How fiat currency killed Marxism

by Jehu

Part One

“I remember quite clearly watching with comrades in a Capital study group on Sunday August 15, 1971 the broadcast of Nixon’s announcement that he had ordered the “closing of the gold window.” Given that we were reading for the previous few months passages like the following from Capital: “money–in the form of precious metal–remains the foundation from which the credit system, by its very nature, can never detach itself” (Marx 1994:606), we left each other that night with the thought that either Capitalism or Marxism was coming to an end before our very eyes! —George Caffentzis, Marxism After the Death of Gold

What crippled and ultimately killed off the Marxian theory was the realization that capitalism, although severely damaged by the Great Depression, did not die. The confidence Marxists felt before the depression that capitalism was a historically limited, relative, mode of production was shattered by the post-depression recovery of the Golden Age of Fascism.

Critical to the difficulties post-war Marxian theory has suffered is it inability to come to grips with the significance of the collapse of the gold standard. That collapse is the subject of this two part series.

Breakdown? What Breakdown?

Although Marx only predicted the breakdown of production on the basis of exchange value, not production for profit itself, post-war Marxian theory ignored the distinction. Production on the basis of exchange value is, of course, production on the assumption that commodities are bought and sold at their values. Production for profit, on the other hand, is production of surplus value. Marx predicted that these two forms of production would become incompatible as the forces of production developed. Henryk Grossman in 1929 predicted this antagonism between value and surplus value would result in labor power being sold below its value. The condition that production is carried on on the basis that commodities are bought and sold at their values would have to be violated.

“I have shown that even if all conditions of proportionality are maintained and accumulation occurs within the limits imposed by population, the further preservation of these limits is objectively impossible. The system of production described in Bauer’s own scheme has to breakdown or the conditions specified for the system have to be violated. Beyond a definite point of time the system cannot survive at the postulated rate of surplus value of 100 per cent. There is a growing shortage of surplus value and, under the given conditions, a continuous overaccumulation. the only alternative is to violate the conditions postulated. Wages have to be cut in order to push the rate of surplus value even higher. This cut in wages would not be a purely temporary phenomenon that vanishes once equilibrium is re-established; it will have to be continuous. After year 36 either wages have to be cut continually and periodically or a reserve army must come into being.”

Only four years later, Grossman’s prediction was borne out as Roosevelt devalued the currency by 40% and outlawed possession of gold. Oddly enough, what should have been seen as a real time confirmation of the validity of labor theory was instead held to disprove it. Production for profit now required that labor power be sold below its value, i.e., the rate of profit fell to zero as Marx predicted.

What complicates the discussion of the breakdown of production on the basis of exchange value is that this event was also supposed to be accompanied by a proletarian revolution, which failed almost everywhere. Capital behaved exactly as Marx predicted it would behave, of course, but the proletariat was never able to take advantage of this. Surprisingly, the failure of the proletarians to take advantage of Marx’s prediction was blamed, at least in part, on Marx’s theory itself. The criticism was directed at Marx’s law of value. Marx predicted the breakdown of production on the basis of exchange value, i.e., commodities could no longer be exchanged at their values. Once the breakdown actually occurred, however, some offered this as proof positive that the law of value was wrong.

Heinrich refutes Marx

Every Marxist critic of Marx since the Great Depression has pointed to the breakdown of exchange value and fiat currency as evidence Marx was wrong about money and exchange value. Some, like Michael Heinrich, go so far as to claim that not only was Marx wrong about value, he was wrong to predict the breakdown of production on the basis of exchange value. According to Heinrich, Marx did indeed predict the collapse of production on the basis of exchange value, but this was in a momentary “ultra-Left” period that, allegedly, he later rejected.

“In the so-called “Fragment on Machines,” one finds an outline of a theory of capitalist (sic) collapse. With the increasing application of science and technology in the capitalist production process, “the immediate labour performed by man himself” is no longer important, but rather “the appropriation of his own general productive power,” which leads Marx to a sweeping conclusion: “As soon as labour in its immediate form has ceased to be the great source of wealth, labour time ceases and must cease to be its measure, and therefore exchange value [must cease to be the measure] of use value. The surplus labour of the masses has ceased to be the condition for the development of general wealth, just as the non-labour of the few has ceased to be the condition for the development of the general powers of the human head. As a result, production based upon exchange value collapses.”

“These lines have often been quoted, but without regard for how insufficiently secure the categorical foundations of the Grundrisse are. The distinction between concrete and abstract labor, which Marx refers to in Capital as “crucial to an understanding of political economy,” is not at all present in the Grundrisse. And in Capital, “labor in the immediate form” is also not the source of wealth. The sources of material wealth are concrete, useful labor and nature. The social substance of wealth or value in capitalism is abstract labor, whereby it does not matter whether this abstract labor can be traced back to labor-power expended in the process of production, or to the transfer of value of used means of production. If abstract labor remains the substance of value, then it is not clear why labor time can no longer be its intrinsic measure, and it’s not clear why “production based on exchange value” should necessarily collapse.”

With the end of production on the basis of exchange value, in which commodities are sold approximately at their labor values, we begin what can probably best be labeled “production on the basis that labor power is sold below its value”. This is now a requirement of production for profit. Since the average profit rate is now zero, or approximately zero, capitalistic profit now requires that labor power be sold below its value. This is in line with the prediction made by Grossman that unless labor power is sold below its value, a population of excess workers forms.

Inflation and “full employment”

In bourgeois economics of the 1970s, this law was expressed as the so-called trade-off between inflation and unemployment. Unless constant devaluation of the currency is imposed by the “monetary authority”, the “economy” tends toward stagnation. This Keynesian ‘law’ is nothing more than the constant devaluation of wages paid out in the form of a currency, the purchasing power of which the state constantly reduces allegedly by increasing the supply of currency in circulation.

Marx discusses this in part one of volume 1, where he shows that an increase in the quantity of currency in circulation only reduces the value symbolically represented by the currency. Currency has no value of its own and can only be a symbol, a token, representing some definite exchange value. An increase in the currency in circulation has no impact on the amount of value in circulation; it only reduces the value symbolically represented by each of the units of the currency.

To understand why this is true, we need to briefly restate the major points of Marx’s theory of money.

  • First, value or the socially necessary labor time required for production of a commodity can not be seen or measured directly; it can only appear in the form of exchange value.
  • Second, exchange value itself is the measure of the value one commodity expressed in the physical form of another commodity.
  • Third, over time a single commodity emerges that becomes the universally valid expression of the values of all other commodities — a money commodity.
  • Fourth, in circulation of commodities this money commodity is represented by a token, a valueless symbol of money that stands in for it; this token, having no value of its own, is not itself exchange value, but only the symbolic representative of exchange value, of money, in circulation.
  • Fifth, the actual value represented by this token is determined by the quantity of a commodity money for which it can be redeemed; thus commodity money serves as the standard for all prices denominated in a fiat currency.
  • Sixth, the forcible increase by the state of the quantity of currency in circulation does not have any impact on the quantity of value in circulation, but, instead, reduces the value symbolically represented by each unit of the currency.

Thus, the purchasing power of the currency could be diluted (depreciated), just as easily as a fool can dilute a fine scotch by adding ice.

Thus, in Marx’s theory of money, the quantity of wages a worker is paid in an inconvertible fiat currency — whether high or low — has no direct impact on the value she is actually being paid for her labor power, except, of course, that at any given price level $20 will always symbolically represent twice the value of $10. To find the actual value of a wage, we must determined what the standard of price is, i.e., how many units of a fiat currency equals a troy ounce of gold.

Labor theory argues the same real value of the wages paid for labor power can be symbolically represented by currency wages of $20 or $100 — depending on the actual standard of prices. In either case the value of the labor power has not changed — it still represents the same expenditure of socially necessary labor time. If this labor time is two hours, in the first case, two hours is represented by $20 of currency and in the second place the two hours is represented by $100. The purchasing power of the currency has fallen five-fold.

The secret of “full employment”

This law can be put to good use by the state. If the state can constantly force more currency into circulation, it can reduce the purchasing power of wages all at once and together. This has profound political implications: “Full employment” is achieved by reducing the purchasing power of wages. The demand for full employment has now been effectively converted into a demand for a reduction of the wages of the employed. Once this mechanism is in place the state can prevent the emergence of a large unemployed population of hungry workers, which might threaten capitalism, while still reducing wages to subsidize profits.

In a Keynesian full employment economy increasing employment, i.e., the constant increase in the aggregate number of hours of labor supplied by the working class, is the means by which wages are reduced. If the aggregate value of wages paid out to the working class remains constant, the average value of the wage paid to each worker falls as the total number of workers increases. This effect has no relation at all to the currency in which the wages are denominated. The currency has no value and its increase or decrease has no impact at all on the actual value of the wages.

The real value of the wages of two hours can be split among two workers simply by having the state create additional valueless currency and using this currency to hire an unemployed worker to dig holes in the ground and then refill them. Where one worker is paid $20 before, two workers are now paid $40, but no new value is created and more importantly no additional value is paid out: the total value paid for the labor power of the two workers is still two hours. Before the split, the real wage was represented by $20; but after the split the same two hours is now represented by $40. The workers are each paid $20 for their labor power and count themselves lucky to have a job. They have no idea that all that happened was that the real wage of one worker is now split between two workers. Each is now receiving only one half of the value of their labor power, but since this wage is paid out in a valueless currency, their nominal wages has not changed.

This ingenious scam for maintaining full employment was first explained by Keynes in chapter 2 of his General Theory in 1936. Keynes explanation of how his scam works can be found in section III. Workers, said Keynes, “do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged”.

In simple language, workers who had jobs would not complain about inflation. Since this was true, nothing stood in the way of the state inflating away the purchasing power of wages to maintain full employment.

Continued in part 2