You may have noticed in the press or on TV that the price of gold has been rocketing up, and now stands at prices last seen 25 years ago. When the price of gold moves up sharply like this, it is an indication tht deep within the bowels of the capitalist economy something is stirring, and its usually not something good. The last time gold rocketed like this, for example, coincided with the high inflation of the 1970's, and the onset of the worst crisis since the end of the second world war, the slump of 1974-5. That slump and inflation continued until the beginning of the 1980's when the crisis of capitalism was resolved in the interest of capital and at the expense of labour by the class war politics of Thatcher and Reagan, which smashed labour organisation in order to drive down wages and conditions in order to push up profits. From 1982 until 2000 Stock Markets entered a long secular bull market on the back of that victory for Capital. At the same time Gold went into a steady decline, having reached a peak of over $800 an ounce it fell to a low point of $250 an ounce in 1999. From that point it has more than doubled, whilst Stock Markets have crashed and then stagnated. Gold's rise is most marked in terms of its dollar price, and as I will try to explain this is largely the explanation behind what is going on, but in the last year or so the price of gold has risen in sterling and euro terms too, by around 30%. What then is going on.

In order to explain it you need to understand something about the nature of what money is, and gold's specific role. I am giving a more detailed account of Marx's Theory of Money in a separate post below, but for now let me try to give the very short version.

Marx explains that the exchange value of commodities is determined by the amount of labour required on average for their production. On this basis you can work out that if a pair of shoes contains 10 hours of labour, whereeas a coat contains 20 hours of labour then 1 coat will exchange for 2 pairs of shoes. In a society where people barter this is fine. If you have a coat to exchange and want shoes you find someone who has shoes and wants a coat. But this is cumbersome. The more people trade the more a better solution is needed. Hence money. If you can find a commodity that everybody wants, which everyone will accept because they can use it to buy other things they want then you can price all commodities in this one commodity. For example, at one point when salt was very valuable salt acted as money. But most societies have used precious metals because, using Marx's method of determining value they tend to be very valuable because it takes a lot of labour to find them, establishing mines, get them out of the ground, smelt them etc. They are also durable, and capable of being divided up into various weights that can be used to denominate different amounts of value. Hence, gold, copper and silver have tended to be the most commonly used metals - copper for lower denominations, silver for more intermediate values, and gold for the most expensive purchases. Of these gold as the most valuable became predominant, and the values of silver and copper coins became functions of the value of gold.

For a long time actual coins made from these metals were used as money. This had many drawbacks. Gold smiths and usurers werre the most common possessors of gold hoards, and they would charge a premium over the value of their gold in order to release it to be minted into coins. Moreover, gold coins could be "clipped" in other words people would snip bits of the coin in order to accumulate gold whilst using the coin at its full value to buy things. Government's too in issuing coins could issue coins which had a face value equivalent say to a quarter of an ounce of gold (for a sovereign), but which actually contained less than that. In addition as trade increased rapidly during the 19th century using physical money was cumbersome. Capitalsist began to use instead Bills of exchange in their internal dealing with one another. For example if A sells £1,000 worth of cotton to B then rather than requiring B to give him £1,000 of gold currency straight away a Bill of exchange is raised. This is like an IOU which states that B owes A £1,000. A can use this Bill to purchase goods from C, by simply passing it to C so that B now owes the money to C not A. Quickly, Discount Houses arose that would accept these Bills and pay the owner of them money up front, in return for a discount. These became Merchant Banks. It is a small step from there to replace the actual mettalic currency in its higher denominations with the logical extensions of these Bills, paper money. All that this paper money does is to promise to pay the bearer a sum of gold. If this paper money is then issued by someone whose authority guarantees that this gold can be handed over - for example - the State - then this paper money becomes as good as gold.

However, between nations gold continued to reign supreme. There was little point in a French farmer being paid in English pound notes. So, if England bought £10 million pounds worth of goods from France, and rance bought £15 million of goods from England, then France owed England £5 million pounds, which would be settled by a transfer of gold from France to Engalnd.

But, then things moved on from there. Because, Britain became the biggest industrial country in the world during the 19th century, and its Empire stretched around the globe, many things that were bought and sold internationally were priced in pounds. Nations could and needed to accumulate pound notes in order to buy things. As long as the value of the pound remained fixed to the value of other currencies by them all being fixed to the price of gold then pound notes could act internationally as well as within Britain as money that was as good as gold. That was what happened, currencies were fixed to the value of gold according to the Gold Standard, and the pound became an international currency alongside gold - it became the so called reserve currency.

That continued until WWII. In the First World War Britain almost bankrupted itself by diverting a large proportion of its production into war production rather than wealth producing production. In order to pay for its production it suspended the gold standard and printed pound notes to cover its expenses. The pound notes continued to be accepted because of sterling's role as reserve currency, but the effect was to increase the number of these notes in circulation in relation to gold, and therefore to reduce the value of each note. At the same time the US was becoming the world's premier industrial power. The introduction of mass production techniques, combined with the introduction of electric power in place of steam led to huge increases in US production. Moreover, because the US stayed out of the war at the beginning it could use this production potential to meet the needs of European countriesw including Britain, whose production capacity was being wasted on military expenditure. As one of the jokes on Dad's Army went - the only thing Americans charged in the First World War was the interest on the money they lent to buy their goods.

Typical of the way capitalism operates in a contradictory manner, even the huge icnrease in US productive power at this time, which you would think should have provided increasing wealth led to disaster. The US began to export more and more goods abroad, compared to what it imported. In order to pay for these goods, therefore, other countries had to send gold to the US. Now the Gold Standard was supposed to provide a self-regulating mechanism to prevent these imbalances from getting seriously out of whack. Countries that sent gold out of the country had to increase their interest rates which cut their money supply reigned back consumption and activity, which reduced the amount they imported. Countries like the US which received gold did the opposite. But the US was already booming, and lower interest rates caused the boom to expand even more. BUt the more the expansion took place the fewer opportunities for profit there were. The rate of profit began to fall, so just as they had done during the 19th century capitalists began to look for places to invest their money where they could get higher returns - they began to speculate. On the back of that came the Stock Market boom of the 1920's. But, just as such speculation in the Railway Mania had resulted in catastrophe in the 19th century, so it did in 1929 with the Stock Market crash, and the massive poverty and unemployment, and waste of resources that followed with the Depression of the 1930's.

An almost identical thing happened with the crash of 2000. Massive increase in production brought about by new technology. Large increase in money supply, low iinterest rates brought in on aoccasion to offset potential panics - the Asian currency crisis, latin American currency crisis, Russian rouble crisis, Millennium Bug fears etc., and ridiculous speculation in Internet companies whose share pricres rocketed despite most of them never having a chance of making any money.

From the edn of WW2 the US occupied the role Britain had done. The dollar became the world reserve currency. In the 1970's France said it wanted to be paid in gold not dollar's because they resented the fact that the US could pay for its imports by simply prinitng dollars, which it did to pay for its expenses in the Vietnam war. Nixon abolished the dollar's link to gold, made it illegal for US citizens to hold gold, and thereby set the basis for the US to use its position to basically buy goods with increasingly devalued currency. The US since then has gone from being the world's largest creditor to the world's largest debtor. US citizens spend kmore than they save, the US government has a budghet deficit bigger than any the world has ever seen, and it pays for all this by pruinting more dollars. From what I have said before it can be seen that the only way for the dollar to go then is down. But in fact although the dollar has fallen against gold, and against sterling and the euro its value has not fallen that much. Why? Because of its continued role. To buy oil you must acquire dollars because oil is priced and sold in dollars, though Iraq changed that just before it was invaded and Iran is promising the same now. Moreovr, other countries such as China which sell a lot to the US buy US securities such as shares and Government bonds so that the US has money to buy Chinese goods and keep Chinese factories epanding.

In addition worried about potential recession and with their economies pretty stagnant already other countries like Britain, Europe and Japan have kept interest rates low and printed money in order to try to keep consumers spending and factories working (though increasingly that spending keeps Chinese factries rather than European factories working. So with the value of all currencies being devalued as governments print more of them, the only money that can go up in value is real money - gold. If the crisis gets worse, and more money is printed - gold will go much higher. To get to its previous high in real terms it will have to go to $3,000, and some gold investors think it could go as high as $5,000 or even $7,000 an ounce - the latter would match its perentage icnrease in the late 70's early 80's.

Have to go for now, but more later.