The End of the Paper Economy and Some Possible Consequences


The economic pundits are no longer talking about whether the financial crisis will affect the “real economy”. With world trade falling and unemployment rising reality has already answered that. So The Independent ran an article by an HSBC boss entitled, “Marx was Right” whilst The Financial Times has now started a series on “The Future of Capitalism”. The question being asked today is how capitalism can survive the deepest crisis it has faced since the inter-war years. Even so, there is a yawning gap between the severity of the crisis and the capitalists’ ability to respond. The article here, translated from the December edition of Prometeo, the theoretical review of our sister organisation in Italy, points to the absurdity of trying to solve a systemic crisis on the basis of a banker’s view of the world which sees money as the creator of wealth. This illusion is what fuelled the ballooning of fictitious capital in the first place. Prosecuting corrupt financiers, curbing pensions and bonuses, bringing in tighter regulations, let alone the state issuing even more fictitious money (previously recognised as printing money but now called “quantitative easing”), are no answer at all to the fundamental problem of insufficient real capital. This is a problem which began, not with the unregulated issuing of sub-prime mortgages a decade or so ago, but with the long-term cyclical crisis of the falling rate of profit which first dented global capitalism’s post-war accumulation growth in the early 1970s. The roots of this crisis lie in something no capitalist will ever admit - in the finite limits to the constant increase in the extraction of unpaid labour from the working class whose work alone produces new value for capital. On the one hand, capital is confronted by a mountain of debt. On the other, it faces declining profit rates. The prospect of a new “New Deal” bringing about a return to the boom years or for a new world older to replace the old Bretton Woods before another imperialist conflagration are nil, although that won’t stop them trying. This article, written before Obama took office and before the upcoming G20 summit, shows why.


When the subprime crisis exploded in August last year the prevalent view, even amongst the most pessimistic economists, was that the financial storm would not have a dramatic effect on the “real economy”. For example the US economist Alan Sinai predicted a period of semi-recession for six to nine months and then a revival of growth at an annual rate of 1% since, according to him, even if the crisis in the financial markets was very serious the “fundamentals of the real economy” were solid. (1)

Even though U.S. Treasury Secretary, Henry M. Paulson, admitted in an article written at the height of the financial storm that, “we find ourselves in the middle of the most serious and unpredictable crisis that we have ever seen” he still described the crisis as essentially financial. In fact, the article goes on:

“In September the government found itself faced with a system-wide crisis: after availing itself of the authority which it enjoyed we requested an all-encompassing and detailed rescue package from Congress in order to stabilise our financial system and minimise further damage to our economy. By the time such legislation was passed on 3 October the crisis in the global markets was so serious that we had to act with great speed and take very powerful steps to stabilise our financial system and to get credit flowing again. Our initial intent had been to strengthen the banking system by purchasing illiquid mortgages and mortgage-related securities. But by this time, given the severity and magnitude of the situation, an asset purchase programme would not be effective enough, quickly enough. Therefore we exercised the authority granted by Congress in this legislation to develop and quickly deploy a $250 billion capital injection programme, fully anticipating we would follow that with a programme for troubled asset purchases.” (2)

For Paulson, as is evident from the title of the article listed in the notes below, the pumping of liquidity into the credit system still remains the best weapon to deal with what is pronounced the most devastating crisis ever to have hit the capitalist system.

On the other hand, Paulson is a banker (for many years he was chief executive officer at Goldman Sachs, one of the U.S. investment banks that has benefited most from Paulson’s manoeuvres) and from a banking standpoint the production of money and/or its paper entitlements is the authentic production of value. Thus when more money comes onto the market this is seen as covering existing credit obligations as if this was the same as the additional production of commodities and not yet another anticipation of the production of real value in the future, or rather of additional debt.

In reality the wiping out of one debt by another debt is only possible from a banking standpoint. For the banker the cycle of reproduction of capital simply comprises the movement of M-M1 (money to more money) and not, as it really is, in the movement M-C-M1 (money-commodity-more money) which presupposes that before the additional money is created (M1) there must necessarily also have taken place the transformation of money into commodities as well as the extortion of unpaid labour power equivalent, in value terms, to the quantity of surplus value represented by the difference between M1 and M. For this reason the contradiction implicit in the functioning of money completely escapes the banker: the contradiction, that is, between money as an abstract measure of value and means of circulation of commodities and its role as universal commodity which effectively incarnates value.

“The function of money as the means of payment -- writes Marx in the First Volume of Capital -- implies an immediate contradiction. In so far as the payments balance one another, money functions only ideally as money of account, as a measure of value. As soon as actual payments have to be made, money does not serve as a circulating medium, as a mere transient agent in the interchange of products, but as the individual incarnation of social labour, as the independent form of existence of exchange value, as the universal commodity.” (3)

Modern capitalism, and particularly since the end of World War Two, has experienced something that would have been impossible in Marx’s day - yet which Marx, as we will verify shortly, anticipated with great precision - and that is that at a certain stage of capitalist development and with it the credit system even paper money, despite having no intrinsic value, can itself assume the function of money both as a simple means of circulation and as “the individual incarnation of value” and is therefore also fully utilisable “in real payments”.

Through a long process beginning with the birth of a public monopoly on the issue of paper money, the state came to guarantee in the first instance that a precise quantity of paper money in circulation would correspond to a precise quantity of commodity money (gold or silver) which was accumulated in the coffers of the institute authorised to issue it (the Central Bank) and to which the paper money could be converted at any moment, thus eventually - with the issue of nonconvertible bills - becoming securities representing the real capacity of the country to produce, in value terms, a corresponding amount of commodities and services (GDP). In this way, over the course of time, the representation of ideal value - paper money - also assumed the function of absolute commodity and as such was also accepted in real payments. From July 1971, that is when the USA reneged on the Bretton Woods agreement and the dollar was no longer convertible into gold, this metamorphosis was extended from domestic circulation systems to the system of international payments. From thence forward, for the first time in capitalism’s history, an nonconvertible bill (the dollar) has been used both as money of account in the balance sheets of the international exchange system as well as for direct payments for imported commodities and services. It thus appeared that the ability to exchange commodities for paper bills also meant that any amount of debt obligations could also be extinguished by the same method. From the viewpoint of the banker, then, it seemed that the age-old alchemists’ dream of transforming dross into gold had been fulfilled by means of paper money, the production of which had become the ideal embodiment of value as opposed to commodities, the true motor force of the production of wealth, thus provoking the exclamation: Here is the dollar, here is gold! And with this new magical power came the ability to print so many dollars that not only had it become impossible to calculate their amount, it had become humanly impossible to match them up, in a reasonable amount of time, with a corresponding concrete production of real wealth.

Figures relating to the volumes exchanged on the commercial and financial markets give a rough idea of the extent of what has been going on. Compared to a daily exchange volume of goods and services equivalent to about $100bn the corresponding trade on the currency and financial derivatives markets equals $5,500bn. (4) It’s been calculated that it would take the world’s total production of goods and services for the next 250 years to absorb this production of fictitious value. Now, you can believe in god, in the miracle of multiplication of the loaves and fishes, in manna from heaven and even that pigs might fly, but nowhere in this world or the next has paper ever fed anyone, much less if you have to wait 250 years for it to be transformed into bread. In the long run then paper is turned back into being only paper and the mystery of the wealth that is produced from nothing is revealed for what it really was: a swindle.

“This contradiction [that is implicit in the dual function of money, ed.] -- writes Marx again -- comes to a head in those phases of industrial and commercial crises which are known as monetary crises. Such a crisis occurs only where the ever-lengthening chain of payments, and an artificial system of settling them, has been fully developed. Whenever there is a general and extensive disturbance of this mechanism, no matter what its cause, money becomes suddenly and immediately transformed, from its merely ideal shape of money of account, into hard cash. Profane commodities can no longer replace it.”

[In our case read: nonconvertible bills denominated in dollars, collateralised debt obligations, futures, swaps, and whatever other so-called creative piece of finance that has ruled during the course of the last thirty years. ed.]

“The use value of commodities becomes valueless and their value vanishes in the presence of its own independent form. On the eve of the crisis, the bourgeois, with the self-sufficiency that springs from intoxicating prosperity, declares money to be an empty illusion. Commodities alone are money! As the hart pants after fresh water, so pants his soul after money, the only wealth. In a crisis the antithesis between commodities and their value-form, money, becomes heightened into an absolute contradiction. Hence, in such events, the form under which money appears is of no importance. The money famine continues, whether payments have to be made in gold or in credit money such as bank-notes.” (5)

Since - as we have seen - for the modern banker, money as the ideal representative of value and money as universal commodity are the same thing, then in order to eliminate the consequences of a shortage of the latter, and being convinced that fictitious money only stems from debt based on paper money (bonds, shares, futures, currency deals, credit cards, etc.) and not on paper money itself, he starts to inundate the world with another mountain of nonconvertible bills. According to him all that’s needed is time for this newly produced money to absorb what for him are the only profane commodities, the toxic debts, and everything will go back to being as it was before. It’s no accident, then, that even the most pessimistic predictions situate the beginning of the next global upturn towards the end of 2009. However, it is obvious from a glance at the reality of the matter that the money which is supposed to eliminate the toxic assets from the market (“toxic” because they are irrecoverable) is in its turn fictitious money and that the whole operation is nothing less than a game of pass the parcel, a substitution of one lot of profane commodities for another. In essence one lender is being replaced by another, in this instance, the state has replaced the big investment banks. In this sense Paulson really is justified in being “very proud of the decisive intervention by the Treasury Department, by the FDEC and the FDIC [Federal Deposit Insurance Corporation - ed.] directed at stabilising our financial system”. (6) In the name of the interest of society as a whole they have in practice transferred the losses of the big investment banks to the state which in turn is in the best position to pass them on to those who will pay the final price: the innocent and ignorant workers. As for demonstrating, however, that this measure is an effective recipe for solving the crisis then it comes up against that same unbridgeable gulf that separates words and actions.

A Crisis Long in the Making

Faced with a crisis in danger of turning into a catastrophe of incalculable dimensions the very statesmen, economists, bankers, opinion-shapers and journalists who only yesterday were busy praising the market’s famous invisible hand, who today are eulogising the state for taking on the losses resulting from the banks’ production of fictitious money, are now quick to call for new regulations to limit the production of this form of money and for a new Bretton Woods to redefine the system of international payments.

This sudden revival of respect for rules and regulations is as if the virus which used to bring on an attack of gout in the nobility as autumn approached is today attacking the minds of the bourgeoisie and provoking a form of degenerative amnesia. How else to explain the fact that none of them remember that the Bretton Woods Agreement had been broken in July 1971 by the then president of the USA, Richard Nixon? Or that at the beginning of the 80’s in the last century liberalisation of the financial markets had been imposed by the United States and Great Britain? And that in 1999 in the United States the Glass Steagall Act, introduced by Roosevelt in 1933, had been abolished, basically because so long as the operations of investment banks and commercial banks were kept separate the latter were prevented from issuing credit instruments guaranteed by savers’ deposits, thereby severely limiting the issue of fictitious money?

In actual fact a closer examination of the present crisis reveals that what appears to be the consequence of excessive financial speculation and the subsequent seizing-up of inter-bank lending is rather the consequence of the re-emergence - on a gigantic and vastly broader level - of that same contradiction, immanent to the process of real capital accumulation, which had already revealed itself at the beginning of the Seventies with a significant reduction in the average rate of industrial profit, above all in the United States. That is, today’s disease is caused by the same pathogenic agent which has provided lymph for the infernal mechanism that allows the parasitic appropriation of surplus value centred on the uncontrolled production of fictitious money. The system has seized up not, as the modern banker says, because there is a shortage of liquidity, but on the contrary because too much liquidity has been created in relation to the system’s capacity to generate a corresponding flow of real wealth.

What happened, for example, to the euro-denominated liquidity that the European Central Bank (ECB) pumped into the credit system from the end of last September to the end of October?

“It ended up -- E. Scalfari informs us in La Repubblica of 09-11-2008 -- in the vaults of the ECB ... They had been issued in the hope that inter-bank lending, that is the borrowing that banks do from each other, would go back to running smoothly again. Instead the banks redeposited the liquidity with the Central Bank. They pocketed the difference but meanwhile reduced the available credit for clients. The figures are as follows: 10th September the deposits of the ECB in Frankfurt amounted to €48 million; on 31st October they amounted to €280 million.
At the same time other countries have a substantial balance of payments surplus. Even if just some of these (the oil-producing countries with a €964bn surplus, China €464, Germany €324 and Japan €225) are taken into account you reach the astronomical sum of around €2,000bn which are not being reinvested. Why? The reason is simple. Since the capitalists only invest when there is a reasonable prospect of realising sufficient profit and nowadays this prospect no longer holds, whatever the sector, whoever has capital hoards it away. And if we look further back over the last thirty years the situation is confirmed. With the liberalisation of the financial markets and the introduction of microelectronics to the process of production there came a new international division of labour based on the delocalisation of manufacturing and a high level of labour power in areas where it is possible to exploit millions of men, women and children as if they were worse than beasts. Thus the most excellent prospect of realising abundant profits opened up and a flood of money was thrown over the likes of the unfortunate Indonesians.
For example, regarding Indonesia - which as we noted was one of the countries that had the most money thrown at it - John Perkins, a self-confessed “hired assassin” of the economy on behalf of the most important transnational companies of the United States and who in his own words is now repentant, writes:
At first reading the official statistics indicated that our work in Indonesia during the Seventies had had a positive economic outcome, at least until 1997 [the year when the so-called Asian tigers collapsed - ed.] These statistics showed a low rate of inflation, currency reserves of more than $20bn [obviously completely nonconvertible - ed.], a trade surplus of more than $900 million and a sound banking sector. Indonesia’s economic growth (measured in terms of GDP) was almost 9% ... until 1997 ... The economists of the World Bank and the IMF, the consultancy bodies, the academic institutions, would use these statistics to maintain that the development policies promoted by we economic assassins were demonstrably effective. It should be said that the statistics didn’t take into account the extremely high price the Indonesian people had paid for what the economists were defining as an “economic miracle”. The benefits were limited to those at the top of the social ladder. The rapid growth in national income had been obtained by untrammelled exploitation of cheap labour power in the factories where the workers worked for hours on end in arduous conditions, and by means of policies which sanctioned the foreign companies’ destruction of the environment and which led to activity that would have been illegal in north America or the rest of the ‘first world’. Even when the minimum wage was declared to be around three dollars a day it was usually ignored. In 2002 it was estimated that 52% of the Indonesian population were living on less than two dollars a day, a condition in many ways comparable to modern-day slavery. Even three dollars a day wouldn’t have been enough to feed the workers and their families ... Perhaps the connection between poverty and abuse by U.S. consumer corporations is more obvious in the exploitative factories of Indonesia than anywhere else (which in any case resemble factories in other countries).” (7)

Meanwhile at Nike, Perkins again tells us, the daily wage was around $1.25 per day.

When all this is taken into account the real reason that the production of fictitious money - the King Midas of our time - has been so successful for so long is apparent. If it is then remembered that the same thing has happened in China, in India, in Latin America and in all the countries of the ex-Soviet bloc it becomes even more obvious that, for anyone in a position to produce and export fictitious money and capital whenever they felt like it, the opportunity to realise enormous profits was immense - or rather, to successfully transform what had only been symbols of value into, as Marx said, “the concrete individual embodiment of social labour, the autonomous existence of exchange value, absolute commodity”.

The river sucking in these easy returns turned into such a flood that even if the Nike workers had renounced their miserable dollar a day the surplus value extorted from them would not be enough to cover them. Now that the river has changed direction Indonesia is left literally in shreds. This passing from an abundance of capital to a dearth of capital shows, therefore, that it’s not the absolute volume of capital that determines the excess or scarcity but the volume in relation to the mass of profits invested in this or that sector, in this or that corner of the world, which can be realised.

Anyone wanting to understand the real cause of the crisis needs to turn their gaze from the explosion on Wall Street and take a look instead at the incurable internal contradiction at the heart of capital’s accumulation process, a contradiction which periodically ensures the incapacity of the system to generate a sufficient mass of profit in relation to the capital invested.

Is A New Bretton Woods Possible?

For the bourgeoisie admitting that this is the principal cause of the crisis would mean having to recognise not only the historicity and transitory nature of the capitalist system whose contradictions are incurable, but also that for the greater part of humanity liberation in the shortest possible time from this system has now become a vital necessity. Instead, therefore, they are persuaded to consider the crisis as an accidental event, at times even something banal despite the fact that only a few days earlier what had once been seen as the panacea for all ills now appeared as the absolute evil. “We need a new Bretton Woods and another New Deal”, repeat politicians, economists, trade unionists and even variety show performers, over and over again. But is a new Bretton Woods really possible? As will be remembered, Bretton Woods is the name of the American town where in 1944 the representatives of the major countries in the western bloc got together to design a new system of international payments in place of the previous gold standard. Continuing to use gold as commodity money was considered unsuitable since neither a stable exchange rate nor a regular flow of international exchange could be guaranteed. Instead a system known as the dollar exchange standard (because it no longer directly used gold as reference money, but rather the dollar) was introduced. The output of this new international reference money would, however, be covered by its convertibility with gold and by the obligation of the Federal Reserve to accumulate gold reserves in view of the fixed link of 35 dollars per ounce of gold. In fact, the recognition of the dollar as the unique means of international payment was the tribute paid to the victors by the vanquished. Paradoxically, however, it was the United States who abandoned this system. In fact, in order to deal with its crisis of industrial profitability the U.S. found itself printing more dollars than it should have been able to on the basis of the Bretton Woods agreement and so in order to avoid declaring itself bankrupt, in the spring of 1971, it denounced that agreement and declared the nonconvertibility of its own money. In effect this imposed a new system of international payments on the entire world, based however on an nonconvertible note which the U.S. could print at will. It’s been calculated that in this way the U.S. has been assured a financial income equivalent to $550bn per year. And as the appetite increased industrial quantities of not only dollar notes were printed, but also every possible sort of credit and loan obligation denominated in dollars. From the stock exchange to the banking system, everyone was able to issue dollar-denominated bonds, stocks or whatever, thus nourishing a gigantic demand for commodities and services from all over the world.

Things had finally come full circle when what happened in Indonesia in the early 90’s was repeated on an international scale. In the attempt to contain the production of fictitious capital interest rates had been lifted. As a consequence a growing number of creditors were no longer able to honour their obligations and at this point the mechanism broke down.

Returning now to our initial question: is there a possibility of a new Bretton Woods? In abstract terms there is nothing to stop this, but it is obvious that such a move would mean turning back the historical clock to before 1971. And in truth, while the media speculate about this, discussions are being held behind the scene about bringing in a system based on a new money of account derived from the currencies of the OECD and the so-called emerging countries, China and India. But even if this became the centre of the system it would still only be virtual money. Given the depth and extent of the crisis and the conflicting interests at work, we are not running much risk of being mistaken by predicting that any new agreement would also see a sharpening of the inter-imperialist struggle as well as intensification and widening of the wars which are already underway.

From New Deal to... New Dream

As we’ve noted, the New Deal was the plan launched by Roosevelt in the USA of the 1930’s and which to some extent was followed, under various names, in every other industrialised country at the time. This used deficit financing of public spending in order to carry out public works (motorways, aqueducts, drainage systems, building of schools, hospitals, etc.) and to support strategic sectors of industry such as steel, metalworking, chemicals and the newly-born car industry. According to the scheme, inspired by the economist Keynes, public spending based on deficit financing should stimulate internal aggregate demand and act as a multiplier for private investment so that both unemployment within the labour force and idle means of production are reabsorbed by the economy. In this way aggregate demand and industrial production, above all in the new automobile sector and its offshoots, would increase. The Keynesian scheme was thus supposed to activate a virtuous circle in which demand and supply would nourish each other, but in reality this policy did not bear significant fruit until the end of the war. In other words, the context in which it functioned was radically different from today.

Nowadays everything is different. Maybe it could work in China, rather less in Europe, but certainly not in the USA. As a matter of fact the Keynesian schema assumes the central presence of a widespread and robust industrial sector as well as the possibility of realising substantial profit from investing in it. Now both these conditions have been absent in the USA for the past forty years. The manufacturing sector has all but disappeared and has been progressively replaced by the financial sphere. In 1980 the former still constituted 20% of GDP. In 2005 this was only 12% and it is not difficult to imagine that over the course of the last three years it has been further reduced. In this same period services linked to the financial sphere have gone from 15% to 21% and once you delve into the balance sheets of the big companies which are nominally part of the manufacturing sector you discover that financial activity weighs even more than the statistics imply.

Take General Motors for example. Even though it is the second largest automobile company in the world after Toyota, in reality it is an agglomerate in which financial assets constitute 80 per cent of its balance sheet. Things are no different in the case of Ford or Chrysler. Thus it doesn’t take a vivid imagination to realise that, for example, the 36 billion dollars the state is ready to throw into their accounts, far less than creating new jobs, will serve instead to plug the gaping holes in their balance sheets and a collapse of the financial markets. In fact, Chrysler has already announced that it intends to “let go” 35,000 employees by the end of the year. If it went bankrupt it’s estimated that around a million employees would be ‘let go’ worldwide. During the election campaign Barack Obama promised to create five million new jobs:

“We will invest -- he declared in one speech -- in solar energy, in wind power, in the next generation of biocarbons, we will seek to develop technology in order to get clean coal and to develop nuclear energy so that it is safe. These investments will serve not only to reduce our dependence on foreign oil, not only will they help to save the planet but they will transform our industries and pull us out of the economic crisis by creating millions of new jobs which will be well-paid and will not be lost to outsourcing.” (8)

Meanwhile, Il Manifesto of last 4th December tells us:

“Almost half a million jobs are being lost every week (50% more than the historical average), but far fewer jobs are being created. By the end of the year it’s estimated that at least a million and a half jobs will have been lost.” (9)

And unfortunately the plants for manufacturing clean coal, for creating solar energy, the new factories, etc., do not spring up like mushrooms in the forest or dollars off the printing press: it takes years to get them under way. Before the count of two this other New Deal has been knocked out without ever seeing the light of day.

This crisis, as Berlusconi himself has said, is truly global and is therefore that much more uncontrollable. As well as the United States, the economy of the whole world relies on the mechanism of financing debt by means of more debt. Not only has U.S. domestic consumption has grown on the basis of debt but also Chinese exports as well as Indian, Brazilian and in part also European exports. In theory it ought to be possible to avoid collapse by increasing domestic demand in these countries. But this would imply a significant increase in wages and a more equitable distribution of wealth; it would imply, that is, a reduction in the fundamental rationale for the delocalising of global manufacturing in the first place. In India, states the economist Aseem Srivasta, “77 per cent of the population are unable to spend more than 20 rupees per day” (10), around 50 eurocents. And with 50 cents, either in Europe or the United States, you can’t even buy a loaf of bread. Therefore the prospect of a long and deep slowdown for the entire world economy is more than likely. Nor will it go back to what it was before. If, as the crisis evolves, the existing balance of power between the bourgeoisie and the proletariat does not change, then it will be the former who will impose their interests upon the world. And it will not be a world where everyone is well-off but a world with a tiny minority of wealthy and a huge number of poor, a world which will only understand what is at stake after a great deal of pain.

Giorgio Paolucci, December 2008

(1) See the article “Rereading Marx in the Light of the Subprime Crisis”, originally in Prometeo 16, 2007, published in English in Revolutionary Perspectives 45.

(2) Henry M. Paulson, “We Leave Obama the Weapons to Deal with the Crisis”, La Repubblica 19th November 2008. [In fact, this article is based on Paulson’s testimony to the House Financial Services Panel, the full text of which is available on the internet, for example via Reuters. Translator.]

(3) Karl Marx, Capital Volume 1, chapter 3, p166 Einaudi; cf. p137 English Lawrence and Wishart edition.

(4) See Philip S. Golub, “What Yesterday Would Have Been Resolved by Force” in Le Monde Diplomatique, November 2008.

(5) Marx op. cit. pp166-7 (137-8 in English version).

(6) Op. cit.

(7) J. Perkins, “The Secret History of the American Empire”, pp49-51, pub. Minimum fax 2007.

(8) From Obama’s victory speech after the US presidential election, La Repubblica 19th November 2008.

(9) F. Piccioni, “Three Big Carmakers Almost on the Streets”, Il Manifesto, 4th December 2008.

(10) Interview reported in Il Manifesto 25th November 2008.

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