IV. Devaluation and debasement
Depressions are real events. No amount of currency devaluation can halt or prevent one. A depression arises when the capacity of a society to produce exceeds, either temporarily or permanently, any possible productive use for that output. It occurs, in other words, when, under the given economic circumstances, hours of work are longer than is required by society. This cannot be altered, nor in any way meaningfully effected, by the devaluation of a nation’s currency.
But, devaluation can shift the burden of a depression. This is clearly evident when one nation devalues its currency to a greater or lesser extent than other nations; it is also evident in the case where one nation devalues earlier or later than other nations. The country that devalues earlier, or devalues more severely can enjoy additional growth at the expense of its peers. But, despite this, there is no net effect on the depression.
According to Henryk Grossman in an article he wrote in 1929 on the eve of the Great Depression, based on his understanding of the model developed by Karl Marx, a complete economic collapse could be avoided if some means could be found to continually slash wages, or reduce productive capacity, or expand overseas.
Wages have to be cut in order to push the rate of surplus value even higher. This cut in wages would not be a purely temporary phenomenon that vanishes once equilibrium is re-established; it will have to be continuous. After year 36 [of an economic expansion] either wages have to be cut continually and periodically or a reserve army must come into being.
In the description I have proposed the breakdown does not necessarily have to work itself out directly. Its absolute realisation may be interrupted by counteracting tendencies. In that case the absolute breakdown would be converted into a temporary crisis, after which the accumulation process picks up again on a new basis. In other words the valorisation of the overaccumulated capital can be met through capital exports to countries at a lower stage of accumulation. Or a sharp devaluation of the constant capital during the crisis might improve the prospects for valorisation. Or wage cuts could have the same effect in terms of warding off the catastrophe.
According to Grossman, once hours of work become too long economic expansion can only be resumed if there was a continuous reduction of wages, or export of investment capital to less developed countries or devaluation of the domestic productive capacity. Grossman does not qualify his statement, nor does he try to minimize the import of what he suggests is a natural and logical result of Marx’s theory. He commits to a definite time horizon of 36 years when this catastrophe must assert itself — requiring, if it is to be avoided, a permanent, continuous, and deliberate effort to cut wages, shift investment offshore, and mothball domestic industry.
It has to be emphasized at this point that these methods employed by industry to lay the groundwork for a new expansion phase in the economy are not merely monetary!
Wages, for instance, cannot merely be reduced by slashing paychecks, nor is it enough to simply lower the price of output, machinery, and factories. The problem is that the actual capacity of a country to produce has grown far more quickly than the need for the output that can be produced. Since what is required is a reduction of the actual productive capacity employed, merely slashing wages or lowering the cost of goods will not suffice. Millions of workers in the existing workforce must be turned out of their jobs, and billions in productive assets must be mothballed, even as investment capital flows out of the country.
It is just these efforts which appear to us in the data as symptoms of a recession noted earlier: unemployment, a credit crunch, banking crises, shrinking output and investment, bankruptcies, sovereign debt defaults, collapsing trade and commerce, volatile currency fluctuations and price deflation. These symptoms of a recession are not the source of the depression; they are only the economy’s response to it, and the forms taken by this response as capital attempts to overcome the massive glut of existing productive capacity it creates in the search for ever higher return on investment.
According to Grossman, Marx’s theory predicts that at a certain point the further expansion of productive capacity becomes inherently superfluous. On the eve of the depression, in order to maximize profit, companies rush headlong into expansion of this productive capacity:
By its very nature capital strives to employ the largest number of workers. Marx himself notes that, on the whole, the number of workers employed in industry grows not only absolutely but as a ratio of the total population … Nevertheless it follows from the law of accumulation that for a given size of working population capital accumulation encounters insuperable limits, beyond which any further accumulation is pointless.
Further investment becomes pointless not because the chase for profits is exhausted, but because further expansion itself becomes unprofitable without an expansion of the market for the output produced. Business literally runs into a brick wall as the labor time expended on the production of output persistently exceeds its socially necessary limit. Productive investment actually begins to contract and must contract as the very attempts to resolve the catastrophe — in first place, the collapse of employment — feeds on itself, as unemployment further reduces demand for what is still being produced. Businesses lay off their work force in response to falling demand resulting from previous rounds of layoffs — demand spirals down into a black hole.
Once capital encounters its “insuperable limits” a stable equilibrium is no longer possible since the progressive increase in the productivity of labor outstrips the possibility for productive economic growth. Both productive employment and investment shrink as the requirement for work itself contracts. Because the improvement in productivity of labor results in a more or less persistent surplus of output beyond that which can be absorbed by the existing market, profitable investment is only possible if the market for the goods produced by this investment constantly expands faster than productive employment itself. The single most important barrier to further profitable investment is finding a market for output produced by this investment.
It follows from this line of reasoning that the debasement of national currencies from gold begins not with the actions of national governments, but with the actions of the owners of gold, who withdraw gold from the national economies precisely because there are no profitable investment opportunities. Great Britain, and then one nation after another, ceased redeeming their currency for gold only as a reaction to this withdrawal. On the other hand, gold is set free from any definite relationship to the national currency because international trade must result increasingly in the formation of international prices.
Economists miss this development because, in their stupidity, they identify money with some or another national currency. A national currency never was money; it was merely the token of money, i.e., the token of a social relationship between the products of human activity. With the increasing importance of international trade, and of a production process straddling the entire global market, the interaction between and among prices of goods denominated in the various national currencies is subject to the increasing domination of an immediately global production process.