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 33: The ‘Great Moderation’ and Financialization
The “Great Moderation” brought with it only moderate economic growth. However, it was accompanied by a credit inflation that was anything but moderate. With the unprecedented growth of the credit system came a considerable increase in the role of interest-seeking loan capital.
Paul Sweezy (1) said in a 1987 interview:
“I sometimes have the feeling that economics now is in need of a general theory, in the sense that physics seems to be in need of a general theory, i.e., that there are a lot of things that are going on that don’t fit into the standard physical theories. And they are looking for a general field theory which would unify all of it. They don’t have it yet.
In economics, we need a theory which integrates finance and production, the circuits of capital of a financial and a real productive character much more effectively than our traditional theories do.
I don’t see that anyone is actually producing it. Some people are beginning to become aware of the need for it, but it’s terribly complicated. And I’m sure that I’m too old to be able to think of those things. I can get snatches, insights here and there, but I can’t put it together into a comprehensive theoretical framework. I think it will take somebody who starts differently and isn’t so totally dominated by M–C–M′, the industrial circuit, with the financial circuits always being treated as epiphenomenal, not part of the essential reality.”
— Monthly Review, July–August 2013 (introduction by John Bellamy Foster)
Sweezy was fascinated by the growth of the circuit of loan capital M—M’. This, as opposed to the circuit of industrial capital, appears to contain no act of production. Instead, money appears to be breeding money.
The circuits of productive capital, merchant capital, and money-bearing capital. Actually, the industrial circuit of productive capital is M—C..P..C’—M’. Industrial capitalists start with a sum of money M. They purchase C, which includes both the elements of constant capital — buildings, machinery, raw and auxiliary materials — and variable capital — labor power — which actually produces surplus value. The value of C is assumed to be equal to the value of M. The industrial capitalists then carry out the act of production in which both constant and variable capital are consumed. As variable capital is consumed, surplus value is produced. The capitalists then end up with a quantity of newly produced capital that has absorbed surplus value. Commodities that have absorbed surplus value are called commodity capital.
The commodity capital includes both value that is of equal magnitude to the starting M, plus an additional surplus value now embodied in C’. The capitalists then must find buyers for the C’ on the market. If buyers are found — and this is most certainly not guaranteed, as any real-world businessperson will tell you — the capitalists appropriate M’, a sum of money greater than the amount they started with. (M’ – M) is the money form of surplus value, which is called profit.
The circuit of commercial capital
Commercial capitalists deal in commodity capital. They purchase commodities whose value includes a surplus value at a price below their value — direct price — and price of production, and then sell them at their value or direct price or, more strictly, on average, the price of production. (2) The commercial capitalists cannot do this unless the commodities have been produced and already contain a surplus value. Therefore, the origin of commercial capitalists’ profit in the sphere of production is clear. However, since no actual production takes place, only changes of titles of ownership, the formula for merchants’ capital is M—C—M’.
The circuit of interest-bearing capital
In contrast to the circuit of industrial capital, the circuit of interest-bearing capital is simply M—M’. The money capitalists lend a sum of money M and receive the original M back after a period of time, plus an additional sum of money — the interest. It appears that that money itself grows — as if gold somehow had the power to create additional gold. (3) Or, as the bank commercials put it, let us grow your money for you.
The mystery of interest-bearing capital
The period dubbed the “Great Moderation,” between the Volcker shock and the “Great Recession” — 1983-2007 — was marked by a huge increase in the role of interest-seeking financial capital — capital whose circuit is M—M’. As we saw above, in the final period of his life, Paul Sweezy was both puzzled and fascinated by the phenomena. But he also sensed that something big was missing from the analysis of his own Monthly Review school. Pleading old age, Sweezy left the solution to a younger generation.
However, before we begin exploring the question raised by Sweezy, we should first consult Marx.
Marx on class and forms of profit
Following Adam Smith, Marx defined three types of incomes earned by the classes of modern capitalist society — rent of land, which goes to the owners of land; wages of labor, which go to the sellers of labor power; and profits of capital, which go to the owners of capital.
The profit appropriated by the owners of industrial capital — both productive and commodity — is called by Marx the profit of enterprise. Marx called the portion of the profit that goes to the owners of money capital interest. In the real world, every industrial as well as commercial capitalist is also to an extent a money capitalist. To the extent the industrial capitalists — or commercial capitalists — own the original M they start with, they get to appropriate both the interest and the profit of enterprise.
However, the more capitalism develops, the more the individual members of the capitalist class are transformed into pure money capitalists entitled only to interest. The roles of the industrial and commercial capitalists are increasingly transferred to collective entities known as corporations, which are considered to be legal persons under the law. Therefore, the corporations, their stockholders, when they realize the capital gains on rising stock market prices, and their officers get to appropriate the profit of enterprise.
Non-capitalist interest
So far, we have dealt only with interest as defined by Marx. Following the classical economists, Marx assumed that all production was capitalist and that there was no consumer credit. The role of state borrowing was also ignored. Under these assumptions, “interest” was seen as simply a fraction of the profit paid from the profits “earned” by industrial and commercial capitalists.
In the real world, in addition to the strictly capitalist interest as defined above, there is also interest on loans made to persons other than industrial or commercial capitalists, which the borrower may use to finance non-capitalist production, such as in the case of a working farmer or peasant, or for personal consumption.
In the days of Marx, various types of money lenders — particularly pawnshops — preyed on workers who faced extraordinary expenses or periods of unemployment. This type of “consumer credit” is still with us today. Marx was well aware of what he called capital’s secondary means of exploitation. Indeed, Marx, who was often hard-pressed for funds during the 1850s and 1860s, had considerable personal experience with this type of exploitation.
When forced to engage in this type of borrowing after producing the “normal” surplus value for their bosses, workers are forced to perform additional unpaid labor to produce the interest due to their money lenders. Under today’s “ultra-modern” capitalism, these types of money lenders range from traditional pawnshops, “mob” loan sharking, check-cashing shops, and mortgages against residential property as well of credit cards issued by mega-banks.
Another type of non-capitalist interest
Another type of non-capitalist interest, already important long before the time of Marx and still important today, is the interest paid on the national debt, as well as the debts of provincial, state, and local governments. In this case, the workers who produce surplus value ultimately bear the burden of tax payments through the unpaid labor they are forced to perform for the state power and its creditors.
The critical point to grasp is that whether we are dealing with the purely capitalist interest that Marx described or “non-capitalist” interest, all interest income ultimately arises in the sphere of production, whether the production is capitalist production employing wage labor or some other mode of production.
The evolution of credit and interest
In pre-capitalist times, there was no interest in the capitalist sense. Instead, money lenders exploited the producers either directly — for example, through usurious loans to peasants or small artisans — or indirectly through loans to large landowners or even kings, who ultimately squeezed the interest out of their peasant tenants, serfs, or slaves.
With the development of the modern banking and credit system, the credit system was subordinated to the needs of the new capitalist mode of production. From the capitalist viewpoint, interest is merely a portion of the surplus value produced by the productive workers that goes to the owners of money capital. If the industrial — or commercial — capitalists borrow money, the interest but not the profit of enterprise goes to the money lenders. If, on the contrary, industrial or commercial capitalists work with their own capital, the entire interest plus profit of enterprise goes to them.
However, the rise of the strictly capitalist credit system did not mean that the old traditional “credit system” of usurious loans simply disappeared. Side by side with the huge corporate banks are the traditional pawnshops, check-cashing shops, and “mob” loan-sharking.
Nor in practice are these two credit systems entirely separate. Loans to the state have always been essential to the banking system, yet strictly speaking, the interest on state loans is paid out of tax revenues and does not necessarily arise from interest in the strict capitalist sense. Today, the giant corporate universal banks are increasingly moving into the business of granting usurious “consumer” loans that were once the province of the pawnshop or the “mob” loan shark.
Starting in the U.S. during the 1920s, consumer loans in the modern sense began to be extended to better-paid workers to encourage them to purchase automobiles and other newly invented consumer durables. The appearance of this type of consumer credit raises interesting theoretical questions that we do not have the space to fully explore here, though we can say a few words.
To the extent that the better-paid workers in imperialist countries share in the surplus value produced by the workers of the Global South, the interest paid on consumer loans to better-paid workers can ultimately be traced back to the unpaid labor performed by the workers of the Global South.
However, under the capitalist mode of production, fluctuations in the purely capitalist rate of interest govern the movement of “non-capitalist” interest rates. Therefore, we have to examine the movements of capitalist interest if we are to understand the movement of interest rates as a whole.
The rate of interest, the rate of profit, and the industrial cycle
A classic recovery phase of the industrial cycle is characterized by a sharply rising rate of profit combined with a low rate of interest. As we have seen, the crisis/stagnation phase of the industrial cycle is marked by the contraction and stagnation of real capital — productive-plus-commodity capital — combined with the acceleration of the accumulation of money capital — increased production of gold bullion.
The result is that during the crisis/stagnation phase, the balance of forces on the money market shifts sharply in favor of the industrial and commercial capitalists relative to the money capitalists. If the rate of profit is given, then the profit of enterprise is the difference between the rate of profit minus the rate of interest. The higher the profit of enterprise the stronger the incentive for capitalists — whether individual or corporate — to act as industrial capitalists and produce surplus value as opposed to acting as money capitalists.
If the profit of enterprise falls to zero or below zero, increasing numbers of industrial capitalists will transform themselves into money capitalists. This will cause the rate of interest to fall as increasing amounts of capital are diverted into the circuit M—M’ as opposed to the circuit M—C..P..C’—M’ or M—C—M’. The result is a flooding of the money market that progressively lowers the rate of interest.
This continues until a positive profit of enterprise is restored — and in practice, some point beyond that. If it were impossible to restore a positive profit of enterprise, capitalism would end, since a positive profit of enterprise is an absolute necessity for the continuation of capitalist production in the long run.
Here, we see an important function of crises. By periodically lowering the rate of interest, crises keep the profit of enterprise positive over time.
The rate of interest from the Depression to the Great Moderation
If we look at charts of the history of interest rates, we see a deep plunge in interest rates between the outbreak of the super-crisis in 1929-33 and the end of World War II, when interest rates had fallen to their lowest levels in the history of capitalism up to that time. We therefore see the classic movement of interest rates within the Depression-era industrial cycle, but on a “super-scale.”
Interest rates, particularly long-term interest rates, were already at record lows in the wake of the super-crisis of 1929-33. In the United States, they fell further after the brief but severe “Roosevelt recession” of 1937-38.
During World War II, despite the huge wartime budget deficits and inflation, long-term interest rates remained near record-low levels or fell further by some measures. In 1946, rates hit 2.09 percent. According to a Chicago CFA Handout by Bianco Research LLC in that year, long-term interest rates in the U.S. were lower than they had ever been since 1790 — that is, in the entire history of the United States. If you were locked in a room and had access to interest rates alone starting from the end of the super-crisis of 1929-33 and continuing until 1946, you would not be aware that an inflationary war economy had replaced the Depression.
Therefore, when normal capitalist expanded reproduction resumed after World War II, it started with a combination of high profits and record-low interest rates. Looking at these figures, it is not hard to see why the Depression did not reappear after World War II, despite the expectations of many radical Keynesians and Marxists to the contrary.
A combination of soaring profits and extremely low rates of interest caused the profit of enterprise to soar, leading to a massive new wave of investments in the private sector. The result was the post-World War II era of capitalist prosperity.
Far from defying the “laws of motion” discovered by Marx, the post-World War II economic boom was fully in accord with them.
Choices facing capitalists
Every capitalist, individual or corporate, has three choices in what to do with that portion they do not spend on means of personal consumption — necessities and luxuries.
One, they can hoard the money. But in this case, they are not acting as capitalists but as misers, since the hoarded money yields no surplus value to its owner. Speculation in which one capitalist attempts to relieve other capitalists of some of their capital is a zero-sum game, so it amounts to hoarding on a social scale.
Two, they can loan the money out at interest.. In this case, they act as money capitalists, not industrial or commercial capitalists. As a result, they do not appropriate any of the profit of enterprise.
Finally, they can transform the profit into new productive capital or in the case of commercial capitalists into new commodity capital. This alone allows them to appropriate the profit of enterprise.
It is only when capitalists seek the profit of enterprise — leaving aside commercial capital — do they purchase the workers’ labor power, intending to use the purchased labor power to produce surplus value. And the production of surplus value is the very heart of the capitalist system. Without the production of surplus value, there is neither rent, interest, nor profit of enterprise nor capitalism itself.
Risk and the profit of enterprise
If the profit of enterprise — profit minus interest — is low, the risk of producing additional surplus value and failing to realize it on the market fully may well be judged by the capitalists as too high. But if the profit of enterprise is high, the capitalists will more likely decide the prospects of a great reward trumps the risk.
In addition, the greater is the chance that small-money capitalists and even adventurous individuals starting out with no capital of their own will attempt to transform themselves into “entrepreneurs” — create new industrial capitalist enterprises, perhaps producing a new type of commodity — as opposed to trying to get rich by financial speculation, gambling, crime or another similar get-rich-quick scheme.
This is why, in the wake of a crisis, the more or less extended period of stagnation that follows the crisis tends to be characterized by the kind of investment that generates economic growth and innovation as opposed to various types of money lending and speculation. It is the circuit of productive capital M—C..P..C’—M’ and merchant capital and M—C—M’ that is encouraged as opposed to the circuit M—M’, the circuit of interest-bearing capital.
During the years of capitalist prosperity between 1948 and 1968, the ratio of debt to the real economy expanded from the low levels that immediately followed the Depression and war. But even as late as the 1970s, it remained well below the levels that prevailed in the years that immediately preceded the super-crisis of 1929-33. During the inflationary crisis of the 1970s, the ratio of debt to the real economy remained more or less stable.
But between the early 1980s and the end of the Great Moderation in 2007, driven by the growth of private — but not government — debt, the ratio of debt to the real economy reached levels that rivaled the ratio prevailing on the eve of the 1929-33 super-crisis. When it came to credit inflation and the subsequent growth of the circuit M—M’, the Great Moderation was anything but moderate.
Debt, credit, and gold
As interesting as the ratio of debt to the real economy is, the ratio of total debt to gold bullion is more important. The nature of both money and credit and capital means that the expansion of the credit system is limited not so much by the ability of the real economy to produce use values but rather by the quantity of gold bullion in existence and the possibilities of increasing it further. (4) Unfortunately, while there are many estimates of the ratio of debt to the “real economy” and incomes, the ratio of debt to the credit system’s metallic base is rarely if ever estimated.
There is little doubt, however, that the huge inflation of the credit system during the Great Moderation was, above all, an inflation of the total quantity of loans relative to the quantity of gold bullion.
The evolution of interest after World War II
During the 1950s and 1960s, long-term interest rates rose during booms and fell during recessions. But because recessions were “cut off” to a certain extent by Keynesian “anti-crisis” measures in those years, long-term interest rates rose more during the booms than they fell during recessions. This showed that the Keynesian measures could not forever avoid a major crisis. Sooner or later, the secular rising rate of interest would swallow up the entire profit of enterprise, thus destroying the incentive of the capitalists to produce surplus value. The lesson is that Keynesian policies work temporarily — especially after a major crisis — but will inevitably fail once overproduction develops to a certain point. The general rule is that the more Keynesian anti-crisis measures are needed the less well they will work.
The conditions of prosperity — especially after World War II — encouraged a fall in the value rate of profit — defined as the rate of profit if all value and surplus value were realized. High levels of employment and relatively low levels of unemployment, combined with the considerable expansion of the “welfare state,” encouraged rising wages — both money and real — and made it much more difficult for capitalists to increase the rate of surplus value. (5)
The capitalists were obliged to react to the fall in the rate of surplus value by increasing their use of machinery — a process dubbed automation — which tended to increase the organic composition of capital. There is little doubt that the value rate of profit declined in this period.
But even if the value rate of profit remained unchanged, the secular rise in the long-term interest rate meant that the all-important profit of enterprise was in decline. Therefore, well before the end of postwar prosperity, it should have been empirically obvious to Marxists that Keynes’s dream of a capitalism free of major economic crises was doomed.
As normal capitalist expanded reproduction resumed after the unprecedented interruptions of the Depression and war, the rate of interest began a long and gradual rise. As late as 1963, the rate of interest on long-term government bonds, though well above the early postwar levels, was still below 4 percent at times. However, the cyclical boom that began in the mid-1960s drove long-term interest rates relentlessly upward.
By March 1968, the interest rate on government bonds approached 5.8 percent, a considerable rise from the 4 percent or less that government bonds returned as late as 1963. The progressive, if gradual, rise in long-term interest rates meant that it would be only a matter of time before the rise in those rates would destroy the incentive to produce surplus value. The only method capitalism has in dealing with such a situation is a major economic crisis that once again lowers the interest rate.
With the end of the Bretton Woods gold exchange standard, the U.S. dollar underwent a massive devaluation against gold. The dollar price of gold, which measures the amount of gold that each U.S. dollar represents in circulation, rose from $35 an ounce to $875 at one point in January 1980. Some economists, especially those of Keynesian bent, claimed that the high long-term interest rates were not dangerous because real interest rates in terms of commodities were often negative. In gold terms, they were even more negative.
The problem was that such a situation could not last. If the U.S. Federal Reserve System had kept interest rates negative in gold terms, the result would have been runaway inflation and, finally, hyperinflation. The U.S. dollar at the center of the world monetary and credit system would have gone the way of the German mark, taking the entire global currency and credit system with it.
To prevent this, the Federal Reserve System was forced to launch the policies known as the “Volcker shock,” the immediate result of which was a sharp rise in nominal interest rates. Since the rate of inflation in dollar terms dropped sharply, and the depreciation of the U.S. dollar against gold was not only halted but partially reversed, there was a dramatic swing from negative interest rates in terms of both real money — gold — and commodities to the highest rates of interest — both real and gold — in capitalist history.
Interest rates peak
When Paul Volcker took command of “the Fed” in August 1979, the interest rate on 10-year government bonds was still “only” around 9 percent. But as the money market tightened — and the dollar’s devaluation against gold was finally halted — the nominal rate on the 10-year bond hit 15.60 percent in November 1981.
The bigger problem was that at the end of the “Volcker shock” recession, at the beginning of 1983, the rate of interest on long-term U.S. government bonds was still over 10 percent. One condition for a new era of capitalist prosperity was now in place: a sharp rise in the value rate of profit reflecting a sharp rise in the rate of surplus value. But the other condition, a low rate of interest, was completely absent.
The result was that industrial and commercial corporations began to transform themselves into money capitalists on an unprecedented scale. This gradually brought down the rate of interest but at the price of unprecedented inflation of credit that has been named “financialization.” Huge amounts of money capital were being diverted from the circuits M—C..P..C—M’ and M—C—M’ to the circuit M—M’.
The first period of financialization
The decades of the 1920s and the Great Moderation years of 1983 to 2007 had one thing in common: a completely abnormal expansion of the credit system. In the 1920s, the abnormal expansion of the credit system was rooted in two factors. One was that World War I broke out at the worst possible time for the world capitalist economy. The war came at the end of a period of exceptional capitalist prosperity that followed the gold discoveries of the 1880s and 1890s.
Factor two was the inflationary rise of prices in terms of gold — the actual fall of the purchasing power of gold, separate and apart from the depreciation of paper currencies against gold during and after the war. This was indeed a recipe for disaster.
The deflationary recession of 1920-21 only partially restored the purchasing power of gold. The reason was that there was little actual overproduction during World War I due to the war and war economy that suppressed normal capitalist expanded reproduction. As a result, during the 1920-21 deflation, the industrial and commercial capitalists ran out of “inventory” before market prices fell back to or below the prices of production.
Because market prices remained too high relative to prices of production, gold production remained below the levels of the immediate pre-war period, though global commodity production measured in terms of the use value of the various commodities produced, world trade defined in terms of the prices of the traded commodities in terms of gold, and commodity prices measured in terms of gold were all higher than before the war.
Therefore, once the reconstruction period after World I was completed, economic growth could only be maintained by credit inflation that went far beyond what was normal by the standards of the pre-1914 industrial cycles. In the pre-1914 period, the Bank of England was central to the global credit system. And except for the fixed fiduciary issue, the banknotes of the Bank of England had to be covered 100 percent by the Bank of England’s metallic reserve.
The Federal Reserve and the gold exchange standard
After World War I, the pivot of the world credit system shifted to the U.S. Federal Reserve System. The design of the Federal Reserve System was influenced by supporters of the banking school, who were the opponents of the currency school. The currency school had inspired the 1844 Bank Act, which governed the Bank of England.
Unlike the Bank of England before 1914, the Federal Reserve System had to maintain only 40 cents of gold for each dollar in banknotes that it issued. In addition, after World War I, the U.S. government reduced the amount of reserves that the U.S. commercial banks had to maintain behind the credit money — checkbook money — they created through their bank loans.
While before the war, the only major type of consumer credit was mortgages backed by residential real estate, by the 1920s, the new durable consumer goods — automobiles and electric appliances — were being sold on credit in the U.S. For the first time, we saw the large-scale extension of credit to working-class consumers, even though this phenomenon was still largely confined to the United States.
On the international level, the gold exchange standard meant that in addition to gold, central banks backed up their banknotes with U.S. dollars and British pounds. The gold exchange standard was used far more broadly than it was before 1914. The overall effect was to leverage the global quantity of credit money and credit in general on a relatively far smaller quantity of gold bullion.
The result was a growing financialization of the economy. Perhaps we should call the 1920s the first financialization. This first financialization ended with the super-crisis of 1929-33 and the ensuing Depression, followed by World War II. When the dust of the Depression and World War II finally settled, the capitalist economy had returned to a much more stable cash-based economy where credit played a far smaller role.
The second financialization of the economy
The causes of the second economic financialization round were quite different from the first. The second financialization was rooted in the Keynesian economic policies adopted after World War II to limit cyclical crises.
When the first big crisis after World War II began to develop at the end of the 1960s, the policymakers of the capitalist governments and central banks — especially the U.S. government and the U.S. Federal Reserve System — believed that it was their duty to prevent a deep downturn in the industrial cycle at almost any cost. As a result, they scrapped what was left of the gold exchange standard, giving themselves the power to issue paper money without having to be concerned with redeeming it in gold.
As a result, the gold value of the U.S. dollar, as measured by the dollar price of gold, fell by more than 95 percent. Inflation in dollar terms soared, and interest rates rose to unprecedented heights. As we saw above, the result was the second wave of financialization that began immediately after the end of the Volcker shock recession.
Volcker’s managed currency and the role of gold
In 1979, Paul Volcker was determined to halt the run on the dollar. Indeed, he had no real choice since the alternative would have been the first global hyperinflation in the history of capitalism. But Volcker did not believe that a return to the gold — or gold exchange — standard was necessary, and considering the political situation, possible.
Instead, he still believed in a Keynes-type “managed currency.” As long as the inflation of commodity prices in terms of dollars and its satellite paper currencies was low — in the 1 to 3 percent range — Volcker, and with him the vast majority of bourgeois economists, believed everything would be fine. Gold production rises
Gold production had fallen during the first half of the 1970s, indicating that the market price of commodities in terms of gold had risen above their prices of production. After the deep recession of 1973-75 and the fall of commodity prices in terms of gold, gold production stabilized but failed to recover.
Only after the run on the dollar in 1979-80 lowered the market prices of commodities in terms of gold considerably further, did global gold production begin to rise again. This indicated that market prices were once again below their prices of production, setting the stage for a major economic recovery. At the same time, the Volcker shock had succeeded in ending the run on the dollar and other paper currencies.
In this sense, the “stagflation crisis” that ended with the Volcker shock recession of 1979-82 acted like a classic capitalist crisis. We saw contraction of real capital — graphically illustrated by the videos of the destruction by their capitalist owners of U.S. steel mills in the old centers of basic industry. The contraction of real capital was accompanied by an accelerated accumulation of money capital, represented by a rise in the production of gold bullion. After several years of deep recession during the Volcker shock, the stage was set for economic recovery beginning in 1983.
But there was a fly in the ointment. As economic recovery began from the 1979-82 Volcker shock recession, interest rates, both long-term and short-term, though off their 1981 peaks, remained much higher than they had been before the prolonged stagflationary crisis that began with the Gold Pool’s collapse in March 1968.
In March 1968, as the stagflationary crisis began, the rate of interest on 10-year U.S. government bonds was around 5.75 percent. In contrast, when the Great Moderation began in January 1983, the rate of return on U.S. government bonds was around 10.35 percent! While in a normal economic crisis, the interest rate falls, during the stagflationary crisis of 1968-1982, interest rates were higher at the end of the crisis than at the beginning. Long-term interest rates, as measured by the rate of interest on U.S. long-term government bonds, didn’t return to the March 1968 level until 1993.
The Volcker shock ends too soon — for capitalism, that is
The real problem was that from the viewpoint of the capitalist system, the Volcker shock ended far too soon. Paul Volcker had taken things to the brink in 1982 but then blinked. The combination of the stabilization of prices in terms of the U.S. dollar and a threatening international debt crisis, especially the debt crisis in Latin America, meant that if the Volcker shock had continued, massive debt liquidation would have set in. Prices in dollars would have fallen, and interest rates would have plunged. The rapid fall in interest rates would have then put into place the conditions for a healthy recovery — a new “Great Boom” without financialization, much as occurred in the early pre-1968 era after World War II.
Of course, the results for the workers of the world, as well as the world’s small farmers and peasants, not to speak of the nations of Latin America, would have been horrendous. No person or tendency in the international workers’ movement advocated, or of course, could or should have advocated such policies. The point is that the objective interests of the capitalist system of exploitation are in much greater conflict with the needs of the workers and peasants and even the middle classes than even the most cold-blooded leaders of U.S. imperialism, such as Paul Volcker, dare to admit, even to themselves.
As huge amounts of money capital were diverted from the normal circuits of M—C..P..C—M’ and M—C—M’, interest rates gradually came down but only at the price of an unprecedented explosion of credit. We also saw a curious reversal of the normal cycle of interest rates. Usually, during periods of relative prosperity, the trend is for interest rates, particularly long-term interest rates, to rise gradually. This is exactly what we saw between 1948 and 1968, with the relatively moderate expansion of credit. But during the Great Moderation, we saw the reverse, a gradual decline of long-term as well as short-term interest rates, accompanied by an explosive expansion of the credit system.
The huge flood of money flowing into the money market finally lowered long-term interest rates. The problem is that it created an inflation in debt that must be liquidated before a new “long cycle” of capitalist prosperity can begin.
The stage was set for a new era of greatly intensified economic crises that began with the Great Recession of 2007-09.
Conclusions
Since 1914, there has been no really “normal” development of the capitalist industrial cycle. The collapse of the 1930s led to the “Keynesian revolution,” which aimed to boost economic growth, tame crises, and achieve more or less permanent capitalist prosperity interrupted by only “mild recessions” or perhaps no recessions at all.
But between 1948 and 2007, when the Great Moderation ended, there were only in reality, 20 years of “healthy” capitalist prosperity—1948-1968. And those 20 years of prosperity were made possible thanks only to the super-crisis of
1929-33 and the ensuing Depression. Far from eliminating or at least reducing capitalist cyclical instability, Keynesian policies have made capitalism less stable than ever in the long run. This is why the entire period between 1968 and 2007 appears to be part of, to use Ernest Mandel’s terminology, a “long wave with an undertone of stagnation” when compared to the epochs of capitalist prosperity such as 1848-1873 and 1896-1913 that preceded World War I.
Notes
(1) Paul Sweezy was a product of the Great Depression and was so heavily influenced by John Maynard Keynes and Michal Kalecki that he tended to pay insufficient attention to the production of surplus value. Under the influence of Keynes, Sweezey sometimes tacitly assumed that surplus value could arise in the sphere of circulation — profits upon alienation. The great problem of the Depression era was, after all, the question of realizing surplus value as opposed to producing it. As a result, in his final years, Sweezy exhibited genuine confusion about where the huge expansion of interest income was coming from. (back)
(2) In analyzing the origins of interest, it is best to assume that the commodity sells at its value, or as Anwar Shaikh puts it, at its direct price. The advantage of saying “sells at its direct price” as opposed to the more traditional expression used by Marx, “selling at its value,” is that it emphasizes the difference between value — a given quantity of abstract human labor, measured by some unit of time — and price — a given quantity of the use value of the money commodity measured in some appropriate unit such as weights of gold bullion. If the commodity sells at a price different from the direct price, which will almost always be the case in the real world, nothing of essence is changed. (back)
(3) Scientists have long been puzzled about the exact origin of gold as an element. In 2013, it was proposed that gold as an element arises from collisions of neutron stars with one another. Neutron stars are very dense objects where the positively charged protons in the nucleus of atoms have merged with negatively charged electrons. The new theory proposes that such a collision sets off complex nuclear reactions that end up with the formation of, among other things, the element gold.
Of course, if the theory is correct, the gold created by colliding neutron stars was not money. Gold became money only when human beings on this planet developed commodity production and exchange. And if we allow our imaginations to run wild, perhaps gold is an ideal money commodity on a few other worlds for the same reason it is on this one. But the neutron star theory of the origin of gold shows how absurd the idea of money producing more money — additional gold — really is! (back)
(4) Gold bullion refers to physical gold modified by human labor. The rest of the gold produced by colliding neutron stars — if this theory is true — does not count. (back)
(5) This is why the capitalists are attempting to get rid of the “welfare state,” or “socialism,” by which they mean the “welfare state.” It explains why the capitalist media is always doing all it can to transform the words “welfare state” or “socialism” in the sense of welfare state into dirty words. While the welfare state is certainly not the ultimate solution to the problems raised by capitalist exploitation, the workers’ movement must do all it can to defend it as long as capitalism lasts. (back)
A Critique of Crisis Theory 