Tuesday, 12 June 2012

Why Higher Bond Yields Don't Matter - Part 4

Keynesian solutions can only work during a period of Long Wave Boom, for similar reasons to those Marx and Engels describe in relation to the limitations of strike action. Yet, in so far as these solutions can provide the working-class with some temporary respite, can place them in a better position to advance their cause it is sheer sectarianism to reject or to oppose them. As Trotsky points out in Flood-Tide,

But a boom is a boom. It means a growing demand for goods, expanded production, shrinking unemployment, rising prices and the possibility of higher wages. And, in the given historical circumstances, the boom will not dampen but sharpen the revolutionary struggle of the working class. This flows from all of the foregoing. In all capitalist countries the working-class movement after the war reached its peak and then ended, as we have seen, in a more or less pronounced failure and retreat, and in disunity within the working class itself. With such political and psychological premises, a prolonged crisis, although it would doubtless act to heighten the embitterment of the working masses (especially the unemployed and semi-employed), would nevertheless simultaneously tend to weaken their activity because this activity is intimately bound up with the workers’ consciousness of their irreplaceable role in production.
Prolonged unemployment following an epoch of revolutionary political assaults and retreats does not at all work in favour of the Communist Party. On the contrary the longer the crisis lasts the more it threatens to nourish anarchist moods on one wing and reformist moods on the other. This fact found its expression in the split of the anarcho-syndicalist groupings from the Third International, in a certain consolidation of the Amsterdam International and the Two-and-a-Half International, in the temporary conglomeration of the Serrati-ites, the split of Levi’s group, and so on. In contrast, the industrial revival is bound, first of all, to raise the self-confidence of the working class, undermined by failures and by the disunity in its own ranks; it is bound to fuse the working class together in the factories and plants and heighten the desire for unanimity in militant actions.

We are already observing the beginnings of this process. The working masses feel firmer ground under their feet. They are seeking to fuse their ranks. They keenly sense the split to be an obstacle to action. They are striving not only toward a more unanimous resistance to the offensive of capital resulting from the crisis but also toward preparing a counter-offensive, based on the conditions of industrial revival. The crisis was a period of frustrated hopes and of embitterment, not infrequently impotent embitterment. The boom as it unfolds will provide an outlet in action for these feelings.”

So, any measures adopted by Capital, which act to cut short the recession, act in the interests of workers, for the reasons Trotsky sets out here, they help to provide “firmer ground” beneath their feet. For the same reasons, although Marxists do not see either of the Capitalist solutions of Free Trade or Protectionism as ones which offer the workers a real solution, we are not indifferent between the two. As Marx puts it,

But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favour of free trade.”

For these reasons, under current conditions, we should favour Keynesian solutions over “Austerian” solutions both because it offers a more rational solution for the development of the productive forces, and also because it enhances the position of the working-class, to pursue its own programme. Finally, this approach is possible for the UK because it prints its own money. By the same token that could apply to the Eurozone. But, what about the situation faced by Francois Hollande? He wishes to pursue a Keynesian approach, but with the ECB controlling the purse strings! There is, however, a way for Hollande to deal with this.

The solution is a consequence of what Money is as analysed by Marx. According to Marx Money acts as a) A unit of account, b) A store of value, c) A means of payment. Take these in turn.

Merchants Needed A Standard Measurement
Of Exchange Value For Accounting Purposes
Unit of Account. Basically, what this means is that money acts as a standardised measure for all transactions. It can do this, because Money originates as commodity money. The Money Commodity acts as a generalised equivalent against which all other commodities' Exchange Value can be measured. So, instead of saying 1 coat is equal to 2 cows, and 1 cow is equal to 4 goats, then if the Money Commodity is goats we can say: 1 cow = 4 goats, 1 coat = 8 goats. The Exchange Value of every commodity is now expressible as a given amount (Quantity of Use Value) of the Money Commodity. This is what Marx terms the Value Form. The current names we have for Money today such as “The Pound” are derived from a certain quantity of the original precious metals that acted as the Money Commodity prior to the introduction of paper Money Tokens i.e. a pound of sterling silver.

If 1 unit of commodity A is worth £1, then if firm X has 100 units of A in stock we can say its value is £100, or if it sells 100 units, its sales were worth £100. But, in order to make this calculation, it is clearly not necessary that the £100 is itself in existence.

A Store Of Value. Because I may not want to spend all of my money at one time, a necessary feature of money is that I can store it to be used later. A commodity such as milk, for example, would be no use as a money commodity, because after a couple of days it would have become worthless. But, things like salt or cows have acted as Money Commodities in the past, because they are durable. But, the most effective commodities for Money have been precious metals like Gold and Silver because they are durable, and because they contain a lot of Exchange Value in a small volume, and because they are divisible. Moreover, because it is not easy to increase the amount of them (outside periods such as the California Gold Rush) the labour-time required for their production remains stable over long periods. That means their Exchange Value remains stable. That is why, when paper tokens representing this Money, are printed in much greater quantities than is required for the circulation of commodities, the purchasing power of these tokens declines (inflation), and the relative price of the Money Commodity they represent rises. Gold has gone from $250 an ounce in 1999 to $1600 an ounce today.

But, even when Gold acted as Money and store of value it was not necessary that all of the stored wealth was held in the form of physical Gold. The Goldsmiths, who became the first bankers, and minters of Gold coins, realised that those who deposited their gold with them, only ever wanted access to a small portion of it, at any one time. Provided they kept an account (using Gold as the Unit Of Account as set out above) of how much each depositor was owed, they could lend out Gold to borrowers, and be paid interest on it.

Suppose depositors only ever wanted access to 10% of their gold. The banker could then lend out the other 90%. But, then, those who borrowed this gold money would do so to make payments of various kinds, and those who received payment would then deposit that Gold once again. So, of all the store of value deposited with the bank only 10% would ever be in the form of physical Gold. The rest would simply be in the form of written amounts in the Bank Ledger. This is the way a fractional banking system creates money.

Means of Payment. Under barter systems there is no need for money because the purchase of one thing is paid for immediately by the sale of some other thing with the same Exchange Value. This is the basis of Say's Law (actually developed by James Mill) which states that Supply creates its own Demand. Production and Consumption are combined in the same act. But, under systems of generalised commodity production this is no longer the case. I may take goods to market and sell them, but with no intention of buying something else. Instead, I may sell, and then hoard the money, or part of it, I have received. This, in fact, is what is happening today with a large proportion of the money form of profits being hoarded rather than used to expand production. Similarly, its possible that I might buy something, and pay for it later. That is I might buy it using credit. I have to repay that Credit at some point, which means at that point I hand over Money, but without receiving back a commodity in Exchange. Another, example would be that I might say pay a month's Rent in advance.

However, once again it is apparent that the total value of all these transactions does not require the existence of an equivalent amount of money. For one thing, any particular physical unit of money can be used for several transactions. A gives a £5 note to B in payment, who gives it to C, who in turn gives it to D and so on. The same £5 note has been used to finance transactions with a total value of £5 x n. The total number of transactions, n, in a given time period is what is called the Velocity of Circulation. In fact, via a modern banking system all these transactions can be effectively simultaneous.

But, secondly, the money required is only that needed to cover the net payments. Suppose A sells £100 worth of goods to B, and B sells £100 worth of goods to A. We are effectively back to the situation of barter. No money payment is required because each has supplied the other with an equivalent amount of Exchange Value. Where businesses do trade with each other on this kind of basis, the accounting practice is to enter the amount in the respective ledgers with a “contra” reference against it, so that it is seen that one amount (or part of it) is cancelled by another. If, however, A sells £100 to B, but B sells £50 to A, then B will still owe A £50. In that case, £50 of money is required as a means of payment, but this £50 has actually financed £150 of Exchange Value transactions.

In fact, this netting off occurs all the time. In the 19th century, transactions were often conducted via Bills of Exchange. These Bills were dealt with by the Discount Houses, who paid cash to the possessors of the Bills in exchange for a percentage discount on its face value. They would then seek full payment of the bill from the debtor. But, given the volume of trade, it was possible to net off all these Bills, so the Bank Clearing House developed to perform this function. In fact, it then became possible to effect all this simply by making the appropriate changes in the relative ledgers of the respective Banks. So, the actual amount of physical money required to facilitate a huge volume and value of transactions becomes a small fraction. As a consequence, although Central Banks play an important role in creating/printing money, the vast majority of money in modern economies is created by Banks themselves.

For more information on Marx's analysis and theory of Money See: A Contribution To The Critique of Political Economy.

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