A Marxist Guide to Capitalist Crises
“A Marxist Guide to Capitalist Crises,” an eBook created from the key posts on the Critique of Crisis Theory blog, is currently in production. We’ll be sharing the completed chapters between our regular postings.
Chapter 32: The Reagan Reaction and the Coming of the ‘Great Moderation’
After World War II, the Keynesian reformers took unjustified credit for the postwar economic upswing. During the reactionary 1980s, it was the turn of the extreme right-wing governments that had come to power in Britain in 1979 and the United States in 1981 to take unjustified credit for the end of the protracted economic crisis of 1968-1982.
These right-wing governments attempted to take back as many concessions as possible that had been won by the working class after World War II. At first, the policies of the new reactionary governments were called “monetarist”; later, they were called “neoliberal” for reasons that will become apparent below.
As we saw in the last chapter, the monetarist, or neoliberal, era in the United States began with the appointment of Paul Volcker as chairman of the Federal Reserve Board by the Democratic administration of Jimmy Carter in August 1979. The post-World War II reformist era had been made possible by the generally expansionary economic conditions combined with what for capitalism was an unusual lack of currency and banking crises.
As we have seen, this era of rapid economic growth and stable financial conditions was part of the aftermath of the super-crisis/Great Depression era. Ordinary economic crises and the depressions that follow in the economic sense temporarily stabilize the capitalist system, and the super-crisis of 1929-33 and the resulting Depression did the same thing but on a “super” scale.
Therefore, it was the super-crisis/Depression itself — not New Deal-inspired financial regulations or the post-World War II Bretton Woods monetary system — that were responsible for the unusual lack of banking and currency crises. This also explains the lack of deep, prolonged slumps in production, employment, and world trade, and the overall high level of economic growth in the real economy. The collapse of the London Gold Pool in March 1968 marked the end of this early post-World War II era of capitalist prosperity and financial stability.
The Rise of Thatcher and Reagan
Attempts during the 1970s to re-launch the post-World War II capitalist prosperity through Keynesian methods — deficit spending and monetary expansion — repeatedly failed. This was the economic basis for the new era of reaction that was symbolized but not caused by the election of Ronald Reagan in the November 1980 U.S. presidential election and the rise to power of Margaret Thatcher in Britain in 1979 with her “there is no alternative” slogan (TINA).
What Thatcher meant was that there was no “Keynesian” alternative to her reactionary monetarism as long as the British pound was plunging in value both against gold and even against the falling dollar on world currency markets. The attempts during the 1970s to pull Britain out of its economic decline through Keynesian policies had even more dismal consequences in the form of skyrocketing inflation and interest rates than similar policies had in the United States.
Therefore, the non-Marxist British Labour Party and the non-Marxist British left in general, which based itself on the economics of Keynes rather than Marx—and even the Tory “wets” (members of the British Conservative Party who opposed some of the more hard-right policies of Thatcher)—no longer represented a viable alternative to Thatcher’s policies of currency stabilization. Thatcher’s “stabilization” policies were carried out at the expense of the working class and its allies for the benefit of the capitalist exploiters.
Monetarism and the Volcker Shock
The Volcker shock, in essence, involved a brutal, but for the capitalist system absolutely necessary, radical rise in the rate of interest that was required to restore confidence in the dollar and its satellite paper currencies. It was presented to the public, however, as the adoption of the policies of Milton Friedman, whose theories supposedly corrected the mistakes that the Keynesian economists had made.
In the 1950s and 1960s, Friedman was considered a right-wing fringe theorist because of his opposition to then-dominant mainstream Keynesian economics. But as economic conditions worsened after 1968, Friedman moved from the fringe to the mainstream.
Friedman claimed that the capitalist economy would avoid sharp swings in the industrial cycle if the rate of growth of the “money supply” — legal tender token money in the hands of the non-bank public plus commercial bank-created credit money — were stabilized. If this were done, Friedman and his supporters held, the contractions of the money supply that had marked classic pre-World War II crises, on one side, and the “stagflation” of the post-1968 years with its rising prices — in terms of paper money — growing unemployment and rising interest rates, on the other, would now be avoided.
Friedman’s Alternative to Keynesianism
In contrast to Keynes, the Friedmanites also claimed that there was no need for expansionary fiscal policies, such as public works programs or even extended unemployment insurance, to combat the effects of mass unemployment caused by recessions. Unlike Keynes, who feared that long-term mass unemployment would turn the working class and even large sections of the middle class against the capitalist system, Friedman claimed that as long as the money supply kept growing at a slow but steady pace, a prolonged deep economic depression and its associated mass unemployment was impossible.
Unlike the Keynesians, who see unemployment as caused by a lack of monetarily effective demand for commodities, the monetarists claimed that the growing unemployment of the 1970s was caused by what they called the “high natural rate of unemployment.” The only way to lower unemployment’s “natural rate” was to cut back social insurance, bust the labor unions, repeal minimum wage laws, and so on. The more this was done, the supporters of Friedman claimed, the more the “natural rate of unemployment” would fall toward zero.
Such policies, along with the steady growth rate of the money supply—which, according to Friedman, requires a paper money system, not any form of gold or gold-exchange system—would bring permanent “full employment” without serious inflation or deflation. By upholding the system of paper money—especially as implemented in practice—the monetarist policies represented a kind of right-wing “corrective” to mainstream Keynesianism rather than a full return to classical economic liberalism, which was based on the pre-1914 international gold standard.
The ‘Great Moderation’
Between 1983 and 2006, there were only two “contractions” in the U.S. economy, according to the National Bureau of Economic Research, one in 1990-91 and another in 2001. The official statisticians claimed both were “brief and mild.” In many European countries, statisticians reported that there was only a period of slow growth rather than an actual recession.
With so few recessions — and generally mild recessions at that — for over a quarter of a century, you would think that the 1983-2006 period would be one of great capitalist prosperity. In reality, 1983 to 2006 was an era of profound decline for the economies of the United States, Western Europe — not to speak of Eastern Europe after 1989—and Japan.
Nor were the two major cyclical downturns of the Great Moderation, one in the early 1990s and the other between 1997 and 2003, as brief and mild as bourgeois economists claim.
The Early 1990s Downturn
In the early 1990s, the U.S. experienced the collapse of the savings and loan home mortgage financial system and a resulting major real estate crisis. The early 1990s downturn in the industrial cycle hit the Nordic countries of Europe, especially Finland, extremely hard. These countries experienced major banking and currency crises.
In Finland, official unemployment rose above 16 percent, and the GDP dropped by more than 10 percent over three years. Ironically, the recession of the early 1990s was more severe in the Nordic countries than it was elsewhere because the economy of Finland was extremely hard hit by the dismantling of the economy of the Soviet Union under Gorbachev and Yeltsin. As a result, Finland’s trade with what had been the Soviet Union declined by 70 percent.
While newly capitalist Russia continued to languish in a deep depression caused not by cyclical factors but by the transformation from a higher mode of production — the socialist beginnings represented by the state-owned Soviet planned economy — to a lower mode of production — capitalism — the economy of capitalist Finland bounced back after “only” three years of deep economic crisis.
The Late 1990s Crisis
The next capitalist economic crisis, which began in July 1997 with the devaluation of the Thai baht, was both protracted and, in some countries, extremely severe. However, the United States, Japan, and especially Western Europe were able to dodge the worst of that particular crisis.
In Argentina, the crisis in 2001 was arguably worse than the crisis of 1929-33 in the United States and Germany. However, no imperialist country experienced a banking or currency crisis during this downturn. The currency and banking crises and their associated deep depressions were confined to the oppressed countries.
The U.S. seemed to come close to a major credit crisis in September 1998, when the giant Long Term Capital Management hedge fund was on the brink of collapse and had to be bailed out by the Federal Reserve Bank of New York. As a result, U.S. credit markets briefly seized up. But in contrast with what was to happen in 2007, this credit market crisis quickly passed.
Stock Market Volatility
Though the period between 1983 and 2006 saw dramatic stock market gains, two major stock market crashes occurred. One was the short-lived but violent stock market panic of October 1987, and the other saw the U.S. NASDAQ high-tech stock index lose more than half its value during the so-called “dot-com” crash that started in March 2000.
On March 9, the NASDAQ closed at 5046.86. This peak was not surpassed until it closed at 5056.06 on April 23, 2015, more than fifteen years later. The economy of Silicon Valley, located in northern California, had not fully recovered from the aftermath of the dot-com crash when it was engulfed in the “Great Recession.”
The early 2000s recession saw the giant swindling Enron energy trading company collapse in December 2001. The fiber-optic industry was devastated by massive overproduction during 2000-2003, leading to major corporate bankruptcies.
Therefore, in contrast to the stability of the 1948-1968 period, which saw few currency and banking crises or major corporate bankruptcies, the global financial and banking system was far less stable during the 1983-2007 Great Moderation, and overall global economic growth was lower.
However, compared to the super-crisis of 1929-33 and the “stagflation” crises of the 1968-1982 period, which threatened on two occasions—1973-74 and even more in 1979-80—to bring down the currency and credit system of the entire capitalist world, the Great Moderation of 1983-2006 was indeed an era of relative capitalist economic stability and prosperity.
Despite the stock market crash of 1987 and the turn-of-the-century dot-com crash, the Great Moderation era saw the greatest boom in stocks and bonds in the history of the capitalist world. If you were a money capitalist—like most of the “opinion makers” and financial “experts” who write for the capitalist press—1983-2006 was the greatest period of prosperity the world had ever seen.
No ‘Great Boom’ in the Real Economy
However, if you look at the “real economy” — especially the sphere of factory employment — you get a quite different picture. A look at the trend of factory employment in the United States, the leading capitalist country in those years, tells the story.
From the War of “Independence” at the end of the 18th century — which marks the birth of industrial capitalism in the United States — to 1979, with cyclical ups and downs, factory employment showed a secular upward trend. True, since factory employment is very sensitive to changes in the industrial cycle, such employment always dipped during periods of sharp crises and lesser recessions, but it always rose to new highs when economic growth resumed.
This held good even for the super-crisis and Depression of the 1930s. After the Depression ended, factory employment rose well above the levels of the 1920s and stayed there. It did show a fall from the extraordinarily high level of the World War II war economy when workers—many of whom were women—who were not in uniform were pressed into the factories to make means of destruction. But after the “re-conversion crisis” of 1945, factory employment resumed its secular rise, falling during recessions but rising more during expansions.
The Long-Term Decline in Factory Employment and the Decay of Capitalism
After World War II in the United States and other highly industrialized capitalist countries, the percentage of factory workers declined, a tendency that had begun to appear in Britain even before World War I. This reflected a dramatic decline in the farm population first in Britain and then in the United States and other imperialist countries. As capitalism develops, the number of factory workers grows relative to small farmers or peasants but drops relative to the broadly defined “service workers” category.
As long as small farmers or peasants formed a large percentage of the population, the number of factory workers grew relative to the entire population. However, once the small farmer/peasant portion of the population fell below a certain level, the percentage of factory workers in the total population starts to decline relative to the percentage of service workers. However, even after this happened, the number of factory workers continued to rise in absolute terms, falling temporarily only during recessions.
The Unprecedented Decline During the Great Moderation
Despite only two official NBER “contractions” in the U.S. economy and perhaps one official recession in many European countries over the 23 years from 1983 to 2006, factory employment fell more during recessions than it rose during NBER expansions. For example, in the United States, the three official NBER “expansions,” two of which were “the longest expansions of record,” according to the NBER, factory employment eroded during expansions and plunged during the two official periods of “contraction” recognized by the NBER.
Indeed, long stretches of the NBER “expansions” were characterized by falling factory employment. Factory employment behaved over large stretches of NBER “expansions” of the Great Moderation more like it did during pre-1979 NBER “contractions.”
During the final official expansion of the Great Moderation — 2001 to 2007 — factory employment increased for only a small fraction of the expansion. Across the entire expansion, U.S. factory employment declined considerably.
This is even true if we take the more realistic dates of mid-2003 to mid-2007 for the last upswing of the industrial cycle during the Great Moderation. As a result, even before the crisis that started in 2007 began, official employment in manufacturing in the U.S. was the lowest since the late 1940s. On the eve of the 2007-08 Great Recession, the entire growth in factory employment that had occurred during the post-1948 prosperity had been wiped out!
If we use the criteria of total factory employment, the recession that began with the Volcker shock in 1979, despite some fluctuations, has never ended but has continued to deepen. The 45-year, and counting, recession in U.S. factory employment stands in the sharpest contrast to the unparalleled performance of U.S. and world stock and bond markets between 1982 and 2007!
Global Trends
These trends were not unique to imperialist countries. The economies of Latin America generally experienced slower growth than they did before the Volcker shock. Indeed, some countries, such as Argentina, that have often been described as “semi-industrialized” experienced drastic economic decline during the Great Moderation. Throughout the Great Moderation, Africa remained an economic disaster zone.
The Rise of China
The great exception to the semi-stagnation of the Great Moderation was Asia, where in some countries, economic growth since 1983 has been considerable and in a few dramatic. This has been especially true of China since the Deng Xiaoping-led government opened up China to outside capitalist investment and began to encourage the expansion of Chinese-owned capitalist enterprises after 1978.
The growth of capitalist industry and exploitation has been nothing short of spectacular. As a result, the China that celebrated the 60th anniversary of its great revolution in 2009 was not only unrecognizable compared to the China of 1949 but even the China of a decade earlier.
The dismal performance of the “real economy” between 1983 and 2006 — China and a few other mostly Asian countries excepted — forced the capitalist media to boast not about the “unparalleled boom” as they did in previous periods of long-term capitalist upswing but only about a “great moderation.”
In long-term capitalist upswings of the past, such as the mid-Victorian boom between 1848 and 1873, the years from 1896 to 1913, and — after World War II — 1948 to 1968, factory employment grew in all capitalist industrial countries. True, output grew much faster than the growth in factory employment due to the rising productivity of labor that characterizes the entire history of capitalism. But before 1979, while industrial production grew much faster than factory employment due to the rise in the productivity of labor—and the growth in the organic composition of capital—factory employment had always grown in absolute terms.
While the growth of labor productivity has been considerable over the last 30 years, and as a result, the performance of factory output has certainly not been as dismal as factory employment, there is no indication that the growth in the productivity of labor has been faster since 1979 than it was in the pre-1979 era.
Certainly, there is not enough difference to account for the decline in factory employment in so many capitalist countries. The Volcker shock that began under Democrat Jimmy Carter in 1979 marked a major watershed in modern economic history, perhaps in the long run more important than the year 1929, which saw the beginning of the super-crisis.
Why Did Factory Employment Decline?
We can explain the post-1979 decline of factory employment as due to the “decline of capitalism.” But this is no real explanation. It’s like saying that factory employment in the United States and other imperialist countries dropped because the number of factory workers declined in those countries.
We, as Marxist economic scientists, must answer why this unprecedented, prolonged decline in factory employment occurred. And will factory employment continue to decline in the future?
What we say below is tentative because we are exploring a new phenomenon in the history of capitalism. In the past, many Marxists, and even more so bourgeois economists, had gone astray by proclaiming relatively prolonged but ultimately temporary deviations from the long-term path of capitalist development as permanent, only to be confounded when capitalism resumed its “normal” path.
As is always the case when confronting a new phenomenon, we should always “consult” Marx. Marx was not a religious prophet who had a lifeline to the almighty. But he often gives us valuable clues that help us analyze new phenomena in capitalist development and decay.
There are many reasons to suspect the long-term decline in factory employment in many capitalist countries is closely related to two other phenomena that have characterized the last 30 years. One is financialization — what John Bellamy Foster of Monthly Review has called the rise of “monopoly-finance capital.”
Closely connected to this has been the rise of the dollar standard, which replaced the old dollar-gold exchange standard of the early post-World War II era. In this and the following chapter, we examine financialization and the “paper dollar” standard that replaced the gold-exchange Bretton Woods system in the early 1970s. Both developments are crucial in understanding the current condition of the world capitalist economy and its future evolution.
Aftermath of the 1968-82 Crisis—The Rise of ‘Financialization’
At the end of the prolonged crisis of 1968-1982, the U.S. and world economies differed in one important sense from the situation that followed a traditional capitalist economic crisis. Typically, in the wake of a major economic crisis, interest rates, both short-term and long-term, are far lower than before the crisis.
This was particularly true in the wake of the Depression of the 1930s. At the end of the Depression era in 1940, the interest rate of return on Aaa (lowest risk) corporate bonds was 2.84%. In 1946, after the end of the World War II war economy, the return of Aaa bonds was even lower at 2.53%. It was only from 1946 on that normal expanded capitalist reproduction resumed.
As it turned out, 2.53% was to be the lowest interest on corporate Aaa bonds until the end of the series, which runs from 1933 to 2010. The very low long-term interest rates were important in launching the post-World War II protracted capitalist prosperity.
Due to the fifteen-year breakdown of expanded reproduction due to the Depression and World War II, combined with rising gold production during the 1930s, interest rates, both long-term and short-term, were at the lowest levels in the history of capitalism up to that time. These low interest rates, combined with a high rate of profit, were the conditions that made possible postwar World War II capitalist prosperity.
The Role of Interest Rates
A low long-term interest rate encourages some money capitalists to become industrial or commercial capitalists and in general encourages the spirit of enterprise. In referring to industrial and commercial capitalists, I am not simply referring to individual money capitalists who might be tempted to try their luck at becoming industrial and commercial capitalists, though this does play a role. Since the end of the 19th century, the world capitalist economy has been increasingly dominated by corporations — associations of money capitalists — that act collectively as individual industrial and commercial capitalists.
Individual holders of shares in industrial and commercial corporations can be said to function as money capitalists insofar as they invest money capital—M—in the shares with the expectation of “earning” a return in the form of dividends and/or capital gains, thereby realizing an augmented money capital—M’. The difference between M’ and M earned by stockholders is equivalent to the accrued interest “earned” by holders of corporate bonds plus the capital gains to the extent that the price of the stock rises on the stock exchange.
The main difference between the two types of “moneyed” capital is that the return on shares is variable, whereas the return on corporate bonds is fixed.
Money Capitalists and Industrial Capitalists and Commercial Capitalists
While there are pure money capitalists, there are no pure industrial or commercial capitalists. Marx explained that every industrial and commercial capitalist is also a money capitalist, just like every industrial capitalist is a dealer in commodity capital—a merchant capitalist. We can see why this is so if we look at the basic formula of industrial capital: M→C…P…C′→M′.
The process always begins with M. Unless our industrial capitalists work entirely with borrowed capital, they must also be money capitalists—owners of capital in the form of money. This is why industrial capitalists are entitled to the interest on their own—but not on borrowed—capital.
In the unlikely event that our industrial capitalists are working entirely with borrowed capital, if the business is successful, we would expect them to transform some of the profit of enterprise into new capital during the next expanded cycle of production. They will thus become the owners of this new capital in the form of money and will, to that extent, become money capitalists.
The same is true of commercial capitalists. There, the commercial or trading capital cycle is expressed by the formula M→C→M′ where C is commodity capital. The trading capitalists begin with a sum of money — money capital — then transform it into commodity capital — commodities that contain unrealized surplus value. They buy the commodities at a price that does not fully realize the surplus value embodied in them and then proceed to sell them at a price that does fully realize the surplus value the commodity capital contains.
In this way, the commercial capitalists get their slice of the surplus value produced by the unpaid labor of the working class. Therefore, the trading capitalist is also, to a certain extent, a money capitalist, except when the trading capitalist works with entirely borrowed capital.
Corporate-dominated Monopoly Capitalism
This becomes even truer as industrial capitalism evolves into corporate-dominated monopoly capitalism. Modern non-financial corporations—industrial and commercial corporations—are careful never to allow any cash they have to lie idle. If they cannot immediately transform idle cash into productive capital in the case of industrial corporations, or into commodity capital in the case of commercial corporations, they invest it in various interest-bearing securities.
By doing this, they act as money capitalists, not industrial and commercial capitalists. Everything remaining equal, the more that capitalist production and trade fall under the control of large corporations, the more the industrial and commercial capitalists will function as money capitalists as well as commercial or industrial capitalists.
The Long-Term Tendency of the Rate of Interest
As we know, the rate of profit has a long-term tendency to decline. Leaving aside ground rent, if the division between the profit that goes to the industrial or merchant capitalist remains stable, the rate of interest would have a tendency to decline with the rate of profit.
However, because as capitalism develops an increasing number of capitalists cease to be active capitalists and become money capitalists, an increasing quantity of the total social capital is invested on the money market—rather than being transformed directly into merchant or productive capital. This creates a tendency for the rate of interest to fall independently of the fall in the rate of profit. Even more than the rate of profit, the long-term tendency of the rate of interest is downward.
In addition, not only individual capitalists can transform themselves from active capitalists into money capitalists. The collective capitalists called corporations can do exactly the same thing. The extent to which “non-financial” corporations act as money capitalists instead of industrial and/or commercial capitalists varies with the stage of the industrial cycle and the interest rate.
If, for example, business is stagnant, corporations will tend increasingly to invest their growing cash revenues that cannot be immediately transformed into productive or commodity capital in low-yielding securities such as government bonds or short-term Treasury notes.
If, however, business is expanding vigorously—that is, the process of capitalist expanded reproduction is proceeding with great vigor—the “non-financial” corporations quickly transform any money that passes through their hands into productive or commodity capital. When the corporations do this, they reduce the supply of money loan capital, driving up the rate of interest. This is one of the reasons that interest rates rise during the boom phase of the industrial cycle.
Profit, Interest, and the Profit of Enterprise
Another factor determining to what extent the corporations — and non-corporate capitalists — act as industrial and commercial as opposed to money capitalists is the relationship between the rate of interest and the rate of profit. If the rate of interest is low while the rate of profit is high, any industrial or commercial corporation incurs a high “opportunity cost” if it invests its capital in low-yielding securities, which yield at best the average rate of interest, rather than investing it in its industrial or commercial business, which yields the average rate of profit.
If it invests in low-yielding securities during periods of brisk business, it will be losing out on opportunities to appropriate the profit of enterprise. Under these conditions, industrial and commercial businesses can transform their money capital into real—productive or commodity—capital. They will hold only the smallest possible balances of money—or interest-bearing—capital. If they don’t do this, they will incur significant “opportunity costs” in terms of the profit of enterprise not obtained, and losing market share to competitors, which leads to the decline of the business and its eventual collapse.
High Rate of Profit and High Rate of Interest
But what about a situation where both the rate of profit and the rate of interest are high? Suppose the rate of profit is high, but all the profit goes to interest and not the profit of enterprise. Assume the rate of long-term interest is 12 percent and the rate of profit is also 12 percent. Though the rate of profit is a high 12 percent, the profit of enterprise is 0 percent.
In this situation, it makes no sense for industrial capitalists to borrow money at 12 percent if they only expect to make a profit of 12 percent. If the industrial capitalists work with borrowed capital under these conditions, they will realize no profit.
But even if working entirely with their own capital, if the industrial capitalists expect to make only a 12 percent rate of profit, it would be much less risky to let the business decay and invest cash revenues in government bonds or other low-risk long-term securities.
As Marx explained, in the long run, the rate of interest must be lower than the rate of profit. If it isn’t, industrial capital decays as the production of surplus value grinds gradually to a halt. But if such a process unfolds, it will unleash the forces that will inevitably reduce the rate of interest over time until once again the rate of interest is below the rate of profit, restoring a positive profit of enterprise. This, in a nutshell, is Marx’s theory of interest.
In the last chapter, we saw that the capitalist economy cannot exist for long if the rate of profit in terms of gold is negative. It cannot exist if simply hoarding gold is more “profitable” than industrial investment.
It is also true that capitalism cannot exist in the long run in a situation where the rate of interest is not below the rate of profit. If the rate of interest is equal to or higher than the rate of profit, the very incentive to produce surplus value is destroyed. Real capital will contract, but the very contraction of real capital will bring about a fall in the rate of interest until it is once again below the rate of profit.
The Long Shadow of Keynesian Economic Policies
We can now see that the Keynesian economic policies of the 1950s and 1960s, though they did for a while reduce the intensity of cyclical crises, caused severe long-term damage to the capitalist economy that extended far beyond the Volcker shock. It was, after all, Keynesian economic policies that preceded the Volcker shock and not the Volcker shock itself that was responsible for the long reign of high interest rates.
This is shown by the fact that from the end of World War II to the Volcker shock, interest rates kept rising on a secular basis. But after the Volcker shock, both long-term and short-term interest rates fell for a generation.
The Dollar Paper Money Standard
While interest rates finally began to fall after the Volcker shock, they remained far above the historical levels for a prolonged time. In the wake of the Volcker shock, currencies were stabilized, but the money capitalists wondered how long the stabilization would last.
After the Volcker shock, the U.S. government rejected suggestions to restore the gold standard—even though President Ronald Reagan was said to favor it personally. Instead, the administration limited itself to continuing to allow U.S. citizens to own monetary gold; a ban on owning it was imposed by Franklin Roosevelt in 1933 and then lifted by President Gerald Ford in December 1974.
The coining of gold bullion produced in the United States was resumed at various mint prices. For example, the mint price for an ounce of gold was $50. However, since the mint price of these new gold coins was far below the market dollar price of gold bullion, these bullion coins were used for hoarding only, though they were formally legal tender currency. Commodity prices and debts continued to be expressed in terms of legal-tender paper dollars and not the new gold dollars.
Both Keynesians and Friedmanites Opposed a New Gold Standard
During the Great Moderation, bourgeois economists — not only Keynesians, who were now much reduced in numbers and influence, but also “monetarist” followers of Milton Friedman — continued to believe that prices in terms of currencies should never be allowed to fall. This was incompatible with a new gold or gold-exchange standard.
The new consensus among bourgeois economists was that the Keynesians had gone much too far in the late 1960s and the 1970s in believing that it would be possible to eliminate the “business cycle” entirely — or almost entirely — through government deficits financed by paper money created by the “monetary authorities.” In the future, the aim of a “stabilization policy” should not be to eliminate the business cycle but simply to keep it within “moderate” limits.
According to the consensus view that developed in the years of the Great Moderation—except for the “Austrian school,” which is not taken seriously in policy-making circles—in the past, under the gold standard or gold exchange standard, the “monetary authorities” had their hands tied and therefore in a crisis were not able to create sufficient money to prevent the business cycle from leading periodically to deflation, panics, and severe depressions with their resulting unemployment crises.
In the 1970s, the new gospel went, governments and monetary authorities had gone to the opposite extreme, believing that they could eliminate the business cycle if only they issued money in sufficient quantity whose quantity was no longer limited by the discipline of a gold or even a gold-exchange standard. This caused the monetary authorities to balloon the “money supply,” which brought the capitalist economy to the brink of runaway inflation and disaster. A middle course should be followed in the future to avoid both extremes.
The early postwar promises that in the future, capitalism would experience permanent “full employment” if only it were given another chance were, in effect, withdrawn. Instead, there was the more limited promise that a depression would never again be allowed to spiral out of control, such as what happened in the 1930s.
However, without the “discipline” of a revived gold standard in some form, the money capitalists feared that the devaluation of the paper currencies would resume sooner or later. There had been brief “stabilizations” of the dollar between 1968 and 1982, after all. But the depreciations quickly resumed. Why would it be any different in the future?
After all, hasn’t the whole history of currency since the coining of money metals was invented about 2,500 years ago been the history of the debasements of these currencies, with brief intermissions of stabilization, such as the international gold standard of 1870-1914?
After currencies were pushed to the brink of collapse during the 1970s, causing them severe losses, the money capitalists were reluctant to lend money except at very high rates of interest. If the monetary authorities tried to force down these high rates of interest by flooding the money market with newly created legal tender token money, the money capitalists would respond by dumping their paper assets for “hard money” in the form of gold.
As a result, especially early in the Great Moderation, long-term interest rates remained high. For example, in 1968 at the beginning of the stagflation crisis, the rate of interest on Aaa corporate bonds was 6.18%. At the end of the crisis in 1983, it was 12.05%. The yield on Aaa corporate bonds was much higher at the end of the crisis than it was at the beginning of the crisis. This is sharp contrast with the 4.49% rate on Aaa after the crisis in 1933 and the 3.01% which prevailed in 1940 at the end of the Depression. With interest rates that high, there was little room for a positive profit of enterprise.
However, converting a considerable section of the industrial and commercial capitalists—or corporations—into money capitalists implies an abnormal expansion of credit. We will examine this more closely in the next chapter, exploring the causes of the “Great Recession.”
The Dynamics of Financialization
We can examine financialization as it unfolded. The extremely high rate of interest tempted the leaders of “corporate America,” and capitalists in other countries as well, to enter the “financial services business” — that is, to make money by lending it out at interest as opposed to acting as industrial or commercial capitalists.
The formula of interest-bearing capital is simply M—M’. Production and, indeed, commodities themselves drop from view. Money seems to be breeding money, as though it was a living organism.
The big capitalist corporations increasingly transformed themselves into collective money capitalists following the Volcker shock. The real industrial economy entered into decay — deindustrialization. As corporations that had previously been mostly industrial or commercial companies began to buy and hold interest-bearing securities of various types, the demand for these securities progressively rose. As the demand for interest-bearing securities rose, the rate of interest on them slowly but relentlessly declined.
Where Did the Money Come From to Buy All Those Securities?
But where did the money come from to buy the huge quantities of securities, derivatives, and other financial instruments that drove the rate of interest relentlessly lower as financialization proceeded? It could not ultimately come from the monetary authorities.
The new money that finally lowered interest rates came not from the monetary authorities but from where new money has always come — the labor of the workers employed in the industry that produces money material. And this industry — the gold mining industry — starting in the 1970s had suddenly become profitable once again, both relatively and absolutely.
Professor Friedman Falls on His Face
If the 1970s allowed Milton Friedman to move from the fringe to the mainstream, the 1980s turned out to be a bad decade for Milton Friedman. After the Volcker shock, Friedman looked at the rate of growth of the “money supply” and once again predicted accelerating inflation, just as he had correctly done throughout the 1970s.
But this time, the University of Chicago professor fell on his face. The rising “money supply,” instead of driving up inflation, began to accumulate into hoards in the banks or was invested in the bullish bond and stock markets rather than being burned up in the form of sharply higher prices. As the quantity of money increased, the supply and demand for gold could be equalized at gradually lower rates of interest.
What was happening was that the quantity of metallic money, due to the rise in the rate of profit in producing it, was growing substantially faster than it had grown in the 1970s. The effect of an increase in the quantity of metallic money, all other things remaining equal, is to lower interest rates.
This rise in gold production, which made the economic stabilization of capitalism possible after the Volcker shock, no matter how shaky, was no accident. It was the working out of the law of value of commodities, which, over the long run, equalizes prices with their underlying values, though only through the deviation of prices from their labor values—or more strictly prices of production—in the short run.
The dramatic fall of commodity prices in terms of gold that was concealed behind the accelerating rise of prices in terms of depreciating paper currency during the 1970s had made the gold mining and refining industries fabulously profitable. Capital, always in search of the highest profits possible, flowed into the gold-producing industry.
As a result, gold production steadily increased from the early 1980s to the turn of the century. The resulting rise in the quantity of metallic money helped make possible a decline in the rate of interest without a new Volcker shock during the years of the Great Moderation.
The Return of Keynesian Thinking
To the bourgeois economists, who have no understanding of value, profit, prices, or interest rates — they are barred from such an understanding by their rejection of the law of labor value and surplus value — it seemed as though the Keynesian world had, to some extent, returned. Once again, the monetary authorities had regained their ability to lower interest rates, even if interest rates remained abnormally high for an extended period of time. As late as 2000, the interest rate on Aaa-rated corporate bonds was approximately 7.2%. In contrast, the rate stood at 5.10% as of October 16, 2025.
A consensus among bourgeois economists began to form that the 1970s had been an aberration caused by the gross abuse of Keynesian economics between the Vietnam War era and the Volcker shock. Keynesian medicine could be used in moderation, especially in an emergency, which hopefully would never occur, but it would have to be used with caution. An overdose would be disastrous.
Therefore, Friedman’s quantity theory of money — monetarism — became increasingly discredited in university circles. However, this was not explained to the “lay public.”
Whatever Happened to ‘Monetarism’?
The University of Chicago professor’s insistence that what was good for the capitalist class corresponded to the interests of society—no social insurance, no labor unions, no rent control, no minimum wage laws—was simply too good to give up, even if his monetary theory—his supposedly great discovery—had proven to be nonsense.
The term “monetarism,” therefore, quietly disappeared and was replaced by “neoliberalism.” It was, after all, possible to advocate cuts in—and even the abolition of—social insurance, labor unions, minimum wage laws, and so on without advocating a fixed rate of growth in the “money supply.” Friedman, who did have a great gift of making vulgar neoclassical marginalist economics appear plausible to the lay public, continued to be a useful icon of reaction even if his alleged “scientific discovery” was no longer taken seriously.
A Critique of Crisis Theory 