade deficit. The fact that countries experience a deficit trade balance shows that their country’s currency exchange rate is set too high — overvalued — and should be allowed to fall against the currencies of the nations with which there is a surplus trade balance. It’s claimed that countries with trade surpluses have undervalued currencies. Deflationary policies aimed at defending an overvalued exchange rate will only cause a completely avoidable recession. It’s considered progressive and pro-labor to advocate a currency devaluation.
However, this is really advocating a cut in money wages in terms of gold and helping the capitalists compete with those of other countries. The hope is that this cut in wages will reduce the cost prices of local capitalists enough to correct the trade deficit balance without a recession and associated mass unemployment. If these progressive, pro-labor advocates were to be honest, the devaluation should be opposed. Instead, a cut in wages in the local currency should be advocated in the hope that a wage cut would prevent an increase in unemployment — which could lead to even deeper wage cuts. Unions are, however, organized to defend wage levels and increase them if possible. Unions are put in a bad position if they advocate wage cuts, even if they are presented as an alternative to layoffs and unemployment. Currency devaluations disguise wage cuts and let union leaders off the hook. Can the workers’ movement, which includes the labor unions, really be built by deceiving union members?
When a currency is depreciated or devalued because of an unfavorable balance of payments caused by an unfavorable trade balance, there will be upward pressure on the national price level in terms of that currency. The greater the depreciation, the greater the upward pressure on prices. Not only do the prices of imported commodities increase, but more importantly, when a currency is devalued or depreciated, it represents less real money, gold, than before. After a depreciation, the commodity prices are lowered in terms of gold. The fall in terms of gold increases demand both in the home market and internationally.
We’re interested only in what happens when local currency prices rise without any change in local currency quantity. Higher prices mean that either the velocity of currency circulation rises or more currency must be put into circulation to meet the increased needs of circulation. In practice, it’s a combination of both increased circulation velocity and a rise in the amount of currency in circulation. If we assume no change in total currency quantity, the additional currency has to be supplied from the reserve hoard held in the banks. The increase in the portion of the local currency in circulation means a reduction in the size of the banks’ reserves. This decline means tightening the domestic money market and a rise in interest rates.
Higher interest rates attract money from abroad in search of higher rates. Money flowing in halts or reverses local currency depreciation. This reduces or stops any further domestic price increases and halts further increases in circulation velocity or further rundown of domestic bank reserves. Interest rates are stabilized at a higher level than before. The country will fall into debt, or some of its land and domestic capital will be shifted to foreign ownership or a combination of both. If we leave aside the lowering of wages that depreciation and devaluation bring, the effect is not any different than if the central bank directly reduced the size of bank reserves to push up interest rates to prevent the currency from depreciating in the first place.
Now think about the reserve situation. Assume a country is running a balance of trade surplus, and this leads to a balance of payments surplus. Assume no change in the quantity of the domestic currency. The exchange rates of the currency against foreign currencies and gold increase. Each unit of currency represents more real money than before. Assuming no change in the quantity of the national currency, the total quantity represents more (gold) money than before. Everything else remains unchanged, which means a rise in wages in gold terms as well as in foreign currency. Obviously, the local capitalists will not like this and will try to neutralize it by cutting wages. (7) Their ability to do so will depend on the balance of forces in the local labor market and the strength of the trade unions. If unemployment is high, they will be able to cut wages, but if unemployment is low, they will find that difficult.
If capitalists do cut wages but they remain unchanged in gold terms, prices will decline. This is partly because imported commodity prices drop while demand for those sold in foreign countries drops because they’re now more expensive in foreign currency (and gold) unless the country with the appreciated currency reduces their prices to reflect the increase. The reduction of demand puts pressure on the capitalists in the appreciating currency to reduce prices in terms of their local currency.
Any fall in prices in terms of the appreciating currency means less of that currency is needed for internal circulation. After the appreciation, every currency token will represent more real money, gold, than before. Fewer currency tokens are needed for circulation. We assume the quantity of tokens and commodities remains unchanged. With fewer currency tokens, either the circulation velocity falls, some of the circulating tokens become redundant and fall out of circulation, or both. Redundant currency tokens flow out of the circuits of circulation into bank currency hoards. The rise in bank reserves causes the local money market to relax, causing a decline in interest rates on the home market. Falling interest rates encourage local banks and money capitalists to lend money abroad due to the higher interest rates abroad. The trade surplus country increases their loans abroad and/or increases ownership of foreign land and capital. This outflow of money creates a deficit in the capital account to cover the surplus on the current account and a positive trade balance.
The domination of the dollar
The present international monetary system is dominated by the dollar. Most internationally traded commodities are priced in dollars. As a result, most international debt is denominated in dollars. Because debts are denominated in dollars, central banks and commercial banks of other countries are obliged to maintain dollar reserve funds, as are corporations headquartered in other countries.
Central banks maintain dollar reserves in the event of runs against their currencies so they can dip into them and check the depreciation of their national currency. Of course, their ability to do so is limited by the number of dollars they have. In a serious run on their currencies, they are forced to allow domestic interest rates to rise. If the central bank were to resist the rise, it would exhaust its foreign currency and gold supply. If the central bank fails to halt the depreciation of their currency against the dollar, corporate reserve funds held in local currency that are set aside to pay debts or service interest payments will be reduced relative to the payments coming due. Corporations may find they have insufficient money to meet dollar-denominated payments, pushing them into bankruptcy.
The greater the danger of depreciation or devaluation of the local currency, the more corporations and banks must keep funds in dollars. The funds kept in dollars aren’t in danger of being depreciated in dollar terms. The more banks, corporations, and even private individuals maintain funds in dollar terms the more dollarized the local economy becomes. Capitalists then calculate their profits in dollars, not local currency, terms. Even if the dollar is not legal tender, the more dollarization proceeds the more widely is the dollar accepted as a means of payment of local debts and as means of purchase for locally-produced commodities sold on the national markets.
U.S. tourists may find they don’t have to change their dollars into local currency. Commodities that are hard to come by in a local currency may be easy to obtain with dollars. The local capitalists are happy to pay wages in depreciated local currency. It buys few commodities, keeping real wages and wages in gold terms at rock bottom. This keeps the rate of surplus value for the local capitalists high. In extreme situations, the national government may even declare the U.S. dollar legal tender and halt the issuance of its own currency. When that happens, dollarization is complete — the dollarized nation has lost a basic element of state sovereignty, the right to issue legal tender currency.
The more dollarized the world economy, the greater the trade deficits the United States can run. If the dollarization of the global economy were effectively zero, U.S. currency wouldn’t be accepted as a means of either purchase or payment outside U.S. borders. Anybody outside of the United States earning dollars as a result of selling commodities on the U.S. market would immediately have to sell the dollar to obtain local currency — they couldn’t buy anything outside the U.S. with the dollar. Whenever the dollar is sold for another currency or gold, there’s downward pressure on the dollar’s exchange rate, both against local currency and gold. But the more the world becomes dollarized the more likely foreigners will hold onto their dollars, instead of selling them for local currency. The greater the degree of dollarization of the world economy, the larger the U.S. foreign trade deficit can be before there’s downward pressure on the dollar exchange rate either against other currencies or gold.
The dollar is only a representation of the money commodity, gold, in circulation. But the more the world economy becomes dollarized, the more that global supply of monetary gold backs the dollar and not just the gold located in the United States.
Next month, I want to examine how the law of value operates on a world-market basis where the value of labor power is different in different countries.
(1) As part of preparing these posts, I listen to many internet videos. I recently watched one by Richard Wolff, professor emeritus at the University of Massachusetts at Amherst. Wolff has emerged as the leading popularizer of Marxism on the Internet today. He explained that he had the same teachers as Janet Yellen, former chairperson of the Board of Governors of the Federal Reserve and now Secretary of the Treasury. The professor talks a great deal about capitalist economic crises in his popular presentations. But as I recall, he does not explain that these periodic capitalist crises are caused by the general overproduction of commodities.
Professor Anwar Shaikh, who I have learned much from, was taught by Gary Becker, one of the leading neoclassical economists of his generation. Shaikh believes that modern money is non-commodity money and he doesn’t understand that the periodic crises of capitalism are relative overproduction. If the state can create money by mere fiat, as Shaikh believes, the state can generate any amount of demand it desires and avoid general overproduction. Throughout his career, Shaikh has struggled against his early education at the hands of Gary Becker and other bourgeois economics professors.
In contrast, the generation of Marxist economists who lived immediately after Marx and Engels’ time or who were under the direct influence of the Russian Revolution learned economics from Marx, Engels, or their immediate successors. They studied bourgeois economics from the viewpoint of an already-acquired Marxist outlook. But today’s Marxist economists learned bourgeois economics first and studied Marxism only after that. Inevitably they have absorbed many aspects of bourgeois economics that, from a Marxist point of view, are false — such as the possibility of non-commodity money under capitalism, to name one example. Marxism is not their native language but a kind of second language they are not entirely fluent in. (back)
(2) Mikhail Gorbachev just died. It was interesting to read about how today’s Russian government views Gorbachev. While the capitalist media was forced to admit that Gorbachev was unpopular among the Russian people — he is widely despised, even hated — the official view is that he correctly realized the needed reform, meaning the policies designed to shift the planned Soviet economy back to a market economy — capitalism. However, in the view of Russia’s ruling circles, he was hopelessly naive about the nature of the collective West, which was aimed at destroying Russia. (back)
(3) The autumn rains began to slow down the German invasion of the Soviet Union in 1941. When winter arrived in late 1941, the muddy ground froze, which enabled the USSR to mount its first major counter-offensive against the Nazi invasion. (back)
(4) Whether or not Ukraine is a nation separate from Russia was hotly debated at the time of the Revolution. It is reminiscent of the discussion that occurred within the Communist International and the U.S. Communist Party under the influence of the Russian Revolution — whether or not African-Americans represent a distinct nation or an oppressed racial minority within the U.S. nation. After a long debate among Ukrainian and Russian Communists, it was decided that Ukrainians represent a nation separate and apart from the Russian nation.
After the discussion concluded, throughout the existence of the Soviet Union, Ukraine was recognized as a nation separate from the Russian nation. It was federated with Russia and the other nations making up the Soviet Union. Putin can blame the disastrous state of relations between Russia and Ukraine on the political and social counterrevolution of 1985-91 that destroyed the Soviet Union, or on the Russian Revolution itself that recognized Ukraine as a separate nation with the right to self-determination. Since Putin does not and cannot repudiate the counterrevolution of 1985-91, of which his government is a direct continuation, he’s forced to blame the Revolution of October 1917 that acknowledged an independent Ukraine. The Russian nationalist view that Ukraine is not a genuine nation plays into the hands of Ukrainian nationalists who claim they are fighting for the very existence of the Ukrainian nation. The Russian nationalist view undermines the Russian war effort. (back)
(5) The current war began in 2013-14 with the U.S.-backed right-wing Euromaidan coup in Kiev.
Not wishing to live under the new anti-Russian far-right regime in Kiev, the ethnically Russian population in the Donbass rose in armed struggle and established the two Peoples Republics of Lugansk and Donetsk, which the Putin government did not recognize. It wanted them instead to function as autonomous republics within a federate Ukrainian state. This way, the pro-Russian Donbass could be a counter-weight to the Western regions where far-right, pro-imperialist, and pro-NATO sentiments are strongest. The Putin government encouraged the Donbass peoples’ republics to negotiate the Minsk accords to keep them within Ukraine. While a ceasefire was negotiated in 2015, sporadic fighting continued.
Early this year, there was every sign that Kiev planned to crush the Donbass republics by military force. A success there by imperialist-backed forces would pave the way for Kiev to retake Crimea by force and hand Sevastopol to NATO. Thoroughly alarmed, under the pressure of Russian nationalists and the Communist Party of the Russian Federation — the main successor party to the former ruling Communist Party of the Soviet Union — Putin agreed to the urgent requests of the leaders of the people’s republic to send in Russian military forces to help local militia forces defend from Ukrainian attack. Russia also decided to send in forces to secure Crimea against attack by occupying parts of Zaporizhzhia and Kherson provinces.
To further pressure Ukraine to negotiate, Russia moved troops to the edge of Kiev and other cities in the north of Ukraine. After Ukraine said it was willing to make concessions, major negotiations were announced in Istanbul, Turkey, at the end of March. As a goodwill gesture, Russia announced a troop withdrawal from the outskirts of Ukrainian cities, including Kiev, that it had made no effort to take. Under pressure from Washington and London, the Kiev government withdrew its concessions, and the Istanbul talks collapsed. After months of bloody fighting, militia forces supported by Russian artillery and air power drove out Ukraine from Lugansk province and parts of Donetsk province.
In August, Kiev launched a counter-offensive. It took back most of Kharkov province, meeting little resistance, took back some territory lost in Donetsk province, and attempted to cut the Russian land bridge in the south in two. Russia responded by accepting the Donetsk republics into the Russian Federation as well as the Kherson and Zaporizhzhia provinces, indicating that, unlike the Kharkov province, Russia intends to fight to defend these territories. Russia’s next move may be an offensive to drive the Ukrainians out of Donetsk entirely and reverse the gains made by Ukraine in Kherson and Zaporizhzhia.
If the offensives succeed, Russia will likely attempt a ceasefire. Still, a peace treaty appears out of reach — barring the intervention of revolution — because the current Kiev government will continue claiming Donbass, Kherson, and Zaporizhzhia, as well as Crimea, as Ukrainian territory. Washington and London seem determined to keep the war going to bleed Russia, provoking a financial-economic crisis they hope will bring down the Putin government. Then they hope Russia’s natural resources will be sold to corporations for a song, as is happening in Ukraine under the Euromaidan government. (back)
(6) We should keep in mind the difference between the devaluation and the depreciation of a currency.
A currency is devalued when the government declares that its currency represents less gold or foreign currency than it did before. A currency is revalued if the government declares that a currency represents more gold or foreign currency than before. A currency depreciates when its exchange rate on the open market falls below its government-declared par value in terms of gold or foreign currency. It appreciates when it rises above its par value.
The official U.S. government price of gold is $42 an ounce, close to the dollar price of gold that prevailed in the early 1970s. On the books of the Treasury and the International Monetary Fund, gold is still listed as $42. In other words, the official par value of the dollar is 1/42 of a troy ounce of gold. The dollar price of gold has been nowhere near the official par value for a half-century. Technically what varies today is the degree of the dollar’s depreciation. The dollar is less depreciated at $1500 an ounce than at $2000 an ounce. In practice, under present conditions where the official par value of the dollar in gold terms bears no relationship to its actual value on the open market, the difference between the devaluation and the depreciation value of the dollar becomes blurred. (back)
(7) This is what happened in Britain in 1926. Under Chancellor of the Exchequer Winston Churchill, the British government followed a policy of pushing up the British pound sterling back to its prewar par value. Churchill did this in an attempt to preserve the role of the City of London as the center of world money and capital markets. The result was a rise in the wages of British workers in gold terms and dollars, making British industry less competitive. In the coal industry, then a leading industry, mine owners attempted to “correct” this situation by lowering the coal miners’ wages in terms of pounds. The miners went on strike to defend their pound-denominated wages, leading the General Strike — considered the high-water-mark of the British workers’ movement to this day. John Maynard Keynes concluded that when workers’ wages are lowered, it should be done through the devaluation of the British pound and not by lowering wages in terms of British pounds. To this day, Keynesian economists advocate currency devaluations whenever their countries face trade deficits, claiming that trade deficits are caused by the overvaluation of their country’s currency. (back)
A Critique of Crisis Theory 