From the forthcoming May 2007 issue of the Socialist Standard
Cooking the Books (I) Underlying cause
On 23 March 2005 an explosion and fire occurred at the BP-owned oil refinery in Texas City. Fifteen workers were killed and 170 injured. The US Chemical and Safety Hazard Investigation Board decided that, on this occasion, it would investigate not just the technical causes of the explosion - which valve was left open, who left it open, which alarm wasn't working, and the like - but also "the underlying and significant cultural, human factors and organizational causes of the disaster that have a greater impact".
The result was a report two years later which the Times (21 March) headlined "Watchdog points finger at cost cuts in damning verdict on BP. Budget pressures behind refinery fire. Top management knew of problems".
BP had acquired the refinery when it took over Amoco in 1988. Following this, BP's chief executive, Sir John Browne, set a target for all its plants of reducing fixed costs in the year 1999-2000 by 25 percent. These are costs other than labour and materials and consist mainly of buildings and equipment including the costs of maintaining them. "In 2002", the report discovered, "BP engineers proposed connecting the Isom blowdown drum system to a flare but BP chose a less expensive option". The refinery manager "ruled against the investment and stated in an e-mail: 'Bank the savings in 99.999 per cent of the cases'".
The Chemical Safety Board's report concluded: "Cost-cutting and budget pressures from BP Group executive managers impaired process safety performance at Texas City".
To go beyond the technical reasons for the explosion and investigate other factors was a step in the right direction. But not far enough. The Board only looked for "the underlying and significant cultural, human factors and organizational causes" within BP. But why stop there? Why not ask what pressures BP's top executives were under to behave in the way they did?
If the Board had done this, they would have to have taken into account the declaration issued on the occasion of the BP take-over of Amoco in 1998:
And also that, at the time, the price of oil was low, meaning that the main way to keep up profits would be by cutting costs rather than increasing sales. And that in fact it was to face what Sir John called in the same statement the "fierce" competition on the energy market that was behind the take-over. And, further, that takeovers involve an expenditure of money which has to be raised one way or another. And that raising this added further pressure to save money and - "in 99.999 per cent of the cases" – bank it.
The cost-cutting exercise was successful - in the middle of it Sir John was elevated to be Lord Browne of Madingley for services to industry - as recorded by the Times financial columnist Carl Mortished:
Cooking the Books (II) Just A Yellow Metal
"Gold prices could pass $850 record" read a headline in the Financial Times (5 April), reporting a forecast by a metals consultancy of what might happen over the next 12 months. As gold is currently selling at around $670-80 an ounce, this would be a huge increase. If something like this had happened a hundred years ago, it would have brought about financial and economic chaos by causing a huge fall in the general price level.
This was because at that time gold was still the money-commodity, as the product of labour having its own value in which the values of all other commodities were expressed. Prices were expressed in units of currency, but these were defined as a given weight of gold. A pound, for instance, was defined as about 1/4 oz of gold. This meant that anything taking the same amount of socially necessary labour time to produce as an ounce of gold would have a price of £1.
If the amount of socially necessary labour needed to produce an ounce of gold fell, a rise in the general price level would result since other commodities, containing more value, would exchange for more gold. If, on the other hand, the labour-time cost of producing gold increased, the result was the opposite: a fall in the general price level. Which is why an increase of the order of from $680 to $850 an ounce would have caused chaos a hundred years ago.
The reason it won't do so today is that gold is no longer the money-commodity. Up to World War 1 gold was used to settle international payments. Also, there were gold coins in circulation, along with paper notes that were convertible into gold at a fixed rate. This system collapsed with the outbreak of war in 1914 and, despite attempts to revive it between the wars, never really worked again. Nearly all currencies became "inconvertible", i.e. no longer exchangeable on demand into a given amount of gold, which has remained the case ever since.
At the end of World War 2 a new system for settling international payments was established based on the dollar. The exchange rate between other currencies and the dollar (and so between the other currencies) was fixed, but, since the dollar was defined as 1/35 oz of gold, gold still played an indirect role as the money-commodity as a standard of price.
This system, with its repeated devaluations of the different currencies, came to an end in 1971 when the US government abandoned its commitment to pay $35 for an ounce of gold. After that, all currencies floated and, though central banks still retained gold reserves, gold became an ordinary commodity, another precious metal alongside silver and platinum, whose price fluctuations have no effect, either way, on the general price level.
The price of gold is still expressed in dollars but, nowadays, rather than a change in the price of gold leading to a change in the value of the dollar, it's the other way round. One of the reasons for the expected rise in the price of gold is the current weakness of the dollar. Another is perceived future economic insecurity in that gold, as a product of labour, is still a store of value which, if the fears are realised, is better to be left holding than a mere piece of paper. Which is why central banks still keep some gold, though Gordon Brown has been criticised for selling off half of Britain's stock from 1999 to 2002 ("Brown lost £2bn selling UK's gold", Sunday Times, 15 April).
When socialism, where of course money will be redundant, has been established, there will be a long-standing proposal as to what to do with gold waiting to be considered. In his book Utopia in 1516 Thomas More proposed it be used for making chamber pots. Some 400 years later Lenin moved an amendment to replace the words "chamber pots" by "urinals". In the end, we'll probably just use it for jewellery and other ornaments.
Cooking the Books (I) Underlying cause
On 23 March 2005 an explosion and fire occurred at the BP-owned oil refinery in Texas City. Fifteen workers were killed and 170 injured. The US Chemical and Safety Hazard Investigation Board decided that, on this occasion, it would investigate not just the technical causes of the explosion - which valve was left open, who left it open, which alarm wasn't working, and the like - but also "the underlying and significant cultural, human factors and organizational causes of the disaster that have a greater impact".
The result was a report two years later which the Times (21 March) headlined "Watchdog points finger at cost cuts in damning verdict on BP. Budget pressures behind refinery fire. Top management knew of problems".
BP had acquired the refinery when it took over Amoco in 1988. Following this, BP's chief executive, Sir John Browne, set a target for all its plants of reducing fixed costs in the year 1999-2000 by 25 percent. These are costs other than labour and materials and consist mainly of buildings and equipment including the costs of maintaining them. "In 2002", the report discovered, "BP engineers proposed connecting the Isom blowdown drum system to a flare but BP chose a less expensive option". The refinery manager "ruled against the investment and stated in an e-mail: 'Bank the savings in 99.999 per cent of the cases'".
The Chemical Safety Board's report concluded: "Cost-cutting and budget pressures from BP Group executive managers impaired process safety performance at Texas City".
To go beyond the technical reasons for the explosion and investigate other factors was a step in the right direction. But not far enough. The Board only looked for "the underlying and significant cultural, human factors and organizational causes" within BP. But why stop there? Why not ask what pressures BP's top executives were under to behave in the way they did?
If the Board had done this, they would have to have taken into account the declaration issued on the occasion of the BP take-over of Amoco in 1998:
"The managements of BP and Amoco already have a shared financial philosophy. The targets our companies have previously set are very similar - powerful annual earnings growth, a strongly-competitive return on capital, and dividends in line with underlying earnings" (see article, BP-Amoco Merger).
And also that, at the time, the price of oil was low, meaning that the main way to keep up profits would be by cutting costs rather than increasing sales. And that in fact it was to face what Sir John called in the same statement the "fierce" competition on the energy market that was behind the take-over. And, further, that takeovers involve an expenditure of money which has to be raised one way or another. And that raising this added further pressure to save money and - "in 99.999 per cent of the cases" – bank it.
The cost-cutting exercise was successful - in the middle of it Sir John was elevated to be Lord Browne of Madingley for services to industry - as recorded by the Times financial columnist Carl Mortished:
"In 2000 BP boasted that it had generated $2 billion in cost-savings, and then, in 2001, Lord Browne of Madingley announced a further $2 billion in 'performance improvements'. By the end of 2002 a further billion dollars was pulled out of the hat and the BP chief executive announced a programme of $2 billion stock repurchases. The cashflows were being delivered in places such as Texas City".
Cooking the Books (II) Just A Yellow Metal
"Gold prices could pass $850 record" read a headline in the Financial Times (5 April), reporting a forecast by a metals consultancy of what might happen over the next 12 months. As gold is currently selling at around $670-80 an ounce, this would be a huge increase. If something like this had happened a hundred years ago, it would have brought about financial and economic chaos by causing a huge fall in the general price level.
This was because at that time gold was still the money-commodity, as the product of labour having its own value in which the values of all other commodities were expressed. Prices were expressed in units of currency, but these were defined as a given weight of gold. A pound, for instance, was defined as about 1/4 oz of gold. This meant that anything taking the same amount of socially necessary labour time to produce as an ounce of gold would have a price of £1.
If the amount of socially necessary labour needed to produce an ounce of gold fell, a rise in the general price level would result since other commodities, containing more value, would exchange for more gold. If, on the other hand, the labour-time cost of producing gold increased, the result was the opposite: a fall in the general price level. Which is why an increase of the order of from $680 to $850 an ounce would have caused chaos a hundred years ago.
The reason it won't do so today is that gold is no longer the money-commodity. Up to World War 1 gold was used to settle international payments. Also, there were gold coins in circulation, along with paper notes that were convertible into gold at a fixed rate. This system collapsed with the outbreak of war in 1914 and, despite attempts to revive it between the wars, never really worked again. Nearly all currencies became "inconvertible", i.e. no longer exchangeable on demand into a given amount of gold, which has remained the case ever since.
At the end of World War 2 a new system for settling international payments was established based on the dollar. The exchange rate between other currencies and the dollar (and so between the other currencies) was fixed, but, since the dollar was defined as 1/35 oz of gold, gold still played an indirect role as the money-commodity as a standard of price.
This system, with its repeated devaluations of the different currencies, came to an end in 1971 when the US government abandoned its commitment to pay $35 for an ounce of gold. After that, all currencies floated and, though central banks still retained gold reserves, gold became an ordinary commodity, another precious metal alongside silver and platinum, whose price fluctuations have no effect, either way, on the general price level.
The price of gold is still expressed in dollars but, nowadays, rather than a change in the price of gold leading to a change in the value of the dollar, it's the other way round. One of the reasons for the expected rise in the price of gold is the current weakness of the dollar. Another is perceived future economic insecurity in that gold, as a product of labour, is still a store of value which, if the fears are realised, is better to be left holding than a mere piece of paper. Which is why central banks still keep some gold, though Gordon Brown has been criticised for selling off half of Britain's stock from 1999 to 2002 ("Brown lost £2bn selling UK's gold", Sunday Times, 15 April).
When socialism, where of course money will be redundant, has been established, there will be a long-standing proposal as to what to do with gold waiting to be considered. In his book Utopia in 1516 Thomas More proposed it be used for making chamber pots. Some 400 years later Lenin moved an amendment to replace the words "chamber pots" by "urinals". In the end, we'll probably just use it for jewellery and other ornaments.
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