Sunday, 21 June 2015

Greece, Money and Capital - Part 2 of 2

Money, as Marx describes in Capital I, Chapter 3, arises as a universal equivalent form of value, as a commodity which everyone would accept in exchange for their own commodity, and thereby facilitated this process of commodity exchange. If A has 10 litres of wine to sell, and B has 20 metres of linen to sell, then if the value of a litre of wine is equal to the value of 2 metres of linen, A and B could exchange. But, if A does not want linen, and/or B does not want wine, there is no basis for this exchange. Moreover, A may only want 10 metres of linen, whereas B wants all A's wine. Ironically, as Marx sets out in Theories of Surplus Value, this limitation is one reason that these forms of commodity production and exchange do not suffer crises of overproduction, whereas industrial capitalism which produces on an ever more mammoth scale, without knowing whether there is someone out there to be the other side of the trade, does suffer such crises.

A money commodity removes the problem for A and B. If 1 gram of gold equals 1 litre of wine, A sells 10 litres of wine to B, and is paid 10 grams of gold. C has a plough, with an exchange-value of 10 grams of gold, which A now buys. C with the 10 grams of gold buys 20 metres of linen from B. This is what Marx means when he says that money is the universal equivalent form of value. If it requires 100 hours of abstract labour to produce 10 litres of wine, then the value of 10 litres of wine is 100 hours, because value is labour, and its measure is time. If 10 litres of wine exchange for 20 metres of linen, then 20 metres of linen is the equivalent form of the value of 10 litres of wine. But, because gold is accepted in exchange for all commodities, it becomes the universal equivalent form of value.

In reality, the seller of the wine could, just as easily, have taken from the buyer of the wine, a piece of paper saying the bearer has a claim to 100 hours of labour-time. They could then have used this to buy the plough, and the owner of the plough used it to buy linen. That really is what happened with the circulation of Bills of Exchange, and is what happens with bank notes. The only difference is that the value is expressed not in terms of labour-time, but in terms of £'s, €'s, $'s etc., which initially represented a certain quantity of gold or silver.

The only reason that the buyers and sellers of commodities insisted on payment with some actual commodity, like gold or silver was a matter of trust. (That was also the reason De Gaulle insisted on the US settling its payments to France with gold rather than dollars.) That is what stands behind any piece of paper like an I.O.U. that a buyer may proffer in payment. The payee must feel confident that that if they accept it, they will be able to obtain the value it represents, and that others will accept it in payment from them. The reason money takes the form of a money commodity, like gold, is precisely because it has value. It has use value that is demanded, which is the first requirement of a commodity, and it is the product of labour, which gives it its value.

But, apart from these considerations, there is no reason why money should take the form of a money commodity, which itself places restrictions on circulation – for example, if there is a shortage of the commodity to act as the medium of circulation – and is itself costly, because the money commodity must be produced and minted for no other reason other than to fulfil this function. A country that has no gold production of its own, for example, is at a disadvantage in using physical gold for its currency, because it must first sell commodities to a gold producing country, in order to obtain this gold, mint it and throw it into circulation. Yet, in every other way, such a country may be well endowed with capital in the form of easily mobilised means of production, and consumption and available labour supply.

For such a country, however, there is no reason why it should not use gold as the basis of its money, in so far as a certain quantity of gold is the manifestation, the equivalent form of a certain amount of value, a certain quantity of labour-time. A gram of gold may have a value of 10 hours of labour-time. In that case, the value of all other commodities in this economy can be expressed in this equivalent form, of so many grams of gold, even though not one single gram actually exists within the economy.

All that is required here is that tokens are used to represent these different quantities of gold. Provided everyone accepts these tokens, because they are issued as fiat currency by a state that is able to dictate that they will be accepted, or else, as in the case of Bills of Exchange, a developed legal system exists, which allows creditors to sue for payment on such bills, the tokens can serve just as well as if the gold they represent had been used.

There is again a parallel here with the situation in Greece. Countries that issue fiat currency are able to print it to meet their requirements. The advantages of this over using gold or silver were described above. But, Greece is rather like the country that uses gold or silver for its currency, but has none of its own. That is it must obtain this currency – even though it is only in the form of paper notes or base metal coins – from elsewhere, i.e. the ECB.

But, the ECB is thereby in a position to deny Greece the physical currency it requires, unless it complies with a set of rules designed by the ECB itself. If we compare the situation with the country that uses gold, as the basis of its currency, the parallel is obvious. Suppose this country gives a coin representing a gram of gold the name of £1. In that case, as unit of account, the value of every commodity can be expressed as a price, that is as so many grams of gold, or now so many £'s. But, no gold whatsoever need exist in the economy. It serves merely as a notional measurement of value.

Every commodity in this economy can be priced in these gold currency units, and all exchanges undertaken on the basis of them, without the presence or circulation of one single fragment of gold. All that is required is the circulation of currency tokens which represent this gold. In fact, trying to restrict economic activity and commodity circulation on the basis of a shortage of this money commodity is a ludicrous thing to do, for the reasons set out above.

A country may have an abundance of commodities that can act as means of production and consumption, as well as an abundant labour supply, and be able to put these together as capital, to be able to produce commodities at competitive prices, and with high profits, but simply lacks the particular commodity required to act as the means of circulation, to enable these exchanges to occur. This was what happened in 1847, when a crop failure caused Britain to have to import a lot of food, which it paid for with gold. Under the provisions of the 1844 Bank Act, Britain had foolishly tied its issue of Bank of England banknotes to the country's gold reserves. As these had been diminished to pay for the food imports, this forced a reduction in the money supply, which led to bank notes being hoarded, and a shortage of medium of circulation forcing up interest rates, and causing a credit crunch similar to 2008.

The consequence of that was that it prevented the circulation of commodities, resulting in a 37% contraction of the economy. Yet, Britain had plenty of capital, and ability to pay its debts. That was demonstrated by the fact that as soon as the Bank Act was suspended, and bank notes put into circulation, the credit crunch was ended, and within months the economy was once more booming.

The imposition of austerity has had a similar effect on European economies like Greece.

But, like the country that bases its currency on gold, without using any gold in its own currency circulation, Greece could do the same thing, in relation to the Euro. Ultimately, any currency unit is just a name for a specific amount of value, a claim to a given amount of labour-time. There is no reason why any economy cannot use any currency unit it likes to denominate prices, any less than a country can choose to denominate lengths in metres rather than yards, weights in kilograms rather than pounds. The currency unit here, as Marx says is just a standard of prices, and acts thereby to mediate the circulation and exchange of commodities.

In fact, many counties have used the currency units of other countries for that purpose. More recently, Zimbabwe used dollars as the denominator of its domestic prices. The US, in the past, has shipped billions of dollars into countries which have circulated alongside the domestic currency. In Ireland, particularly near the border, both £'s and €'s circulate in the economy, both North and South, and in London, some prices are denominated in both £'s and €'s, with both being accepted in exchange.

As with the economy that uses gold as the basis of its currency, but circulates no gold, a country could base its currency on £'s, $'s, or €'s without circulating any of these either. In fact, in every economy the circulation of these physical notes and coins has always represented a small proportion of the total circulation. As Marx demonstrates, if A and B exchange, with A selling £100 of commodities to B, and B selling £80 of commodities to A, only £20 needs to be thrown into circulation to cover the difference of the trade. 

In fact, a vast amount of such trade occurs with all of these net balances being all that requires money payment to clear. Yet, in fact, even as far as these payments are concerned, no actual notes and coins are required. The payments are made via the banking system, with merely a book keeping transaction, reducing the deposits in the payer's account and increasing the deposit in the receiver's account. All these transactions are netted off at the level of the banks' relations with each other, so that this is again conducted via book transfers in the banks' accounts with the central bank.

If we think of the way transactions occur, in a modern economy, wages are paid by means of electronic transfers into employee's accounts, most bills between businesses and from consumers to businesses are paid by means of electronic transfers, using either direct debits, electronic banking, credit card or debit card transfers, and increasingly other forms of payment such as ApplePay. Increasingly, physical money tokens, like gold and silver before them, are disappearing from circulation and being replaced by electronic transfers. It makes no real difference what currency unit those transfers are measured in, other than banks use the opportunity to charge a commission for converting from one currency unit to another.

It does not matter whether the prices are denominated in grams of gold, £'s, $'s, €'s or Roubles. None of these things have to be physically in circulation for the exchanges to take place denominated in them.

Its for that reason that if the ECB ejects Greece it is not only in many ways a meaningless gesture, but would, in other ways, be actually liberating for Greece. Meaningless because Greece could continue to denominate its prices in €'s regardless – just as Scotland proposed to keep using the £ - and liberating because, freed from ECB rules, Greece could instruct its central bank to create as many electronic € deposits in the government's accounts as it required to ensure the government could pay its bills with those electronic €'s, pay its workers wages, and pensions and so on, and thereby remove the restrictions to capital accumulation and growth that austerity is imposing.

The more Greece can simply convert all of its payment and banking systems to electronic means, the more it frees itself from reliance on the ECB to provide it with notes and coins, and thereby to control the Greek money supply. This does not mean that Greece can resolve all its problems simply by printing electronic €'s. It does mean that the issue of a shortage of money, the need to borrow money from the ECB, or elsewhere is being blown up out of proportion, and to misdiagnose the problem.

Removing itself from ECB control, whilst retaining the € as its currency, and printing electronic € deposits, through its own banking system, ends the credit crunch and potential bank run it faces. At the same time, it avoids the inevitable collapse of the currency that would occur with a return to the Drachma, and subsequent hyper inflation and crushing of living standards.

In terms of the government budget, Greece is already running a current budget surplus, so no immediate problem exists there. Moreover, freed from existing limits, the government could even, by the above means, borrow from itself, paid for by money printing to ease the present austerity, and provide some fiscal stimulus to get the economy growing more rapidly. But, the problem still revolves not around the budget deficit but around the country's external balances. The reason the country faces immediate problems is in repaying previously incurred loans. As Paul Mason has shown, there are questions over whether these loans are in any case illegal, thereby removing the liability for their repayment.

But, in any case, every economist knows that these debts can never, and will never be repaid. They are being used simply to apply political pressure on the Syriza government. The best response to that is for Syriza to sack the current central bank governor, to appoint someone sympathetic to the government and to default on the debts, as Iceland did. Let those who irresponsibly borrowed, and those who irresponsibly lent take the responsibility for their actions, not the people of Greece who were responsible for neither.

The problem of Greece's external balances is the problem identified at the beginning. It is a problem of a lack of capital. Greece cannot resolve that problem on its own. It is a problem which requires coordinated action across Europe. It is why we need a United States of Europe, within which workers can organise for a Workers' Europe; it is why, in Britain, we need a Socialist Campaign for Europe, that raises a socialist programme of demands to be taken into the EU referendum and beyond, based upon the need to fight for a positive vision for Europe that meets the needs and aspirations of all workers in Europe, to be achieved by their own collective actions, organised across borders, and with the stated intention of pulling down every such border.

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