On the end of paper economy

Creato: 14 Marzo 2014 Ultima modifica: 17 Settembre 2016 Visite: 3339

from “ La crisi del capitalismo – Il crollo di Wall Street”   Ed. Ist. Onorato Damen – Jun 2009.

After the subprime crisis exploded in August 2007, the certainty that this financial storm wouldn’t have had dramatic effects on real economy was prevalent among the most pessimist economists, too.
For instance, the American economist Alen Sinai foresaw a period of semi-recession from 6 to 9 months and then a growth recovery at a rate of the 1% per year because according to him, even though the financial market crisis was very serious, the real economy fundamentals were firm-based [1].

In an article written in full financial storm burst in the last few months, the American Treasury Minister, Henry M. Paulson, though he was forced to admit that: “We find ourselves in the middle of a more serious and unpredictable crisis than the ones we have experienced until now”, he still describes the crisis as an essentially financial one. In the article continuance we can in fact read: “In September the government found itself in front of an incumbent total system crisis: after availing ourselves for months of the authority we had, we asked the Congress an all-embracing and detailed rescue plan, with the aim to stabilise our financial system and to reduce at minimum any possible damage to our economy. When this law passed on the 3th October, the global market crisis was by now so serious that we had to act very quickly and to take very effective measures in order to stabilise our financial system and to get  the credit flux started up again. Our earliest objective was to reinforce the bank system by acquiring not-liquid mortgages and securities connected to them (the ill-famed COD, editor’s note). But the seriousness and the reach of the situation has worsened so much that a simple asset purchase program wouldn’t be no more efficient. Therefore we have rapidly enacted a program of capital injection for 250 billions of dollars, starting by saying that a program of toxic asset purchase would have followed up” [2]. According to Paulson, as we can also deduce from the title of the article cited in the note, the injection of liquidity in the credit system is still the best way to face the predicted most devastating crisis never affected the capitalistic system before.
On the other hand, Paulson is a bank official (for many years he was one the most important managers of the business bank Goldman Sachs which, among the American business banks, is one of those mainly taking advantages from Paulson’s measures) and, from the bank official’s point of view, the production of money and/or its representative securities is an authentic value production, so the injection of further money on the market would compensate the debt securities as if it were the equivalent of an additional goods production and not a further advance of a value future real production that is a new debt.
Actually the pay off of a debt by another debt is considered as such only from the bank official’s point of view according to whom the capital reproduction cycle consists in the only D-D’ movement and not, as it really is, in the D-M-D’ movement, presupposing that before arriving at D’, the transformation of D into M and the coercion of the labour force used in the goods production in an surplus amount equal, in value terms, to the difference between D’ and D, had necessarily occurred. For this reason, the implicit contradiction in the fact that money is an abstracted value measure as for goods means of circulation and universal goods in which the value actually embodies, totally escapes the bank official.
“The function of money – Marx writes in the First Volume of Capital -  as the means of payment implies a contradiction without a terminus medius. In so far as the payments balance one another, money functions only ideally as money of account, as a measure of value. In so far as actual payments have to be made, money does not serve as a circulating medium, as a mere transient agent in the interchange of products, but as the individual incarnation of social labour, as the independent form of existence of exchange value, as the universal commodity”[3]. In modern Capitalism, and in particular from the end of the Second World War, it has occurred what in the time of Marx would not have been possible  – anyhow Marx foresaw it with great punctuality, as we will see shortly – and that is, at a certain phase of the capitalistic development and of the credit system, paper money , even if devoid of any intrinsic value, could function both as simple means of circulation and as “individual embodiment of value” which enables it to be used rightfully in “real payments”.
It has been a long process presupposing the birth of the public monopoly in issuing paper money, that is at first it was the State to guarantee that a certain amount of paper money in circulation corresponded to a given amount of commodity money (gold or silver) accumulated in the lock boxes of the institute authorized to issue them (Central Bank) and into which paper money could be converted at any time and, subsequently, by issuing nonconvertible bills, that they were in any case securities representative of the country real capacities to produce, in terms of value, an equivalent amount of goods and services (GNP). In this way the value ideal representation, paper money, over the years, has assumed also the function of absolute commodity and as such accepted in real payments, too.
Starting from July 1971, that is from when the USA repealed Bretton Woods Agreement and the dollar was not convertible into gold anymore, this metamorphosis, from the internal circulation system, extended to the international payment one. Since then, for the first time in the history of Capitalism, an unconvertible note (the dollar) has been used both as money of account for the international exchange compensation operations and for direct payments of imported goods and services. So it seemed that, being possible to exchange goods vs paper notes, in the same way it was possible to pay off any debt security, too. Therefore, the interested bank official thought that the ancient alchemist’s dream to change stones into gold had come true thanks to paper money and so the real driving force of the wealth production process was the production of the value ideal representation, and not the goods one, and so he cried out: Here it is the dollar, here it is gold! And inebriated of this new magic power of his, he printed so many dollars that not only it was impossible to quantify them, but it was impossible to make it correspond, in a reasonable time, an equivalent and concrete real wealth production.
The data referring to the dimensions of the exchange volumes on the commercial and financial markets give an idea, even if approximate, of the phenomenon. Face to a daily exchange volume of goods and services equal to about 1o0 billions of dollars, there is a corresponding one on the exchange and financial derivative markets equal to 5.500 billions of dollars [4]. It has been calculated that in order to reabsorb this fictitious value production, it would be necessary that the entire world should produce goods and services for 250 years. Now, you can believe in God, in the multiplication of bread and fish, in the manna from heaven and even that donkeys fly, but from the beginning of the world, paper has never fed anyone, all the more so that in order to change it into bread, you have to wait 250 years. At length then paper has returned to being only paper and the mystery of the wealth coming from nothing showed itself as it really was: a cheat.
“This contradiction (the one implicit in the twofold  function of money - editor’s note) – Marx also writes - comes to a head in those phases of industrial and commercial crises which are known as monetary crises. Such a crises occurs only where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed. Whenever there is a general and extensive disturbance
of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed from its merely ideal shape of money of account into hard cash. Profane commodities
(in our case they are unconvertible notes, denominated dollars, COD, futures, swaps and all the other products the so-called creative finance has given to us in the last thirty years as gift – editor’s note) can no longer replace it. The use-value of commodities becomes valueless, and their value vanishes in the presence of its own
independent form. On the eve of the crisis, the bourgeois, with the self-sufficiency that springs from intoxicating prosperity, declares money to be a vain imagination. Commodities alone are money. But now the cry is everywhere that money alone is a commodity! As the hart pants after fresh water, so pants his soul after money, the only wealth. In a crisis, the antithesis between commodities and their value-form, money, becomes heightened into an absolute contradiction. Hence, in such events the form under which money appears is of no importance. The money famine continues, whether payments have to be made in gold or in credit money such ad bank notes”
Since, as we have seen, for the modern bank official, money as ideal representation of value and money as universal commodity are the same thing, in order to prevent the famine of this latter in the belief that the only form of fictitious money is the one made of the debt securities deriving from paper money (bonds, shares, futures, bills of exchange, credit cards, etc.) and not also paper money itself, he is flooding the world with another mountain of unconvertible notes. According to him, it will be sufficient to give this new production of money the time necessary to reabsorb what he considers the only profane commodities, toxic securities, and everything will be the same as before. So it is not a coincidence that also the most pessimistic previsions situate at the end of 2009 the beginning of the next world economic upturn. But if you look at the concrete, it is evident that the money by which they think to remove irrecoverable toxic securities from the market is, at its turn, fictitious money, therefore the ongoing operation is just a simple clearing entry, a replacement of profane commodities with other profane commodities. In substance, they are replacing a debtor with another one, in this case the State with the great business banks. In this sense, Paulson is really right to consider himself: “…very proud of the decisive intervention of the Treasury Department, of the FEDC and of the FDIC (Federal Deposit Insurance Corporation – editor’s note) aiming at making stable our financial system” [6]. In the name of the general interest of society, in fact he succeeded in transferring the great business banks’ losses to the State, that is the smartest way to transfer them to the unaware and innocent last resort payers: the workers. Anyhow, between this operation and what would be a good recipe to get out the crisis there is the same immeasurable difference as the one between saying and doing.

A crisis coming from far away

Face to the risk that the crisis would change into an immeasurably widespread catastrophe, even those statesmen, economists, bankers, pundits and journalists, who until yesterday spent most of their time to raise their pen to the sky in order to exalt the redeeming work of the famous market invisible hand, while they praise the State taking-charge of the bank losses producing fictitious money, they don’t hesitate to request new rules to limit the production of this form of money and a new Bretton Woods to redefine the international payment system. If you consider this back in love with rule respect, you have the suspicion that, as autumn approaches, a particular flu virus was born, attacking the bourgeois’ minds, like in the past gout attacked noblemen’s limbs, causing a sort of degenerative amnesia. How to explain otherwise the fact that none of them remembers that Bretton Woods Agreement were repealed by the then-President of the USA Nixon? And that the market liberalization was imposed, from the early 1980s, by the USA and Great Britain? And that in 1999 the USA abolished the Glass Steagall Act, introduced by Delano Roosevelt in 1933 just because, in addition to separating the business bank activities from the commercial bank ones, it forbade these latter to issue debt bonds secured by the savers’ deposits, so strongly limiting the uncontrolled production of fictitious money?
In truth, if you go deeper in the analysis of the current crisis, you will realize that it is only apparently a consequence of the speculative finance excesses and of the resulting interbank credit freeze, but it is instead the consequence of the reappearance, even more enlarged and dilated in the space, of that same contradiction, immanent to the capital real accumulation process, revealing itself already from the early 1970s with a significant reduction of the industrial profit average rate above all in the USA. That is, the nowadays illness is provoked by that same insuppressible pathogen which has nourished with new life this infernal mechanism of surplus parasitic appropriation centered on the unrestrained production of fictitious money. And it has conked out not because, as the modern banker says, there is liquidity shortage, but on the contrary, since it has been produced in too great amounts in relation with the system real capacities to create a corresponding flux of real wealth.
For example, what happened to the liquidity denominated in Euros, injected by the ECB in the credit system during the period between last September and the end of October? “It ended up – E. Scalfari informs us in La Repubblica of the 9th November 2008 – in EBC’s coffers … It had been given hoping that the interbank credit, that is what banks lend each other, could restart to flow fluently. Instead banks redeposited their liquidity at the Central Bank. They make money out of the difference but, meanwhile, they cut the credits for their clients. These are the sums: on the 10th September the bank deposits at Frankfurt EBC were 48 million euros; on the 31th October they were 280 millions”. The countries having significant surpluses in their payment balances are doing the same. Even though you consider only some of them (the oil producers 946 billion of euros, China 464 billion, Germany 324 and Japan 225), you get the astronomic sum of two thousand billions of dollars, however not re-invested, why? The reason is simple. Since capitalists invest only if there is a reasonable prospect to get adequate profits and today there is no such prospect in any sector, the one who has capitals, stores them in his drawer. And if you look more closely at what happened in the last thirty years, you will have a confirmation. A new international division of labour, by means of the delocalization of the high workforce content productive processes where it was possible to exploit millions of men, women and children even more than beasts, and so with excellent prospects to get abundant profits, has followed the financial market liberalization and the introduction of micro-electronics in the productive processes and consequently a river of money has poured up on the unlucky East Indians. For instance, referring to Indonesia, which, as it is generally known, is one of the countries most washed by this river of money, John Perkins, ex - as he defines himself - “hired assassin” of economy on behalf of the most important American transnational companies and now, according to him, supergrass, writes: “At first sight the official statistical surveys showed that our work in Indonesia in the 1970s had produced remarkable economic results, at least  until 1997 (the year when the so-called Asian tigers collapsed – editor’s note). Those surveys proclaimed a low rate of inflation, currency reserves of more than twenty billions of dollars (obviously all strictly unconvertible – editor’s note), a commercial surplus of more than 900 million dollars and a solid banking sector. The East Indian economic growth  (evaluated in terms of Gross National Product or GNP) had been of almost the 9% ... until 1997. The World Bank economists, the FM, the advice companies and the academic institutions used these surveys in order to assert that the development policies promoted by us – hired assassins of economy – had proved themselves effective. But soon I realized the surveys did not consider the extremely high price the East Indian people had paid for what economists defined “economic miracle”. Its benefits were limited to the top of the social ladder. The rapid progresses of the national income had been achieved by exploiting abundant and cheap labour in factories where workers worked for many hours in prohibitive conditions and through means of policies authorizing foreign corporations to destroy the environment and to carry out activities which would have been unlawful in Northern America and in the rest of the “first world”. Though the minimum wage had rose to about three dollars a day, often it was ignored. In 2002 it was estimated that the 52% of the East Indian population lived on less than two dollars a day, a condition comparable in many respects to a modern slavery. Less than three dollars a day were enough to satisfy the workers and their families’ daily elementary needs … Maybe in no other place the link between poverty and  abuses of the American consumer corporations was more evident than in the East Indian exploiter factories (which are representative of the other countries ones) ” [7]. And at the Nike, Perkins informs us, the daily wage was about 1, 25 dollars.
If you consider all this, you get across the real reason for which the production of fictitious money, the king Midas of our time, has been successful for such a long period. If you also consider that the same thing happened in China, in India, in Latin America and in almost all the ex-Soviet bloc countries, it appears even more evident how much, for those who had the power to produce and export money or whatever fictitious capital to their liking, the possibility to gain enormous profits was great, in other words to transform successfully mere value symbols “into – as Marx says - concrete individual incarnation of social labour, as the independent form of existence of exchange value, as the universal commodity”.
The river, allured by easy gains, has swelled at the point that even though Nike workers had renounced their miserable dollar a day, the surplus extorted from them would not have been sufficient to remunerate it; then it changed direction leaving Indonesia literally without a dime. So there was a shift from the abundance of capitals to famine in confirmation that their excess or shortage is not due to their volume absolute size, but to their volume in relation with the profit mass you can gain by investing them in a certain sector or in another, in a certain corner of the world or in another.
If you want to understand the real cause of the crisis, you have to looking away from Wall Street where it exploded and turn towards that incurable contradiction internal to the capital accumulation process because of which periodically a system incapability to generate a profit rate sufficiently profitable of the invested capitals occurs.

Is a new Bretton Woods possible?

For bourgeois, admitting that this is the main cause of this last crisis means having to acknowledge not only the historicity and the transiency of the capitalistic system because its contradictions are incurable, but also that for most of the human race getting free as soon as possible from this system has become by this time an undelayable necessity.  For this reason they are led to think that the crisis is an accidental and sometimes even banal event and what until some days before appeared as the panacea for all kind of evils, now it appears as the absolute evil.
A new Bretton Woods and another New Deal are necessary, politicians, economists, union organizers and even the showgirls in the variety shows keep on asking with obsessive insistence. But is a new Bretton Woods really possible? As you would remember, Bretton Woods is the name of the American townlet where in 1944 the representatives of the main Western bloc countries met to reshape a new international payment system in substitution of the previous one, named Gold Standard, since it used gold as reference commodity money, and considered not suitable anymore to guarantee the exchange stability and the regular flux of the international exchanges. It was replaced by a system named Dollar Exchange Standard because it used no more gold as reference currency, but the dollar, whose issue was anyway guaranteed by its convertibility into gold and by the obligation for the Federal Reserve to accumulate golden reserves in the proportion of 34 dollars per ounce. The acknowledgement of the dollar as the only means of international payment was indeed the tribute of the defeated to the winner. But, paradoxically, just the USA abandoned this new system. It was in fact revealed that, in order to face the industrial profit
crisis, they were printing more dollars than they could have printed according to Bretton Woods Agreement and so they, to avoid declaring bankrupt, in the summer of 1971, repealed that agreement and decreed their currency unconvertible. Indeed, they imposed to the entire world a new international payment system, but based upon an unconvertible note that they could print at their liking. It is evaluated that at the time, in such a way, they insured a financial income equal to 550 billions of dollars per year. And, since the more you get the more you want, they printed profusely not only dollars but also any kind of debt securities denominated in dollars. From stockbrokers to bank officials, everybody could issue securities denominated in dollars feeding in this way a huge demand for goods and services coming from all around the world.
The circle closed when what happened in the early 1990s in Indonesia occurred again on world scale. In the attempt to limit the fictitious capital production, the interest rates were risen with the consequence that an increasing number of debtors was not able anymore to honour their commitments and at this point the mechanism broke down.
Let’s get back now to our opening question: is a new Bretton Woods possible? From a total abstract point of view, nothing would forbid it, but it is evident that it would imply that time should go back to before 1971. And in truth media are talking about this, while in the secret rooms there is a discussion about the possibility to give life to a system based on a new money of account, expression of the OECD country currencies and of the undeveloped ones, China and India. Given the depth and the extent of the crisis and the contrasting interests involved, we do not believe to run many risks foreseeing that we will witness an embitterment of the inter-imperialistic clash rather than a new agreement and the escalation and the expansion of the ongoing wars and of the monetary ones in particular.

From the New Deal to the ... new dream
As everybody knows, the New Deal was the plan promulgated by D. Roosevelt in the USA in the 1930s. It appealed to the deficit financing of the public expenditure in order to make civil works (motorways, aqueducts, sewage pipes, school building, hospitals, etc.) and to support the productive sectors with a strategic interest such as the iron and steel sector, the metal and mechanical, the chemical ones and the growing car sector. In the model, inspired by the economist Keynes, the deficit financing of the public expenditure, had to stimulate the home aggregate demand and to multiply the private investments so that it would promote the reabsorption both of the labour force unemployment and the means of production devaluation and in this way of the aggregate demand and of the industrial production, above all of the growing car sector and of its spin-off. In Keynes’ model, this should have activated a virtuous circle in which demand and offer fed each other, but actually this policy yielded more benefits only at the end of the war.
So it worked only in a context radically different from the today’s one. Since then everything has changed. Maybe it could work in China, a little less in Europe, but definitely not in the USA. In Keynes’ model in fact the presence of a widespread and solid industrial sector as well as the possibility to realize, by investing in this sector, adequate profits, is central. Now, both these conditions are lacking in the USA since about 40 years. The manufacturing sector literally disappeared and was progressively replaced by the financial one. In 1980 it still represented the 21% of the GNP, in 2005 only the 12% and it is not difficult to imagine that during the last three years its weight has further reduced. In this same period the sector of the services linked to the financial sphere shifted from the 15 to the 21% and if you examine in depth the analysis of the balances of the big firms that only in name are part of the manufacturing sector, you will find out that the weight of the financial activities is still heavier than what statistical surveys say.
General Motors, for instance, even though it is the second firm of the world car sector after Toyota, is actually an agglomeration in which the financial assets represent the 80% of its aggregate balance. As concerns Ford and Chrysler, things are not different.
Then you don’t need to use your imagination to realize that, for example, the 36 billions of dollars that the State is going to deposit in their cashes, rather than creating new jobs, will help to stop up the deficits in their balances caused by the financial market slump so that Chrysler has already announced that if it doesn’t go bankrupt, by the end of the year it will “set free” about 35,000 workers. In case of bankrupt, about a million workers all around the world would be “set free”. During his campaign, Barack Obama promised to create 5 millions of new jobs: “We will invest – he declared in a speech – in solar and wind power, in the next generation of bio-fuels, we will try to develop technologies in order to have clean coal and to exploit nuclear power working to make it sure. These investments will not only serve to reduce our dependence from the foreign oil, they will not only help us to save the planet but they will also transform our industries and will take us out of the economic crisis by creating five millions of  new jobs that will be well paid and cannot be outsourced.” [8]. In the meantime “Il Manifesto” of the 4th December 2008 informs us that: “ ... Almost half a million jobs are being lost every week (the 50% more than the historical averages), but many fewer ones are created. By the end of the year at least one million and half will be lost” [9]. And unfortunately the clean coal plants, the solar power ones, the new factories, etc., are not born suddenly like mushrooms in a wood, or like dollars in a printing house: in order to grow up they need many years. You just have to do a few sums and this other New Deal has disappeared even before being born.
This crisis, whatever Berlusconi says, is really global and for this reason in many ways uncontrollable. The world economy, together with the American one, has based itself on the mechanism of the debt financing through the production of further debt. The American home consumptions, as well as the Chinese exportations and also the Indian, Brazilian and partially the European ones, have grown up on debts. Theoretically the collapse could be avoided by increasing the domestic demand of these countries. But this would imply that a great wage increase and a fairer distribution of wealth took place in them, that is it would imply that there were not anymore the fundamental reasons for which most of the world manufacturing production has been there delocalized. In India – the economist Aseem Srivasta tells us: “The 77% of people can spend no more than 20 rupees a day” [10], about 50 euro cents and with 50 euro cents both in Europe and in the USA you can buy not even a sandwich. So a strong and long-lasting slackening if not the complete stoppage of the world economy is a perspective anything but remote.
But not everything will go back to being as it used to be. If in the crisis evolution the current power struggles between the bourgeoisie and the proletariat don’t change, the former will impose a world oriented according to its interests. And there will not be only wealthy people in the world, but very few wealthy and many poor people and such a world will come into existence only after a long ordeal.

1 See:  About the  subprime crisis followingi Marx –  www.istitutoonoratodamen.it

2 Henry M. Paulson – “Lasciamo ad Obama le armi contro la crisi” – La Repubblica, 19/11/2008.
3 K. Marx – “Capital” – Volume One – Chapter 3 - www.marxists.org/archive/marx/works/1867-c1/ch03.htm#S3

4 See: Philip S. Golub – “What yesterday was solved by weapons” – Le Monde Diplomatique, November 2008.
5 K. Marx-  Op. Cit.
7 J. Perkins – “The secret history of the American Empire” – pp. 49-51 – Ed. Minimum Fax – 2007.
8 From the Obama’s thank you speech when he won the presidency – La Repubblica, 19/11/2008.
9 F. Piccioni – “Tre Big Carmaker quasi fuori strada” – Il Manifesto, 04/12/2008.
10 Interview  given to Il Manifesto, 25/11/2008.