[OPE-L:1284] Re: Gold and credit-money weaknesses

Duncan K Foley (dkf2@columbia.edu)
Sun, 3 Mar 1996 10:42:05 -0800

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Some comments on Jerry's questions:

On Sun, 3 Mar 1996 glevy@acnet.pratt.edu wrote:

> Gold:
> -----
>
> 1) If a large enough percentage of the available world supply of gold is
> owned by a small group of individuals, firms, or nations, there is the
> possibility of unloading gold on world markets causing the market to
> crash and, possibly, initiating a general rise in the price level.

This ties in with the issue of speculation. One reason agents hold gold
is to speculate on future movements in gold/commodity prices. There have
been "corners" in gold (I seem to remember one in the 1870s) and more
recently (1970s) a corner in the silver market. I doubt that this kind of
manipulation would in the end create more than a temporary blip in actual
accumulation, and it's not clear what the motive would be.

>
> 2) If there are new methods of production that greatly increase the
> productivity of labor in gold production, a similar result might occur.

Presumably this is exactly what happened after the Spanish discovery of
South American gold and silver in the 16th century, leading to the "Great
Inflation" which many historians have linked to the initial growth of
world capitalism.

>
> 3) If there is a new, cost-effective method of converting another
> substance (water?) into gold, that as well would both shake up world
> markets and make those economies like South Africa that depend on gold
> production vulnerable.

If you could turn water into uranium or titanium, something of the same
sort might happen to economies highly dependent on producing those items.
For that matter, how different is this case from what happened to the
U.S. auto and tv industries as a result of East Asian competition?

>
> 4) A "socialist" nation (like the former USSR) could decide to do 1)
> above. This was something that Western capitalists, after all, feared for
> many decades.

The main people to fear the USSR gold stocks would have been speculators
long on gold because they thought the gold price would rise. The gold
price reached a high of around $800/oz in around 1980; now it's around
$400/oz, so that those who speculated in gold (and I'm afraid a
considerable number of Marxist economists were tempted in this direction
in the 1970s) took a bath.

>
> Credit-money:
> -------------
>
> 1) Counterfeiting. Suppose millions of fake Federal Reserve notes were
> dropped over the city of Los Angeles. What would happen? BTW, advances
> in photocopying and laser technologies make this option increasingly
> possible. During WW2, the Nazi's with less sophisticated technologies
> tried to counterfeit millions of 5 pound notes with the aim of
> de-stabilizing the British economy.

Counterfeiting is a form of fraud and effectively takes money from those
who accept the queer notes (or who get caught with them when they are
finally discovered.) It's not clear why counterfeiting in and of itself
should disrupt ordinary transactions, unless the public loses confidence
in the currency issued by the State (maybe that was the idea of the
Germans, but I don't think it was a very good idea, myself.)

>
> 2) Countries that receive credit from commercial banks, the IMF, and/or
> the world Bank can "simply" refuse to pay. Individual nations, after all,
> have sovereignty. If a small country like Grenada tries this, they could
> find US Marines on the beaches in the morning. If a country like Mexico or
> Brazil defaulted, the same military option would probably not be used
> (too many body bags would be required). This was, after all, an option
> that many countries in Latin America considered in the 1980's. At one
> point, I believe, it was forecasted that if the Mexican government
> defaulted on its loans, that would cause major commercial banks like
> Citibank, Chemical, Chase Manhattan etc. to declare bankrupcy. One would
> imagine that this would then lead to a temporary collapse of world
> financial markets. In any case, the mere fact that the US government and
> banks, as well as international lending agencies, knew that default was a
> possibility, gave the Mexican government bargaining power to
> re-negotiate the terms of the loans.

International credit is interesting because there is no super-national
enforcement of contract. On the other hand, there are severe penalties
for defaulters: particularly loss of access to world credit markets,
which makes running a modern national economy almost impossible. Even
large domestic defaulters (like the Illinois Trust episode) are sometimes
viewed as "too big to be allowed to fail", and can negotiate surprisingly
effectively with their creditors from a position of weakness.

>
> 3) Housing activists in a number of countries have supported calls for a
> general rent strike. What would happen if workers organized a loan strike
> by collectively refusing to pay back loans for homes, cars, etc.? One
> might anticipate a state response and a political crisis, but the result
> would largely depend on the balance of class forces, the level of worker
> militancy and solidarity, and the degree of workers self-organization.

The main effect of a collective loan strike, if it were at all effective,
would be to make credit harder to come by for working class households in
the future, I think, and to raise the interest rate they would be forced
to pay. Actually, the repayment record on working class household loans
is very good, which raises the question of why these loans are so often
made at a very high rate of interest.

Duncan

>
> Michael P: Is this what you had in mind in terms of "vulnerabilities and
> weaknesses"?
>
> In OPE-L Solidarity,
>
> Jerry
>
>
>
>