Ernest Mandel on currency crises and the end of money

by Jehu

For people who care about how the dollar works to slow capitalist collapse, Ernest Mandel wrote an interesting piece in 1968, The Crisis of the International Monetary System. I found the essay both interesting and puzzling.

Why I find the essay interesting is probably obvious to anyone who reads this blog regularly. I think Marx’s view of money and associated issues is far too blithely dismissed by even those who consider themselves orthodox followers of his theory. My argument is simple: you cannot claim labor theory is legitimate and valid while arguing one of the most fundamental and critical labor theory premises of commodity production and exchange — that money itself must also be a commodity — is invalid.

(Which is to say, of course, you can hold this position, and may even be right about it, but the results of your analysis won’t be consistent with labor theory. Something has to give here.)

Before I explain why I found Mandel’s essay not only interesting but, more importantly, puzzling, I want to provide some context.

A falling rate of profit?

One of the questions Marx had to explain was this: if the rate of profit falls, why was it taking so long. In his opening to chapter 14 of volume 3, Marx stated few economists in his time thought the falling rate of profit was controversial. Instead, according to Marx, they wondered why it didn’t fall faster. This is completely unlike our own day where even Marxists question whether there is any tendency of the rate of profit to rise or fall.

Celebrity Marxists are on all sides of this debate, which pits theorists like Dumenil, Heinrich and Harvey against the minority views of theorists like Kliman and Roberts. A lot of the issues are obscured by the technical and empirical aspects of the debate and it is probably difficult for layman communists to follow the discussion, but here is the gist.

Marx thought there was a law, which could be shown mathematically to exist, that the rate of profit must fall. This law, however, was offset or paralyzed by what he called countervailing influences, which reduced the law itself to a tendency.

To make an analogy: If a bucket has a hole in it, the water it contains will leak out until it falls to level of the hole: this is the law of gravity. But if the bucket is under an open faucet, the law that says the bucket will gradually empty of water is offset by the countervailing influence: new water entering the bucket from the faucet. That is how the countervailing influences work: they prevent the law of the falling rate of profit from being expressed as a law.

Countervailing influences

Marx lists six counter-tendencies he thought accounted for the paralysis of the law, some of which were cited by other economists of his time. They are:

  1. Intensification and prolongation of the labor of the working class;
  2. Efforts to force wages below the value of labor power;
  3. Efforts to cheapen the cost of capital — machines, raw materials, etc.;
  4. Creation of a labor reserve army for times of expansion;
  5. Expansion of foreign trade and the increase in the scale of production; and,
  6. Concentration of capital.

What is notable about these counter-tendencies is that they imply, at least in the short-term, the falling rate of profit can be reversed. What do I mean by the phrase, “at least in the short-term?” Basically, the term means the rate of profit does not fall until the countervailing influences above can no longer prevent the rate of profit from falling.

Why does the rate of profit fall in the first place?

What is the mechanism of the law itself? The rate of profit falls over the long run, because capital progressively replaces direct human labor in production with machines, science and technology. In Marx’s model of the capitalist mode of production, labor is the source of value and surplus value. As the quantity of labor employed in production diminishes, and production comes more to rely on machines, science and technology, the only source of value and surplus value starts to dry up.

Of course, the capitalist mode of production is organized in such a way that the critical relation between labor and profit is obscured from all the participants — both workers and capitalists. Thus, the capitalist has no idea that the steps he takes to replace living labor by machines in production also eventually force his profits to fall. Just the opposite: introducing the improved machines into production to replace labor allows him to reduce his labor costs; it lowers the production price of his commodity, and he can make a hefty profit even while he is underselling all of his competitors with older, less advanced production methods.

In sum. each individual capitalist introduces improved machines, science and technology because it increases his individual profits. He thus has no idea he is reducing the rate of profits by taking these measures. Using our analogy above, the capitalists, unknowingly, are progressively widening the hole in the bucket even as more water is pouring into it from the faucet. Thus, even as the stream from the faucet increases, the bucket is draining ever more rapidly.

As I said, the falling rate of profit acts as a tendency because the capitalists can offset what they are doing by squeezing more labor out of the worker, driving her wages down below its value, reducing the cost of his machines, dumping excess product on external markets, increasing the labor reserve and achieving a greater scale of production. All of these efforts increase the stream of surplus value, from the faucet — the working class.

The twist

Here is the problem with all of this: assuming it is successful — and it is — it only aggravates the falling rate of profit. Profits are pushed up in the short-term, only to fall ever more viciously in the long-term.

So does capitalism die because the rate of profit falls to zero? Surprisingly, that answer to this question may be, “No.”

The profit rate is the goad of capitalist production, but the cause of capitalist collapse might just come from another source. Eventually the mode of production gets so efficient at these sort of counter-measures to the falling rate of profit that huge masses of profits are created that cannot be reinvested. Continuing with my bucket analogy above, despite the constant and increasing drain of water from the bucket, the flows of surplus value into it are so large it begins to overflow.

In a bizarre twist, capitalism probably does not die because the rate of profit falls to zero; it likely dies because it literally drowns in the astonishingly huge volume of surplus value it creates.

Phase transition

I have hypothesized that the Great Depression was the phase transition of this process — the point where no new investment adds to profits. In addition to Marx, I have based my argument on two major sources: Henryk Grossman — likely the most important Marxist theorist in the 20th century, although he is almost completely unknown — and John Keynes, who almost everyone recognizes as founder of the theory of state managed capitalism.

In 1930, Keynes argued the depression was caused by the fact that capital was economizing on the employment of labor faster than it could find new uses for labor. The obvious flip-side of that argument is that capital was accumulating surplus value faster than it could find profitable uses for it. In this form, Keynes defined the cause of the Great Depression almost exactly in the terms Marx did in chapter 15. Marx called this condition absolute overaccumulation of capital — the point where no new investment could increase profits.

In 1929, Henryk Grossman predicted it as well and made the argument that once absolute overaccumulation of capital was encountered the premise of labor theory that commodities are sold at their values would no longer hold. If the capitalist mode of production were to continue beyond the point of absolute overaccumulation of capital, argued Grossman, labor power would have to be sold below its value. This, of course, was Marx’s so-called immiseration thesis: as capital accumulated, the conditions of the working class would decline.

This is just my hypothesis, but I argue the Great Depression was the onset both of absolute overaccumulation cited by both Keynes and Grossman and the real immiseration of the working class predicted by Grossman.

A breakdown of exchange value is a breakdown of money

But what does this all have to do with Mandel’s essay from 1968?

While Keynes wrote about absolute overaccumulation of capital and Grossman warned about real immiseration of the working class, in his 1968 essay Mandel is talking about the third leg of the triad: monetary crises. Mandel focuses on the third and most famous (today) of Marx’s predictions: the actual breakdown of production based on exchange value, (which is the subject of Grossman’s 1929 essay.) From Mandel it is possible to see that this breakdown took “the form of [currency] convulsions that follow each other with increasing rapidity”.

To understand Mandel’s point you have to understand what money is.

In Marx’s theory money is exchange value, which means money is the phenomenal expression of the value of commodities. If there is indeed a breakdown of production based on exchange value as Marx predicted, this breakdown cannot take any other form than a breakdown in the monetary system itself. This is because value itself cannot appear in any other form than exchange value — i.e., money.

In particular the recurrent monetary/currency crises of the 1960s was about the relation between the various national currencies and the commodity money, gold. While gold was the money of the world market, each national currency was a token of this commodity money having this exclusive status as legal representative of gold within the territory of each nation state. This legal designation is itself a two sided contradiction: money versus currency; with three players: gold, the national currency, the national currencies of the rest of the world.

In this three-sided dance of exchange value (gold) and its legal representative, each nation state determined the relationship of its own currency to gold, but this also determined the relation of the national currency to all the currencies of other countries.

To describe what this means, let’s look at an example:

If in the US, 20 dollars represented the value of one troy ounce of gold, and in the UK 5 pounds represented one troy ounce of gold, the exchange rate of dollars to pounds should be 20 US dollars to 5 UK pounds. However, in actual currency exchange markets, we might find that 19 dollars might actually exchange for 5 pounds, or 20 dollars might actually exchange for 8 pounds.

Why might this happen? Aside from normal fluctuation of prices, the divergence of real exchange rates from what their nominal or official exchange rates, I believe, is to be explained by (among other things) the differences in the national rates of profit of the two countries.

Governments lose control of their national capitals

You can probably see the difficulty this presents for various national governments: Effectively, they no longer had control of their national currencies so long as their currencies were directly or indirectly tied to gold. And without control of their national currencies, they cannot managed their national capitals.

By the late 1960s this divergence between nominal and real exchange rates resulted in a series of recurrent currency crises that shook the capitalist world markets. The solution: either gold was going to be top dog and national governments had to submit to it (France’s position), or gold had to go (Nixon’s shock).

France was not being “marxist’ or “austrian” in its view, it was merely reflecting the general belief that the US had an unfair advantage (“exorbitant privilege”) because its national currency also played a central and pivotal role in the world market. By general agreement (Bretton Woods), the dollar was effectively designated a substitute for gold in international trade.

Now think about that. If you were authorized to create perfect copies of the American dollar that could not be detected by any known means, what would you do with that authority? Essentially, the US was using its special position against the rest of the world in the 1960s.

To bring this back to Marx’s argument in chapter 14 of volume 3, the US was using the dollar as an additional means to paralyze its own falling rate of profit at the expense of its trading partners.