What is the euro?

Any serious analysis of the euro, and the complex web of interests and politics that surround it, must begin with a discussion of money itself. Following in the footsteps of the classical bourgeois economists - William Petty, Adam Smith and David Ricardo - Karl Marx defined money not only as a universal equivalent, but also as an embodiment, or store, of social wealth - or value (value being the average socially necessary labour expended on the production of a commodity). Money emerged along with the development of commodity production and its contradictions. By degree, as a greater and greater quantity and range of products flow onto the market, barter and other primitive forms of exchange become impractical and come to stand as barriers to expansion. The spontaneous answer emerged with the gradual putting aside of a certain part of society's wealth to serve as money. Iron bars, rare sea shells and common salt were all tried. But, whatever the particular form, commodities bifurcate into commodities and money. The typical form that money took from ancient times onwards was some kind of precious metal - silver and after that, in early modern times, gold. Such metals have the advantage of being uniform in quality and easily divisible. A definite weight of metal can function as a standard monetary unit. As the reader will know, today's pound and penny derive from the Roman pound and denier. The pound was till recently a legal measure of weight in the United Kingdom. And much to my surprise the penny still serves as a measure of weight in the "grading of nails" (B Eichergreen Globalising capital Princeton 1996, p8). The disadvantage of non-precious metals serving as money is easily illustrated. In Sweden - which for its own reasons adopted a copper standard in 1625 - the huge weight of coins meant that lumbering wagons pulled by teams of horses had to be employed in order to facilitate everyday transactions. Petty thieves did not dream of stealing large-denomination coins - they could weigh as much as 20 kilos a piece (the price of copper being one-hundredth of silver). Silver and gold, in contrast, were far more practical. Small amounts, especially of gold, were easy to stow away and move from place to place. Gold coins were used by the Romans. Gold florins circulated in mercantile Florence and gold sequins or ducats in Venice. Louis IX introduced gold coinage for France in 1255. This metal suited larger transactions. But in most cases for day-to-day purposes silver was the dominant form of money. Hence throughout the medieval and early modern period a bimetal system operated. Payments could be made in silver or gold. However, maintaining a bimetallic system proved difficult: "Gold and silver were in competition" (F Braudel The wheels of commerce Berkeley 1992, p424). The value of silver and gold tended to alter. That of gold would increase compared to silver or vice versa. There could be wild oscillations and 'bad' money driving out the 'good'. Britain accidentally adopted a de facto gold standard in 1717, when Isaac Newton, master of the mint, set "too low a gold price for silver", inadvertently causing all but "very worn and clipped silver coins to disappear from circulation" (B Eichergreen Globalising capital Princeton 1996, p7). Token coins were introduced and used for small transactions, but under an overall gold standard. Once new minting techniques allowed the easy detection of forgeries - in the early 19th century - silver was formally abolished as legal tender. Gold was both sufficiently common and sufficiently rare. Found in unevenly dotted outcrops throughout the world, it does, however, require a large expenditure of labour to produce even a few grammes, compared with almost any other commodity. New mining or smelting techniques, which made extraction easier, or the discovery of cheaper sources (the conquest of the Inca empire by Spain in the 16th century, the opening up of the Californian goldfields in 1848-49, Australia's in 1851 and those in South Africa at the end of the 19th century, etc) might lower the value of gold. But only by a degree. Money and crisis Money is therefore a uniform measurement based on a precious metal that in its developed form can be almost infinitely multiplied or divided. Through being given a money-name - a price - one commodity is compared with another, no matter how different its qualitative properties and the nature of the labour needed for its production. Beer, boots and books are that way equated and easily exchanged - not, as of old, directly - ie, ten pints of beer for one pair of boots - but indirectly, for money. Through this universal medium of exchange the concrete labour expended in mining gold was translated into an ideal expression of the social labour expended on the production on the whole cornucopia of other commodities. That ideal relationship between the price of a commodity and its exchange value is, of course, only confirmed by a sale - the exchange of the commodity in return for money. Equivalent exchange, it must be stressed, is only a tendency, albeit a dominant one. There are innumerable market variations. Once price exists, there exists also the possibility of a difference between the value of a commodity and the money for which it changes hand. Whim, fashion, shortage or glut ensures that one commodity exchanges for a money equivalent above its value. Another will exchange below its value. Price then is the money-name for the imaginary value of a commodity. As Marx said, the exchange-ratio may express "either the real magnitude of that commodity's value or the quantity of gold deviating from that value, for which according to circumstances it may be parted with" (K Marx Capital Vol 1, Moscow 1970, p102). Self-evidently this possibility of a deviation between value and money is characteristic of the price-form itself, as is the attachment of a price tag to less tangible non-values (ie, the sale the Blair government's 'impartiality and honesty' in return for generous donations to the Labour Party). Nevertheless over the course of time and countless billions of sales and purchases value and price are drawn together. And in the normal course of events after a sale money continues to circulate and is again used to purchase some other commodity. It is not extinguished, as in barter. Money is constantly being converted into commodities, yet always remains money. Money does not vanish. It merely changes hands. Commodity production takes its highest form under bourgeois or capitalist society. Money ceases to be simply a means of exchange, a means of obtaining one use-value for another: ie, beer for books. Instead money is the prime object of production. Production comes to be for its own sake. Beer, boots or books are not produced for any intrinsic value they may have. They are produced solely with the aim of realising a profit. After the sale there must be more money than was initially advanced to purchase raw materials, etc, at the beginning of the cycle. Marx brilliantly showed that this trick of apparently conjuring something out of nothing could be performed throughout capitalist society not by anything as prosaic as cheating: that must by definition leave losers along with winners and thereby in the end cancel itself out. On the contrary the uncanny ability of capitalism to get money to beget money lay in social relations - namely the fact that labour power had been turned into a commodity. Where once that relationship existed only on the margins of society, buying and selling labour power is generalised by capitalist society (to begin with as the unintended by-product of the separation of the mass of labourers from the land and the emergence of a middling class of tenant farmers in England). The worker sells their ability to labour - the commodity, labour-power - to the capitalist for a wage, which is on average equal to its value (what is required for the physical and cultural reproduction of labour-power). However, unlike electricity, steel, leather, computer chips, paper, etc, labour-power is a special commodity, a commodity that is inextricably bound up with the worker, who is a living, sentient and creative human being. That is why labour-power is uniquely capable of producing a surplus. In expenditure labour power renews and actually develops itself. Capitalist society is, however, riven with innate contradictions. The very existence of money qualitatively separates - not just in time and space - the acts of production and consumption. With money therefore comes the possibility of a crisis born out of a delay, or even an inability to make a sale, and thus realise surplus value (profit, interest or rent). But what was potential becomes a social determinate, with huge consequences, through the generalisation of commodity production and the transition of money into capital (self-expanding money or self-expanding value). Whether the crisis manifests itself primarily in a disproportion between supply and demand and general overproduction, in the underconsumption of the masses or in a crash in profit rates, the basic underlying contradiction, from which there can be no escape, is capital itself and the subordination of the production of things to the production of value. Production is no longer directly related to human need. By making money (capital) the overriding objective of production, the exchange relation inadvertently comes to stand over capitalists individually and collectively as an external power which drives them forward. Without a sale - in the final analysis to another capitalist - disaster threatens. Costs must therefore be reduced below those of competitors. Expansion is a necessity. Rest an impossibility. Overaccumulation inevitable. What was of secondary importance in ancient Athens, medieval Nuremberg or renaissance Venice - mercantile cities all - has under capitalism metamorphosed into a global system which must constantly search out new sources of surplus value. The permanent technological revolution goes hand in hand with periodic bouts of destruction, the overthrow of old social bargains and the clash of class against class. Gold standard With Britain's emergence as the world's dominant industrial, commercial and financial power in the 19th century, its gold-based money became an increasingly attractive and logical alternative to silver-based money. Those countries seeking trade with the United Kingdom or wanting to borrow from it adopted the British system. Portugal did so in 1854. Sweden, Argentina and Holland followed. And, with the shock waves produced by the Franco-Prussian war and the spread of industrial capitalism, the days of the bimetallic system were numbered. Germany led the way in 1871 and abandoned silver for gold; by the 1880s virtually the entire civilised world had gone over to gold. Silver remained the standard only in China and a few Central American countries. Out of these spontaneous decisions the international gold standard was born. Withdrawal of silver as legal tender triggered a whole period of deflation. Price levels fell by 18% in Britain between 1873 and 1879 and by an additional 19% by 1886, "as less money chased more goods" (B Eichergreen Globalising capital Princeton 1996, p19). One price was that of wages and social unrest resulted - especially in the United States, where small farmers found themselves trapped between fixed mortgage payments and falling prices for their products. Nevertheless attempts to reintroduce bimetallism failed. Germany, but above all Britain, blocked any moves to restore the monetary role of silver. So the rise and triumph of capitalism was associated with gold and the functioning of gold as world money; though only four countries - Britain, Germany, France and the US - maintained what might be called a pure gold standard, whereby internal money circulation took place in the form of gold or paper notes which could be exchanged for gold. Weaker powers - Japan and Russia - made do with token coinage and paper money, a percentage of which was backed up by gold or imported overseas bonds that were convertible into gold. The gold standard imposed upon capitalism a self-discipline much welcomed by its stern ideologues. Not only were relations between various countries regulated - debtors and creditors - but so too were relations between classes. Obviously value is closely linked with the degree to which the working class is exploited and therefore the degree to which the working class can force concessions. By lessening absolute exploitation (the length of the working day) or relative exploitation (the intensity of labour) the working class erodes value and thus the value of money in one country compared to another. Central banks could though hit back by increasing interest rates, lowering demand and thus triggering rises in unemployment levels; working class bargaining power is in that way diminished and the value of money restored. The invisible hand of the market pummelled the working class. As Barry Eichengreen remarks, the ability of the central banks in the 19th century to guard the national currency in such a brutal manner was in part ensured by the fact that the working class "were ill positioned to make their objections felt" (ibid p31). In most countries the franchise was limited by property qualifications (workers and women were excluded). Workers could not punish the government in the ballot box. Moreover working class organisations were in most cases weak or in their infancy. The fact that the US had through two revolutions achieved universal male suffrage - the black population expected - put pressure on those above and meant that its commitment to the gold standard was equivocal until the dawn of the 20th century. Populist and Democrat politicians urged electors not to sacrifice American farmers and workers on a "cross of gold" (ibid p41). The demand was for unlimited silver coinage to depreciate the value of gold and make money cheaper. The election of the Democrat S Grover Cleveland as president in 1892 prompted a flight of capital to Europe. However, he was a poacher-turned-gamekeeper and quickly changed tune. The dollar's link with gold was saved by discoveries of new reserves in South Africa, Alaska and Australia. The development of the cyanide process of extracting gold from impure ore also simulated the growth of money supply. The association of the gold standard with deflation temporarily receded. The US passed the Gold Standard Act in 1900. World War I showed beyond doubt that capitalism had entered its declining phase. Essential laws remained but were overlaid by new determinates. The epoch was, concluded Lenin in his Imperialism, one of "transition from the capitalist system to a higher socio-economic order" (VI Lenin CW Vol 22, Moscow 1977, p298). Free competition and money gave way to monopoly, militarism and organisation. In a perverted, negative way capitalism anticipated the socialist future. Total war demanded massive state intervention and the subordination of short-term profits to the needs of the military machine. Prices and returns were fixed by bureaucratic decree. Gold reserves were used by the state to import strategically vital supplies. Exports of gold by individuals were prohibited. The link between gold and the currency had to be abandoned. Hard money became soft money or even token money. As each power turned to autarchy, exchange rates between currencies floated. Money and value drew apart. Corruption, need and state power filled the vacuum. The most hard-pressed countries paid soldiers and purchased supplies at home in fiat money (token money, unbacked by gold). In conditions of endemic shortage inflation pushed prices skyward. At the same time labour peace at home was brought in return for allowing the growth of trade unions and giving basic living standard guarantees. Rationing and subsidies kept people alive and working. As the war dragged on, however, and bled Europe white, social antagonisms inexorably increased. The 1917 October Revolution in Russia proved that there was an alternative to capitalism and the murderous barbarism it had unleashed upon the world's population. The party of Lenin, Trotsky and Zinoviev inspired millions of class-conscious workers. Bolshevism entered the collective consciousness of a generation. Within the space of five years virtually every country had within it an influential Communist Party. In Italy, France and Germany the mass parties of social democracy cleaved down the middle. Communism was an idea and a material force. Capitalism, for its part, emerged from World War I much weakened and face to face with its nemesis. Britain's industrial and banking supremacy went with World War I and could never return. Foreign assets had to be sold off to pay for the war. Sterling could no longer operate as the hub of the world economy. Germany was reduced from a creditor to a chronic debtor country. The Austro-Hungarian empire disintegrated. France, which had been the world's foremost lender, lost a staggering fortune with the overthrow of tsarism and the removal of Russia from the capitalist global system. Only the US managed to hang on to the gold standard. But the ruling class still possessed reserves of strength. The Soviet Union was successfully isolated and began its terrible metamorphosis into a counterrevolution within the revolution. Revolution elsewhere was crushed or diverted. Nevertheless capitalism could only save itself by managing its own decay. Everywhere the working class was on the rise. Controlling labour could no longer be achieved simply through the market and the threat of unemployment. Overcoming inflation and re-establishing the gold standard was synonymous with attacking the working class and the attempt to reimpose the old discipline. Among the first countries to put their currency back onto the gold standard were those that had experienced revolutionary upheavals and hyperinflation: Germany, Austria, Hungary and Poland. The monetary economy had all but disappeared and without money capitalist accumulation becomes to all intents and purposes impossible. We all know the apocryphal story. A German thief snatches a woman's shopping bag, but contemptuously discards the wads of virtually worthless paper notes she was carrying to the shops. The bag has more value than millions of marks. Austria stabilised its exchange rate in 1923, Germany and Poland in 1924 and Hungary in 1925. The new currencies were backed by gold, albeit often in the form of loans obtained from the US or the League of Nations. However, in each case the attempt to impose the old discipline required an internal agent. Social democracy willingly acted on behalf of capital, but could do so only in return for further expensive concessions. The Weimar republic and an SPD government, Lloyd George's 'land fit for heroes' and social insurance, Austria's 'third way' and Red Vienna. Fascism stalked the wings. Other countries which had experienced moderate inflation stabilised their currencies by re-establishing the link with gold too. Belgium in 1925, France in 1926, Italy in 1927. Showing the ravages of even 'moderate' inflation, the French franc was stabilised at a level which meant it purchased only one-fifth as many dollars it could before World War I. Britain could though just about restore pre-war parity with the dollar when it returned to the gold standard in 1925. And, with the core countries back on the gold standard, most others quickly followed suit - Canada, Australia, South Africa, Switzerland, Chile, Finland, etc. As the gold standard was restored, inflation gave way to deflation. Soft money became hard. But the return to the old could not hold. Money and value could not be reunited. With the economic crash of 1929, the gold standard system disintegrated, beginning at the periphery. Argentina and Uruguay limited gold convertibility in 1929. Canada put a hold on gold exports, while Brazil, Chile, Paraguay, Peru, Venezuela and New Zealand ensured that gold was difficult to obtain, thereby allowing their currencies to slip below their official exchange rates. In 1931 Austria and Germany suffered banking crises as they haemorrhaged gold. Exchange controls were introduced and convertibly suspended. The crunch came when Britain was forced off the gold standard in September 1931. After that blow the whole system crumbled. Many countries still relied on trade with Britain, so pegging their currencies to the pound and keeping reserves in sterling were perfectly logical. The world economy splintered into three zones: the gold standard countries around the US; the sterling area; and the central and eastern European countries, led by Germany, where exchange controls prevailed. Such a tripolar arrangement could not hold either. Depreciation of sterling and exchange controls in Germany eroded the position of the gold standard countries. In the end even the mighty US was compelled to suspend convertibility and devalue. The political cost in terms of industrial shutdowns, agricultural ruination and mass unemployment radicalised society. In the 1932 presidential election Franklin Roosevelt defeated Herbert Hoover, who campaigned on his commitment to the gold standard. Taking the dollar off the gold standard was one of Roosevelt's first acts. His famous promise was the New Deal. State power was used to push down the value of the dollar and thus raise prices and once again generate productive activity. Roosevelt also presided over a massive programme of public works. Other countries still on the gold standard had no choice. The competitive position of Czechoslovakia, Belgium, France, Holland and Switzerland deteriorated rapidly and the link with gold had to be ended. The gold standard gave way to the violent oscillations and chaos of floating exchange rates. World trade declined and was overshadowed in political and economic importance by empire, or zonal, self-sufficiency and import controls. Redivisionism once again came to the fore. Greedy eyes surveyed China, Stalin's Russia and the sprawling Dutch, Belgian and French empires. Britain's empire and the associated sterling zone was, though, the main prize. Fall of the dollar and the rise of the euro During World War II the US extracted from Britain a binding pledge to restore sterling's convertibility and the principle of downgrading import control in return for financial aid. In effect Britain agreed to peg sterling to the dollar, which would in turn be based on an agreed percentage relationship with gold. The dollar was to act as the world currency and other currencies would float around it within strictly defined banded limits. This system of half-soft, half-hard money became the basis for the Bretton Woods system, which in the 1950s and 60s coincided with - though did not cause - an unprecedented economic boom and the social democratic state. In Europe capitalism had in the 1930s and 40s become associated in the popular mind with fascism (or collaboration with fascism). That and the boom simultaneously necessitated and allowed yet more sweeping concessions - higher wages, full employment, expanded education, health services and social housing. Socialism was again put off by capitalism - anticipating the future, albeit in a half-hearted and negative fashion. Bretton Woods operated as a kind of pyramid system. While the world economy expanded and the dollar remained strong, the system could be sustained. Confidence generated confidence. But once growth started to falter and become problematic, the dollar weakened and cracks began to show. Throughout the 1960s the dollar came under increasing pressure. The Kennedy and Johnson administrations enacted all manner of palliative measures but to little or no effect. The US war in Vietnam proved enormously costly and added to inflationary pressures. By 1971 there were precipitative runs on the dollar. Dollars were exchanged for marks. The Federal German government allowed the currency to float sharply upwards. Official holders of the dollar sought to convert them into gold - the agreed price was $35 an ounce. However the Nixon administration unilaterally suspended the commitment to provide gold on demand in defence. Instead of consulting with the International Monetary Fund, the US delivered a fait accompli. Frantic negotiations followed and an agreement was eventually hammered out which allowed banded currency fluctuation to increase from 1% to 2.25%. US import surcharges were abolished. But non-convertibility of the dollar for gold remained. Within two years any lingering pretence of maintaining the Bretton Woods system evaporated, as the dollar suffered devaluation time and again. The demise of the Bretton Woods system ushered in another uncertain period of floating exchange rates. In general the dollar fell relative to other major currencies. A strong working class, buoyed up by its post-World War II gains, and the gap separating soft money from value allowed inflation to rip. Forcing down inflation became an economic orthodoxy behind which a full-scale attack on the working class took place - from wage controls to high interest rates and allowing unemployment to reach 1930s levels. It is against this background that the birth of the euro ought to be understood. What was the European Economic Community - and is now the European Union - had been originally envisaged by its founders as a way to ensure that Germany and France never went to war again. However, a whole complex of trade and monetary agreements evolved, going far beyond the initial coal and steel community. Success of the project saw an ever increasing share of economic activity accounted for by inter-EEC trade. Exchange rate stability between these partners was necessarily highly desirable, facilitating as it did the further openness. After a customs union the next logical step was a monetary union, "especially for those who saw the EEC as a nascent political entity" (B Eichergreen Globalising capital Princeton 1996, p153). Political ambition, combined with the fear of the dollar's instability and the worrying consequences for Europe, led minds towards economic and monetary union (EMU). In 1970 to a high-powered study group under Luxembourg's prime minister, Pierre Werner outlined a plan whereby monetary union would be achieved by 1980. Exchange rates would be steadily drawn together and the fluctuation of one currency against another progressively narrowed. Werner recommended coordinating national economies and policies, especially fiscal measures, but offered no vision of a single currency or a European Central Bank. There would be a system of central national banks. The Werner report and its recommendations were endorsed. Enlargement delayed monetary integration, but did nothing to put off the desire for ever closer cooperation. However, attempts at convergence through pegging proved fraught with difficulties. Dollar devaluation and the shock of successive oil price-hikes had an asymmetrical effect on national economies. The so-called Snake system effectively collapsed in the mid-1970s. After that the mark emerged as "Europe's reference currency" and its "anti-inflationary anchor" (ibid p160). By definition that implied an accountability deficit. The Bundesbank would rule Europe. France sought to politically rectify that situation in 1979 through the creation of the European Monetary System. Under EMS measures were put in place to support weaker currencies and provisions were made for unlimited short-term credit facilities. Germany's social democratic chancellor, Helmut Schmidt, in his turn saw the creation of EMS as a step towards a federal Europe and cementing the Franco-German alliance. Eight of the nine EC countries participated in the Exchange Rate Mechanism from the outset (the exception was Britain). There were frequent realignments between the national currencies, but within set banded limits - shades of Bretton Woods. Economic stagnation and the pressing need to compete with the US and Japan lent additional impetus to the integration process, however. The decision was made to go for the creation of a single European market in commodities and labour-power. That went hand in hand with abolishing the opportunities which still existed for national governments to manipulate exchange rates for protectionist purposes. Both of those goals unmistakably pointed towards a single currency. And this found explicit expression in the 1989 Delores report and then the Maastricht Treaty - adopted by the European Council in December 1991 and formally signed by the heads of government on February 7 1992. Maastricht outlined a three-stage transition to a single currency. Stage one, which commenced in 1990, was to eliminate capital controls (though Greece, Ireland, Portugal and Spain were permitted to miss the deadline). Central banks were to be given greater autonomy and thus, so it was hoped, removed from political pressure exerted from below. Fines were to be imposed on any country running an excessive budget deficit. Concessions to the working class are that way supposedly limited. Stage two, set to begin in 1994, was to be characterised by the coordination of economic policies and the transition towards a single currency. Stage three would irrevocably fix exchange rates, and the European Central Bank would then introduce the single currency. As we know, ERM went into crisis almost from the off. The collapse of bureaucratic socialism in eastern Europe and the Soviet Union between 1989 and 1991 derailed plans. Federal Germany in particular, having incorporated the German Democratic Republic and overseen a one-to-one monetary union, was forced to shoulder a huge budget deficit. The dollar's further decline increased the competitive pressure on Europe and a damaging economic downturn ensued. Denmark then rejected the Maastricht Treaty with the June 2 1992 referendum. The peseta, escudo, lira and franc all wobbled. The pound dived. Britain and Italy then withdrew from the system. Yet, despite all the many cast-iron predictions from rightwing Tory pundits and 'Marxist' sages alike to the effect that the single currency was doomed to fail, the facts speak for themselves. After three years of being a virtual currency - a financial instrument used by banks and money traders, but not ordinary citizens - the euro became, on December 31 2001, a tangible reality. The euro now exists as coins and notes. Stage three happened. Jack Conrad