The Socialist Forum: Some Questions About Gold. (1932)

Letter to the Editors from the April 1932 issue of the Socialist Standard

Elvaston Place, S.W.

Editor of the Socialist Standard.

Sir,

In October, you wrote: “The illusion that lack of gold has anything to do with the main problems is easily dispelled.” Is trade depression not a main problem ? No doubt a large part of the world’s economic difficulties are due to the lack of any plan in laissez-faire production and to the inequitable distribution of purchasing power resulting from private exploitation of the sources of wealth. But the best chance of modifying these conditions lies in the trades unions’ membership being increased, and the number of their members varies inversely with the percentage unemployed.

If the supply of gold is inadequate for the alleged requirements of the central banks and their clients, then primary prices will be forced down ; such a fall in prices involves reduction in the demand for manufactures, and inadequate profit or prospective losses deter the entrepreneur class from operations which increase employment and wages. There is almost complete short-term correspondence between the relation of primary prices to costs and the numbers unemployed, while with the upward trend of prices from 1896 to 1915 there was only two-thirds the unemployment of the preceding twenty years when the trend of prices was downward. Thorp & Mitchell’s Business Annals shows seven times as many years of prosperity per year of depression for the upward periods, 1849-73 and 1896-1920 as for that from 1873 to 1896. Your reference to the “very great increase in the supply of gold from 1890 to 1914″ shows that you do not appreciate the meaning of the term, “relative gold supply,” i.e., the actual supply relative to an increasing demand. This rose but slowly from the year 1896, allowing for an average increase in prices of about 2 per cent. a year from the disastrously low level of 1894-98. Both employment and the standard of living, however, were much higher at the end of the period than at the beginning. In 1926, real wages in the United States, according to Professor P. H. Douglas, were one-quarter higher than in 1890-99, while for Great Britain the New Survey of London gives a figure one-third higher than in 1890.

With regard to the second part of the article, “The Gold Standard and the Crisis,” I should like to say that (1) a practical policy must adapt itself to changing conditions. At the beginning of 1931, Mr. Keynes—who was mainly responsible for the Macmillan Report—considered that Great Britain would be in a much stronger position for leading the world out of the depression if sterling remained tied to gold. In the summer he no longer held that view. (2) Mr. Norman’s opinion as to the efficacy of Bank Rate is of no importance. Under the circumstances, a 9 per cent. rate would have been ineffective, but would probably have caused a panic. It might have been better if we had abandoned gold without first borrowing and then being pushed off, but to contend that the Bank should have maintained payments in gold, come what might, is to imagine that gold parity is an end in itself. The essential—as opposed to the ostensible—reason for high money rates is a sharp rise in the level of prices. And prices were falling heavily.

Geoffrey Biddulph.

Reply

Mr. Biddulph’s remarks are only distantly related to the articles which he seeks to criticise. Further they reveal a complete lack of understanding of the Socialist view of the depression. Our contention is that the present crisis is merely a fresh manifestation of an ever-recurring phenomenon of capitalism. As such it does not create any new problem for the workers, whose political object should be the substitution of capitalist society by Socialism. Consequently the workers, as a class, have nothing to gain from any of the various measures—from tariffs and wheat quotas to currency reform—put forward to rescue capitalism from the mire in which its own inherent defects have landed it. By whatever means the depression is ended, capitalism, as a system, will remain intact. In other words the propertyless condition of the workers, the ending of which is, in our view, their sole concern, will persist. Reforms designed to make that condition less oppressive have no attractions for us. When we discussed the present trade depression it was with two objects in mind. In the first place we wished to show how the fundamental cause of this crisis—as of its predecessors—was the fact that goods are produced by wage-labour for profit and not for use. Secondly, we sought to refute certain of the explanations of the crisis that have been advanced, and to expose the incompetence in high places that it has revealed. As we carefully pointed out, we are not concerned to take sides on the question of gold versus managed standard; we merely gave an account of the events thai led up to the abandonment of the gold standard by this country.

Having made clear our position let us turn to Mr. Biddulph. Although he does not specifically say so, it would appear that his view is :—

(1) That the depression is attributable to a fall in the general price-level, itself the consequence of the fact that the rate of increase of the world’s gold has been less than the rate of increase in “the alleged requirements of Central Banks and their clients” for gold.

(2) That a rise in general prices is required to end the depression.

(3) That rising prices are desirable from the point of view of the workers.

The second and third points can be taken together. Even if it is conceded that the depression could be ended by a currency policy that would raise world prices, would the basic conditions of the workers be altered? For one thing would unemployment be eliminated? The most that Mr. Biddulph can claim for a period of rising prices is that unemployment (on the experience of 1896-1915) might be reduced to two-thirds of what it is at present. It is just because Capitalism cannot provide a full life for all, even given the most favourable business conditions, that we are Socialists. Unemployment is a symptom of a defective economic organisation and the defects it indicates remain when unemployment is relatively low as when it is relatively high. This is what reformers and those who talk of “years of prosperity” overlook when they urge their reforms and the taking of steps to restore “prosperity.”

So far as Mr. Biddulph’s first contention is concerned, that is open to two criticisms. Firstly, if it is correct, then Capitalism stands condemned on account of the incompetence of capitalists, for from his use of the word “alleged” in the phrase “alleged requirements of the Central Banks and their clients” for gold it is clear that these requirements were in his view capable of being reduced. In other words, the relative shortage of gold, which he believes to be at the root of the trouble, need not have manifested itself if the world’s leading bankers had possessed but an elementary knowledge of correct currency principles. This is to say that the crisis occurred because of the inability of those in charge ot the financial machine to run it properly. A system of production under which there is such scopes for incompetence to produce evil must stand condemned.

But in our view the crisis cannot be traced to monetary causes. Prices did not fall because of the decline in the relative gold supply but because, as periodically does and must happen under capitalism, goods were produced beyond the capacity of the market to absorb them.

The facts do not support the contrary view advanced by Mr. Biddulph.

The period from 1925 to 1929 was, for the world as a whole, one of increasing economic activity. Even here the national income was rising, and U.S.A. enjoyed the greatest boom in its history. The increase in the supply of gold during that period must have been sufficient to carry the increased volume of business, since economic expansion in fact occurred. In the face of this Mr. Biddulph’s theory requires that the rate of increase in the gold supply after 1929 was less than during the preceding 4 years. Unfortunately for the theory, however, the figures show exactly the opposite. According to the estimates of Mr. Kitchin (see “The Times,” February 18th, 1932), in the years from 1925 to 1928 the world’s gold production increased, as compared with the preceding year, by nil, 1.8 per cent., .04 per cent, and 1.3 per cent, respectively and in 1929 was 1.1 per cent, less than in 1928. On the other hand, in 1930 output rose by 3.5 per cent, above the 1929 level and in 1931 was even 4.4 per cent, more than in 1930.

But apart altogether from the question whether the relative supply of gold was or was not sufficient to maintain the 1929 price level, Mr. Biddulph has no justification for stating, without further evidence, that the crisis resulted from a fall in general prices. The price level was falling continuously up to 1929, yet the slump did not start until that year and indeed, as already stated, the period from 1925 to 1929 was one of economic expansion. This last fact destroys the whole of Mr. Biddulph’s case and completely disproves his implied assertion that periods of falling prices are periods of dwindling trade, reduced employment and declining “prosperity.” In this connection it is worth looking at some figures. Between 1924 and 1929 wholesale prices fell about 20 per cent. During the same period the Board of Trade index of industrial production rose about 14 per cent., and the numbers of insured workers in employment rose by nearly 9 per cent., although admittedly the percentage unemployed rose from 10.7 per cent, to 11.1 per cent.

Of those, such as Mr. Biddulph, who relate trade activity to rising prices, Mr. D. H. Robertson, the well-known economist, has well written that they speak “with the voice of the inflationist entrepreneur of all ages, claiming that the scales must always be weighed in (their) favour if (they) are to do (their) job properly” (The International Gold Problem, 1931, page 146).

So much for Mr. Biddulph’s main argument. The other points in his letter must, because of the lack of space, be dealt with only briefly.

(1) He implies that the standard of living rises with rising prices and vice versa. Sauerbeck’s index for 1873 was 111 and for 1896 was 61, a fall of about 45 per cent. Would Mr. Biddulph contend that the standard of living was lower in 1896 than in 1873?

(2) So far as the last paragraph of his letter is concerned, we regret that we cannot, without evidence, accept Mr. Biddulph’s view of the efficacy of the Bank Rate as being of greater value than the view of Mr. Montagu Norman.

(3) As we do not enjoy the personal confidence of Mr. Keynes we are interested to be informed of his changes of opinion by Mr. Biddulph. We had, however, thought that Mr. Keynes had been opposed to the gold standard for some years. As long ago as 1925, Mr. Keynes was opposing a return to the gold standard, and advocating a “managed” currency. (See “Nation,” March, 1925.) The “Nation” (supposed to echo the opinions of Mr. Keynes) were attacking the gold standard early in 1931.

4) Finally, we would assure Mr. Biddulph that we fully appreciate the meaning ol the term “relative gold supply.” In fact, we understood the phrase to have been introduced into economic discussion by Prof, Cassel, and that among economists it had the meaning given to it by him. For Mr. Biddulph’s guidance we quote from “Fundamental Thoughts in Economics,” where Prof. Cassel writes : “I have introduced the conception of a relative gold supply, which is for any given year the actual gold supply divided by the normal gold supply.” Mr. Biddulph might compare this definition with that given in his letter above.

B. S.

Letter: Banks and Credit. (1933)

Letter to the Editors from the December 1933 issue of the Socialist Standard

Banks and Credit.

We have received a further letter from Mr. Hobsbaum, whose criticisms were dealt with in the November Socialist Standard: —

Tottenham, N.17.

7/11/33.

Dear Comrade,

That bank deposits result mainly from lending operations is testified to by Mr. McKenna, chairman of the Midland Bank, Ltd., in his book on Post-War Banking Policy. He says, on page 7, “bank loans are the main source of the growth of deposits ”; and indeed, how else would you explain the fact that total deposits in January, 1932, were £1,714 millions, while currency notes were only £400 millions? If deposits were created by depositors placing surplus funds with the banks, how on earth would the total deposits exceed total of notes in existence by such a huge figure? (£1,314 millions.)

In one section of your reply to my letter you both admit and deny that loans by banks increase deposits. You say an advance of £50,000 would result in an increase in total deposits, whereas an overdraft of the same amount would leave deposits unchanged! Why?

I did not wish to imply that cheques were currency. A cheque book handed to a borrower entitled to draw up to £50,000, means that that amount has been credited to him, and the cheques he draws are the instruments by which he transfers that credit or portions thereof to others. Clearly, if he does not utilise the whole of the credit, it does not become cancelled as you suggested, but remains available.

How are prices affected? There are many influences which condition changes in prices, one of which is the variation in the quantity of those units in which prices are expressed. Granting that Mr. McKenna is right in attributing growth of deposits to loans (mainly), since these loans swell the quantity of money (or more precisely its representative forms), then the tendency is for prices to rise, unless, of course, a proportionate increase in the productivity of labour follows. To deny this is to deny the possibility of inflation. Too full lending by banks always carries that danger, and though it increases the indebtedness to the banks, it is not until the banks slow down their lending, i.e., deflate, that the value of that indebtedness is realised, for restrictions on lending make it difficult for borrowers to obtain money, enhance the value of money itself, which is reflected in a tendency for prices to fall, and the bankers find that their loans in terms of goods have risen in value.

Yours fraternally,

R. Hobsbaum.

Reply.

The contradiction which Mr. Hobsbaum thinks he has discovered in the reply given to him in the November issue is the product of his own confused thinking. If he will read again the section which we assume he has in mind, he will see that its purpose was to show the futility of maintaining, in the face of all experience, that the price level is a function of the total deposits shown in the books of the banks. It was pointed out that one method of recording a loan transaction in the books of a bank can produce an effect on that total which is different from the effect produced by another method. If a bank agrees to make an advance of £100, it debits the client immediately with £100 in an advance account and credits him with a similar amount in current account, thereby causing an immediate increase in the total of deposits shown in its books. If, however, it should agree to allow a customer to go debit in his current account, there is no immediate effect on the total. But even if, for the purposes of book-keeping, the total of deposits shown in the books of a bank are increased immediately to record the fact that the bank has agreed to make a loan, this increase does not represent something created by the bank. Until the borrower draws a cheque on, or cash from, the bank the latter, in fact, has lent him nothing and so certainly cannot have created anything. In due course, however, the client will avail himself of his borrowing facilities. Suppose him to draw a cheque for £100 with which he pays a car manufacturer for a car. The latter pays the cheque into his own account, thereby increasing his bank balance by £100. The balance (if any) in the borrower's account is now the same as it was before the bank agreed to make the advance. The total of bank deposits is, therefore, higher by £100 than it was before the bank agreed to grant the loan, but if the car manufacturer was told that the bank had “created" the increase he would quite rightly tell his informant not to be a fool, and would point out that it arose from a car having been produced. It should also be noted that the increase has not occurred in the deposit? of the bank which made the advance; so that the "credit creation" theory comes down to a statement that a bank creates deposits of the other banks, but not for itself! The fact that banks make loans to customers is not inconsistent with the statement that banks must borrow before they can lend, and cannot lend more than a part of what they borrow, for before the bank could undertake to lend £100 it had to have that amount of cash available. Mr. Hobsbaum has not yet brought forward a single argument to prove his claim that a bank actually lends more than it borrows (i.e., than is deposited with it). He seeks to support it with a statement by Mr. McKenna that "bank loans are the main source of the growth of deposits." However objectionable this phrase may be, there is a world of difference between it and Mr. Hobsbaum’s statement that bankers create deposits. Mr. McKenna's views on the subject are not free from confusion, but the following passage taken from the report of the examination of Major Douglas before the MacMillan Committee is quite dear: —

Mr. McKenna: “ Are you quite familiar with the banking system? "

"Well, reasonably, I think."

Mr. McKenna: "I suppose you appreciate its working? Supposing for a moment that you are a borrower and I am a banker. If you come and borrow £10,000 from me you take £10,000 from my cash."

"Not from your cash, do I? "

Mr. McKenna: "From my cash absolutely." ("Minutes of Evidence," Vol. I, Page 301.) 

This is quite a definite statement that the banks can "create" nothing but can only lend what they have. Other bankers, with a larger experience of banking than Mr. McKenna, are equally definite. The late Mr. Walter Leaf, at one time Chairman of the Westminster Bank, wrote: —

The banks can lend no more than they can borrow—in fact not nearly so much. If anyone in the deposit banking system can be called a “creator of credit," it is the depositor;. for the banks are strictly limited in their lending operations by the amount which the depositor thinks fit to leave with them.

("Banking," Home University Library, Page 102.)

If the evidence before the MacMillan Committee of bankers, like Sir W. H. N. Goschen (former Chairman, National Provincial Bank, Ltd.), Mr. J. W. Beaumont Pease (Chairman of Lloyds Bank, Ltd.), Mr. Hyde (Managing Director of the Midland Bank, Ltd.), etc., is studied, it will be seen that they quite certainly regard their lending as controlled by the amount of deposits with them, not vice versa. The last-named quite definitely stated, in reply to a question regarding the granting of advances, "We have to be guided by the position of our deposits " (Vol. I, page 59) while the reply given by Sir W. Goschen to the question, "Have you any views regarding the proportion of your deposits that you should advance on loan and current account?" was, "If the remainder of your assets are very liquid, I think you are entitled to lend a higher proportion of your deposits than you are if you have unliquid assets." (Page 116.)

After reading into Mr. McKenna's statement more than it says, Mr. Hobsbaum goes on to argue in effect that "Banks must create deposits, otherwise how could the total of bank deposits greatly exceed the total amount of currency in circulation?" This is an entirely illogical and fallacious argument. At the date Mr. Hobsbaum mentions, deposits in the Post Office and Trustee Savings Banks totalled about £480 million, or about £80 million more than the total notes as given by Mr. Hobsbaum. Nobody has ever claimed that such banks “create" deposits. If their deposits can exceed the total of currency notes without their creating deposits, why should a similar position in other banks be impossible ? The following illustration may help Mr. Hobsbaum to understand the matter.

Assume Mr. Hobsbaum starts business as a banker on a desert island on which there are only 100 units of currency. To begin with he has 10 units of currency representing the capital of his bank, and nobody has made any deposits with him. Then along comes "A" with the other 90 units of currency on the island and deposits them in Mr. Hobsbaum’s bank, thereby raising the deposits to 90 and the currency holding to 100. Mr. Hobsbaum now lends 95 to "B," who takes currency and pays it to “A” for coconuts. “A” deposits the 95 units of currency with Mr. Hobsbaum, thereby raising the total of deposits to 185, although all the currency in the island was only 100. If the process is repeated, deposits would rise to 280, but Mr. Hobsbaum, the banker, would not have lent more than he borrowed, he would not have “created" any credit or deposits, and he would have received currency in respect of all the deposits, despite the fact that the island never held as much currency as he has deposits. On a larger scale this is what happens in the banking system of the real world. So much for the power of banks to “create” deposits!

Mr. Hobsbaum has abandoned, or not sought to defend, the other claims made in his first letter. Faced with the figures which show that in recent years prices have not moved with, but in the opposite direction from deposits, he falls back on the implied defence that if prices fail to rise when deposits are increasing it is due to an increase in the productivity of labour. The ridiculousness of this assertion is soon apparent if the figures are examined. Thus, from May, 1920, to January, 1922, deposits rose by 8%, so that on Mr. Hobsbaum’s theory, prices should have also risen by 8%, unless labour became more productive. In fact, prices fell over this period by 50, which, on Mr. Hobsbaum*s theory, meant that labour more than doubled its productivity. Does he really believe this?

Another correspondent, Mr. Wright, sends us a letter in which he expresses the belief that “A Socialist State" could be founded upon £2,000 millions of money, and urges us to adopt a policy of gaining control of the banks so as to be able to use them to create this amount of money to “finance Socialism." Mr. Wright, like Mr. Hobsbaum, has still to prove that banks create money, deposits, or anything else, out of nothing.

B. S.

The Gold Standard and the crisis. (1931)

From the November 1931 issue of the Socialist Standard

Each of the periodic economic crises brings its own particular explanation. Publicists, orthodox economists, and politicians of every shade of opinion, are agreed that on this occasion the nigger in the wood-pile is the “gold standard,” or rather the failure of France and the U.K.A. to operate that standard “according to the rules of the game.” But despite their unanimity our scepticism is reasonable when it is recalled that there have been 16 crises during the past 150 years, and that a different explanation has been forthcoming each time. All of those crises, including the present one, have exhibited, in greater or less degree, the same features, viz., an accumulation of stocks of all commodities, a decline in production owing to the inability to sell the products of agriculture and industry at a profit, bankruptcies and banking difficulties as a consequence of the general fall of prices, falling money wages, growing unemployment, and for the mass of the population want in a time of superabundance.

This general similarity between one crisis and another points to there being a general explanation for all of them. Instead of which the explanations are always changing. This time we are told that the trouble has been caused by the attempt to operate the gold standard in a world split up by tariff walls and burdened by war debts. Can this explanation be accepted? To answer the question it is necessary to consider what the gold standard is and what its history has been.

First of ail it must be noticed that while the gold standard implies a monetary systen based on gold, it does not require that gold coins shall actually circulate. For all practical purposes there is no difference between a country whose monetary unit consists of a gold coin which circulates and is used as money in ordinary commercial transactions, and a country in which there is a paper currency convertible into gold. Both are on the gold standard. Before the war this country had, as its monetary unit, the sovereign, which passed freely from hand to hand in every-day transactions. Between 1925 and September of this year monetary settlements were effected in paper pounds which (above a minimum value of £1,700) were exchangeable into gold at a fixed rate. At both periods Great Britain was on the gold standard. What is necessary for a country to be on the gold standard is, then, not that there should actually be gold coins circulating, but that the unit of currency must, if it is a paper unit, be exchangeable on demand at some central institution, whether a bank, mint, or Government department, without charge to the holder, for a known and fixed amount of gold. Conversely any holder of gold must have the right to exchange it for currency, either coin or paper, at the same rate. Finally free importation and exportation of gold must be permitted so that a holder of currency who has to settle a debt abroad may do so by exporting gold obtained at the central institution in exchange for his currency at the fixed rate; while anyone having funds abroad must be able to convert them into the currency of his own country by importing gold and exchanging it for the currency of his own country at the central institution. In order to avoid complicating the question later it should be pointed our that free importation and exportation of gold is not necessary for this purpose provided that the central institution is compelled by law to buy and sell gold-backed foreign exchange, i.e., the currencies of other gold standard countries, at fixed rates corresponding to the amount of gold in the monetary units of the respective gold standard countries.

Given that these conditions are observed the country is on the gold standard, the significance of which is twofold. The first is that the value of the currency is the same as, and is dependent on, the value of gold. In other words, the amount of commodities that can be bought with £1 will be determined by the amount of commodities that will exchange for 113 grains weight of gold, that being the amount of gold for which £1 can by law be exchanged. Movements in the value of gold will be accompanied by corresponding changes in the purchasing power of the currency unit. As the value of currency reflects itself in the form of prices this is the same as saying that, under the gold standard, if the value of gold falls, prices will rise, and the amount of commodities which can be purchased with a £1 will diminish. Conversely if the value of gold rises, prices will fall. The second significant feature about the gold standard is that the general level of prices in two gold standard countries must be in equilibrium. This follows from the fact that, as has been pointed out, gold moves freely between the two countries. The price levels will not be exactly the same in the two countries for reasons which, however, are of no importance from the point of view of the present article and can therefore be ignored. The two price levels will tend to move up or down together, in accordance with changes in the value of gold.

So much for the value of a currency in terms of commodities, i.e., its internal value. Now let us consider the value of one currency in terms of another, usually referred to as its external value. Under the gold standard the value of one currency in terms of another, expressed in what is known as the foreign exchange rate, is fixed within narrow limits. For example, when this country was on the gold standard £1 was exchangeable by law for 113 grains of gold, and the American dollar was exchangeable by law for 23.22 grains. If 113 is divided by 23.22 the result is approximately 4.86. So that, apart from certain small variations that can be ignored here, the value of £1 was automatically fixed at 4.86 dollars. The exchange rate with francs, marks, etc., was similarly fixed.

To sum up the argument to this point we see the following consequences of an international gold standard :—

1. The value of the currencies of all gold standard countries is determined by, and fluctuates with, the value of gold.

2. Prices in all gold standard countries tend to move up or down together.

3. Exchange rates between gold standard countries remain stable.

After this brief survey of the principles of the gold standard now let us turn to its history.

As soon as division of labour resulted in individuals and social groups ceasing themselves to produce all the articles they consumed, a system for exchanging the products of various forms of human activity became necessary. In the first place recourse was had to simple barter. Cattle, for example, would be exchanged direct for corn or some other article. In the course of time direct barter became too cumbersome and a “universal equivalent” was evolved for the purpose of effecting exchanges. For a variety of reasons the universal equivalent that ultimately came to be generally adopted was a given weight of metal. In Western Europe this metal was silver. It soon came to be realised that it was more convenient to have coins of a known weight of metal instead of having to measure out quantities of the metal for each transaction. Gold coins were introduced in the 15th century, and finally this country led the world in making gold the basis of its currency, relegating silver coins to the position of “token” money, their value being fixed by law as a proportion of that of the gold coin. During the second half of the 19th century most of the leading countries of the world also abandoned the silver standard, and reorganised their currencies on a gold basis. When the war broke out in 1914 all the leading commercial countries were on the gold standard, and their currencies were gold coins winch actually circulated. At the same time there were in circulation bank notes which were redeemable into gold coin or bullion. The war saw the collapse of the old gold standard and the replacement of gold coins, as circulating media, by paper money. After the war, when the gold standard came to be restored, certain countries, including Great Britain, did not restore gold coins to circulation. Instead they retained their paper currencies, but made them convertible into gold, and permitted the export of gold. The notes, therefore, had the character of gold.

Another significant difference between the post-war and pre-war systems was that after the war certain countries did not revert to the simple gold standard, but to a developed standard known as the “gold exchange standard.” Under the pre-war system it had been the rule for each country to keep its own separate gold reserve for cashing notes. Under the gold exchange standard a country—Austria is an actual example— keeps part of its reserves not in the form of actual gold in the vaults of its own Central Bank, but in the form of balances with the Central Banks in other gold standard countries. As these balances could always be withdrawn in gold and taken back to the country of origin, it was thought that they were “as good as gold”; as indeed they were, so long as conditions remained normal. But the system had one important consequence. Gold deposited, say, by the Austrian National Bank with the Bank of England, was not only the basis of currency issued in Austria, but also provided the Bank of England with funds which it proceeded to utilise in this country. Under the pre-war system the withdrawal of gold from the Austrian National Bank would only have affected, directly, that bank. But under the new system the Bank of England would aiso be affected. In other words, under the “gold exchange system” events affecting the credit situation in one country would be likely to have immediate consequences in other countries, because the credit structure of more than one country had come to be based on the one lot of gold.

There remains another aspect of the post-war situation to be examined. The gold standard was never intended, as is so frequently alleged, to provide for the liquidation of an adverse balance of payments between two countries by the shipment of gold. Under the gold standard the function of gold shipments is to produce conditions in which an adverse balance of payments is eliminated. To reduce the matter to its simplest terms, the position can be explained as follows :—If people in country A are buying more goods and services from country B than B is buying from A, it must be because commodities are cheaper in B than in A. As the currencies of both countries are based on gold this is equivalent to saying that the purchasing power of gold is lower in A than in B. Consequently, gold will be sent from A to B. The gold for shipment will be obtained by changing notes into gold in A, and sending it to B. When it reaches B this gold will be converted into the currency of that country. The result will be to cause monetary stringency and a probable rise in the bank-rate in A, thereby lowering prices there. While in B the monetary situation will be eased and prices will rise. This will tend to discourage people in A from buying goods in B, and will encourage people in B to buy goods in A. This will continue to the point where A’s exports are increased and its imports diminished, sufficiently to eliminate the former adverse balance. From the foregoing it will be seen that under the gold standard the function of gold shipments is to cause adjustment of prices in the countries between which gold shipments take place, such that their international payments and receipts shall balance by the exchange of goods and services.

Owing to conditions arising out of the war gold shipments in recent years have been resorted to for the purpose of adjusting unfavourable balances of payments. What these conditions were can only be referred to here very briefly. Among the more important are the post-war system of tariffs, particularly in America, which prevented debtor countries from liquidating their indebtedness in goods, and compelled them to pay in gold; the flow of international payments in one direction, principally to U.S.A. and France, owing to Reparations, etc. ; and finally deliberate action by Central Banks to neutralise the effects that gold shipments would otherwise have had on the credit structure and the price levels. So that the adjustment of adverse trade balances by means of goods and services, in the manner discussed earlier, was impeded. In Great Britain, for example, the Bank of England consistently counterbalanced withdrawals of gold by what is known as its “open market” policy. In other words, when gold was withdrawn, and credit as a consequence became scarce, the Bank of England restored the position by buying securities, so that the funds that the money market lost as a result of the gold shipments were restored to it by the payments made by the Bank of England for the securities it bought. One of the main reasons why the Bank of England did this was probably that it was seeking to keep interest rates as low as possible in order that the Treasury should not have to pay more interest on its large floating debt. Whatever the reason may have been, the important fact is that Central Bank action frequently operated to make gold shipments of no avail, so far as concerns the adjustment of international balance of payments, by means of alterations in the relative amount of commodity imports and exports. This means that the gold standard in recent years was called upon to achieve purposes it was never designed to fulfil and which it was incapable of achieving; gold was used to liquidate adverse balances instead of operating to promote conditions in which adverse balances would disappear. Finally the inevitable happened. The gold standard broke down.

What will happen in the future to the gold standard need not be discussed here. For us the problem is, “Was the crisis caused by the failure of the gold standard ? Can it be overcome and economic welfare assured to all by a re-establishment of the gold standard, as we have known it or in some revised form, or by its supersession by some other currency system?” The answer to both questions is an emphatic “No.” The reasons for this answer must be reserved for a later article. Here it will suffice to point out that the recent acute world depression started, and has been most pronounced, in U.S.A. If gold is the cause of all the trouble this is rather strange seeing that U.S.A. was crammed with gold. Secondly, it is hard to see how the world in general,, and the working-class in particular, would have benefited if, before the crisis, there had been another £100 million, or even £1,000 million, of gold available in the world. What could have been done with it that would have overcome the fact that world stocks of all kinds, and especially of raw materials, were so high tthat they could not be disposed of at prices which would yield a profit ? The plain truth is that capitalism had again run up against its permanent and insoluble problem of being unable to distribute all the goods produced, because capitalist production is for sale at a profit and not for use. Therein is the cause of this, as of every other economic crisis of the past 150 years.

B. S.

Capitalism and Speculation. (1935)

From the March 1935 issue of the Socialist Standard

An attempt by a group of speculators to enrich themselves by cornering two commodities has recently failed. The two commodities are shellac and white pepper; both, it might be mentioned in passing, of importance in connection with the production of war materials. About a year ago the group, through its agents, began to buy up all supplies of these commodities as they came on the market, the object being to force the price up and then to sell at a substantial profit. Shellac and pepper were, presumably, chosen by the speculators for their market manipulations because they thought that the amount of money required to create a comer in these commodities was relatively small, and that supplies could not be rapidly increased. They were mistaken in both respects. As the operations of the group lifted the price of pepper from 8¾d. per lb. to 1s. 6d. per lb., and that of shellac from around 70s. per cwt. to 120s. per cwt., larger and larger supplies came on to the market and buyers went round the back of the speculators and obtained their requirements in the native markets. Imports into this country increased enormously, as the following figures show: —

By the end of January stocks of pepper in London amounted to 21,000 tons (four years' supply) as compared with 3,000 tons a year earlier. About 7,000 tons was due to be paid for on February 8th. At the last minute the speculators found themselves not able to command the financial resources they had relied upon. The gamble had failed.

The storm has centred around a Mr. Bishirgian and a firm of metal brokers, James & Shakespeare, of which he is a director. This business was established in 1842 and was converted into a private company in 1917. In September of last year, after the buying of shellac and pepper had begun, the company made a public issue of £300,000 of preference shares and 300,000 ordinary shares of 5s. each. Part of the proceeds of this issue was utilised to acquire the metal and produce departments of G. Bishirgian & Co., and a majority interest in another firm, Williams, Henry & Co. Among the shareholders of James & Shakespeare are Mr. Reginald McKenna, chairman of the Midland Bank, Ltd., who, however, disclaims knowledge of the pepper gamble. Another is Sir Hugo Cunliffe Owen, chairman of the British-American Tobacco Co., Ltd., and the Dean Finance Co., a company of which we shall have more to say later. Purchases of shellac were made by Williams, Henry & Co., while pepper was bought by James & Shakespeare, both firms acting in the market through brokers. Their dealings, however, were not for their own account, but were on behalf of the group of speculators whose identities are not positively known. It was only because the market confidently believed that there was a powerful group behind the ostensible buyers that dealings were permitted to reach their final unwieldy size. There is now a demand for investigation, but we think it is a safe prophecy that there will be no real inquiry into the gamble and its initiators.

When the bubble burst, all the shellac bought by Williams, Henry & Co., was taken up. Arrangements were made by which the Dean Finance Co., Ltd., took over from James & Shakespeare their holding of shares in Williams, Henry & Co. The Dean Finance Co., Ltd. (director, Sir Hugo Cunliffe Owen) is a subsidiary of Tobacco Investments, Ltd. (directors, Mr. McKenna and Sir Hugo Cunliffe Owen), which in turn is owned by Tobacco Securities Trust (chairman, Mr. McKenna, vice-chairman. Sir Hugo Cunliffe Owen), a subsidiary of British-American Tobacco Co., Ltd. (chairman, Sir Hugo Cunliffe Owen). The managing director of Williams, Henry & Co., Mr. Louis Hardy, resigned. He is on the board of a number of tin companies, which have been connected with the tin restriction scheme, which has the blessing of the Government.

The pepper position, however, could not be propped up, as the shellac was. A winding-up order was applied for against James & Shakespeare. With that company unable to carry out its obligations, the brokers. Rolls & Sons, and J. T. Adair & Co., Ltd., who had acted for it, were also forced to default. Pepper and shellac are now back to their former level of prices. Three firms have smashed. Their employees are out of jobs. The City, in a fit of righteous indignation, is demanding the heads of the real culprits.

This indignation is farcical. There have been many cornering gambles in the past, and there will be more in the future. Capitalism provides scope for gambling of this kind. It offers fortunes to the successful speculator. Its apologists prate of the useful functions performed by the speculator in helping to make a market. When the gamble goes wrong those who get hurt in their pockets always set up howls of indignation. While a system based on the legalised robbery of the workers persists, there will always be struggles over the swag. That is what speculation is, and that is why talk of “cleaning up” capitalism is bluff and pretence. To end speculation it would be necessary to end capitalism.

The fate of the innocent victims, the clerks now out of jobs, provides a pretty commentary on those who say that profits are payment for risk. The speculators, if they had won, would have made huge profits. The clerks have lost their jobs. What reward did they, or could they, have got for running the risk of unemployment? They suffer when the gamble goes wrong, they would not have gained if it had gone right.

One final point worthy of notice is that we see here a banker, Mr. McKenna, investing money outside banking. Perhaps the illusionists who believe that bankers possess in the banking system a means of creating wealth without limit for themselves will explain why Mr. McKenna should have sought profit in another field.

B. S.

The Capitalist Never Learns - Part 2 (1932)

From the August 1932 issue of the Socialist Standard

(Continued from July issue.)

The Crises of 1929 and 1873 Compared.

For the purpose of comparison with the present, the crisis of 1873 is probably the most interesting of the crises of the nineteenth century. It lasted for six years, from 1873 to 1879, and before it had fun its course its effects had been felt in practically every country in the world. The period before 1873 had been one of enormous expansion everywhere. New developments in communications, due to railways, steamships and the telegraph cable, had opened up new areas, had created a demand for capital equipment of all kinds, and had revolutionised the production of foodstuffs. Immense increase in wealth and business activity resulted from these developments and from the introduction of limited liability, which fostered the founding of companies for every conceivable purpose. European countries, such as Germany and Russia, which had lagged behind in economic development, began to make rapid strides. Loans to Governments and the flotation of private companies enabled machinery, plant, etc., to be imported into developing countries. "Between 1860 and 1876, more than £320 million was raised in the London money market upon foreign Government loan issues. In the same, period half as much again was raised upon the credit of the Governments of India and of other parts of the British Empire. £232 million was paid up in the same years on the shares and debentures of private companies engaged in railway building or other enterprises outside the British Isles.”, (See "The Migration of British Capital,'” by L. H. Jenks. Pub. Alfred A. Knopf, New York, 1927, page 280.) In every financial centre the values of securities, etc., soared. There seemed to be nothing that could hinder the growth of wealth, and industry and international finance seemed to have entered into the golden age.

Then, in May, 1873, the bubble burst in Vienna. Prices of securities had been run up by speculators on the Vienna Bourse, just as they had been on every other Stock Exchange in the world, and just as they were in Wall Street and elsewhere in the period preceding the crash in October, 1929. Finally, the speculation petered out and security prices tumbled more rapidly than they had risen. The consequence was, to quote Hyndman, “panic, chaos, wild despair, hopeless madness, collapse of confidence, complete crash in business.” These terms are to be heard to-day when the effects of the Wall Street collapse of 1929 and the failure of the Credit Anstalt in Vienna last year are discussed.

The depression soon spread to the neighbouring European States. By September, 1873, America was in the throes of the severest crisis of its history. In U.S.A., from 1869 to 1873, there had been what Hyndman described as a “marvellous boom in West and East alike,” owing to the rapid railway development that had taken place and the opening up of the West. Writing in 1892 of this period, Hyndman uses words which find an echo in the accounts of the boom in America that ended in 1929. He states :—

  Those who have been in the United States at such times know the sensation of general well-being and universal progress which is felt throughout the country. Nowhere is a period of prosperity more suddenly and surely exhibited in the lives of the people . . .  the whole nation thought itself on the full flow of continuous improvement, (p. 108.)

Finally the period of overbuilding of railways and rash financing came to an end. Half the railways fell into the hands of receivers, “banking house after banking house came down, and the New York Stock Exchange was closed, only opening again on 30th September. Great commercial and distributing houses were also obliged to suspend payments: Not a single industry remained unaffected by the collapse. There was a.glut in every department of trade. From a third to a half of the workpeople in the Eastern States were said to be without employment. The number of actual “tramps” during the winters of 1873 and 1874 was placed as high as 3 millions out of a whole population of little over 40 millions. All prices were down and yet goods were unsaleable. Cotton, wheat, wool, lead, iron, steel, leather were all selling from 20 per cent. and more below the prices they had fetched before the crisis” (pp. 116 and 117).

The likeness between the situation in the U.S.A. in 1873, as described by Hyndman in the sentences just quoted, and the situation to-day is sufficiently obvious for further comment to be unnecessary.

The 1873 crisis was not felt so acutely in England as in other countries, but this country did not escape unscathed. To the era of foreign financing that had preceded 1873 succeeded a period of insolvency and defaults. In this respect the history of the years 1927 to 1932 merely repeats that of the crisis half a century ago. In 1873 the bankers announced that the Honduras Government was in default.

   Costa Rica, Santo Domingo and Paraguay defaulted in the same year . . . . To relieve a desperate financial situation in Spain and keep King Amadeus on the throne, bondholders consented to a funding of the portion of the interest then due. There was, in consequence, a, heavy fall in Spanish stock, a 'collapse of credit, the abdication of King Amadeus, civil war and complete default in June, 1873. By this time foreign Government securities were tumbling madly downwards in price. . . .  In November, 1873, the Bank Rate in London was at a minimum of 9 per cent. and the recession in stock prices began slowly to spread into industry and commerce. In the following year all South America became depressed as the currents of capital, which had moved to that region, ceased to flow. Then . . . . the suspension of interest payment by Bolivia, Guatemala, Liberia and Uruguay. Insolvency spread to Turkey, Egypt and Peru." (Jenks, pp. 291 and 292.)

Finally, in 1875, defaults on foreign loans had reached such a point that a House of Commons Committee was set up to inquire into the whole position. The revelations contained in its report find a counterpart in those how being made before an investigating committee sitting in America which is inquiring into the question of foreign lending during the 1927/8 boom.

One other aspect of the 1873 crisis in England is worth referring to, because the same features loom large to-day. The price index in 1873 stood at 111. '

   There now set in a fall which continued without interruption until a low point of 81 was reached  in 1879 . . . . export values fell off dramatically, while quantities could, with difficulty, be increased. But there was more food, and more copper, and more iron and wool for which to pay. Great Britain did it out of the surplus which had formerly been available for foreign investment. For the twenty years ending in 1874, Great Britain had been exporting an average surplus of capital of about £15 million. She had done this in addition to re-investing abroad all of the earnings upon foreign investments already made. These, by the ’seventies, amounted to at least £50 million a year. At this time the surplus capital exports above this ran well over £30 million. Within the space of three years this item of the British balance of payments entirely disappeared and became, in fact, reversed. (Jenks, pp. 332/3.)

Jenks goes on to say that by 1876 Great Britain “could scarcely balance her requirements of food and raw materials with the manufactures she could export and the freights her merchant marine could collect. The export of a capital surplus was over.” He estimates that Great Britain’s capital surplus reached £56 million in 1872, and dwindled to £1½ million by 1876. From then until 1880 there was a deficit each year, amounting to £110 million for the five-year period. The deficit reached its peak of £38 million in 1877. When allowance is made for the expansion in wealth that has taken place since the ’seventies, these figures show that the “adverse balance of payments,” of which we hear so much to-day from economists and politicians, is not in any way remarkable.

Before leaving the 1873 depression, let us see how, at the time, it was explained. A contemporary writer, quoted by W. T. Layton in his “Introduction to the Study of Prices,” stated that the following causes were “generally regarded as having been especially potential ” :—

   “Over-production, ” “the scarcity and appreciation of gold," “restrictions on the free course of commerce,” through protective tariffs on the one hand, and excessive and unnatural competition caused by excessive foreign imports, contingent on the absence of “fair" trade, or protection on the other; heavy national losses occasioned by destructive wars; the continuation of excessive war expenditure; the unproductiveness of foreign loans and investments; excessive speculation and reaction from great inflations; . . . . a general improvidence of the working class.

The above "explanations” of the 1873 depression, which were current at that time, are identical with the popular attempts to explain the present depression. And yet we are told that the present depression is of a kind unknown to the past!

Given the time and the space, every single feature of the present crisis could be shown to have its counterpart in one or other of the crises of the nineteenth century. In 1931 the Bank of England borrowed from the Bank of France in order to protect the exchange value of sterling. It had done the same in 1839 and 1890. (See Andreade’s "History of the Bank of England,” p. 367.) The financial manipulations of Kreuger recall those of Nicholas Biddle in the thirties of last century. (See Jenks, Chap. III.)

Finally, the remedies now proposed are the same as in the past. To-day we are told that if trade is to recover, prices must be raised, and that for this purpose recourse must be had to bi-metallism or to a managed currency, of gold or of paper. These panaceas for our ills are as old as the ills themselves. Bi-metallism was being advocated in 1817. It was resurrected frequently during subsequent crisis, particularly in 1896, when W. J. Bryan, candidate for the American Presidency, made his famous speech in which he declared: “You shall not press down upon the brow of labour this crown of thorns, you shall not crucify mankind upon a cross of gold.”

In 1817, also, proposals for a gold currency system, under which "money contracts should be ‘corrected' by reference to a price index number,” were put forward by Lowe and Thomas Attwood respectively. (See "Financial Reconstruction in England, 1815-1822,” by A. W. Acworth. Pub. P. S. King & Son, Ltd., 1925, pp. 83-90.) The present schemes of our economists like J. M. Keynes represent little advance on these proposals of more than a century ago. They are of interest as showing how the present crisis lacks even the originality of provoking new proposals for its cure.

The foregoing only touches the fringe of the subject, but it may at least serve as a warning against unquestioning acceptance of the contention almost universally made that the present crisis is not part of the usual trade cycle, but is entirely different in kind from any crisis that has gone before. It may prevent those who stop to consider the matter, from being gulled into the belief that by currency manipulations and international conferences of politicians and business men a new era of permanent prosperity can be ushered in.

One further warning can, perhaps, usefully be given. It is frequently maintained that because commodity prices have fallen, because Governments and companies have defaulted, because investments in securities no longer yield the income they did three years ago and show a shrinkage in market value, and because established firms all over the world have failed, that the wealth of the world has diminished. In fact, the real wealth of the world to-day is greater than it was in 1929. It cannot be measured by the prices of shares and securities on the Stock Exchange. When fundamentals are considered, it is seen to consist in the accumulation of consumable goods and equipment produced by the expenditure of labour in the past, and in the supply of labour available to operate and add to that equipment in the future. Changes in prices of commodities and securities have not reduced this real wealth. This assertion runs so counter to what is usually written and said on the subject, that it may be worth while quoting the view of an economist whose ”orthodoxy” cannot be questioned. Professor T. E. Gregory of London and Manchester Universities, has written :—

  In so far as equipment and human labour continue to produce as fruitfully as before, society, as a whole, suffers no loss even if the market values of the securities representing the nominal value of the productive enterprises of the community undergo a decline, and society, as a whole, gains nothing if these securities rise in value. The real wealth of the U.S.A. was no greater as a result of the phenomenal rise in stock market values in 1928/9 and is no less because of the subsequent decline; for the real wealth of a country consists of the stream of goods and services which can be consumed and not of the nominal value of the securities issued by the enterprises producing these goods and services. (See Outline of Modern Knowledge. Victor Gollancz, Ltd. 1931, page 651.)

That capitalism does not secure a satisfactory distribution of the products of industry at the best of times, and that it imposes aggravated suffering on the workers in its periodical crises of "over-production,” is something that it is beyond the scope of the present article to discuss.

B. S.

The Capitalist Never Learns. (1932)

From the July 1932 issue of the Socialist Standard

For two-and-a-half years the world has been in the throes of a severe business depression. The consequences of that depression have been far-reaching. Unemployment has mounted to fantastic heights, until to-day about 30 million workers in the leading countries are unable to find jobs. In fact, the world-wide incidence and growth of unemployment are so pronounced that even those who but a short time ago were seriously alleging that unemployment was due to the unemployed being too lazy to work, if the chance to do so were offered to them, have been effectively silenced. Nobody now pretends that there are jobs waiting round the corner, and that it is only love of lining up in a queue that keeps workers on the “dole" or the bread line. There are no jobs, just as there are no markets for the thousand and one commodities produced by industry and which the producers find they cannot sell. Plant stands idle just as men and women stand idle. If there are 300,000 miners in Great Britain who will never again be employed to go down a pit, there is likewise redundant plant of all kinds which will cease to be operated. The only difference is that capitalism has to feed its redundant workers in order to avoid trouble; its redundant plant it sooner or later scraps. For examples of this scrapping of plant, it is sufficient to refer to the Lancashire Cotton Corporation, Ltd., and National Shipbuilders' Security, Ltd. The first of these companies was incorporated in 1929 on the initiative of the Bank of England. According to a prospectus published in “The Times" of March 26th, 1931, “the aim of the Corporation is to acquire between 9 million and 10 million equivalent spindles, and it is intended that production shall be concentrated in the most efficient mills . . . the remaining mills being scrapped." The National Shipbuilders’ Security, Ltd., was also begotten by “the Governor and Company of the Bank of England.” It was incorporated. “for the purpose of assisting the shipbuilding industry by the purchase and dismantling of redundant and obsolete shipyards . . .  and the re-sale of the sites under restriction against further use for shipbuilding" (see prospectus in “The Times" of January 21st, 1931). It is a pretty commentary on a social system that it has to devote new savings to the destruction of existing capital equipment because it has too much!

Not only has capitalism come up against the problem of surplus workers and redundant plant, but it is struggling to live down the effects of a too bountiful Nature. Vast areas in America are being thrown out of wheat cultivation, cotton acreage is reduced, Brazil is burning coffee, and wondering whether all her efforts to get stocks down to an “economic level" will be nullified by a bumper crop in 1933-34, sugar cane is not being cut in Cuba, oil wells are shut down in nearly every field, copper output is restricted, as is that of nitrate, the stocks of which equal three-and-a-half years' consumption. The list could be extended to include practically every raw material, but these few examples will suffice to show that want exists to-day, not because there is too little but because there is too much. All that is lacking is the opportunity to make profits, and because of this workers and plant stand idle, misery is widespread, and since Nature will not withhold her gifts they have to be refused or dissipated.

Under conditions such as these, which if we had not experienced them might be unbelievable, it is not surprising that universally the question is raised: “What has caused this crisis? What is its cure?” If the answer given to this question is to be of any value, there must be brought to the consideration of the subject an historical knowledge of previous crises. Such knowledge is conveniently provided by the late H. M. Hyndman's “Commercial Crisis of the 19th Century,” published in a new edition with a preface by J. A. Hobson (Allen & Unwin, Ltd.: 3/6). This book is probably the best Hyndman ever wrote. It is a classic of its kind; it has always been so recognised in interested circles. No one who wishes to understand economic development during the nineteenth century can afford to ignore it. It undoubtedly has its defects. The chief of these is a certain scrappiness in the treatment of the subject. In a work which attempts to cover so wide a field in less than two hundred pages, incompleteness is, however, inevitable. One thing for which the reader will search its pages in vain is, as Hobson points out in his preface, an explanation of why a system of production based on profit-making “expresses itself in a recurrent failure of demand to keep pace with supply.” Nevertheless the book is exceedingly useful, particularly at the present time. Hyndman confined himself to an “historic account of these successive failures.” He succeeds sufficiently well in his purpose for us to be able to agree with the statement, made in Hobson's preface, that “those who witness to-day in almost every trade and every country masses of idle workers facing idle machinery and untilled fields will be disposed to give close and serious consideration to Hyndman's declaration that 'the capitalist class has virtually declared its own inability to conduct the business of the community.' ” In those words of Hyndman are summarised our case against capitalism, and our justification for urging the workers to become Socialists.

It is usual to hear the present crisis spoken of as being unique. It is explained as being due to reparations and war debt problems, the hoarding of gold by Central Banks, the failure of creditor countries to lend to debtor countries, and again in the same quarters as being caused by over-borrowing by debtor countries. Economic nationalism and the raising of tariff barriers are blamed to a greater or less extent. Finally, every explanation involves a reference to the stultifying effects on business of the fall in prices. The explanations are as numerous as the suggested remedies, of which the most popular are those which aim at raising the price level through manipulation of the currency. In this group of proposals fall the suggestions for the introduction of bimetallism, managed paper currencies, and international monetary conferences. Only a slight knowledge of economic development during the past century is necessary to show that far from being a unique phenomenon, the present crisis is of the same kind as those of the past, and that the so-called "explanations" only repeat the explanations put forward by the men who lived through the crises of the nineteenth century. Further, the remedies now proposed merely represent a refurbishing of old ideas.

Certain unimportant characteristics of each crisis are, of course, particular to the crisis concerned, but in their broad outlines, all crises present the same features. The resemblance between one crisis and another even goes to the point, of those who live through any particular crisis, imagining that it is something entirely different from anything that has gone before, and of those of them who advocate remedies always thinking that the adoption of their proposals will prevent the recurrence of crises in the future. But just as a war to end war only sows the seeds for another war, so the melting away of a crisis in a burst of renewed activity only prepares the way for the next crisis. Until that fact is clearly realised, the true cause of a crisis cannot be appreciated, for not until then will it be seen that the fundamental cause of all crises must be the same. This is to say that it must be a continually operating cause, and cannot be something, such as reparations or war debts, particular to the individual crisis. Such special factors may, of course, intensify a crisis when it comes, delay its solution or help to determine the time of its occurrence. Their responsibility for causing it cannot be carried further than that.

Crises are inherent in the capitalist system of production owing to the fact that production is based on the principle of profit-making, not on that of satisfying needs. Goods are produced in order to be sold at a profit. When trade is booming productive capacity is extended in order to increase the opportunities to make profits. New plant is installed, new sources of supplies of raw materials are opened up to enable the output of finished products to be increased. Competition between producers to secure the lion’s share of the profitable markets leads to production being extended further and further. Finally a point is reached when the supply exceeds the demand. Markets are glutted. Production has to be curtailed, first in one sphere and then gradually in others. Prices fall as stocks are unloaded. Workers are dismissed, and as their wages cease the demand for commodities further declines. The spiral is then leading downwards to business stagnation, bankruptcies and widespread unemployment. The boom has dissolved into a depression. There is a crisis. Then in time stocks run off, there are a number of bankruptcies, demand revives, and the mad dance through the figures of boom and slump goes on again.

This is a brief description of the course and cause of all crises. Any attempt to explain or deal with a crisis that ignores the profit-making basis of capitalism ignores essentials, and can only deal with what are, more or less, irrelevancies. Once it is realised that crises arise because the object of production is the making of profit, all remedies, such as those for currency reform, of which so much is now heard, must be dismissed as futile. As they fail to take account of the fundamental cause, they cannot hope to prevent its operation in the future, whatever temporary relief they may afford. The only means by which economic crises, such as the present, can be permanently banished from the world is by the overthrowing of capitalism. Until the present system of society is superseded by one from which profit-making has been eliminated, crises will, and must, occur periodically.

A study of past crises by revealing the correspondence in events between them and the present crisis will help to put the popular explanations and suggested remedies for to-day’s depression in their proper perspective and to demonstrate the truth of the assertion made above that crises are inherent in the capitalist system of production. Here it is impossible to consider the crises of the past in detail. That has been done by Hyndman, and readers are recommended to study what he has written on the subject. Certain features of past crises will, however, be discussed so that the similarity between present and past events may be demonstrated.

Before doing this, however, it is worth referring to one aspect of economic crises which is too frequently overlooked. To appreciate the real significance of an economic crisis it is essential to realise that what takes place in a time of crisis over the whole business field and in several countries is taking place continuously locally and in particular spheres of business. In some industry or place, plant, workers, and commodities are always proving to be redundant, as the supply of the particular commodity outruns the demand. It is when this condition becomes general and pronounced that the disease is glorified with the title of crisis and the general manifestation is treated as some rare event. 

B. S.

(To be continued.)

Part 2 here.

Karl Marx — An Appreciation. (1933)

From the March 1933 issue of the Socialist Standard

Fifty years ago, on March 14th, 1883, Karl Marx died in London, after a lifetime devoted to the workers' cause. The persecutions and privations he had endured in that cause hastened his death. When he died, much of the work he had planned still remained to be done, but, nevertheless, he had the satisfaction of knowing that he had given the working class movement all over the world an impulse and direction. His significance as a thinker and as a revolutionary grows more important each year, and although critics succeed one another in an unending line with “refutations" of his theories, those theories still stand awaiting disproof. History as it unfolds brings new illustrations of the truth of Marx*s discoveries and of the inadequacy of opposing doctrines.

But, before we consider the body of Marxian thought, let us take a brief glance at the man himself.

Karl Marx was born on May 5th, 1818, at Treves, in the Rhineland, of Jewish parents who subsequently adopted Christianity. The Germany into which he was born was very different from modem Germany. It was mainly an agricultural country, and such industry as was carried on was still greatly restricted by relics of feudal barriers. There was nothing to which the term large-scale industry, in the modern sense, could be applied. Industrialism, which had been growing apace in England during the previous fifty years, was hardly known. Politically the country was split up into a number of independent States, each with an autocratic government based on land ownership. The feudal restrictions on industry and commerce, the impediment to trade that was constituted by the multiplicity of States, made the German bourgeoisie, then just emerging into prominence and anxious for power, very receptive of the ideas that Napoleon by his victories had spread over Europe. A united Germany arid a liberal constitution, these were the popular ideals in which the needs of the rising capitalist class expressed themselves. When Marx was twelve years old, the 1830 revolution broke out in France and spread to nearly all Europe. It is quite safe to assume that the events taking place around him made a deep impression on Marx even at that age. In 1835 Marx entered Bonn University and started on a course of jurisprudence to meet the wishes of his father, who was a lawyer. He added to this a study of philosophy and history, for the economic changes of the period were undermining all established ideas and forcing all who thought at all to seek a new basis for the understanding of life. The leaders in the new thought were the Young Hegelians, the followers of Hegel. Marx became associated with this school, but soon became dissatisfied with the idealism of Hegel and began to spread a wider net than his master. It was through their common interest in Hegelian philosophy that Marx and Engels first met and the friendship was established that lasted until Marx died.

In 1841 Marx took his doctorate. The next year, when about to take up an appointment at Bonn University, he was offered, and accepted, the editorship of the Rheinische Zeitung, a Cologne newspaper started by the Rhineland Liberals, to which Marx had already contributed articles. This marks the turning-point in his career. From this time dates Marx’s realisation of the historical task of the proletariat and of the inadequacy of all current philosophy. But at this stage Marx was far from the theories that are now known by his name. He was simply a Radical Democrat interested in and anxious to improve the conditions of the peasants and the workers. The controversies in. which his work as an editor involved him soon convinced him of the need to study and understand political economy if political problems .were to be understood. When, therefore, the attention paid by the censor to the Rheinische Zeitung hampered Marx in his work, he resigned his editorship in 1843 and, with his friend, Arnold Ruge, proceeded to Paris. (Notwithstanding Marx’s departure from the editor’s chair, the paper was suppressed shortly afterwards.) Before then he had married Jenny von Westphalen, the daughter of Baron von Westphalen, who was of Scots descent and who later became, in the words of Engels, “ a reactionary minister of State.”

To Paris had come, after 1830, a number of German revolutionaries. They had formed a secret society, out of which grew the League of the Just. The. League had disappeared in 1839, but many of the leaders were still in Paris at the time of Marx’s arrival. One of the original leaders, Schapper, had gone to London and started the Workers' Educational Society among the German artisans there. This was one of the beginnings of the Communist League. In Paris, Marx and Ruge started the Deutsch-Franzosichen Jahrbucher, of which, however, only two numbers appeared. By this time Marx had progressed beyond mere Radicalism, his thoughts were beginning to move along the lines of their final development, but his realisation of the revolutionary role of the proletariat in the development of society still required the basis which the conception of the class struggle was afterwards to give it. In 1844, in collaboration with Engels, he wrote the “Holy Family.” Here the new theories begin to take form. (Engels states that Marx had worked out the ” Materialist Conception of History ” by 1845.) The importance of this book lies in the fact that, in working out the ideas, Marx had come to appreciate how essential for the purposes of his thought was a knowledge of the economic laws governing production in the society in which he found himself. As a consequence, with his usual thoroughness, he took up seriously the study of economics. In 1845 Marx was compelled to leave Paris because of his attacks on the Prussian Government. He proceeded to Brussels. Here he wrote and published, in 1847, his ”Poverty of Philosophy” in reply to Proudhoun’s “Philosophy of Poverty,” and began the career of revolutionary activities that only death brought to an end. In 1847 he joined an organisation which, after a Congress held in London in that year, came to be known as the Communist League. It had grown out of various secret societies started in the different countries in which the leaders of the defunct League of the Just had found themselves. Towards the end of the same year (1847) a second Congress of the Communist League was held in London, at which Marx was present. At this Congress the new ideas of Marx, to which his studies during the preceding years had led him, came in conflict with the revolutionary idealism which up to then had provided the workers’ movement with its basic ideas. Finally Marx managed to convert the Congress to his views and was instructed to prepare, in the name of the League, a manifesto setting out their aims.

The Communist Manifesto

The manifesto was written and issued by February, 1848, shortly before the outbreak of the 1848 revolution. This manifesto is what we now know as the Communist Manifesto. In writing it, Marx used a draft prepared by Engels before the Congress met, but to it he added what Engels himself has described as “the fundamental proposition which forms its nucleus.” Engels goes on to state that proposition as follows:—

That in every historical epoch, the prevailing mode of economic production and exchange, and the social organisation necessarily following from it, form the basis upon which is built up, and from which alone can be explained, the political and intellectual history of that epoch; that consequently the whole history of mankind (since the dissolution of primitive tribal society, holding land in common ownership) has been a history of class struggles, contests between exploiting and exploited, ruling and oppressed classes; that the history of these class struggles forms a series of evolution in which, nowadays, a stage has been reached where the exploited and oppressed class—the proletariat—cannot attain its emancipation from the sway of the exploiting and ruling class—the bourgeoisie—without, at the same time, and once and for all emancipating society at large from all exploitation oppression, class-distinctions and class-struggles. (Preface to Communist Manifesto. Preface written by F. Engels, 1888.)

With the publication of the Manifesto a new stage is reached in the history of the working-class movement. The Manifesto may not be a perfect piece of work, from the point of view of the present day. Had Marx been called upon to write it in 1878 instead of 1848 certain things in it would no doubt have been different. Even so it contains in embryo most of Marx’s later ideas and was a significant advance on anything of the kind that had preceded it. It took Communistic thought out of the world of Utopias and set it up on a basis of reality.

The Writing of “Capital”

On February 24th, 1848, the revolution that overthrew Louis Philippe broke out in France, and by March Germany was in the throes of liberal revolutions. The Belgian Government did not choose at such a time to have a revolutionary of Marx’s calibre in Brussels, so he had to seek shelter elsewhere. He returned to Paris, and from there went to Cologne accompanied by Engels. Here they started a newspaper, the Neue Rheinische Zeitung. For nearly a year this journal poured forth the opinions of Marx and Engels and brought to an examination of the political events and problems of the day the understanding of historical processes that the “Materialistic Conception of Histor ” had provided. It was in the pages of this paper that the articles now gathered together under the title, “Wage Labour and Capital” appeared. Finally, during the period of reaction after 1848, the paper was suppressed (May, 1849), and Marx went on his travels again. After a short stay in Paris he sought refuge in London, and there he remained for the last thirty-four years of his life.

In 1852 the Communist League, after prolonged internal dissension among its members, came to an end, and for about ten years Marx was not actively engaged in political affairs. This was the period that commenced his prolonged economic researches, during which he laboured on the preparation of his greatest work—“Capital.” At the beginning it was a period of great hardship for Marx, whose only source of income was his pen. Three of his children died as a result of the privations to which the family was subjected. In 1851 he became a contributor to the New York Tribune. Certain of the articles he wrote for this paper on events in Germany have since been gathered together under the title "Revolution and Counter Revolution.” Another of his works, now widely read, “The Eighteenth Brumaire of Louis Bonaparte,” also appeared about the same time in another paper, Die Revolution, published in New York. Engels meanwhile had gone into his father’s business in Manchester as a means of providing monetary support. In 1859 the "Critique of Political Economy" appeared. This work is the forerunner of “Capital,” and contains the first exposition of Marx’s theory of value. —

The First International

Marx’s active participation in political agitation began again with the First International in 1864, of which he soon became the leading spirit. The inaugural address and constitution were written by Marx. They follow the lines laid down sixteen years before in the Communist Manifesto, but show that Marx’s thought had progressed far since 1848. The Declaration of Principles of the S.P.G.B. bears many strong resemblances to the constitution drawn up by Marx for the First International. But in writing for a body like the International Marx could not be entirely himself, and certain parts of the constitution cannot be considered as indicative of Marx's own ideas. About one passage, for example, he is found writing to Engels: "I was compelled to insert into the constitution some phrases about 'rights' and ‘duties’ as well as ‘truth, morality and justice,' but all this is so placed that it is not likely to bring any harm.”

Marx's struggle with Bakunin sprang out of the International, as did his famous monograph, “The Civil War in France,” which was originally written as an address for the International. In 1873 the bureau of the International was shifted to New York. Three years later it had ceased to exist.

Throughout the period of his work on the General Council of the International Marx was continuing his researches and studies. In 1867 he published the first volume of “Capital.” The other two volumes were first published after his death by Engels, who prepared them from the notes Marx left behind. In 1869 Engels retired from business, and returned to London in the following year. This meant easier conditions for Marx: Engels brought not only monetary assistance, but also relieved Marx of a large part of the work to be done for the International. After the transference of the International to New York Marx devoted all his energies to his studies. On these were spent the last ten years of his life.

The Marxian Theories

Marx’s importance in the history of the Labour movement comes from his having discovered first the basic law governing the development of society, and second the essential economic principles underlying production in a particular form of society, the capitalistic form. The first of these is embodied in the “Materialist Conception of History.” which is outlined above in the words of Engels. The corner-stone of the second is Marx’s theory of value, the only economic theory that has succeeded in giving an adequate explanation of the sources of profit in capitalistic production. Both of these theories have been attacked, but it is safe to say that at no time has their validity been more apparent than to-day. A whole school of economic historians has arisen during the last fifty years, re-writing history from the viewpoint provided for them by Marx, although few of them are honest enough to acknowledge his influence. For the workers the importance of the Materialist Conception of History lies in its revelation of the class struggle as the mechanism through the operation of which social changes are produced. Without the guiding principle of the class struggle working-class thought must inevitably flounder about in a morass of reformism. Until the identity of interests of all workers everywhere, as members of the same class, was made apparent by Marx, there was no solid basis on which an international working-class movement could be established. Without such a movement capitalism cannot be overthrown.

Marx’s theory of value made clear the exploitation of the worker, gave it scientific proof and demonstrated its inevitability under capitalism. Here was the final blow to all theories of social reform. Once it was shown that the preventable evils from which the workers suffer are the result of their being numbers of an exploited class in society it followed that only by terminating their exploitation could those evils be abolished. Revolutionary Socialism was born.

The S.P.G.B. and Marx 

It is to preach this that the S.P.G.B. exists. In putting itself forward as the only party worthy of the support of the workers, the S.P.G.B. does so as a Marxist organisation. What do we mean when we describe ourselves as a party of Marxists? In the first place, it does not mean that we claim infallibility for Marx, or accept all he wrote as dogma and true just because he wrote it. But we do claim that Marx, in all his main ideas, was correct and provided explanations of social problems and guidance in the solution of those problems. To the extent that these ideas pass the test of modern experience—and we contend that, fundamentally, they do satisfy such a test —we subscribe to them, but we do so in no blind spirit of hero worship. We appreciate that Marx, like lesser men, was subject to the environment in which he found himself. The body of his thought did not emerge fully formed at the beginning of his career, it developed and grew each year as his researches and experience increased. Inevitably, until Marx had completed his economic studies, his thought was not rounded off, and certain of his earlier ideas are not altogether consistent with those of his mature years. Engels referred to this in his introduction to “Wage Labour and Capital," Engels wrote: —

All his (Marx’s} writings which appeared before the publication of the first part of. his “Critique of Political Economy” differ in some points from those published after 1859, contain expressions and even entire sentences, which from the point of view of his later writings appear rather ambiguous and even untrue.

In other words, where there are contradictions —and they are relatively few—in Marx's teachings it is on the later statement that he must be judged. The particular conditions of his times, the undeveloped nature of capitalism and the struggles to overthrow the relics of the feudal restrictions on capitalist industry, made him an advocate at certain periods of courses of action which, in his later years, he disavowed and which, in any event, are not applicable to modern conditions. For example, Marx’s (and Engels’) ideas on the use of armed force to achieve revolutionary objectives underwent a radical change during his lifetime, and the reasons that led Marx, in 1848, to advocate war with Russia, and later to subscribe to a political programme of immediate demands, including such things as the eight-hour day, are no longer operative: Marx’s example cannot be pleaded in defence of the support given to the war of 1914-18 by the various Labour Parties of the belligerent countries or in justification of reformism. Experience has shown that a programme of immediate demands cannot be used to build up a socialist organisation. In practice immediate demands have soon brought confusion and destroyed the Socialist objective of the parties which adopted them.

Marx and Engels also underestimated capitalism's strength and ability to adjust itself to the demands made upon it. They both thought in the ’fifties that capitalism could not survive its industrial crisis and that its end was imminent.

We dare to mention the shortcomings of Marx even in a commemorative article just because he was a genius. His reputation is big enough to bear the truth. Marx, like Cromwell, would have insisted on being painted “wart and all.’’ Only mediocrity has to be protected from being judged on account of its mistakes. It was Marx himself who said: “Ignorance never helped nor did anybody any good," and ignorance of the development of Marx’s thought can only lead to difficulties in understanding his final ideas. An understanding of these ideas provides a sure and complete key to all modern social and political problems. The S.P.G.B. aims in its propaganda to provide that understanding.

B. S.