Just to note that Marx has his own "anatomy of a typical crisis" story
in chapter 35, vol. 3 of Capital.
That is just after Marx takes care of the argument underlying the
English Act of 1844, which tried to restrict the issue of credit to
make it conform to the size of the (gold) monetary base. The
underlying argument was that the causes of panics and crashes were the
recurrent deficits in the current account (gold drain), which reduced
the gold reserves of banks. At the time, the Bank of England had
already largely centralized this function, but there were other banks
still with significant hoards. Incidentally, some specific provisions
of the Act of 1844 helped the central bank snatch those metal hoards
away from these central banks. In any case, since these reserves
played the dual role of (1) monetary base (both hoard in the old sense
and fund to redeem bank notes, which under the Act of 1844 became
virtual gold certificates) and (2) security reserve to underwrite
credit expansion, then even a small reduction of the reserves could
lead to panics and crashes.
Needless to say, althought the Act of 1844 was passed to prevent
panics, panics didn't read the memo and the law had to be suspended or
made flexible every time there was a panic.
Marx separates carefully the functions of gold as loanable capital
from that of money proper, and builds up his argument to show that the
reason why such a tiny event like a small drain in gold reserves can
unleash hell is that capitalist industry is in a state of
over-sensitivity. He alludes to cases in which larger gold drains
exhibit no effect in the economy.
But, again, there's an "anatomy of a typical crisis" kind of story. Here:
"An import of precious metal takes place mainly during two periods. On
the one hand, it takes place in the first phase of a low interest
rate, which follows upon a crisis and reflects a restriction of
production; and then in the second phase, when the interest rate
rises, but before it attains its average level. This is the phase
during which returns come quickly, commercial credit is abundant, and
therefore the demand for loan capital does not grow in proportion to
the expansion of production. In both phases, with loan capital
relatively abundant, the superfluous addition of capital existing in
the form of gold and silver, i.e., a form in which it can primarily
serve only as loan capital, must seriously affect the rate of interest
and concomitantly the atmosphere of business in general.
"On the other hand, a drain, a continued and heavy export of precious
metal, takes place as soon as returns no longer flow, markets are
overstocked, and an illusory prosperity is maintained only by means of
credit; in other words, as soon as a greatly increased demand for loan
capital exists and the interest rate, therefore, has reached at least
its average level. Under such circumstances, which are reflected
precisely in a drain of precious metal, the effect of continued
withdrawal of capital, in a form in which it exists directly as
loanable money-capital, is considerably intensified. This must have a
direct influence on the interest rate. But instead of restricting
credit transactions, the rise in interest rate extends them and leads
to an over-straining of all their resources. This period, therefore,
precedes the crash.
[The latter is a reference to a full fledge credit bubble. In the
jargon of an intro textbook: the supply of gold (M) shifts to the
left. That raises the rates and, if the demand for liquid gold (L)
stays put, it should lead to less liquidity in the system. However, L
shifts to the right because of the speculative motive: i goes up, but
also M*. Something that would frustrate Marx here is that the macro
scheme makes no distinction between the different functions of gold --
domestic money proper, global money, loanable capital, reserve for
banknote issue -- because the implications are different.]
[...]
"Furthermore, as soon as somewhat threatening conditions induce the
bank to raise its discount rate — whereby the probability exists at
the same time that the bank will cut down the running time of the
bills to be discounted by it — the general apprehension spreads that
this will rise in crescendo. Everyone, and above all the credit
swindler, will therefore strive to discount the future and have as
many means of credit as possible at his command at the given time.
These reasons, then, amount to this: it is not that the mere quantity
of imported or exported precious metal as such which makes its
influence felt, but that it exerts its effect, firstly, by virtue of
the specific character of precious metal as capital in money-form, and
secondly, by acting like a feather which, when added to the weight on
the scales, suffices to tip the oscillating balance definitely to one
side; it acts because it arises under conditions when any addition
decides in favour of one or the other side. Without these grounds, it
would be quite inexplicable why a drain of gold amounting to, say,
£5,000,000 to £8,000,000 — and this is the limit of experience to date
— should have any appreciable effect. This small decrease or increase
of capital, which seems insignificant even compared to the £70 million
in gold which circulate on an average in England, is really a
negligibly small magnitude when compared to production of such volume
as that of the English.[17] But it is precisely the development of the
credit and banking system, which tends, on the one hand, to press all
money-capital into the service of production (or what amounts to the
same thing, to transform all money income into capital), and which, on
the other hand, reduces the metal reserve to a minimum in a certain
phase of the cycle, so that it can no longer perform the functions for
which it is intended — it is the developed credit and banking system
which creates this over-sensitiveness of the whole organism. At less
developed stages of production, the decrease or increase of the hoard
below or above its average level is a relatively insignificant matter.
Similarly, on the other hand, even a very considerable drain of gold
is relatively ineffective if it does not occur in the critical period
of the industrial cycle."
Note the passage after: "But it is precisely the development of the
credit and banking system,..."
Marx continues:
"In the given explanation we have not considered cases in which a
drain of gold takes place as a result of crop failures, etc. In such
cases the large and sudden disturbance of the equilibrium of
production, which is expressed by this drain, requires no further
explanation as to its effect. This effect is that much greater the
more such a disturbance occurs in a period when production is in full
swing.
"We have also omitted from consideration the function of the metal
reserve as a security for bank-note convertibility and as the pivot of
the entire credit system. The central bank is the pivot of the credit
system. And the metal reserve, in turn, is the pivot of the bank.[18]
The change-over from the credit system to the monetary system is
necessary, as I have already shown in Vol. I (Ch. III) in discussing
means of payment. That the greatest sacrifices of real wealth are
necessary to maintain the metallic basis in a critical moment has been
admitted by both Tooke and Loyd-Overstone. The controversy revolves
merely round a plus or a minus, and round the more or less rational
treatment of the inevitable.[19] A certain quantity of metal,
insignificant compared with the total production, is admitted to be
the pivotal point of the system."
>From this point on, a bunch of potent punchlines:
"Hence the superb theoretical dualism, aside from the appalling
manifestation of this characteristic that it possesses as the pivotal
point during crises. So long as enlightened economy treats 'of
capital' ex professo, it looks down upon gold and silver with the
greatest disdain, considering them as the most indifferent and useless
form of capital. But as soon as it treats of the banking system,
everything is reversed, and gold and silver become capital par
excellence, for whose preservation every other form of capital and
labour is to be sacrificed. But how are gold and silver distinguished
from other forms of wealth? Not by the magnitude of their value, for
this is determined by the quantity of labour incorporated in them; but
by the fact that they represent independent incarnations, expressions
of the social character of wealth. [The wealth of society exists only
as the wealth of private individuals, who are its private owners. It
preserves its social character only in that these individuals mutually
exchange qualitatively different use-values for the satisfaction of
their wants. Under capitalist production they can do so only by means
of money. Thus the wealth of the individual is realised as social
wealth only through the medium of money. It is in money, in this
thing, that the social nature of this wealth is incarnated. — F.E.]
This social existence of wealth therefore assumes the aspect of a
world beyond, of a thing, matter, commodity, alongside of and external
to the real elements of social wealth. So long as production is in a
state of flux this is forgotten. Credit, likewise a social form of
wealth, crowds out money and usurps its place. It is faith in the
social character of production which allows the money-form of products
to assume the aspect of something that is only evanescent and ideal,
something merely imaginative. But as soon as credit is shaken — and
this phase of necessity always appears in the modern industrial cycle
— all the real wealth is to be actually and suddenly transformed into
money, into gold and silver — a mad demand, which, however, grows
necessarily out of the system itself. And all the gold and silver
which is supposed to satisfy these enormous demands amounts to but a
few millions in the vaults of the Bank.[20]
"Among the effects of the gold drain, then, the fact that production
as social production is not really subject to social control, is
strikingly emphasised by the existence of the social form of wealth as
a thing external to it. The capitalist system of production, in fact,
has this feature in common with former systems of production, in so
far as they are based on trade in commodities and private exchange.
But only in the capitalist system of production does this become
apparent in the most striking and grotesque form of absurd
contradiction and paradox, because, in the first place, production for
direct use-value, for consumption by the producers themselves, is most
completely eliminated under the capitalist system, so that wealth
exists only as a social process expressed as the intertwining of
production and circulation; and secondly, with the development of the
credit system, capitalist production continually strives to overcome
the metal barrier, which is simultaneously a material and imaginative
barrier of wealth and its movement, but again and again it breaks its
back on this barrier.
"In the crisis, the demand is made that all bills of exchange,
securities and commodities shall be simultaneously convertible into
bank money, and all this bank money, in turn, into gold."
These last passages are clearly a reference to his discussion in ch.
3, vol. I. All this talk about "liquidity" in modern economics, I
frame by reference to Marx, ch. 3, vol. I [If something is not clear
or out of the blue, refer to Marx, ch. 3, vol. I]:
"Liquidity" is the ability of a particular commodity to be converted
into money, a fungible, generally-acceptable one -- the closest to
sheer, absolutely fungible productive power that may exist embodied in
a thing, since in its direct existence it is fluid and inherent to
humans with their own minds and wills. That power is the "moneyness"
of money. It's social power embodied in a thing, portable, deployable
as a thing separate from particular individuals. However, at its
root, that ability of a thing to be money is not inherent to it, not a
natural attribute of it. The objectivity (i.e. independence from
one's individual will) of the liquidity of money is purely social.
Its being effective at its role relies on ownership being a binding
force, capable of commanding labor, which depends on the stability of
the social order. And the stability of the social order, the fluidity
of social labor, relies on a whole, precise, and complex "pattern of
complementarities" (to use Anwar Shaikh's phrase). Because the
ultimate social power lies in humans. It's their productive power of
labor, cooperative, interdependent labor. Capital, the market, the
state, etc. hijack such power and turn it against the producers.
"Liquidity" refers to a social power, a power that ultimately lies in
human labor, captured and encapsulated, embodied in a thing. A flight
or rush to liquidity means a flight to the commodities that, in the
given circumstances, appear to be more robustly capable of playing the
role of sheer power embodied in things. Why cash? Why U.S.
Treasuries? Because the state still appears robust in its ability to
enforce its own explicit and implicit contracts. Why gold? Because
even states may fail to honor their contracts. And, up to a point,
this is all a matter of degree. Inflation and devaluation of a
state's currency erode faith on a continuum dial, rather than on a
on/off switch.
Local and personal bounds are dissolved by the circulation of
commodities. A whole, complex network of mutual social
interdependence has been spanned by the circulation of commodities.
Key point: This social interdependence is essentially different from
the social interdependence in a communist society, because it is
restricted by the value held by one another individual. Under
communism, people cooperate with one another -- help one another,
interact with one another -- for the sake of it, because those acts of
cooperation enrich them as human beings. My ability to help somebody
is not restricted by the power that such person can return to me in
reward, because the reward is inseparable from my helping her. Love,
as opposed to trade, is giving without asking or expecting anything in
return.
In this sense, the social interdependence under communism is much more
elastic than under the narrow confines of market and capitalist
societies, where how much I "give" you depends on how much you "give"
me back, and the quantitative relations that regulate that
back-and-forth giving are weaved behind the backs of individuals.
They are an organic or spontaneous result of our actions, but their
results appear as social forces beyond each individual's control.
This apparent self-sufficiency or localized and evanescent quality of
barter is w.r.t. the market. Other social interactions between
individuals may happen, but they are direct personal interactions
unmediated by markets. Marx's point here is that the circulation of
commodities on the other hand keeps the ball rolling in the markets.
It is like a perpetual motion machine.
Say's law is akin to my saying that just, because, whenever I kiss a
woman on the lips, a woman is kissing me back on the lips, therefore I
kiss women on the lips whenever I want, as frequently as I wish. Hm,
not really. It's entirely possible that I'm just blowing all my
kisses into the thin air without anybody reciprocating. This is the
point in life when you feel that living in society, having to receive
your validation as a human being from other human beings, really
sucks!
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