Wednesday, February 01, 2012

All that glitters - The yellow brick road

All That Glitters

According to various sources total mined gold mined from known history to the end of 2009 amounted to approximately 165,000 tonnes. In 2008 jewellery accounted for 52 percent of the world’s gold; central bank holdings and investments accounted for 34 percent; and industrial gold, 12 percent. The remaining 2 percent was unaccounted for. The price of gold is expressed in dollars but, nowadays but rather than a change in the price of gold leading to a change in the value of the dollar, it’s the other way round. One of the reasons for the recent rise in the price of gold is the current weakness of the dollar. Another is, of course the threat of future economic insecurity and gold, as a product of labour, is still a store of value which, if the fears are realised, is better to be left holding than mere pieces of paper.

From 1850 to 1914 the general price level was stable; there were moderate fluctuations but the prices in 1914 was much the same as it had been 64 years earlier (Between 1850 and 1914 average wage rates went up by nearly 90 per cent, more than keeping up with the steadily rising productivity in industry - but no inflation.) Governments before 1914 knew how to stabilise prices, how to raise them and how to lower them. They knew that the key to the situation is the amount of currency (notes and coins) in circulation. If this is kept in line with the needs of the growth of production, population, etc. prices will be stabilised. If currency is arbitrarily increased prices will go up. If arbitrarily reduced, prices will go down. Before 1914 stability was maintained through the gold standard which closely controlled the issue of currency.

Before the present era of managed currencies, money took the form of some commodity having its own value as a product of labour having its own value in which the values of all other commodities were expressed such as gold and silver which were made into coins by governments (who also issued metallic and paper substitute for it which were exchangeable on demand for the real thing). The function of the money-commodity, gold, is to facilitate the equation of different commodities.For instance, it may require 10 hours of labour time to produce 1oz. of gold, 5 hours for a shirt and 2 hours for a bottle of beer. In this case, the value of a shirt will be equivalent to l/2oz.of gold and the value of a bottle of beer would be equal to 1/5oz. So 1oz.of gold would be equal to two shirts or five bottles of beer, and this is the relationthrough which these commodities will be exchanged, as measured by their value expressed in gold.

Under this gold standard the amount of money in circulation was more or less self-adjusting in accordance with the requirements of the economy for payments. This system was suspended during the First World War and finally ended with the Second. This meant that from then on governments have had to decide how much money the economy requires. Not always an easy task. This government-created, “fiat” money is issued by state-controlled central banks and could be described as being created, if you want to use the term, “from thin air” by them, in effect by governments. In most countries it is introduced into the economy by the central bank buying government bonds from commercial banks of which “quantitative easing” is one form. At the end of WW2 a new system for settling international payments was established based on the dollar. The exchange rate between other currencies and the dollar (and so between the other currencies) was fixed, but, since the dollar was defined as 1/35 oz of gold, gold still played an indirect role as the money-commodity as a standard of price. During the early 1970s this changed dramatically when loss of confidence over escalating costs of the Vietnam War became evident with many countries selling off their dollar reserves in favour of gold. By 1968, the United States's external obligations vastly exceeded the value of its diminishing gold stock. Unable to withstand this pressure the US came off the Gold Standard in 1971 and allowed the fixed exchange rate system that was pegged to the dollar to collapse and abandoned its commitment to pay $35 for an ounce of gold. After that, all currencies floated and, though central banks still retained gold reserves for a while, gold became an ordinary commodity, another precious metal alongside silver and platinum, whose price fluctuations have no effect, either way, on the general price level.

Ron Paul wants to go back to a gold-based currency. The right-"libertarian" types like to return to the gold standard because the idea is to have control of the money supply independent of the state. But the financial industry will itself create money, and in ways that can lead to dangerous crashes. Paul has a correct understanding of what causes inflation and his solution would work to stop it, if that what was wanted. ( Nor has he been a lone maverick voice. Even in 1974 Rees-Mogg of the Times was urging a return to the gold standard). Some politicians and economists are now urging a return to the nineteenth century gold standard in order to get rid of inflation. The amount of notes and coins in circulation in Britain has increased from around 450 million in 1938 to over 19,000 million in 1996, much more than would have been needed because of increases in production and trade. Workers will still of course be faced with the wide range of difficulties the failed policy of "more money" was supposed to help cure in the first place.

It only needs to add that getting rid of inflation is not the answer. Capitalism without inflation, as in the nineteenth century, no more solves working class problems than does capitalism with inflation. Since the U.S. dropped the gold standard in 1971, the price of gold has risen tenfold. But consumer prices have risen only two and a half times (In recent years Paul’s view has been modified to peg currency value to a market basket mixture of commodities in place of simply gold). If the U.S. had instituted a full gold standard in 1971, the result would have been the worst deflation since the Great Depression. Deflation isn't necessarily a good thing for workers. Falling commodity prices mean that employers are under pressure to cut wages, which they did in previous deflationary years. It was wage-cutting that provoked the Great Rebellion, the railway strike, of 1877. Recessions/depressions tend to reduce worker bargaining power. Wages shrank by a quarter in the 1870s and in some industrial states like Pennsylvania by 50 percent.

Many radicals in the US in the 19th century spent a lot of time attacking the gold standard as it allowed the banks to charge extremely high interest as it and restricted the money supply. Of course in that era credit in general was extremely scarce. for example, until after World War II, it was hard to get houe mortgages in the U.S. Typically you could only get a mortgage for a short period like 7 years and there'd be a balloon payment at the end. Consumer credit only really developed in the '20s.
It was a key means of restricting working class access to capital -- which was essential to proletarianise a mostly artisan/peasant (i.e. pre-capitalist) society. This is relevant to the issue of the money supply because expansion of credit expands the money supply and so in reality there is no particular reason to tie money to gold.

The gold standard in the U.S. was implemented due to demands from Wall Street financiers. They had financed the Union Army based on paper money (greenbacks) and they wanted to be able to redeem the debt in dollars worth more than what they provided. By tying the dollar to gold, this would cause deflation, thus raising the value of their dollar-denominated debt. The effects on households dependent on natural resource production, i.e.,farmers, miners and lumbermen, were often more severe. Prices of their products fell by 30 percent to more than 50 percent. And such households still constituted well over half of the population. As in any deflation, anyone who took out a mortgage, including those for farms, mines and sawmills, before or during the decline was punished severely. So the agrarian protests of the era had a basis in real human hardship.

As capitalism developed it was found that gold itself did not have to circulate, but that paper notes could substitute for it as long as those accepting or holding it could be sure that they could always change them for gold. Up until WWI in most countries the currency was gold coins and paper notes convertible into gold. The Great Depression of the 1930s led to the major capitalist countries abandoning this convertibility. Since then the currency nearly everywhere has been inconvertible paper notes. With an inconvertible paper currency, the amount of money is no longer fixed automatically by the level of economic transactions, nor is there any limit to the amount of paper currency that can be issued. It is this that Paul objects to because, if the central bank issues more paper money than the amount of gold that would otherwise be needed, then the result will be a depreciation of the currency; the paper money will come to represent a smaller amount of gold with the result that prices generally will rise. If Paul had his way, the Fed would no longer manage the issue of the currency. This would pass to the Treasury Department which would only be allowed to issue paper money if it had the equivalent value of gold in Fort Knox. This would be a further absurd waste of resources as much more gold would have to be mined.

Ron Paul thinks that a return to a gold-based currency would eliminate crises such as in the 1930s and today. This is an illusion. There was a gold-based currency up until WWI, yet crises occurred regularly, including a Great Depression in the 1880s and similar banking crises as today. The National Bureau of Economic Research lists 12 recessions totaling 312 months out of the 588 months from 1865 through 1914. Moreover, it was a period of frequent financial crises. There were at least seven national banking panics, with some banks failing and many others suspending withdrawals and payments of checks for some period. Capitalism goes through its boom/slump cycle whatever the basis of the currency. No monetary reform can change that. Socialists have no nostalgia for the Gold Standard. While this may have both advantages and disadvantages to the capitalists as an international trading system revolutionary socialists are only interested in the abolition of all the defining characteristics of the capitalist economy (wages, capital, prices, money, etc) including the paraphernalia of international trade. The answer is not to revert to some earlier stage of capitalism - to go back to the gold standard - but in establishing socialism.

A general who ruled Brazil in the 1970s once said "The economy is doing well, but the people are doing badly." That is a pretty good description of capitalism.

The Yellow Brick Road

"Have you heard of the wonderful wizard, The wonderful Wizard of Oz, And he is a wonderful wizard, If ever a wizard there was"

While many today consider gold an instrument of financial and personal freedom, Frank Baum, author of 'The Wonderful Wizard of Oz' painted it as a villain - the tool of oppression. Baum published the book in 1900, just after the US emerged from a period of deflation and depression. Prices had fallen by about 22% over the previous 16 years, causing huge debt. Farmers were among those badly affected, and the Populist political party was set up to represent their interests and those of industrial labourers. The US was then operating on the gold standard - a monetary system which valued the dollar according to the quantity of gold. A key plank in the Populist Party platform was a demand for "free silver" - that is, the "free and unlimited coinage of silver and gold" at a fixed ratio of sixteen to one. Populists and other free-silver proponents advocated unlimited coinage of the white metal in order to inflate the money supply, This would have increased the US money supply, raised price levels and reduced farmers' debt burdens thus making it easer for cash-strapped farmers and small businessmen to borrow money and pay off debts. Baum's allegory is a critique of the Populist rationale. The Land of Oz, is a microcosm of America and Oz is short for ounce, the measure for gold and silver. Emerald City, its center and seat of government, represents Washington, D.C. The journey to Emerald City corresponds to the Populists effort to acquire power in Washington. The yellow brick road is the gold standard. The brainless Scarecrow represents the midwestern farmers. The Tin Man represents the nation's workers, in particular the industrial workers. The Wicked Witch of the West and the Wicked Witch of the East represent financial-industrial interests and their gold-standard political allies (NY banker J.P.Morgan and JD Rockefeller), the Emerald City of Oz (green-back money is also a delusion). The Wizard is simply a manipulative politician who appears to the people in one form, but works behind the scenes to achieve his true ends through deceit, and even Dorothy’s silver slippers (changed to ruby slippers for more effect in the color movie version) is a symbol of the belief that adding silver coin to gold coin would provide much needed money to a depression-strapped, 1890s America). Oz is full of monetary reform symbolism.

But it also included some utopian hopes.

In the sequel to the Wizard of Oz 'The Road to Oz' Baum has the Tinwoodman explain:
“It must have cost a lot of money,” remarked the shaggy man.
“Money! Money in Oz!” cried the Tin Woodman. “What a queer idea! Did you suppose we are so vulgar as to use money here?”
“Why not?” asked the shaggy man.
“If we used money to buy things with, instead of love and kindness and the desire to please one another, then we should be no better than the rest of the world,” declared the Tin Woodman. “Fortunately money is not known in the Land of Oz at all. We have no rich, and no poor; for what one wishes the others all try to give him, in order to make him happy, and no one in all Oz cares to have more than he can use...
...[later]"Don't they work at all?" asked the shaggy man.
"To be sure they work," replied the Tin Woodman; "this fair city could not be built or cared for without labor, nor could the fruit and vegetables and other food be provided for the inhabitants to eat. But no one works more than half his time, and the people of Oz enjoy their labors as much as they do their play." ”

The next book in the series , The Emerald City of Oz, Baum goes into more detail (inconsistencies notwithstanding) on the money-less economics:
"There were no poor people in the Land of Oz, because there was no such things as money, and all the property of every sort belonged to the Ruler. The people were her children, and she cared for them. Each person was given freely by his neighbors whatever he required for his use, which is as much as anyone may reasonably desire. Some tilled the land and raised great crops of grain, which was divided equally among the entire population, so that all had enough. There were many tailors and dressmakers and shoemakers and the like, that made things that any who desired them might wear. Likewise there were jewellers who made ornaments for the person, which pleased and beautified the people, and these ornaments also were free to those who asked for them. Each man and woman, no matter what he or she produced for the good of the community, was supplied by the neighbors with food and clothing and a house and furniture and ornaments and games. If by chance the supply ever ran short, more was taken from the great storehouses of the Ruler, which were afterward filled up again when there was more of any article than the people needed. Every one worked half the time and played half the time, and the people enjoyed the work as much as they did the play, because it is good to be occupied and to have something to do. There were no cruel overseers set to watch them, and no one to rebuke them or to find fault with them. So each one was proud to do all he could for his friends and neighbors, and was glad when they would accept the things he produced."

A wizard idea!!!

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