Inflation and the Financial System (1977)

The 10 billion deutschmark was worth, at the time it was printed in 1923, approximately 3p.

INFLATION and the FINANCIAL SYSTEM

This pamphlet, first 
produced in July 1977 
by West London Militant Supporters, "attempts to outline the nature of the capitalist financial system and the root causes of inflation in Marxist terms"

Inflation and the Financial System

"This study attempts to outline the nature of the capitalist financial system and the root causes of inflation in Marxist terms. The intention is to simplify our explanation as much as possible. So some of the points may be put in a one-sided manner. This pamphlet is not regarded as a substitute for 'Capital' and a more systematic study of Marxist economics but as an approach to the problems".

Inflation means real hardship for working people. Wages just haven't been keeping up with the rise in prices. In the eleven months up to the end of July 1977 prices went up by 17.7% while earnings went up by 9%. Inflation has been the instrument of the first major fall in living standards since the war. Over two years of the social contract the average worker has lost £10 in the purchasing power of his wages. Wage restraint, a real sacrifice by the labour movement, can be seen to have done nothing to hold down the upward spiral of prices.

Of the extra amount of money wages workers do get to chase after prices, a higher and higher proportion is clawed back as tax. So a 20% wage rise will not compensate for a 20% price increase because 40p in the pound of the extra goes on income tax and national insurance. Much higher wage rises must be fought for to keep up with the cost of living, and to re-coup the losses of the last two years.

Every year Denis Healey, to console us for this state of affairs, wheels out economic forecasts to tell us "we are turning a corner" and "inflation will be down to single figures in a little while”. The forecasts have been consistently wrong. Professional economists are at sixes and sevens on the issue and the solutions they offer would invariably make things worse for ordinary people.

This is not just because all capitalist economists are nincompoops, though there is a case to be made out for this. Their solutions may be rubbish, but they are rubbish at the service of the rich and powerful in this country. The same 'experts' also tell you that social service spending cuts are necessary for the country and that unemployment is an unavoidable evil that is here to stay. In other words, their job is to tell the working class to pull their belts in, to bear the entire burden of the crisis.

To fight against cuts in living standards we need to be able to show why their arguments are wrong. We need to understand economics.

Marxism puts economic arguments at the disposal of the labour movement. Although the subject matter may be unfamiliar, Marxist economics shows society as it really is and does not try to pull the wool over people's eyes with incomprehensible jargon about the balance of payments deficit and the public sector borrowing requirement.

IS "ONE MAN'S WAGE INCREASE ANOTHER MAN'S PRICE INCREASE"?

The government and the press try to tell you that it is wage rises that cause inflation. They argue that wages are a cost of production, and just as companies using oil as raw material or fuel had to pass the price rises on to the consumer or go out of business, so wage rises are passed on to the consumer, which is you again, so you're no better off. This argument seems plausible to working people, who no sooner get a wage increase than its real benefit is swallowed up in rising prices. Over the past few years trade unionists have been feeling like hamsters on a tread-wheel-running fast and getting nowhere.

But what prices have been going up the fastest? How do the advocates of the theory of wage inflation explain that land prices jump every time it is transferred from hand to hand? There's no wage-cost involved yet land is one of the fastest-rising commodities on the market. Likewise food prices have soared above the general rise in the cost of living. But agricultural crops are produced by one of the lowest-paid sections of the British working class or by the destitute starvelings of the underdeveloped countries. When coffee prices jump twenty times over in a-year, that's not because in Brazil the men who actually harvest coffee are all driving round in Cadillacs. The middlemen get all the benefits.

The highest rate of inflation in the world is in Chile, a country where trade unions are suffocated, so wages rises are certainly not responsible.

Wage restraint has at least driven the lesson home to the mass of the working class, that wage rises have nothing to do with inflation. If they did, how could real living standards be falling? How could prices go up faster than wages? Trade unionists have not just learnt the lesson, they are beginning to act accordingly.

HOW PRICES ARE FORMED:

If we want to know the real cause of inflation, we have to know how prices are formed in the first place. If you look at school economic textbooks, they will ten you that prices of goods are determined by supply and demand. There's an element of truth in that remark. The government doesn't put a compulsory price on every pea pod or tomato, they leave the price at which these items should be sold to the bargaining position of the stallholder and his customers. A supermarket in the centre of town faced with competition from half a dozen other big stores has to keep at least some of its prices down to attract people inside. The friendly little shop on the corner which stays open late can charge more - you either buy at their price or do without.

But however much the price of a tin of beans may vary from shop to shop, it consistently costs less than a combine harvester or a palace. Why? It costs much more to produce combine harvesters and palaces than it does tins of beans. It's impossible for combine harvesters and palaces to cost less than tins of beans. Prices may vary according to the laws of supply and demand but the variations fluctuate around an axis, determined by the cost of production.

But this is only taking us from pillar to post. What after all is the cost of producing a house? The cost of mortar, cement, bricks, nails, wood, glass, and bricklayers, carpenters and slaters. But what determines the cost of all these items?

The cost of bricks, to take one item, is in turn reducible to the cost of the raw materials, depreciation on the brickworks, and the wages of the brickworks workers. The raw materials and machinery and buildings in the brickworks in their turn were produced entirely by human labour. All costs can be boiled down to labour time. All machinery and raw materials have been produced by the toil of the working class. Labour time is the only common substance from which the real price of different commodities can be compared.

So when we say that prices are on average determined by the production costs that means the labour time required to produce goods. The next problem is where does profit come from? After all capitalists are in business for one reason only, to make a few bob out of their fellow men. It would be a mug's game from their point of view to buy cotton cloth, sewing machines, heat and light, and wages at their cost of production, mix them all up together to produce shirts and pyjamas and sell them again at their cost of production.

It's no answer to say that if the prices of raw materials, wages and all the rest come to £5 then the capitalist just adds on 50p or so to give himself a 10% rate of profit. If he starts doing that, then all his fellow capitalists will follow suit. Cotton cloth, instead of coming to £2 will now be £2.20 and so on. He'll be no better off than before. It would be the same as if each capitalist stole £1 from every other capitalist - they'd all gain £1 and lose £1.

Of course the capitalists are continually trying to swindle each other and the working class at every opportunity but this cannot explain the continual production of new wealth, the lion's share of which is pocketed by the boss class.

WAGE, PRICES, AND PROFITS:

The source of profits, the wealth of the capitalist class, must be sought in the production process. We all talk about the 'labour' market as if the worker is paid the full value of the work he has put in which makes the final goods worth more.

For profit to exist the worker cannot be paid for the full value of his labour. The value of his labour is split two ways. If he works an eight hour day he may be working four hours which goes to his wages and four hours which goes to the profits of the capitalist. The same can be said of each minute he works and of each piece of work he finishes. The commodity is sold and the capitalist uses part of the proceeds to pay for raw materials and plant depreciation at their value, and splits the rest, which represents the new value added by the worker in the process of production, between wages and profits.

What the worker is really being paid for is not his labour but his keep, his labour-power, as Marx calls it. This doesn't necessarily mean just enough to keep body and soul together on beans, though the boss will try that on if he can get away with it. But the worker always runs out of money by the end of the week and has to go back cap in hand to the boss for the privilege of keeping him in idleness for another week. The capitalists can get away with this because between them they monopolise the means of production - the means of life. The working class are outsiders in a world they have created, surrounded by signs saying "Private Property. Cross our palms with money or keep out".

Since the workers are not paid for their labour - wages are not the value of labour - it follows that rising real wages cannot cause a rise in prices. If the workers get more the boss will have to make do with less - and that's what all the moaning and groaning about "wage inflation" is really about. A general rise in wages will cause a general fall in profits, not a general rise in prices.

Why can't your boss pass the wage rise on? He will be forced to keep his prices down by competition unless he wants to end up in bankruptcy court. The argument might then be advanced, "you Marxists are always going on about monopolies. This may have been true in the days of free competition, but they're long gone. Surely nowadays the monopolies have the power to pass on any increase to the consumer.”

It's absolutely true that Marx was the first to point out that monopoly would inevitably arise out of free competition itself. But even a complete monopoly within a national market, like ICI with a wide range of chemical products, is still faced with competition on the international arena - Dupont for one. Of course every capitalist is on the make, and monopolies have more opportunity than the others, but there are limits to their power to mark up prices. If ICI was making 30% profit because of monopoly price fixing while Dupont was contenting itself with 10%, the Dupont directors would soon cotton on and start to flood Britain with their products at cheaper prices than ICI was selling at. ICI in turn would be forced to trim their margins or price themselves off the market, and the ensuing price war would reduce prices to their true value.

Even if Dupont and ICI decided between themselves to carve up the world market and respect each other's super profits, the other capitalists in Britain would look with envy and resentment at ICI's regular 30% profits, while they had to make do with the average 4%. Eventually they would be forced by the pressure of their shareholders to shift from producing garden hoses, mustard or bricks and move into the lucrative chemical industry. Once again the result would be a trade war and a reduction of chemical profits to the average.

If monopolies were really impervious to assaults on their profits through higher wages, then they wouldn't bother to resist wage claims involving strikes which cause costly production stoppages. If they were in a completely secure position, which of course individual monopolies can attain for a period of time, why hang about waiting for a wage rise before jacking up prices? Their attitude would then be "It’s a fine day. Time to put up prices". In that case it wouldn't be the wage rise but the monopoly which really caused inflation.

It could be argued that if the workers have more money in their pockets after a wage rise, then shopkeepers will see them coming and put up prices. That might happen for a limited period of time. But what about the capitalists? They are going to be out of pocket. Though the shopkeepers will be able to force the workers to bid the prices of the goods they want up, reduced demand for the goods the capitalists want will force the shopkeepers to drop their prices on these items.

Thus the publicans will be selling more mild and bitter and less brandy and champagne, and the tobacconists more 'Weights' and 'Old Holborn' and less big cigars. Capitalists' profits will be higher on workers' consumption goods and lower on items of capitalist luxury spending. The capitalists will then switch production away from the things the rich buy towards the things workers want, chasing a higher profit. The overall effect of a rise in wages will, be the production of more things the workers need in proportion to their higher purchasing power and not a long term rise in the price of these items.

There is no necessary connection between the level of wages and prices as the “wage inflation" theorists should expect. Wages are at least 50% higher in Germany than in Britain, but German capitalists can consistently undercut British made goods on the world market, because the productivity of labour is so much higher. Similarly the cost of pocket calculators has dropped dramatically over the last ten years even though the workers making them are getting higher money wages. The reason is that the development of assembly line techniques and scientific advance in the manufacture of components has enabled the work force to produce a calculator in much less labour time.

It can be argued that high wages lead to lower prices because they force the capitalists to introduce new techniques. The USA consistently had a higher level of wages than Britain even before the revolution of 1776. The reason for this was that whereas in the industrial revolution in Britain there was always a reserve army of unemployed desperate for jobs, whom the bosses used as a whip against higher wages and trade unions, in the USA there was a perpetual shortage of labour. Most workers in the USA worked for the eastern seaboard capitalists for just long enough to get provisions to go West and escape wage slavery. Thus from an early stage the American capitalists were forced to bring in new techniques to economise on labour by raising the productivity of the workers who were available to them. This was an important factor, in developing American capitalism to the stage where their cheap goods could bombard British capitalism out of one stronghold after another.

Of course everyone can think of cases where low prices are accompanied by low wages - the textile manufacturing of South-East Asia is one. The basic point is that the main factor affecting the level of prices within capitalism as a whole is the level of productivity and not the level of wages, because productivity determines the amount of labour time required to produce the goods. 

Cartoon drawn for 'Militant' by Alan Hardman

INFLATION: THE REAL CAUSES

So what is the real cause of rising prices? It would be stupid to try to set out one single reason to explain why every single price ever goes up in every country and historical epoch. A multitude of factors can be responsible.

Two factors which have been very important in the acceleration of inflation in Britain over the last few years are the oil price rises and the fall in the value of the pound sterling against other national currencies.

Oil prices quadrupled after 1973. Oil is the most important fuel used for the generation of electricity as well as in transport and is an important raw material in industry. The price of oil therefore enters into the price of virtually everything else and the rises added an extra twist to the screw of the inflationary garrotte.

Likewise the devaluation of the pound from $2.80 at the present time to about $1.70 at the present time has meant that whereas British capitalists had to pay £1.70 for imported goods from the USA worth $4.76, they now have to pay £2.80. When imported goods become so much more expensive the increase feeds through to almost everything.

Devaluation hits the working class hard since this country traditionally exported manufactured goods and imported raw materials and fuel. After the 1967 devaluation for instance the price of imported materials rose 11½% in a year, whereas for years before they had been going up at a steady rate of only 1.3%.

Nevertheless inflation is a worldwide problem. It was going on before the oil crisis struck the capitalist world. Likewise inflation is also happening in countries like Germany where the Deutschmark is going up against other currencies and therefore imports are becoming relatively cheaper.

WHAT IS MONEY?

What is the most important cause of inflation? To answer that question we have to understand the money system.

Commodities are not just swopped in a capitalist economy - they are exchanged for money. Money allows a worldwide division of labour and a world market to be established. Likewise though we value commodities according to the labour time involved in their production, we don't go in a shop for a packet of fags and get the answer "fifty labour minutes please". They say "fifty pence please". In other words commodities are valued against the labour time represented by a certain quantity of money.

What gives money, inherently worthless pieces of paper and discs of cheap metal, its purchasing power? The state decrees that a piece of paper with a certain pattern on it shall be worth £1. Unfortunately they don't tell us how much a £1 note will buy, and it doesn't buy nearly as much beer, fags and other essentials of life as it did ten years ago.

Money is essentially a chit entitling you to a certain share in the wealth of society. If ten chits are issued entitling each holder to an equal slice of a cake then, even if each chit says "½ a cake", you'll only get a tenth share. In other words the value of money is determined by the amount of it (the number of chits) and the wealth of society (the size of the cake).

How does inflation occur? To oversimplify the real process considerably, imagine you decide to throw a party. You are sick and tired of asking people to bring a bottle and getting half the guests slinking in with a half-pint can of light ale and drinking all your Guinness. You decide to charge everyone a straight whip and buy the booze yourself. You issue them with tickets. The local LPYS decides to gatecrash and uses their duplicator to supply themselves with tickets. They descend on your booze like a plague of locusts. You would have it brought home in the most forcible and unpleasant fashion that your "money" won't go so far because there is more money knocking around but no more resources to match it.

Inflation is the robbery of a portion of the wealth of society by debasing the currency. In that respect it is like forging rather than highway robbery, which is an open and forcible transfer of resources.

So inflation is not mainly a matter of rising costs, of the value of commodities going up against a constant purchasing power of money, but rather of the value of money declining so that each £1 can buy less goods.

How does this process work out in modern capitalist society? What forces are working to produce money to direct resources towards themselves?

MARX ON MONEY

Money in this country was originally the precious metals - the gold sovereign, the silver shilling and the copper penny. Gold is a commodity like any other so far as the capitalists who go in for its production are concerned. They are in business for one reason only - to make money. If gold production doesn't offer at least the average rate of profit, then they'll start producing watering cans or suspender belts or whatever does. The value of gold is therefore determined over the long term in exactly the same way as any other commodity, by the labour time required to produce it, through the ebbs and flows of capital as capitalists switch their money from one sector to another in search of the fast buck.

Commodities are valued against money. When money was gold coin one bottle of whisky was worth £4 because it took the same amount of labour time to produce either. Gold was a universal equivalent, it was generally wanted and could be taken anywhere.

The practice of the local king dividing gold into coin changed nothing in this. The king's seal was merely a certificate of a certain weight. In Stevenson's book Treasure Island, Billy Bones expires of a stroke after being given the "black spot" by Blind Pew. Jim's mum breaks open Billy Bones' old sea chest to work out his reckoning at her guesthouse. This is the chest where the treasure map is to be found. She finds doubloons, pieces of eight and all kinds of exotic piratical gold coinage. She works out their value by comparing their weight to that of a sovereign. She can do this because gold is an objective measure of value, determined by the labour time embodied in its production. Thus if a doubloon weighs twice as much as a sovereign it will be worth twice as much.

At any given time a certain quantity of money will be required to circulate the commodities which have been produced. The capitalists responsible for the production of gold will be no more able to flood the market with gold than the watering can producers would glut the market with watering cans. At the first sign of overproduction the different capitalists mining gold would be forced by competition among themselves to reduce their prices, so depressing profits. Capital would then flow to a more lucrative area of employment.

It has been said that nobody pays the next man the sovereign itself. It is always a little lighter because of wear in the pocket. It was estimated in 1819 that £19 million of the £380 million coin circulating in Europe had completely disappeared through abrasion. So long as gold coin functions entirely as means of circulation and is perpetually passing from hand to hand there is no reason why a worn coin should not be accepted as worth a full sovereign.

This process allows the state to replace the gold coinage in circulation (let us say £14 million at one time) entirely with paper notes for £14 million. There is no reason why this should be necessarily inflationary.

The quantity theory of money advocated by Milton Friedman and other right wing economists, like Enoch Powell states that money is a symbol of value, whether it be gold or paper. Its value is supposed to be determined simply by the quantity in circulation compared with the total amount of production. From this premise they draw the conclusion that inflation is caused by the government printing money to pay for "excessive" spending. The government should therefore slash public spending and return to the good old days of nineteenth century laissez faire if they want to end inflation. Since Marxists have been accused of being "monetarists" we need to show the profound differences between Marx's views and those of the quantity theorists.

For Marx paper money is a token of gold. "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 solely on the price of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity". (Critique of Political Economy). He goes on to show how, if the state replaces £14 million in gold coin by not £14 million pound notes but by £210 millions, then there will be inflation, each £1 will represent only one fifteenth of the former amount of gold.

Unlike the monetarists who seek the cause of inflation in increased government spending because of the malignant growth of socialism, Marxism shows how inflation results from the crisis in the production process itself.

Nevertheless, since we have a paper currency which is not convertible into gold, inflation is caused by the printing of paper money in excess of the actual requirements of circulation. What we need to know is why this should happen.

CREDIT

So far we have analysed money as a means of circulation. In other words a commodity changes hands from A to B while B shells out money to A at the same time. Any worker who has ever tried to get groceries on the slate, signed an H.P. agreement or got a mortgage knows that full payment does not always take place at the same time as delivery of the goods. Money can serve as a means of payment as well as a means of circulation.

How does credit develop in the capitalist system and what purpose does it fulfil? To answer that question, imagine a capitalist society functioning without credit. The isolated capitalist may take three weeks production time and a further nine weeks to get rid of his commodity and get the money back. Until he gets the money back he can't restart production. If it costs him £10,000 in circulating capital - (money laid out on wages and raw materials) to produce each commodity then he'll need to keep in hand not £10,000 but £40,000 in money capital to maintain production on a permanent basis. He'll have to lay out £10,000 at the beginning of the first week, another £10,000 at the beginning of the fourth week, another £10,000 at the beginning of the seventh week and yet another £10,000 at the beginning of the tenth week. It won't be until the beginning of the thirteenth week that he'll get back his first grubstake of £10,000 back (hopefully with a nice little profit on top.) even if it sells all right. So he'll have to keep in hand four times as much money as he actually needs to start up production at any one time. Either he'll only keep production going a quarter of the time, which is practically impossible, what with hiring workers every three weeks and then laying them off for nine weeks and also involves heavy outlays on expensive plant and buildings which will be lying idle three quarters of the time. Or he'll only keep production going at a quarter of the capacity he'd like to, shelling out £2,500 every three weeks instead of £10,000 to, keep production going permanently. Either way enormous reserves of money-capital which could be used to expand production will be lying idle.

The situation is even worse than that. Let's say the same capitalist has invested £1 million in plant which will last for ten years. Each year he'll have to put £100,000 depreciation by to get a new machine of the same type after ten years. Here again huge reserves of money capital are unused.

This situation can only be overcome by the development of the credit system. First a stratum of commercial capitalists will emerge who undertake to give the manufacturing capitalist the price of his goods at once so he can restart production immediately without his money capital lying idle. Of course they only do this in return for a slice of the action for themselves. You invariably find in practice that credit enters into the operation. Either the commercial capitalist will pay the manufacturer off with a bill of exchange payable in nine weeks time instead of with cash, in which case the manufacturing capitalist can cash the bill in at the bank - for a discount. Alternatively the commercial capitalist will pay in cash which he in turn has got from borrowing the money. Either the next commercial capitalist along the line who takes charge of the goods will issue him a bill of exchange or he in turn will borrow the money. After all there will usually be a whole chain of commercial capitalists - wholesalers, retailers, and so on - and none of them want their money tied up in unsold stocks any more than the manufacturer himself. In any case credit is granted, goods are exchanged with the money to follow later, and the creditor takes a slice of interest.

What is true for each individual capitalist is true for the system as a whole. Each capitalist has large sums of idle money-capital at hand at one time, and at another time is crying out for cash. This is where the banks - the middle-men and book keepers of modern capitalist society - come in. If the capitalist had sums of money lying idle, they offer him interest if he is prepared to deposit it with them. His only alternative is to let it lie fallow till he needs it. If another capitalist needs more money to keep production going, they can lend him the first capitalist's money at a higher rate of interest payable back to the bank. It will be worth it for a capitalist making a 10% profit to expand production beyond the limits his own money-capital will allow him even if he has to pay 5% to the bank as interest.

Gradually the banks dispose of the entire money wealth of society. In addition to the funds of the capitalists they draw in the savings of some workers and particularly of the middle class and put them at the disposal of capitalism - for a small consideration of course.

Thus from hard money of metal of real value modern capitalism moves first to token money issued by the government and then to money of account. What is money in a modern capitalist society? It's not just a matter of pound notes and coins. If one capitalist is buying a new factory off another he would need a wheelbarrow if not a fork lift truck to pay in the currency. Instead he just writes a cheque from his deposit within the bank.

The banks have a network for exchanging cheques drawn on one bank's customer for another's. So NatWest may end up owing Midland £10 million at the end of the day while Midland also owes NatWest £10 million. All they have to do is to enter the payments in their customers' accounts. If Midland ends up owing NatWest £10.1 million instead of £10 million then they just settle the difference between themselves.

Cash payment is restricted increasingly to the retail trade and payment of wages and even here payment direct into bank accounts and the use of credit cards and cheques to pay for consumer goods is catching on.

Thus banks increasingly become the book keepers of modern capitalist society and payments are not transacted with real money, even paper money, but just by adjustment of accounts.

THE EXPANSION OF CREDIT

So far we have assumed that the banks, the main lenders of money, have only lent money which actually exists in their vaults in the form of deposits so the total overdrafts are never greater than total deposits.

Actually this is not the case. Banks found at a very early stage in their development that much of the money deposited with them lay untouched from one year's end to another. As the main holders of money in society people had full confidence that if they allowed a customer an overdraft the money actually existed in the bank to back it up. As the main holders of money they were sorely tempted to base themselves on this confidence to lend out more money than actually existed in their vaults. After all, if they lent out to a capitalist who was going to make a profit the money represented by the overdraft would soon find its way back into the bank and no-one would be the wiser. In that sense credit could extend production beyond the limits imposed upon individual capitalists with a limited supply of money capital.

The capitalist for his part was very happy to borrow money at 5% if he could then expand production to meet new orders and make a profit of 10%. So interest -bearing capital developed, snatching a portion of the surplus exploited from the working class from manufacturing capital. Usually this interest-bearing capital was channelled through the banks.

Two processes are going on here. In the first place money lying idle may be lent out to the industrial capitalists either directly or through the banks in return for a share of the surplus. Secondly the banks may create money in order to lend to capitalists in the expectation that the resources to back the extra money conjured out of nowhere will be generated in the process of production.

Nor is this second process necessarily inflationary. The capitalist accepts a loan of £1 million pounds which he then spends on wages, raw materials and machinery. There is therefore an increased demand for these things within the economy. Other capitalists are also getting overdrafts from their banks. They too want more raw materials and machinery and they give their workers more money to buy wage goods.

One capitalist applies himself to producing raw materials, another to producing machinery and a third to producing wage goods. The capitalists between them produce all the goods which they have created an extra demand for, by expanding production, and swap them amongst each other according to use. Of course they also have a little extra profit on the side to spend on themselves. They are also in a position to repay the banks for their overdrafts, plus a little bit left over to boost bank profits.

Nevertheless the initial effect of putting more money in capitalists' hands to buy machine tools and raw materials etc. will give the sellers of these items the opportunity to raise prices. But the inflationary effect of credit can be seen more clearly with consumer credit. There has been a dramatic increase in consumer credit to every class of the population over the past few years: the biggest expansion of credit to a consumer has been to the state through the national debt. If the consumers have more money to spend (and remember the money may not physically exist as pound notes - all the payments may be made by cheque) then more money is being injected into the economy and inflation will result.

WHAT IS FICTITIOUS CAPITAL?

We have already seen that money in a modern capitalist economy is not just pound notes and coins. When we say that inflation is mainly a matter of more money coming into existence, that is not a simple question of the government minting more of the currency. In fact the expansion of the total value of the currency is usually a response to the fact that prices are higher and therefore more money will be needed for circulation. The government plays an important part in stimulating inflation, as we shall see, but the point is that the government is not in complete control of the rate of inflation.

Under modern capitalism not just token paper money and cheque money (money of account) serve to circulate commodities but also what Marx called fictitious capital. To understand this term it's handy to know what real capital is. A factory is a commodity,whose value is determined by the labour time involved in its production, just like any other commodity. In that respect capitalists producing factories are no different from any other capitalists - they're out for money and through the process of competition the value of their commodity will be beaten down to the labour time required to produce it. If we say a factory is worth £1 million or 10 million ice lollies are worth £1 million that means they both cost an equal amount of time to produce.

A factory functions as capital whereas ice lollies usually do not because a factory is bought by the capitalist so he can exploit his workforce more effectively. Ice lollies play no role in the production process, but are usually bought by the children of workers for their own consumption. The factory can be used to generate a surplus for its owner.

Fictitious capital also entitles its owner to a share in production, but unlike a factory has no inherent value. It only exists on paper. As capitalism declines, the capitalists increasingly withdraw from direct involvement in the productive process but keep their oar in through their ownership of wealth: their wealth consists more and more of pieces of interest-bearing paper or property claims. These pieces of paper are not real capital however since their 'value' (the price they'll exchange for) has no counterpart in assets actually in existence. Insofar as such pieces of paper pass from hand to hand, accepted because they entitle the bearer to a steady revenue, and increase the money supply in excess of the increase in production they too contribute to the inflationary process. In Capital vol 3 Marx says of fictitious capital (p457):

'Such papers however, if in government bonds, are capital only for the buyer, for whom they represent the purchase price, the capital he invested in them. In themselves they are not capital, but merely debt claims. If mortgages, they are mere titles on future ground rent. And if they are shares of stock, they are mere titles of ownership, which entitle the holder to a share in future surplus-value. All of these are not real capital. They do not form constituent parts of capital, nor are they values in themselves.'

The main forms of fictitious capital are land prices, company shares and government stocks, all of which entitle their owner to a steady revenue even though they represent no real wealth. They can serve as money or as securities to expand credit and thus effectively increase the amount of money knocking about in society.

THE SOURCES OF INFLATION: THE STATE AND THE PRIVATE SECTOR

The state has been running a public sector borrowing requirement of something like £10,000 million. This means that it has been spending £10,000 million more than it has been getting from taxation and other receipts. How is this done? You can't consistently earn £50 a week and spend £60 without going into debt and that’s exactly what the state does. The total national debt is now fast approaching £50,000 million. The government issues treasury bills and what, are called gilt edged securities to those who are prepared to lend. As usual in this wicked world loans are only made for interest and so the government spirals deeper and deeper into debt.

So a whole caste of coupon clippers springs up entirely dependent on the interest they get from government paper. Every time a sum of £10,000 million or so falls due for repayment the government usually just renews the debt by issuing more interest-bearing paper and often increases the debt by issuing extra paper either to pay off the interest on the last lot or to increase its own level of spending. Clearly the national debt will never be paid off under capitalism and under socialism we will leave its repayment to those who are responsible for it, as Marx put it.

The national debt was originally funded in its present form in 1688 by William III. Actually it existed before that. The periodic expulsions of Jews from this country by medieval English kings' such as Edward III was connected with welching on the national debt. But this century the level of debt has spiralled out of control- £7, 700 million in 1938, £27,730 million in 1960 and £33,400 in 1971.

The reason for this is the decline of capitalism. The state is increasingly forced to intervene to prop up the decaying system. In the first instance, it provides every kind of handout to the bosses particularly in the most depressed areas, now amounting to some £4,000 million each year. British capitalism has been confronted with a catastrophic fall in the rate of profit, and the handouts effectively help to keep the system afloat. In addition to obvious government handouts there is the enormous spending on general services like roads which are an essential underpinning for private profit-making firms. Then there is the artificial depressing of nationalised industry prices as a service to 'industry' while the public (the working class) pay for the losses the public sector makes as a result.

In addition to raising profits through handouts to the 'corporation bums' the state through its spending provides a tied market for British firms feeling the chill winds of competition from the world market. Companies that win tenders for government contracts can charge pretty well what they like. The Ferranti scandal and the more recent Hoffman La Roche drug superprofit revelations (where the drugs were mainly provided for the National Health Service) give an idea of the extortion that goes on below the surface.

One of the most important developments since the second world war in fuelling the inflationary process, has been the astronomical increase in spending on armaments, a spending forced on capitalist governments by the pressures of the cold war and the need to intervene where possible against the revolt of the colonial peoples against imperialism, as well as to keep the working class down at home. Arms spending has bloated state spending still further, while at the same time offering a section of the capitalist class safe markets for profiteering. It is not accidental that these capitalist countries with the highest relative arms bills, such as Britain and the U.S.A., have also had the highest government budget deficits and higher rates of inflation than countries like Germany and Japan which were formerly forbidden by treaty to spend more than a small proportion of their Gross National Product on weaponry.

Like other forms of state spending, arms are not paid for entirely out of taxation, but partly by expanding the government's borrowing requirement, thus increasing inflation. In addition the overseas military spending of the USA has been a major factor in the dollar becoming overvalued against gold in the post-war period which, as we shall see, was a prime cause of world inflation.

But, even this has not been enough. Not content with using government money to prop up the system the capitalist state has striven might and main to pass the entire burden of taxation from company profits to the working class.

In 1960 the average worker paid only 8% of his earnings in tax and national insurance; by 1971 deductions were 20%. Now it's even worse. The reason for this is that taxation allowances have not been raised to keep pace with inflation. A worker has higher money wages than in 1960, even though his living standards may not have risen at all. His allowances cover a smaller proportion of his earnings so he pays much more tax. With the capitalists, an opposite process has been taking place. One of Denis Healey's first acts as Chancellor of the Exchequer in March 1975 was to give them so many more allowances - loopholes to avoid paying Corporation tax - that it has virtually been abolished. Even before that the incidence of taxation was continually shifting away from big business profits towards wages. In 1949-52 36.5% of tax came from profits, 9.8% from earnings. By 1965-68 only 19% came from profits but 15.5% from earnings.

The capitalist apologists try to say that government spending is used to featherbed the welfare state at the expense of profits. On the contrary, the increase in government spending is used to prop up the system, increasingly at the expense of the working class. Every worker knows that the benefits he does get from the state he has paid for. The state, insofar as it provides facilities for the workers, acts like the Foresters or some other saving club. The working class gets nothing for nothing out of it.

Another evil effect of the national debt is the rocketing interest charges which it entails. Peter Jay pointed out in the Times in February 1976 that particularly with the prevailing high interest rates, interest repayments alone could soon be £7,500 million or between 25-50% more than education or health spending. He went on to say - 'One wonders how ministers will feel when they realise that all their labours ( in cutting public spending) have merely led to a gigantic redistribution of priorities in favour of the rentier owners of gilt-edged securities.' So much for the argument that 'we' are spending more than 'we' can afford.

How is the national debt inflationary? If the government was unable to borrow it would have to drastically cut spending or increase taxation - necessarily starting to hit big business. Instead it chooses the easy way out. The net result is that consuming power is increased without any increase in production. It is exactly the same as if they just printed the money. Inflation is the inevitable result.

FINANCE CAPITAL AND INDUSTRIAL CAPITAL

Any bank makes money by borrowing money cheaper than it lends it back again. In addition they lend much more than they borrow. In this sense they inject more money into the system. How? Under what conditions?

The natural inclination of any banker would be to lend as much money as possible to get the maximum interest irrespective of whether there is any backing for the loan. Governments have had to intervene to prevent them offering unlimited credit. The inevitable result of this would be financial chaos as some of the capitalist borrowers would overextend themselves and go bankrupt. The depositors, suspecting something was up, would ask for their money back, and it wouldn't be there. The result would be a run on the banks. The government has fixed a proportion of assets to loans which ensures stability in normal times. There will be enough to meet daily withdrawals and dealings. The ratio of cash to overdrafts is 8% but the banks also have to cover 28% of their loans with other assets. This is called the liquidity ratio.

Now to the question, who buys government bonds? For the most part they find their way into the hands of the banks. Nor is this just so the banks can garner interest off the government. Since the 'liquidity ratio' is 28%, and since government securities count as a backing asset, for every £100 of gilt edged the banks buy they can issue about £350 in overdrafts and make money out of them as well.

When we say the banks 'print' money, the money doesn't have to physically exist as pound notes -they just allow more overdrafts. But this has exactly the same effect - the consumers have more purchasing power without any equivalent increase in production.

The development of credit has been one of the most marked features of capitalism since the war. In the USA for instance, the heartland of world capitalism, consumer credit went up from 73.5% of the G.N.P. to 140% in 1969. Credit to U.S big business also expanded enormously. The liquidity ratio of corporations (this is cash in hand divided by current liabilities, so a high figure indicates financial solvency while a low one shows heavy indebtedness.) fell from 88% in 1947 to 21% in 1970.

In exactly the same way as the state becomes increasingly intertwined with private capitalism, so the development of credit reflects the merger of finance capital with manufacturing capital. It is a reflection of the decline of the system, of the increasingly parasitic nature of the capitalist class. The increasing domination of finance capital is shown by the fact that in the U.S. between 1946 and 1969 debt repayments rose from 6% to 21% of the national income.

Credit to the capitalist class allows them to expand production, retool and raise the productivity of labour. At the same time an increasing proportion of the wealth of society is creamed off by what even the manufacturing capitalists would regard as a stratum of parasites. Their entitlement to the good things of life comes from their ownership of claims to interest.

Inflation is not a process that hits all sections of the population evenly. If some people are getting less, then others must be getting more of the wealth of society. The beneficiaries of inflation are those who push out more money into the economy in order to grab a share of social production. Inflation is generated by the state taking a portion of the surplus produced by the workers away from private capital; by finance capital grabbing more from manufacturing capital; and as we shall see later, by an increasingly parasitic U.S. imperialism robbing its more virile competitors - such as Japan and West Germany through its possession of the dollar, the main unit of world money.

The main victims of inflation are manufacturing capitalists, when the real value of their profits are eroded, and of course the working class.

Inflation is a sickness which reflects the decline of capitalism and its ripeness for revolutionary overthrow.

RENT, INTEREST AND PROFIT

We have already seen how the surplus pocketed by the capitalist class is nothing else but the unpaid labour of the working class. It would be entirely wrong to envisage that the manufacturing capitalist alone takes the entire surplus. Where else does the entire class of parasites - landlords and moneylenders as well as industrialists - get their ill-gotten gains from, if not off the backs of the workers? They may never have to get their hands dirty directly exploiting the workforce and bossing them around, but they live without contributing anything to the wealth of society and they live very well at our expense.

No doubt they wax indignant when they are accused of doing no work. They may worry themselves to death in their carpeted offices for all we care. Their work does not assist in creating more wealth for society but solely in distributing the existing wealth - in the general direction of their dear, sweet selves. The 'work' of robbing banks is a good deal more energetic and of precisely the same nature. Let's say you woke up in the morning to find someone had bought the road outside overnight and erected a toll gate which was patrolled by guard dogs and could only be passed after payment. The tollgate manager might be jumping up and down like a yo-yo in the rush hour, but you would be loath to accept his argument that he was an indispensable pillar of society.

Other sections of the capitalist class manage to cream off a section of the surplus created by the working class by their monopoly of land and of loanable money capital.

Basically then the total surplus is divided into rent, interest and profit, and the manufacturing capitalists, in addition to fending off the workers' demands for higher wages have a fight on their hands with the landlords and moneylenders to maximise their own profits.

LAND PRICES

We have already seen how land certainly has a price even though it is not a product of labour and therefore has no value. This is the case because there is a limited supply of land, particularly in the prime spots near markets and supplies of raw materials, which present advantages which can enormously reduce a capitalist's costs and help him to undercut his competitors. As those with a sunny view of the capitalist class' mentality will already have noticed to their distress during the course of this study, all these people are on the make, and where there’s a limited supply that can be cornered, then somebody is going to do it.

Thus the stratum of modern landlords spring up, raking off a share of the surplus through their ownership of the land. We cannot deal with the laws which determine the level of rent here, but if the rate of rent is given, what is the price of land? As soon as any section of capitalists find a safe little nest egg like land ownership, then they get out of the bother of investing in manufacturing and turn themselves into idle rentiers. The entire class of capitalists has progressively moved in this direction, leaving managing of capitalist firms to highly paid employees, who don't often have a direct stake in the capitalist system, in the sense of making their money through the ownership of property. All this is clear evidence of the decline of the system into complete parasitism.

If the rent of land is £500 how much will it sell for? We have to look at the question from the standpoint of these rentiers. They have a number of places where they can put their money. Their only criterion is how much more money they can get back. This is how a general rate of interest is formed as they all scramble over each other trying to outbid each other for a more profitable avenue of investment, offering the lender the opportunity to beat them down to the general level.

If the general rate of interest is 5% that means a rentier can get an extra £500 every year when he lends £10,000.

Alternatively he can invest in land, which he only does to cut himself a nice slice of rent. He won't invest £10,000 to get just £250 if he can get £500 by lending the money direct. Likewise nobody would lend money and get £250 back if they could get £500 by buying a piece of land. Everybody would be trying to buy land and the price would rise till it got to £20,000 because then there would be no difference between investing in land or lending money directly - both 2½%.

So if the rate of interest is 5% the price of land with a rent of £500 will be £10,000. That way a rentier with £10,000 could lend his money and get £500 a year or buy land and get £500 a year.

Land has a price, and a pretty monstrous one too, yet it has no value. That price represents no expenditure of labour time. That is why the price of land is fictitious capital. The price is just a spoon helping the rentier to dip into the broth of social production.

Cartoon drawn for 'Militant' by Alan Hardman

 

SHARE CAPITAL

We have seen how one section of the capitalist class after another gets out of any direct part in the production process and transforms themselves into rentiers. This process has been going in among the manufacturing capitalists as well.

A hundred years ago most capitalists were sole owners and took some part in wheeler-dealing at least. Now they have managers to do all that. Most large capitalist concerns are now joint stock companies. The capitalists sit at home or cruise around the Bahamas and just spend their share dividend as it comes.

The right-wing Labour leaders welcome this development. To them it represents the 'democratisation of capital'. It gives every working man a chance to share in profits if they would just save like the thrifty capitalists do instead of throwing all their money away on food and housing. Whenever nationalisation is mentioned our Labour leaders shed a tender tear for the little old ladies in Tunbridge Wells, who apparently own British industry between them through their holding half a dozen shares each as a little supplement to their pensions.

What this "democratisation of capital" really means was shown by the House of Fraser scandal where Fraser got his own money out of Scottish and Universal Investment Trusts and left the small men holding the baby as the scandal broke and SUIT shares plummeted. The lions' share of profits is grabbed by the big boys and the managers, where they are also major shareholders, and siphoned out of the firm, while losses are democratically shared out among the small investors.

Another argument put up by the apologists of capitalism is that nowadays only a minority of shares are privately owned. The majority are held by unit trusts, pension funds, trade union funds and other representatives of the small punter.

What do they expect trade unions to do in this inflationary age with their members' funds - allow them to depreciate day by day under the general secretary's mattress? Though institutions do now hold a higher portion of shares, of course it's the rich who have the lion's share of holdings in the institutions, as you would naturally expect. They're the people with the money. In other words the rich now held shares through institutions. So far from choosing themselves what to invest in, they can't even be bothered to hire their own stockbroker, but leave the institutions to take all the decisions. In reality share ownership is even more unequal than ownership. of wealth generally in this country. The top 1¼% hold 65.5% of all ordinary shares while the top 3½% own 87.2%.

What determines the price of a share? Why do share prices go up and down on the stock exchange?

Shares are a form of fictitious capital just like land prices. A capitalist sole owner may own capital worth £1 million in plant and stock etc. The value of factories and raw materials are determined in exactly the same way as other commodities on the market - by the labour time embodied in their production. This is real capital.

Let us say a manufacturing capitalist is making the average rate of profit on his capital of 10%. He therefore makes £100,000 a year. If he decides to go public and become a joint stock company, does he just break up the £1 million into a million £ 1 shares for sale on the stock exchange? Let’s look at it from his point of view. As we have come to expect by now he is a greedy, grasping individual whose sole ambition in life is to lord it over his fellow men. If the going rate of interest is 5%, while the rate of profit is 10%, he is aiming at rentiers, who can only expect the going rate of interest. There's no reason why they should get twice as much just because they're investing in manufacturing instead of land. If they lend £1,000 they'll get back £50. They'd have to lend £2million to get £100,000 as simple interest. The former owner will therefore issue not £1 million but £2 million in shares. He can get back his entire £1 million pound grubstake by selling half the shares, and still hold on to half the shares and therefore half the profits. The miracle of the feeding of the five thousand has nothing on him.

In other words share prices in general have no necessary relation with the assets of the firm. A £1 share does not represent so many bricks or raw materials of the capitalist concern. Share capital is fictitious capital. Just like real capital it entitles its owner to an income without having to work. Unlike the real capital of the sole owner it does not represent real assets.

In the above case the extra £1million in shares which seems to come from nowhere with the flotation of a new company is what the city press daintily refers to as 'water'. Of course there are cases when a firm is actually making a loss, where share prices will actually be below the value of the real assets of the firm. When British Leyland went bankrupt it was said that "British Leyland is worth less than Centre Point". This seems senseless to a worker who knows that the Leyland combine contains far more assets than any single office building. But the total share value of British Leyland was less because its shareholders were unloading their shares as fast as they could, knowing they wouldn't get a dividend and they couldn't find takers, except at knockdown prices. Centre Point shares however were paying out handsomely so their shares were in steady demand.

The whole phenomenon of asset stripping developed in the feverish post-war boom as a result of, this factor, There was more to be made in land speculation or through loans than in manufacturing industry in Britain. The rate of profit in manufacturing industry was falling steadily. As a result of this, more capitalists switched to getting their income from rent or interest rather than manufacturing profit. The higher levels of rent and interest had the effect of further reducing the profits of manufacturing capitalists.

The effect on the system is to accelerate the crash in industry and the incomes of every section of the capitalist class come from the exploitation of the workers in industry.

The asset strippers would find a firm whose share prices were depressed because of poor profit performance. They could buy the firm up for a song (and there were many shenanigans involved in this process) and take the assets over to use as property, for the property market was booming. Of course this would involve sacking the workforce and reducing Britain to an industrial desert, but that was neither here nor there to them.

The individual capitalist may love children and animals but in the business world it’s dog eat dog. This is all the more the case since the capitalist class have increasingly become simple parasites leaving the wheeling and dealing to stockbrokers, managers and other hirelings subject to the sack. One stockbroker may have a liberal antipathy to the South African regime for instance. As a stockbroker he has to put his client's money where it will garner the maximum dividends, and the hellish repression in South Africa is a good guarantee of high profits. If the stockbroker allows his moral principles to dictate to him, and shows less profits as a result, his customers just take their business elsewhere. The same is true of a humanitarian capitalist who wants to pay higher wages. His firm's shares would go down on the stock exchange and he would have great difficulty getting loans from the bank, because his profits would be lower. He'd soon be out of business, which is why the beast called a humanitarian capitalist doesn't exist. It is the blind laws of the system which dictate to individual capitalists. In truth they are as much prisoners of their system as the working class, though their prison accommodation is a good deal more tolerable.

We have seen that there are two factors affecting the share values of firms on the stock exchange – the dividend and the general rate of interest. Shares can rise or fall for either of these two reasons. As we have seen in the above example, if the rate of interest is 5% and profits are £100,000 then the share value will be £2 million. Each share will be worth £2. If the interest rate goes up to 10% then the shares will fall to £1 million or each one to £1, even when the same profit is being paid out. This happens because with the rise in the rate of interest, government securities and other lending operations become a more attractive proposition compared with investing in shares. A rentier with £10,000 to invest could get £1,000 interest on lending and unless shares fall in price then he could only get £500. Sellers of shares will be forced to reduce their prices so that their yield is at the same level as the rate of interest.

Alternatively if profits double and the rate of interest stays the same then naturally share prices will double. The moneylenders will have to pay twice as much if they want twice as much. A combination of either of these factors may be operating at any time upon share prices.

THE STOCK EXCHANGE

What other factors have an effect on the level of share prices upon the stock exchange? In the first place the stock exchange is only responsible for an insignificant proportion of new investment in industry. After the Second World War when firms were feeling flush because profit rates were high, most new investment was from profits ploughed back into the firm. As the rate of profit declined throughout the post-war boom then the manufacturing capitalists were forced to resort more and more to the banks for new investment. Interest charges of course further reduced their profits and made them even more dependent on the banks for the future.

The stock exchange is the biggest casino in the country. Not every day to day fluctuation can be regarded as an objective indicator of the state of the economy. Some short term movements may just be a matter of speculators fleecing one another. We usually hear about stock exchange movements in connection with political events. "Trade Unions will not stand Phase 3. Stock exchange takes a tumble." read the headlines. Here the movement is caused by the expectation of lower profits in consequence of having to pay higher wages. Likewise a fall in the value of sterling may precipitate a fall in share prices because the stock exchange fears a rise in interest rates. We shall see why a little later. So the stock exchange is an indicator of interest rates and profits, if we disregard short term fluctuations.

That is what this mysterious "business confidence" around which it moves really represents. The stock exchange may be a hysterical indicator in times of relative affluence. In that respect it's like a seismograph finely timed to tiny reverberations but completely incapable of showing the catastrophe of a real earthquake.

The point is that shares are just pieces of paper passing from hand to hand. No money is raised for new investment each time shares are bought and sold, and variations in their prices have no necessary connection with the value of the assets they purport to represent. For instance the financial press puffed its collective chest out with patriotic jubilee-year pride after the B.P. share issue, when government holdings in a profit-making sector of the economy were thrown to the stock exchange wolves. This was seen as showing they could still raise funds for industry. On the contrary not one penny to develop oil was raised. All that happened was the government (to pay debts incurred by propping up private industry) sold off existing assets at giveaway prices. Shares were so underpriced they were five times oversubscribed and total BP share prices rose by about a hundred million pounds in a very few days!

INTEREST RATES

We have seen how important interest rates are in the determination of share prices and other forms of fictitious capital such as land prices. What determines the level of interest rates?

There may be a multitude of factors at work here, but basically the 'price' of money capital is determined in the same way as anything else, by the processes of supply and demand. If the lenders are jumping all over each other to lend money, then the borrowers will be able to bid interest rates down. If there is a heavy demand for loanable capital that will tend to push interest rates up. Of course there is more than one interest rate. No bank would borrow money at 5% and lend it out again at 5%. They may offer 4% on deposits in the above case. So a whole pyramid of interest rates is established as everyone tries to borrow and get a rake-off by lending. The actual banking structure is complex and the details are not important for Marxist theory but the apex of this pyramid of lending and borrowing is formed by the Bank of England owned by the government.

The government therefore can control the level of interest through Bank Rate (now Minimum Lending Rate.) This is not to say the government has free control over all rates of interest. Inflation happens because capitalists put their prices up, but not whenever they feel like it but as a result of what appears to them as rising costs. In reality what is happening is that their supplies cost more because money is worth less. In exactly the same way the government alters Bank Rate in response to pressures produced by market forces.

What are these forces? Many factors may be responsible but over the past few years one in particular has been important in keeping interest rates high and the stock exchange depressed in consequence. That factor is the chronic balance of payments deficit and consequent decline of the pound. This will be gone into later more fully.

With floating exchange rates and a tendency to permanent balance of payments deficit, the only way British capitalism could maintain an equality between money coming in and out of the country and so keep the pound afloat was by offering the highest interest rates among the advanced capitalist countries. Since they couldn't compete in terms of offering attractively-priced exports with countries like West Germany, they had to get money into the country as short-term loans. This became particularly important in the wake of the oil crisis. As a result of massive oil price rises, countries like Abu Dhabi, formerly despised by British imperialism, were in a position to completely ruin the formerly mighty pound sterling by withdrawing all their money from this country. British capitalists feared the possibility of a catastrophic decline in the value of the pound, since all the indications were that the downward spiral of sterling didn't make British goods more competitive on the world market, but certainly did jack up the price of imported goods, thus fuelling inflation.

Many of the Arab sheikhs, who were the main beneficiaries of the oil price rises had no inclination to build up industry within their own frontiers. Some, like King Feisal of Saudi Arabia, were well aware that this would bring into existence a working class capable of challenging their privileges and power. They therefore lent their extra money out on the short -term money market in Europe - which at least was marginally more useful than papering the walls with it. Many of these countries had formerly been in the sterling area and had all kind of trade links with Britain, so it was natural for the money to flow here in the first instance.

Such was the desperate plight of British capitalism that they had to prevent an outflow of that money which would have given the nudge to other capitalists and reduced the pound to nothingness. The only way was to screw up interest rates, despite the disastrous effects this would have on manufacturing profits. Industrial capitalists all over the country would have to pay so much more in interest repayments.

Thus interest rates are linked with the performance of the pound on the one hand and the stock exchange collapse on the other.

WORLD MONEY

Within the national economy the state can replace gold entirely with paper tokens of gold for the purposes of circulating commodities. This is an enormous advantage for the system as a whole. For the capitalist class the need for gold for circulation represented a cost of their system.

The discovery of new and more productive mines in California in 1849 played a major part in levering the world economy out of the slump of 1847 which had led to the revolution of 1848. The whole system was very much dependent on the production of gold.

On the market, a jungle of warring national capital blocks, it was not possible to find a paper universal equivalent which would be above suspicion. No one capitalist power is strong enough to impose its own national currency on the whole world economy as the sole means of international payment. Since each country is at odds with all the others, they are unable to get together within a world government which is the only way a paper world currency would gain credibility. The national paper currency is backed by the resources of the state but what backing could there be for a world paper currency?

Nevertheless the world market presupposes an exchange between countries with commodities moving to one country and money to the other. The trading powers will want to know how much the foreign currency they are accumulating is worth. Also if France is consistently selling more goods to Djibouti than Djibouti is selling to France, the French capitalists will want to make sure they are not just being palmed off with worthless pieces of paper printed for that purpose by the Djibouti government. They will therefore demand payment in some universally acceptable medium of exchange - after all they don't just trade with Djibouti to heap up unexchangeable pieces of paper. Alternatively they may accept the currency of Djibouti provided they know they can get rid of it at a definite rate of exchange for a world money which is generally acceptable.

Because of the whole way world trade developed at a time when all national currencies were based on gold, the yellow metal naturally became the medium of world trade. Even after the capitalist national economies moved towards paper money, gold retained its function as a measure of value against which paper currencies could be measured and an international means of exchange and payment. That is not to say that every foreign payment was made directly in gold ingots. Gold was a means of international settlement. If Britain ran a £500 million deficit with Germany over the course of a year, then Germany had the right to demand payment in gold. We shall see a little later under what conditions the German capitalists would actually find it profitable and necessary to demand gold payment.

THE POST - WAR POSITION

After the chaos in world trade and money caused by the great slump of 1929 a new system of international money dealings was introduced under the auspices of the U.S.A. through the Bretton Woods agreement of 1944. The U.S.A. was in a position to do this because at that time it was responsible for nearly 50% of the production of the capitalist world, 70% of world trade and had 75% of the world's monetary gold tucked away in the vaults of Fort Knox. You invariably find that the strength of a national currency is a reflection of the strength of the national economy. At the end of the war America's capitalist rivals lay prostrate while U.S. arms-manufacturing corporations had made millions. Because of this overwhelming productive might the U.S. was able to impose its own monetary settlement on the rest of the capitalist world.

The gold exchange standard provided that the dollar should be the main world money, replacing gold for this purpose. They were able to get away with this because they had cornered the world's gold. They knew that the widespread use of their currency would give American capitalists all sorts of rub-offs in world trade and banking. Normally all other currencies would be valued in terms of the dollar and not in gold. Likewise outstanding balances in the balance of payments could be settled in dollars. Just to show they weren't on the fiddle, printing money to pay their debts because they had the advantage of owning the world reserve currency, they magnanimously provided that dollars could always be exchanged at the rate of $35 for one ounce of gold.

Inevitably the balance of economic power turned dramatically against the USA during the post-war boom. The shattered economies of Germany, Italy and Japan experienced economic miracles and in one sphere after another became serious trade competitors of the American capitalists. US imperialism for its part went the way of empires in the past. On top of the world, it took upon itself the enormous expenses of becoming capitalism's world policeman. In addition, American capitalism, formerly one of the most self-sufficient powers with a huge home market to supply, increasingly sought out foreign outlets where capital could get a higher rate of return. In a word, they became more and more parasitic on the world economy, and falling further behind their rivals, prepared their own downfall.

THE BALANCE OF PAYMENTS

The balance of payments is simply the balance of money flowing out to buy exports and various services from foreign capitalists.

As is well known British capitalism has been running a consistent deficit on its balance of payments for as long as anyone can remember. Why is this? As we've already found, the basic problems stem from the production of wealth, the real basis of any economy, and reflect themselves in the monetary sphere. British capitalism has been in decline relative to its competitors since at least the beginning of the century. The reasons for this process are complex, but basically British capitalism as the first major industrial power, grabbed the lion's share of colonies in the last century and concentrated on the super-exploitation of the people of three continents to the detriment of investment in home industry, the original reason for their pre-eminence. This lack of investment led to an inability to compete with more modern national capital blocs such as West Germany. British capitalism lost one outlet after another on the world market and then found its home market invaded with cheaper foreign goods. At the time of writing nearly 50% of cars in Britain are foreign made.

This is the real reason for the balance of payments deficit, the surplus of imports over exports.

How do foreign capitalist powers view this balance of payments deficit? Up to the world currency crisis of the early 1970s, national currencies exchanged at fixed ratios with one another. After the October 1967 devaluation the pound got $2.40 of US currency for instance. When the deficit became particularly chronic the cry would go up, “We are spending more than we are earning as a nation.” Of course it’s the capitalist class that does all the exporting and importing, and it’s entirely their fault that they haven't invested and British goods can't compete on the world market. Any capitalist power keeps a certain reserve of foreign currencies and gold to settle up on temporary imbalances in trade, but no capitalist country can run a consistent deficit, as they'll run entirely out of foreign currencies. Their competitors certainly won't accept pounds sterling. In the first place they have no need for them piling up without enough sufficiently attractive British goods on the world market to buy with them. Secondly they can see the balance of payments figures, they know British capitalism can't go on like this and they don't want to be palmed off with Mickey Mouse money just before a big collapse. They'll demand hard cash-either gold or their own or some other reputable national currency.

The British capitalists would then be forced to cut down on imports somehow to stop the outflow of reserves and improve their balance of payments. The measures taken in a capitalist society inevitably end up depressing living standards of the working class and throwing hundreds of thousands of them on the dole. This was the recurrent feature of post-war British economic history: stop-go. The solution hit out at symptoms (the balance of payments deficit) and not the disease (the incapacity of British capitalists to invest and hence compete.) These measures resemble the remedies of medieval doctors. They were confronted with a man with a fever. How to deal with the fever? One way was to get out a rusty dirty knife and cut holes in him to let out the blood. Alternatively they got a lot of unhygienic bloodsucking leeches and applied them to the patients limbs (hence the doctors' name 'leeches'). True enough the fever subsided for a while, but only because the body had been weakened. As soon as strength returned so did the fever because its cause had not been dealt with.

FLOATING EXCHANGE RATES

Since 1972 the pound has had no fixed parity but has floated against other currencies - like a stone. British capitalism is still faced with its relentless decline which contrives to manifest itself in semi-permanent balance of payment deficits, The mechanics of the 'solution' may be different but it has the same effect, to unload the entire burden of the crisis on to the backs of the working class.

Floating exchange rates mean that the government doesn't intervene under the pressure of a balance of payments deficit to maintain the pound at the level of $2.40 until they are forced into a squeeze on the British economy to slow down imports or else to devalue the pound so that each one buys less dollars. They just allow the pound to depreciate bit by bit, under the pressure of market forces.

What are these market forces? If British capitalism is in deficit on balance of payments at any given rate of exchange then there will be more pounds sterling flowing out of the country for imports. At the same time there may be a shortage of Deutschmarks on the world money markets because West Germany has a balance of payments surplus and therefore they buy less imports with their own national currency. The solution would be exactly the same as if the capitalists producing brown sauce had produced too much in relation to tomato sauce. The price of brown sauce would go down in relation to tomato sauce in order to get rid of the glut. In the same way the pound will float down, with the results we have already analysed that imports will become dearer and the working class will suffer. In theory exports will be cheaper since foreigners will be able to buy a greater amount of British goods with the same amount of their own I money. In practice what seems to have happened is that the British capitalists have just upped their prices along with each devaluation, so they gain no competitive edge but instead make a super-profit of the goods sold. Since the British capitalists have just pocketed the extra or invested it in anything except manufacturing industry, the rot continues and the whole process becomes a vicious circle. Increased prices for imported raw materials and semi-manufactures force the British capitalists to up their prices again and further price themselves off the world market.

DECLINE OF THE DOLLAR

As American capitalism began to lose out to its competitors during the long post-war boom, it began to confront the same kind of problems that British capitalism had and for basically the same reasons. In particular its huge balance of payments surplus after the war turned into its opposite. It was the declaration of an actual balance of trade deficit in 1971 that triggered off the panic on the world currency markets that led to the fall of the dollar. A trade deficit is just imports and exports of goods. It takes no account of the outflow of capital in foreign investment and government money to pay for their military position in the world and particularly the Vietnam war, which enter into the balance of payments, which had been in deficit since the late 1950s.

Nevertheless the USA , as the proud possessor of the main means of international circulation was not under the same constraints as British capitalism to cut its coat according to its cloth. On the one hand there was no possibility of foreigners demanding payment in a currency other than America's own - it was after all world money. On the other hand they could not force American capitalism to devalue. The dollar was the yardstick by which all other currencies were measured - how can you devalue a yard?

But the US dollar had one weakness. In order to ensure its acceptability the American government had made it exchangeable against gold at the fixed rate of 1 ounce to $35. This ratio had existed from 1934. Since that time the general level of prices had doubled. Gold prices on the free market had gone up even more as could be seen by the prices paid for gold for non-monetary purposes such as stopping teeth, jewellery and industrial uses. In other words the dollar had become overvalued against gold. It was now worth far less gold than it pretended to be.

We saw earlier how £14 million pound notes could replace £14 million gold sovereigns for use in the internal circulation of a country without any inflationary effects. We also saw the temptation open to the state of replacing £14 million in gold with not £14 million in notes but £28 million so that they could increase their spending. Each £1 note was then in effect overvalued against gold - it only represented half the former quantity of gold. The government was subsidising its entire expenditure through inflation.

This was exactly what was happening on the world scale with the dollar. American capitalism was subsidising its parasitic position through world inflation. They were thus funding the resources of more thrusting competitors towards themselves for use on their own military expenditures. When American capitalists bought out European firms with dollars, they were doing so on the cheap, with a depreciating currency.

The French capitalists were the first to organise resistance to American domination. Anyone who accepted dollars in trade with the USA was getting a bad deal, for the USA was virtually printing more dollars which were worth less and less to pay for their balance of payments deficit, their foreign expenditures. On the other hand, anyone who demanded gold was getting a very good deal because the free market price of gold was very much higher than $35 to the ounce .

The French, under de Gaulle had the policy of accumulating gold in return for the surplus of exports over imports they had with the USA. Their strategy was to clean out Fort Knox leaving the dollar no backing and force the American imperialists to devalue the dollar to a level that would not be swindling their competitors. French capitalism alone could not take the strain. De Gaulle's single -minded economic nationalist policy, which sacrificed workers' living standards to the pursuit of his grand design, brought in its train the revolutionary upheavals of May and June 1968.

Nevertheless, de Gaulle had prepared the ground for a full-scale onslaught on the privileged position of the dollar. Throughout this period Fort Knox was progressively emptied of gold, the only real backing the dollar had. The final blow came in the 1970s when step by step the American capitalists were forced first to suspend dollar convertibility into gold and finally to allow it to float to its own real level on the market. The supremacy of the dollar was overthrown but the chain of world inflation it had begun continued. American capitalism no longer had the predominant position to enforce its money on the rest as unchallenged world money. On the other hand, none of its competitors could take over. Gold emerged once again as the alternative means of international settlement, as it was bound to do because gold alone represented a real objective value.

CURRENCY CRISIS AND TRADE WAR

At the beginning of the century the pound sterling had played very much the same part in day to day transactions on the world market as the dollar had done more recently. The overthrow of the pound also happened because of the decline of the economy which gave it credibility as a medium of world trade.

The collapse of the supremacy of the pound coincided with the great slump of 1929. The slump was caused by the production relations of capitalism themselves but had a profound effect on world trade and world money. Each national capitalist class attempted to unload the burden not only on to their own working class but also on to their capitalist rivals. There was a wave of competitive devaluations throughout Europe. Walls of protective tariffs were set up by one country after another. This had the effect of drying up world trade, which further drove down production in each country. In the same way the post-war boom started with conditions being right in production but the consequent development of world trade in its turn prepared the conditions for a further upturn in production.

The collapse of the dollar comes at an unfortunate time for world capitalism. The trade wars and currency crisis are a reflection of falling profit rates world-wide. It becomes a matter of urgency for each capitalist class to apportion the losses on to their competitors. This is a different matter entirely from sharing out profits. Though the dollar can no longer play its former part in world trade, there is no chance that the Yen or the Deutschmark can replace it. US capitalism is still the biggest capitalist power.

The perspective for world trade is a development of protectionism. The capitalists now say “We must hang together or we'll hang separately” Despite their good intentions they'll be at each other’s throats as the crisis deepens, they can do no other.

Likewise currency crises, a reflection of crisis in production will intensify and create more problems for the capitalist system.

THE TENDENCY FOR THE RATE OF PROFIT TO FALL.
Though we have dealt mainly with the monetary side of the capitalist economy we have tried to show throughout this study how financial problems are a product of the crisis in production itself. We have several times mentioned how the tendency for the rate of profit to fall has been a major part of the capitalist crisis since the second world war.

Why should profit rates fall? We already know that the wealth of the ruling class is the unpaid labour of the working class. The capitalists get more out of the workers than they pay them in wages. Competition acts as a coercive law forcing the individual capitalists to maximise their profits.

How can the capitalists squeeze more out of their workforce? The main way historically the working class has been forced to produce more is by raising the productivity of labour through the introduction of new techniques. Each capitalist is forced to try to steal a march on his competitors by retooling, because in doing so he can produce cheaper and undercut his competitors. He can sell his commodities cheaper because it takes less labour time in total to produce them, and in using the latest techniques he's exploiting the workforce more effectively. The trouble is that it will cost him much more to do so, because the new techniques will inevitably be much more expensive. Nevertheless competition forces them to go on and in the development of capitalism the rate of profit tends to fall.

Imagine a capitalist who employs cavemen to hit dinosaurs on the head with stone axes. He pays the cavemen £10 a day and the wear and tear on stone axes is negligible, so however inefficient the cavemen may be at hunting down dinosaurs the surplus compared with the costs will be comparatively high.

Along comes a fellow capitalist who equips his cavemen with Vertical Take Off and Landing supersonic jets equipped with heat-seeking missiles. Clearly each caveman is going to bag a lot more dinosaurs, so the surplus will be higher. The only problem is that it costs infinitely more for VTOL jets than it does for stone axes, and as the new technique is taken up generally the rate of profit will be much lower as a result.

That is why the tendency for profit rates to fall is built in to the capitalist system though needless to say the real process is much more complicated than the above illustration suggests. The crisis in capitalist finance is a consequence of the crisis in production.

THE WAY FORWARD

We have seen how inflation is rooted in the capitalist system in its age of decline. Any development of production brings in its train the creation of a whole house of cards of credit and fictitious capital. That is not to say that inflation will continue at an even pace over the next few years.

We already hear the siren voices of the monetarist economists like Sir Keith Joseph from within the highest ranks of the Tory Party. They are demanding that the government stop printing money. The price would be the dismantling of the welfare state. But if the government just stopped printing money there would also be a total collapse of the pyramid of credit, bringing in its train a massive decline in production overwhelmingly based on credit. The wholesale withdrawal of government subsidies would also force bankruptcy after bankruptcy. In effect these people are saying they want mass unemployment as the cure for inflation.

For the time being the major sections of the capitalist class recognise that the cure is worse than the disease. But the world of credit and fictitious capital is a world of illusion. As the crisis continues to deepen further bankruptcies will take place in production and this in turn will pull down the house of cards of paper wealth. In a period of even worse economic crisis the monetarists may gain a hearing in ruling circles and inflation may subside in the depths of a slump, but the working class will still be paying.

In that sense inflation is a product of declining capitalism. In the East European bloc the only inflation that exists is caused by materials imported from the capitalist west. These are not socialist societies but monstrous police dictatorships nevertheless based on planned economies. The dictatorships we can and will do without. But the only way forward for working people is to do away with the system that spawns inflation and all its attendant evils.

Now we have understood how inflation arises in capitalist society the point remains, to change society.