Theories of the current crisis: What Williams doesn’t know about ex nihilo money
Even if we assume John Williams’ prediction of a hyperinflationary depression turns out to be correct — and the global economy is plunged into an apocalyptic nightmare as prices rise with blinding rapidity, while economic activity shudders to a standstill — his argument for this outcome is so defective as to merely represent the chimes of an otherwise broken clock for the following reasons:
First, his prediction rests on mere accounting identities, and assumes the Fascist State can be counted on, or forced, to observe these accounting identities. As a counter-argument, I offer the historical evidence of Washington’s behavior over the past 80 years, when it routinely ignored whatever accounting identities as were forced upon it by circumstances and left the rest of American society and the global population as pitiful bag-holders of worthless ex nihilo currency. Williams offers no argument why the Fascist State will act differently in this crisis. In all likelihood, Washington will effectively renounce its debts and continue business as usual — leaving China and other exporters to absorb the impact.
Second, Williams does not understand hyperinflation. His definition of hyperinflation is entirely defective, because he doesn’t realize ex nihilo currency is not made worthless by hyperinflation; rather, it is already a collection of worthless dancing electrons on a computer terminal in the Federal Reserve Bank. Ex nihilo currency was worthless the moment the Fascist State debased the token currency from gold in 1933 and 1971. Hyperinflation and inflation are not the more or less sudden depreciation of money, but the more or less sudden depreciation of the purchasing power of an already worthless money.
Third, Williams does not understand depression, and in particular the Great Depression. Depressions are produced by the overproduction of capital — whether this overproduction is momentary or persistent. They are characterized by a general surfeit of commodities, fixed and circulating capital, and a relative over-population of workers. These are periodic occurrences, owing their genesis not to simple fluctuations of economic activity, but to constraints imposed on consumption by the necessity that all productive activity is carried on, not with the aim of satisfying human needs, but for profit. All depressions result in the sudden devaluation of the existing stock of social capital, of the existing stock of variable and constant capital, which is the absolute precondition for the resumption of self-expansion of the total social capital.
Before the Great Depression, this last point always meant a rather pronounced and sudden deflation of prices. After the Great Depression, this devaluation is accompanied, not by a sudden and spectacular collapse of prices, but a sudden and spectacular explosion of prices. The event itself has not changed — it is still a devaluation of the total social capital. What has changed is the expression of this devaluation in a general fall in the price level. I argue the source of this change was the debasement of national currencies during the Great Depression.
What the three points made above tell me is that Williams and the growing community of hyperinflationists do not understand ex nihilo money; they do not understand how prices behave under an ex nihilo regime; and, finally, they do not understand why ex nihilo money was a necessary result of the Great Depression. They are an odd collection of petty speculative capitalists concerned only with preserving their “wealth” through what are likely to be very interesting times.
Understanding ex nihilo money
Like money in general, ex nihilo money, is not simply a “thing” — a currency without commodity backing — rather, it is a social relation that appears to us in the form of this thing. It is a social relation that takes the form of worthless currency because this social relation itself can only take the form of things. The social relation, of course, is a global social cooperation in the act of labor. Since, this social cooperation does not by any means result from conscious decisions of the members of society and proceed with their conscious direction, the requirements of this social cooperation impose themselves on the members of society as necessities — as the law of value, as the value/prices mechanism.
What is peculiar about ex nihilo money as a form of money is that the relation between value and price has been completely severed — the two most important functions of money have devolved on entirely different objects. By debasing the currency from gold money’s function as standard of price was completely severed from its function as measure of value. This much is acknowledged by the hyperinflationist, who place the blame for this separation on the Fascist State; however, historical research shows impetus behind this separation did not first appear as a matter of State policy, but as a matter of financial common sense.
Every depression begins with money exchanging for commodities below its value, or, what is the same thing, with the prices of commodities at their apex for the cycle. Prices near the top of the cycle rise to unsustainable levels, and the competition to dump commodities on the market under favorable price conditions gets fairly intense. Everyone is optimistic about the economic outlook, profits expand, credit flows freely, workers are hired, factories furiously churn out commodities around the clock, the stocks of goods begin to pile up in the warehouses. And, then, BOOM! — depression erupts just as wages, prices, profits and interest are at their highest, and the purchasing power of money is at its lowest.
As the disorder spreads, profits and prices collapse, credit is choked off, debtors default, factories grind to a halt, millions of workers are laid off… yadda, yadda, yadda — we all know the drill. Side by side with this disorder, money is with drawn from circulation. Gold money disappears into hoards, as capitals attempt to avoid the worst of the devaluation of the existing social capital. The competition at this point is not to see who can sell the most commodities, but who can avoid taking any of the losses that the social capital as a whole must suffer. While this total social capital must take the hit, which capitals actually take this hit is a matter of entirely other circumstances.
As Marx put it:
The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.
How is this conflict settled and the conditions restored which correspond to the “sound” operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.
The total social capital is devalued; and, this devaluation takes place both in terms of the values of the capital — prices fall, etc. — and by a winnowing out of the players — some definite portion of the total social capital is pushed out of productive activity altogether. Capitals go bankrupt, factories are shuttered, the reserve army of the unemployed expands. At the lowest point in the ensuing depression, prices and profits have fallen to their lowest point in the cycle, while the purchasing power of money is at its highest point in the cycle. Assets can be snatched up at bargain basement prices, labor power can be had for a wage below its value. If the capitalist has survived the wash out, he stands to accumulate on a prodigious scale, since unemployed productive capacity is just laying around collecting dust.
There was one problem with this scenario during the Great Depression: the economy hit this point and just laid there like the decaying carcass of a beached whale; the condition for the “‘sound’ operation of capitalist production” were never restored, money just sat in hoards as investors, waiting out the crisis for better times, clung to their useless gold stocks for dear life. There was, as usual, a general over-accumulation of capital, i.e., an overproduction of commodities, an excess of fixed and circulating capital, and an excess population of workers, but these excesses were rather persistent. As with any general over-accumulation, it was not a matter of “consumer confidence” returning, but the necessary actual devaluation of the existing total social capital. Absent this devaluation, attempts to increase production would merely result in an over-supply that further forced down prices and profits. Under these circumstances, a portion of the existing stock of commodity money could not circulate until the devaluation of the existing stock of social capital had taken place.
So, it was not the Fascist State that expelled gold from circulation as money; rather, because gold money could no longer circulate as money, the Fascist State was forced to replace it with ex nihilo currency. The Fascist State debased the currency from commodity money, because the circulation of commodity money had already halted. This action was no American exceptionalism, however; within a short period of time all industrialized nations went off the gold standard domestically.
I want to emphasize an extremely important point here, a point that is vital to understanding the present crisis: going off the gold standard did not simply convert money into a worthless, debased, token — entirely fictitious from the standpoint of the law of value — it also changed the behavior of prices, i.e., the behavior of the purchasing power of the currency itself. On this basis alone the Fascist State could take control of the social process of capitalist production.
The behavior of prices under ex nihilo money
Ex nihilo money is not commodity money, it is not token money, it is not fiat money — it is an altogether different animal entirely. For instance, under a commodity money regime an over-accumulation of capital produced falling prices during depressions, while the purchasing power of the commodity money rose. As I will show, ex nihilo currency inverts this relation after the Great Depression — now prices denominated in the debased ex nihilo currency rise as economic activity contracts, while the purchasing power of the ex nihilo currency falls.
So far as I know, there is no instance of a commodity money suffering a hyperinflation. Hyperinflation does not render a currency worthless; rather, the currency is immediately rendered worthless during debasement from a commodity that can serve as standard of price. Debasement can result in hyperinflation, but hyperinflation is not the necessary result of debasement. Hyperinflation must be defined as the extreme and rapid depreciation of the purchasing power of a currency that is already worthless, that already has been debased. Historically, while hyperinflation follows the debasement of the currency from gold, not every debasement of currency from gold has led to hyperinflation. Hyperinflation is historically associated not with commodity money per se, but with ex nihilo currency.
Here a distinction must be made between money — the commodity which performs the function of universal equivalent — and ex nihilo currency, which has no relation to commodity money at all. While this ex nihilo currency can replace commodity money in circulation like token money under certain definite circumstances, what makes it different from token money is that it has no definite relation with a commodity that serves as money — it is not “honest” money, i.e., tokens whose purchasing power is held within limits governed by the laws governing the circulation of commodity money. However, like the circulation of tokens of money, ex nihilo currency is subject to certain laws, the most important of which is it can only represent in circulation the value of the commodity money it replaces.
When we speak of the purchasing power of ex nihilo money, we are in fact only referring to the quantity of commodity money this ex nihilo currency actually represents in circulation. In this case, the commodity money on which I base my discussion is gold; so, the purchasing power of an American ex nihilo dollar represents the quantity of gold having a price of one dollar. If gold has a price of $22.67 an ounce, the purchasing power of one ex nihilo dollar is equal to the value of 0.044 ounce of gold; if gold has a price of $1525, the purchasing power of an ex nihilo dollar is equal to 0.0006557 ounce of gold. If the price of gold falls from $800 per ounce to $250 per ounce, the purchasing power of ex nihilo currency has risen from 0.00125 ounce of gold to 0.004 ounce of gold. If the price of an ounce of gold rises from $250 to $1525, the purchasing power of ex nihilo currency has fallen from 0.004 ounce of gold to 0.0006557 ounce of gold.
In any case, the purchasing power of ex nihilo currency refers only to the quantity of gold that would otherwise be in circulation circulation had not it been replaced by ex nihilo currency. It does not refer to the purchasing power of ex nihilo currency in relation to any other commodity. But, the quantity of gold in circulation at any point is not given — at one point it may be higher, while at another point it is lower. If, despite these fluctuations, the amount of ex nihilo currency in circulation is unchanged, it will, in the first case, represent more commodity money, and, in the latter case, represent less commodity money. The purchasing power of the ex nihilo currency will rise or fall with the fluctuation of economic activity which it denominates in itself. Since, when actually in circulation, the currency of commodity money is only a reflex of the circulation of commodities — rising and falling with this circulation — the purchasing power of the ex nihilo currency will only represent this quantity of commodity money irrespective of the absolute quantity of ex nihilo currency in circulation.
The circulation of commodity money is only a reflex of the circulation of commodities. Assuming the value of commodities and the velocity of money are fixed, when the circulation of commodities increases, the quantity of commodity money in circulation must increase. When the circulation of commodities decreases, the quantity of commodity money in circulation must decrease. Consequently, a fixed quantity of ex nihilo currency will represent a larger or smaller quantity of commodity money respectively as economic activity expands or contracts. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is increasing, the purchasing power of this fixed quantity of ex nihilo currency must increase. If a fixed quantity of ex nihilo currency is in circulation when the circulation of commodities is decreasing, the purchasing power of this fixed quantity of ex nihilo currency must decrease.
The supply of commodity money and the supply of ex nihilo currency are not the same thing. While the circulation of commodity money is naturally driven by economic activity, the amount of ex nihilo currency available to circulate is always dependent on the State issuance of ex nihilo currency. Moreover, once ex nihilo currency is in circulation, it will tend to remain in circulation. Thus, while the quantity of commodity money in circulation rise or falls with the circulation of commodities, the purchasing power of the ex nihilo currency replacing commodity money tends to increase or decrease with the circulation of commodities instead. For this reason, ex nihilo currency presents us with the paradox that prices tend to fall as economic activity increases and rise with the fall in economic activity.
If all else is given, we are forced to the following conclusion regarding the purchasing power of ex nihilo currency :
- the purchasing power of ex nihilo currency rises during periods of economic expansion, i.e, a given quantity of ex nihilo currency can purchase a greater sum of values. This is precisely the opposite of what we would expect from commodity money. While,
- the purchasing power of ex nihilo currency falls during periods of economic contraction, i.e, a given quantity of ex nihilo currency can purchase a smaller sum of values. Again, this is precisely the opposite of what we would expect from commodity money.
The behavior of prices are the inverse of what we would expect if ex nihilo currency behaved like commodity money. With commodity money, we should expect to find commodities being over-valued during expansions and devalued during periods of contraction. But. with ex nihilo currency, we find instead that commodities are devalued during expansions and over-valued during periods of contraction. Prices denominated in ex nihilo currency fall during expansions and rise during contractions.
When an economic contraction takes place, the sum value of commodities in circulation falls; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money too must fall. A given supply of ex nihilo currency now represents the value of a smaller quantity of commodity money. The values expressed by commodity prices fall, or, what is the same thing, a given value is expressed in higher ex nihilo currency prices. On the other hand, when an economic expansion takes place, the sum value of commodities in circulation rises; since the circulation of the commodity money is only a reflex of the circulation of commodities, the circulation of commodity money must rise as well. A given supply of ex nihilo currency now represents the value of a larger quantity of commodity money. The values expressed by commodity prices rise, or, what is the same thing, a given value is expressed in lower ex nihilo currency prices. The result is that, absent a commodity to serve as standard of prices, prices denominated in an ex nihilo currency will tend to rise during periods of economic contraction, but fall during periods of economic expansion.
Moreover, in a pure ex nihilo money economy where no commodity serves as standard of prices, prices of commodities are subject to disturbances in the ratio of the existing supply of ex nihilo money in circulation and the quantities of commodities in circulation that are denominated in the ex nihilo currency.
- Should the quantity of commodities in circulation suddenly increase, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly decrease. Should the quantity of commodities in circulation suddenly decrease, while the supply of ex nihilo money remains unchanged, the general price level expressed in ex nihilo money will just as suddenly increase.
- Should the supply of ex nihilo money in circulation suddenly increase, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly rise. Should the supply of ex nihilo money in circulation suddenly decrease, while the supply of commodities remains unchanged, the general price level of commodities expressed in the ex nihilo money will just as suddenly fall.
In either case, the sum of prices are not related to the sum of values of commodities, but only to the ratio of the sum of ex nihilo money to the sum of commodities in circulation. In fact I question whether money exists at all. Insofar as money function as a measure and store of value, it cannot circulate within society; insofar as is circulates within society and serves as a standard of prices, it cannot be a measure of value. What is left after the debasement of money is money, the social relation, irretrievably broken.
Actually, we’ve been in a depression since 2001
Whatever the outcome of the present crisis, John Williams’ prediction rests on such a defective theory of money and ex nihilo price formation that his prediction is useless to us. Ex nihilo money appears to allow the formation of so-called monopoly pricing in the economy. By restricting production, monopolies can, in fact, pad their profits, even as society descends into abject scarcity and want under an ex nihilo monetary regime. Rising prices during a depression is not a defect of an ex nihilo monetary regime, but the way prices would be expected to behave under that regime as capital is devalued. From the standpoint of the capitalist mode of production, inflation of ex nihilo prices is to be expected, and is the expression of the mode’s attempt to establish the sound basis for its future operation.
When I look at gold prices, I find evidence that the economy actually has been in a depression since 2001. According to my figures, gold prices bottomed in 2001 at around $271.04, and have been rising steadily for most of the decades after this. This is the first time gold prices have risen so consistently since the 1970s great depression/great stagflation. It follows from this that Williams’ depression, at least, has nothing to do with a hyperinflation of prices itself. At the same time, hyperinflation, in his model, does not coincide with a depression, but hinges on an exogenous political event: the rejection of the dollar as world reserve currency by other nations. To this we will turn next.