It is the problem of a central bank and currency that does not have a single state and single fiscal and debt issuing authority standing behind it. It is the problem of separate states and fiscal regimes that do not have the necessary control over their own currency. Greece has merely illustrated this contradiction at its most acute point, but it will undoubtedly manifest itself in Spain, Portugal, Italy and other eurozone economies until either it is resolved, or until the Eurozone itself is destroyed.
There are various immediate solutions that Greece could adopt. It could, for example, choose to use Bitcoin for its currency. That would be jumping from the frying pan into the fire. There are two obvious problems with Bitcoin. The first is that although it has a price (which itself is a problem because it varies by huge amounts on a day to day basis) it has no value. Bitcoin is the product of labour, but not necessary labour. Gold, for example, is a use value in its own right. It has exchange value, because people desire it as a use value (for jewellery etc.) and because it has value as the product of labour. But, Bitcoin can only ever be used as a money token, no different from a £10 note.
The price of Bitcoin is derived from the fact of its scarcity, and the fact that it is traded, or really we should say is the object of speculation. In fact, one reason that the price of Bitcoin varies so widely, is precisely because it does have no value, which can act as the locus around which its market price fluctuates. For most commodities, the market price fluctuates within fairly limited ranges around the price of production, that is the cost price plus average profit. If the market price rises much above this, the producers of that commodity make higher profits, which encourages additional capital into its production, pushing the market price back down to the price of production. But, for any commodity that does not have value, like land, for example, there is no price of production. If the demand for land rises, it cannot cause a production of more land! And the same applies to Bitcoin, which thereby causes speculation, and spikes and collapses of its price.
But, by the same token someone can and has created other virtual currencies, so that the scarcity of one is neutralised by the plethora of many different such currencies.
Secondly, Bitcoin would simply replicate the unnecessary problems caused by an artificial constriction of the currency that the ECB is now inflicting on Greece. Bitcoin is much loved by the Libertarians and adherents of the Neo-Austrian School of von Mises, precisely because it takes control of the currency out of the hands of the state, and places it into the straitjacket of “sound money” based on artificial constraints.
Another option is to reintroduce the Drachma, with Greece then simply printing whatever currency the circulation of commodities and capital within its economy requires. All other things being equal, that would certainly have been a better option for Greece in 2010, than the five years of austerity and destruction of real wealth that has been imposed on it by the Troika.
The evidence of that can perhaps be seen in Iceland, which allowed its capitalist banks to go bust, leaving the capitalist shareholders and bondholders, who had lent money to those banks, to pick up the tab for the reckless actions of those banks. Having done so, and not thereby wasted taxpayers money on bailing out the money lenders, it was able to provide the currency its economy required, so that it quickly recovered, and has continued growing since.
It has been said that a reintroduction of the Drachma would inevitably see that currency collapse in value, with a consequent sharp rise in import prices and devastation of Greek living standards. That is more than likely, but on the basis of what has been said above, that possibility should not be overstated.
If we consider what causes the value of money tokens such as the Drachma or the Euro to fall, it is that too many of these tokens have been put into circulation, relative to what is required for the circulation of commodities. As Marx puts it,
“How many reams of paper cut into fragments can circulate as money? In this form the question is absurd. Worthless tokens become tokens of value only when they represent gold within the process of circulation, and they can represent it only to the amount of gold which would circulate as coin, an amount which depends on the value of gold if the exchange-value of the commodities and the velocity of their metamorphoses are given... The number of pieces of paper is thus determined by the quantity of gold currency which they represent in circulation, and as they are tokens of value only in so far as they take the place of gold currency, their value is simply determined by their quantity. Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity."
The reason the Bank Act was introduced in 1844, besides the fact that it was based upon false economic theory, and was a reflection of the growing power of money lending capital relative to productive-capital, is that fear still existed in England, following a series of bank runs in the 18th and early 19th centuries, due to commercial banks printing excessive amounts of banknotes, which they could not honour. People wanted gold currency or a paper currency backed by gold to assuage this fear.
But, as Marx and Engels set out, it was a fear that had never affected Scotland. In Scotland, not only had gold never formed a significant element of currency circulation, but the Scots preferred the circulation of a paper currency to that of gold and found the constraints of the 1845 Bank Act an imposition.
“As mentioned before, the Scottish banks were forced by the Bank Act of 1845 into a system resembling that of the English. They were obliged to hold gold in reserve for their note issue beyond the limit fixed for each bank. The effect of this may be seen from the following testimony before the C. D. 1848/57.
Kennedy, Director of a Scottish bank:
"3375. Was there anything that you can call a circulation of gold in Scotland previously to the passing of the Act of 1845? — None whatever." — "3376. Has there been any additional circulation of gold since? — None whatever; the people dislike gold." — 3450.
The sum of about £900,000 in gold, which the Scottish banks are compelled to keep since 1845, can only be injurious in his opinion and
"absorbs unprofitably so much of the capital of Scotland."”
(Capital III, Chapter 34, p 562)
Marx goes on to give further such testimonies as to the way a gold backed currency imposed unnecessary restrictions on the Scottish banks and economy.
The amount of money put into circulation, as Marx sets out in “A Contribution To The Critique of Political Economy”, is a function of the value of commodities to be circulated, and the velocity of circulation of the currency, together with the value of the money commodity.
“The law that, if the speed of circulation of money and the sum total of the commodity-prices are given, the amount of the medium of circulation is determined, can also be expressed in the following way: if the exchange-values of commodities and the average speed of their metamorphoses are given, then the quantity of gold in circulation depends on its own value. Thus, if the value of gold, i.e. the labour-time required for its production, were to increase or to decrease, then the prices of commodities would rise or fall in inverse proportion and, provided the velocity remained unchanged, this general rise or fall in prices would necessitate a larger or smaller amount of gold for the circulation of the same amount of commodities...
Since the quantity of gold in circulation depends upon two variable factors, the total amount of commodity-prices and the velocity of circulation, it follows that it must be possible to reduce and expand the quantity of metallic currency; in short, in accordance with the requirements of the process of circulation, gold must sometimes be put into circulation and sometimes withdrawn from it. We shall see later how these conditions are realized in the process of circulation.”
Of course, as Marx described in the quote provided earlier, this relation is stood on its head when paper currency replaces precious metals, as the more paper put into circulation, the lower its value, and so the higher the level of commodity prices. If in 2010, Greece had not had to comply with the austerity measures imposed upon it, in order to obtain liquidity from the ECB and IMF, it would not have suffered a 25% contraction of its economy. Instead, its economy may have grown by say 10% over that period.
In that case, it could have undertaken a 30% expansion of notes and coins in circulation compared with today without that having any inflationary impact on the value of its currency. Likewise, a return to the Drachma may not have the damaging effect that is being predicted. For example, suppose the government tomorrow reintroduced the Drachma, and announced that all deposits were secure, and enough Drachma would be supplied to banks to meet all withdrawals.
There may still be a surge of withdrawals, but once people were sure that whenever they went to the ATM, there would be drachma in it, they would tend to stop panic withdrawals. If the government had the Drachma it required to pay wages and other bills, it could begin to employ more people. They would have money in their pocket to spend with the small trader, who would expand their business and so on.
In other words, just as happened in 1847, when the Bank Act was suspended, and more notes and coins were put into circulation, which caused an increase in economic activity, so too that could be the consequence in Greece. Following a 25% contraction of economic activity, with 25% unemployment/60% youth unemployment, there are significant under used economic resources that could be put to work, and which would thereby justify an increased currency circulation without causing inflation.
The main problem, in that respect, however, is the devaluation of that currency in foreign exchange markets. This is really, the answer to the point raised at the beginning about how notes and coins can disappear from the economy. One reason is that people hoard the currency so it disappears from circulation, but the other is that if the economy is uncompetitive, it imports more than it exports, and so the difference is made up by an export of capital. In the past, that was symbolised by an outflow of gold. But, today importers may exchange domestic currency for the foreign currency of the country from whom they want to import so that thereby the domestic currency flows out and ends up in the foreign currency reserves of the exporting country.
A country that controls its own currency can print more notes to cover the outflow, but this then leads to the problem of inflation discussed earlier. The problem that Greece faces currently, however, is that not only has the country lacked the resources to import commodities, because its own industry has been decimated by austerity, making exporting more difficult, but large chunks of its capital has gone to repay debt. Moreover, the problem it has faced more recently is that, without currency, importers are unable to obtain foreign currency to be able to import anyway. Ironically, although this has been causing severe problems for pharmacies etc., who cannot obtain drugs, it does represent a self-stabilising mechanism. Over recent months, for example, when Russia has not only faced restrictions on its imports, but also a depreciation of the Rouble, this has acted as an incentive for domestic producers to fill the gap in the market, and has also led foreign businesses to establish businesses in Russia for the same purpose, which thereby strengthens the Russian economy, making it less dependent on imports, or on oil exports to finance them.
The policy of austerity has been a totally illiterate economic policy imposed on the country by the ECB, EU and IMF, that has seriously damaged the economy during that period. But, the policy of austerity has had the same effect everywhere it has been applied. It has destroyed real capital and the ability to produce profits, solely in order to maintain the fictitious wealth of money lending capitalists, a policy which ultimately will cause an even bigger crash of those fictitious capital prices.
But, in the meantime, there seems little need for Greece to risk the potential downside from a reintroduction of the Drachma, as I've set out before. Nor does it need to introduce any further Euro denominated IOU's, in addition to those already in circulation in the shape of Euro notes and coins, bank cheques and so on.
The Euro is merely a symbol of measurement of value, and so of a given quantity of labour-time. There is no more need of these symbols to be in circulation for prices to be denominated by this unit of measurement than there is for gold to be in circulation.
The advantage for Greece at the moment is this. If it were using the Drachma as its currency, the quantity it put into circulation would be constrained by the value of commodities to be circulated. Put too many Drachma into circulation and they become devalued, reflected in inflation, too few and there is money hoarding, a credit crunch, higher interest rates and economic contraction.
But, Greece could have its central bank print electronic Euros in exchange for Greek sovereign bonds. At the moment this is not possible because only the ECB is allowed to determine which bonds are acceptable as collateral. So, it restricts the ability of banks to create money. However, that gate swings both ways. If the ECB cuts Greece adrift, which by maintaining but not increasing ELA it has so far been careful not to do, then Greece is free to set its own rules on what bonds its central bank will take as collateral.
So, Greece could continue to consider itself part of the Eurozone, in so far as Euros are its standard of prices, and legal tender, but it would be outside the control of the ECB, just as it has to borrow money in capital markets, on its own terms, rather than as a member of the Eurozone, like Germany.
On that basis, the Greek government, with its bank account filled with these electronic Euros could lift the austerity. It could begin to undertake the work needed to rebuild the Greek economy, once again putting Greek workers back to work, creating real wealth.
Its notable that on the same day that the institutions were trying to impose further austerity on Greece, President Obama and President Rousseff were doing the opposite, announcing major programmes of fiscal expansion in both the US and Brazil, to put workers back to work, building roads and bridges and undertaking the other infrastructure work that their economies require, and Obama was also announcing that millions of US workers would from now on be legally entitled to overtime pay, who previously lacked that right.
The Greek government with the currency it requires could begin to put people back to work. They would have incomes to spend, which would enable a range of Greek businesses to expand, and for Greece to be able to build the capital it requires to meet its needs, rather than relying on imported goods. Indeed it could begin to build the capital it requires to be able to export goods so as to pay for its imports without exporting capital.
The advantage of doing this whilst continuing to denominate prices in Euros is that it avoids the dislocation a return to the Drachma implies, and because any increase in money supply it brings about would be tiny compared to total Euro money supply, it would have no inflationary impact. That is why I have been arguing for the latter course of action. If the Greek people vote No today, as seems likely, Syriza should not let this be interpreted as a vote to leave the Euro. It is a vote to reject austerity, and to provide, by whatever means necessary, the currency required to end it, and to put the Greek and European economy back on the path of growth from which austerity has derailed it.
No comments:
Post a Comment