Gold Bars

Can the Gold Standard Save Capitalism?

Ron PaulRepublican presidential candidate Ron Paul, among others, has advocated a return to the gold standard for U.S. currency. He is worried about inflation and the continued devaluation of the U.S. dollar. Capitalist politicians like Paul claim if only the dollar were fixed to the price of gold, all would be well in the economy. This actually brings up several questions. Such as, what is money in the first place? Is American money, since it is “not backed by gold,” worthless?

Gold and Money

There are many misconceptions about the meaning of the gold standard and what U.S. currency is actually worth.   Needless to say, U.S. currency is exchangeable for gold. What is the present value of a dollar? As of Friday, August 19, 2011, the price of gold in dollars was $1,848.90 per ounce. One Euro is exchangeable for about $1.44, and the Euro can also be exchanged for gold.  If I can purchase gold with dollars, or I can purchase another currency and this can also purchase gold, then clearly the currency is not worthless. Therefore, on August 19, the American dollar was worth 1/1,848.90 of an ounce of gold, which of course is a very small amount of gold.

Okay, since American money is exchangeable with other currencies and gold, and we know we can purchase commodities and services with it, what exactly is money?

Marx explained that all commodities have an exchange value. If I want to exchange eggs for tea, neither party wants to be fleeced, so exchange should, on average, take place at equivalent exchange values. Marx explained that the exchange value of commodities came down to how much labor was needed to produce these commodities. If raising chickens and collecting the eggs so as to give 3 dozen eggs to someone in exchange for tea represents the value of  x hours of labor, that person should get back the amount of tea that can be produced with x hours of labor.

Without money, in order to exchange commodities, we would have to search for equivalents for all sorts of different products.  Therefore, Marx explained that there developed a universal equivalent in metals such as gold and silver, which in turn became money.

Gold and silver can be melted and are divisible and can be fashioned into coins. However, over time, wear and tear reduces the size and therefore the value of these coins. Society, in the form of the state, began the use of paper currency and coins in metals other than gold and silver, but with the proviso that these be backed by the value of gold.

The value of gold, silver, copper or any other metal is determined the same way as any other commodity.  The value of these commodities is determined by the average socially necessary labor needed to produce or replace a given quantity of metal.

One of the reasons that gold has high value is that it requires much labor to discover it, especially in large quantities. The extraction and purification process requires more labor on top of that.

Bretton Woods

After World War II, U.S. imperialism was by far the most powerful economic and military power among the capitalist countries. A series of economic agreements were made at Bretton Woods, New Hampshire, aimed at allowing capitalist world trade to expand. The U.S. government fixed its currency supply so that gold would exchange for $35 per ounce.  Countries around the world would then fix their currencies to the U.S. dollar. Assuming no change in the supply or value of gold, this would control growth in the money supply, reduce inflation, and allow world trade to expand with a minimum of volatility and unpredictability. However, Marx explained that if the state tries to manipulate the value of the currency as it relates to the value of gold, prices would tend to increase.

However, in the late 1960s and early 1970s, faced with an unpopular war in Vietnam and domestic struggles at home, Presidents Johnson and Nixon tried to pay for reforms and war by credit, which could be more easily paid for by devaluing the dollar. In August 1971, Nixon took the U.S. off the fixed $35-per-ounce gold standard and allowed the devaluation of the currency. It is not that the currency was no longer exchangeable with gold, but that it would take more dollars to buy an ounce of gold.

Would increasing the value of the dollar help create jobs?

Those, like Ron Paul, who champion the return to the gold standard, are like those who believe diseases should be cured by bleeding the patient. In other words, if the disease does not kill them first, the cure surely will! The major problems facing capitalism today are overproduction and overcapacity. In other words, capitalism can produce more commodities than can be sold on the market at a profit. This is why companies are not expanding production and in many cases are further curtailing production. This means that we could be heading into another slump or “double dip.”  A return to the gold standard would not help this.

In terms of world trade, the U.S. has been trying to devalue its currency as a way to export more commodities and import less. This has the effect of shifting the crisis of overproduction to its rivals. The problem is that China, which depends on exports to the U.S., fixes its currency to the U.S. dollar, and has mostly countered the U.S. devaluation. Recently, the debt crisis of Greece and other countries in Europe has also devalued the Euro relative to the dollar.

Establishing a fixed exchange rate between the dollar and gold would mean that the U.S. could not devalue the dollar, and this would have the effect of making imports cheaper and exports more expensive. This would only aggravate the crisis of overproduction/overcapacity in the U.S., and could push the economy right into another slump.

The reason for the recent decline in world trade was the world slump. Every country, including China, is dealing with overproduction and overcapacity.  Volatility in exchange rates is a minor issue compared with this.

Capitalism or Socialism

The fact is, no matter whether the capitalists devalue the currency or return to the gold standard, the only way theycan get out of this crisis is by destroying enormous amounts of productive capacity and the jobs that go with them. This has created and will create more poverty and instability for millions in the USA and around the world. However, the working class will not stand by and watch this happen without a fight. It is through these fights that it will come to see the need to replace capitalism with socialism.

Then, as Lenin once said, “When we are victorious on a world scale I think we shall use gold for the purpose of building public lavatories in the streets of some of the largest cities of the world. This would be the most ‘just’ and most educational way of utilizing gold.”


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