[OPE-L:1288] Re: Gold and credit-money weaknesses

glevy@acnet.pratt.edu (glevy@acnet.pratt.edu)
Sun, 3 Mar 1996 14:35:08 -0800

[ show plain text ]

WARNING: Speculative thoughts follow. The author takes no responsibility
for any of the following ideas should any become reality.
Duncan wrote in [1284]:

> This ties in with the issue of speculation. One reason agents hold gold
> is to speculate on future movements in gold/commodity prices. There have
> been "corners" in gold (I seem to remember one in the 1870s) and more
> recently (1970s) a corner in the silver market. I doubt that this kind of
> manipulation would in the end create more than a temporary blip in actual
> accumulation, and it's not clear what the motive would be.

There was a fictional work by Ian Fleming called "Goldfinger." It
concerned an evil agent of SPECTRE who wanted to monopolize the world's
gold reserves by nuking Fort Knox (of course 007 prevented this from
happening). It sounds far-fetched, to be sure. However, gold takes a
material form and the supply of that material can be eliminated or
curtailed by various means. Had there been a real Goldfinger and had he
been successful, don't you think it would have caused something more than
a "blip"?

> > 2) If there are new methods of production that greatly increase the
> > productivity of labor in gold production, a similar result might occur.
> Presumably this is exactly what happened after the Spanish discovery of
> South American gold and silver in the 16th century, leading to the "Great
> Inflation" which many historians have linked to the initial growth of
> world capitalism.

Wasn't this associated more with the plunder and genocide accompanying
the original accumulation of capital rather than being an expression of
new methods of gold production? Of course, technological developments in
shipping and navigation were required for this process of "discovery" to

> If you could turn water into uranium or titanium, something of the same
> sort might happen to economies highly dependent on producing those items.
> For that matter, how different is this case from what happened to the
> U.S. auto and tv industries as a result of East Asian competition?

The question of industrial location in term of auto and TV is rather
complex and can't be reduced to the development of new products
and methods of production. Locational strategies by transnational
corporations also consider government regulatory policies, trade
policies, taxation, access to markets, local labor markets, degree of
unionization, etc..

> The main people to fear the USSR gold stocks would have been speculators
> long on gold because they thought the gold price would rise. The gold
> price reached a high of around $800/oz in around 1980; now it's around
> $400/oz, so that those who speculated in gold (and I'm afraid a
> considerable number of Marxist economists were tempted in this direction
> in the 1970s) took a bath.

There was a very interesting (and well acted and written) BBC production
called "A Very British Coup" a few years back. The story line involved
the election of a radical socialist former coal miner as Prime Minister.
Rather than introduce austerity programs proposed by the banking
community, the state budget was financed with "Moscow gold." What
happened next was very interesting indeed (although, I think that the
idea that the Soviets would bail out the UK was rather far-fetched and
seemed to rest fundamentally on a misunderstanding of Soviet foreign

Anwar Shaikh has recently been doing some research into the behavior of
stock market prices which is very interesting. While not a predictive
model, he claimed recently that he was considering speculation in stocks
based on further developments of his model. He said that we would know
whether he was successful when we either saw him in front of the New
School with a cup in his hand or found out that he *bought* the New School.
I have my doubts about the ability to accurately forecast gold or stock
prices, though. The theoretical implications of his work, though, are
well worth discussing when he has the time.

> Counterfeiting is a form of fraud and effectively takes money from those
> who accept the queer notes (or who get caught with them when they are
> finally discovered.) It's not clear why counterfeiting in and of itself
> should disrupt ordinary transactions, unless the public loses confidence
> in the currency issued by the State (maybe that was the idea of the
> Germans, but I don't think it was a very good idea, myself.)

Suppose a hundred billion dollars worth of counterfeit notes was
available. What would the consequences be? If the notes were in the hands
of working-class families, would one not expect a rather large shopping
spree? Would businesses continue to accept government or bank notes not
knowing if they were real or counterfeit? Might they not demand payment
with some other material, like gold or silver? Would workers not demand
some other form of payment instead of $ wages if this were to happen?
At a minimum, wouldn't such a prospect lead to a huge inflationary
spiral and, possibly, a redistribution of income?

Most likely, if the above were to happen with the $, that would probably
speed the demise of the $ as international money and another currency
such as the DM or the Yen would take its place. That would certainly have
major consequences for the US economy and, especially, for Fed monetary

The reason why I believe that credit-money here is "vulnerable" is
because it is in the material form of paper which can potentially be
duplicated. BTW, the Secret Service is very aware of these possibilities
and recently changed Federal Reserve notes to make them more difficult to
counterfeit. I believe that international law, in fact, considers
counterfeiting to be "terrorism" if the intent is to destabilize an economy,
which they even sometimes call "economic warfare."

Of course, increasingly records of bank transactions are stored
electronically. What would happen if a hacker got into the Fed's computer
system and deleted all records (or shifted large amounts of $ among
accounts)? A temporary blip? Perhaps.

> International credit is interesting because there is no super-national
> enforcement of contract. On the other hand, there are severe penalties
> for defaulters: particularly loss of access to world credit markets,
> which makes running a modern national economy almost impossible. Even
> large domestic defaulters (like the Illinois Trust episode) are sometimes
> viewed as "too big to be allowed to fail", and can negotiate surprisingly
> effectively with their creditors from a position of weakness.

Agreed. Still, on balance, some countries might believe with
justification that they would gain more than they would lose if they

> The main effect of a collective loan strike, if it were at all effective,
> would be to make credit harder to come by for working class households in
> the future, I think, and to raise the interest rate they would be forced
> to pay.

Perhaps. A lot would depend, though, on the level of militancy and
solidarity and on the form of state response.

> Actually, the repayment record on working class household loans
> is very good, which raises the question of why these loans are so often
> made at a very high rate of interest.

It's not surprising that the repayment of working class household loans
is very good -- they have too much to lose. (The dictum: "you have
nothing to lose but your chains" seems a little misplaced for workers in
advanced capitalist countries today, don't you agree?).

Why are the interest rates so high for these kinds of loans? Colateral
and equity would be much lower for working class families than for
business firms, right? Isn't it therefore a more risky type of loan?

In OPE-L Solidarity,