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Posts Tagged ‘Presidential Executive Order 6102’

CLUELESS: “Deflation is bad. M’kay?”

October 21, 2012 Leave a comment

The world market had been shaken by a series of financial crises, and the economy of Japan had fallen into a persistent deflationary state, When Ben Bernanke gave his 2002 speech before the National Economists Club, “Deflation: Making Sure “It” Doesn’t Happen Here”. Bernanke was going to explain to his audience filled with some of the most important economists in the nation why, despite the empirical data to the contrary, the US was not going to end up like Japan.

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CLUELESS: How Ben Bernanke is managing the demise of capitalism

October 17, 2012 Leave a comment

So I am spending a week or so trying to understand Ben Bernanke’s approach to this crisis based on three sources from his works.

In this part, the source is an essay published in 1991: “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison”. In this 1991 paper, Bernanke tries to explain the causes of the Great Depression employing the “quantity theory of money” fallacy. So we get a chance to see this argument in an historical perspective and compare it with a real time application of Marx’s argument on the causes of capitalist crisis as understood by Henryk Grossman in his work, The Law of Accumulation and Breakdown.

In the second part, the source is Bernanke’s 2002 speech before the National Economists Club: “Deflation: Making Sure “It” Doesn’t Happen Here”. In this 2002 speech, Bernanke is directly addressing the real time threat of deflation produced by the 2001 onset of the present depression. So we get to compare it with the argument made by Robert Kurz in his 1995 essay, “The Apotheosis of Money”.

In part three, the source will be Bernanke’s recent speech before the International Monetary Fund meeting in Tokyo, Japan earlier this month, “U.S. Monetary Policy and International Implications”, in which Bernanke looks back on several years of managing global capitalism through the period beginning with the financial crisis, and tries to explain his results.

To provide historical context for my examination, I am assuming Bernanke’s discussion generally coincides with the period beginning with capitalist breakdown in the 1930s until its final collapse (hopefully) in the not too distant future. We are, therefore, looking at the period of capitalism decline and collapse through the ideas of an academic. Which is to say we get the chance to see how deflation appears in the eyes of someone who sees capitalist relations of production, “in a purely economic way — i.e., from the bourgeois point of view, within the limitations of capitalist understanding, from the standpoint of capitalist production itself…”

This perspective is necessary, because the analysis Bernanke brings to this discussion exhibits all the signs of fundamental misapprehension of the way capitalism works — a quite astonishing conclusion given that he is tasked presently with managing the monetary policy of a global empire.

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Inflation, the negative rate of profit, and the Fascist State (Part five)

April 17, 2011 2 comments

According to the Wikipedia entry on Executive Order 6102, the fine for hoarding gold was ten thousand dollars. At the same time, the executive order demanded all private holdings be turned in and exchanged for government issued ex nihilo dollars at an exchange rate of $20.67 per troy ounce of gold. Using this as our base measure, the fine for hoarding gold amounted to 483.79 troy ounces of gold.

So, like the authors of the Wikipedia entry I tried to update the purchasing power of the 1933 ten thousand dollar fine into an amount of money equal to it in 2011 dollars. I went to the Bureau of Labor Statistics Consumer Price Index website and found that according to its statistical measure of inflation it now takes $171,897.69 to purchase the same quantity of goods that the ten thousand dollar fine would have purchased in 1933. According to the Bureau of Labor Statistics, the purchasing power of the ten thousand dollar fine has fallen to just 5.82 percent of its purchasing power in 1933. This is a fantastic depreciation in the purchasing power of dollars. However, it is also a gross lie — the depreciation of dollars has been far more severe than even the BLS admits, as we will now show.

The Problem of the Consumer Price Index

The Consumer Price index has been the subject of continuing controversy, including charges that it overestimates inflation and charges that it underestimates inflation. But, this controversy does not concern us here, since it is, in part at least, a political disagreement. What does concern us is the index itself, which popularly purports to measure the depreciating purchasing power of money in relation not to a fixed standard, but against a multitude of standards — that is, against a so-called basket of consumer goods.

Upon deeper investigation, however, I found, according to the entry in the Wikipedia on the United States Consumer Price Index, that the CPI was never meant to measure inflation or the depreciating purchasing power of money:

The U.S. Consumer Price Index (CPI) is a time series measure of the price level of consumer goods and services. The Bureau of Labor Statistics, which started the statistic in 1919, publishes the CPI on a monthly basis. The CPI is calculated by observing price changes among a wide array of products in urban areas and weighing these price changes by the share of income consumers spend purchasing them. The resulting statistic, measured as of the end of the month for which it is published, serves as one of the most popular measures of United States inflation; however, the CPI focuses on approximating a cost-of-living index not a general price index.

Intrigued by this disclaimer, I went searching for the difference between a measure of inflation and a measure of the “cost of living”. Among the information I found was an admission by the Bureau of Labor Statistics that the Consumer Price Index not only does not measure inflation, but it is not even a true measure of the cost of living. It is limited to measuring market purchases by consumers of a basket of goods and services.

According to Wikipedia, the BLS states:

The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would constitute a complete cost-of-living framework.

Since, the BLS, by its own admission, incompletely measures the amount you must spend to achieve a presumed certain level of “utility” — the so-called Standard of Living — how do they define this “utility”? Further reading explains:

Utility is not directly measurable, so the true cost of living index only serves as a theoretical ideal, not a practical price index formula.

So, to sum up: the Bureau of Labor Statistics Consumer Price Index is a measure of a theoretical construct which cannot be defined, is difficult to determine, and, in any case, is not directly measurable: the so-called “Standard of Living“.

The hidden costs borne by society

If we go back to the first paragraph of the original definition of inflation proposed the the Wikipedia entry, we find this:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[my emphasis] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Inflation is defined as the general rise in prices of goods and services, but also as the erosion of the purchasing power of money — i.e., the depreciation of money. Against what is this erosion of purchasing power to be measured? Here, the Wikipedia is silent, leaving us with the wrong idea that the “real value” of money is to be measured against the commodities we can purchase with it. As this “real value” erodes, we can purchase fewer goods and services. This implied method of measuring the depreciation of money, however, does not give us a general measure of the price level, as the BLS admits, but only a measure of the price level as expressed in a series of transactions in the market for so many individual commodities.

The war in Afghanistan, for instance, would not be captured by this implied method; nor, would the cost incurred by society as a result of  the damage British Petroleum caused to the Gulf of Mexico; nor, the cost borne by society for the Fukushima nuclear disaster, or that created by the bailout of the failed banksters on Wall Street. Unless these costs actually entered into the prices of commodities in market transactions, they will not show up in the Consumer Price Index. And, a considerable  period of time could pass between the events and their expression in the prices of commodities tracked by the Consumer Price Index. Moreover, the change in prices of the commodities tracked by the Consumer Prices Index are subject to innumerable factors arising from market forces within the World Market — making it impossible to trace any specific fluctuation back to its source. On the other hand, each of the events of the sort cited above materially affected either the necessary labor time of society or the quantity of ex nihilo money in circulation within the economy.

The question to which we seek an answer is not how much the purchasing power of ex nihilo money has depreciated with respect to some arbitrarily established concept of living ltandard, but how much it has diverged from the purchasing power of gold standard money? To answer this question, we must directly measure these changes by comparing the general prices level against the commodity that served as the standard for prices until money was debased and replaced with ex nihilo dollars.

Gold standard dollars more or less held prices to the necessary social labor time required for the production of commodities; the divergence between gold and dollars since the dollar was debased, provides us with an unambiguous picture of inflation since 1933.  The divergence between the former gold standard money and ex nihilo money must be expressed as the depreciation of ex nihilo money purchasing power for an ounce of gold over time , or, what is the same thing, as the inverse of the price of gold over a period of time — as is shown in the chart below for the years 1920 to 2010.

Inflation since 1933 has been four times higher than BLS figures show

So, how does all of this relate back to the fine imposed on anyone found guilty of hoarding gold under Executive Order 6120? Remember, in 1933 the ten thousand dollar fine could have been exchanged for 483.79 ounces of gold. According to the BLS Consumer Price Index this translates into $171,897.69 in current dollars. However, 483.79 troy ounces of gold actually commands the far greater sum of $714,441.22, or 4 times as many dollars as the BLS Consumer Price Index states.

To put this another way, the Consumer Price Index is a complete fabrication by government to deliberately understate the actual depreciation of dollar purchasing power. The cumulative results of decades of false inflation statistics can be seen by simply comparing CPI statistics to the actual depreciation of dollar purchasing power against its former standard, gold. The extent of this fabrication can be seen in the chart below:

Moreover, for 2010, the annual average price inflation rate was a quite staggering 26%, when measured against the value of gold, not the paltry 1.6% alleged by the BLS.

If you didn’t receive a 26 percent increase in your wages or salary in 2010, you experienced a 26% loss in purchasing power — your consumption power was systematically destroyed by Washington money printing.

Using gold as the standard against which the depreciation of ex nihilo money is measured demonstrates how the Fascist State deliberately manipulates statistics for its own purposes to hide from the public the extent to which it manipulates exchange, and, therefore, the extent to which this manipulation has resulted in greatly increased prices for commodities.

But, gold does not only allow us to actually visualize the extent of this manipulation, as we shall show in the next post, gold also can demonstrate how this manipulation results in the needless extension of social working time beyond its necessary limit. That the Fascist State relentlessly extends working time beyond this limit, or, more importantly, that operates to maintain an environment of scarcity within society, which is the absolute precondition for Capital’s continuation.

To be continued

Inflation, the negative rate of profit, and the Fascist State (Part four)

April 14, 2011 Leave a comment

Executive Order 6102

In the bare bones sketch of Marx’s theory I argued that the value of the object serving as money played no role in its function as money. This was incomplete, of course, but it served to advance my argument until I could directly address the implication of debasement of money by the industrial powers during the Great Depression. In reality, the price (actually value/price) mechanism can only perform its function to coordinate the separate acts of millions of individual labor times if it shares with commodities the attribute of being a product of labor itself, and, for this reason, requires a definite socially necessary labor time for its own production. Because gold has value, it can express the value of the commodities with which it is exchanged.

On the surface, a commodity is exchanged for money, and this transaction is the exchange of two absolutely unlike objects: the money serves no purpose but means of exchange, while the commodity with which it is exchanged is eventually consumed; the money never leaves circulation, while the commodity disappears; the money can always find a new owner, while the commodity only finds an new owner where it is needed. They are as different as night and day. Although, the flows of money through the community are only a necessary reflex of the flows of commodities through the community as it engages in a more or less developed act of social production. But, by always being exchangeable for commodities throughout the community, always being in constant circulation within the community, and by serving only as means of exchange, money brings millions of isolated individual acts of production into some sort of rough coordination.

As the physical expression of socially necessary labor time money is a natural and spontaneous means by which the value/price mechanism regulates the activities of the community in absence of the community’s own planned management. However, I must emphasize, money is only the expression of socially necessary labor time; it is not and should not be mistaken for socially necessary labor time itself. And, it can only express the socially necessary labor time of society, because the community requires some definite socially necessary labor time to create it. What object serves as money for the community is, therefore, of general interest to the whole of the community, and has a very long history — most of which, since we take this history as our starting point, is of no interest to us here. I only note that since this General Interest must take some form, the form it takes during the period under discussion, from the Great Depression until the present, are the laws of the various States regarding the legal definition of money.

Breakdown of the law of value emergence of the Fascist State

On April 5, 1933, the Roosevelt administration issued Executive Order 6102. The Wikipedia outlines the scope of this executive order:

Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens. The bank panics of Feb/March 1933 and foreign exchange movements were in danger of exhausting the Federal Reserve holdings of gold. Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both.

This simple executive order, which was succeeded by several additional orders during 1933, and by the Gold Reserve Act of 1934, removed gold as the standard for the dollar, made it illegal to own more than a small amount of the metal, and compelled individuals under penalty of law to turn their gold over to the Federal Reserve in return for the then existing exchange rate of $20.67. On the surface this order just gave the State monopoly over the ownership of gold and reduced money to just a State-issued token. While this step was, in and of itself, fairly staggering, particularly when we consider that it was duplicated in all the big industrial nations at the same time, once we consider the full ramifications of the orders and succeeding law in terms of the various national economies, it quickly becomes apparent that a state monopoly over the ownership of gold, and the replacement of gold standard money by State-issued currency was only the most obvious effect. John Maynard Keynes, who examined the issue entirely from the standpoint of a bourgeois economist, had some inkling of the far reaching implication of State issued ex nihilo money. Fifteen years earlier, he argued that the inflationary consequences of excessive money printing amount to the confiscation of private property:

… By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

If excessive money printing raised the question of secret confiscation of property, the actual confiscation of gold, and the replacement of gold money  by state-issued currency amounted to the explicit expropriation of monetary wealth. Yet, even this implied expropriation of social wealth in its capitalistic form was not the most significant implication of the state action: From the standpoint of Marx’s theory, the debasement of money was the abolition of the historically developed natural and spontaneously created value/price mechanism as the regulator of the social act of production. In place of a natural relation between the values of commodities and the prices of commodities, the relation between the two was, after this, to be established as a matter of state policy. This separation is the absolute development of the historical antithesis between the commodity and money, since paper money has no use except as medium of circulation of commodities — as means of exchange. Moreover, by this executive order severing gold from money, we see not only that the value of the commodity was severed from its price, but, further, that production was severed from consumption; labor power was severed from wages; surplus value was severed from profits. Finally, with the law of value no longer determining the social necessity of a given expenditure of labor time, the labor time expended by society was no longer limited by social necessity.

In place of the historical, spontaneous and naturally developed mode by which the separate activities of millions of members of Civil Society in every country had been hitherto regulated, social labor and its duration was now regulated by the State, and under conditions determined solely by the State. The abolition of the gold standard did not simply sever the connection between gold and money, and abolish the value/price mechanism, it also placed the total social capital of Civil Society at the disposal of the State — or, what is the same thing, announced the emergence of the Fascist State. Property, the classical thinkers argued, is the power to dispose of the labor of others, hence this total social capital was converted into the property of the State.

The Fascist State as regulator of production and consumption

The entire social capital of every nation was expropriated, precisely as Marx predicted, but in a fashion and under circumstances quite different than those which might have been welcomed by him. As I argued in another post, Marx’s differences with Bakunin came down to difference over whether the Proletariat would be compelled to effect management of social production according to the principle of “to each according to his work”, that is by replacing the existing Civil Society and the State with new rules enforcing labor equally on all members of society. Marx was not making this argument in a vacuum; his theory predicted a breakdown of the law of value as the regulating principle of social labor before the necessary conditions were established for a fully communist society. Society would be required by this breakdown to step in and manage social labor directly and according to a plan. Marx’s argument with the Anarchists essentially asked the question, “By what rules would this management be effected?” As is obvious from an investigation of history, this question was settled decisively in favor of the existing Civil Society, which rose to manage its General Interest — i.e., its interests as a mode of Capital — through the machinery of the Fascist State.

Within ten years of this act, more than 80 million people were dead and the Eurasian continent lay in ruins, as each nation state, finding itself in total control of the productive capacity of their respective nations, immediately put this productive capacity to good use by trying to devour their neighbors — unleashing a catastrophe on mankind. By 1971, with the collapse of the Bretton Wood agreement, a single fascist state, the United States, had imposed on the survivors the very same control over the other national economies, that it imposed on its own citizens.

As I stated in the previous post:

However, there are so many holes in the economist’s definition of inflation, as a matter of due diligence I must consider inflation from the standpoint of Marx’s labor theory of value. If I arrive at the same conclusions about inflation that are expressed in the Wikipedia definition — or at conclusions that throw no new light on the subject — then I will have spent about five hours pursuing a dead end.

I have now considered inflation from the standpoint of Marx’s labor theory of value and have come to decidedly different conclusions than those drawn in the Wikipedia entry on the subject. These conclusions, I argue, suggest a catastrophic breakdown of the conditions of capitalist production and exchange during the Great Depression; and, based on this, the assumption by the State of direct management of social production, the conversion of the total social capital into the property of the State — not by means of outright seizure of this capital, but by taking control of the conditions of exchange — and the extension of this relationship to the entire World Market.

With the assumption of management of social production by the Fascist State, the law of value, which served to limit the average price of the commodity to the socially necessary labor time required for its production, no longer imposed such limits on prices. Hence, prices could be determined by factors other than the value of these commodities. On the other hand, with the law of value — that is socially necessary labor time — no longer imposing a limit on the total labor time of society, this labor time could be expanded in a form that is completely superfluous to social necessity. We can, therefore, define inflation as the chronic general rise in the price level resulting from the further extension of hours of labor beyond their socially necessary limit; or, prices held constant, by the reduction of the ratio of socially necessary labor time to the actual hours of labor expended. Finally, we can see that inflation itself is no more than the result of Fascist State policy, which, acting as the social capitalist, seeks the ever greater extension of the working day even as the productive capacity of society reduces the necessary labor time of social labor.

In my next post, I will examine each of these conclusions in turn.

To be continued

Other takes on why capitalism didn’t end in 1929

September 27, 2009 Leave a comment

Since the question of why capitalism didn’t end in 1929 has such obvious relevance to our present circumstances, it is no surprise some of the most important – or the most irritatingly ubiquitous – voices in economics have weighed in with their various theories. All of these theories consist, in one way or another, of a description of how Washington and its many subdivisions fixed the economy, and set it back on the road to ceaseless expansion.

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