The measure of profit since the end of the gold standard

Under a gold standard, the rate of profit in terms gold bullion and the rate of profit in terms of currency are identical. This is because currency units—dollars, pounds and so on—are defined in terms of specific weights of gold bullion. The last time a gold standard prevailed—during the Bretton Woods system—the U.S. dollar was defined as 1/35th of a troy ounce of fine gold.

However, under a system of token money, currency units like dollars have no fixed definition in terms of gold. This gives rise to the illusion that currency somehow serves as tokens of value directly and therefore acts as non-commodity money as opposed to mere money substitutes. This is the mistake the supporters of MELT make. They imagine that the value of the coat can be measured by tokens that directly represent value as opposed to being measured by the use value of linen. But Marx proved this to be impossible.

Because labor under any system of commodity production, including capitalist production, is private, it can only express its social nature by exchanging for another commodity with a different use value. Except for the earliest stages of barter, the abstract labor embodied in a particular commodity having a particular use value with a particular quality must prove its convertibility into a given quantity of the money commodity measured in the unit appropriate for the use value of the money commodity. This is necessary to demonstrate that the abstract human labor embodied in it is actually a fraction of the total sociallabor. In contrast to all other commodities, the labor embodied in the money commodity, Marx explained, is directly social.

The effects of the depreciation of token money

During the 1970s, the currency price of gold—the exchange rate of dollar monetary tokens with the money commodity gold bullion—rose so rapidly that hoarding gold was more profitable than most lines of business. While prices were rising in terms of U.S. dollars and other currencies linked to the U.S. dollar under the dollar system, prices calculated in terms of gold bullion fell rapidly, in fact so rapidly that profits in terms of gold bullion were wiped out. This did not mean that surplus value wasn’t being produced—it was—but the surplus value wasn’t being realized in terms of the use value of the money commodity—gold bullion.

However, though paper money was losing purchasing power against commodities, real rates of profits—after inflation was taken into account—profits measured in terms of commodities in general were still high enough to make possible continued expanded reproduction in physical terms. Therefore, virtually all bourgeois economists and most Marxists assumed that production was still profitable since in physical terms the capitalists were proceeding with expanded reproduction—even if at a somewhat reduced pace.

Most economists would agree that nominal profits were somewhat overstated in the 1970s due to inflation. In a period of high inflation like the 1970s, if we calculate prices in terms of current costs as opposed to historic costs, the rate of profit will be considerably lower. What is often not realized is that we have to distinguish between a rise in prices in terms of gold and a rise in prices produced by the depreciation of the paper currency against gold. For example, the high inflation during World War I in the U.S. is an example of inflation of the former type, while the high rate of inflation during the 1970s is an example of the latter type.

In the U.S. economy during World War I, it was not simply prices in terms of gold that rose independently of value, it was profits in terms of gold as well. But precisely because the movements of prices and profits did not reflect real changes in underlying labor values, they proved unsustainable. The profit bonanza of World War I was ultimately paid for by the huge losses that the capitalists incurred in the early 1930s. This played no small role in the origins of the the Great Depression. This was the market’s way of balancing things out so that in the long run, the rate of profit in value terms and the rate of profit in gold and currency terms were pretty much in line with the value rate of profit.

But what about the 1970s when the movements of not only prices but also profit measured in terms of depreciating U.S. dollars diverged sharply from prices and profits measured in terms of gold bullion. Under the influence of Keynes, during the 1970s Washington policy assumed that by tolerating a rather high rate of inflation in dollar terms they were successfully staving of a situation where falling prices would cause profits to disappear entirely for a number of years like happened in the early 1930s.

The pragmatic policymakers reasoned that practical businessmen were governed by profit in terms of official legal tender currency, not profits in terms of gold bullion. Washington—echoed by Keynesians and the supporters of Milton Friedman as well—claimed that gold was being “demonetized” and that in the future a “pure” fiat currency would act as the measure of value directly without any help from gold or any other commodity.

It is true that except in the final stages of extreme hyper-inflations, practical businessmen will measure their profits in terms of official legal tender currency, though there was a general feeling during the 1970s that the official rates of profit in terms of paper dollars were being considerably overstated. If inflation was taken into account, the mass and rate of profit would be lower, both bourgeois and Marxist economists alike reasoned. (7)

However, the same practical businessmen are always looking to move their capital into the areas where they earn the highest rate of profit in terms official legal tender currency. During the 1970s the most “profitable” area to invest capital was to purchase and hoard gold bullion. Of course, if we measure profits in terms of gold the mere hoarding of gold by definition bears no profit. Leaving aside the costs of storage you simply break even. If, however, we combine Marx’s analysis of value and exchange value as the form of value while never forgetting that capitalism cannot exist for very long without a positive rate of profit, we draw the conclusion that a situation like the 1970s where profits remain positive in terms of paper money but are strongly negative in terms of gold bullion is unsustainable.