Schrödinger’s Capital: How commodity money died (and the value-form school missed it)

by Jehu

NOTE 8: “Money never finally exits circulation”?

Again with Chris Arthur and his amazing 2003 paper.

Perhaps some might think I am being unfair in castigating Arthur for his historical ignorance when it comes to his discussion of money.

Well, let me put that thought to rest right now.

In the previous note I pointed out that Arthur makes the argument inconvertible fiat currency behaves the same commodity money does without ever once introducing a single piece of empirical evidence to support his claim. But this is not his only claim that actual historical investigation will disprove.

According to Arthur, money never really exits circulation. Thus Marx is wrong to insist money must be a commodity once it drops out of circulation.

“[Money] never finally ‘exits’ from an economy, such money (viz means and store) is fixed ‘as money’ merely temporarily, so such money could be identical with the medium of exchange (abstracting from inflation). (That world money was gold in Marx’s day is historically contingent, not conceptually necessary; today the dollar is world money.)”

Obviously, says Arthur, there are time when money will be withdrawn from circulation and must become ‘real’ (i.e., commodity) money, however these events are a temporary, momentary, cessation of its circulation as medium of exchange. Since money does not really leave circulation, the idea money ultimately must be a commodity, as Marx insisted, is contingent. Money does not have to be a commodity if it never stops circulating as medium of exchange.

Arthur makes these assertions as if he has access to some treasure trove of data the rest of us have not seen. Is it true money never exits from circulation? Or that such an exit is temporary?

Let’s look at the actual historical record.

In October 1930, the Fed warned massive quantities of gold were being drained from the economy when it reported the loss of over $700,000,000 of gold.

“The most important question which the System faces at present is the problem of bank failures and hoarding of currency. Failures had been increasing at a rapid rate and are exercising a terrific pressure on the credit situation. Every action of the System should be considered in the light of its possible effect on these failures and on the willingness of banks to help out their corres­pondents in time of difficulty# A decrease in the System’s holdings of govern­ment securities might affect the situation adversely, first, by its psychological influence as indicating a policy of pressure, and second* as tending to increase the amount of member bank discounts and so making them somewhat less willing to lend freely to help banks actually in need.”

At the same time, according to Eichengreen’s book, Gold Fetters, in Argentina, gold could no longer be obtained in return for domestic currency. In Brazil, it was impossible for investors to convert currency into gold. Meanwhile, Canada lost a one fourth of its gold reserves in 1928.

Along similar lines, Benjamin Bernanke gave a speech in 2004 where he noted this massive drain on gold money throughout the economy:

“[Afraid] to leave their funds in banks, people hoarded cash, for example by burying their savings in coffee cans in the back yard. Hoarding effectively removed money from circulation, adding further to the deflationary pressures.”

In other words, commodity money was being drained from the world market. Why? Eichengreen argues central banks, by attempting to maintain convertibility of their currencies, were forced to restrict domestic credit. Paul Krugman restated Eichengreen’s argument this way:

“OK, now to the Friedman-Eichengreen theory of depression. Friedman famously argued that the key factor causing the Depression was a collapse in the US money supply, which was not due to a sharp fall in the monetary base, but rather to a sharp fall in the money multiplier, as households decided that cash in the mattress was better than money in the bank, and the surviving banks decided that cash in the vault was better than money lent out. (my emphasis) The Eichengreen theory of the international spread is that as countries’ commitment to the gold standard came into question, the gold coverage ratio rose: central banks, especially the Bank of France, started wanting to hold more gold reserves”

It can be seen from this brief restatement of Eichengreen’s argument that the behavior of central banks did not differ at all from that of private capital and individuals. No one, not private capitals nor the state itself, wanted to release their gold holding to circulation. The onset of the Great Depression saw the holders of gold literally go on strike against themselves.

To put this another way, everyone with gold was hanging onto their gold and refusing to place it in circulation.

Arthur’s complete ignorance of historical facts

Mind you, the gold had not disappeared; no one was burning gold for fuel or eating it. Every ounce of gold that had existed before the crisis was still there but was sitting in lifeless hoards. The owners of gold, private and public, refused to part with their gold no matter the economic consequences.

Now here is the thing, this development was permanent — gold never again circulated in the economy as money. Although Chris Arthur assures us that “money never finally ‘exits’ from an economy”, this is exactly what happened in the 1930s!

Had Chris Arthur read even a single book on the period he would know this. In a matter of months, gold stopped circulating in the economy throughout the entire world market and never resumed.

Commodity money never came back into circulation.

One by one countries were forced off the gold standard, because no one in their right mind wanted to give up their gold! In the U.S. and a number of others countries, the government not only stopped redeeming its paper for gold, it demanded private citizens turn all of their gold over to the state. In return, Washington gave its citizens valueless paper currency at a 40% discount to its gold standard peg.

Which is to say, the fascists literally expropriated the total monetary wealth of the country!

What in god’s name is going on inside the heads of the value-form school that they just manage to erase this history?