Inflation - Inflation & Fiat Currency - Part 1 of 2

William Lowndes

In A Contribution To The Critique of Political Economy, Marx discusses the nature of the convertibility and inconvertibility of the currency for the money commodity, usually gold. It arose in relation to the debate between Locke and Lowndes, in relation to the Shilling. In essence the government had contracted debts in currency – silver Shillings (20th £) - that had been heavily debased. It is the opposite of the process described earlier, whereby the state contracts debts, and attempts to pay back its creditors in debased currency.

Lowndes argued that as the debts had been contracted in light Shillings, when it paid them back, it should not do so in full weight Shillings.

“The government debts had been contracted in light shillings, were they to be repaid in coins of standard weight? Instead of saying pay back 4 ounces of silver for every 5 ounces you received nominally but which contained in fact only 4 ounces of silver, he said, on the contrary, pay back nominally 5 ounces but reduce their metal content to 4 ounces and call the amount you hitherto called 4/5 of a shilling a shilling. Lowndes’s action, therefore, was in reality based on the metal content, whereas in theory he stuck to the name of account. His opponents on the other hand, who simply clung to the name of account and therefore declared that a shilling of standard weight was identical with a shilling which was 25 to 50 per cent lighter, claimed to be adhering to the metal content.”

(A Contribution To The Critique of Political Economy, Chapter 2)

Thomas Attwood

Locke won the day, but the arguments of both Locke and Lowndes were faulty. Locke was arguing that it was the name Shilling that was decisive, and represented some fixed quantum of value, and so the value of silver moved up or down against it. And, Marx details the resurrection of this debate a century later by Thomas Attwood, and the Birmingham “Little Shilling Men”. Attwood, here, adopted the position of Lowndes. As Marx says, Lowndes' argument was faulty, but it served the purpose of justifying a practical response to the given situation.

“A trial showed that £57,200 in silver coins, whose weight ought to have been 220,000 ounces, weighed only 141,000 ounces. The mint continued to coin silver pieces according to the same standard, but the lighter shillings which were actually in circulation represented smaller fractions of an ounce than their name denoted. A larger quantity of these reduced shillings had consequently to be paid for an ounce of uncoined silver on the market. When, because of the resulting difficulties, it was decided to recoin all the money, Lowndes, the Secretary to the Treasury, claimed that the value of an ounce of silver had risen and that in future accordingly 6s. 3d. would have to be struck from an ounce instead of 5s. 2d. as previously. He thus in effect asserted that, because the value of an ounce of silver had risen, the value of its aliquot parts had fallen. But his false theory was merely designed to make a correct practical measure more palatable.”

(ibid)

In reality, it was not that the value of silver had risen, but that the value of the coins had fallen, as a result of their debasement. Yet, the owner of a coin was entitled to silver to a value equal to the nominal value of the coin. In the end, if states want to have fiat currencies they are led to end convertibility. That does not change the fact that the currency itself is debased, the government cannot simply dictate, by fiat, the value of the currency. For Attwood and the Birmingham School that was not a problem, because as under-consumptionists, they saw such devaluation of the currency as a means of stimulating economic growth.

“While the denomination of paper is based on gold or silver, the convertibility of the note, i.e., its exchangeability for gold or silver, remains an economic law regardless of what juridical law may say. For instance, a Prussian paper thaler, although legally inconvertible, would immediately depreciate if in everyday commerce it were worth less than a silver thaler, that is if it were not convertible in practice. The consistent advocates of inconvertible paper money in Britain, therefore, had recourse to the ideal standard of money. If the denominations of money, pound, shilling and so on, are names for a determinate amount of particles of value, of which sometimes more, sometimes less are either absorbed or lost by a commodity when it is exchanged for other commodities, then the value of an English £5 note, for instance, is just as little affected by its relation to gold as by its relation to iron and cotton. Since its designation would no longer equate the bank-note in theory to a determinate quantity of gold or of any other commodity, its very concept would preclude the demand for its convertibility, that is for its equation in practice with a determinate quantity of a specific thing.”

(ibid)

And, this was the situation that recurred after WWII, when the Dollar became reserve world currency. It was fixed at a value of $35 to an ounce of gold, and all other currencies were then fixed relative to the Dollar. But, huge amounts of Dollars were subsequently printed, as the US sought to pay for its wars in Korea, Vietnam, and the Cold War arms programme, as well as its expansion of the Welfare State under Johnson's Great Society agenda.

The reality was that the actual value of each Dollar bill was massively depreciated, and so the relationship to gold at $35 an ounce was a fantasy. As soon as the practicality of convertibility was actually tested, that reality became apparent. In 1971, fed up of being paid for French exports to the US, in these phoney Dollars, De Gaulle insisted on converting Dollars to gold at the official exchange rate of $35 an ounce. The US could not possibly comply, and so Nixon ended Dollar convertibility, and also made it illegal for US citizens to own gold bullion. The Dollar price of gold soared, not because the value of gold had risen, but because the real value of the Dollar against gold and other currencies was now manifest. By 1980, the price of gold had risen to $800 an ounce.

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