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Karl Kautsky

High Cost of Living

IV. Increase in Prices and Poverty

WE have seen that the view that changes in methods of producing gold are ineffective to produce changes in the prices of commodities is untenable for the reason that changes of this kind are easy to discover.

We have further noted the process by which the law of value operates in the case of gold. The mode of operation is simply this, that given stable distribution of labor-power in the different spheres of production, increased gold production creates increased demand for goods a consequently causes a rise in prices.

In the first place if the change in prices thus produced does not avail to realize the law of value for gold and if its production under the capitalistic conditions yields an extra profit for a considerable length of time, equalization of profit rates manifests itself as a regulating element which brings more capital and more labor to the gold mines until the equality of the profit rate is restored – a law which is somewhat modified by the distinctive lottery character of gold mining which always tends to keep the rate of profit in this industry below the average.

The rise in prices of commodities which is caused by the increase in gold-production may under certain circumstances be so large that the value of gold is not fully realized in exchange. If the limits which exist owing to the admittedly lottery character of gold-production were overstepped, the least productive mine would not only not yield any ground rent but it would yield no profit whereby to hold capital. Then some of the mines would be abandoned and capital would leave the production of gold until there was an equalization of the profit rate.

The fulfilling of the law of value for gold does not fail under all conditions of the movement of capital, and it may reach a higher price owing to improvements in the method of getting gold or the discovery of richer gold fields as well as a dislocation of capital which militates against the gold mining industry.

Varga is wrong, then, when he says that the present rise in prices cannot be the result of changes in the production of gold, because, through this means, the movements of capital are quite unimportant.

The theoretical possibility that the present rise in prices is involved in the rise in the amount of gold production seems to be undeniable. Another question is if the possibility is the actual truth. This can hardly be proved in figures in the present state of statistics. But all the probabilities are in that direction. I had assumed when I began to investigate the question of the rise in prices that the probabilities were in favor of the responsibility of gold for the rise. Varga’s objections however set me investigating the question afresh and the more I did so, the more I was established in my conviction that changes in gold production had led to the rise in prices. It would be a real marvel if these changes had had no influence.

But I never said and certainly never maintained that gold is the only cause of the rise in prices.

The whole economic life of capital is reflected in the movement of prices. All its intercrossing and its tendencies, now rapid, now stagnant, operate on prices. One can and must separate, follow up and investigate each one of the tendencies scientifically. In the answer to the question of the reason of the rise in prices one must be able to present a composite picture of these tendencies.

The rise in prices in the last two decades would have corresponded in strength with the fall in prices in the preceding decades since 1873, if the change in gold production were alone responsible. In this case, as in the other, this would be advanced by another working in the same direction. To treat of every other movement completely at this time would extend the investigation indefinitely and would be of little use as they have been considered by other writers, including myself, on different occasions so that we should have nothing new. A few remarks in this regard may however be useful.

To the factors that caused prices to sink after 1873 there belonged in addition to the stagnation in the production of gold the improvement in the means of transportation as it brought with it in particular the development of the trans-oceanic steamships, as well as the building of railroads in America and Russia, by which great stretches of land up to the present exploited but little or entirely unused and still to a tremendous extent free from private ownership came into the closest relations with countries where the capitalist system was highly developed. This caused a fall in the cost of production of food stuffs and raw materials and thus a fall in prices which in its turn was reflected in the prices of industrial products.

But the same improvement in the means of transportation had also brought into intimate proximity those lands in which under the spur of increased gold production since 1851 the capitalistic industry had greatly extended its enormous forces of production in England, France, Germany and the Eastern portion of the United States. The wildest industrial competition broke out among them after the crisis of 1873 which, at times, reduced prices below the cost of production.

The industrial states with the exception of England, in order to meet this situation at the end of the seventies and in the course of the eighties set to work to limit this competition, at least, against foreigners, by protective tariffs. Germany began in 1879 a protective tariff which has been continually made more stringent, France followed in 1891. In the United States there was after 1870 an anti-tariff tendency, but a backward movement began in 1875 which finally reached an extreme with the McKinley tariff in 1890.

But a protective tariff although it may momentarily raise prices, and hold them higher than they would be without it, cannot throw off the depressing effect of a whole decade of falling of prices upon the world market. So the industrial capitalists sought a more practical means by abolishing competition among themselves and transforming falling into rising prices, by the creation of private monopolies, through combinations, syndicates, trusts. At the outset this was chiefly with respect to localities which have a sort of natural monopoly, petroleum, but particularly coal and iron, the life sources of modern industry.

These creations began in the eighties, but first attained economic importance in the nineties, and then quickly started from the beginning of the present century to get control of the whole process of production.

At the same time the causes which had reduced the cost of production in agriculture ceased to operate, so that a rise in prices for these took place, afterwards the various capitalistic countries, with the exception of England, introduced protection for agricultural products, simultaneously with industrial, and thereby in their districts had raised prices above those of the world market.

The virgin soil of the newly opened territory was, under capitalistic conditions, rapidly exhausted by imprudent farming. To restore its old fruitfulness or to increase it, now required tremendous expenditure. In addition in our century the freedom from the pressure of the private ownership of property is at an end, as it existed in American agriculture and by its competition reduced European ground-rents. Even in America every place has its landlord, and can only be built upon if it pays ground-rent; that means if the prices of the local products are sufficiently high.

Ground-rent, a mark of high prices of agricultural products, grows and becomes itself the cause of still further increase in those prices. Then, although it is surplus value, a portion of the excess of price over the cost of production, it belongs to the agriculturalist’s cost of production. The higher the ground-rent, just so much more from the money derived from his harvest or his cattle, he must hand over to the support of the possessor of land or money, who is of no use in agriculture, instead of accumulating it as capital for the improvement and extension of his business. This happens practically today where the landlord is a leaseholder. He also feels it where he has to buy his place. Every change in possession increases the burden of landlordism so much the more, the higher the prices of agricultural products, and accordingly ground rent. And the more this increases the owner of land is correspondingly transformed into a speculator in land, and he sells his place the more readily, and change in ownership occurs the more frequently.

To all these causes of the raising of prices a new impetus is given by the emulation in armament of the great powers, through world politics, which tends to an increase in the military forces both on land and sea. The latter proceeds less by means of the increase in the number of combatants than by reason of the development and growth of the technical apparatus, which knows no limits and proceeds more rapidly than increase in the forces, and thereby the waste of productive forces is increased, since they are literally thrown into the sea, and the burdens of the people are much heavier, as appears today in the form of a steady increase in indirect taxation, and increasing the cost of the means of consumption of the masses. The capacity of gold production to raise prices is enormously increased by all of these movements.

We cannot however believe that each of these movements because it raises prices has the same influence on economic life as the others. A rise in prices can come from two sources, an increase in demand or a diminution of supply. We have seen how an increase in demand on the part of the owner of money operates. It signifies more active production, more active circulation, increased prosperity. Everywhere there is an increase in the price of commodities under these conditions. If all prices and wages rise in the same proportion and do not change their mutual relations, the condition of the worker is improved in so far as his yearly income, produced by steadiness of employment, arising from the more rapid development of capital, is greater than the rise in price of the commodities.

At the same time, still, the capitalist also considerably increases the yearly sum of his profits through the rapid movement of capital. He cannot consume more, he can only accumulate.

It appears therefore as if high prices were synonymous with economic prosperity, and as if the economic task of the state was to see that prices are high, which, to be candid, as we have seen, it anxiously provides for, by means of duties and indirect taxation.

But there is a difference between high prices and high prices. As we have seen, on the other hand, there is a rise in prices where there is no increase in demand but where there is a limitation in supply, a bad harvest for example. In this case the farmer charges a higher price per hundred weight, but the number of hundred weights he puts on the market is reduced. His total income does not grow. But his own family and his laborers have to pay more for flour and bread. He and his people have less money left over for the products of industry than formerly. The same is true of the rest of the people. The demand for industrial products is not increased, very frequently, indeed, it is diminished while the cost of living of the working class increases so that they must strive for an increase in wages. Then a tendency to rise in prices of raw material shows itself which increases the compulsion to a rise in prices of factory products, while the demand for them declines as we have seen. If the rise in prices succeeds, it must still further cripple the slow disposal of goods, and therefore the impulse of capital; if the rise in prices does not succeed, the prices of the products remain behind the raised cost of production. In both cases the profit rate sinks, there is, as a result, general stagnation and misery among the great masses of labor.

Finally international competition is still to be reckoned with in the question of the economic effect of a universal raising or lowering of prices. On the world market that nation gets ahead soonest which sells cheapest, and this can only be done by producing most cheaply.

Hence the praise of low prices sung by the school of free trade. This is not false, but it has no absolute, merely a relative, justification. But the absolute superiority of high prices favored by the tariff is still less justifiable. Only under very peculiar circumstances are higher prices synonymous with economic prosperity. Under these circumstances, the burdening of industry with high state taxes, such as a system of protective tariffs for all products, as well as for raw materials and the means of life, comes into existence.

Generally it may be said that a rise in prices which springs from an increase in demand is attended by conditions which signify heightened prosperity, and that on the other hand a rise in prices which causes a discontinuance or stopping of supply produces the greatest misery.

The results of increased gold production on social conditions are just the opposite to the results of the price raising factors here considered. Moreover these factors are not all simultaneously active in the same proportion. If one or the other of them dominated, social life would take on another character; the rise in prices would be welcome as a sign of prosperity or detestable as evidence of adversity.

Since 1894 the effects of gold production predominated and made themselves earlier and more powerfully felt than the other factors which caused increased prices with the exception of tariff’s which only operated in a transitory fashion. Under these conditions there arose that view which we call revisionism, that theory, that the capitalistic method of production develops tendencies, to continually improve the condition of the proletariat, to limit the exploitation of it, and so to put an end to all the tendencies of misery, without a political revolution. Just as in the sixteenth century the force of Protestantism in Germany, and after 1848 of Chartism in England was weakened through the increase in the production of gold, so the revolutionary spirit of the entire working class was weakened throughout the capitalist system. But only briefly on this occasion.

The answer to this question depends very closely upon the expectations which we entertain of gold production.

The speed of its growth since 1890 may be found in the table.

It can be seen that the fact of the yearly increase in gold production is significant if we omit the time of the Boer War and its results (1899, 1900 and 1901). In 1897 in particular and 1898 the figures climbed rapidly owing to the discovery of the Alaskan gold fields.

But since 1905 the percentage of the yearly product rose rapidly with the exception of 1908. The progress of the figures of amount of gold taken from single great regions of gold production is shown on pages 99 and 100.

In Australia therefore gold production has already begun to decline, in 1903 it reached its highest point. Since then it has fallen from 89 to 61 million dollars.

In the United States it already appears to have reached its maximum. Since 1906 it has made only an insignificant advance. The falling off from 1910 in comparison with 1909 has been more evident in 1911. The new figures shown for 1909, 99,673,400 dollars; 1910, 96,269,100 dollars, and 1911, 96,233,000 dollars

In South Africa gold production now makes enormous strides. There is however no extension of the gold district, but a more complete exploitation of the existing stores at present which must consequently be all the more rapidly exhausted.

The Director of the Mint quotes a Johannesburg correspondent of the Engineering and Mining Journal, who says, “We are still far from being able to judge what the year 1911 means for the history of Rand Mining. It appears as if the best portion of the profitably worked ore on the mine was exhausted, as if mining here had reached the maximum output in a few years, and as if it had almost attained the maximum profit, if it has not already gone beyond it. In a few years we shall see many famous mines exhausted, like the Jubilee, the Salisbury, the Champ d’Or which produced nothing this year.”

There remains now only the gold of “other countries,” particularly Canada, India, Mexico, Russia. From Russia the Engineering and Mining Journal for 1911 reports a falling off in production from 43.2 to 40.6 million dollars, from Mexico from 24.1 to 19.5 million, from India from 12.1 to 10.5 million, from Canada a slight increase from 10.2 to 10.6 million dollars. In the meantime the gold production of the most important district of Canada, the Yukon district, has for several years lost its earlier significance. The production of gold in the Yukon district has been in millions of dollars since 1896:

Certainly a failure of the hitherto well known gold fields of the world in the sense that they yield absolutely no more gold profitably is not to be soon expected, but it is just as little to be expected that a development of the rapid increase in production at the rate of that from 1892 to 1905 will be maintained. It is of course not impossible that gold fields as rich as those in British South Africa will be discovered, but the probability of it grows continually less.

Gold has from time immemorial so aroused the desire of men that they have always sought it with the greatest eagerness. The discovery of gold fields no longer occurs in lands of developed civilization but only in the wilderness, newly discovered and for the first time accessible; at first, in the sixteenth century in Spanish America, then in Brazil where in 1680 mines were opened in Minas-Geraes. In Russia gold was found in the Ural Mountains in 1743, the discovery of Siberia was made known at the beginning of the nineteenth century with the gold fields there. In the middle of this century there follows as we have already said the discoveries in California and Australia, and at the end of the century those in South Africa and Alaska. There are yet, as we see, uncultivated districts in which new gold fields are to be found. But capitalistic civilization continually embraces the world; with giant strides it opens one place after another. Undiscovered lands capable of yielding gold became scarcer year by year. The number of places capable of surprising by new extraordinary gold discoveries, and by means of a new capital prize of putting bankrupt capitalism on its feet again becomes always smaller.

There exists a possibility of a wider extension of gold production, through the extraordinary technical advance, which has rendered possible the exploitation of well known gold fields with the expenditure of less labor power than hitherto or has obtained a greater amount of product with the same expenditure of labor power. This possibility is undeniably very probable in our times of unbroken technical revolution. But nothing justifies us in the opinion that this advance will proceed more rapidly in mining than in other branches of production. It would seem rather that, in view of the increasing difficulty of getting gold, resulting from the exhaustion of the upper strata and the necessity of going continually deeper, it will suffer so many obstacles that the rate of addition of the amount of gold obtained, even if maintained, will be kept within the average of the last twenty years. And hence we arrive at this conclusion: if gold production operates as a means of advancing prosperity, then it is not enough if it continue merely in the same measure as at present, or in a lessened degree. It must grow manifold and without interruption.

The capitalistic method of production itself develops the compulsion, the necessity not only of not standing still but also of a continual extension, in the proportion in which the accumulation of capital increases year by year, and, at the same time, the technique, the means by which the product of a given amount of labor power is continually increased. The break of this both through the increased productivity of labor as well as through the increase of capital brings enormous masses of products, the consumption and the progressive production of which, and, hence, social prosperity, depends upon there being an increase in demand commensurate with the increase in these factors, that is to say under these same conditions, upon an increase in the mass of money.

This is true only when conditions are the same. These may alter and the mass of gold once again be as at other times of comparatively small economic account.

But there is no ground to declare that they do not make for the necessity of an increase in the production of gold. The quicker or slower circulation of money is closely connected with the general advance of the process of production, it increases in times of prosperity, it diminishes in times of crisis. Nothing justifies us in expecting that a falling off in gold production will continue with increasing prosperity and that a smaller addition of gold will produce better results by more rapid circulation.

It is possible that in the Orient, particularly in Egypt, India and China, there is still much hoarded gold, which by the advance of capitalism, particularly of the banking system, might be transferred into circulating, demand-producing money.

We have already seen how the Orient, since the close of classic times, has continually received amounts of gold and silver which it has withdrawn from circulation and hoarded.These treasures have been plundered from time to time, but its foreign trade, the exports of which always exceed the imports, always permits of the collection of new treasures.

The Bulletin of General Statistics of France in its July number gives a table which shows well the economic rule of India.

According to the figures of trade balance, India must be continually getting richer, since the excess of exports grows strongly and uninterruptedly. But the lion’s share of this surplus goes without any diminution to England. So long as this surplus is not offset by the importation of precious metals, it comes under the head of British exploitation of India, and yet the hoard of precious metals increases. It produces gold (1910 – 17,826 kilo, value 22 million pounds sterling), and it still imports precious metals to the amount in round numbers of 500 million marks. In a lecture before the East India Association, Sir James Wilson put the excess importation of gold in India since 1890 at five billions of marks, a tenth of the world-production of gold in that period of time.

Similar, if not so great, is the collection of gold treasures in Egypt.

It is quite impossible to reckon or even to estimate how much of the imported gold is used for industrial purposes, how much remains coin or is minted, or how much of it goes into circulation or is stored as treasure.

The custom of using precious metals for jewelry, or collecting them as treasure, is still strong in every country. The director of the American Mint in 1909 asked the American Consul General in Cairo, what became of the gold that went to Egypt. The Consul related that in 1905 the stamp bureau of Cairo had under taken an inquiry in the gold bazaars which showed that in the year, gold to the value of two million pounds sterling had been worked up into jewelry. It is of course impossible to state exactly how much of this was newly imported gold and how much old material.

Certain typical facts which Lord Cromer mentioned in a speech in London are worth noting:

“Several years ago I heard of an Egyptian who left at his death 80,000 pounds sterling in gold coin in his cellar. Then I heard of a certain well-to-do landlord who bought property for 25,000 pounds sterling. Half an hour after the signing of the agreement he appeared with a pack donkey, with the money, which he had had buried in a garden, on its back.”

It is clear that in the Orient large quantities of gold still lie dead, which would be brought into circulation under the capitalistic system. But this process is not just beginning, it has been vigorously pressed for the last two decades. If it is to offset a diminished gold production it must not only go further, but at a swifter rate than hitherto. There is no justifiable expectation of this.

We must expect this process to be more slow also, as in the case of the unexplored districts, therefore the places in the Orient still closed to capitalism, which can furnish hitherto unused treasures, will grow less and less every year, and more and more limited in proportion as the scope of the capitalistic circulation process is extended and the quicker that railroads and banks are developed in the Orient.

So that the increased gold production, and along with it the auxiliary methods of increasing gold production, are ceasing to display those economic results which produce an increase in prices. But this is by no means all. It proceeds further and now becomes for the first time unpleasantly obvious. For now the other mentioned price-raising factors become not weaker but stronger,

Some of the figures are given here so that the present rise in prices may be recognized. They are taken from the table of price statistics of the American Labor Bureau in Washington. As a basis of the movement in prices, the yearly average of 1890 to 1899 is taken and set at 100. We first give the movement of the two great classes of raw materials and manufactured products, then some subdivisions, which are particularly informing as regards price movement.

See tables on this and the following page:

Generally we can say that the prices of manufactured articles have fallen less than those of agricultural products, the harvest of which is so dependent on the weather. Next, it appears that the tendency to a rise in prices is much stronger in agricultural products than in industrial, and the tendency of prices in these to rise goes on in later years, the years of diminution of gold production, even to to-day. Manufactured articles as a whole reach their highest point in 1901 with the figure 129.6. They go to 1910 with the figure 129.6 and in 1911 go below it to 126.9. Then clothes show the figures 1907, 126.7, 1911 119.6. Metals and furniture for 1901, 148.4, and 1911 119.4. On the other hand we find in agricultural products, 1901, 137.1, 1911 162.0. For cotton, 1908, 153.0, 1911 168.0, and afterwards, in 1912, it climbed to the incredible height of 194.8. Lumber climbs upward uninterruptedly. Even the crisis, especially in the years 1901 to 1908, which made a setback in prices, had no effect on the price of lumber.

Here appears perfectly evident the result of the capitalistic destruction of forests. In agriculture, too, we see the price-raising influence of private property.

The general character of price development since 1907 is this: steady rise in prices of the necessities of life for the worker, of the agricultural raw material of industry, slow addition to the demand for industrial products, stagnation in the wages of the industrial working class. This is true chiefly for America. In Europe there are no complete statistics of prices, but the picture is the same, as can be learnt in the statistics of prices.

And this development will proceed as long as the robber system of economy prevails, nay more, with the addition to the population and the extension of capitalism, private property extends its realm and its burdens become more onerous. The combination of industrial capitalists could paralyze the downward tendencies of these factors profitably, but would press with double weight upon the entrepreneurs not in the combinations and the working class.

And the attempt to offset the rise in the price of agricultural raw materials, such as cotton and of the means of life, by means of a colonial expansion policy, is no less detrimental to the working class. For the results on agriculture are remote and uncertain, and private property in land as well as the robber system of economics will continually drive prices higher. Besides, the colonial policy involves unavoidably rapid increase in naval armament and therefore taxes, which means a new burden on the working class, a strengthening of the tendency to a rise in prices.

The latter now completely changes its character. As long as the influence of increased production brought with it increased demand it was welcomed as an accompanying phenomenon of growing prosperity. Since the flow of increased gold production has receded and the other factors of increase in prices are still existent, and altogether leave not had the effect of increasing demand but of diminishing supply, this increase takes on a more disturbing character. From a phenomenon accompanying prosperity it becomes a cause of growing misery, and no longer of mere social relative misery, increased exploitation, but of absolute physical misery.

To the constant rise in the prices of the means of life a constantly growing lack of employment is the companion in proportion as the new tendencies gain force together with the most frantic license, and greatest intensification of those tendencies of the modern method of production, which the Erfurter Program recognizes in the words of Capital “a growing addition to the insecurity of existence, misery, oppression, slavery, degradation, exploitation,” but with it also, as Capital further said: “ The revolt of the steadily rising and united and organized working class trained by the mechanism of the capitalistic method of production itself.”

The class war of the proletariat continually broadens, in times of rising or sinking prices, in times of growing prosperity as well as in those of growing need, since it proceeds front class antagonisms produced by capitalistic society under all circumstances. But the forms of the class war are one thing during times of industrial movement and another during economic stagnation.

The former permit the organization of the proletariat to strengthen its feeling of power and its power, but blunt the spur of class antagonism and weaken revolutionary compulsion to the overthrow of the whole capitalistic system and the power of the state which protects it.

The period of stagnation or increasing misery sharpens the spur of class antagonism and strengthens the revolutionary compulsion of the proletariat in proportion as the conditions are more unbearable.

Such times tend steadily to profound disturbances of the existing state and organization of society. From these the proletariat may derive great advantage; it may, by means of them, be able the earlier to deprive existing classes of new positions of power in the state, the more the preceding periods of prosperity made it capable of increasing its means of power and its class consciousness.

A look back over the last two decades impresses us that the party and the unions have done their duty. So we may confidently enter upon the conflict which the new era of capitalism has for us, in which no rapid addition to gold production can longer interfere with the sharpening of class antagonisms, in which capital extends its domain only at the expense of the growing misery of the mass of the population, and the latter is more and more compelled to cause the overthrow of the capitalist system on pain of its own destruction.

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Last updated on 12.1.2004