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 9
Profit and Interest
Some assumptions made in this chapter
In the last chapter, I indicated that when I examine the industrial cycle proper, I will assume initially that only metallic money and credit money exist and bring in token money at a later stage—that is, I will assume a gold standard.
However, in this chapter, it is more useful to assume the existence of not only metallic and credit money but also token-paper money. Here I will assume a paper money system and not the gold standard. The reason is that the laws determining the interest rate only find their full expression under a token money standard.
The rate of interest and the profit of enterprise
The owners of capital are “entitled” to both interest and profit of enterprise as long as they work with their own capital. If, however, they lend their capital to another capitalist, they are entitled only to interest. The borrower of the capital — the active capitalists — is entitled to the profit of enterprise on the borrowed capital but not the interest. While real capital — productive and commodity capital — can be lent, money capital can be lent far more easily than real capital. Indeed, the pure money capitalist must lend their capital — or invest in shares — because it is only through being lent that the relatively small amounts of capital owned by the individual money capitalists can function as capital.
Real capital is only occasionally lent, while money capital — as long as it is owned by pure money capitalists — must either be lent or invested in shares. In the case of shares, the individual shareholder is a money capitalist, while the collective capitalist — the corporation — is the active capitalist who owns the real capital — the productive and/or commodity capital. The more capitalism develops, the more the individual capitalists become “pure” money capitalists who do not directly own any real capital. Because loan capital is dominated by money capital, the relative quantity of money seeking to be turned into capital by being lent out at interest relative to the quantity of real capital plays a decisive role in determining how much of the profit goes to the profit of enterprise and how much goes to the interest on capital.
The rate of interest must be lower than the rate of profit
The rate of interest cannot, in the long run — that is, outside of crises — be equal to or exceed the rate of profit. If it does, it would be in the interest of the industrial capitalists, who produce surplus value, to turn into money capitalists. Therefore, a rate of interest that equals or exceeds the rate of profit destroys the incentive to produce surplus value no matter how high the rate of profit. Such a situation cannot persist in the long run, so whenever the rate of interest approaches the rate of profit, the rate of interest will fall.
Therefore, the rate of profit establishes the upper limit for the rate of interest. But what determines the lower limit? The rate of interest cannot fall to zero because if it did, the money capitalists would turn into misers. There would be no advantage in lending money. Why take the risk of not being paid back or being paid back in devalued currency for no “reward” whatsoever? A zero rate of interest is not compatible with the credit system.
It is sometimes claimed that the rate of profit determines the rate of interest. In fact, the rate of profit only determines the upper limit of the rate of interest. A high rate of interest is not compatible with a low rate of profit, but a low rate of interest is perfectly compatible with a high rate of profit.
Long-term trend of the rate of interest
Assuming a long-term downward trend of the rate of profit rooted ultimately in the rising organic composition of capital, we would expect that the rate of interest will also tend to fall since as the rate of profit falls, the maximum sustainable interest rate falls with it. In addition, the lower the rate of profit, the lower the rate of interest must be relative to the rate of profit if a substantial profit of enterprise is to be preserved.
For example, if the rate of profit is 20 percent, even a rate of interest of 15 percent will preserve a profit of enterprise of 5 percent. But if the rate of profit were to fall to 2 percent, even a 1 percent rate of interest would allow only a 1 percent rate of the profit of enterprise. Therefore, a fall in the rate of profit tends to cause a somewhat sharper fall in the rate of interest.
No natural rate of interest
Many bourgeois economists, especially those of the neo-liberal school, such as Milton Friedman, claim that there is a “natural rate of interest.” The rate of interest is supposed to be determined by the productivity of capital or, more precisely, by the value of the marginal product of capital. In marginalist theory, the rate of interest is supposed to reflect the degree of scarcity of capital as a “factor of production.”
Marx, in Volume III of Capital, in contrast, explained that while there are natural prices — prices of production — of commodities, ultimately determined by their labor values, there is no such thing as a natural rate of interest. Instead, the rate of interest can be anywhere from just above zero to just below the rate of profit.
The rate of interest is determined by the competition between the owners of loan capital — mostly money capitalists — on one side and the industrial and commercial capitalists on the other. If the money capitalists are in a strong competitive position, the rate of interest will approach the upper limit set by the rate of profit. If, on the other hand, the balance of forces strongly favors the industrial and commercial capitalists, the rate of interest will approach the limit of zero.
Keynes, in his General Theory, actually agreed with Marx on this point rather than the orthodox marginalists. Like Marx, Keynes understood that the rate of interest is determined by the scarcity of money capital, not real capital. Keynes defined interest as the reward that money capitalists obtain for not hoarding money.
Those who claim that the economics of Keynes and the economics of Marx are compatible primarily base themselves on this point of agreement between the two economic thinkers. Unlike Marx, however, Keynes was not concerned about where the “reward” money capitalists obtain for performing the great “service” of not hoarding money comes from.
We now have to examine exactly what determines the relative strength of the money capitalists on one side and the industrial and commercial capitalists on the other. As we saw above, the most important factor in determining the balance of forces between the money capitalist and the industrial and commercial capitalists is the quantity of real capital — productive capital plus commodity capital — relative to the quantity of money capital. Remember, an industrial capitalist is an owner of productive capital, both constant and variable, a commercial capitalist or merchant is an owner of commodity capital, and a money capitalist is an owner of money lent out at interest or invested in shares.
If real capital — both productive and commodity — is abundant relative to money capital, the balance of forces on the market will favor the money capitalist, and interest rates will be high relative to total profit. Conversely, if money capital is abundant relative to real capital, the battle of competition will favor the industrial and commercial capitalists, and the rate of interest will be low relative to the total profit.
In the preceding chapters, we have seen that there are three forms of money. First and most important, there is actual money material, sometimes called real money by Marx; second, there is token or legal-tender paper money; and third, there is credit money.
Just as real capital is made up of commodities representing congealed abstract human labor, real money, in contrast to token and credit money, is made up of a special commodity — the money commodity — that, like all commodities, represents congealed abstract human labor. It differs from other commodities only as a consequence of its very special use value. The labor congealed in the money commodity due to its use value as money material is directly social. This is true because its primary use value is to measure the value of all other commodities in terms of their own use value. In contrast to all other commodities, the money commodity does not have to be sold to demonstrate that the private labor used to produce it is a fraction of the total social labor.
In contrast, the “value” of token money comes not from the trivial value of paper and ink or the value of the base metals used for fractional coinage but from its role as the representative of money material in circulation. For this reason, token money is sometimes called representative money.
Credit money is a promise of one party — usually a bank — to pay another party that can be used as a “money substitute” by its owner to make purchases and payments. Therefore, though token and credit money can be used in place of metallic or gold money as a means of purchase and payment, it can never replace real money in its role as the universal measure of the value of commodities.
As we saw in the preceding chapters, the quantity of both token and credit money in terms of the amount of real money it represents — and through real money, the amount of abstract human labor, or value, it represents — is dependent on the quantity of money material in existence. The question then becomes, how much token and credit money can be produced on a given base of real money? We have already seen that the quantity of token plus credit money can considerably exceed the amount of metallic money.
The relationship between the quantity of money material and the quantity of token plus credit money — what bourgeois economists call the money supply — is not rigidly fixed. Indeed, with the development of the credit system, the amount of token plus credit money that can be produced on a base of a given quantity of real money expands. However, when a crisis — whether a crisis of overproduction or some other type of crisis — shakes the “confidence” of the capitalists in the solidity of capitalist reproduction, the quantity of token plus credit money that can be created on a given base of real money can dramatically and suddenly decline.
The most dramatic example in history is the contraction of the global money supply during the infamous crisis of 1929-33. This partially reflected bank failures — mainly in the United States that wiped out the promises to pay checkable deposits through the bankruptcy of the banks — plus the fact that many more bank loans were repaid than taken out during the crisis years. But despite the decline in the “money supply,” there was no decline in the quantity of real money — gold — during the crisis. In fact, the quantity of real money grew at an accelerated rate during that crisis.
During the crisis of 2007-09, there was also a sharp decline in the quantity of “checkbook” bank credit money relative to the huge increase in the “monetary base” of legal-tender token money created by the U.S. Federal Reserve System and other monetary authorities. The 2007-09 crisis also reversed a decline in world gold production that had begun in 2001 and therefore accelerated the growth of the quantity of “real money.” We will look at the effect of crises on the production and rate of growth of money material in future chapters.
However, leaving aside sharp fluctuations caused by crises, the amount of token and credit money that can be created on a given base of real money will be determined by the degree of development of the credit system. Assuming the degree of this development is a given outside of crises, the amount of token and credit money that can be created in terms of real purchasing power, though not in terms of arbitrary units such as dollars, euros, yen, and so on, will be determined by the amount of real money in existence.
Rate of interest and the industrial cycle
Let’s examine how this law is illustrated by the behavior of the rate of interest in the course of a “normal” industrial cycle. During the boom, when capitalist expanded reproduction is flourishing, the growth rate of real capital is high absolutely but, for reasons that we will examine in future chapters, also relative to the growth of the quantity of money material. The boom, therefore, tends to shift the relationship in the money market in favor of the money capitalists as opposed to the industrial and commercial capitalists.
As a result, both long- and short-term interest rates rise during the boom phase of the industrial cycle. The only reason that the profit of enterprise — the difference between the rate of profit and the rate of interest — doesn’t collapse, and with it, the boom sooner than it does is that the overall rate of profit also rises sharply during the boom phase of the industrial cycle. During the boom, money capitalists get a relatively larger piece of a rapidly growing “pie” of profit.
During the crisis, on the other hand, the quantity of real capital contracts — inventories are liquidated, and unprofitable factories are destroyed — and the value of much of the remaining fixed capital that remains is “written down.” In addition, the creation of new real commodity capital — inventories — and new means of production is sharply constricted. Commodity capital is sharply reduced as inventories are liquidated, often at distressed prices. But the growth of metallic money — the world gold hoard — keeps expanding as gold continues to be produced. Indeed, the production of gold — real money — is stimulated.
We also must remember that it is characteristic of money material — gold bullion — as a material use value that, unlike other commodities, is neither productively nor unproductively consumed. Instead, it keeps piling up or being accumulated throughout the lifetime of the capitalist system.
Therefore, during the downward phase of the industrial cycle, the quantity of money capital grows relative to the quantity of real capital. This manifests itself in a decline in the rate of interest during this phase of the cycle. As a general rule, the more rapidly the economy grows, the greater the upward pressure on the rate of interest will be. During periods of contraction or weak growth, the tendency of the rate of interest is downwards.
Depreciation of token money and its effects on the rate of interest
A factor that significantly influences the rate of interest independently of the industrial cycle is the quality of the token money. By this, I mean whether the token money holds its value and is expected to continue to hold its value relative to real money — or on the contrary, the token money is expected to be devalued against real money. This factor is not a concern under a gold standard where token money plays no significant role but becomes important in “fiat money” systems where the currency is made up not of credit money convertible into gold at a fixed rate of exchange but rather token money.
It is often argued, especially by Keynesians, that paper monetary systems are superior to gold standard-based monetary systems because they enable the monetary authorities to maintain a low rate of interest without having to be concerned with the convertibility of the currency into gold. The argument goes that by maintaining a low rate of interest, the profit of enterprise is increased and economic growth accelerated, making possible something approaching “full employment.” For this reason, John Maynard Keynes and his politically progressive followers “hate gold.”
What is being confused here is real or metallic — gold — money and legal-tender token money issued by a monetary authority. If the quantity of metallic money expands, all things remaining equal, the rate of interest will fall, and the profit of enterprise will rise, stimulating the process of capitalist expanded reproduction. However, the expansion of the quantity of legal-tender token money that is not matched by an expansion in the quantity of metallic money flowing out of the gold mines will have, over a certain period, an opposite effect on the rate of interest. Why is this so?
As we have already seen, all things remaining equal, an expansion of the quantity of token money relative to the quantity of money materials leads to higher nominal prices and, eventually, wages if the reproduction of the commodity labor power is to continue. This is the element of truth in the quantity theory of money.
However, Keynesians wrongly assume that an expansion of the quantity of token money by the monetary authorities has the same effect as a rise in gold production. If Keynesians wrongly apply the laws of metallic money to token money, the supporters of the quantity theory of money apply the laws that should apply only to token money to both metallic and credit money.
If the monetary authority allows the quantity of token money to grow faster than the quantity of real money — the kind that comes out of the gold mines — the token money not only depreciates but expectations are created that the token money will continue to depreciate. The money capitalists then demand a higher nominal rate of interest to protect themselves from the devaluation of the media in which loans are repaid.
The money capitalists have the power to enforce their will in this regard. One of the features of the capitalist system is that in any showdown between the “monetary authorities” and the money capitalists over the rate of interest, the money capitalists inevitably prevail. We will see a historical example of this below.
Let’s examine what happens when the monetary authority attempts to force down the rate of interest by increasing the rate of growth of the quantity of token money not matched by a comparable rise in the rate of growth of real money.
Suppose the long-term rate of interest is 5 percent, and the central bank attempts to lower the long-term rate to 4 percent. The central bank accelerates the rate of growth of the token money it creates, and the long-term rate of interest falls from 5 to 4 percent. However, anticipating currency depreciation at a long-term interest rate of 4 percent, the collective money capitalist will want to increase the percentage of gold held from, say, 1 to 2 percent. This increases the “currency price of gold.” The result is that a given unit of currency will represent less gold in terms of weight.
As the currency depreciates, primary commodities such as oil, copper, and grains start to rise along with gold. The velocity of circulation increases and more credit money is created through increased bank loans necessary to finance the higher level of prices in terms of the token currency. Assuming that the depreciation of the currency persists, the price increases work their way through the wholesale to the retail level.
Assuming the commodity labor power sells at a price that corresponds to its value, nominal wages, too, must finally rise. The inflation that occurs is the market’s way of reducing the real quantity of money — token money and the credit money that is created based on token money — so that once again, the long-term rate of interest rises to the 5 percent desired by the collective money capitalist.
However, whenever the central bank allows the currency to be devalued, it tends to increase the fear that more devaluations will follow. As the devaluation fear grows — all else remaining equal — the rate of interest below which the money capitalists will increase the demand for real money — gold — they wish to hold in their portfolios rises, thereby forcing interest rates higher. Where before the money capitalists might have been satisfied with a 5 percent rate of interest, now they might insist on 6 percent.
As a result, the interest rate is forced up through the mechanism of inflation and the consequent reduction of the real money supply until it reaches the new equilibrium level of 6 percent. At this point, the supply of and demand for gold will again be equal. The money capitalists will now be satisfied with the percentage of total assets they hold in the form of gold in their portfolios.
From the central bank’s viewpoint, on the other hand, the operation will have backfired. They set out to lower the long-term rate of interest from 5 to 4 percent and ended up instead with a rate of interest of 6 percent. The profit of enterprise, instead of rising from 5 to 6 percent once the dust settles, has fallen from 5 to 4 percent. Instead of an expansion of investment opportunities, there is a contraction. Far from falling, unemployment will rise once the adjustment has fully worked its way through the system.
The greatest example of this occurred in the wake of the massive devaluation of the dollar and the currencies tied to it during the 1970s. At the beginning of the 1980s, interest rates on U.S. long-term bonds exceeded 15%! It took many years for interest rates to fall back to anything like historically normal levels.
Defending real wages
Everything else remaining equal means that the workers are successful in defending their real wages. To do this, the workers must be well organized in labor unions; the labor unions must see through all the arguments that the bourgeois — especially Keynesian — economists advance and understand that wages in terms of a depreciating currency must be raised as prices in terms of the depreciating currency increase if the workers are to continue receiving the value of the only commodity they have to sell, their labor power.
Here we assume that the labor unions retain the freedom of striking — that is, there are no enforceable laws that limit the ability of the unions to strike whenever it is necessary to defend their members’ standard of living. This must be true whether the attacks on the workers’ standard of living come from individual bosses or from a move by the government and its monetary authority to devalue the currency in which wages are paid.
These are, historically, highly unrealistic assumptions. Currency devaluations that lower the amount of gold — real money — that a given dollar, pound, euro, and so on represent cut wages in terms of real money. They also cut real wages whenever such currency devaluations provoke a rise in the cost of living.
Any rise in the interest rates the industrial and commercial capitalists pay is reflected in a rise in the interest rates that the workers will pay on consumer loans. Therefore, the workers will not only have lower real wages but will have to hand over a greater percentage of those wages to the money lenders as well, further lowering real wages. Therefore, if the living standard of the workers is to be fully protected from the effects of currency devaluations, not only must wages in terms of the devalued currency be increased to compensate for the rise in commodity prices in terms of the devalued currency, but they must be further increased to make up for the higher rate of interest on consumer loans.
In the long run, however, wages, even in the absence of unions, must reflect at least partially the devaluation of the currency, or else the workers will starve to death, and the production of surplus value will cease. If in the future, workers and their unions learn to demand increases in nominal wages whenever the currency is devalued, the monetary authorities will be far less likely to devalue the currency since one of the main motives for currency devaluations is to raise the rate of profit by lowering real wages.
Returning to the above example, suppose the rate of profit rises from 10 to 12 percent due to a rise in the ratio of unpaid to paid labor brought about by a currency devaluation that is not offset by a rise in nominal wages. In this case, the profit of enterprise could rise despite a rise in long-term interest rates. Assuming that the new equilibrium interest rate is 6 percent, the profit of enterprise, instead of falling from 5 to 4 percent, will rise to 6 percent. In this case, both the money capitalists and the industrial and commercial capitalists win, and the workers lose.
The history of interest rates during the 20th century
The history of interest rates during the last century illustrates the operation of all the economic laws that govern the rate of interest. The Great Depression of 1929-40, followed by the war economy of 1940-45, meant that for nearly 16 years, the process of expanded reproduction of real capital — productive plus commodity capital — came to a standstill.
However, the 16-year standstill in the accumulation of real capital was not matched by a standstill in the accumulation of real money capital. The world’s gold hoard not only continued to grow, but it grew at an accelerated rate under the impact of the Great Depression. During World War II, while contracted reproduction reigned in the sphere of real capital, the world’s collective gold hoard — the lion’s share held by the United States government — continued to grow, though at a reduced pace.
The result was an unprecedented accumulation of a huge hoard of idle money that drove the rate of interest to its lowest levels in the history of capitalism. Once the war ended, the combination of record low interest rates combined with a very high rate of profit encouraged the spirit of enterprise. The capitalists had a strong incentive once again to function as industrial capitalists that actually generate surplus value and not as mere money capitalists. The extremely low interest rates that resulted from the 16-year hiatus in the process of expanded capitalist reproduction combined with a high rate of profit caused capitalist expanded reproduction to flourish as it had never done before.
The great post-World War II boom was on. Gold production also increased but rather slowly for reasons I will examine in the coming chapters. The accumulation of money capital, after speeding up during the Depression, was now proceeding at a slower rate, just as the accumulation of real capital was proceeding with unprecedented vigor. As a result, interest rates reversed direction and began a slow but persistent rise. While interest rates did fall during the relatively mild post-World War II recessions, these falls were always less than the rise that had occurred during the preceding boom.
Because interest rates were so low relative to the total profit at the beginning of the long expansionary wave that followed the Depression and war, they could gradually rise for several decades without becoming a problem. This allowed the great capitalist prosperity to continue for 25 years except for the occasional recession. But interest rates could not keep on rising indefinitely unless the rate of profit itself continuously rose at a rate that offsets the rise in the rate of interest. Such a continuous rise in the rate of profit is not possible, as we saw when we examined the tendency of the rate of profit to fall. Therefore, even during the early years of the post-Depression, post-war great wave of capitalist prosperity, its eventual end was already in sight.
Indeed, it was precisely this great capitalist prosperity that once again unleashed the long-term tendency of the rate of profit to fall which was explained by Marx in Volume III of Capital. As capitalist industry once again expanded rapidly, the demand for the commodity labor power was high, and unions were far stronger than they had been in earlier decades and would be again in the decades that followed.
This, combined with the rapid mechanization of industry — the result of the capitalists’ response to the rising wages and made possible by advances in technology that were dubbed automation — meant a renewed rise in the organic composition capital. All this put downward pressure on the rate of profit.
Therefore, the gradually rising rate of interest was on a long-term path toward a collision with the gradually declining rate of profit. By the Vietnam War era, things were coming to a head. The U.S. administration of Lyndon Johnson and the Federal Reserve System was trying to find a way to halt this slow but persistent long-term rise in interest rates.
In earlier times, the long-term rise in interest rates would have ended in a major crisis — depression. Real capital would have contracted while the rise in the world’s monetary gold hoard would not only have continued to grow but would have grown at an accelerated rate. Interest rates would have fallen once again until the world economy — assuming capitalism still existed — had recovered from the new depression. A low rate of interest combined with a high rate of profit would have restored the profit of enterprise, unleashing yet another long-term wave of capitalist prosperity that, in the fullness of time, would lead to yet another major crisis — depression.
But this time, the U.S. government was determined to halt the rise in long-term interest rates and avoid a major new depression. Partially, this arose from the need to finance the Vietnam War, but more fundamentally because it feared that a major new depression would radicalize the U.S. and the world working class. Remember, this was an era of strong unions, mass workers’ and labor parties — outside of the United States — and a strong socialist bloc with its full-employment planned economies.
In addition, in the late 1960s, U.S. presidents were surrounded by Keynesian economic advisers who thought they had found a way to prevent major downturns in the business cycle. The key to doing this, they believed, was to end once and for all the convertibility of the dollar and its satellite currencies into gold. While under the Bretton Woods system, the U.S. dollar was already a token currency for ordinary people, it had remained a form of credit money for central bankers and government treasuries because it remained convertible into gold at the rate of a troy ounce of gold for every $35. Under the Bretton Woods International Monetary System, government finance ministries and central banks had the right to exchange U.S. dollars for gold at the rate of a troy ounce of gold bullion for every thirty-five U.S. dollars.
These economists argued that if this last relic of the international gold standard was finally abolished, Keynes’s dream of a “fully managed” currency whose quantity would not be limited by the quantity of monetary gold would finally be realized.
This process of abolishing what was left of the gold standard, which extended over three years, was formally completed when U.S. President Richard Nixon announced in August 1971 that the U.S. government was “closing the gold window” in response to a final rush by European governments to convert some of their dollars into gold. This was something that, under the Bretton Woods system, it had promised never to do. This “bold move” by Nixon was hailed by virtually the entire academic economics profession, from the followers of Keynes on the left to Milton Friedman on the right.
War on the world’s money markets
The end of what was left of U.S. dollar convertibility into gold by the Nixon administration opened a decade-long war fought out on the battlefield of the world’s money markets. On one side were monetary authorities led by the U.S. Federal Reserve System that were determined to hold interest rates down. On the other side were the world’s money capitalists, who were determined to raise interest rates sharply in response to the growth in the number of dollars and its satellite paper currencies against real money — gold.
Marginalist and labor theories of value tested
Many economists at the time, using the marginalist theory of value, predicted that the price of gold would fall sharply with the closing of the gold window. They assumed suspension of the convertibility of U.S. dollars into gold would end any monetary role for gold. And they figured that since gold’s primary use value is to serve as money material, its value would plummet as its main use value was abolished. In contrast, according to Marx, the value of gold, just like the value of any other commodity, is determined by the quantity of labor that is socially necessary to produce it under the prevailing conditions of production. Only a sharp drop in the amount of abstract human labor needed to produce a quantity of gold would lead to a collapse in gold’s value.
In addition, Marx explained that the law of labor value requires a special commodity that measures in its use value the value of all other commodities. If Marx was right, only the abolition of commodity production would get rid of “commodity money.” Therefore, if Marx’s theory of labor value reflected reality, the attempt to demonetize gold was doomed to fail. In contrast, if the marginalist theory of value was correct, there was no reason why gold could not be demonetized.
The decade of the miser
The results of the “experiment” were decisive. The world’s money capitalists, over the decade that followed, pushed up the dollar price of gold from $35 to $875 at one point in January 1980. The purchasing power of gold also rose sharply against other commodities. Indeed, the best “investment” during the 1970s was not stocks and bonds or even real estate but rather buying gold bullion and sitting on it. It was truly the misers’ decade. As the dollar price of gold soared, so did the prices of primary commodities. Gradually, the high — in terms of devalued paper currency, not gold — primary commodity prices worked their way through the wholesale to the retail level.
At first, the bourgeois — especially Keynesian — economists explained that it was only “nominal” interest rates, not “real” interest rates — interest rates in terms of commodities — that were rising. The Keynesians claimed, therefore, that the policy of holding down interest rates was working despite the “unexpected” inflation, which Keynesian economists blamed either on the unions that supposedly were driving a “wage-price spiral” or on special circumstances involving particular commodities. In contrast, Friedman and his supporters claimed that the high interest rate was only an “inflation premium” on top of the natural interest rate of about 3 percent.
Decisive battle of the war
The final and decisive battle in the war between the world’s monetary authorities and the world’s money capitalists began in the final quarter of 1979. Between August 1979 and February 1980, the dollar price of gold rose from less than $300 at times to $875 per troy ounce. In less than six months, the U.S. dollar lost more than half its gold value threatening to bring the entire global monetary system and the credit system built on top of it to the point of collapse. As this happened, inflation accelerated sharply at the retail level. But the war was now coming to a close as a clear winner emerged.
Monetary authorities surrender to the money capitalists
While a dwindling minority of “progressive Keynesian economists” wanted to continue the war, the administration of Democrat Jimmy Carter realized it was lost. Under Paul Volcker, who was appointed chairman of the Federal Reserve Board by then-U.S. President Carter, the Federal Reserve System and other world monetary authorities surrendered to the world’s money capitalists. Long-term interest rates soared to the highest levels seen in the history of capitalism. Short-term interest rates rose even more. Never before had so much of the world’s surplus value produced by the working class been pocketed by the money capitalists as opposed to the industrial and commercial capitalists. It was to take the better part of two decades for interest rates to fall back to historically normal levels.
The time of the money capitalist
This prolonged period of very high interest rates led to large-scale “deindustrialization” and “financialization,” as many industrial corporations preferred to invest in interest-bearing securities rather than carry out new industrial investments. A whole section of industrial capitalists was transforming themselves into money capitalists. The misers’ decade of the 1970s was followed by the time of the money capitalist, the very “rentier” that Keynes predicted would be “euthanized.”
But in the process, more real wealth was destroyed or not created in the first place than would have been the case if an old-fashioned deflationary depression had occurred instead of the “stagflation” that actually marked the 1970s.
Instead of a classic panic and deflationary depression, there were two severe recessions in addition to the relatively mild recession of 1969-1970. One occurred in 1974-1975, and the other was the “double-dip” “Volcker shock” recession of 1979-1982. These recessions differed from classical depressions in the sense that prices — in terms of a devalued currency — rose rather than fell. In terms of prices measured in real money — gold — however, prices not only fell, but they fell more sharply than they ever did under the gold standard.
By the time the stagflation crisis bottomed out in 1982, official unemployment in the U.S. and many other capitalist countries as well exceeded 10 percent. Then when economic conditions finally began to improve starting in 1983, unemployment declined at a painfully slow pace. Unlike the periods that followed the traditionally deflationary depressions of the past, including the Great Depression of the 1930s, the upswing that followed the crisis of the 1970s and early 1980s was not followed by a “great boom” of capitalism but only by what the economists and economic journalists called the “Great Moderation.”
The reasons for this are not so hard to figure out in light of the economic laws that we have been examining in this chapter. Just like the recovery that followed the Depression of the 1930s and World War II, the recovery that began in 1983 was marked by a sharp rise in the rate and mass of profit. Indeed, this rise is all the more dramatic if we measure profits in terms of the money commodity — real money — and not in nominal dollar terms or in commodity terms — which is the only scientifically correct way to measure profits. During the “misers’ decade” of the 1970s, capitalists, as a rule, were not making profits at all in terms of gold since it was more “profitable” just to hoard gold.
But however we choose to measure profits, the dramatic rise in the mass and rate of profit in the wake of the Volcker shock reflected the devastating rise in the rate of surplus value brought about by first inflation and then mass unemployment. However, Marx explained that a high rate of profit is not by itself sufficient to set off a powerful upswing in the industrial cycle. You also need a low rate of interest. The problem in the early 1980s was that though the rate of profit was very high so was the rate of interest. As a result, at the beginning of the Great Moderation, the rate of the profit of enterprise was low, if not still negative.
Therefore, as the capitalists after 1982 became confident that the world’s monetary system was not headed after all towards collapse, a large amount of the realized surplus value — profit — was converted not into productive capital (M — C…P…C’ — M’) as was the case after 1945 but rather into loan capital (M — M’). This is not surprising since interest rates were close to, if not above, the total rate of profit. But just as Marx explained in Volume III, Part V of Capital, such a situation was not sustainable.
A significant portion of the world’s industrial and commercial capitalists (corporations) converted themselves into money capitalists. This process has even acquired a name, it is called “financialization.” And as a result, we had an unparalleled debt explosion. The rate of interest was gradually lowered, especially since the sharp fall in commodity prices in terms of gold during the stagflation made gold mining extremely profitable, unleashing a boom in mining. Gold production began a major upswing in the early 1980s and didn’t peak until 2001.
A Critique of Crisis Theory 