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sGOLDPRODUCTION AND INFLATION: '

A Post-Modtem on t h e Debate i n Pre-Worid War One German-AustriaS

-f
v S o c i a l Democracy

by
Gerald A. Levy

\:\..

; Seminal paper p r e s e n t e d i n : f u l f i l l m e n t o f t h e requirements o f

, Economics 208S: S e l e c t e d Topics i n Advanced P o l i t i c a l Economy:

T h e o r i e s o f C o m p e t i t i o n and P r i c e

January, 1982
 P r i o r t o t h e b e g i n n i n g o f World War One t h e l e a d i n g

t h e o r e t i c i a n s o f t h e German and A u s t r i a n s o c i a l democratic

p a r t i e s l o c k e d heads i n a heated polemic c o n c e r n i n g t h e cause

or causes o f i n f l a t i o n and whether i n c r e a s i n g p r o d u c t i v i t y o f

the g o l d - m i n i n g branch o f p r o d u c t i o n was a p o s s i b l e source o f

t h i s i n f l a t i o n . T h i s debate which l a s t e d from 1910 t o 1912

o r i g i n a t e d because o f a need f o r a response t o t h e p e r i o d o f

h i g h i n f l a t i o n i n A u s t r i a b o t h i n terms o f d e v e l o p i n g p r a c t i c a l

economic p r o p o s a l s and p o l i c i e s and d e v e l o p i n g a M a r x i s t t h e o r y

of i n f l a t i o n which would c o u n t e r t h e p o p u l a r bourgeois concept-

i o n t h a t i n f l a t i o n r e s u l t s from t h e r i s i n g wages o f workers as

a consequence o f t h e growing s t r e n g t h o f the t r a d e u n i o n

movement.

I t i s a f a c t t h a t over s e v e n t y years s i n c e t h e b e g i n n i n g

of t h i s debate t h e t h e o r e t i c a l i s s u e s i n v o l v e d have y e t t o be

c l a r i f i e d and t h e r e has been no s e r i o u s attempt t o c r i t i s i z e

and c r i t i q u e t h e p o s i t i o n s t h a t were advanced c o n c e r n i n g g o l d -

p r o d u c t i o n and i n f l a t i o n . T h i s i s a l l t h e more s u r p r i s i n g s i n c e

the i n f l a t i o n a r y p e r i o d o f world-wide c a p i t a l i s m t h a t began i n

the 1960's has p r e s e n t e d a c h a l l e n g e t o today's M a r x i s t economists

t o develop an i n t e g r a t e d t h e o r y o f i n f l a t i o n , c r i s e s , and c y c l e s .

T h i s c h a l l e n g e , u n f o r t u n a t e l y , has y e t t o be answered s a t i s f a c -

t o r i l y and t h e t h e o r e t i c a l i s s u e s which were f i r s t r a i s e d i n

1910 by o t t o Bauer have y e t t o be c l a r i f i e d l e t alone settled.

T h i s i s , moreover, j u s t as i m p o r t a n t f o r s o c i a l i s t s today as i t

was t h e n because i t i s s t i l l necessary t o develop a t h e o r y o f

i n f l a t i o n which can c o u n t e r t h e b o u r g e o i s conceptions ( b o t h

 2

n e o c l a s s i c a l and n e o - R i c a r d i a n v e r s i o n s ) ; t o base t h i s theory

on t h e law o f value and connect i t t o a t h e o r y o f c r e d i t ,

crises, and c y c l e s ; and t o develop a p r a c t i c a l s e r i e s o f economic

p r o p o s a l s t o counter i n f l a t i o n .

T h i s paper w i l l f i r s t summarize t h e p o s i t i o n s advanced

i n Bauer's and Kautsky*s books and i n t h e a r t i c l e s i n Die Neue

Z e i t by Varga, S p e c t a t o r , J.v.G, , and Bauer. We w i l l then

c r i t i q u e a l l o f these p o s i t i o n s a t t e m p t i n g t o e x p l a i n t h e t h e o r -

e t i c a l e r r o r s i n v o l v e d and a p p r o p r i a t e any p o s s i b l e advances i n

t h e o r y . L a s t l y , we w i l l develop an o u t l i n e o f a theory o f

i n f l a t i o n which i s based o n t h e law o f v a l u e and t h e M a r x i s t

t h e o r y o f money.
 3

I . The Debate on G o l d p r o d u c t i o n and I n f l a t i o n s A Summary o f t h e

Different Positions

A. Otto Bauer's book on i n f l a t i o n

The debate on g o l d p r o d u c t i o n and i n f l a t i o n began a f t e r t h e

p u b l i c a t i o n i n 1910 o f Die Teuerung; Eine E i n f u h r u n g i n die

W i r t s c h a f t s p o l i t i k der S o z i a l d e m o k r a t i e ( " I n f l a t i o n s An I n t r o d u c -

t i o n t o t h e Economic P o l i c i e s o f S o c i a l Democracy"). The f i r s t

p a r t o f t h i s book analyses t h e causes o f i n f l a t i o n which i n c l u d e ,

i n h i s view, t h e development o f t h e p r o d u c t i v e f o r c e s ; t h e

anarchy o f ( c a p i t a l i s t ) p r o d u c t i o n ; t h e o r g a n i z a t i o n o f p r o d u c e r s

( c o m p e t i t i o n ) ; ( i n t e r n a t i o n a l ) t r a d e and s p e c u l a t i o n ; and money

(the d e c r e a s i n g value o f g o l d due t o t e c h n i c a l p r o g r e s s i n t h e

gold-mining branch o f p r o d u c t i o n ) . Bauer makes no a t t e m p t t o

access t h e r e l a t i v e importance o f each o f these e x p l a n a t i o n s and

gives t h e c l e a r i m p r e s s i o n t h a t a l l o f these f a c t o r s are r e s p o n s i -

b l e f o r i n f l a t i o n . We s h o u l d note here t h a t t h i s method o f

s t u d y i n g t h e o r e t i c a l c a t e g o r i e s o f p o l i t i c a l economy i s u n s a t i s -
f a c t o r y because i t s m u l t i - c a u s a l e x p l a n a t i o n t a k e s i n f l a t i o n as

g i v e n and does n o t connect t h e law o f value and t h e laws o f

m o t i o n o f c a p i t a l t o t h e t h e o r y o f i n f l a t i o n i n a c l e a r way b u t

r a t h e r g i v e s a shopping l i s t o f reasons f o r i n f l a t i o n w i t h o u t

e x p l a i n i n g t h e fundamental source o f i n f l a t i o n .

Although f r o m t h e p o i n t o f view o f t h e o r e t i c a l c l a r i t y

Bauer's book f a l l s way s h o r t o f t h e mark i t should be s a i d , i n

f a i r n e s s , t h a t t h e p r i m a r y purpose o f Die Teuerung was n o t t o

develop a coherent t h e o r y o f i n f l a t i o n , b u t , r a t h e r t o e x p l a i n

the economic p o l i c i e s o f t h e s o c i a l democrats f o r combatx&gg

 4

i n f l a t i o n and e x p o s i n g and opposing t h e b o u r g e o i s economic

t h e o r y t h a t i n f l a t i o n r e s u l t s f r o m t h e growth o f w o r k e r s ' wages

and t r a d e u n i o n s t r e n g t h . The e s s e n t i a l p o i n t t h a t he made i n t h i s

book i s t h a t w h i l e money wages have been r i s i n g inflation

r e s u l t s i n a d e c l i n i n g r e a l wage and t h e g r o w i n g impoverishment

of t h e w o r k i n g masses. I n some p a r t s o f Die Teuerung Bauer seems

t o be s a y i n g t h a t i n f l a t i o n i s used as a c l a s s weapon by t h e

c a p i t a l i s t s t o cheat workers o u t o f a p o r t i o n o f t h e i r wages

s i m i l a r , f o r i n s t a n c e , t o gambling and l o t t e r i e s . While Bauer

does n o t develop t h i s p o i n t f u l l y i t must be s a i d t h a t from a

methodological viewpoint t h i s i n t e r p r e t a t i o n i s u n s a t i s f a c t o r y

because i t does n o t e x p l a i n an o b j e c t i v e cause o f i n f l a t i o n tied

t o t h e laws o f m o t i o n o f c a p i t a l b u t r a t h e r r e s t s on t h e s u b j e c -

t i v e designs o f i n d i v i d u a l c a p i t a l i s t s t o cheat t h e i r w o r k e r s .

This i s a v e r y s e r i o u s problem which a r i s e s f r o m h i s confused

m u l t i - c a u s a l t h e o r y o f i n f l a t i o n , b u t , i t must be added i n

f a i r n e s s t h a t t h i s s u b j e c t i v i s t aspect i s n o t t h e major explana-

t i o n o f i n f l a t i o n i n Die Teuerung and t h a t t h i s m u l t i - c a u s a l

e x p l a n a t i o n o f economic laws was t h e s t a n d a r d way i n which t h e

t h e o r e t i c a l works o f t h e day's s o c i a l democrats were developed

and were c e r t a i n l y n o t l i m i t e d t o Bauer (see, f o r i n s t a n c e , K a r l

Kautsky's The Economic D o c t r i n e s o f K a r l M a r x ) . T h i s m u l t i -

c a u s a l c o n f u s i o n a l s o i s extended by Bauer t o h i s d i s c u s s i o n

o f c r i s e s , f o r i n s t a n c e , h i s d i s c u s s i o n about t h e anarchy o f
1
p r o d u c t i o n and t h e " d i s p r o p o r t i o n a l i t y o f p r o d u c t i o n " .

The debate i t s e l f arose f r o m a c o n t r o v e r s y about s e c t i o n

number f i v e o f P a r t One "Das Geld" ("Money") o f Die Teuerung.

This i s s u r p r i s i n g i n o p a r t because t h i s s e c t i o n i s o n l y f i v e

pages l o n g and because Bauer does n o t p l a c e any g r e a t e r emphasis

on t h i s e x p l a n a t i o n o f i n f l a t i o n t h a n he does on any o f t h e

p r e e c e e d i n g e x p l a n a t i o n s and, f u r t h a r , does n o t r e a l l y develop

t h i s t h e o r y i n t h e r e m a i n i n g two p a r t s o f t h e book. The explana-

t i o n i n t h i s s e c t i o n seems t o be i n terms o f one c o u n t r y ( n a t i o n

s t a t e ) a l t h o u g h t h e r e i s no i n h e r e n t reason why i t can't be

extended t o an a n a l y s i s o f t h e w o r l d market s i t u a t i o n . A g o l d

s t a n d a r d i s presupposed i . e . i n f o r e i g n trade everything i s

p a i d f o r i n g o l d , t h e u n i v e r s a l money commodity, and on a n a t i o n a l

l e v e l paper c u r r e n c y i s o r d i n a r i l y used f o r exchange. The assump-

t i o n o f the existence o f a gold-standard seems t o be c o r r e c t b o t h

because h i s t o r i c a l l y i t was t h e u n i v e r s a l system o f exchange a t

the t i m e and has o n l y r e c e n t l y been r e p l a c e d and because i t i s

necessary t o f i r s t e x p l a i n t h e o r i g i n o f i n f l a t i o n w i t h i n an

economy on t h e g o l d s t a n d a r d b e f o r e one can e x p l a i n how i n f l a t i o n

a r i s e s when a c a p i t a l i s t economy i s d i v o r c e d from t h e g o l d

s t a n d a r d s i n c e i f t h i s procedure were n o t t a k e n one c o u l d e a s i l y

m i s t a k e a consequence o f i n f l a t i o n f o r i t s cause.

The two sources o f i n f l a t i o n r e l a t e d t o g o l d p r o d u c t i o n

a r e , a c c o r d i n g t o BaueXjL_.that_J;ejiJ^^ gold- a

e x t r a c t i n g branch o f p r o d u c t i o n causes t h e s u r p l u s p r o d u c t o f / /

the gold-mineowners t o r i s e g e n e r a t i n g an e x c e l s demand and /

causing a g e n e r a l r i s e i n p r i c e s . Secondly, decreasing cost£ i n

the g o l d - e x t r a c t i n g branch o f p r o d u c t i o n caused e i t h e r by

t e c h n i c a l advances o r l o w e r c o s t s f o r employing v a r i a b l e c a p i t a l

lowers t h e v a l u e o f g o l d by d e c r e a s i n g t h e amount o f s o c i a l l y
necessary l a b o r time embodied i n a g i v e n weight o f t h e commodity

g o l d . T h i s w i l l r e s u l t i n a decrease i n t h e c o s t s o f p r o d u c i n g

g o l d and t h e p r i c e o f g o l d and s i n c e g o l d serves t h e s p e c i a l

f u n c t i o n o f t h e money commodity t h i s w i l l mean t h a t t h e exchange'

of g o l d f o r o t h e r commodities w i l l cause t h e p r i c e o f a l l o f t h e

Bauer suggests t h a t i t can be shown e m p i r i c a l l y t h a t t h e

costs o f p r o d u c i n g g o l d have been d e c l i n i n g i n t h e p r e e c e e d i n g

s i x t y years due i n p a r t t o t h e cheaper l a b o r power t h a t can be

puchased by t h e g o l d - m i n i n g c a p i t a l i s t s i n South A f r i c a and i n

p a r t t o t h e advances i n t h e t e c h n i c a l n a t u r e o f t h e g o l d - m i n i n g

p r o d u c t i o n p r o c e s s . Both o f these arguments i t s h o u l d be noted

have t o do w i t h t h e s p e c i a l n a t u r e o f t h e money commodity g o l d

and t h a t because o f t h a t changes i n t h e c o s t s o f e x t r a c t i n g

g o l d due t o t e c h n i c a l change o r o t h e r d e c r e a s i n g c o s t s o f

p r o d u c t i o n (cheaper l a b o r power, e t c . ) w i l l have a d i r e c t a f f e c t

on t h e g e n e r a l l e v e l o f market p r i c e s . The assumptions o f

t e c h n i c a l change and an i n c r e a s i n g o r g a n i c c o m p o s i t i o n o f

c a p i t a l i n t h e g o l d - e x t r a c t i n g branch o f p r o d u c t i o n seem t o be

i n accordance w i t h Marx's t h e o r i e s b u t were, as we s h a l l see,

c h a l l e n g e d by o t h e r s o c i a l democrats. I n an i m p o r t a n t sense

one can say t h a t Bauer's book r e p r e s e n t e d an advance over

p r e v i o u s d i s c u s s i o n s i n t h a t i t a t l e a s t attempted t o r e l a t e

changes i n t h e p r o d u c t i o n o f t h e money commodity g o l d t o t h e

r i s e i n the l e v e l o f p r i c e s ( i n f l a t i o n ) but i t contained only

an undeveloped embryo o f a t h e o r y and one which was n o t c a u s a l l y

connected t o his other explanations of i n f l a t i o n .

 7

I t i s i m p o r t a n t t o e x p l a i n what t h e p r a c t i c a l political

c o n c l u s i o n s o f Bauer's book a r e . They i n c l u d e the need f o r a

s t r u g g l e f o r t h e i n d e x a t i o n o f wages ( s l i d i n g scale o f wages)}

i n t e r n a t i o n a l p r o l e t a r i a n s o l i d a r i t y i s needed because o f the

t r a n s - n a t i o n a l c h a r a c t e r o f m i n i n g g o l d f i e l d s ; and inflation

s h o u l d thus be seen as a necessary r e s u l t o f t h e anarchy o f

c a p i t a l i s t p r o d u c t i o n and i t s o n l y answer must t h e r e f o r e be a

s o c i a l i z a t i o n o f t h e p r o d u c t i v e f o r c e s which w i l l f r e e workers

f r o m t h e a r b i t r a r y workings o f t h e market mechanism and g o l d .

These c o n c l u s i o n s are s i g n i f i c a n t b o t h because t h e y were the

r e a l o b j e c t o f t h e book and because i t i s c l e a r t h a t t h e y

r e p r e s e n t a c o r r e c t p o l i t i c a l p e r s p e c t i v e f o r combating i n f l a t i o n .

D e s p i t e t h e p o s i t i o n s t h a t Bauer took i n 1914 ( s u p p o r t i n g an

i m p e r i a l i s t war) t h e r e i s no i n d i c a t i o n here o f a n y t h i n g o t h e r

t h a n a r e v o l u t i o n a r y programme f o r f i g h t i n g inflation.

B. Varga's Response - The Debate Begins

Eugen Varga, a member o f t h e Hungarian S o c i a l Democratic

P a r t y , wrote a p o l e m i c a l a r t i c l e a g a i n s t Bauer's p o s i t i o n on

g o l d p r o d u c t i o n and i n f l a t i o n ( s e c t i o n #5, P a r t One o f Die Teuerung)

i n t h e t h e o r e t i c a l j o u r n a l o f t h e German S o c i a l Democratic P a r t y ,

Die Neue Z e i t ("The New Times"). Varga claimed i n t h i s contri-

b u t i o n t h a t t e c h n o l o g i c a l progress i n t h e process o$f goldproduc-

t i o n has no a f f e c t on t h e l e v e l o f p r i c e s because i t o n l y

generates i n c r e a s i n g d i f f e r e n t i a l r e n t s w i t h i n the g o l d - e x t r a c t i n g

branch o f p r o d u c t i o n . He claimed t h a t Bauer's t h e o r y was

"bourgeois" because i t a t t r i b u t e d t h e source o f i n f l a t i o n t o t h e

t e c h n i c a l n a t u r e o f g o l d p r o d u c t i o n and because i t saw the o r i g i n

 8

o f i n f l a t i o n i n some f a r - o f f g o l d mines r a t h e r than being

d i r e c t l y caused by t h e s p e c i f i c c o n d i t i o n s i n A u s t r i a and
2
Germany a t t h e t i m e . L i k e Bauer h i m s e l f Varga never o f f e r s an
i n t e g r a t e d theory o f i n f l a t i o n but rather l i m i t s himself n o t
t o e x p l a i n i n g t h e r e a l i n f l a t i o n a r y process b u t rather<.toc
opposing t h e Bauer t h e s i s about t e c h n o l o g i c a l p r o g r e s s i n
g o l d p r o d u c t i o n b e i n g a source o f i n f l a t i o n . I n t h i s sense
Varga's c o n t r i b u t i o n was a n e g a t i v e one s i n c e he made no
e f f o r t t o e x p l a i n t h e cause o f i n f l a t i o n and l i m i t e d himself
t o p o l e m i c i z i n g a g a i n s t t h e Bauer c o n t r i b u t i o n . The most l i k e l y
reason f o r t h i s a t t a c k on Bauer's book p r o b a b l y l i e s i n t h e
l a t e n t p o l i t i c a l d i f f e r e n c e s w i t h i n Austro-German s o c i a l
democracy and i t seems l i k e l y t h a t he b e l i e v e d t h a t Bauer's
t h e o r y was a p o l o g e t i c and r e f o r m i s t . Yet even t h e most casual
r e a d i n g o f Die Teuerung w i l l demonstrate t h a t t h i s i s an
i l l e g i t i m a t e p o s i t i o n since there i s nothing e i t h e r apologetic
t o b o u r g e o i s t h e o r y o r p o l i t i c a l l y r e f o r m i s t i n t h e book, i n
f a c t , t h e whole p o i n t o f Bauer's book was t o m o b i l i z e working
c l a s s support f o r t h e s t r u g g l e a g a i n s t i n f l a t i o n and f o r t h e
s o c i a l i z a t i o n o f t h e p r o d u c t i v e f o r c e s . A d d i t i o n a l l y i t seems
reasonable t o demand o f Varga t h a t he i d e n t i f y some o f t h e
s p e c i f i c h i s t o r i c a l c o n d i t i o n s t h a t caused t h e A u s t r i a n i n f l a t i o n
s i n c e he i s a t t a c k i n g Bauer f o r n o t doing t h i s , y e t , he f a i l s
o f o f f e r an a l t e r n a t i v e e x l a n a t i o n o f t h e r e a l s o c i a l process
of i n f l a t i o n .
Varga wants t o show t h a t "changes i n t h e g o l d - e x t r a c t i o n
 9

3
(process) can have no i n f l u e n c e on i n f l a t i o n " . He discusses

two p o s s i b l e t h e o r i e s which h o l d c o n t r a r y p o s i t i o n s - the

q u a n t i t y t h e o r y ( " Q u a n t i t a t s t h e o r i e " ) and t h e c o s t o f produc-

t i o n t h e o r y . The q u a n t i t y t h e o r y holds t h a t s i n c e the mass o f

g o l d i n t h e w o r l d has r i s e n enormously i n t h e p r e v i o u s half

c e n t u r y a l l commodities exchange a g a i n s t a g r e a t e r amount o f

g o l d t h a n b e f o r e . I f we assume t h a t the issuance o f paper

c u r r e n c y i s n o t t i e d t o t h e amount o f g o l d i n s t o r e t h e n this
t h e o r y i s p l a u s i b l e b u t i f we presuppose t h e g o l d standard then

t h i s t h e o r y would o n l y be c o r r e c t i f we assume t h a t the t o t a l

amount o f g o l d used f o r exchange grows a t a f a s t e r r a t e t h a n t h e

t o t a l n a t i o n a l p r o d u c t i o n ( o r , by i m p l i c a t i o n , t h e t o t a l p r o d u c t

of c a p i t a l i s t p r o d u c t i o n on an i n t e r n a t i o n a l s c a l e ) , Varga

dismisses t h i s p o s i t i o n suggesting that r a t h e r than goldproduction

i n c r e a s i n g f a s t e r t h a n t h e t o t a l commodity p r o d u c t i o n t h e r e i s

an a b s o l u t e shortage o f g o l d r e p r e s e n t e d by an excess demand

f o r g o l d by the banks. I f t h i s i n f a c t were n o t t h e case t h e n

g o l d would stand f o r money more i n r e a l i t y and t h e r e would be a

d i m i n i t i o n i n t h e issuance o f paper currency and o t h e r forms o f

c o n v e r t i b l e notes*whereas t h e process o f i n f l a t i o n i n r e a l i t y

a f f i r m s t h e exact c o n t r a r y phenomenon.

The c o s t o f p r o d u c t i o n t h e o r y i s the p o s i t i o n t h a t Varga

c l a i m s t h a t Bauer has adpoted. T h i s t h e o r y h o l d s t h a t even

though g o l d doesn't serve t o f u l f i l l a l l o f t h e needs o f c i r c u l a -

t i o n w i t h t e c h n o l o g i c a l change i n t h e g o l d - e x t r a c t i n g branch o f

p r o d u c t i o n the p r i c e s o f a l l commodities w i l l r i s e because o f

the s p e c i a l and i n d i s p e n s i b l e n a t u r e o f the money commodity g o l d .

 10

He r e j e c t s t h i s t h e o r y because he b e l i e v e s t h a t g o l d i s a s p e c i a l
commodity l i k e some o t h e r m i n i n g p r o d u c t s t h a t y i e l d s a r e n t
and i s t h e r e f o r e exempt from t h e f o r m a t i o n o f t h e g e n e r a l r a t e
o f p r o f i t and p r i c e s o f p r o d u c t i o n . I f we b e l i e v e t h i s t o be t h e
case t h e n t h e r e i s no i n c e n t i v e f o r g o l d - m i n i n g capitalists
t o i n t r o d u c e t e c h n o l o g i c a l changes i n t h e i r p r o d u c t i o n process,,or
t o have c o m p e t i t i o n amongst themselves, The o r g a n i c composition
of c a p i t a l i n t h e g o l d - m i n i n g branch o f p r o d u c t i o n would t h e r e -
f o r e e i t h e r remain c o n s t a n t o r c o u l d c o n c e i v a b l y d e c l i n e .

I n t h e case o f g o l d p r o d u c t i o n , a c c o r d i n g t o Varga, p r o d u c t i o n
can o n l y be i n c r e a s e d through i n c r e a s i n g p r o d u c t i o n c o s t s as i n
the case o f a g r i c u l t u r e w i t h an a b s o l u t e shortage o f s o i l , Prices
are determined i n such circumstances by t h e p r o d u c t i o n costs i n
the l e a s t y i e l d i n g f i e l d s o f p r o d u c t i o n o r , i n t h i s case, t h e
p o o r e s t mines, t h a t can be i n d u s t r i a l l y used. M j o s e t has
summarised t h i s aspect o f Varga's t h e o r y i n t h e f o l l o w i n g manners

:HSince we're t a l k i n g about t h e p r o d u c t i o n o f t h e g e n e r a l

e q u i v a l e n t , t h e maximum p r o d u c t i o n c o s t s o f 1 oz. g o l d i s 1
oz. c o i n e d g o l d . I f you e s t a b l i s h y o u r s e l f i n g o l d -
e x t r a c t i o n and your mine y i e l d s 1 o z , g o l d w i t h p r o d u c t i o n
c o s t s l e s s t h a n t h i s , t h e n your mine i s n o t t h e p o o r e s t
and you r e c e i v e a d i f f e r e n t i a l r e n t . The p r o d u c t i o n costs
o f a mine a r e , ; p r i m a r i l y dependent on t h e go I d - c o n t e n t o f t h e
o r e , as w e l l as on t h e depth o f t h e mine, (Varga g i v e s
e m p i r i c a l evidence o§. t h i s , p. 218). These p r o d u c t i o n
c o n d i t i o n s d i f f e r e x t r e m e l y from mine t o mine, t h a t i s :
underneath t h e maximum c o s t s t h e r e i s no s y s t e m a t i c
v a r i a t i o n o f c o s t s . Now Varga argues t h a t t e c h n i c a l progress
w i l l n o t a f f e c t the g o l d produced under t h e p o o r e s t
c o n d i t i o n s t h e r e f o r e t h e o n l y consequence o f such progress
i s an i n c r e a s e i n t h e d i f f e r e n t i a l r e n t o f some o f t h e mine-
owners. The r e g u l a t i n g p r i c e o f g o l d remains t h e same ( 1 oz.
c o i n e d g o l d i n v e s t e d must g i v e a r e t u r n w o r t h a t l e a s t t h e
same, i . e . 1 oz. g o l d ) . With t e c h n i c a l p r o g r e s s i t c o u l d
t h e n happen t h a t even p o o r e r mines would be u t i l i z e d . But
t h i s o n l y means t h a t the ."former p o o r e s t mine now would
r e c e i v e some k i n d o f d i f f e r e n t i a l r e n t . The r e g u l a t i n g
p r i c e o f g o l d would o n l y s i n k i f t o o much g o l d was e x t r a c t e d ,
 11

i t would t h e n i n c r e a s e and t h e p o o r e s t mines would "be

c l o s e d down. But - as we have a l r e a d y noted - Varga
suggests t h a t e m p i r i c a l l y t h e r e e x i s t s an excess demand
f o r gold. Therefore t h e r e i s - i n c o n t r a s t t o f r e e l y
r e p r o d u c i b l e goods - no c o m p e t i t i o n i n t h e g o l d p r o d u c t i o n
p r o c e s s . Gold produced a t lower c o s t s doesn't push t h e
. p r i c e down, i t y i e l d s t h e same r e g u l a t i n g p r i c e , g i v i n g
t h e mine owner and/or c a p i t a l i s t i n c r e a s i n g e x t r a p r o f i t s
i n t h e form o f d i f f e r e n t i a l r e n t .

Varga p o i n t s o u t t h a t Bauer seems t o have r e c o g n i z e d t h i s ,

s i n c e he as a second cause mentions t h e i n c r e a s i n g income
and demand from mine-owners, e t c . ( t h e r e b y p r e s u p p o s i n g a
c o n s t a n t p r i c e o f g o l d ) . But a g a i n s t t h i s Varga p o i n t s t o
t h e f o l l o w i n g arguments: ( i ) T h i s new demand i s p r i m a r i l y
d i r e c t e d t o l u x u r y p r o d u c t s , ( i i ) o r towards investment
goods, t h e r e f o r e wage goods would be u n a f f e c t e d , ( i i i )
S o l d m i n i n g c a p i t a l i s t s a r e a d e c r e a s i n g percentage o f
c a p i a l i s t s on a w o r l d s c a l e . T h e r e f o r e t h e o n l y element
i n Bauer's t h e o r y t h a t was t h e o r e t i c a l l y p l a u s i b l e i s n o t
e m p i r i c a l l y sound", (manuscript c o r r e s t e d , G.A.L.) 4

As i n t e r e s t i n g as t h i s t h e o r y i s and w h i l e t h e r e may be

some e m p i r i c a l evidence t o support i t i t s fundamental problem

i s t h a t i t attempts t o d i v o r c e t h e c o n d i t i o n s o f t h e p r o d u c t i o n

o f t h e money commodity g o l d from t h e o p e r a t i o n o f t h e l a w o f

v a l u e . I t i s n o t d i f f i c u l t t o demonstrate t h a t t h e r e has been

a tendency f o r i n c r e a s i n g p r o d u c t i v i t y i n t h e g o l d - m i n i n g branch
o f p r o d u c t i o n and t h a t t h e o r g a n i c c o m p o s i t i o n of capital i n

t h i s branch has r i s e n s i g n i f i c a n t l y o v e r time (wether i t has

r i s e n f a s t e r t h a n t h e average r i s e i n o t h e r branches o f produc-

t i o n i s another q u e s t i o n ) . The w i l d s p e c u l a t i o n i n g o l d which

p e r i o d i c a l l y occurs would a l s o tend t o work a g a i n s t Varga's

s u g g e s t i o n t h a t t h e r e i s no c o m p e t i t i o n i n t h e g o l d - m i n i n g

branch o f p r o d u c t i o n . One c o u l d ask why t h e c a p i t a l i s t s owning

the b e s t most p r o d u c t i v e and r i c h e s t mines would n o t a t t e m p t

t o i n c r e a s e g o l d p r o d u c t i o n w i t h o u t l i m i t under such circumstances.

Varga's assumption t h a t t h e banks can c o n t r o l t h e p r o d u c t i o n o f

 12

g o l d by e s t a b l i s h i n g d i f f e r e n t i a l rents ignores the speculative J /^/

demand f o r g o l d and t h e s a l e o f g o l d t o n o n - f i n a n c i a l institu-
/ ^" "
jI -
O t i o n s . The f l o o d i n g o f t h e market w i t h g o l d (as, f o r i n s t a n c e , j
when t h e U.S.S.R. s o l d l a r g e amounts o f i t s g o l d r e s e r v e s t o I X/T /
7
\ !" IS" ' /'.-v-
/ c•
^ [ Western c a p i t a l i s t s ) has had an immediate e f f e c t o f c a u s i n g t h e P>Or<
I ) i M f h PY.
^ ,y1

problems f o r Varga's t h e s i s . I r o n i c a l l y , t h i s p o s i t i o n moves ^ . •

market p r i c e o f g o l d t o f a l l and t h i s a g a i n would seem t o c r e a t e / , / L-i/
towards H i l f e r d i n g ' s p o s i t i o n t h a t t h e banks and f i n a n c i a l I M/ ft i M *
J
J)./ • / /
1
i n s t i t u t i o n s have c o l l e c t i v e c o n t r o l o v e r t h e issuance o f paper
c u r r e n c y and g o l d p r o d u c t i o n i n an " o r g a n i s e d " way r a t h e r than
the l a w o f v a l u e d e t e r m i n i n g t h e c o n d i t i o n s o f p r o d u c t i o n and
the market p r i c e o f g o l d .

C. Bauer's Reply t o Varga and t h e c o n t r i b u t i o n s o f J.v.G. and

Spectator

Bauer responds t o Varga by a r g u i n g t h a t i t i s necessary t o

explain t h e way i n which t h e "law o f p r i c e s " m a n i f e s t s i t s e l f
as a s o c i a l law, i n o t h e r words, " i n what way t h e s i n k i n g value
5
o f g o l d r e s u l t s i n i n f l a t i o n " . Under t h e p r e s s u r e o f an open

l i t e r a r y debate i n t h e pages o f Die Neue Z e i t Bauer s h i f t e d h i s

p o s i t i o n somewhat i n two s i g n i f i c a n t ways, f i r s t l y , by i n s i s t i n g

t h a t t h e argument t h a t i n c r e a s i n g gold-extracting productivity

causing i n f l a t i o n must be t i e d t o t h e l a w o f v a l u e ( o r as he

puts i t , i n a less s c i e n t i f i c formulation, t h e "law o f p r i c e s " )

and must be a necessary consequence o f t h a t lav;, and, secondly,

whereas he had p r e v i o u s l y c l a i m e d i n Die Teuerung t h a t t h i s was

o n l y one o f many causes o f i n f l a t i o n he seems t o be s u g g e s t i n g

i n t h i s a r t i c l e i n Die Neue Z e i t t h a t t h i s process i s t h e

 13

p r i m a r y s o c i a l mechanism t h a t n e c e s s a r i l y b r i n g s i n f l a t i o n into

b e i n g . From t h e p o i n t o f v i e w o f h e l p i n g the debate on g o l d -

p r o d u c t i o n and i n f l a t i o n t o advance b o t h o f these s h i f t s are

improvements. U n l i k e Varga a t l e a s t Bauer s e t s h i m s e l f t h e t a s k

of e x p l a i n i n g and d e v e l o p i n g a t h e o r y o f i n f l a t i o n and he a l s o

attempts t o connect t h i s t h e o r y t o the laws o f m o t i o n o f c a p i t a l -

i s t development and the law o f v a l u e .

Bauer's answer t o Varga i s summarized w e l l by Mjoset i n

the f o l l o w i n g l e n g t h y passage from h i s paper:

"Decreasing c o s t s o f p r o d u c t i o n - g e n e r a l case. - Bauer

f i r s t l i k e s t o remind us about the mechanism through which
p r i c e s are adapted t o new p r o d u c t i o n c o s t s w i t h i n commodity
p r o d u c t i o n i n g e n e r a l a b s t r a c t i n g from g o l d p r o d u c t i o n .

Bauer s e t s up a ( v e r b a l ) model w i t h an i n d u s t r i a l s e c t o r and

an a g r a r i a n s e c t o r b o t h based on c a p i t a l i s t p r i n c i p l e s .
I n i t i a l l y the r a t e o f p r o f i t ( f r o m now on r , r e p e c t i v e l y r-i
and r ) r=r£-ra- 15%. S e c t o r I now i n t r o d u c e s machinery and
a

t h e c o s t s o f p r o d u c t i o n t h e n s i n k s by 10%. I f p r i c e s
r e m a i n unchanged, t h i s g i v e s us ri=2?.7%, r = 1 5 $ . Through
a

competition w i t h i n Sector I , i s reduced t o r^-21%. Bauer

t h e n l o o k s a t the d i s t r i b u t i o n o f i n v e s t m e n t s . Before t h e
i n t r o d u c t i o n o f machinery, s e c t o r A absorbed 30% and s e c t o r
I h0% o f t o t a l i n v e s t m e n t s . A f t e r t h e y absorb r e s p e c t i v e l y
25%{A) and ^ 5 % ( I ) s i n c e r i > r . That i s : c a p i t a l f l o w s f r o m
a

S e c t o r I , b u t t h i s g i v e s an excess supply i n Sector I ,

t h e r e f o r e r ^ s e t t l e s a t r i = 1 6 ^ . Since t h i s change i n t h e f l o w
o f i n v e s t m e n t s also generates excess demand i n a g r i c u l t u r e ,
r a jumps up t o r = j a

Now the f i n a l l e v e l o f t h e r a t e ©f p r o f i t depends on s e v e r a l

f a c t o r s (and t h i s i s n ' t t h a t i m p o r t a n t t o Bauer's argument):
t h e i n f l u e n c e o f a s m a l l e r r e s e r v e army and i n c r e a s i n g c o s t s
o f raw m a t e r i a l s . Bauer g i v e s t h e f o l l o w i n g s y s t e m a t i c
account o f t h e whole p r o c e s s :

Stage Industry Agriculture

I Share o f t o t a l c a p i t a l
r ri=15#
I I P r o d u c t i o n costs Lowered Constant
I I I Competition Increasing a '-15%
DDecreasing
r r* —21% r^l5%
IV Change i n t h e share o f kh%&5%^5% 30%-5%^25%
total capital (increasing) (decreasing)
 14

V. Change i n Supply Increasing, Decreasing

Prices sink Prices increase
r r^-16$

A c c o r d i n g t o Bauer ( r e f e r r i n g t o Bauer 1910, pp. 13-18,

where t h i s i s counted as a n o t h e r cause o f i n f l a t i o n ) t h i s
r e f l e c t s a r e a l process! a g r a r i a n p r o d u c t i o n has s t a y e d
b e h i n d i n r e c e n t economic development, i n d u s t r y has grown
f a s t e r than a g r a r i a n production.
Decreasing c o s t s i n one i n d u s t r y seem t o i n c r e a s e p r i c e s
g e n e r a l l y (Bauer r e f e r s t o Marx, Das {Capital, V o l . I l l , p.199
f f and Marx T h e o r i e n , V o l . I I , 2, pp.38-40, boths o l d
e d i t i o n s ) . From t h e d i s c u s s i o n above Bauer concludes t h a t
t h e f o l l o w i n g h o l d s f o r a l l commodities!
1 . Decreasing c o s t s i n i n d u s t r y A changes t h e d i s t r i b u t i o n
o f c a p i t a l f o r d i f f e r e n t branches o r s e c t o r s .
2. Demand/supply r e l a t i o n s are changed. The s u p p l y o f
commodities A i n c r e a s e s , t h e s u p p l y o f a l l o t h e r commodities
decreases.
3. The p r i c e s o f commodities A s i n k , a l l o t h e r p r i c e s r i s e .
T h i s process i s i n f a c t t h e r e d u c t i o n o f market p r i c e s t o
p r i c e s o f p r o d u c t i o n v i a demand/supply f l u c t u a t i o n s . F u r t h e r
on Bauer w i l l i n v e s t i g a t e whether t h i s a l s o h o l d s f o r g o l d .
But a l r e a d y a t t h i s stage o f his? argument, he c l a i m s t o be
a b l e t o p o i n t o u t the main f l a w o f Varga's argument. Varga
accused Bauer o f b e l i e v i n g t h a t d e c r e a s i n g p r o d u c t i o n c o s t s
a u t o m a t i c a l l y determines t h e imerease i n p r i c e s . But, as
Bauer has shown, i t i s n o t so s i m p l e ! d e c r e a s i n g c o s t s
i n f l u e n c e p r i c e s o n l y t h r o u g h changes i n t h e r e l a t i o n
between demand and s u p p l y generated through t h e r e d i s t r i b u -
t i o n o f s o c i a l c a p i t a l ( p . 8 f ) . Varga doesn't understand
t h a t t h i s i s a q u e s t i o n o f the " m e d i a t i n g l i n k s " ( Z w i s c h l e n g -
l i e d e r ) . So t h e answer t o t h e i n f l u e n c e o f g o l d - e x t r a c t i o n
can o n l y be found t h r o u g h an a n a l y s i s o f t h e changing
r e l a t i o n s o f s u p p l y and demand generated by c o s t decreases
i n g o l d - e x t r a c t i o n " , (manuscript c o r r e c t e d , G.A.L.) 6

There are a number o f problems w i t h Bauer's argument

which a t t h i s p o i n t have t o be t a k e n n o t i c e o f . F i r s t l y , i t i s

d o u b t f u l wether t h e schemes o f r e p r o d u c t i o n t h a t Marx used i n

Volume Two o f C a p i t a l can be used t o shed any l i g h t on t h e r e a l

s o c i a l process o f i n f l a t i o n . I t i s n o t m e t h o d o l o g i c a l l y c o r r e c t ,

we would suggest, t o l o c a t e the n e c e s s i t y o f i n f l a t i o n i n t h e

process o f c a p i t a l i s t exchange as the f o r m a t i o n o f t h e g e n e r a l

 15

p r o f i t r a t e , c r i s e s , c r e d i t and c y c l e s can o n l y be understood by e

groining t h e process o f c a p i t a l i s t p r o d u c t i o n as a whole. I f we
examine t h e exchange process i n d e p e n d e n t l y o f t h e p r o d u c t i o n
process t h e most we would be able t o accomplish would be t o
l o c a t e t h e f o r m a l a b s t r a c t p o s s i b i l i t y o f i n f l a t i o n and n o t i t s
cause. The o t h e r obvious problem w i t h Bauer's argument i s t h a t
i t r e s t s on t h e assumption t h a t t e c h n i c a l change, c o m p e t i t i o n ,
and an i n c r e a s i n g o r g a n i c c o m p o s i t i o n o f c a p i t a l occur i n Sector, /
(Department) I b u t n o t i n S e c t o r (Department) I I . I f t h i s
assumption were n o t made and i f t h e o r g a n i c c o m p o s i t i o n o f
c a p i t a l and c o m p e t i t i o n i n c r e a s e d i n Department I I then t h i s
whole t h e o r y c o l l a p s e s u n l e s s one made t h e f u r t h a r assumption
t h a t t h e r a t e o f change i n t h e o r g a n i c c o m p o s i t i o n o f c a p i t a l
i s l e s s i n Department I I t h a n i t i s i n Department I . I t i s
f u r t h e r m o r e n o t s u f f i c i e n t t o s i m p l y suggest t h a t e m p i r i c a l l y
t h i s has been the case, r a t h e r , one must demonstrate t h e a c t u a l
s o c i a l mechanism and t h e o r y b e h i n d i t c a u s i n g t h e l a g o f
agricultural development b e h i n d i n d u s t r i a l development. There
i s no t h e o r e t i c a l reason which can be advanced a t t h i s stage o f
the a n a l y s i s t o exclude t h e a c c e l e r a t i o n o f c o m p e t i t i o n ,
c o n c e n t r a t i o n , and t e c h n o l o g i c a l change i n Department I I b u t
r a t h e r i t c o u l d be argued e i t h e r t h i s i s t h e case i n b o t h d e p a r t -
ments i f we are s t u d y i n g t h e process o f c a p i t a l i s t exchange o r
i f we a r e s t u d y i n g the p r o c e s s o f c a p i t a l i s t p r o d u c t i o n as a
whole t h a t f o r c a p i t a l i s m t o s u s t a i n a growth i n a c c u m u l a t i o n i t
i s necessary t h a t b o t h departments grow s i m u l t a n e o u s l y .
 16

I t should a l s o be added, however, t h a t Bauer's c a l l f o r

the n e c e s s i t y o f e s t a b l i s h i n g " m e d i a t i n g l i n k s " i s a l e g i t i m a t e

c r i t i c i s m o f Varga a l t h o u g h , as we have suggested, i tis

q u e s t i o n a b l e t o what e x t e n t Bauer's a n a l y s i s has satisfactorily

e s t a b l i s h e d these links.

We can now pass over t o Bauer's e x l a n a t i o n o f t h i s process

when g o l d p r o d u c t i o n i s t a k e n i n t o c o n s i d e r a t i o n . C o n t i n u i n g on

w i t h M j o s e t ' s summary:
"The p o o r e s t g o l d mine y i e l d s g o l d w o r t h 1 , 1 5 0 , 000 marks
w i t h t o t a l c o s t s o f 1 , 0 0 0 , 0 0 0 marks. The r a t e o f p r o f i t i s
r g = 15$. (As a r e s u l t o f Varga*s c r i t i q u e Bauer takes
d i f f e r e n t i a l r e n t i n t o account here : t h e mine d e s c r i b e d
here g e t s a d i f f e r e n t i a l r e n t , i . e . a s u r p l u s p r o d u c t , w o r t h
more t h a n 1 5 0 , 0 0 0 marks). A new machine i s t h e n i n t r o d u c e d
which i s more p r o d u c t i v e b u t has t h e same costss the mine
now produces 1 , 3 0 0 , 0 0 0 marks i n g o l d . r t h u s goes up t o
= JOfo. A f l o w o f c a p i t a l i s t h e r e f o r e d i r e c t e d i n t o g o l d -
g

r g

e x t r a c t i o n and t h i s r e s u l t s i n the u t i l i z a t i o n o f even

p o o r e r mines.

Whereas b e f o r e 1% o f t h e t o t a l c a p i t a l was employed i n g o l d -

e x t r a c t i o n , now 2% i s . The d i s t r i b u t i o n o f c a p i t a l s between
t h e 2 branches o f p r o d u c t i o n has changed. What are t h e
e f f e c t s on commodity markets? Demand has i n c r e a s e d ( f r o m
mineowners, r e n t i e r s , e t c . t ) . Supply has a l s o i n c r e a s e d , b u t
slower t h a n i t would have done i f t h e r e had been no t e c h n i c a l
p r o g r e s s i n g o l d - e x t r a c t i o n . The G-sector has occupied a
p a r t o f the a c c u m u l a t i o n f u n d ( p . 1 0 ) . " T h e r e f o r e , t h e
s u p p l y o f commodities has i n c r e a s e d a t a slower r a t e t h a n
i t would have w i t h o u t t e c h n i c a l development i n the g o l d -
p r o d u c t i o n " . T h i s i s t h e f i r s t phase o f t h e process:
i n c r e a s i n g demand and d e c r e a s i n g s u p p l y generates i n f l a t i o n
thereby also i n c r e a s i n g the r a t e of p r o f i t .

T h i s b r i n g s up the d i f f e r e n c e t h a t Bauer seems t o f i n d

between t h e i n f l u e n c e o f t e c h n i c a l p r o g r e s s i n g o l d - e x t r a c t i o n
as opposed t o commodity p r o d u c t i o n i n g e n e r a l . I n the g e n e e r a l
model w i t h A- and I - s e c t o r , a decrease i n c o s t s lowers I -
p r i c e s and causes A - p r i c e s t o r i s e because o f t h e change i n
t h e d i s t r i b u t i o n o f c a p i t a l towards these two s e c t o r s . I n
t h e g o l d - e x t r a c t i o n model, on the o t h e r hand, a l l p r i c e s r i s e ,
and - t h i s i s c r u c i a l t o Bauer's argument - here t h e r e ' s n o t
j u s t a change i n the d i s t r i b u t i o n o f c a p i t a l w i t h i n t h e
sphere o f commodity p r o d u c t i o n , b u t now " t h e share o f t o t a l
commodity p r o d u c t i o n o u t o f t o t a l c a p i t a l has decreased"
( p . 1 1 ) . ( J u s t a s h o r t note f o r d i s c u s s i o n here: D i d n ' t
Bauer s t a t e t h a t g o l d t a k e s p a r t i n the e q u a l i z a t i o n o f t h e
 17

p r o f i t r a t e j u s t l i k e any o t h e r commodity? How can he now

argue t h a t g o l d p r o d u c t i o n i s n o t a p a r t o f commodity
production?)

Now, t h e process goes f u r t h e r s An i n c r e a s i n g r a t e o f p r o f i t

g e n e r a t e s p r o s p e r i t y . The t u r n o v e r r a t e i s lowered ( t h e
share o f p r o d u c t i o n i n t o t a l t u r n o v e r - t i m e i s i n c r e a s e d , p .
1 1 ) . Demand f o r workers and c a p i t a l goods i n c r e a s e . C a p i t a l
hungers f o r more c r e d i t and t h i s i s p o s s i b l e t o g e t s i n c e
g o l d p r o d u c t i o n has i n c r e a s e d . The amount o f accumulated
s u r p l u s v a l u e has i n c r e a s e d . The f o l l o w i n g two f a c t o r s t h e n
c o n t r i b u t e t o i n f l a t i o n s ( a ) i n c r e a s i n g c r e d i t lowers t h e
r a t e o f i n t e r e s t which s t i m u l a t e s a c t i v i t y i n t h e c o n s t r u c t i o n
s e c t o r , t h e s t a t e , and t h e l o c a l governments ( p . 1 1 ) i and
( b ) f a s t e r a c c u m u l a t i o n o f s u r p l u s v a l u e , expansion o f a l l
branches o f p r o d u c t i o n , i n c r e a s i n g demand f o r l a b o u r power,
consumption goods, and a d i m i n i s h i n g r e s e r v e army. Workers
have t h e o p p o r t u n i t y t o s t r u g g l e f o r h i g h e r wages. S e c t i o n s
w i t h a low o r g a n i c c o m p o s i t i o n o f c a p i t a l ( c / v ) j_ are h i t
h a r d e r t h a n those w i t h a h i g h c o m p o s i t i o n ( c / v K . More new
c a p i t a l t h a n b e f o r e now f l o w s t o ( c / v ) . T o t a l ( c / v ) t h e r e -
h

f o r e increases. Prices o f ( c / v ) ^ i n d u s t r i e s r i s e a t a f a s t e r
r a t e than ( c / v ) ^ i n d u s t r i e s .

A c c o r d i n g t o Bauer i n f l a t i o n i n c r e a s e s t h e r a t e o f p r o f i t ,
b u t i t a l s o produces " c o u n t e r a c t i n g t e n d e n c i e s " , l i k e
( i ) i n c r e a s e i n t h e p r i c e o f raw m a t e r i a l s , ( i i ) r i s i n g ( c / v )
w h i c h s e t s a l i m i t t o t h e i n c r e a s e o f r . ( B u t as Bauer n o t e s
( p . 13) workers w i l l n o t g e n e r a l l y manage t o f u l l y p r o t e c t
t h e i r r e a l wages a g a i n s t i n f l a t i o n and t h i s i s t h e r e f o r e
not a counteracting tendency).

But c o s t s i n g o l d p r o d u c t i o n have now i n c r e a s e d because o f

more expensive means o f p r o d u c t i o n and l a b o u r power. A l s o ,
p o o r e r mines are now u t i l i z e d . C o n t r a r y t o t h e s i t u a t i o n i n
o t h e r i n d u s t r i e s r has decreased. The g o l d s e c t o r no l o n g e r
g

r e c e i v e s an e x t r a p r o f i t . "The e q u a l i z a t i o n o f p r o f i t r a t e s
i s completed", ( p . 12)

•"Technical progress i n g o l d p r o d u c t i o n d i d r i s e the r a t e o f

p r o f i t i n t h e g o l d mines above t h e average r a t e o f p r o f i t .
Such a d i s p a r i t y i s n o t t o l e r a t e d i n t h e process o f
c o m p e t i t i o n between c a p i t a l i s t s . C o m p e t i t i o n leads t o a new
d i s t r i b u t i o n o f c a p i t a l , which a g a i n e q u a l i z e s t h e r a t e s o f
p r o f i t , as i t , on t h e one hand, increases:,the r a t e o f
p r o f i t s i n commodity p r o d u c t i o n ( s i n c e i t i n c r e a s e s p r i c e s ) ,
and, on t h e o t h e r hand, decreases t h e r a t e o f p r o f i t i n
g o l d p r o d u c t i o n ( s i n c e i t i n c r e a s e s c o s t s o f p r o d u c t i o n ) . The
r e s u l t o f t h i s process i s t h a t g o l d a g a i n i s exchanged w i t h
commodities i n r e l a t i o n t o p r i c e s o f p r o d u c t i o n , t h a t i s , i n
such a way, t h a t g o l d p r o d u c t i o n a g a i n gets t h e same share o f
s o c i a l s u r p l u s value ( p e r u n i t c a p i t a l ) as a l l o t h e r
commodity producers g e t . T h i s e q u a l i z a t i o n o f p r o f i t r a t e s
was g e n e r a t e d through t h e i n c r e a s e i n commodity p r i c e s ' . ( p , 1 2 f )
 18

At t h i s stage o f h i s r e p l y , Bauer r a i s e s h i s main o b j e c t i o n s

a g a i n s t Vargas

Varga i s r i g h t saying t h a t s i n c e t e c h n i c a l progress i n g o l d -

e x t r a c t i o n r e s u l t s i n t h e u t i l i z a t i o n o f p o o r e r mines, t h e
p r i c e - r e g u l a t i n g costs o f g o l d remain t h e same: b u t , says
Bauer, one must study how t h i s comes about, one should n o t
j u s t s t a t e t h e f i n a l r e s u l t . The main f l a w i n Varga's argument
i s h i s u n d i f f e r e n t i a t e d a s s e r t i o n o f no c o m p e t i t i o n i n t h e
g o l d i n d u s t r y . One has t o d i s t i n g u i s h between c o m p e t i t i o n
w i t h i n a sector (the reduction of i n d i v i d u a l prices to a
common market p r i c e ) , and c o m p e t i t i o n between s e c t o r s ( t h e
making o f p r i c e s o f p r o d u c t i o n c o n t a i n i n g a g e n e r a l r a t e o f
p r o f i t f o r a l l s e c t o r s ) . With r e s p e c t t o t h e former, i t i s
c o r r e c t t h a t t h e r e i s no c o m p e t i t i o n i n t h e G-sector, b u t
t h i s i s n o t r i g h t w i t h r e s p e c t t o t h e l a t t e r . There are no
r e s t r i c t i o n s on c a p i t a l f l o w s t o t h e g o l d s e c t o r i f t h i s
shows a t e m p o r a r i l y h i g h e r r a t e o f p r o f i t . The l a w o f an
average r a t e o f p r o d u c t i o n i s v a l i d also f o r t h e g o l d s e c t o r .
T h e r e f o r e s i n k i n g c o s t s i n g o l d p r o d u c t i o n generates a change
i n t h e exchange r e l a t i o n between g o l d and commodities ( i . e .
i m f l a t i o n ) , u n t i l the r a t e s o f p r o f i t are again equalised,"
(manuscript c o r r e c t e d , G.A.L.) 7

The p r a c t i c a l c o n c l u s i o n s t h a t Bauer comes t o i n t h i s

a r t i c l e f o r w o r k i n g c l a s s a c t i v i t y r e m a i n t h e same as t h e ones

he advanced i n h i s book, namely, t h a t i n f l a t i o n i s used as a means

t o c u t workers' r e a l wages, t h a t i n t e r n a t i o n a l s o l i d a r i t y and a

s t r u g g l e a g a i n s t i m p e r i a l i s m a r e necessary, and t h a t o n l y t h e

s o c i a l i z a t i o n o f t h e means o f p r o d u c t i o n can f r e e t h e p r o l e t a r i a n

masses from b e i n g "slaves o f t h e g o l d " .

There are a number o f a d d i t i o n a l c o m p l i c a t i o n s w i t h t h i s

e x p l a n a t i o n t h a t we can examine now. Bauer i s , on t h e one hand,

examining t h e s p e c i a l n a t u r e o f t h e money commodity g o l d and i t

i s i t s n a t u r e which causes t h e changes i n t h e process o f g o l d -

p r o d u c t i o n t o have a d i r e c t i n f l a t i o n a r y e f f e c t on t h e p r i c e s o f

a l l o f t h e o t h e r commodities, b u t , on t h e o t h e r hand, as M j o s e t

suggests, t h e g o l d - m i n i n g branch o f p r o d u c t i o n takes p a r t i n t h e

e q u a l i z a t i o n o f t h e r a t e o f p r o f i t i n t h e same way t h a t t h e
 19

commodities produced i n a l l o f t h e o t h e r branches o f p r o d u c t i o n

do. T h i s i s a d i f f i c u l t t h e o r e t i c a l t a n g l e b u t we c o u l d suggest
t h a t t h i s c o n f u s i o n a r i s e s p r e c i s e l y because Bauer has n o t been
c a r e f u l enough t o e s t a b l i s h those m e d i a t i n g l i n k s i n h i s argument
which he saw as so i m p o r t a n t . The f i r s t problem can be discussed
w i t h i n t h e process o f c a p i t a l i s t exchange and t h e f o r m a l p o s s i b i l -
i t y o f i n f l a t i o n but the formation o f the general p r o f i t r a t e
must be e s t a b l i s h e d a t t h e l e v e l o f t h e process o f c a p i t a l i s t
p r o d u c t i o n as a whole. I t would a l s o be c o r r e c t t o suggest a l o n g
w i t h Bauer t h a t t h e c r e d i t system and t h e movements i n t h e mass
and r a t e o f p r o f i t a r e e s s e n t i a l t o t h e complete answer t o t h i s
question.

Bauer also seems t o be somewhat confused i n h i s t r e a t m e n t

o f t h e " c o u n t e r a c t i n g t e n d e n c i e s " and f u r t h a r seems t o be
i m p l i c i t l y a c c e p t i n g p a r t o f Varga's t h e o r y o f d i f f e r e n t i a l r e n t
i n t h e g o l d - e x t r a c t i n g branch o f p r o d u c t i o n b u t he does n o t
e x p l a i n t h i s process. This c o n c e s s i o n t o Varga i s n o t w e l l -
founded i n our o p i n i o n and, moreover, does n o t f i t i n w e l l w i t h
the remainder o f Bauer's t h e o r y .

One must conclude, however, t h a t Bauer's most fundamental

c r i t i c i s m s o f Varga's method, namely, t h a t i t a s s e r t s what i t
seeks t o prove, i g n o r e s c o m p e t i t i o n i n t h e g o l d - e x t r a c t i n g
i n d u s t r y , and does n o t e s t a b l i s h a c o n n e c t i o n w i t h t h e "law o f
p r i c e s " , a r e c o r r e c t and we would have t o support i t . Despite
a s e r i e s o f q u e s t i o n a b l e statements, confused f o r m u l a t i o n s , and
misuse o f economic c a t e g o r i e s , Bauer i s c o r r e c t a g a i n s t Varga's
method on a) t h e importance o f showing t h e o r i g i n s and n e c e s s i t y
 20

o f i n f l a t i o n ; b) c o n n e c t i n g up t h e a c t u a l process o f i n f l a t i o n
with the law o f value; c) c a l l i n g f o r e s t a b l i s h i n g mediating
l i n k s i n t h i s a n a l y s i s ; and, d) i n s i s t i n g t h a t t h i s s t u d y must
proceed from the assumptions o f i n c r e a s i n g c o m p e t i t i o n and
organic composition o f c a p i t a l r a t h e r than the opposite assumptio

J.v.G. (an anonymous a u t h o r ) and S p e c t a t o r (Wi. Nakhimson)

a l s o p a r t i c i p a t e d i n t h e exchange i n Die Neue Z e i t . J.v.G.
supported t h e Bauer-Kautsky p o s i t i o n and S p e c t a t o r a l t h o u g h he
had eonceeded t h a t Bauer had r a i s e d l e g i t i m a t e o b j e c t i o n s t o
Varga's t h e o r y and method claimed t h a t e m p i r i c a l l y Varga's
p o s i t i o n on rents? i n t h e g o l d - e x t r a c t i o n i n d u s t r y was t h e more
c o r r e c t . N e i t h e r o f these two a u t h o r s , however, advanced
s i g n i f i c a n t l y new p o s i t i o n s i n t h i s debate and were o n l y minor
c o n t r i b u t i o n s . S p e c t a t o r ' s p o s i t i o n e s p e c i a l l y seems t o hedge
the major a n a l y t i c a l q u e s t i o n s i n t h e debate t h r o u g h an appeal
to s t a t i s t i c s .

D. Kautsky g e t s t h e l a s t word

The l a s t round i n t h e debate o f 1910-12 on g o l d p r o d u c t i o n

and i n f l a t i o n was f i r e d by t h e e l d e r l y dean o f t h e German S o c i a l

Democratic P a r t y , K a r l Kautsky, i n h i s book e n t i t l e d The High

Cost o f L i v i n g . This book attempted t o s i m u l t a n e o u s l y develop a

M a r x i s t t h e o r y o f i n f l a t i o n ; p r e s e n t i t i n " p o p u l a r " form;

defend t h e Bauer t h e o r y c o n c e r n i n g g o l d p r o d u c t i o n and i n f l a t i o n

a g a i n s t Varga's c r i t i q u e ; p r e s e n t r e l e v a n t e m p i r i c a l data; and

summarize and s e t t l e t h e debate on g o l d p r o d u c t i o n and i n f l a t i o n .

Of a l l these tasks Kautsky most f a i l e d t o accomplish t h i s last

 21

t a s k as a l t h o u g h he throws some r a t h e r sharp barbs a g a i n s t

Varga he n e i t h e r summarizes t h e a n a l y t i c a l i s s u e s i n t h e debate

w e l l nore does he advance i t s i g n i f i c a n t l y beyond i t s p r e v i o u s

level.

Kautsky summarizes t h e p r e s e n t s t a t e o f t h i s debate by

accurately w r i t i n g that;

"Comrade Varga p u b l i s h e d , more t h a n a year ago, an a r t i c l e

i n t h e Neue Z e i t on 'Gold P r o d u c t i o n and t h e Rise i n P r i c e s ' ,
i n which he s e t f o r t h t h e t h e o r y t h a t changes i n t h e produc-
t i o n o f gold are n o t accountable f o r the present r i s e i n
p r i c e s , and f u r t h e r m o r e t h a t such changes would never cause
a f a l l i n t h e v a l u e o f g o l d , b u t o n l y a r i s e o f ground r e n t
i n m i n i n g . He has r e c e n t l y sought t o s u p p o r t t h i s view,
which was c o n t e s t e d by J.V.G. and m y s e l f " . 8

Kautsky advances t h e f o l l o w i n g c r i t i s m s a g a i n s t t h e Varga

positions ( 1 ) \he r e p e a t s Bauer's charge t h a t Varga * s c r i t i c i s m

of t h e i r p o s i t i o n i s a tautologyi " i t merely s t a t e s t h a t which

i t seeks t o p r o v e , namely t h a t p r i c e s do n o t r i s e because o f

9
the i n c r e a s e d p r o d u c t i o n o f g o l d " . ( 2 ) " I f Varga concludes f r o m

t h i s t h a t changes i n t h e method o f p r o d u c i n g g o l d cannot make

changes i n t h e p r i c e s o f commodities, he proves t o o much, s i n c e

such changes have been a f r e q u e n t occurence i n h i s t o r y and

c o n s p i c u o u s l y so i n t h e s i x t e e n t h c e n t u r y , a f t e r t h e d i s c o v e r y
10
r
o f America". ( 3 ) "Varga d e c l a r e s t h e system o f banking t o be t h e

reason why- changes i n t h e p r o d u c t i o n o f g o l d do n o t a u t o m a t i c a l l y

o p e r a t e t o produce changes i n t h e v a l u e o f gold....(however) i n

11
r e a l i t y t h e banks p l a y no p a r t i n t h e economic r o l e o f g o l d " .

($) He quotes Varga's statement t h a t "owing t o t h e cheaper

w o r k i n g o f ores a kilogramme o f g o l d m e t a l can now be had by t h e

e x p e n d i t u r e o f a s m a l l e r q u a n t i t y o f m i n t e d g o l d " t o which

Kautsky r e p l i e s t "but g o l d i s n o t produced by means o f g o l d ,

 22

12
b u t by t h e e x p e n d i t u r e o f human l a b o r " . ( 5 ) He charges t h a t

Varga confuses t h e t e c h n i c a l and economic uses o f g o l d and

does n o t understand t h a t t e c h n i c a l l y g o l d remains i n bank

13
v a u l t s b u t e c o n o m i c a l l y i t c i r c u l a t e s i n b i l l s o f exchange.

This i s an i m p o r t a n t c r i t i c i s m p r e c i s e l y because Varga*s

p o s i t i o n , as Kautsky has a l r e a d y p o i n t e d o u t , r e s t s on a

misconception about t h e r e l a t i o n s h i p between banking and g o l d -

p r o d u c t i o n . ( 6 ) He a t t a c k s Varga's r e n t t h e o r y by a r g u i n g t h a t

i f Varga were r i g h t t h e n t h e r e n t s f o r m i n i n g p r e c i o u s metals

would become h i g h e r t h a n i n any o t h e r method o f e x p l o i t i n g

l a n d "But Adam Smith d e c l a r e s t h a t i n no t h e r form o f i n d u s t r y

14
are ground r e n t s so low, and Marx s u p p o r t s him". He i m p l i c i t l y
suggests t h a t t h e Varga t h e o r y i s R i c a r d i a n and t h e r e f o r e
r e p r e s e n t s n o t o n l y a step away from Marx b u t a s t e p walked i n
the wrong d i r e c t i o n away f r o m Smith. ( ? ) " I f he (Varga) wants
t o show t h a t t h e l a w o f v a l u e does n o t a p p l y t o t h e money-rp
commodity, he must prove t h a t an i n c r e a s e i n t h e demand which
a r i s e s from i n c r e a s e d g o l d - p r o d u c t i o n has no i n f l u e n c e on
commodity p r i c e s , commodity exchange, o r commodity p r o d u c t i o n .
15
He would f i n d t h i s h a r d t o prove". That i s , by abandoning t h e

law o f v a l u e i t w i l l be i m p o s s i b l e f o r him t o e x p l a i n a n y t h i n g

of importance.

I t would seem t h a t these charges t a k e n t o g e t h e r r e p r e s e n t

a severe and a t l e a s t p a r t i a l l y s u c c e s s f u l broadside on t h e

c r i t i c i s m o f t h e young Varga by t h e e l d e r l y a d m i r a l o f S o c i a l

Democracy, A couple o f Kautsky's p o i n t s , however, such as ( 2 )

and ( 3 ) * are p a r t i c u l a r l y c o n t e n t i o u s as an appeal t o s p e c i a l

 23

cases i n economic h i s t o r y ( t h e d i s c o v e r y o f g o l d i n t h e

Americas) and denying t h e r o l e o f banks and f i n a n c e c a p i t a l i n

the i n f l a t i o n a r y process a r e u n c o n v i n c i n g and do n o t serve w e l l

t o dissuade workers from a c c e p t i n g Varga's t h e o r y .

The purpose, however, o f Kautsky's book extended beyond

p o l e m i e i s i n g a g a i n s t t h e Varga p o s i t i o n and i n i t he developed

an e x p l a n a t i o n o f i n f l a t i o n t h a t i s s i g n i f i c a n t l y different

from t h a t o f Bauer's Die Teuerung. One such development was h i s

e x p l a n a t i o n o f how i n c r e a s e s i n gold-mining p r o d u c t i v i t y cause

i n f l a t i o n under a system o f simple commodity p r o d u c t i o n . I f

the g o l d producer does n o t s e l l g o l d as an i n d u s t r i a l commodity

but t r a n s f o r m s i t i n t o money he i s t h e o n l y commodity p r o d u c e r

who e n t e r s t h e market w i t h a demand and n o t an o f f e r . "The
demand which he makes i s q u i t e independent o f t h e c o n i t i o n s o f
the market i n so f a r as he i s t h e o n l y producer who does n o t
16
need t o have s o l d i n o r d e r t o be able t o buy". He goes on t o

a s s e r t t h a t " a d d i t i o n a l g o l d becomes t h e s t a r t i n g - p o i n t and t h e

impetus t o an a d d i t i o n a l c i r c u l a t i o n o f commodities i n which

17
again a r i s e new demands and commodities". I n simple commodity

p r o d u c t i o n "the c i r c u l a t i o n o f commodities f o l l o w s t h e r u l e o f

the l a w o f v a l u e . The p r o d u c t o f an hour o f l a b o r i s bought w i t h

18
g o l d t o whose p r o d u c t i o n an hour o f l a b o r i s necessary". Now i f

we suppose t h a t due t o d i s c o v e r i e s i t i s p o s s i b l e t o double t h e

p r o d u c t i o n o f g o l d w i t h t h e same amount o f l a b o r t i m e , then

" p r o d u c t i v i t y i n o t h e r branches o f p r o d u c t i o n remains t h e same,

t h e r e f o r e t h e amount o f commodities f o r t h e market does n o t

grow i n p r o p o r t i o n t o t h e amount o f g o l d . The demand f o r

 24

commodities t h e r e f o r e grows s t r o n g e r t h a n the s u p p l y . The prices

o f commodities must t h e r e f o r e n e c e s s a r i l y r i s e , even i f t h e r e i s

n o t the l e a s t change i n the d i s p o s i t i o n o f the s o c i a l l a b o r

f o r c e s " . "The r e s u l t w i l l be a d o u b l i n g o f the p r i c e s o f

19
commodities".

Kautsky t h e n extends t h i s argument t o c a p i t a l i s t production

by a s s e r t i n g t h a t t h e " i n c r e a s e i n the f u n c t i o n s o f money and

c r e d i t " i n t h e p r e e c e e d i n g 20 years have s t r e n g t h e n e d and not

weakened t h e i n f l u e n c e o f g o l d p r o d u c t i o n on the p r i c e s o f a l l
5
commodities. U n q u e s t i o n a b l y c r e d i t and f i n a n c e c a p i t a l have t o

be u n d e r s t o o d t o e x p l a i n the r e a l process o f the development o f

i n f l a t i o n under c a p i t a l i s m , b u t , Kautsky, does n o t e x p l a i n t h e

a c t u a l mechanism o f how i n c r e a s e s i n g o l d p r o d u c t i o n cause

i n f l a t i o n under c a p i t a l i s m b u t r a t h e r assumes i t t o take place

i n t h e same way as under "simple commodity p r o d u c t i o n " w i t h

o n l y a d d i t i o n a l c o m p l i c a t i n g f e a t u r e s ("new forms o f money and

c r e d i t " ) t h a t have t o be t a k e n i n t o account. A l s o , s i n c e Kautsky

has a l r e a d y dismissed the importance o f banking i n s t i t u t i o n s

on g o l d p r o d u c t i o n when d i s c u s s i n g Varga i t seems a little

c o n t r a d i c t o r y f o r him now t o appeal t o b a n k i n g and c r e d i t t o

e x p l a i n how the i n f l a t i o n a r y e f f e c t o f g o l d p r o d u c t i o n productivity

has i n c r e a s e d under c a p i t a l i s t p r o d u c t i o n .

A more s e r i o u s and fundamental o b j e c t i o n can be r a i s e d

a g a i n s t t h i s e x p l a n a t i o n o f i n f l a t i o n by Kautsky. I t does n o t

seem a p p r o p r i a t e t o t h i s w r i t e r t o b e g i n e x p l a i n i n g i n f l a t i o n

under a system o f simple commodity p r o d u c t i o n . I n t h e f i r s t place

t h i s form o f p r o d u c t i o n i t s e l f i s an a r t i f i c i a l c o n s t r u c t i o n ,

secondly, i t e x p l a i n s the laws o f m o t i o n o f c a p i t a l i n the

 25

c i r c u l a t i o n process and n o t i n t h e p r o c e s s o f c a p i t a l i s t
p r o d u c t i o n , i t can n o t t h e r e f o r e t a k e i n t o account, t h i r d l y ,
the developments i n t h e monetary mechanism, c r e d i t , and b a n k i n g
particular t o advanced c a p i t a l i s m , and t h e r e f o r e , f o u r t h l y , i t
i s n o t p o s s i b l e t o develop a r e a l u n d e r s t a n d i n g o f t h e laws
of m o t i o n o f c a p i t a l i s t development and how i n f l a t i o n n e c e s s a r i l y
a r i s e s from these laws. Q u i t e s i m p l y , i t i s i l l e g i t i m a t e t o
develop an a r t i f i c i a l a h i s t o r i c a l a b s t r a c t c o n c e p t i o n o f t h e
exchange process ( s i m p l e commodity p r o d u c t i o n ) and t h e n go on
to e x p l a i n how t h e laws which govern t h i s form o f p r o d u c t i o n a r e
m o d i f i e d by c a p i t a l i s m . I t s h o u l d be remembered, though, t h a t
t h i s method o f p r o c e e d i n g f r o m an a n a l y s i s o f s i m p l e commodity
p r o d u c t i o n t o c a p i t a l i s t p r o d u c t i o n was by no means l i m i t e d t o
Kautsky and a t t h e t i m e he w r o t e t h i s book would have been
accepted by a l l s i d e s o f t h i s debate and v i r t u a l l y a l l contempor-
ary M a r x i s t economists.

Kautsky*s p r a c t i c a l p o l i t i c a l c o n c l u s i o n s are b a s i c a l l y
the same i n The High Cost o f L i v i n g as i n Bauer's book which
began t h e debate. Kautsky's book, though, shows q u i t e clearly
how i n a t l e a s t one major r e s p e c t Bauer's o r i g i n a l e x p l a n a t i o n
o f i n f l a t i o n changed i n t h e course o f t h i s debate. Bauer began
h i s book by e x p l a i n i n g many d i f f e r e n t causes o f i n f l a t i o n o f
which g o l d p r o d u c t i o n was j u s t one and we saw i n h i s r e p l y t o
Varga i n Die Neue Z e i t how t h e emphasis s h i f t e d . A l t h o u g h
Kautsky e x p l i c i t l y declaims a t h e o r y o f i n f l a t i o n t o t a l l y based
on g o l d p r o d u c t i o n I " I have never s a i d and c e r t a i n l y never
20
m a i n t a i n e d t h a t g o l d i s t h e o n l y cause o f t h e r i s e i n p r i c e s " )
 26

i t i s e v i d e n t t h a t he does b e l i e v e t h i s t o be t h e p r i m a r y cause

o f i n f l a t i o n . I n t h i s way what began as a s u g g e s t i o n by Bauer

i n f i v e pages o f h i s book as a p o s s i b l e cause among many o f

i n f l a t i o n under t h e f o r c e o f debate s h i f t e d t o t h e p r i m a r y and

e s s e n t i a l cause o f i n f l a t i o n . To t h e e x t e n t t h a t t h i s represents

a s h i f t away from Bauer's m u l t i - c a u s a l approach t h i s represents

an improvement i n t h e s t a t e o f t h e d i s c u s s i o n , however, i t

must be immediately added t h a t t h e t h e o r e t i c a l e x p o s i t i o n o f

i n f l a t i o n p r o g r e s s e d l i t t l e i f a t a l l i n t h e course o f t h i s

debate except i n s o f a r as i t dismissed Varga's r e n t t h e o r y o f

goldproduction.
 27

II. An E v a l u a t i o n o f t h e Debate on G o l d p r o d u c t i o n and Inflation

•> I*:
• X.

1. T h i s debate a r o s e b e c a u s e o f the need f o r a p o l i t i c a l and

programmatic r e p o n s e by t h e A u s t r i a n and German s o c i a l democrats

to the i n f l a t i o n a r y p e r i o d p r e e c e e d i n g World War I . The issues

of t h e d e b a t e , however, a r e n o t o v e r t l y p o l i t i c a l i n n a t u r e b u t

are r a t h e r l i m i t e d t o the t h e o r e t i c a l d i s c u s s i o n o f g o l d p r o d u c t i o n

and i n f l a t i o n . V a r g a charged i n h i s c o n t r i b u t i o n t h a t B a u e r ' s

book teas p a r t i a l l y " b o u r g e o i s " b e c a u s e i t a t t r i b u t e d p a r t o f

the s o u r c e of i n f l a t i o n to e c o n o m i c - t e c h n i c a l c o n d i t i o n s o u t s i d e

of Europe i n the g o l d - e x t r a c t i o n i n d u s t r y . T h i s c h a r g e , though,

must be e m p h a t i c a l l y r e j e c t e d both b e c a u s e o f i t s i m p l i c i t l y

anti-internationalist c o n c e p t i o n and b e c a u s e t h e p o l i t i c a l

c o n c l u s i o n s o f B a u e r ' s book - c a l l i n g f o r i n t e r n a t i o n a l w o r k i n g

class solidarity, s t r u g g l i n g a g a i n s t i m p e r i a l i s m , and the

socialization o f the p r o d u c t i v e f o r c e s - a r e c l e a r l y not " b o u r g e o i s

Undoubtably Varga thought t h a t B a u e r ' s a t t r i b u t i n g advances i n

g o l d p r o d u c t i o n a s a s o u r c e o f i n f l a t i o n was an attempt t o smuggle

i n a new r e f o r m i s t t h e o r y o f i n f l a t i o n , y e t , even t h e most

c a s u a l i m p a r t i a l r e a d e r o f B a u e r ' s book must r e j e c t t h i s c h a r g e .

It i s i n t e r e s t i n g to note t h a t d e s p i t e the l i t e r a r y f u r o r

that t h i s debate g e n e r a t e d t h e p r a c t i c a l p o l i t i c a l evaluation

and p r o p o s a l s f o r working c l a s s a c t i v i t y d i d not s h i f t a t a l l

d u r i n g t h e c o u r s e o f t h i s d e b a t e . I t must be added, i n f a i r n e s s ,

that r e g a r d l e s s of the t h e o r e t i c a l i n a b i l i t y of the p a r t i c i p a n t s

to c o n t r i b u t e towards an advancement o f the e x p l a n a t i o n o f

i n f l a t i o n t h e i r p o l i t i c a l e v a l u a t i o n o f the e f f e c t of inflation
 28

on w o r k i n g c l a s s incomes and t h e i r p r a c t i c a l p r o p o s a l s were w e l l

s u i t e d t o t h e c o n d i t i o n s o f t h e time and r e p r e s e n t e d a c l e a r

revolutionary class alternative to c a p i t a l i s t rule.

2. To u n d e r s t a n d t h e growth o f i n f l a t i o n a t any one moment i n

h i s t o r y i t i s not s u f f i c i e n t t o a n a l y s e the p a r t i c u l a r nature

o f a s p e c i f i c n a t i o n a l economy and s e e how i n f l a t i o n has specific

a l l y developed. The u n d e r s t a n d i n g o f i n f l a t i o n must b e g i n not

j u s t w i t h an a n a l y s i s o f a c o n c r e t e s i t u a t i o n but must r e s t on

a t h e o r y o f i n f l a t i o n . On t h i s p o i n t too we must s u p p o r t Bauer

a g a i n s t V a r g a i n t h a t a t l e a s t B a u e r understood the necessity

o f d e v e l o p i n g a t h e o r y o f i n f l a t i o n t i e d to the l a w s o f motion

o f c a p i t a l whereas Varga, on t h e o t h e r hand, o n l y s e t s h i m s e l f

the n e g a t i v e t a s k o f d i s p r o v i n g one o f B a u e r ' s theories, and,

on t h e o t h e r hand, i m p l i e s t h a t i n f l a t i o n can be u n d e r s t o o d by

examining t h e s p e c i f i c f e a t u r e s i n A u s t r i a t h a t gave i t b i r t h .

3. The n e x t q u e s t i o n t h a t must be r a i s e d i s where to b e g i n a

t h e o r y o f i n f l a t i o n . We have s e e n t h a t Bauer l o c a t e d the

n e c e s s i t y o f i n f l a t i o n c a u s e d by i n c r e a s e s i n g o l d p r o d u c t i o n by

examining t h e p r o c e s s o f exchange and t h e r e p r o d u c t i o n schema

whereas K a u t s k y attempted to show i t s o r i g i n s w i t h i n " s i m p l e

commodity p r o d u c t i o n " and t h e n a s s e r t t h a t c a p i t a l i s t production

has o n l y e x a c c e r b a t e d the c a u s e s which gave i t b i r t h . Both o f

t h e s e approaches a r e m e t h o d o l o g i c a l l y u n s a t i s f a c t o r y . As we [/

have p r e v i o u s l y s u g g e s t e d , the n e c e s s i t y o f i n f l a t i o n can o n l y

be shown i n the development o f the b a n k i n g and c r e d i t s y s t e m i n

the p r o c e s s o f c a p i t a l i s t p r o d u c t i o n a s a whole whereas an

 29

a n a l y s i s o f t h e p r o c e s s o f c a p i t a l i s t exchange i n isolation

from t h e c a p i t a l i s t p r o d u c t i o n p r o c e s s c a n o n l y show t h e abstract

f o r m a l p o s s i b i l i t y o f i n f l a t i o n and n o t i t s c a u s e . K a u t s k y ' s

approach i s j u s t a s u n c o n v i n c i n g both b e c a u s e s i m p l e commodity

p r o d u c t i o n i s an a r t i f i c i a l a h i s t o r i c a l construction divorced

from t h e r e a l i t y o f c a p i t a l i s t p r o d u c t i o n and because i t s scope

i s l i m i t e d to the p r o c e s s o f commodity exchange and c a n t h e r e f o r e

not be u s e d to h e l p e x p l a i n t h e l a w s o f motion of c a p i t a l i s t

production. I t i s furthermore illegitimate to e s t a b l i s h a p r o o f

of t h e n e c e s s i t y o f i n f l a t i o n by showing i t s emergence under

s i m p l e commodity p r o d u c t i o n and t h e n a s s e r t i n g , as K a u t s k y d i d ,

t h a t because c a p i t a l i s m f u r t h e r develops the b a n k i n g and credit

systems the same " p r o o f " h o l d s t r u e f o r c a p i t a l i s t p r o d u c t i o n .

We would s u g g e s t t h a t i t i s because t h i s debate was n e v e r a b l e

to b e g i n i t s a n a l y s i s w i t h an e x a m i n a t i o n o f t h e c a p i t a l i s t

p r o d u c t i o n p r o c e s s t h a t i t was n e v e r a b l e to b e g i n to d e v e l o p a

c o r r e c t t h e o r y o f i n f l a t i o n and i s t h e most fundamental source

of a l l o f the c h i e f e r r o r s o f i t s p a r t i c i p a n t s .

4. I t h a s been c o n v i n c i n g l y argued that f o r Marxist c r i s i s theory

i t i s i n a p p r o p r i a t e to f o r m u l a t e a m u l t i - c a u s a l t h e o r y o f crisis

because such a t h e o r y makes i t i m p o s s i b l e to e x p l a i n t h e

fundamental cause and n e c e s s i t y o f c r i s e s and i s an e x p r e s s i o n

of a t a n g l e d t h e o r e t i c a l cobweb s k i p p i n g m e d i a t i n g s t e p s and

c o n f u s i n g cause and e f f e c t . T h i s same c r i t i c i s m must be extended

to t h e B a u e r m u l t i - c a u s a l t h e o r y o f i n f l a t i o n . I t i s n o t

sufficient as Bauer d i d to c a t a l o g a shopping list of causes of

i n f l a t i o n , r a t h e r , one must l o c a t e i t s fundamental cause and

 30

n e c e s s i t y w i t h i n c a p i t a l i s t p r o d u c t i o n . Although Bauer shifted

h i s emphasis i n t h e c o u r s e o f t h e debate to t h e development o f

a p r i m a r y cause o f i n f l a t i o n i t must be s a i d t h a t a l l o f t h e

p a r t i c i p a n t s i n t h e debate (Bauer, K a u t s k y , and V a r g a especially)

i n s i s t e d t h a t t h e r e was no one t h e o r e t i c a l c a u s e o f i n f l a t i o n

under c a p i t a l i s m . T h i s i s a n u n s a t i s f a t o r y approach and d i s m i s s e s

the t a s k o f a c l e a r t h e o r e t i c a l e x p o s i t i o n o f t h e fundamental

cause and n e c e s s i t y o f i n f l a t i o n , f o r an e a s i e r way o u t , a l t h o u g h ,

at l e a s t t h e s h i f t i n t h e debate away from B a u e r ' s o r i g i n a l approach

to t r y i n g t o l o c a t e a p r i m a r y cause o f i n f l a t i o n r e p r e s e n t e d a

step forward f o r t h i s discussion.

5. We would argue t h a t V a r g a ' s rent theory of goldproduction i s

t o t a l l y u n s a t i s f a c t o r y f o r a number o f r e a s o n s . F i r s t l y , this

t h e o r y r e s t s on a n u n r e a l i s t i c and u n r e a s o n a b l e assumption about

c o m p e t i t i v e b e h a v i o r and t e c h n i c a l change i n t h e g o l d - e x t r a c t i n g

branch o f p r o d u c t i o n . There i s every r e a s o n to suggest that

i n c r e a s i n g l a b o r p r o d u c t i v i t y , i n t e n s i t y o f c o m p e t i t i o n , and

organic composition a r e the r u l e i n t h i s i n d u s t r y as with a l l

o t h e r m a j o r b r a n c h e s o f p r o d u c t i o n . The t h e o r e t i c a l importance

of t h i s p o s i t i o n i s o b v i o u s and e m p i r i c a l e v i d e n c e would a l s o

tend t o s u g g e s t an i n t e r p r e t a t i o n c o n t r a r y to V a r g a ' s thesis.

A s e c o n d problem w i t h V a r g a ' s theory i s i t s b e l i e f that banking

and f i n a n c i a l i n s t i t u t i o n s c a n c o n t r o l t h e amount o f goldproduc-

t i o n by e s t a b l i s h i n g d i f f e r e n t i a l r e n t s i n t h e g o l d - e x t r a c t i n g

branch o f p r o d u c t i o n . T h i s a s p e c t o f V a r g a ' s theory i s p a r t i c u -

l a r l y weak both because i t i g n o r e s t h e s p e c u l a t i v e demand f o r

 31

g o l d because i t leads t o the H i l f e r d i n g p o s i t i o n t h a t b a n k i n g

i n s t i t u t i o n s can c o n t r o l economic f o r c e s i n an o r g a n i z e d way
r a t h e r t h a n v i c a v e r s a . The most fundamental problem w i t h Vargsf's
r e n t t h e o r y i s t h a t i t does n o t u n d e r s t a n d e i t h e r the s p e c i a l
n a t u r e o f the money commodity g o l d o r t h e pervasiveness o f the
r u l e o f the law o f v a l u e . Varga's a t t e m p t t o c r i t i s i z e the
"bourgeois" p o s i t i o n o f Bauer, i r o n i c a l l y , r e s t s on the i r r e l e v a n c e
o f t h e law o f v a l u e f o r the g o l d - e x t r a c t i n g i n d u s t r y and i t i s
i n t h i s sense t h a t i t can be s a i d t h a t Varga made the most
s e r i o u s t h e o r e t i c a l e r r o r i n the debate.

6. The Bauer - J.v.G. - Kautsky t h e o r y o f g o l d p r o d u c t i o n and

i n f l a t i o n i s , however, n o t w i t h o u t s e r i o u s a n a l y t i c a l f l a w s . We /

have a l r e a d y examined some o f t h e b a s i c m e t h o d o l o g i c a l errors \

o f t h e Bauer-Kautsky p o s i t i o n such as i t s m u l t i - c a u s a l a n a l y s i s

and the l o c a t i o n o f the source o f i n f l a t i o n w i t h i n the exchange

p r o c e s s , simple commodity p r o d u c t i o n , o r the r e p r o d u c t i o n schema.

Ernest Mandel, t h e o n l y contemporary a u t h o r t o comment on this

debate, has l e v e l l e d a more s e r i o u s charge a g a i n s t t h i s t h e o r y :

"Kautsky ... o v e r l o o k e d the f a c t t h a t an i n c r e a s e i n the volume

o f g o l d p r o d u c t i o n leads o n l y t o an i n c r e a s e i n money c a p i t a l ,

and t h a t t h e d i s t i n c t i v e c h a r a c t e r i s t i c o f g o l d i s p r e c i s e l y

t h a t i t does n o t have t o be i n j e c t e d i n t o c i r c u l a t i o n , b u t can

a l s o be hoarded i n t h e form o f t r e a s u r e . There i s hence no

automatic c e r t a i n t y - as Kautsky assumed - t h a t t h e annual

p r o d u c t i o n o f g o l d w i l l r a i s e the t o t a l demand f o r commodities

along w i t h i t s own v a l u e . T h i s depends on whether o r not the

 32

additional quantity o f gold i s integrated into c i r c u l a t i o n , i . e . ,

on t h e g i v e n c o n j u n c t u r e o f t h e c a p i t a l i s t economy, t h e volume

of commodity p r o d u c t i o n , t h e v e l o c i t y o f t h e c i r c u l a t i o n o f

money, t h e volume o f c r e d i t ( t h e payments, besides t h e exchanges

21
f u n c t i o n s , which have t o be met by t h i s money) and so on".
Mandel, i t would appear, l e v e l s a d e v a s t a t i n g charge a g a i n s t t h e
Bauer-Kautsky t h e o r y and a l t h o u g h t h i s c r i t i c i s m i s n o t e n t i r e l y
c o r r e c t (Kautsky does i n f a c t analyse t h e process o f h o a r d i n g )
i t does make t h e e s s e n t i a l p o i n t . The Bauer t h e o r y t h a t an
i n c r e a s e i n g o l d p r o d u c t i o n i s a n e c e s s a r i l y i n f l a t i o n a r y process
i s obviously dependent upon t h e idea t h a t t h e t o t a l demand f o r
commodities w i l l grow a l o n g w i t h t h e v a l u e o f g o l d , b u t , Mandel
c o n v i n c i n g l y r e f u t e s t h i s assumption. I f Mandel*s c r i t i c i s m i s
accepted - which we would say i t must be - t h e n i t must s u r e l y
capsize t h e l o g i c a l s t r u c t u r e o f t h e g o l d p r o d u c t i o n t h e o r y o f
inflation.

7. I n h i s r e p l y t o Varga i n Die Neue Z e i t Bauer p o i n t e d t o t h e

importance o f " m e d i a t i n g l e v e l s " i n the analysis o f goldproduction

and i n f l a t i o n . While Bauer used t h i s charge t o g r e a t advantage

a g a i n s t Varga's c r i t i q u e t h i s same c r i t i c i s m must be l e v e l l e d

a g a i n s t t h e Bauer-Kautsky g o l d p r o d u c t i o n t h e o r y o f i n f l a t i o n .

The most fundamental weakness o f t h e Bauer-Kautsky t h e o r y was

t h a t i t d i d n o t show how t h e law o f v a l u e n e c e s s a r i l y b r i n g s

i n t o b e i n g an i n f l a t i o n a r y process b u t r a t h e r a t t r i b u t e d t h e

s p e c i a l c h a r a c t e r i s t i c s o f t h e g o l d - e x t r a c t i n g branch o f p r o d u c t i o n

as t h e cause o f i n f l a t i o n . The f a i l u r e , i n p a r t i c u l a r , to integrate

 33

a t h e o r y o f t h e c r e d i t system, c r e d i t c y c l e s , f i n a n c e c a p i t a l ,

and c r i s e s made i t i m p o s s i b l e t o l o c a t e t h e c a u s a l n e c e s s i t y o f

i n f l a t i o n . I t was t h i s i n a b i l i t y t o i n t e g r a t e more c o n c r e t e

t h e o r e t i c a l categories into the theory o f i n f l a t i o n that

u l t i m a t e l y p r e v e n t e d t h i s debate from a c h i e v i n g i t s i n t e n d e d

o b j e c t , i . e . , t o a p p r o p r i a t e from r e a l i t y a t h e o r y o f i n f l a t i o n

which p l a c e d i n f l a t i o n as a necessary consequence o f c a p i t a l i s t

production.

J
I t must: be added, i n fairness t o t h e p a r t i c i p a n t s i n t h i s

debate, t h a t M a r x i s t a n a l y i s t s have n o t been a b l e t o advance

s i g n i f i c a n t l y beyond t h e p o i n t where t h i s debate ended i n t h e

more t h a n s i x t y years t h a t have l a p s e d . More r e c e n t d i s c u s s i o n s

22
(Mandel, F r i t s c h , deBrunhoff, and F o l e y ) have n o t been a b l e t o

competently develop a t h e o r y o f i n f l a t i o n which i s t i e d t o t h e

law o f v a l u e and i s a necessary consequence o f t h e laws o f

motion o f c a p i t a l i s t development. I n f a c t , w i t h t h e e x c e p t i o n

o f Mandel, none o f these a u t h o r s have made any r e f e r e n c e t o t h e

g o l d p r o d u c t i o n - i n f l a t i o n debate and have t h e r e f o r e n o t been

able t o a p p r o p r i a t e any o f t h e t h e o r e t i c a l advances o r a v o i d

any o f t h e t h e o r e t i c a l b l u n d e r s t h a t t h e debate e x h i b i t e d .

A r e c e n t example o f how M a r x i s t economists have n o t been

able t o move beyond o r l e a r n from t h e t h e o r e t i c a l e r r o r s t h a t

were committed b e f o r e World War I i s t o be found i n an exchange

between H. Wolpe, Michael W i l l i a m s , and Barbara Bradby about

the p a r t i c u l a r n a t u r e o f South A f r i c a n c a p i t a l i s m and g o l d -

 34

23
production. Williams' theory, i n p a r t i c u l a r , i s nothing other
than a modernized m o d i f i e d v e r s i o n o f Varga's r e n t t h e o r y o f

g o l d p r o d u c t i o n . He, l i k e Varga, assumes t h a t g o l d producers do

not e n t e r i n t o c o m p e t i t i o n and t h a t t h e r e i s an i n c e n t i v e f o r

gold-producing c a p i t a l i s t s t o m a i n t a i n a low o r g a n i c composition

o f c a p i t a l , i . e . , t o have "as much l a b o u r packed i n t o as l i t t l e

24
g o l d as p o s s i b l e " . T h i s argument, l i k e Varga's, depends on a

c o n s t a n t o r f a l l i n g r a t h e r t h a n an i n c r e a s i n g o r g a n i c composition

o f c a p i t a l i n t h e g o l d - e x t r a c t i n g branch o f p r o d u c t i o n . That t h i s

t h e o r y i s a t odds w i t h t h e l a w o f v a l u e and t h e tendency f o r t h e

r a t e o f p r o f i t t o f a l l was c o n v i n c i n g l y shown i n Barbara Bradby's

r e p l y t o t h e W i l l i a m s a r t i c l e . Although t h e debate on t h e n a t u r e

o f South A f r i c a n c a p i t a l i s m i s o b v i o u s l y a n a l y t i c a l l y distinct

from t h e debate on i n f l a t i o n i t can be seen here j u s t how s m a l l

the advances have been s i n c e t h e debate i n Die Neue Z e i t .

The most s e r i o u s evidence though o f t h e e x t e n t t o which

M a r x i s t s have n o t been able t o approach a b e t t e r understanding

o f i n f l a t i o n s i n c e 1911 i s t h e wide-spread acceptance among

"Marxists" o f the neo-Ricardian t h e o r y o f i n f l a t i o n . The neo-

Ricardian theory e s s e n t i a l l y explains t h a t i n f l a t i o n r e s u l t s

from t h e " c l a s s s t r u g g l e " , i . e . , r i s i n g money wages o f workers

as a r e s u l t o f t h e i r s t r e n g t h from t r a d e u n i o n o r g a n i z a t i o n

causes t h e p r i c e s o f a l l commodities t o r i s e . The neo-Ricardian

t h e o r y o f i n f l a t i o n i s b a s i c a l l y an e x t e n s i o n o f t h e i r t h e o r y

o f c r i s i s ( t h e G l y n - S u t c l i f f e and B r o d y - C r o t t y " p r o f i t squeeze")

and t h i s t h e o r y l o c a t e s t h e cause o f c r i s e s and i n f l a t i o n n o t

 35

i n the law o f v a l u e and t h e laws o f m o t i o n o f c a p i t a l i s t

development b u t r a t h e r i n t h e "excessive" wage demands o f
workers and t h e r e l a t i v e s t r e n g t h o f the t r a d e u n i o n movement.
The weakness o f t h i s t h e o r y i s n o t o n l y a n a l y t i c a l i n n a t u r e
b u t a l s o i d e o l o g i c a l and p o l i t i c a l s i n c e l i k e bourgeois
economic t h e o r y and i d e o l o g y i t blames t h e w o r k i n g c l a s s f o r t h e
i n f l a t i o n a r y process. I n t h i s sense t h e r e can be no doubt t h a t
the Bauer-Kautsky t h e o r y was more advanced t h a n t h e neo-
R i c a r d i a n t h e o r y o f today because i t a t l e a s t understood the
necessity o f r e j e c t i n g the bourgeois t h e o r y and e x p l a i n i n g how
p r o l e t a r i a n s o l i d a r i t y was needed i n the f a c e o f workers
d e c l i n i n g r e a l wages and i m m i s e r i z a t i o n caused by inflation.

The above d i s c u s s i o n c l e a r l y i n d i c a t e s t h a t the fundamental

t a s k t h a t Bauer s e t h i m s e l f o f d e v e l o p i n g a M a r x i s t t h e o r y o f
i n f l a t i o n which would counter t h e bourgeois t h e o r i e s remains
j u s t as i m p o r t a n t f o r today's r e v o l u t i o n a r i e s as i t was f o r the
s o c i a l democratic movement b e f o r e World War I . I t is i n this
sense t h a t we can l o o k a t t h e debate on g o l d p r o d u c t i o n and
i n f l a t i o n as a marked advance over most o f t h e s o - c a l l e d M a r x i a n
t h e o r i e s o f i n f l a t i o n today and i t i s i n t h a t sense t h a t i t i s
e s s e n t i a l f o r M a r x i s t s today t o go backwards i n time t o
a p p r o p r i a t e t h e t h e o r e t i c a l advances i n t h a t debate b e f o r e we /
can a t t e m p t t o move t h a t d i s c u s s i o n f o r w a r d t o an e x p l a n a t i o n 9:
the epoch o f i n f l a t i o n a r y c a p i t a l i s m t h a t we are experiencing
today.
 36

III. Notes Towards a Theory o f I n f l a t i o n

The f o l l o w i n g notes are n o t i n t e n d e d t o r e p r e s e n t a

f i n i s h e d t h e o r y b u t , r a t h e r , a r e o n l y my p r e l i m i n a r y , u n f i n i s h e d ,
and t e n t a t i v e t h o u g h t s on how t o b e g i n t o develop i n o u t l i n e -
form a t h e o r y o f i n f l a t i o n .

1 , The t h e o r y o f i n f l a t i o n must show t h a t i n f l a t i o n i s a necessary

consequence o f t h e fundamental c o n t r a d i c t i o n o f c a p i t a l i s t
p r o d u c t i o n . Any t h e o r y which a t t r i b u t e s t h e occurance o f i n f l a t i o n
t o improper f i s c a l and monetary c o n t r o l s i s i d e a l i s t . The t a s k
must be t o show t h a t i n f l a t i o n n e c e s s a r i l y a r i s e s f r o m t h e
essential character o f c a p i t a l i s t production.

2. The t h e o r y o f i n f l a t i o n must b e g i n w i t h an a n a l y s i s o f t h e

d i f f e r e n t forms and f u n c t i o n s o f money. Non-Marxist t h e o r y i s

unable t o grasp t h e e s s e n t i a l cause o f i n f l a t i o n e i t h e r because (•

)
t h e y accept t h e q u a n t i t y t h e o r y o f money ( c l a s s i c a l p o l i t i c a l (
economy and "monetarism") o r because t h e y assume away money j
/
by u s i n g a numeraire ( m a r g i n a l i s t t h e o r y a l a Walras and neo- /
[
Ricardian theory). \

3 . Money performs t h e r o l e s o f a measure o f v a l u e , a medium o f

c i r c u l a t i o n , an i n s t r u m e n t o f h o a r d i n g , and " w o r l d money".

The money commodity must p e r f o r m a l l o f these roles.

4. The money commodity g o l d w h i l e s o c i a l l y determined by v i r t u e

/
o f h i s t o r i c a l circumstances and i t s p h y s i c a l c h a r a c t e r i s t i c s

becomes necessary f o r commodity c i r c u l a t i o n and becomes t h e

universal equivalent. &7 ^ *^Z^f.. .T "

e
 a

l J if *
5. W i t h i n the process o f t h e c i r c u l a t i o n o f c a p i t a l i t becomes ; J^</
p o s s i b l e f o r paper c u r r e n c y t o be i s s u e d . Paper currency stands i ^
f o r a c e r t a i n amount o f g o l d and t h e r e i s a r e l a t i o n s h i p between
the two which a t any p o i n t i n time i s f i x e d . ;

6 . There i s a l i m i t w i t h i n the sphere o f c i r c u l a t i o n t o t h e

i s s u a n c e o f paper c u r r e n c y . Gold i s ' t h e u n i v e r s a l e q u i v a l e n t

b u t paper currency can o n l y be a symbol f o r a c e r t a i n amount

o f g o l d . I f the issuance o f paper c u r r e n c y does n o t conform t o

the amount o f g o l d and i f paper c u r r e n c y i s j u s t " p r i n t e d up"

indiscriminately w i t h o u t r e g a r d f o r t h e money commodity t h e n

t h i s separation represents the abstract formal p o s s i b i l i t y o f

r inflation.

I
f
\ 7. W i t h i n the process o f c i r c u l a t i o n i t i s easy t o show how i f
/ A an economy i s on the g o l d s t a n d a r d the s e p a r a t i o n o f the money

\ commodity g o l d from t h e amount o f paper c u r r e n c y issued will

j r e s u l t i n the f o r m a l p o s s i b i l i t y o f i n f l a t i o n . ( F a c t o r s such as

/ a r i s i n g productivity o f l a b o r i n the g o l d - p r o d u c i n g sector

/a permanent t r e n d / and h i s t o r i c a l circumstances r e l a t i n g t o

the magnitude o f g o l d , i . e. new d i s c o v e r i e s /a temporary

c o n d i t i o n / are d i s r e g a r d e d here).

8. W i t h i n the process o f t h e c i r c u l a t i o n o f c a p i t a l even i f the

economy i s no l o n g e r on a " g o l d s t a n d a r d " the r o l e o f g o l d as

the u n i v e r s a l e q u i v a l e n t s t i l l e x i s t s and t h e r e i s an indirect

and y e t a necessary r e l a t i o n between t h e amounts o f g o l d and

paper c u r r e n c y which must conform t o the law o f v a l u e . Even o f f

 38

the g o l d s t a n d a r d t h e market a t any p o i n t i n t i m e w i l l determine

an exchange r e l a t i o n between the two. I f paper c u r r e n c y i s
p r i n t e d up w i t h o u t r e g a r d f o r the amount o f g o l d i n s t o r e t h e n
here a g a i n t h e r e i s the a b s t r a c t p o s s i b i l i t y o f i n f l a t i o n . As
y e t i n f l a t i o n i s o n l y a p o s s i b i l i t y and n o t a n e c e s s i t y because
we are a t t h i s stage o f our a n a l y s i s c o n f i n i n g our study t o the
process o f c a p i t a l i s t c i r c u l a t i o n . Only w i t h i n capitalist
p r o d u c t i o n as a whole can t h e n e c e s s i t y o f i n f l a t i o n be seen.
I t i s i m p o r t a n t t o note t h a t so f a r we have o n l y seen the f o r m a l
p o s s i b i l i t y o f i n f l a t i o n and t h e f o r m a l p o s s i b i l i t y i s different
than t h e cause and n e c e s s i t y o f i n f l a t i o n .

9. I t i s w i t h i n the process o f c a p i t a l i s t p r o d u c t i o n as a whole

t h a t the cause o f i n f l a t i o n can be l o c a t e d . The law o f value

through an i n c r e a s i n g o r g a n i c c o m p o s i t i o n of c a p i t a l necessarily

b r i n g s about the law o f the tendency f o r the g e n e r a l r a t e o f

p r o f i t t o d e c l i n e (LTGRPD). T h i s r e p r e s e n t s t h e fundamental

c o n t r a d i c t i o n i n h e r e n t i n t h e c a p i t a l i s t mode o f p r o d u c t i o n .

10. The LTGRPD causes s i g n i f i c a n t and i n some cases insurmountable/

d i f f i c u l t i e s f o r the v a l o r i z a t i o n requirements o f c a p i t a l , Credit j

i s a means by which c a p i t a l i s t p r o d u c t i o n can t e m p o r a r i l y f u l f i l l \

its valorization requirements.

11. C r e d i t i s used t o promote the upswing by f u r n i s h i n g necessary

money c a p i t a l t o p e r m i t the expansion i n the c i r c u i t o f

i n d u s t r i a l c a p i t a l . While t h e c r e d i t c y c l e i s used t o help

f u l f i l l the v a l o r i z a t i o n and expansion r e q u i r e m e n t s o f capital

 39

i t i s bound t o and dependent upon t h e i i n d u s t r i a l c y c l e as a

whole. The two c y c l e s can appear t o r u n i n d e p e n d e n t l y , however,

the c r i s i s w i l l b r i n g t h e two c y c l e s i n t o r e l a t i o n w i t h one

another.

12. The n e c e s s i t y o f i n f l a t i o n i s t o be found i n t h e f u n c t i o n i n g

o f t h e c r e d i t c y c l e and i n f l a t i o n i s n e c e s s a r i l y b r o u g h t i n t o

b e i n g by t h e v a l o r i z a t i o n d i f f i c u l t i e s o f c a p i t a l . The issuance
o f paper c u r r e n c y beyond a normal r e l a t i o n t o g o l d and t h e

i n f l a t i o n t h a t f o l l o w s can t h u s be seen as a " c o u n t e r a c t i n g

tendency" t o t h e LTGRPD.

13. I n f l a t i o n a l s o cheapens wages and t h e v a l u e o f t h e commodity

l a b o r power,and t h u s i n c r e a s e s r e l a t i v e s u r p l u s v a l u e . T h i s

does n o t mean t h a t i n f l a t i o n i s p u r p o s e l y used t o "cheat"

l a b o r e r s b u t r a t h e r i s an i n s t r u m e n t t h a t h e l p s c a p i t a l meet
v
i t s expansion r e q u i r e m e n t s .

Ik, The s p e c i a l n a t u r e o f t h e money commodity g o l d , however, s e t s

a l i m i t t o t h e degree o f i n f l a t i o n . Paper money can o n l y be

p r i n t e d up t o a c e r t a i n e x t e n t beyond which i t s s e p a r a t i o n from

g o l d r e s u l t s i n t h e d e s t r u c t i o n o f money. A t a c e r t a i n p o i n t

paper c u r r e n c y f a i l s t o p e r f o r m a l l o f t h e f u n c t i o n s o f money

and i t i s a t t h i s moment t h a t t h e f a c t t h a t paper currency i s

not t h e u n i v e r s a l e q u i v a l e n t becomes o b v i o u s .

15. The d e s t r u c t i o n o f money accompanies and i s t h e m i r r o r

s i d e o f t h e d e s t r u c t i o n o f c a p i t a l . The c r i s i s serves as t h e

mechanism which b r i n g s t h e c r e d i t and i n d u s t r i a l c y c l e s t o g e t h e r

 40

and d e s t r o y s b o t h money c a p i t a l ( i n a l l o f i t s forms) and

industrial capital.

16. When t h e c a p i t a l i s t economy i s o f f t h e g o l d s t a n d a r d i t

g i v e s t h e i l l u s i o n t h a t t h e bond between the money commodity
g o l d and paper c u r r e n c y i s c o m p l e t e l y broken b u t t h i s illusion
i s s h a t t e r e d d u r i n g t h e c r i s i s when g o l d f o r c i b l y r e a s s e r t s
i t s e l f as the u n i v e r s a l e q u i v a l e n t . D u r i n g t h e c r i s i s i t i s
g o l d which becomes v a l u a b l e and paper c u r r e n c y i s made r e l a t i v e l y
w o r t h l e s s . Thus t h e w i l d s p e c u l a t i o n i n g o l d t h a t accompanies
the c r i s i s . I t i s t h e c r i s i s t h a t demonstrates the n e c e s s i t y
o f g o l d and the l i m i t s t o t h e issuance o f paper c u r r e n c y .

1?, The c a p i t a l i s t s t a t e has promoted i n f l a t i o n . While i t can

not choose i n f l a t i o n which i s necessary f o r t h e v a l o r i z a t i o n

r e q u i r e m e n t s o f c a p i t a l i t can a f f e c t t h e pace o f i n f l a t i o n .

18. At some p o i n t i n f l a t i o n looses i t s e f f e c t i v e n e s s as a

" c o u n t e r a c t i n g tendency" t o t h e LTGRPD and can no l o n g e r h e l p

t o meet the v a l o r i z a t i o n r e q u i r e m e n t s o f c a p i t a l o r check t h e

growth o f t h e i n d u s t r i a l r e s e r v e army. A t t h i s p o i n t i n f l a t i o n

becomes t r a n s f o r m e d from an a i d t o an o b s t a c l e f o r t h e

v a l o r i z a t i o n o f c a p i t a l . Thus you have t h e simultaneous and

unprecedented growth o f i n f l a t i o n accompanied by an i n c r e a s e d

amount o f unemployment. T h e r e f o r e t h e t h r u s t by t h e c a p i t a l i s t

s t a t e i s now b e i n g d i r e c t e d a t c o n t r o l l i n g i n f l a t i o n s i n c e i t s

growth t h r e a t e n s t h e expansion o f c a p i t a l . T h i s , however, i s

not w i t h o u t i t s c o n t r a d i c t i o n s as the e l i m i n a t i o n o f i n f l a t i o n

would r e s u l t i n a c a p i t a l i s t c a t a s t r o p h e . A d d i t i o n a l l y whereas
 41

i n f l a t i o n was b r o u g h t i n t o b e i n g t h r o u g h t h e dynamic o f t h e

c r e d i t c y c l e i t now serves as a brake f o r t h e expansion o f

b o t h c r e d i t and i n d u s t r y .
 42

FOOTNOTES

1 . Otto Bauer Die Teuerung; Eine B i n f u h r u n g i n d i e W i r t s c h a f t s p o l i t i k

der S o z i a l d e m o k r a t i e , p. 7 4

2 . Eugen Varga " G o l d p r o d u k t i o n und Teuerung" Die Neue Z e i t , 30

Jg, 1911/1912, I . Bd, p. 213

3 . I b i d , p. 2 1 3 . T r a n s l a t i o n from L a r s Mjoset The Debate on

G o l d p r o d u c t i o n and I n f l a t i o n W i t h i n A u s t r i a n and German S o c i a l
Democracy Before World War I , p . 3 ?

4 . M j o s e t , pp. 3-4
5 . Otto Bauer " G o l d p r o d u k t i o n und Teuerung" Die Neue Z e i t , 30 J g ,
I 9 U / I 9 I 2 , I I . Bd, p. 4 . T r a n s l a t i o n from M j o s e t , p. 4

6 . M j o s e t , pp. 4-6

7 . I b i d , pp. 6-7
8 . K a r l Kautsky The High Cost o f L i v i n g , p. 18

9. I b i d , p. 3 3
10. I b i d , p. 20

11. I b i d , P. 19

12. I b i d , P. 33

13. i b i d , pp. 84-85

14. I b i d , pp. 34-35

15. I b i d , p. 52
16. I b i d , pp. 2 2 - 2 3

17. I b i d , p. 23
18. I b i d , pp. 2 4 - 2 5

19. I b i d , pp. 25-26

20. I b i d , p. 90
2 1 . E r n e s t Mandel L a t e C a p i t a l i s m , pp. 425-426
 43

22. E r n e s t Mandel L a t e C a p i t a l i s m ; Bruno F r i t s c h Die Geld- und

K r e d i t t t h e o r i e von K a r l Marx; Suzanne De B r u n h o f f Marx on
Money; Duncan K. F o l e y Notes 'on Marx's Theory o f Money and
On Marx's General Theory o f Money.

23. B a r b a r a Bradby "The Value o f Gold. A note on M i c h a e l

W i l l i a m s ' Economics" B u l l e t i n o f t h e Conference o f S o c i a l i s t
Economists, V o l . V #2 (14) October 1976; M i c h a e l W i l l i a m s
"An A n a l y s i s o f South A f r i c a n C a p i t a l i s m - Neo-Ricardianism
o r Marxism" B u l l e t i n o f t h e Conference o f S o c i a l i s t Economists,
V o l . IV # 1 , February 1975; H. Wolpe " C a p i t a l i s m and Cheap
Labour Power i n South A f r i c a : from S e g r e g a t i o n t o A p a r t h e i d "
Economy and S o c i e t y , V o l . I , #4, 1972
24. M i c h a e l W i l l i a m s "An A n a l y s i s o f South A f r i c a n C a p i t a l i s m -
Neo-Ricardianism o r Marxism"
 44

BIBLIOGRAPHY

Bauer, O t t o Die Teuerung. E i n e Binhuhrung i n d i e W i r t s c h a f t s p o l i t i k

der S o z i a l d e m o k r a t i e , Wien, V e r l a g d e r Wiener Volksbuchhandlung
I g n a z Brand & Co., 1910

" G o l d p r o d u k t i o n und Teuerung" Die Neue Z e i t 30 Jg, 1 9 1 1 /

1912, I I Bd, pp. 4 - 1 4 , 4 9 - 5 3 , 246^24"?

Bradby, Barbara "The Value o f Gold, A Note on M i c h a e l W i l l i a m s '

Economics" B u l l e t i n o f t h e Conference o f S o c i a l i s t Economists,
V o l V # 2 ( 1 4 ) October 1 9 7 6 G ^ ^ f c ,
De B r u n h o f f , Suzanne Marx on Money, New York, U r i z e n Books, 1 9 7 3
Foley, Duncan K. Notes on Marx's Theory o f Money, u n p u b l i s h e d
manuscript

— On Marx's General Theory o f Money, u n p u b l i s h e d m a n u s c r i p t

F r i t s c h , Bruno Die Geld- und K r e d i t t h e o r i e von K a r l Marx,

F r a n k f u r t , Europaische V e r l a g s a n s t a l t , 1 9 6 8

H i l f e * ? d i n g , Rudolf Finance C a p i t a l , London, Routledge & Kegan

Paul, 1 9 8 1
J.v.G. " G o l d p r o d u k t i o n und Preisbeweung", Die Neue Z e i t , 30 J g ,
1911/1912, I Bd, pp. 6 6 0 - 6 6 4

Kautsky, K a r l The Economic D o c t r i n e s o f K a r l Marx, New York, The

M a c m i l l a n Company, 1 9 3 6 '•

" The High Cost o f L i v i n g , Chicago, Charles H. K e r r &

Company, 1 9 1 5
"Gold, P a p i e r , und Ware", Die Neue Z e i t , V o l . 3 0 / 3 1 ,
pp. 8 3 6 - 8 4 7 , 886-893

Mandel, E r n e s t L a t e C a p i t a l i s m , London, NLB, 1975

M j o s e t , L a r s The Debate on G o l d p r o d u c t i o n and I n f l a t i o n W i t h i n

A u s t r i a n and German S o c i a l Democracy Before World War I ,
unpublished manuscript

S p e c t a t o r "Zur Frage der G o l d p r o d u k t i o n und Teuerung" Die Neue

Z e i t , 30 J g , 1 9 1 1 / 1 9 1 2 , I I Bd, pp. 550-553
Varga, Eugen " G o l d p r o d u k t i o n und Teuerung" Die Neue Z e i t , 30 J g ,
1911/1912, I Bd, pp. 212-220
 I

45

W i l l i a m s , M i c h a e l "An A n a l y s i s o f South A f r i c a n C a p i t a l i s m -
Neo-Ricardianism o r Marxism" B u l l e t i n o f t h e Conference o f
S o c i a l i s t Economists, V o l . IV # 1 , February 1975

Wolpe, H. " C a p i t a l i s m and Cheap Labour Power i n South A f r i c a :

f r o m S e g r e g a t i o n t o A p a r t h e i d " , Economy and S o c i e t y , V o l . I ,
#4, 1972
New S c h o o l f o r S o c i a l R e s e a r c h
F a l l 1981 - Eco 208 S

L a r s Mjoset

THE DEBATE ON GOLDPRODUCTION AND INFLATION WITHIN AUSTRIAN AND

GERMAN SOCIAL DEMOCRACY BEFORE WORLD WAR I

A p r e s e n t a t i o n o f some u n t r a n s l a t e d texts.

The d e b a t e on g o l d p r o d u c t i o n and i n f l a t i o n d e v e l o p e d from p r a c t i c a l

c o n c e r n s about d e v e l o p i n g s o c i a l d e m o c r a t i c economic p o l i c i e s i n A u s t r i a
d u r i n g a p e r i o d of r a p i d i n f l a t i o n , i m m e d i a t e l y b e f o r e World War I .
(The d e b a t e r a n 1 9 1 0 - 1 2 ) .

The d e b a t e took o f f from a c h a p t e r i n O.Bauers book " I n f l a t i o n " ( 1 9 1 0 )

- w i t h t h e u n d e r t i t l e : "An I n t r o d u c t i o n t o t h e economic p o l i c i e s o f
t h e S o c i a l Democrats". The f i r s t p a r t o f t h e book a n a l y s e s s e v e r a l
c a u s e s o f i n f l a t i o n and one of t h e s e i s t h e d e c r e a s i n g v a l u e o f g o l d ,
due to t e c h n i c a l p r o g r e s s i n t h e g o l d - e x t r a c t i n g s e c t o r . (The o t h e r
c a u s e s d i s c u s s e d i n the book c a n be s e e n i n t h e t r a n s l a t i o n o f t h e
t a b l e o f c o n t e n t s i n BLaugc book, b e l o w ) . The book i s e v i d e n c e o f an
i n c r e a s i n g a w a r e n e s s - on t h e s i d e o f t h e s o c i a J . d e m o c r a t s - o f t h e
movements o f the r e a l w a g e (which a c c o r d i n g to Bauer was s i n k i n g ) . I t
was of c o u r s e of supreme i m p o r t a n c e t o t h e s o c i a l d e m o c r a t s t o d e f e a t
b o u r g e o i s t h e o r i e s i m p l y i n g t h a t g r o w t h of t h e wage-share was a c a u s e
of i n f l a t i o n .

B a u e r s d i s c u s s i o n o f g o l d p r o d u c t i o n was c r i t i s i z e d by t h e b o l s c h e v i k
E . V a r g a i n t h e t h e o r e t i c a l j o u r n a l o f t h e german S o c i a l Democracy,
D i e Neue Z e i t (The new t i m e s ) . A c c o r d i n g t o Varqa t e c h n i c a l p r o g r e s s
i n the g o l d p r o d u c t i o n d i d not i n f l u e n c e t h e p r i c e l e v e l , i t o n l y gene-
r a t e d i n c r e a s i n g d i f f e r e n t i a l r e n t s w i t h i n the goldmining s e c t o r .
( I n f a c t V a r g a (p.220) l a b e l e d B a u e r s t h e o r y " b o u r g e o i s " , b e c a u s e i t
t i e d i n f l a t i o n t o some f a r a w a y , u n c o n t r o l l a b l e , t e c h n i c a l , e x o t i c ,
s o u t h a f r i c a n c a u s e s . V a r g a o b v i o u s l y wanted t o p o i n t out more " l o c a l "
c a u s e s , b u t i n t h i s d e b a t e he n e v e r comes up w i t h h i s own a l t e r n a t i v e . )
Va'rga a l s o u s e d e m p i r i c a l d a t a t o s u p p o r t h i s argument.

Two head s o c i a l d e m o c r a t s , O t t o B a u e r and K a r j K a u t s k y , w r o t e a r t i c l e s

i n Die Neue Z e i t t o r e j e c t V a r g a s a n a l y s i s . Bauer t r i e d t o s p e c i f y
t h e mechanism whereby c h a n g e s i n t h e g o l d e x t r a c t i o n i n f l u e n c e d the r e s t
of the (world) economy, t h r o u g h e q u a l i z a t i o n of the r a t e s o f p r o f i t .
K a u t s k y s arguments seems t o be t h e o n l y p a r t of t h i s - d e b a t e a v a i l a b l e
i n e n g l i s h . (The book must, be a development o f h i s arguments i n t h e
a r t i c l e (s) he wrote i n t h i s d e b a t e ) . A p a r t from t h i s , Varga was a l s o
c r i t i s i z e d by t h e anonymous "J.v.G.". All 1 t h e s e r e j e c t i o n s d i d n o t
b r i n g i n much e m p i r i c a l e v i d e n c e , w h i l e a l a s t p a r t a k e r i n the d i s -
c u s s i o n ( " S p e c t a t o r " ) a g r e e d t h e o r e t . i c a . l l y w i t h the c r i t i c s , b u t
c l a i m e d t h a t under t h e p r e s e n t , h i s t o r i c a l c i r c u m s t a n c e s , V a r g a was
i n f a c t p a r t l y r i g h t . H i l f e r d i n g a l s o seems t o have been i n v o l v e d i n
t h e d e b a t e on V a r g a s s i d e , though n o t employing V a r g a s r e n t - a r g u m e n t .
 - 2 -

I n one way t h i s d e b a t e i s o l d f a s h i o n e d : many f e a t u r e s of t h e

l a b o u r t h e o r y of v a l u e t h a t we now see a s p r o b l e m a t i c , was t a k e n a s
g r a n t e d . On t h e o t h e r hand i t i s s u p e r i o r t o r e c e n t d e b a t e s on
v a l u e t h e o r y : i t r e v o l v e s around contemporary, p o l i t i c a l p r o b l e m s
( c o n c e r n i n g t h e s p e l l i n g o u t of a l t e r n a t i v e economic p o l i c i e s ) .
I t i s a l s o oldfashioned s i n c e i t takes the goldstandard-system as a
u n i v e r s a l n e c e s s i t y , but then again s u p e r i o r to r e c e n t debates,
s i n c e i t a c t u a l l y t a k e s up t h e problems o f money, g o l d , i n f l a t i o n ,
e t c . - w h e r e a s t h e s r a f f i a n c r i t i q u e of t h e l a b o u r t h e o r y of v a l u e
has l e d away from s u c h q u e s t i o n s .

S i n c e t h e Kautsky-book i s t h e o n l y one from t h i s d e b a t e t h a t i s

t r a n s l a t e d , I have c h o s e n t o g i v e a d e t a i l e d p r e s e n t a t i o n of o n l y the
n o n - t r a n s l a t e d a r t i c l e s . (And t h i s p r e s e n t a t i o n i s more d e t a i l e d t h a n
j u s t a twopage summary, b u t I suppose t h i s w i l l be t o l e r a t e d ) .

Bauer^ o r i g i n a l formulations

Bauer's arguments a r e m o s t l y g i v e n t h e form o f v e r b a l models. Most of

t h e t i m e he seems t o t h i n k o f one c o u n t r y ( n a t i o n s t a t e ) w i t h a g o l d -
e x t r a c t i n g s e c t o r , but i t i s o f t e n c l e a r t h a t he a l s o a p p l i e s t h i s
as an a n a l y s i s o f t h e w o r l d - m a r k e t s i t u a t i o n . A g o l d - s t a n d a r d - s y s t e m
i s presupposed: i n f o r e i g n trade everything i s paid d i r e c t l y i n gold,
in domestic c i r c u l a t i o n papermoney,etc. i s a l s o u s e d , b u t t h o s e can
a l l be exchanged w i t h g o l d . I n t h e i n f l u e n c e o f g o l d - p r o d u c t i o n on t h e
p r i c e l e v e l , Bauer s e e s t h e e s s e n c e of c a p i t a l i s m , a s Marx d e s c r i b e d
i t : "Money d e v e l o p s from s l a v e to m a s t e r . Out of a pure h e l p e r money
becomes t h e god of c o m m o d i t i e s . " (Marx, G r i t . o f . P o l . E c . , 1 8 5 9 ) .

S i n c e t h e p r i c e of a commodity i s i t s v a l u e - r e l a t i o n to g o l d , B a u e r finds
two c a u s e s of i n f l a t i o n r e l a t e d t o g o l d :

1. D e c r e a s i n g c o s t s i n t h e g o l d - e x t r a c t i o n s e c t o r s l o w e r s t h e v a l u e of
gold. That i s : i n c r e a s i n g p r o d u c t i v i t y , l e s s labourtime per u n i t gold.
A c c o r d i n g t o B a u e r t h i s w i l l a l s o d e c r e a s e t h e p r o d u c t i o n p r i c e of g o l d ,
and s i n c e g o l d and commodities a r e exchanged due to t h e p r o d u c t i o n p r i c e ,
t h i s means t h a t t h e p r i c e s o f p r o d u c t i o n of a l l o t h e r commodities w i l l
rise.

2. B e c a u s e o f t e c h n i c a l p r o g r e s s i n the g o l d - e x t r a c t i o n sector,
t h e s u r p l u s of mine-owners w i l l r i s e , and t h i s w i l l g e n e r a t e an e x c e s s
demand, p u l l i n g p r i c e s even f u r t h e r up.

E m p i r i c a l l y Bauer a l s o p o i n t s out t h a t t h e c o s t s o f g o l d - e x t r a c t i o n has

been s i n k i n g t h e l a t e s t y e a r s , p a r t l y due t o c h e a p e r l a b o u r : C h i n e s e
k u l i s , e t c imported t o s o u t h e - a f r i c a n g o l d - m i n e s . Bauer c o n c l u d e s :

The d e c l i n e o f e x t r a c t i o n c o s t s i n t h e s o u t h - a f r i c a n g o l d m i n e s
i s p r o b a b l y one of t h e c a u s e s of c o n t e m p o r a r y i n f l a t i o n . We must
today g i v e out more money f o r each commodity, b e c a u s e e v e r y p i e c e
of g o l d today c o n t a i n s l e s s s o c i a l l a b o u r t h a n b e f o r e . (1910, p . 3 9 f ) .

We s h o u l d a l s o note B a u e r s p o l i t i c a l c o n c l u s i o n s : ( i ) A s t r u g g l e f o r
i n d e x a t i o n of wages i s n e c e s s a r y , ( l i ) I n t e r n a t i o n a l s o l i d a r i t y i s
n e c e s s a r y ( i f t h e C h i n e s e k u l i s squeeze t h e c o s t s o f s o u t h - a f r i c a n
g o l d m i n e s , t h e n t h e e u r o p e a n p r i c e l e v e l would s i n k ? ? ) ( i i i ) I n f l a t i o n
 - 3 -

i s a consequence o f t h e a r b i t r a r y powers o f g o l d w i t h i n t h e
c a p i t a l i s t mode o f p r o d u c t i o n . Workers must u n d e r s t a n d t h a t o n l y
a s o c i a l i s a t i o n o f p r o d u c t i o n w i l l f r e e them from t h e s e a r b i t r a r y
powers.

Vargas c r i t i q u e o f Bauer

C o n t r a r y t o Bauer, V a r g a c l a i m s t o "prove t h a t c h a n g e s i n t h e g o l d -
e x t r a c t i o n c a n have no i n f l u e n c e on i n f l a t i o n " ( p . 2 1 3 ) .

V a r g a d i s c u s s e s two t h e o r i e s t h a t h o l d s t h e o p p o s i t e p o s i t i o n p o s i -
t i o n : (1) q u a n t i t y t h e o r y , and (2) p r o d u c t i o n c o s t t h e o r y (which i s
Bauers s o l u t i o n ) .

(1) The q u a n t i t y t h e o r y s a i s t h a t s i n c e t h e amount o f g o l d i n t h e

w o r l d h a s i n c r e a s e d e n o r m o u s l y t h e l a s t y e a r s , a l l commodities
exchange a g a i n s t a g r e a t e r amount o f g o l d t h a n b e f o r e . - T h i s i s
p e r h a p s r i g h t w i t h r e g a r d s t o papermoney n o t t i e d t o g o l d . B u t i f we
p r e s u p p o s e g o l d s t a n d a r d , t h e n t h e t h e o r y would o n l y be c o r r e c t i f we
have an a b s o l u t e e x c e s s o f g o l d , t h a t i s : t h e amount o f g o l d (minus
t h e amount used f o r i n d u s t r i a l p u r p o s e s ) grows a t a f a s t e r r a t e t h a n
the n a t i o n a l product. Varga a s s e r t s t h a t t h i s i s not the c a s e , i n
f a c t , h i s s u g g e s t i o n t h a t t h e r e ' s an a b s o l u t e l a c k o f g o l d ( t h a t i s :
e x c e s s demand f o r g o l d by t h e banks) i n t h i s r e s p e c t i s i m p o r t a n t
a l s o f o r h i s argument f u r t h e r on. ( T h i s a b s o l u t e l a c k i s t h e r e a s o n
why a p a r t o f t h e c i r c u l a t i o n i s a c c o m p l i s h e d by g o l d , t h e r e s t by
" g o l d s i g n s " l i k e cheques, b a n k n o t e s , e t c . - an i n c r e a s i n g amount o f
g o l d would t h e r e f o r e o n l y l o w e r t h e l a t t e r p a r t o f t h e means o f
circulation).

(2) The p r o d u c t i o n c o s t t h e o r y i s B a u e r s a p p r o a c h . Varga q u o t e s

B a u e r s c o n c l u s i o n (19.10,p. 3 9 f , quoted above, p . 2 ) . The p o i n t h e r e
i s t h a t even i f g o l d does n o t a c c o m p l i s h a l l c i r c u l a t i o n , t h e p r i c e s
w i l l r i s e (following t e c h n i c a l progress) s i n c e gold i s the " i d e a l
menas o f c a l c u l a t i o n " ( i d e e l l e s R e c h e n g e l d ) . V a r g a s r e a s o n s f o r n o t
a c c e p t i n g t h i s t h e o r y i s t h a t , c o n t r a r y t o Bauer, he v i e w s g o l d a s a
commodity y i e l d i n g r e n t . T h a t i s : g o l d f a l l s under t y p e B i n t h e
following c l a s s i f i c a t i o n :

A. F r e e l y r e p r o d u c i b l e c o m m o d i t i e s : p r o d u c t i o n c a n be i n c r e a s e d w i t h -
o u t i n c r e a s i n g p r o d u c t i o n c o s t s . P r i c e s a r e h e r e d e t e r m i n e d by s o c i a l l y
n e c e s s a r y labourtime. T e c h n i c a l p r o g r e s s i n such s e c t o r s w i l l d e c r e a s e
the marketprice.

B. Not f r e e l y r e p r o d u c i b l e - r e n t - y i e l d i n g - c o m m o c i t i e s : p r o d u c t i o n
c a n be i n c r e a s e d o n l y t h r o u g h i n c r e a s i n g p r o d u c t i o n c o s t s ( e . g . a g r i -
c u l t u r e , w i t h a b s o l u t e shortage of s o i l ) . P r i c e s here a r e determined
by p r o d u c t i o n c o s t s i n t h e l e a s t - y i e l d i n g f i e l d s o f p r o d u c t i o n ( w i t h
r e s p e c t t o g o l d p r o d u c t i o n : t h e p o o r e s t m i n e s ) t h a t c a n be c o m m e r c i a l -
l y u t i l i s e d . S i n c e we're t a l k i n g about t h e p r o d u c t i o n of t h e g e n e r a l
e q u i v a l e n t , t h e maximum p r o d u c t i o n c o s t s o f 1 o z . g o l d i s 1 o z . c o i n e d
g o l d . I f you e s t a b l i s h y o u r s e l f i n g o l d - e x t r a c t i o n and your mine y i e l d s
1 o z . g o l d w i t h p r o d u c t i o n c o s t s l e s s than t h i s , t h e n your mine i s n o t
t h e p o o r e s t and you r e c e i v e a d i f f e r e n t i a l r e n t . The p r o d u c t i o n c o s t s
 - 4 -

o f a mine i s p r i m a r i l y dependent on t h e g o l d - c o n t e n t of t h e o r e ,
as w e l l a s on t h e d e p t h o f t h e mine. (Varga g i v e s e m p i r i c a l e v i d e n c e
o f t h i s , p. 2 1 8 ) . T h e s e p r o d u c t i o n - c o n d i t i o n s d i f f e r e x t r e m e l y
from mine t o mine, t h a t i s : u n d e r n e a t h t h e maximum c o s t s t h e r e i s
no s y s t e m a t i c v a r i a t i o n of c o s t s . Now Varga a r g u e s t h a t t e c h n i c a l
p r o g r e s s w i l l not a f f e c t t h e g o l d p r o d u c e d under p o o r e s t c o n d i t i o n s /
T h e r e f o r e , t h e o n l y c o n s e q u e n c e o f s u c h p r o g r e s s i s an i n c r e a s e i n
t h e d i f f e r e n t i a l r e n t o f some o f t h e mine-owners. The r e g u l a t i n g
p r i c e of g o l d r e m a i n s t h e same (1 o z . c o i n e d g o l d i n v e s t e d must g i v e
a r e t u r n w o r t h a t l e a s t t h e same, i . e . 1 oz. g o l d ) . With t e c h n i c a l
p r o g r e s s i t c o u l d t h e n happen t h a t e v e n p o o r e r m i n e s would be
u t i l i s e d . But t h i s o n l y means t h a t t h e former p o o r e s t mine now
would r e c e i v e some k i n d of d i f f e r e n t i a l r e n t . The r e g u l a t i n g p r i c e of
g o l d would o n l y s i n k i f t o o much g o l d was e x t r a c t e d , i t would t h e n
i n c r e a s e and t h e p o o r e s t mines would be c l o s e d down. But - a s we
a l r e a d y h a v e noted - V a r g a s u g g e s t s t h a t e m p i r i c a l l y t h e r e e x i s t s
an e x c e s s demand f o r g o l d . T h e r e f o r e t h e r e i s - i n c o n t r a s t t o
f r e e l y r e p r o d u c i b l e goods - no c o m p e t i t i o n i n t h e g o l d p r o d u c t i o n .
Gold produced a t l o w e r c o s t s d o e s n ' t p u s h t h e p r i c e down, i t y i e l d s
t h e same r e g u l a t i n g p r i c e , g i v i n g t h e mine owner and/or c a p i t a l i s t
i n c r e a s i n g e x t r a p r o f i t i n t h e form of d i f f e r e n t i a l r e n t .

V a r g a p o i n t s out t h a t B a u e r seems t o have r e c o g n i s e d t h i s , s i n c e

he a s a second c a u s e m e n t i o n e s t h e i n c r e a s i n g income and demand
form m i n e - o w n e r s , e t c . ( t h e r e b y p r e s u p p o s i n g a c o n s t a n t £>rice of
g o l d ) . But a g a i n s t t h i s V a r g a p o i n t s t o t h e f o l l o w i n g arguments:
( i ) T h i s new demand i a p r i m a r i l y d i r e c t e d t o l u x u r y p r o d u c t s ,
( i i ) or t o w a r d s i n v e s t m e n t - g o o d s , t h e r e f o r e wagegoods would be un-
a f f e c t e d , ( i i i ) G o l d m i n i n g - c a p i t a l s a r e a d e c r e a s i n g percentage of
c a p i t a l i s t s on t h e w o r l d s c a l e . - T h e r e f o r e the o n l y e l e m e n t i n B a u e r s
t h e o r y t h a t was t h e o r e t i c a l l y p l a u s i b l e , i s not. e m p i r i c a l l y sound.
V a r g a s c o n c l u s i o n : "Changes i n g o l d p r o d u c t i o n i s n o t t h e c a u s e o f
i n f l a t i o n " (p. 2 2 0 ) .

Bauer's r e p l y to critics

F i r s t B a u e r m e n t i o n s t h a t he a c c e p t s K a u t s k y s r e j e c t i o n of H i l f e r d i n g s
arguments.

As a r e p l y t o Varga, Bauer p o i n t s o u t t h a t i t i s n e c e s s a r y t o d e f i n e
more p r e c i s e l y t h e s o c i a l mechanism t h r o u g h which t h e "law of p r i c e s "
m a n i f e s t s i t s e l f . T h a t i s " i n what way the s i n k i n g v a l u e o f g o l d
results in inflation (p. 4 ) .

D e c r e a s i n g c o s t s of p r o d u c t i o n - g e n e r a l c a s e . - B a u e r f i r s t l i k e s to
remind us about t h e mechanism t h r o u g h w h i c h p r i c e s a r e adapted t o new
p r o d u c t i o n - c o s t s , w i t h i n commodity-production i n g e n e r a l ( a b s t r a c t i n g
from g o l d p r o d u c t i o n ) .

B a u e r s e t s up a ( v e r b a l ) model w i t h an i n d u s t r i a l s e c t o r and an a g r a -
r i a n s e c t o r , b o t h b a s e d on c a p i t a l i s t p r i n c i p l e s . I n i t i a l l y the r a t e
of p r o f i t (from now on r , r e s p e c t i v e l y r ^ and r ) a r = r j _ = r = 15%. S e c t o r I
a

now i n t r o d u c e m a c h i n e r y , t h e c o s t s of p r o d u c t i o n t h e n s i n k s by 10%.
 - 5 -

I f p r i c e s remain unchanged, t h i s g i v e s us r^=27,7%, r = 15%. Through a

c o m p e t i t i o n w i t h i n s e c t o r I , r ^ i s r e d u c e d to rj_= 21%. B a u e r t h e n
l o o k s a t t h e d i s t r i b u t i o n o f i n v e s t m e n t s . B e f o r e the i n t r o d u c t i o n of
m a c h i n e r y , s e c t o r A a b s o r b e d 30%, s e c t o r I 40% o f t o t a l i n v e s t m e n t s .
A f t e r t h e y absorb r e s p e c t i v e l - 25% (A) and 45% (JEl ~ s i n c e r j _ , > r . a

T h a t i s : c a p i t a l f l o w s i n t o s e c t o r I , but t h i s g i v e s an e x c e s s s u p p l y
i n s e c t o r I , t h e r e f o r e r j _ s e t t l e s a t r ^ = 16%. S i n c e t h i s change i n t h e
f l o w of i n v e s t m e n t s a l s o g e n e r a t e s e x c e s s demand i n a g r i c u l t u r e , r a

jumps up t o r = 16%. a

Now the f i n a l l e v e l o f t h e r a t e of p r o f i t depends on s e v e r a l f a c t o r s

(and t h i s i s n ' t t h a t i m p o r t a n t t o B a u e r s a r g u m e n t ) : t h e i n f l u e n c e of
a s m a l l e r r e s e r v e army and i n c r e a s i n g c o s t s of raw m a t e r i a l s . - Bauer
g i v e s t h e f o l l o w i n g s y s t e m a t i c a c c o u n t of t h e whole j j r o c e s s :

Stage Indu s t r y Agriculture

I S h a r e of t o t a l capital 40 % 30
r r^ = 15% 153

II Production costs Lowered Constant

r r ± = 27,7% r a = 15%

III Competition Increasing Decreasing

r r . = 21% r a = 15%
1
IV Change i n t h e s h a r e of 40%+5%=45% 30%-5%=25%
total capital (increasing) (decreasing)

V Change i n 4e»e«d $oppkj Increasing, Decreasing

P r i c e s sink Prices increase

r. =16% 16%
l

A c c o r d i n g to Bauer ( r e f e r i n g t o Bauer 1010,p.13-18, where t h i s i s

counted a s another cause of i n f l a t i o n ) t h i s r e f l e c t s a r e a l p r o c e s s :
a g r a r i a n p r o d u c t i o n h a s s t a y e d b e h i n d i n r e c e n t aconomic development,
i n d u s t r y has grown f a s t e r t h a n a g r a r i a n p r o d u c t i o n .

D e c r e a s i n g c o s t s i n one i n d u s t r y seem to i n c r e a s e p r i c e s g e n e r a l l y
(Bauer r e f e r s t o Marx, Das K a p i t a l , V o l . I l l , p.199 f f and Marx,
T h e o r i e n , v o l . 1 1 , 2, 38-40, b o t h : o l d e d i t i o n s ) . From the d i s c u s s i o n
above B a u e r c o n c l u d e s t h a t t h e f o l l o w i n g h o l d s f o r a l l c o m m o d i t i e s :

1. D e c r e a s i n g c o s t s ( i n i n d u s t r y ' A) c h a n g e s the d i s t r i b u t i o n o f c a p i -
t a l on d i f f e r e n t b r a c h e s (or s e c t o r s ) .
2. D e m a n d / s u p p l y - r e l a t i o n s a r e changed. The s u p p l y of commodities A
i n c r e a s e s , t h e s u p p l y o f a l l o t h e r commodities d e c r e a s e s .
3. The p r i c e s of commodity A s i n k s , a l l o t h e r p r i c e s r i s e .

T h i s p r o c e s s i s i n f a c t t h e r e d u c t i o n of m a r k e t p r i c e s to p r i c e s of
p r o d u c t i o n v i a d e m a n d / s u p p l y - f l u c t u a t i o n s . F u r t h e r on Bauer w i l l
i n v e s t i g a t e whether t h i s a l s o h o l d s f o r goJLd. But a l r e a d y a t t h i s s t a g e
of h i s argument, he c l a i m s t o be a b l e t o p o i n t out the main f l a w o f
V a r g a s argument. V a r g a a c c u s e d Bauer of b e l i e v i n g t h a t d e c r e a s i n g
 - 6 -

p r o d u c t i o n c o s t s a u t o m a t i c a l l y determines the i n c r e a s e i n p r i c e s .
But as Bauer h a s shown i t i s n o t so s i m p l e : d e c r e a s i n g c o s t s i n f l u e n c e
p r i c e s o n l y t h r o u g h c h a n g e s i n t h e r e l a t i o n between s u p p l y and demand,
g e n e r a t e d t h r o u g h t h e r e d i s t r i b u t i o n o f s o c i a l c a p i t a l (p. 8 f ) . Varga
doesn't understand t h a t t h i s i s a q u e s t i o n of the "mediating l i n k s "
( Z w i s c h e n g l i e d e r ) . So t h e a n s w e r t o the q u e s t i o n o f the i n f l u e n c e o f g o l d -
e x t r a c t i o n c a n o n l y be f o u n d t h r o u g h an a n a l y s i s o f t h e c h a n g i n g r e l a -
t i o n s o f s u p p l y and demand, g e n e r a t e d by t h e c o s t d e c r e a s e i n g o l d -
extraction/

The c a s e f o r g o l d - e x t r a c t i o n . The p o o r e s t goldmine y i e l d s g o l d w o r t h

1 150 000 mark, w i t h t o t a l c o s t s o f 1 000 000 mark. R a t e o f p r o f i t
i s r g = 15%. (As a r e s u l t o f V a r g a s c r i t i q u e , Bauer h e r e t a k e s
d i f f e r e n t i a l r e n t i n t o a c c o u n t : the mine h e r e d e s c r i b e d g e t a d i f -
f e r e n t i a l r e n t , i . e . i t y i e l d s a s u r p l u s p r o d u c t w o r t h more t h a n
150 000 m a r k ) . Then a new machine i s i n t r o d u c e d , more p r o d u c t i v e
b u t w i t h t h e same c o s t s : t h e mine now produce 1 300 000 mark ( i n g o l d ) .
r g goes up to Vg=30%. T h e r e f o r e a f l o w of c a p i t a l i s d i r e c t e d i n t o
g o l d - e x t r a c t i o n . T h i s r e s u l t s i n u t i l i s a t i o n o f even p o o r e r m i n e s .

Whereas b e f o r e 1% o f t o t a l c a p i t a l was employed i n g o l d - e x t r a c t i o n ,

now 2% i s . The d i s t r i b u t i o n o f c a p i t a l s between t h e 2 b r a n c h e s has
changed. What a r e t h e e f f e c t s on commodity m a r k e t s ? Demand has i n c r e a s e d
(from m i n e o w n e r s , r e n t i e r s , e t c . ! ) . Supply h a s a l s o i n c r e a s e d , b u t s l o w e r
t h a n i t would have done i f t h e r e had been no t e c h n i c a l p r o g r e s s i n
g o l d - e x t r a c t i o n . The G - s e c t o r h a s o c c u p i e d a p a r t o f t h e a c c u m u l a t i o n -
fund ( p . 1 0 ) . " T h e r e f o r e , t h e s u p p l y o f commodities h a s i n c r e a s e d a t
a s l o w e r r a t e t h a n i t w o u l d h a v e , w i t h o u t t e c h n i c a l development i n
t h e g o l d - p r o d u c t i o n " . - T h i s i s t h e f i r s t p h a s e of t h e p r o c e s s : i n c r e a s i n g
demand and d e c r e a s i n g s u p p l y g e n e r a t e s i n f l a t i o n , t h e r e b y a l s o i n c r e a s i n g
the r a t e of p r o f i t .

T h i s b r i n g s up t h e d i f f e r e n c e t h a t Bauer seems to f i n d between the

i n f l u e n c e of t e c h n i c a l p r o g r e s s i n g o l d - e x t r a c t i o n a s opposed t o com-
modity p r o d u c t i o n i n g e n e r a l . I n t h e g e n e r a l model w i t h A- and I - s e c t o r ,
a d e c r e a s e i n c o s t s l o w e r s I - p r i c e s and c a u s e s A - p r i c e s t o r i s e , b e c a u s e
o f the change i n d i s t r i b u t i o n o f c a p i t a l t o w a r d s t h e s e two s e c t o r s . I n
t h e g o l d - e x t r a c t i o n - m o d e l , on t h e o t h e r hand, a l l p r i c e s r i s e , and - t h i s
i s c r u c i a l t o B a u e r s argument - h e r e t h e r e ' s n o t j u s t a change i n t h e
d i s t r i b u t i o n o f c a p i t a l w i t h i n t h e s p h e r e of c o m m o d i t y - p r o d u c t i o n , b u t
now " t h e s h a r e o f t o t a l c o m m o d i t y - p r o d u c t i o n o u t o f t o t a l c a p i t a l h a s
d e c r e a s e d " ( p . 1 1 ) . ( J u s t a s h o r t note f o r d i s c u s s i o n h e r e : D i d n ' t Bauer
s t a t e t h a t gold takes p a r t i n the p r o f i t - r a t e - e q u a l i z a t i o n j u s t l i k e
any o t h e r commodity? How c a n he now argue t h a t g o l d p r o d u c t i o n i s n o t a
p a r t of c o m m o d i t y - p r o d u c t i o n ? )

Now, t h e p r o c e s s goes f u r t h e r : I n c r e a s i n g r a t e o f p r o f i t g e n e r a t e s
p r o s p e r i t y . The t u r n o v e r - r a t e i s lowered ( t h e s h a r e of p r o d u c t i o n i n
t o t a l t u r n o v e r - t i m e i s i n c r e a s e d , p . 1 1 ) . Demand f o r w o r k e r s and c a p i -
t a l goods i n c r e a s e . C a p i t a l hunger f o r more c r e d i t and t h i s i s p o s s i b l e
t o get s i n c e g o l d p r o d u c t i o n h a s i n c r e a s e d . The amount o f a c c u m u l a t e d
s u r p l u s - v a l u e h a s i n c r e a s e d . The f o l l o w i n g two f a c t o r s t h e n c o n t r i b u t e
t o i n f l a t i o n : (a) I n c r e a s i n g c r e d i t lower t h e r a t e o f i n t e r e s t . T h i s
s t i m u l a t e s a c t i v i t y i n t h e c o n s t r u c t i o n s e c t o r , t h e s t a t e and t h e l o c a l
governments ( p . 1 1 ) . (b) F a s t e r a c c u m u l a t i o n o f s u r p l u s - v a l u e : e x p a n s i o n
 - 7 -

o f a l l b r a n c h e s o f p r o d u c t i o n : i n c r e a s i n g demand, f o r labourpower,
c o n s u m t i o n goods, d i m i n i s h i n g r e s e r v e - a r m y . Workers have t h e o p p o r t u -
n i t y t o s t r u g g l e f o r h i g h e r wages. S e c t i o n s w i t h low o r g a n i c c o m p e t i t i o n
o f c a p i t a l (c/v) i s h i t harder than those w i t h a high composition
( c / v ) ^ . More new c a p i t a l ( t h a n b e f o r e ) now f l o w s t o ( c / v ) - ^ . T o t a l ( c / v )
t h e r e f o r e i n c r e a s e s . P r i c e s of ( c / v ) - ^ - i n d u s t r i e s r i s e a t a f a s t e r r a t e
than ( c / v ) ^ - i n d u s t r i e s .

A c c o r d i n g t o B a u e r i n f l a t i o n i n c r e a s e s the r a t e of p r o f i t , b u t i t a l s o
p r o d u c e s " c o u n t e r a c t i n g t e n d e n c i e s " , l i k e ( i ) i n c r e a s e i n t h e p r i c e of
raw m a t e r i a l s , ( i i ) r i s i n g ( c / v ) ( a s a l r e a d y m e n t i o n e d ) . T h i s s e t s a
l i m i t t o t h e i n c r e a s e o f r . (But a s B a u e r n o t e s (p.13) w o r k e r s w i l l n o t
g e n e r a l l y manage t o f u l l y p r o t e c t t h e i r r e a l w a g e s a g a i n s t i n f l a t i o n ,
t h i s i s t h e r e f o r e no c o u n t e r a c t i n g t e n d e n c y . )

But c o s t s i n g o l d e x t r a c t i o n h a s now i n c r e a s e d b e c a u s e of more e x p e n s i v e

means of p r o d u c t i o n and l a b o u r p o w e r . A l s o : p o o r e r mines a r e now u t i l i s e d .
C o n t r a r y t o i n o t h e r i n d u s t r i e s , r h a s d e c r e a s e d . The g o l d - s e c t o r no
g

l o n g e r r e c e i v e s an e x t r a - p r o f i t . "The e q u a l i z a t i o n of p r o f i t - r a t e s i s
completed." ( p . 1 2 ) .

T e c h n i c a l progress i n goldproduction d i d r i s e the r a t e of p r o f i t

i n t h e g o l d m i n e s above t h e a v e r a g e r a t e of p r o f i t . Such a d i s p a r i t y
i s not t o l e r a t e d i n t h e p r o c e s s of c o m p e t i t i o n between c a p i t a l i s t s .
C o m p e t i t i o n l e a d s t o a new d i s t r i b u t i o n of c a p i t a l , w h i c h a g a i n
e q u a l i z e s t h e r a t e s o f p r o f i t , a s i t on t h e one hand i n c r e a s e s t h e
r a t e of p r o f i t s i n commodity-production ( s i n c e i t i n c r e a s e s p r i c e s ) ,
and on t h e o t h e r hand d e c r e a s e s t h e r a t e o f p r o f i t i n g o l d p r o d u c t i o n
( s i n c e i t i n c r e a s e s c o s t s of p r o d u c t i o n ) . The r e s u l t of t h i s
p r o c e s s i s t h a t g o l d a g a i n i s exchanged w i t h commodities i n r e l a t i o n
t o p r i c e s o f p r o d u c t i o n , t h a t i s , i n s u c h a way, t h a t g o l d p r o d u c t i o n
a g a i n g e t s t h e same s h a r e o f s o c i a l s u r p l u s - v a l u e (per u n i t c a p i t a l )
a s a l l o t h e r commodityproducers g e t s . T h i s e g u a l i z a t i o n of p r o f i t -
r a t e s was g e n e r a t e d through t h e i n c r e a s e i n c o m m o d i t y - p r i c e s . ( p . 1 2 f ) .

At t h i s s t a g e of h i s r e p l y , B a u e r r i s e s h i s main o b j e c t i o n s a g a i n s t
Varga:

Varga i s r i g h t saying that s i n c e t e c h n i c a l progress i n g o l d e x t r a c t i o n r e -

s u l t s i n u t i l i s a t i o n of poorer mines, the p r i c e - r e g u l a t i n g c o s t s of
g o l d remain t h e same: But, s a i s B a u e r , one must s t u d y how t h i s comes
about, one s h o y l d not j u s t s t a t e t h e f i n a l r e s u l t . The main f l a w i n
V a r g a s argument i s h i s u n d i f f e r e n t i a t e d a s s e r t i o n o f no c o m p e t i t i o n i n
t h e g o l d i n d u s t r y . One has t o d i s t i n g u i s h between c o m p e t i t i o n w i t h i n a
s e c t o r ( t h e r e d u c t i o n o f i n d i v i d u a l p r i c e s t o a common m a r k e t - p r i c e ) ,
and c o m p e t i t i o n between s e c t o r s ( t h e b u i l d i n g of p r o d u c t i o n p r i c e s , c o n -
t a i n i n g a g e n e r a l r a t e of p r o f i t f o r a l l s e c t o r s ) . With r e s p e c t t o t h e
former, i t i s c o r r e c t t h a t t h e r e ' s no c o m p e t i t i o n i n the G-sector,
b u t t h i s i s not r i g h t w i t h r e s p e c t t o t h e l a t t e r . T h e r e ' s no r e s t r i c t i o n s
on c a p i t a l f l o w s t o t h e g o l d - s e c t o r , i f t h i s shows a t e m p o r a r i l y h i g h e r
r a t e of p r o f i t . The law of a v e r a g e r a t e o f p r o d u c t i o n i s v a l i d a l s o
f o r the g o l d - s e c t o r . Therefore s i n k i n g c o s t s i n gold-production g e n e r a t e s
a change i n t h e e x c h a n g e - r e l a t i o n between g o l d and commodities ( i . e .
i n f l a t i o n ) , u n t i l l the r a t e s of p r o f i t are again e q u a l i z e d .

I n a second p a r t o f t h e a r t i c l e B a u e r d i s c u s s e s H i l f e r d i n g s a s s e r t i o n s .
The f l a w i n H i l f e r d i n g s argument c a n - a c c o r d i n g t o Bauer - be t r a c e d
 - 8 -

-back t o h i s p o l e m i c a g a i n s t t h e q u a n t i t y t h e o r y o f money. T h i s t h e o r y
s a i s t h a t p r i c e s a r e d e t e r m i n e by t h e amount o f c i r c u l a t i n g money.
Against t h i s H i l f e r d i n g points out that t h e money i s t a k e n o u t o f
c i r c u l a t i o n by b a n k s . T h i s l e a d s H i l f e d r i n g t o b e l i e v e t h a t o n l y an
i n c r e a s i n g amaount o f c i r c u l a t i n g money c a n r i s e p r i c e s . C o n t r a r y t o
t h i s Bauer t a k e s t h e s p h e r e o f p r o d u c t i o n a s h i s p o i n t - o f - d e p a r t u r e :
We deduce i n c r e a s i n g p r i c e s n o t from t h e r e l a t i o n between
c i r c u l a t i n g money and e x c h a n g e a b l e commodities, b u t from t h e
d i s t r i b u t i o n o f c a p i t a l on g o l d - p r o d u c t i o n and c o m m o d i t y - p r o d u c t i o n .
We r e l i e n o t on t h e q u a n t i t y t h e o r y , b u t on t h e l a w o f e q u a l i -
z a t i o n o f r a t e s o f p r o f i t . We t h e r e f o r e do n o t p r e s u p p o s e i n c r e a -
s e d c i r c u l a t i o n o f money, ( p . 5 1 ) .

A g a i n s t t h i s H i l f e r d i n g seems t o a s s e r t t h a t t h e G - s e c t o r does n o t t a k e
p a r t i n t h e e q u a l i z a t i o n o f r a t e s o f p r o f i t , and t h a t i t t h e r e f o r e
receives absolute rent.

But a c c o r d i n g t o Bauer t h i s i s t h e c a s e o n l y f o r b r a n c h e s o f p r o d u c t i o n
t h a t d o e s n o t a t t r a c t new c a p i t a l s , even when t h e r e a r e p o s s i b i l i t i e s
of e x t r a - p r o f i t s , ( e . g . a b s o l u t e s c a r c i t y o f t i l l a b l e s o i l ) .

H i l f e r d i n g p o i n t s t o t h e f a c t t h a t t h e amount and v a l u e o f c i r c u l a t i n g
money i s d e t e r m i n e d by s o c i a l c i r c u l a t i o n v a l u e ("die Menge d e s umlau-
fenden G e l d e s , a l s o auch d e r Wert d i e s e r Menge, d u r c h den g e s e l l s c h a f t -
l i c h e n Z i r c u l a t i o n s w e r t bestimmt i s t " , p . 5 1 ) . B u t t h i s p r e s u p p o s e s , s a i s
Bauer, c o n s t a n t v a l u e o f a u n i t money, But i f t h i s v a l u e s i n k s , we
need more money t o a c c o m p l i s h t h e c i r c u l a t i o n , even i f t h e c r e d i t system
i s improved and t u r n o v e r s h o r t e n e d .

T h i s i s an a p p e a r a n c e o f t h e f a c t t h a t t h e p r i c e s i s n o t a s i m p l e
r e f l e c t i o n o f t h e v a l u e o f commodities, b u t t h e m i r r o r i n g o f t h e
commodity-value i n t h e v a l u e o f g o l d . I f t h e m i r r o r c h a n g e s , t h e n
so a l s o the p i c t u r e i n t h e m i r r o r ( p . 5 1 ) .

E m p i r i c a l l y , Bauer f i n d s i t d i f f i c u l t t o d e c i d e whether t h i s i n f l u e n c e
i s r e a l l y w o r k i n g . He c a n n o t a c c e p t V a r g a s e m p i r i c a l a c c o u n t . To s t u d y
t h e i n f l u e n c e o f t h e g o l d - s e c t o r , one would have t o l o o k a t a l l t h e
i n d u s t r i e s p r o d u c i n g i n p u t s t o t h i s i n d u s t r y , and s t u d y t h e d e g r e e
to w h i c h t h e s e h a v e been d i r e c t e d away from commodity-production i n t o
g o l d - p r o d u c t i o n . The l a b o u r a l l o c a t e d t o t h e s e i n d u s t r i e s , i s f a u x
f r a i s of c a p i t a l i s t production: production of exchange-values, not
u s e v a l u e s . I n f l a t i o n l e t s us pay f o r t h i s :

The g r e a t e r amount o f s o c i a l labour a l l o c a t e d to g o l d - e x t r a c t i o n ,

t h e more s e v e r e ( d r u c k e n d e r ) i s i n f l a t i o n , (p. 5 2 ) .

P o l i t i c a l consequences:
- t h e r e ' s no ne#d f o r t a r i f f s p r o t e c t i n g a g r a r i a n p r o d u c t i o n ( i n A u s t r i a ) ,
s i n c e a g r a r i a n p r i c e s on t h e w o r l d - m a r k e t now i n c r e a s e .
- s t r u g g l e a g a i n s t i m p e r i a l i s m : goldhunger i s one o f t h e r o o t s o f impe-
rialism.
- s o c i a l i s t s should p o i n t out t h a t i n f l a t i o n proves t h a t t h e masses
a r e " s l a v e s of t h e g o l d " .
- c a p i t a l i s t s u s e g o l d p r o d u c t i o n a s one o f many means t o c u t r e a l w a g e s .
 REFERENCES

O t t o Bauer, Die Teuerung. Eine EinfUhrung i n d i e W i r t s c h a f t s p o l i t i k

der S o z i a l d e m o k r a t i e , Wien 1910, 100 p, esp. pp. 37-44.
( I n f l a t i o n . An i n t r o d u c t i o n t o t h e economic p o l i c i e s o f t h e
s o c i a l democracy).

Eugen Varga, " G o l d p r o d u k t i o n und Teuerung", Die Neue Z e i t ,

30 Jg, 1911/12, I.Bd, p.212-220. ( G o l d p r o d u c t i o n and I n f l a t i o n )

J.v.G, " G o l d p r o d u k t i o n und Preisbeweung", I b i d , p.660-4

( G o l d p r o d u c t i o n and movement o f p r i c e s ) .

O t t o Bauer, " G o l d p r o d u k t i o n und Teuerung", Neue Z e i t ,

30 Jg, 1911/12, 2.bd, p.4-14, 49-53 (246-7).

S p e c t a t o r , "Zur Frage der G o l d p r o d u k t i o n und Teuerung", 212-220, Ibid.

K a r l Kautsky, The High Cost o f L i v i n g , Changes i n t h e G o l d p r o d u c t i o n

and t h e r i s e o f p r i c e s , Chicago: C.H.Kerr f? Co, 1915 (german e d i t i o n
1913??)

Contents o f Bauers book, The Inflation...

Vorwort (Introduction)
l . p a r t : The i n t e r n a t i o n a l causes o f i n f l a t i o n
1. The development o f t h e p r o d u c t i v e f o r c e s 5
2. The Anarchy o f p r o d u c t i o n 12
3. The o r g a n i s a t i o n o f p r o d u c e r s IS
4. Trade and S p e c u l a t i o n 27
5. Money 37
6. I n f l a t i o n i n th& w o r l d economy 41

2. p a r t : S t a t e i n t e r v e n t i o n i n t h e movement o f p r i c e s
7. The i n t e r n a t i o n a l exchange o f commodities 45
8. The t o o l s o f economic p o l i c y 49
9. T a r i f f s and trade-agreements 55
10.Industry-tariffs 60
11.Agrarian T a r i f f s 81
12.Inflation i n Austria 91

3. p a r t : The Working Class and Inflation

13. Wages and commodityprices 87
14. The s t r u g g l e ' a g a i n s t i n f l a t i o n 94