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Essay Number 10
November 1998  

Mao, Money, & Foreign Exchange

thin rule
By Satya J. Gabriel

In describing the differences between the Maoist Left and the more conservative elements of the Communist Party of China (CPC), most commentators ignore one aspect of the Maoist ideology, an aversion to the use of money as medium of exchange and store of wealth. In order to better understand this aspect of Maoism, let's discuss the role of money in both a domestic context and in foreign exchange.

The urban Chinese economy has been a highly monetized economy for a long time. The use of money to facilitate trade has a more recent vintage in rural China, where barter exchange is not uncommon today. One of the purposes of money in China, as in other countries, is to expand the range of trading opportunities by eliminating the need for a double coincidence of wants and needs. Money makes commercial transactions easier. Thus, the expanded use of money makes possible an expansion in commercial transactions.

The power of money to act as medium of exchange and unit of account is intricately linked to the power of money to act as intertemporal store of wealth. In addition to facilitating trade, money can facilitate the reproduction of pre-existing social relationships by allowing the command over commodities to be stored for future use, even passed on to future generations. In some cases, these intertemporally controlled commodities may include human labor-power. Given that the role of money (and relative access to money) is determined within social relationships that are developed, reproduced and reinforced over historical time, then using money to command human labor power can result in reproduction of relationships of domination and subordination: the poor get locked into subordinate status and the rich start with an advantage (their command over the labor of others) which is easily reproduced.

The legacy of exploitation is passed on to future generations in the form of differential access to money. The slave master accumulated wealth in money form that can be used, even after slavery is abolished, to command the labor power of the descendents of the former slaves. Money allows for the intertemporal transfer of power over human beings, giving contemporary men and women the power over other contemporary men and women because of acts that are long past. Thus, a single man can inherit the power to command the arms, legs, and brain power of thousands of other human beings. The deployment of money makes this one man a Hercules. This is the reason that the Maoist Left favored a more rapid transition from a monetized society to a radical version of communism in which money would play a limited role, at most.[1]

Those members of the CPC who had an affinity for classical Marxism, if not Stalinism, were also supportive of displacing the use of monetary exchange relationships by administrative (or command) relationships whereby products and services, both production inputs and final goods, could be distributed within society and therefore drastically minimizing the role of money. Thus, early in the history of the People's Republic, both the Maoist Left and the Stalinists within the CPC favored the displacement of monetized exchange relationships by centrally planned, administrative/bureaucratic allocation mechanisms. The national administrative planning process (the Plan) determined the use of financial resources, just as it determined the use of physical resources and human labor power. Banks became instruments for plan execution, lending in accordance with the Plan and related administrative commands. The loans from banks to state owned enterprises served as a means for signalling plan objectives, which were shaped by various political struggles and agreements within the CPC and the CPC-led bureaucracy. This system of allocation was meant to transform money from an embodiment of past and present relationships of exploitation into an embodiment of the collectively determined objectives of the society.

There were several problems with this approach. For one thing, it is very problematic to assume that the CPC was representative of the Chinese population and therefore in a position to communicate democratically determined objectives of the society taken as a whole. It is also problematic to assume that the internal dynamics within the Party and the bureaucracy could even reflect the internal consensus within the CPC. And even if there was some means for resolving the various disagreements and understandings within the CPC, it is not clear that the technology was available to translate the resulting consensus on objectives into workable plan objectives. The bureaucratic process lacks sufficient flexibility and information transmission and feedback mechanisms to generate non-contradictory equilibria (or near equilibria) results that meet such objectives, even when they can be unambiguously communicated. In other words, the system for allocating goods and services through administrative fiat was inadequate to even serve the interests of the Party, much less the society as a whole.

However, even if the Maoist Left could have developed a system of allocating goods and services within the domestic Chinese economy that did not require the use of money, could they have maintained trade ties with other countries without money? The answer is yes. Contemporary transnational barter transactions are not uncommon. Indeed, given the current wave of economic crises sweeping the globe, more and more parties seem willing to enter into such transactions. The reason is very much linked to the way money serves the above described historical function of reproducing past social relationships, even when such social relationships have had a transnational character.

In order to understand the way different kinds of "national" monies can embody the underlying history of relationships between countries then we need to examine why monies have value. Fiat money, as a mechanism for commanding human labor power, directly through the command over labor time or indirectly through the command over products created by labor time, is valuable the extent to which it can be used in exchange. Fiat money is, by definition, given the power to command labor power and the products of labor by the political power of the government to secure this social role of money, to reproduce it, and to extend it over time. In international terms, the most valuable money will be that money that can be used in the widest range of exchanges on both various domestic and international markets. This power of money to command global labor time and the products of labor time is different for different countries. The Nigerian naira has far less command over global labor time than does the German d-mark, for example. The U.S. dollar is the unparalleled (at present) global money, far more powerful than any other national money. The power of these monies is directly linked to the ability of the specific home government of said money to make its money acceptable in international and domestic transactions. These relationships are directly reflected in concrete institutions of the society in question and that governments' relative influence over international institutions, particularly economic institutions. In other words, different economic and political histories (specific events and processes wherein a specific government has achieved dominance or suffered subordination in relationships with other nations) results in different sets of economic institutions and political power over economic institutions (both those in the domestic economy in question and those outside the domestic economy in other nations or international institutions) and economic institutions and political dominance give money relative value and relative liquidity (the ease with which it can be used in exchange). The post-World War II dominance of the United States (Pax Americana) has created the conditions for the U.S. dollar to become the dominant global money. It is no accident, for instance, that the U.S. dollar is used as the medium of exchange and unit of account in most international oil transactions. During the heyday of the British Empire, the British pound sterling was the dominant global money.

Thus, the current status of the U.S. dollar as the hardest of the hard currencies must be constantly generated by reproducing the underlying political and economic dominance of the United States on the global stage. This requires constant rethinking of and adjustments in concrete economic and political institutions (both in the U.S., international institutions, and foreign institutions that play a role in helping to maintain U.S. dominance). There is an advantage to already being dominant, of course. One of these advantages is that U.S. banks, with the ability to create dollars (in the fractional banking system) have an advantage over non-U.S. banks. And U.S. firms typically have relatively easier access to U.S. dollar revenues than foreign firms. Given the power of the U.S. dollar as an international currency, then this greater access to U.S. dollars provides U.S. institutions with an edge in the global economy. Nevertheless, the creation of the new european currency, the euro, reflects a significant transformation in European political and economic institutions that has implications not yet fully understood. If this transformation results in a shift in the global power balance away from the United States and towards Europe then the relative importance of the U.S. dollar may be diminished. And consequently some of the advantages that have accrued to U.S. institutions may be lost.

Barter exchange is an attempt to circumvent this historically shaped hierarchy of international monies and to impose value on the basis of the underlying usefulness of the specific commodities that are available in a given country. For example, Russia is rich in natural resources but its currency, the ruble, has become increasingly soft as Russia collapses in political and economic clout. Thus, Russia is very weak in currency terms, but strong in resource terms. This is why Russian enterprises have come to favor barter deals (goods for goods), rather than money-based trades. This eliminates the need for hard currencies. Mao tried to disconnect China from the international economy by pushing for self-sufficiency (autarchy). If China could become self-sufficient --- not need to engage in transactions with foreign commercial entities --- then China could opt out of this game, avoid developing a need for hard currency, and not participate in the reproduction of these transnational power relationships. Indeed, Mao understood the created demand for hard currencies (which were, in the 1950s, mostly U.S. dollars, British pounds, and French francs) as akin to opium addiction: the creation of a need for something that is intrinsically worthless but is monopolized by foreigners.

The current leadership in China has a very different philosophy about money, commercial transactions, and foreign exchange than the Maoists. The pragmatic modernists have, in fact, strongly encouraged the growth of foreign trade. And they have been very successful at this process. Chinese trading companies have been able to sell relatively large quantities of goods in foreign markets. The dollar revenues of Chinese exporters exceeds the dollar value of goods imported into China. In other words, China has a fairly large trade surplus. When Chinese firms deposit the dollars earned in foreign trade in Chinese banks, these banks then turn the dollars over to the Chinese central bank, the People's Bank of China. Thus, years of trade surpluses have allowed the People's Bank of China to amass one of the largest foreign exchange (forex) reserves in the world. Thus, unlike South Korean, Thai, or Indonesian firms that have resorted, to a large extent, to borrowing dollars (and other hard currencies) to pay for imports, Chinese enterprises have been in a stronger position to purchase foreign machinery, inputs, or other trade goods with U.S. dollars earned in commercial transactions. The dollars that were deposited in Chinese banks and made their way into the forex reserves of the People's Bank of China are available to Chinese firms who want to import goods or purchase foreign assets. The firms simply go to their banks and exchange renminbi for dollars. The commercial banks can always replenish their supply of dollars and other foreign currencies by going to the People's Bank of China and making a similar exchange. This is part of the reason China does not face the same sort of debt crisis as South Korea, Thailand, and Indonesia. Like Japan, China's debt problem is primarily a domestic affair -- the debt is denominated mostly in the domestic currency (renminbi) and can, therefore, be solved by domestic policies without the need for outside help.

Thus, despite the concerns of the Maoist Left that participation in the global economy would be to China's detriment, the large reserves of U.S. dollars has provided an opportunity for Chinese enterprises to purchase not only American goods and services, but also to accumulate U.S. government debt (as was discussed in the previous essay), and the securities of U.S. and other foreign firms. Chinese entities can also purchase foreign real estate. China's large hard currency reserves has allowed Chinese banks to become major players in the global foreign exchange markets where foreign currencies are bought and sold (Hong Kong is one of the major sites of these forex trades). China has not, therefore, had to kow-tow to the foreigners. Far from it.

China has been so successful in foreign trade that there was some expectation that the Chinese government would make a further liberalization of its monetary system by allowing the renminbi to be fully convertible. What does this mean? As it turns out, it is up to the government of a country to decide whether or not it will allow its domestic currency to be freely bought and sold on forex markets. A country can, in fact, make it illegal for the domestic currency to be taken out of the country or severely restrict the quantity that can be taken out. These actions would make forex trading in that currency impossible and we would therefore be unable to gauge the relative economic and political power of a country, in part, by observing the way its currencies trades against other currencies. If a government does not want the value of its currency vis-a-vis other currencies to be determined by forex transactions, then it can avoid this by imposing such restrictions. We then say the currency is not fully convertible into other currencies. China has, so far, not allowed the renminbi to be freely bought and sold in forex markets, although it is easier to convert renminbi outside of mainland China today than when I first went to China (when it was impossible to do so). This is why China was relatively insulated from the chaotic devaluations that rippled like an earthquake across Asia and even touched many shores beyond Asia (the Canadian dollar has, for example, significantly fallen (depreciated) in value vis-a-vis the U.S. dollar). The currency crises in many Asian countries has probably convinced China's current leadership to take a much slower path to the full convertibility of the renminbi than might otherwise have been the case, as well as providing some solace to the Maoist Left that maybe they were right about the role of money after all.


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[1] A Marxian analysis of the role of money is in clear contrast to the concept of "money neutrality" popular within the neoclassical debates. The neoclassical notion that money could have a limited impact on the social formation (changing prices in an economy but having no affect on any other social or natural phenomena) has been formalized in a number of models and continues to be taken seriously by many economists, particularly those neoclassicalists specializing in so-called monetary theory and macroeconomics (although, perhaps fortunately, getting appointed to the Federal Reserve board of governors seems to cure this curious form of myopia). Most Marxian analysts would reject the very ontological basis of the neoclassical argument (that a phenomenon like money could exist and yet not influence the other social and natural phenomena with which it interacts/is an integral element of). Marxian analysis begins with recognition that money is a significant instrument in reproducing certain social relationships, in shaping human possibilities, and even changing the consciousness of agents.

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Copyright © 1999 Satya J. Gabriel, Mount Holyoke College.  
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