On Tue, 21 May 1996, Chai-on Lee wrote:
(I've removed some things to shorten up the discussion)
> Dear Prof. Duncan Foley,
>
> Thank you very much for your reply.
> But I have some more questions.
>
> Duncan (1)
> ----------
> There is, however, a question as to the substance of the speculation
> in the two monetary systems. In a gold standard system speculators
> are looking forward to the relative speed of technical change in gold
> production relative to other commodities. In the state credit system
> they are speculating on the future fiscal policy of the state.
>
> Question (1)
> -----------
> Yet, your distinction between the two monetary systems in the
> substance of speculation is not so determinate as you suggest.
> "The relative speed of technical change in gold production relative to
> other commodities" is immediately related to Keynes's "expected rate
> of price change". In considering the gold speculation, interest rate
> is also an important element to be considered as an opportunity cost
> of gold hoard. And "the future fiscal policy of the state" is also
> related to the level of expected rate of interest. Basically, therefore,
> the two are identical. Speculators must consider the expected rates
> of price change about not only gold but also other ordinary
> commodities as well as investment good's rate of returns. What is at
> issue here is not the absolute levels of price but the rates of price
> change.
This seems to me to confuse matters in some ways. If you are thinking
about holding gold as an asset, it is true that the rate of change of gold
prices relative to commodities is one of the things that will influence
your decision. But you must also consider the fact that newly produced
gold will come on the market, which puts a limit on how much the gold
price of commodities can change. Thus you are wind up considering the
future path of technical change in the gold industry and in other
commodity production. The relative costs, not just their rate of change,
plays an important role.
> In the consideration of the fisical policies of the state, too, what is at
> issue is not the value of money but the rate of interest, not the
> expected rate of value change of money but the expected rate of interest
> rate change.
The market determines the rate of interest, and if it believes that the
debt of the state will depreciate in value, it will require an interest
premium to offset that loss. I don't understand how the "expected rate of
interest rate change" comes into it.
> To be short, the speculation cannot play a role in the determination
> of the value of monetary unit but that of the rate of money interest.
I don't accept this conclusion. From a Marxian point of view the rate of
money interest is basically determined by bargains between
financial capitalists and industrial capitalists over the division of
surplus value. It seems to me that either in a gold standard system or in
a state credit system speculation plays a critical role in determining
money prices.
>
> Duncan (2)
> ----------
> For produced assets with a use value (like gold) these factors are
> rooted in the course of future technical change. But for derivative
> assets (like the state debt) they are rooted in expectations about the
> future course of politics and policy. I think Keynes writes rather
> eloquently about this point.
>
>
> Duncan (3)
> ----------
> >"Representing abstract labor" implies, by the
> > word itself, the abstract labor did exist before the money represent it.
>
> > So, the existence of abstract labor should itself have nothing to do
> > with money. It exists as a reality in the commodity production as the
> > labor that produces commodities, which is the same as my point.
>
> Here I part company with you, though the point is quite subtle and as far
> as I can tell, the subject of considerable controversy. I think
> abstract labor emerges dialectically with money, not "prior to" it. But
> some people (such as David Gleicher) interpret "abstract labor"
> purely in the production context as the "routinization" and
> "de-skilling" of labor, which I don't agree with. Even craft labor
> comes to have an abstract aspect when its products become
> commodities and are sold for money, in my opinion.
>
> Question (3)
> -----------
> I, of course, do not agree with Gleicher, and neither with Rubin. If
> abstract labor did not exist prior to the exchange with money, i.e. if the
> substance of value is formed in exchange, how can you tell the
> magnitude of value can be determined independently of the process of
> exchange? Independently of the supply and demand relationship?
Since the commodity is the unity of exchange and production,
I'm not sure I understand what you mean by "independently" in this
formulation.
> Duncan (4)
> ----------
> Well, I would argue that the "nature" of the monetary system remains
> the same insofar as it still functions to represent abstract labor, and
> that the same general laws (speculative ones) govern the valuation
> mechanism, but that the substance of the speculation is different in
> the two systems (as discussed above).
> I think I've tried to clarify the exact sense in which I view the
> "mechanisms" as similar and different. Does this version appeal to you?
>
> Question (4)
> -----------
> The functions like the measure of value and the means of circulation,
> etc. can be substituted by any kind of money substitute. This is said by
> Marx in the first section of Chap 3 Capital vol 1. So, those roles are not
> essential. What is never to be substituted is the role as the means of
> debt-payment, which is the most essential.
> Your conception of credit money did not take this role into account. A
> debt cannot be repaid forever by another credit only.
I think I can clarify my idea on this point. Under the gold standard the
state stabilizes the value of its debt by making a very strongly credible
promise to maintain convertibility of its debt (the dollar, or pound) into
gold at a fixed rate. Occasionally (especially in wartime) governments
suspended this promise, but always with the expectation that it would be
renewed in the future. This system puts a very strong structure on
speculation in the value of the government debt. If speculators mostly
believe the promise, the main thing they will speculate on is the relative
valuation of gold in relation to commodities.
Under current political circumstances, no states promise to return to
convertibility. In effect the value of their debt depends on the market's
valuation of it in speculative terms, and they never have to contemplate
"paying it off" except by issuing more. As long as the government keeps
its fiscal deficit within certain limits, this process is not
self-contradictory and can continue indefinitely.
> Duncan (5)
> ----------
> At this point I'd like you to review briefly what you view as the
> essential parts of your "commodity money conception", so that I could
> answer more responsively.
>
> Question (5);
> -----------
> My commodity money conception is not incompatible with that of credit
> money since, even in the gold money system, the credit money was still
> required. The only difference between the credit money conception and
> mine is in two points. The first is in the determination of the value of
> money. The second is in the role of debt-payment (in this role, the
> credit money can never replace the commodity money completely).
See my remarks above. I don't think we have disagreement about the
institutional questions in the gold standard context.
>
> As for the first, the credit money conception has no theory of the value of
> money as I argued above.
I don't agree with this, as I've explained. Do you really think that the
U.S. government will ever return to gold? Even if this is a possibility,
its influence on the value of the dollar will depend on the gold price at
which convertibility is resumed. What do you think this will be?
> IMO, paper money is still a product of
> labor because, to get it, we have to pay a certain amount of labor or
> labor-product just as we do so in order to dig out gold from the gold
> mine.
I don't understand what you mean here. Certainly workers have to earn
their wage, but that doesn't produce any money (or necessarily gold). The
debt of the state is created in credit transactions, not through the
expenditure of labor.
Yours,
Duncan