William J. Blake: An American Looks at Karl Marx
Marxist doctrine prophesies that the centralization of industry and banking, in an era of sharpening crises of capitalism, will produce financial forms that correspond more closely with the present class relations. For example, the use of cash has diminished and that of checks has gained, until in the United States today money (including paper money) is really used only for retailing.
One has only to compare the circulation of money in a country where actual bills still circulate and where well-to-do people walk about with large amounts of money on their person, as in France, with a country where such a person would be an eccentric, as in the United States.
The population of France is 42 millions, of the United States 129 millions, or more than three times that of France. The circulation of money here is about six billions whereas in France it is not two billions, but on a basis of 35 francs to the dollar, is our three billions. When francs were 15 to the dollar, instead of per capita circulation being a mere 50 per cent more, it was over 100 per cent more, in terms of dollars.
That does not explain the total discrepancy. For although the United States today uses far less actual money than in 1913, the circulation of money is far greater. For the United States needs a large circulation of money for other than commercial transactions.
The new need for currency is an extension of those described in Marx’s elaborate study in the third volume of Capital. Its special feature, above all others, is the increase of debt and share capital that has called for so astonishing a divergent use of money from its normal circulatory purposes.
Rise of “Paper” Prices
The national debt of England was terribly swollen before the World War. It was four billion dollars. Now it is forty billions. The United States federal debt was two billions. Now it is forty billions (approximately). The French debt is in the stellar regions; the printers’ fonts must run short of figures to record it. All paper “values”1 have increased beyond belief. The “value” of shares on the New York Stock Exchange, which was surely not in excess of ten billion dollars in 1913, rose to 88 billions in 1929, and when now it sinks to 30 billions (in depreciated money) it is indicative of “national ruin.”
When an industrial stock once sold at ten times its earnings, solid men in Wall Street shook their equally solid heads. Today they consider that ratio conservative.
There are many explanations attempted for this strange fact. The Marxian is one of the fundamental studies. For Marx the tendential fall of the rate of profit carried with it a still greater diminution of the rate of interest. That means that it is harder to get a return on money but, paradoxically, those who get that lessened return are “richer.” This turns on capitalization.
Capitalization Rises at the Rate of Profit Falls
For example, when money is at 4 per cent, a bond yielding 4 per cent a year sells for $1,000, that is, the right to receive $40 a year and keep your principal is valued at $1,000. Suppose the rate of interest to fall to 3 per cent. At once the right to receive that $40 a year is worth more, since a $1,000 bond yielding 3 per cent would now sell for $1,000, hence one commanding 4 per cent is worth above $1,000.
Shares of stock are affected by this movement. If money invested in government bonds will yield only 2½ per cent, investors look gladly to good common stocks yielding 5 per cent. Hence these shares are bid for and rise in price.
The declining rate of interest (disregarding intermediate fluctuations) is fundamentally part of the declining tendential rate of profit. That means that the shares of stock represent an equity in declining rates (not mass) of profits. But that does not put down their values, as common sense would indicate, but puts them up.
No one is going to let a first-class share yield more than a certain amount above that of a good bond. So it comes about that as the rate of profit tends to decline, all persons who hold claims on income are “richer.” Along with the lamentation that they do not know what to do with their money goes its increased capitalization.
How British Capitalism Used This Tendency
An interesting example of this reasoning appeared in England in June, 1932. Trade was at the lowest level in a generation. So were profits. The currency had been devalued by some 25 per cent and still share prices tumbled even in the bad money, because profits looked far away. Money went to absurdly low levels because no one could make any profits with borrowed money. The government bonds, despite this low rate of money, were very low because it was argued first, that the money in which they were expressed had received a body blow and might get worse, so that one got no yield at all in terms of gold, but only a loss, and secondly, that bad trade means a poor yield of taxes and so the bonds were shaky as to their interest basis, since if the government kept on yielding deficits there was a possibility of real trouble.
Thus one had a situation in which no one would bid for money and yet bonds were on a 5 per cent basis. This very absence of use for money was seized on by the government (at the instance of banking monopolists) as an excuse for conversion. They were right. Once the 5 per cent bonds were converted to 3½ per cent the question for the resisters to conversion was what could they do with the money if they declined to convert? Put it into trade loans? These yielded still less. Commercial discounts? Still less. Other government bonds? England’s mess was part of a world mess; it was a general crisis.
They took the 3½ per cent instead of 5 per cent, and exchanged their old 5 per cent bonds for the new 3½ per cent bonds. The old 3½ per cent bonds that had stood at something like 70 were worth now 100. The shares that had yielded 10 per cent were now cagerly sought, and despite dark business prospects they fell to a yield of 5 per cent, that is, they doubled in value. At one stroke of the pen England was nearly 100 per cent “richer.”
We see why Marxism is not a formal science. The fall in profit rates does not lead to “automatic collapse” but to its strategic use by monopoly capital to save itself at the expense of smaller capitalists.
American Experience
The United States went off gold; repudiated its very receipts for gold, its very ten-dollar bill which stated that that bill was merely a receipt for a specific piece of gold deposited in Washington and payable to any bearer without a moment’s delay, on his demand.
Then the wail went up from the sound-money crowd in Wall Street2 that no one would ever trust the government again and its credit was ruined.
“He that filches from me my good name,” cried “honest” Iago, is a rascal. Perhaps in Shakespeare, but not in life. The credit of the United States has never been so high as it is today with a dollar at 59.06 per cent of par, after a wholesale repudiation of its covenants, and with a debt mounting perpendicularly. The more we owe, the greater our deficits, the worse our money, the deeper our dishonor, the higher our credit. This requires not an ethical but an economic explanation.
Credit Is Not Correlated with Mass of Debt
When Britain owned eight billions before the War that credit was good; now that she owes forty billions it is equally good, although her production of wealth has risen but slightly, certainly not a fifth of the rate of increase of the debt, perhaps not a twentieth. The debt of England is $5,000 per family, which is a pretty sum when it is computed that a majority of English families have never seen $500, and that among the workers there are a great number who would not recognize a five-pound note and who count in shillings because “quids” or pounds are, for them, on an astral plane.
The net result of the evolution of capitalism is that the advance in debt and “values” far outstrips any gains in production or even in profits as a mass. For it is not the mass of profits that is the basic factor in capitalization; it is the rate. That is not to say that the rate of profits is the only factor, but it is, so to speak, the accordion spreader. When the mass of profits of American corporations sank to very low levels in 1931-33, not even a high rate of capitalization could, of course, capitalize dividends that were not there. But for all that the prices of these semi-defunct shares also rose, because the valid ones that paid a return had risen, and there was a hope that revival meant a revival of profits for the fallen as for the upright.
“Values” a Class Conditioning of Physical Production
One sees this different most clearly in “land values.” The price of an acre of ordinary grain land in the Prussian province of Pomerania has always been a multiple of that of similar grain land in Iowa. Yet the farmer in Pomerania whose land was “worth” three times that of the lowa farmer ate only potatoes, and meat but once week, for Sunday lunch, if at all. The difference in prices was due to factors having little to do with production and, in this case, even unaligned with net profits.
Circulation of Money Is Constantly Less Aligned with Trade
The increase of circulation of money since 1914 has been related to these needs, rather than to commerce and exchange. The volume of world trade since 1900 has increased at a snail’s pace, the price at a hare’s run. It has been largely due to the need of moving this immense weight of paper resulting from the tendential fall in the rate of profit, combined with the fact that war, and its waste, has transferred claims from those who own goods to those that claim them from the producers. Surplus-value remains less with the producing capitalist and more with the sharers.3 (We assume, for this study, that these are different persons, real or artificial.) The share of taxation is enormous and its class meaning is rather new.
For the sphere of circulation now becomes more dramatic. If a Proudhon and his followers looked for the source of all our woes in credit in 1844, the present world thinks of little else.
Everyone wants to restore stock prices as the prelude to production. That stock prices represent a capitalization of profits and that these arise in production is completely obscured. The stock market is an index, it is thought, of future profits. Put up the index and producers will be encouraged.
Therefore men like Keynes regard the whole game now as psychological, as manufacturing confidence, and they have come to believe that political economy is a species of hypnotism and that if the eye of the producer is kept glimmering long enough on the diamond of hope4 we will never have another panic. In other words, the thermometer governs the weather, the barometer the winds.
These are not analogies, say these learned psychologists. For the wind bloweth where it listeth but man is conscious, he can be influenced.5 This is the crowning absurdity of subjective economics: poor Böhm-Bawerk would not recognize this spotted grandchild!
But why have these indices, devaluations, etc., become the qualitatively new factors in capitalist evolution? First we must look to changes in the sphere of production, in the relations of classes, or surplus-value, of the relative wages, of organic composition of capital. Then we must see how, out of the surplus-value, a new partition has occurred in the sphere of circulation. Lastly we must study both the rate and mass of profit. For unless all the historic variations of the last quarter-century are understood in real terms we shall be forced back to the techniques of a J. M. Keynes.
Meaning of Debt in Class Terms
What is the meaning of increased national and corporate debt and its corollary, higher taxation? In America today there is a payout of interest and dividends that reaches into the tens of billions per annum. Relatively those burdens, whether expressed as national, corporate, mortgage debt, or even fluctuating dividends, functions very much alike—they are repartitions of surplus-value, not addition to surplus-value. But that leads to another question: Has the mass of surplus-value increased out of which these subsequent dividers, usurers, governments, etc., are paid?
NOTES: It is necessary here to resume the Marxist theory of money. Money, or gold, is a universal equivalent of goods, because it is itself a commodity that embodies labor-time and can function as the one commodity in which all others realize their immanent value. But we know that gold is replaced by paper money, and that, in turn, exists mostly for paying wages and in turn is used by the workers for retail purchases and payment of house rent. It is also used by rich people only for retail transactions, and even these are mostly billed and paid by check.
The proportion of gold to paper is usually less than 100 per cent; it ranges from about 25 per cent to 80 per cent in most countries with a sound currency. We have seen that an inflation exists only when the amount of money in circulation, however composed, exceeds the amount of currency.
Actually money transfers can reach fantastic amounts without there being an inflation, since they would not exceed the velocity of circulation times the price of commodities, for which a currency is required.
Thus the circulation of the Bank of England is some 450 million pounds, the gold back of it some 300 million pounds, the “exchange equalization fund” that sustains it either zero or 300 million pounds, depending on the fortunes of British in-and-out payments, and yet the clearing of checks, that is, the use of currency, is 42 billion pounds, or a hundred times the official circulation, and as in England there are only five great banks that do 90 per cent of the business, one must add checks within each bank so that it is probably 140 times the amount of money in circulation.
Yet that is not an inflation. If it does not exceed the turnover of commodities multiplied by their prices expressed in the value of gold, the pound will remain good money. That is, if the value of gold is 1,000 labor-hours per troy pound and, despite this amount of paper circulating it appears still to command 1,000 labor-hours of other commodities, it is good money.
It is only when 1,000 labor-hours expressed as, say, 50 pounds, buys twice the commodities it did formerly that we call it 100 pounds instead of 50 and say that the pound has been devalued, lost half its value.
The Marxian referent is always the labor-time embodied in the universal equivalent, gold, and it is only when that time commands more than it should that we speak of prices having risen, that is, it takes more commodities to buy the same amount of gold. Then the paper certificates or book credits have to be twice as high to acquire that gold. The actual currency of money has been doubled.
The Basic Marxist Theory Requires Elaboration
Now what occurred during the World War was first a continuance of the permanent tendency of money to cheapen. For if the amount of production is still gaining, if more commodities (or money) are acting as capital, then money capital is making more money, quantitatively, all the time and the currency of money required is increasing.
The total of exchange-values can be increased only by further production, by a further accumulation of capital. Each accumulation gives a capitalist the right to command an equivalent amount of commodities, and so he has more “money.”
Not only this, but although gold is more abundant (that is, produced in less time than formerly), commodities on the whole are being produced even more efficiently, so that they constantly are worth less gold, that is, they rise in price. That is why, despite all the gold mines that have been discovered in the last three centuries, prices have risen very much.
That would explain why prices have risen by, say, some 50 per cent in the last few years, but it would not explain the enormous increase in the use of money in the sphere of circulation which those prices somehow maintain. It is some explanation but not the explanation.
A second explanation is that of booms. In booms goods are sold above value and so everyone thinks he has an immense amount of profits to reinvest as capital, but so soon as capitalist production is stopped by the Chinese Wall of consumption, goods are offered below their value, and the fictitious “money” used as credit goes the way of any soap-bubble. True enough and important. But it would not explain to a Frenchman why his money has gone down by 93 per cent since 1913, whereas it blithely supported a round dozen of crises for a century. Nor would it explain to an Englishman how his debt has gone up fivefold, and prices expressed in pounds are still not fantastically above those of 1913.
How Debts Operate
During a war a government needs billions. During a reflation, such as we have seen in the United States since 1933, it needs billions. Taxes simply cannot suffice, since if this money is taken by taxes, surplus-value is abolished. But we live under capitalism, which exists to conserve this surplus-value (basically). Some diminution of surplus-value enjoyed by the producing capitalist, and even by the circulating capitalist, must occur, since they have the mass of capital and the people have merely consumption savings. But it can never interfere with the basic drive for profits, or the system is over, and we are not here concerned with Utopias.
So that if the government needs billions, for war or recovery, it cannot get them out of profits actually arising within any given year.
Instead of drawing on claims on commodities that exist it must create claims on those that do not as yet exist, it must borrow.
To borrow means that it transfers claims from present to future goods. Those capitalists who buy its bonds have an option on future labor-products. Up to a certain point actual idle bank credits, etc., can be used, that is, claims on present goods can be transferred into claims on future goods. But now comes the rub.
There is not enough for taxation to get at and there are no longer enough reserves for the government to use. It then does something much more desperate. It creates money.
That is to say, it issues, say, four billions of bonds. There is no such free money in the world. It accepts the credit of the banks who receive the bonds from the government in exchange. This is an inflation since there has been no corresponding creation of capital to cover this transaction. The value of gold is now greater than the value of the currency, and so the money of the government buys less gold, or is depreciated. The reason for this is that the time to produce the gold remains the same, whereas it required no time put into production at all to “create” that additional currency. Prices rise.
But even the banks will not lend this credit money if they do not expect that the government in the future will be able to repay them in real products, or pay the interest in real products. In the case of the defeated nations in the last war it was certain they could never do so. Their money became worthless, but still the capitalists were rich men, since they owned the capital of the country, however expressed in money terms.6
Summary of Recent Financial Changes
What happened can be summarized. The value of goods is constantly falling, since they take less time to produce. The rate of profit tends to fall over a given period, whatever its intermediate rises. The mass of profit has somewhat risen. The value of gold is falling slightly compared to the value of commodities. The amount of currency has increased with the increasing prices. The increasing prices have resulted not so much from a greater value in commodities, nor a lesser production of gold, but from an increase in the currency above the previous amount required to circulate commodities, and this increase was due to the increase of the demand for goods due to the War.
NOTE: In this phantasmagoria a cool economic head is required. The credit mechanism has obscured production relations, but there is no need to deny that it has some life of its own. We must trace this life, to explain what has happened.
Credit, said Marx, is half-swindler, half-prophet. Credit is the instrument of speculation, but there is scarcely a reformer living who does not look to it as the gateway to the Golden Age, from Upton Sinclair’s EPIC to the Social Credit group in England. This peculiar position in bourgeois thought held by credit represents both a need of the middle classes to function as capitalists, and a vaguely correct perception that credit is a mechanism for increasing the power of those who already control the means of production. The first section is “swindler,” the second “prophet.”
Now Marx in Volume II of Capital studies money-capital as distinguished from commodity capital and productive capital. (This has not been elaborated so far, as this is a textbook and not an encyclopedia.)
One part of capital continually changing, continually reproduced, exists as commodity capital converted into money; another part as money converted into productive capital; and a third as productive capital converted into commodity capital again. Capital exists simultaneously in these three phases, but every part passes successively from one phase and functional form into the other and must perform a function in all of them. These special cycles are simultancous and successive parts of the same rotation.
If constant capital is five times that of variable (or if fixed capital is five times that of circulating), then the variable must be turned over five times for the constant’s one. Otherwise the disproportion in values would be unworkable.
The turnover is not a factor in production outside of labor. It is a way of describing a certain quantity of labor in time. A capitalist accumulates, largely because he must improve technique, that is, cut down units of value, to meet competition. The labor-time base is paramount.
The rate of interest is not altogether an abstract question concerned only with a rough congruence with the rate of profit. The weight of money looking for investment, of a large rentier class, helps to depress the rate of interest by increasing the supply of money.
This class of people are outside of production, but since no one can live by reason of ownership, but only out of current production, they must lend to live. Interest is not an increment of money but a transfer of money. The development of the credit system too, by channeling all monies into available loan capital, itself increases the available supply of money and so reduces the rate of interest.
It is seen that Marx here does not concern himself with the almost meaningless generalization that the rate of interest must be above zero and below profit (a bromide of Marxist textbooks). He is aware of the great importance of studying the reasons for the exact rate, in class terms, in a given situation.
It is clear, then, that the change in the character of the middle class from that of independent capitalists hungry for loans to a dependent class anxious to lend, and the reduction of the borrowing capitalists by centralization, plus the intensification of their control by fusion with the very institutions that do the lending, are potent factors in reducing the rate of interest and increasing the capitalization of “values.”
Both taxation and inflation, then, are specific class phenomena. In taxation, an attempt is made to get around the comparative inelasticity of the means of subsistence, as values, by a reduction of wages below value. In inflation, the increase in prices outstrips that of wages, so that for a time the wages of labor are reduced below value. Where, as in Germany, the capital was wiped out, so was the money, but the capitalist, unable to place his gains in money, put them into fixed capital. In France, a large rentier class resisted taxation, and so the form of inflation was utilized. In England the taxation was enormous, resulting in the class of new poor.
That is, those rich people not directly concerned with war production, or production at all, paid high taxes and could not recover; those concerned with production paid high taxes but could recover in the wartime price structure.
Hence the gigantic British debt has resulted in no net increase in a rentier class, but has been largely borne by the weakening middle classes, by the colonies (as in the transfer of gold from India), and, by devaluation and conversion, the burden of debt service has been cut down by 60 per cent, in terms of commodities. So that the gain from 1 to 5 in debt has really been from 1 to 2 in commodity terms; serious enough, but not enough to imperil the currency as a trading unit, as in France.
Questions for Budding Economists
This treatment of credit and debt (two great characteristics of the present era, accompanied by tremendous taxation) is very superficial. It points to the road the student must follow. It cannot take up the following fascinating questions:
To what extent is increased taxation and state expense a sign of strain in class relations, that is, to what extent is the cost of government an increasing insurance premium against disturbance of the present class organization in most countries?
To what extent is it a carrying cost of monopoly capitalism, transferred onto the derivative income of the middle classes?
What class interest made taxation the refuge in some countries and inflation in others?
Is the consistent depreciation of the French franc, for example, by billions in French holdings abroad (both state and private), a maneuver peculiar to the French bourgeoisie to make their own workers lose their savings while they fortify themselves by participating in surplus-value abroad? That would be a new extension of the pooling of surplus-value, of the average rate of profit.
What is the difference between an inflation of the currency and an inflation of security “values,” as in 1923-1929? What is the class content?
Why was England’s inflation stopped by foreign receipts, and yet Germany’s difficulties unchanged by foreign borrowing? (This would illustrate the thesis that production relations are primary.)
Was the round of devaluations effective only because there was an upward industrial cycle, anyway?
If so, is inflation a permanent balance wheel for monopolies in cyclical crises?
Will quotas, etc., end the relation of external trade balances to currencies? Is the device of equalization funds to support currencies merely a masked form of trade maneuvers, as was formerly effected by ordinary purchases of bills of exchange?
Can a non-existent real currency like Germany’s be sustained by a permanent shortage of consumers’ goods, accompanied by nonreproducible armaments?
Why does capitalism resort to devaluations now and not before? Why could capitalists formerly utilize write-downs as a mode of recovery whereas this is now intolerable? Is it the nominal burden of debt owed the middle classes? Is it the inelasticity of monopoly prices that is fortified, as a weapon, by devaluation? Formerly the capitalists let everything slide but the money. Now they let the money slide but not the prices. What altered class situation, in economic terms, accounts for this?
There is a postgraduate course in Marxism in answering these questions. The money theory of Marxism remains that part of the theory where the student (as also with the theory of accumulation) can hope to add significantly, for the foundations of the system have been expounded and criticized since 1867 with very little being added.7
NOTE: A few common reflections on currency should be noted for the Marxian treatment. It is often asked, if credit causes undue expansion of industry, why should it not be spread intelligently, that is, restricted when business is good, so as to restrain overexpansion, and extended when it is bad, so as to smooth slumps?
If credit is restricted, some industries would reduce buying. Now in credit restriction, as in all restriction, this would favor the capitalist who required the least credit. It would aid him to reduce prices, to cripple his competitor denied credit. These would have to reduce wages to compete. But that is exactly how a panic starts in any case. Unless some method can be invented to reduce production more than wages (however this is done) and the old contradiction is there again. Who will consent to favor labor at the expense of capital so as to smooth cycles? The capitalists?
All schemes for credit restriction are national. To be operative they should be international. Good. Then instead of credit going into the prorated older industries, money will flow into actual investment in industries that can absorb that investment. Well, then, you will prohibit new production? That is what trusts do anyway and look at the results.
Bank policy, of course, has an auxiliary effect, but only within the determined relations of production at the time when it acts.
Certainly public works and subsidies have a temporary effect. They may be desirable for social reasons, that is, they brake the power of capitalists to reduce wages in other industries. But economically they can affect only the lag of booms and crises.
The social credit theorists say, Increase purchasing power. The costs of business are never covered by those who have the money to spend. True, but why? It must be remembered that purchasing power is always at its height before a crash.
Also the social dividend would result in a fall of wages to balance it; just as pensioners and younger daughters working for pin-money reduce wages because they can take their other income into account, so the receivers of any certificates, social-credit, Townsend, Ham-and-Eggs, and whatnot) would find wages cut down to approximate the means of subsistence funds in the hands of labor, however arrived at (that is, cut down by the amount of the certificates).
The mistake in these arguments is natural. They all argue correctly that if banks did certain things they would remedy certain effects of capitalism. So they could, if that were the completed cycle.
Unfortunately these abstract possibilities have to be realized within the mode of making profits. Hence they set up counter-tendencies within that system that nullify them. That is why, apart from the Marxian replies, the perfectly sound objections to “crank” theories by orthodox economists are not convincing. For they permit the contradictions of the profit economy, and ridicule all other contradictions. The honest radical senses this.
Perhaps the most important studies in the fiscal nature of capitalism are those of the French Marxians. They stress the importance of continuous state deficits, as a weapon for the large banks to keep the state dependent on them for short-term debts in order to ease its treasury position. This enables social legislation to be nullified by fiscal pressure.
In England, in 1931, the May Committee was used to this end: it used state deficits as an excuse to bring out a wages attack by reason of fiscal pressure on the treasury. In countries like Belgium, this relationship is undisguised.
1. Popular use, not Marxist.
2. Including myself; that is what the French delightfully term “professional deformation.” [Author.]
3. Of course, the monopoly industrialist, because he is intertwined with banking and insurance and “investment trusts,” has hedged these claims on industrial capital.
4. Crystallized cheap money.
5. They say money policy is a thermostat.
6. In England, in 1914-1918, the ability to command national, colonial, Indian, foreign, capital in the future was not very much overrated, due to gigantic reserves. In France, the larger quantity of investments in ratio to current surplus-values led to too great a reliance on loans, instead of taxes, such as had much more largely sustained Britain in the War. The loss of Russian investments of France meant that part of these expectations could never be made good. In Germany all outside claims were wiped out by defeat. But in every country the class relation of capitalist and worker was unaffected; in every country monopoly tendencies continued.
7. Except formally by Hilferding and in class terms by Lenin.