Over the last month, the news in the U.S. (the world’s leading imperialist power) was dominated by three main stories. The first is the strikes against the Big Three automakers by the United Auto Workers (UAW). The second is the continued struggle of the Party of Order against the presidential candidacy of Donald Trump. As of early October 2023, Trump appears to have built a sizeable lead in the Republican primary, with all the other candidates fading fast. The third story was confined mainly to the financial pages but is of particular interest to the readers of this blog. That story is the crash of the U.S. government bond market.
A government bond crash gets much less attention than a stock market crash, though it’s really more important. A stock market crash lowers interest rates. Unless a recession is already underway — like the famous 1929 stock market crash — a crash that relaxes the money market and lowers interest can postpone a recession. This happened in the crash of October 1987, when it lowered interest rates and prolonged the ongoing economic expansion by several years.
While a government bond crash doesn’t prevent the federal government from continuing to borrow money (increasing the cost to the taxpayer), it does increase the interest rate that both businesses and consumers have to pay. For example, housing construction had been slumping but began to recover last summer as mortgage rates began to decline. This raised hopes for a “soft landing” of the U.S. and the world economy. But now mortgage interest rates are rising to their highest levels since before the 2007-09 crisis, and housing starts renewed their decline.
Let’s start with the most important story: the ongoing union upsurge and target strikes of the UAW against the Big Three automakers.
On September 26, U.S. President “Corporate Joe” Biden did what no other U.S. president has ever done: joining a UAW picket line. As in every struggle, workers must build the greatest support possible for their actions. Having the president of the United States appear on a picket line, no matter how token and symbolic, certainly reflects the widespread support the auto workers are enjoying throughout the U.S. and the world. However, Biden’s appearance raises an interesting question. Even when presidents have claimed to support unions, they’ve never appeared on picket lines. Why has Corporate Joe found it advisable to appear on a major industrial union’s picket line when, as far as we know, none of his predecessors even considered making such a move?
Biden wasn’t the only president to appear in Michigan that week. The next day, his predecessor — and the leading Republican presidential candidate — Donald Trump arrived, though he didn’t join any picket lines. To do that is not in this shady businessman’s DNA. Instead, he spoke at Drake Enterprises, an open shop (non-union) auto parts manufacturer. Attendees waved UAW signs, though the Detroit News reported that none were union members or workers in the struck plants. Trump also claimed to support the auto workers. But did either Biden, the Democratic incumbent president and candidate for a second term, or Trump, the former Republican president and also a candidate for a second term, put forward a viable program for the striking auto workers? Of course, they didn’t. But what did they propose?
As he appealed for their support in the 2024 election, Biden told the striking auto workers, “You deserve what you earned, and you’ve earned a hell of a lot more than you’re getting paid now.” No doubt the UAW workers agree with him on this point.
If Biden meant by “earning” the value that workers produce during the workday, he is correct. If the workers didn’t “earn” in the sense of value produced or labor performed — “a hell of a lot more” than they’re paid, there’d be no surplus value produced and, therefore, no profit. But as correct as this observation is, it’s not a program. Biden’s program for the working class is summed up by the expression he repeats whenever he speaks to workers or a labor union audience. On April 25, he told a meeting of labor union leaders in Washington, D.C., “Wall Street did not build America, the middle class built America and unions built the middle class.” It was not Wall Street, but the working class, not the middle class, who built America — and all other countries as well. (1)
The real point Biden makes is that in the past, Gompers-style unionism lifted some workers above their class into the middle class. This was possible only because other workers in the United States and even more so in what is called the Global South, were super-exploited by U.S. monopoly capitalism. The monopolies could share a portion of their profits with a section of the workers, lifting them into the middle class for a while.
What neither Biden nor other “pro-labor” Democratic politicians explain is that with U.S. imperialism victorious in its class struggle against the Soviet Union and East European socialist allies on one hand and the loss of the old U.S. industrial monopoly to first a revived Western European capitalism and Japanese capitalism, and later to the rising industries of China and the other BRICS countries on the other, the bosses began to take away the middle-class lifestyle. (2)
Corporate Joe now says that if you support us in our struggle against China and the other BRICS countries, as well as any other people or country like Cuba, Nicaragua, or Venezuela (countries that dare to resist U.S. imperialist domination) perhaps then we Democrats will convince the bosses to let you have some of the middle-class lifestyle back that your fathers and grandfathers who built the UAW enjoyed. So far, though, Biden hasn’t backed up his election season enthusiasm for unions by launching a serious effort to pressure Congress to pass the Protecting the Right to Organize (PRO-Act) to restore some labor rights that were taken away by the 1947 Taft-Hartley Act.
Let’s turn to Trump’s message to auto workers. Appearing at the non-union shop, Trump claimed that while he supports the UAW workers, it doesn’t matter what their wages are because unless he becomes president again, the entire industry will shift to electronic vehicles (EVs) and move to China. He says the enemies of the UAW workers are not the auto bosses and the rest of the capitalist class, but rather the workers of China, Germany and other European countries, South Korea, Japan, and workers of the rest of the world beyond U.S. borders.
The only difference in these messages is that Biden promises that if workers support U.S. imperialism and if it’s victorious in the coming struggles against the world’s peoples, there will be a possibility of sharing some super-profits with the upper sections of the working class — the middle class. Trump and his capitalist supporters, in opposition to the ruling Party of Order (I’ll call them the “American First Party”), believe it’s unrealistic to think U.S. imperialism will succeed in crushing all the peoples of the world sufficiently to make this possible. America First believes the glory days of industrial monopoly the U.S. enjoyed in the mid-20th century are gone forever.
America First holds that if they’re to survive the cutthroat real competition on the world market, U.S. bosses will have to take it out of the hides of U.S. workers by increasing the rate of surplus value — the rate of exploitation — right here at home. This is the central plank of America First’s program being counterposed to that of the Party of Order Party that’s dominated U.S. politics since World War II.
Trump warned the UAW that it will have to support his bid to return to the White House or else. In his America First vision, either the workers will have to put up with whatever the bosses offer — nothing good — or be thrown on the scrap heap of permanent unemployment. It goes without saying that to the extent there’s any difference between these two perspectives — they’re not mutually exclusive, just different emphases — both are dead ends for the working class.
Something we shouldn’t forget is that no matter how concerned the capitalists supporting the Party of Order are about the dangers of Trump and his dictatorial tendencies, they’re far more concerned with the dangers presented to them by the workers. If Trump were to push the Party of Order aside and impose a personal dictatorship — and he fell short of achieving this during his first term — that would just be a different form of capitalist class rule. But if the current rise in the labor union movement were to end in the formation of a government that genuinely represents the interests of the working class majority and its allies, it would be the end of the road for the class that lives in luxury off the unpaid labor of the workers of the U.S. and of the entire world.
Economic background of the current worker upsurge
For decades, the capitalist mass media has all but ignored strikes. Gone are the days when the major capitalist newspapers assigned reporters to the “labor” beat. Back then, union leaders like John L. Lewis of the United Mine Workers of America, Walter Reuther of the United Auto Workers, and James (Jimmy) Hoffa, President of the Teamsters Union, were household names. But for decades now, the bosses’ media has presented labor unions as mere relics of a bygone era of industrial America. That has begun to change, and as the deadline for a contract to avoid a strike against the Big Three automakers approached, it changed big time.
In analyzing the economic situation, we must distinguish between long-term tendencies and changes in the phase of the industrial economic conjuncture, or conjuncture for short. Is the economy in a crisis/recession phase, a depression/stagnation phase, a phase of average prosperity, or an economic boom? Changes in the economic conjuncture can dramatically affect the political situation and the struggles between the labor unions and the bosses.
Unions are most successful when the demand for labor power by the capitalists is strong and the pool of unemployed workers — reserve industrial army — smallest. Periods of decline in the demand for labor power, while the pool of unemployed workers ready to take the jobs of employed workers is large, is tough on labor unions. Since the middle of the 1970s, while conditions have fluctuated with the ups and downs of the industrial cycle, they have overall been overwhelmingly unfavorable for the sellers of labor power and the unions that represent them. However, as I’ve explained before, conditions since the 2020 COVID shutdowns have become more favorable for the unions than they’ve been in decades.
Let’s examine why this is true. The COVID shutdowns, at their height in March and April 2020, sent even official unemployment into the double digits. But COVID itself was preceded by a sluggish decades-long recovery from the 2007-09 crisis. Unions, including the once-powerful UAW, were on the ropes before the crash of 2008 due to decades of slow economic growth combined with the end of the U.S. monopoly the Big Three auto manufacturers once enjoyed on the world auto market. (3)
Then, the crisis dealt the UAW a devastating blow. On June 8, 2009, the once unthinkable happened as General Motors, long considered the leading industrial corporation in the U.S., declared bankruptcy. Wikipedia explains, “On July 10, 2009, the original General Motors sold assets and some subsidiaries to an entirely new company, including the trademark ‘General Motors’. Liabilities were left with the original GM, renamed Motors Liquidation Company freeing the companies of many liabilities and resulting in a new GM.”
As part of the restructuring of the U.S. auto industry, the UAW made big concessions that auto bosses under the Democratic Obama administration claimed were necessary to save the U.S. auto industry from extinction. In addition to lower wages, a wage tier system was introduced where new hires earn much less than workers who have worked for many years. Cost-of-living clauses were eliminated. Wages and benefits like healthcare and unemployment pay that once gave the UAW a middle-class lifestyle no longer existed. Instead, workers had to put up with grueling work weeks that could extend to 80 hours some weeks, while there might be no work on other weeks.
In the wake of the crisis of general overproduction of 2007-09 (the capitalist media call it the financial crisis) that forced the old GM into bankruptcy, large amounts of idle money capital accumulated in the capitalist banking system, sending interest rates to the lowest levels in the history of capitalism. Following the COVID shutdowns of many capitalist industries in 2020 came the COVID aftermath boom of 2021-23. During this boom, capitalist industry scrambled to rebuild inventories. This rebuilding, combined with the multiplier and accelerator effects, created the strongest boom the world capitalist economy has experienced for the last forty years. The boom removed obstacles to the realization of surplus value as the demand for commodities of all types soared.
The expansion of the market combined with an increased rate of surplus value (ratio of unpaid to paid labor) due to decades of high unemployment led to an explosion of the profits of capitalist industry in general and the auto industry in particular. (4)
According to the Economic Policy Institute, “The Big 3’s $250 billion in profits since 2013 amounts to nearly $1.7 million for each of the roughly 150,000 workers covered by UAW collective bargaining agreements”.
During the COVID aftermath boom, demand increased much faster than supply, driving up prices. This has unleashed what I call a profit-push inflation that’s sent profits and the cost of living soaring, putting downward pressure on real wages. As a result, despite increased demand for their labor power, most workers earn less in terms of real purchasing power for each hour of labor they perform than before COVID.
Comparable situations in the past led to strike waves, and this time is no exception. There are examples of aftermath booms after World Wars I and II that led to the strike waves of 1919 and 1946. Another example is the economic recovery that began in 1933 following what I call the super-crisis of 1929-33. After the catastrophic collapse of production and employment between the summer of 1929 and the winter of 1933, the U.S. economy rapidly recovered in the spring of 1933.
Though starting from a very low level, this economic upswing continued until the short but violent recession of 1937-38. During this recovery, the demand for labor, as well as dollar prices — fueled in part by President Franklin Roosevelt’s devaluation of the U.S. dollar as well as by the economic upturn — caused workers beginning in 1933 to strike.
In 1934, the strike waves escalated with a general strike in San Francisco, California, spearheaded by dock workers, the Toledo, Ohio, Auto-Lite strike by auto parts workers, and the Minneapolis, Minnesota, Teamsters strike. In 1936-1937, the strike wave climaxed with the sit-down strikes organized by newborn United Auto Workers, and the Congress of Industrial Organizations (CIO) was born. Behind the strike wave and the birth of the CIO was the fact that the demand for labor power was again increasing.
Workers were determined to regain what they’d lost during the terrible years following 1929. Today, a new generation of workers wants to regain what they’ve been losing over the last forty years, especially in the years following the 2008 crash. And again, the auto workers are in motion.
The U.S. labor union revival that includes Starbucks workers, Hollywood writers, as well as workers in basic industry represents a major problem for the ruling Party of Order. How can it harness the upsurge in a way that’s harmless to the Party of Order before the inevitable return of mass unemployment that they hope again brings the workers back into line? And how does the Party of Order’s determination to keep the U.S.’s would-be Bonapartist strongman Trump out of the White House figure into this?
Trump used the mass discontent in the Rust Belt and elsewhere to win support from some frustrated workers — overwhelmingly white — in his drive to become president in the 2016 election. His surprise victory put him in the White House, making his unsuccessful coup attempt possible after he lost his reelection bid in 2020. Today, widespread discontent with falling real wages of the inflationary COVID aftermath boom sent Corporate Joe’s approval ratings plunging. Virtually all polls show that if the election were held today, Biden and Trump would be neck-and-neck in the popular vote or that Trump would win. One poll showed Trump beating Biden by 9%. No poll showed Corporate Joe with a meaningful lead. Considering the built-in advantages the Republican candidate has in the electoral college means that as of today, Trump is the odds-on favorite to return to office come January 2025.
With Florida Governor Ron DeSantis fading in the polls and no other Republican candidate gaining momentum against Trump despite, or maybe because of, the 91 criminal indictment against him as well as various civil cases, many progressives have expressed a wish that the now 80-years-old Biden step down in favor of a younger and more popular, if not more progressive, Democrat. The problem is that no Democrat has the popularity to challenge a sitting president. Even if Biden decided to — or was forced to — step down, any other candidate would still be branded with the Biden-Democratic record.
Despite progressive misgivings about him, union leaders, including the AFL-CIO, have endorsed the unpopular Biden, with one exception: the UAW under its new president, Shawn Fain. Why would Corporate Joe go out of his way to win the endorsement of a union when it’s already endorsed him? He walked the picket line of a union that hasn’t yet endorsed him.
The rise of working-class struggle is taking place against a crisis of leadership that’s been developing for some time now in the U.S. capitalist ruling class. The current president will celebrate his 81st birthday on November 10, the Senate minority leader Mitch McConnell is 81 years old and has some serious health problems, while the once powerful conservative Democratic California Senator Diane Feinstein just died in office at the age of 90 after being barely able to function in recent years. Polls show that Biden is unpopular, not only because it isn’t clear that his age won’t physically and mentally challenge him during the coming five years, but more importantly because neither he nor the Democrats have kept the promises they made when they defeated Trump in 2020.
One promise Biden has kept is his opposition to Medicare for All. He promised to veto the measure if Congress passed it into law, which it now shows no signs of doing, even when the Democrats had a majority in both Houses of Congress. Among the promises Biden hasn’t kept was passing the Protect the Right to Organize Act, which would undo much of the damage the Taft-Hartley Act of 1947 did for labor rights. Nor did Democrats pass a law guaranteeing the right to abortion throughout the United States, which would have largely overridden last year’s Supreme Court decision that took away the right to abortion as constitutionally protected. Nor did the Democrats, even when they had a majority in both Houses of Congress, pass the Voting Rights Act to outlaw many of the Republican voting suppression policies.
This, combined with the fall in real wages that’s characterized his administration, has made Biden increasingly unpopular with the American people. Yet, as it stands now, it looks like the alternative to what will be offered to the American people by then-82-year-old Corporate Joe in 2024 will be by the then-78-year-old Trump.
A British Tory weighs in on imperialist leadership crisis
The arch-reactionary British journalist Allister Heath, writing in the September 13 edition of the British Tory organ “The Telegraph,” takes a dim view of the current state of U.S. politics. Heath explains, “Biden’s job is that of CEO of the most powerful country in the world, the leader of the free world [Health means the U.S.-NATO world empire -SW], not the chairman emeritus: [an obvious reference to Biden’s age -SW]. It is a complex and responsible managerial and executive role, not just because his hands are hovering over the nuclear button. We [meaning we imperialists -SW] all have an interest in the role being exercised by a competent president.”
Heath goes on, “The sort of delegated decision-making we are now seeing ‘works’ in the sense that decisions are evidently taken, presumably by conventionally competent technocrats, but many will be rightly skeptical that they are truly Biden’s choices. This is undermining the U.S. system of government, and encouraging despots [Heath means governments that don’t do what Washington and London tell them to do -SW] in China or Russia to dismiss Western claims of moral superiority.”
So much for Biden. But what about Trump? He is, of course, an arch-reactionary, but so is Mr. Heath. So why not Trump? Indeed, Heath sees some positive elements in Trump’s program, at least judging from his first term in office.
“I’m no fan of Donald Trump,” Heath tells us. But “he was good [for capital that is -SW] on tax, regulation and the Abraham accords.” That’s the upside of Trump for Heath, “but was inflammatory and disorganized, failed repeatedly in many other policy areas and [this is the important part -SW] terminally disgraced himself by refusing to concede his obvious defeat.”
Coups are acceptable in outlying provinces of the far-flung Anglo-Saxon empire, but this is not, Heath believes, the way to do business in the core.
Heath complains, “In the meantime, Biden (or his close associates) are busily trashing America’s rule of law and allowing critics to depict the entirety of the West as deeply hypocritical.” Trump’s attempted coup of January 6, 2021, not to speak of his months-long campaign to steal the 2021 election, doesn’t look good. But, neither does the attempt to convict Trump (Biden’s main capitalist political opponent) on criminal charges — logically leading to his imprisonment if convicted — look especially good. In Western-style democracies, aren’t elections supposed to be decided by the voters, not the criminal courts?
Heath might have added we don’t do things this way under the (unwritten) British constitution. If a prime minister like, for example, Ms. Liz Truss presents a program that’s not in the interests of finance capital, all the Tory party has to do is remove that person as leader of the party and appoint a more satisfactory prime minister — to finance capital — like Mr. Rishi Sunak. Unfortunately, from Heath’s viewpoint, the center of the free world empire of finance capital no longer lies in London but in the hands of the American colonials in New York and Washington. If the power of the U.S. is undermined by political chaos in Washington, things won’t go well for London either.
For Heath, the solution is for the Democrats to find a way to get Biden out of the picture and nominate someone who can at least create the impression he has some notion of what’s going on and could hold up long enough to serve out the next presidential term that expires in January 2029. Polls show most registered Democrats feel the same way.
Heath thinks the Democrats should nominate California Governor Gavin Newsom instead. From the opposite end of the capitalist political spectrum, Young Turks host Cenk Uygur makes the same points. He is circulating a petition urging Biden to step aside. Though he would prefer a progressive Democrat, he thinks any other mainstream Democratic politician would have a better chance of defeating Trump than Biden would. Uygur doesn’t believe an enfeebled and unpopular Biden will be able to defeat Trump in 2024. To his credit, Uygur was one of the few observers who thought Trump had a good chance to win in 2016. And though Trump did lose the popular vote by two million to Hillary Clinton, he prevailed where it counted, in the electoral college.
On October 11, 2023, Uygur announced that he was a candidate for president in the Democratic primary. He calls himself a “proxy candidate,” hoping to get one of the Democratic governors to run for president if he can win 25% of the vote in the primaries.
Government bond crash and economic prospects
According to the mainstream media, the U.S. economy is doing well. Unemployment is either near or at record lows, and inflation is fading. And wonder of wonders, real hourly wages are starting to rise ever so slightly. With economic conditions so great and with the U.S. not openly involved in any major military conflict — the government is quite happy to leave the actual dying to Ukrainians in the war against Russia and to Israelis in the war against the Palestinian people — Biden should be a shoo-in for reelection. The problem is that few people buy it outside the capitalist ruling class, and its bought and paid for media.
USA Today online on September 13 complained, “Nearly 70% of Americans said the economy is getting worse, according to the poll, while only 22% said the economy is improving. Eighty-four percent of Americans said their cost of living is rising, and nearly half of Americans, 49%, blamed food and grocery prices as the main driver.
“The White House has tried to get credit for an unemployment rate that’s near a 50-year-low, a robust job market, including 13.5 million jobs added under the Biden presidency, and annual inflation that, according to the Consumer Price Index, is down to 3.7% from a 40-year high of 9.1% in June 2022.”
But this is empty boasting. Even if inflation, according to official figures, has declined from 9.1% in June 2022 to only 3.7% now, prices are still higher than ever — in terms of U.S. dollars — and still rising. As for the 13.5 million jobs that were added — the real figure is probably lower because of the problems related to the birth and death of business models used to estimate total employment — the lion’s share of this reflects the snapback from the extremely low levels of employment that prevailed during the COVID shutdowns and their aftermath. Biden and his supporters boasting about these statistics only indicate the basic dishonesty characteristic of Corporate Joe and all major capitalist politicians, including Trump. What distinguishes Trump from most other U.S. politicians is that he’s a more skillful demagogue than traditional Party of Order politicians such as Corporate Joe.
If the Party of Order hoped that showering Trump with felony charges would cause his popularity to decline, they’ve been disappointed. The criminal charges have only made it easier for him to appear as a victimized champion of the people. It’s possible he could use a trial to put the Party of Order itself on trial. If the election were held today (if polls are to be believed), the election could go either way, though Trump would have the advantage in the electoral college. If Trump isn’t well ahead of Biden, it’s only because most people who aren’t both Christian and white are alarmed about Trump’s racism and general bigotry. Polls show that Christian, white, and straight are still the majority of U.S. voters, even if this majority is declining, and they plan to vote for Trump, though with exceptions. Biden’s progressive supporters are having a tough time explaining to white workers why they should vote for Corporate Joe rather than Donald Trump.
Soft landing?
What will happen if the economic situation worsens between now and November 2024? Party of Order commentators and their allied economists are pointing to the declining inflation rate as a sign the economy has achieved a soft landing. According to them, the problem is inflation, but they insist it’s declining. They say the Fed has achieved a soft landing where inflation declines without a recession and its associated rise in unemployment. However, a “soft landing is not really achieved until the Federal Reserve System can lower its target for federal funds without inflation quickly re-accelerating. That is the way things appear to the Open Market Committee that sets the target for the federal funds rate at its monthly meetings.
And how does the crash in the price of government bonds that accelerated during the first week of October 2023 fit into this? The sharp rise in interest rates is dimming the hopes for a soft landing.
Truth be told, capitalist economists have no understanding of what causes capitalist recessions. As we have seen throughout this blog, Say’s Law — that a general overproduction of commodities is impossible because commodities are in the final analysis purchased by other commodities — is built into the very foundations of the neoclassical system. Since neoclassical economists have no idea what causes recessions, they rarely predict them.
Inflation is seen as either too much money chasing too few goods — demand-pull inflation — or so-called wage-push inflation, where rising wages increase the cost of production, forcing businesses to pass the costs along in the form of higher prices.
Rarely do capitalist economists ever talk about what can be described as profit-push inflation, where the rising selling price of commodities increases the rate of profit. Capitalists see prices as a combination of the cost price of commodities plus a certain profit added on. If we increase the size of the profit added to the cost prices, both the mass and rate of profit increase. It’s profit-push inflation that’s dominated the post-COVID shutdown period.
When demand rises faster than supply at current prices, commodity sellers can increase prices without losing sales to competitors, as Marx explained in his early work “Wage Labor and Capital.” As a result, capitalist commodity sellers can increase the markup over their cost price, leading to high profits. Since the COVID shutdowns ended, the quantity of commodities offered for sale has increased relative to demand, causing the inflation rate to slacken. This weakening of profit-push inflation raised capitalist economists’ hopes for a soft landing.
The other type of inflation is caused by the depreciation of the currency issued by the monetary authority — the leading one today is the U.S. Federal Reserve System — against the money commodity that, in its own use value, measures the value of commodities and importantly for the capitalists, functions in terms of its own use value as the measure of profits. Profit is the difference between two prices, the commodity’s market price, and its cost (the cost to the capitalist) price, which is the sum of prices the capitalist must pay to produce the commodity. Like all prices, the commodity’s market price and its cost price must, in the final analysis, be calculated in terms of the use value of the money commodity.
The money commodity is gold. The unit of measure of both prices and profits is some measure of the weight of gold, such as troy ounces, grams, metric tons, etc. Currency units like U.S. dollars, British pounds, etc., represent defined weights of gold. When the international gold standard was in effect, the major currencies — pounds and dollars — represented legally defined weights of gold. The amount of gold the major currencies represented was, within narrow limits, a mathematical constant.
Today, currency represents variable weights of gold as the dollar price of gold fluctuates on the open market, and the rates of exchange between the dollar and other currencies likewise fluctuate hour-by-hour, minute-by-minute. If these variations exceed certain limits, the system is thrown into chaos.
Under the current dollar-centered international monetary system, the dollar price of gold measures the quantity of gold the dollar represents on the market at any given moment. The amount of gold other currencies represent is measured by how many dollars these currencies exchange for on the open market. If the dollar — and through it other currencies — loses gold value, the prices of commodities measured in dollar terms — all other things remaining equal — rise in dollar terms. Since the dollar price of gold constantly fluctuates, there can be considerable lags before a change in the dollar price of gold is reflected in higher consumer commodity prices.
Most of the fluctuations in the dollar price of gold represent random noise, with gains soon wiped out by losses. However, if the dollar price of gold moves in a significant way, up or down, and persists, commodity prices in dollar terms begin to reflect the change in the dollar’s gold value. Then, through the mechanisms of the dollar standard, these changes are reflected in prices measured in other currencies as well.
The first dollar prices to be affected by a downward movement of the dollar against gold — a rise of the dollar gold price — will be volatile primary commodities such as oil and agricultural commodities and industrial metals like copper, etc. But once it becomes clear that the dollar has lost part of its gold value and this reduced value is likely to last for some time, the rise in primary commodities spreads first to the wholesale level and finally to the retail level — the prices you pay at the grocery store or for commodities delivered to your door by Amazon.
Often, governments and their monetary authorities devalue or allow their currencies to depreciate during periods when the supply of commodities is rapidly increasing relative to the gold supply, causing commodity prices to fall in gold terms. Under these conditions, currency devaluations and deprecations cause price rises by less than the extent of the currency devaluation or depreciation or even rise in terms of devalued or depreciated currency.
The classic example of this occurred during the Great Depression. Between 1933 and 1934, President Franklin Roosevelt ordered the U.S. Treasury to purchase gold on the open market at ever higher dollar prices. As a result of these purchases, between 1933 and 1934, the dollar price of gold rose from $20.67 to $35 an ounce, at which point Roosevelt declared the new gold value of the dollar was 1/35 a troy ounce.
Legally, this meant that a dollar, formerly defined as 1/20.67 of a troy ounce of gold, was then defined as 1/35 of an ounce. The immediate effect on dollar commodity prices, though, was slight because the supply of commodities greatly exceeded the demand for them under Depression conditions. After World War II, commodity prices, including retail consumer prices, reflected lower dollar gold value in the form of higher dollar prices than those that prevailed before the war.
Commodity prices calculated in terms of the use value of commodity money — gold — are not arbitrary but are governed by the law of the value of commodities. As we’ve explained before, competition between capitalists that causes the rate of profit to tend toward equality between different industries operating with different organic compositions of capitals and turnover periods transforms prices that directly reflect values into prices of production.
As a result, prices measured in terms of the use value of the money commodity tend toward prices that equalize the rate of profit. These are the natural prices of classical political economy called prices of production or production prices for short by Marx. Anwar Shaikh calculates that production prices are usually within 7% of direct prices. The transformation of values into prices of production modifies but doesn’t change the fact that in the final analysis, prices calculated in terms of the use value of the money commodity are ruled by labor values.
One consequence is that if, as a result of a period of prosperity, the general price level (made up of the market prices of all commodities having prices) rises above their values in one period, they’ll fall below their values in the following period. What Shaikh calls real competition — not neoclassical perfect competition — is the mechanism through which the tendency of market prices to move toward prices of production is enforced but only by constant deviations of prices from production prices, first up and then down.
To understand how this works, let’s begin with the price of a specific commodity, for example, a type of cloth. If a period of high demand causes the cloth’s market prices to rise above its price of production, industrial capitalists producing the cloth realize profits above the average rate of profit. Industrial capitalists producing the cloth will increase their production, and other capitalists will enter the cloth trade. Cloth production will rise. Soon, the market will be glutted, and as a result, market prices will fall below their production price.
At that point, capitalists producing that cloth will experience less than average profit rates, maybe even losses. They’ll then either reduce their cloth production or exit the line of production altogether to invest in more profitable lines of business. The amount of cloth on the market will decline, causing market prices to again rise above production prices. Now, the cloth capitalists will again experience exceptional profits, and capital will again flow into their business from less profitable branches of production.
Over time, the market price will dance around the production price, though at any given moment, the market price will seldom be equal to its production price. This way, capitalist society’s demand for a certain quantity of that cloth will be fully met but not exceeded not immediately but in the long run. What’s true of cloth is true of all other commodities having prices. Long before Marx, classical political economy had discovered this law.
How do we extend our analysis of how the law of the value of commodities determines prices through the mechanism of real competition from specific commodity prices to the general price level? The general price level is the sum of the market prices of all commodities that have prices. All commodities have prices except the commodity that serves as money.
Prices are expressed in terms of physical quantities of the money commodity — for example, ounces of gold. The dollar price of gold is actually an exchange rate between gold money and a particular currency, the U.S. dollar, that represents gold in circulation. Gold is a commodity, but the dollar isn’t. It’s a currency that represents a certain amount of gold in circulation. We can use the slang expression “the price of gold” if we keep this in mind, but in a strict sense, gold doesn’t have a price since we can’t express the price of one ounce of gold as one of an ounce of gold. This would be sheer tautology.
If gold has no true price, how does the market see to it that gold is produced in quantities adequate for expanded reproduction under capitalism? The problem is that gold, like other commodities, must be produced in certain proportions relative to other commodities, but at the same time, its production must be in the hands of private capitalists who produce it in a decentralized way. If gold was not produced this way, it couldn’t function as money since before a particular use-value could function as money, it must first be a commodity. The only interests of the capitalists who produce gold, as with any capitalist producing commodities, must be their personal profit.
As we’ve seen throughout this blog, economically, real prices must be measured in terms of the use value of the money commodity. What about the rate of interest?
Interest is often described as the price of money or the price of capital. These are slang terms that are not strictly correct. Price expresses a relationship of exchange between the money commodity acting as the equivalent form of value and some other commodity that acts as the relative form. We can’t measure money by money as it has no price. Interest is not a price but a share of the profit that goes to the owner of loan capital. Money capital, because it represents wealth in general, is the form of capital most likely to be loaned. If market prices equalize the supply and demand for commodities at a certain price, the interest rate equalizes the supply and demand for money at a certain interest rate. This gives rise to the slang that interest is the price of money or capital.
If the demand for money being offered as loans rises faster than the quantity of money being demanded on the money market, the rate of interest rises. This means a larger portion of the total profit goes to the money capitalist at the expense of industrial and commercial capitalists. When the quantity of money being offered for loans rises faster than the demand for money, the interest rate falls. Now, a larger portion of the total profit goes to industrial and commercial capitalists at the expense of the money capitalist.
Money is a social relationship of production, a relationship between people, represented by a given commodity such as gold. The quantity of money comes down to the quantity of gold available to serve as money.
John Maynard Keynes hated this fact because he hoped that if the currency issued by a monetary authority — such as British pound notes or U.S. dollar bills — could somehow directly serve as money without representing any particular money commodity, the quantity of money could then be determined centrally by the monetary authority. If that were possible, the monetary authority could, through its control of the quantity of money, determine the interest rate.
For example, if the demand for money loan capital increased due to an economic boom, the interest rate of the monetary authority could prevent the rate from rising by increasing the money supply to meet demand fully. But as we’ve seen, the law of the value of commodities dictates that money must be a commodity and prohibits control of the quantity of money by a central monetary authority. Instead, the law of value of commodities dictates that the money commodity must be produced by for-profit industrial capitalists like all other commodities.
The quantity of money material produced is dictated like the quantity of any other commodity by the rate of profit that the capitalists realize that produce that commodity that serves as money can obtain on their total capital advanced both absolutely and relative to capitalists producing other commodities. In this sense, there is nothing special about the money commodity.
But unlike most commodities, gold as a use value is virtually immortal relative to the lifetime of the capitalist mode of production and as determined by the laws of physics and chemistry beyond that. Once it is produced, it’s unlikely to be destroyed. Over time, the quantity of gold measured in some unit of weight grows. The question is, does it grow fast enough to meet the needs of capitalist production on an expanded scale over a given period? And if it doesn’t, how does the law of value make the production of gold increase? And what happens if capitalists produce gold over a certain period above the needs of expanded capitalist production?
Fluctuations in the profit rate in the production of the commodity gold, both absolutely and relative to other commodities, determine how quickly the quantity of gold will grow. You cannot combine decentralized commodity production with centralized control of the quantity of money by a monetary authority. Milton Friedman’s critics on the extreme right of bourgeois economics have pointed out what they say is a contradiction between Friedman’s opposition to the centralized planning of the production of goods combined with his support of a strictly centralized planning of the quantity of money.
The same contradiction is found in John Maynard Keynes. Herein lies the fatal contradiction in both Keynesian and Friedmanite economics.
This flaw is illustrated by the views of Campbell Harvey, a professor of finance at Duke University. His claim to fame is that he developed the measure of the yield curve — the relationship between short- and long-term interest as a recession indicator. When demand for loan money increases faster than supply, short-term interest rates rise faster than long-term rates. At a certain point, short-term rates rise above long-term interest rates. When this happens, the yield curve is said to be inverted. History shows that whenever the yield curve inverts, recession soon follows.
Harvey complained, “The [inflation gauge] that the Fed uses makes no sense whatsoever, and it’s totally disconnected from market conditions.” Essentially Harvey says that the Fed uses lagging indicators to fight inflation. Though inflation is declining, Harvey points out that the Fed does not yet lower its target for federal funds, making a recession likely in the near future. The Fed should ease immediately and not worry about lagging inflation indicators. If inflation, as opposed to overproduction of commodities, was the main problem and money was not a commodity, Harvey’s criticisms of the Fed would seem reasonable to both capitalists and workers alike.
The capitalists gain by a high rate of the turnover of capital, increasing the annual profit rate. Workers gain from a high demand for labor power. This common interest in good business between the classes is what progressives and social democrats hope can reconcile the interests of capital and labor.
Most progressives and trade unionists, though they might not agree with Harvey on other questions, share his criticism of the Federal Reserve’s tight money policies that threaten to strangle the economy. If the economy declines before the November 2024 election, the chances that Trump will return to the White House increase accordingly.
Why, then, isn’t the Federal Reserve System, controlled by the Party of Order, taking Harvey’s advice and moving to lower interest rates now by accelerating the rate it’s creating new dollars? Wouldn’t this reduce the chances of a recession prevailing come November 2024 and increase Corporate Joe’s chances of reelection?
Overproduction of commodities, not inflation
The reason is that money is a commodity. The overproduction of commodities, not inflation, represents the greatest threat to profits that must be measured in terms of money material.
This is the problem the Fed confronts today. The Fed wouldn’t put it in these terms, as it would expose one of the main contradictions of capitalist production they must keep hidden from the working class and even from themselves. This is how ideology, false consciousness, works. The closest it can get is to say that the economy is overheated, inflation is too high, and the economy and the labor market must be cooled down.
To be honest, the Fed’s current problem is that global production and trade, even if no longer expanding, have not yet fallen far enough to remove the threat that overproduction represents to profits calculated in terms of the use value of the money commodity in the near future. If it eases before such a fall in production, employment, and world trade occurs, profits in dollars and other currencies linked to it under the dollar system remain positive for a little longer. If the Fed allows that, the demand for gold will feed on itself and grow explosively as it did in the 1970s. Then, the dollar’s depreciation against gold will unleash a wave of currency depreciation inflation, driving interest rates in the near future much higher than they are now.
The modern Federal Reserve System operates in the shadow of the 1930s as well as the 1970s. In the 1970s, the Fed learned the hard way that it couldn’t keep the interest rate down by just increasing the quantity of dollar-denominated currency in the absence of a comparable increase in the quantity of newly produced gold bullion. Attempts to drive down interest rates by creating dollars not backed by gold only cause accelerated inflation that, in turn, is the market’s way of driving interest rates even higher.
Ultimately, the rate(s) of interest equalize demand for gold with its supply. When the monetary authority drives down the interest rate by creating currency not backed by increased gold, the market drives gold demand into a frenzy. The result: after a brief decline, interest rates rise higher than before.
During the 1970s, interest rates were driven higher because there was too little gold relative to commodities, and the demand for gold was whipped up because the capitalists expected the dollar and currencies linked to it to be further depreciated. Then, a panicky rush into gold developed that could only be halted by letting interest rates rise to the highest levels in the history of capitalist production.
Government bond market crash
Today, we see the same economic laws working against the background of the crash in government bond prices. In economic terms, bond prices are just another way of saying the rate of interest the U.S. federal government must pay on government bonds. Earlier this year (2023), we had the fake government debt crisis. Republicans threatened not to expand the federal government borrowing limit unless Biden and the Democrats agreed to cuts in social spending. As usual, an agreement was reached at the last minute. There was never a chance that the Treasury would be allowed to default on its debt obligations to the capitalists that lend it money. This doesn’t mean there weren’t economic effects.
By the beginning of this year, the Treasury had come close to the borrowing limit. As a result, it borrowed little on the money markets during the first half of the year. Instead, it ran down its checking account with the Federal Reserve System. As the checking account ran out, the Biden administration reached a compromise with the Republicans.
This meant that during the opening months of the year, the Treasury pumped vast amounts of purchasing power into the economy without taking anything out by borrowing money. This stimulated the general economy and helped stave off recession. But it could not be maintained. Treasury sold few bonds. The reduction in bond supply meant bond prices rose, or put another way, the reduced demand for credit by the government meant that the interest rate on bonds and all loans came under downward pressure.
For example, on October 15, 2022, the interest rate on ten-year government bonds closed at 4.123%. Recession seemed near. But the price of gold was only $1662.50 an ounce, well below the over $2046.10 an ounce on August 8, 2020. That is, one dollar represented more gold on October 15, 2022, than on August 8, 2020. However, in August 2020, the interest rate on ten-year bonds was 0.5620%, a far cry from the 4.123% prevailing on October 15, 2022. The rise in interest rates that was bringing recession near was also bringing down the demand for gold. For money capitalists, a return of 4.123% a year seemed a good bet compared to gold which yields its owner no interest (surplus value) at all.
Then, because of the budgetary situation, Treasury borrowing dropped, affecting the bond market. By April 15, 2023, the yield on bonds dropped to 3.2880%. Interest rates were down, and inflation was declining, raising hopes of avoiding a recession. Stock prices advanced on Wall Street.
Ignored was the reason for the drop in the yield on bonds; the temporary and unsustainable drop in government borrowing brought on by the row between Democrats and Republicans in Congress — largely theatrical — over cuts in social spending.
Also overlooked by optimistic economic forecasters was the rising demand for gold brought on by the drop in interest rates. While 4.123% on ten-year government bonds seemed a good yield considering the risks of dollar depreciation, a yield of 3.2880% did not.
The problem was that the accumulation of more and more unsold commodities wasn’t disappearing. Only a recession could cause the quantity of unsold commodities to shrink. The fall in interest rates and relaxation of the money market was blocking the way for the necessary (for profit-making over the coming few years) recession with its liquidation of unsold commodities. Under these conditions, the money capitalists thought a return of 3.2880% wasn’t high enough. They reacted by increasing their demand for gold, and its dollar price rose to $2024.90 by May 5, 2023.
Soon, the theatrical crisis over the federal budget was over, and the Treasury resumed borrowing to keep spending and build back its checking account. In the meantime, the economy had been stimulated by all the purchasing power pouring into it, as well as the resulting accelerator and multiplier effects. But this was no soft landing.
The federal government was now in competition for the limited quantity of money available with commercial and industrial businesses, other governments, and people who purchase durable consumer goods on credit around the world. Soon, the price of government bonds dropped, and other interest rates began to rise. In the last week of September 2023, a wave of panic hit the bond market.
The week before, interest rates on ten-year government bonds closed at 4.5730. A week later (the trading week closing on October 6), the rate was 4.7840. From the viewpoint of the money capitalists, this is a big improvement over 3.2880%. As a result, the demand for gold dropped, as shown by the gold’s dollar price at 3.2880%, on the ten-year was $2024.90, but at 4.7840% as of the end of the trading week on October 6, 2023, is only $1847.00.
The dollar has regained some of its gold value, pushing back the chance of a return to 1970s inflation but at the price of increased recession chances for 2024. The soft landing optimism that seized Wall Street earlier in the year is fading.
From the viewpoint of the Fed as the world’s central monetary authority, if it eases too soon, the economy will accelerate, increasing the chances that the Party of Order’s favorite Corporate Joe might be able to defeat Trump in November 2024. But by making overproduction worse, profits in gold terms will collapse, and in the end, interest rates will have to rise well above current levels, leading to a worse economic crisis but just a little later.
This could eventually lead to a deeper and more dangerous challenge to the Party of Order than that represented by Trump. This is why the Fed prefers lagging indicators of inflation. By the time they decline, the recession arrives, overproduction is being liquidated, and then interest rates fall because a decline in the quantity of non-money commodities combined with an accelerated production of money commodities restores the equilibrium between gold production and other commodities needed to realize the value and surplus value contained in commodities.
We can now see what happens when gold is overproduced, as it periodically must be under the capitalist mode of production. Quantities of money fall out of circulation, and the demand for gold can be equalized with the supply of gold at lower and lower rates of interest.
During the rising phase of the industrial cycle, prices of all commodities that have prices, all commodities except the money commodity, rise above their values — direct prices — and production prices. The greater the increases in prices measured in terms of money material, the greater will be the mass and rate of profit. This was illustrated during the COVID aftermath boom of 2021-23.
However, by definition, the industry that produces money material will experience rising cost prices, reflecting the higher prices of commodities experiencing a squeeze on its own rate and mass of profits. As a result of the absolute and relative decline in the profit rate of the producers of money material, the production of new gold will decline.
This is why profit-pushed inflation can’t continue indefinitely. This is also the central mistake of the Monthly Review school. They believe capitalist monopolies can push prices relative to costs (ultimately values) because they don’t realize that money is a commodity that itself must be produced by private capitalists for profit.
Because money must be a commodity, the growth rate of the production of money material measured in its use value slows down. If the market prices of commodities keep rising above production prices, production of gold would cease altogether, though, in reality, an economic crisis would intervene, causing market prices to drop long before this happens. (5) The growth rate of the global total quantity of money material measured in terms of its use value lags behind the sum of the prices of all commodities that have prices (all commodities except the money commodity) also measured in terms of the use value of gold.
This is why every successive boom in the history of capitalism has raised the interest rate and eventually ended in tight money followed by a recession. The general price level fluctuates around the prices of production that are themselves determined by the values of commodities.
When the general price level rises above production prices, gold production declines, and a shortage of gold relative to all other commodities progressively develops. This causes interest rates to rise, leading to an economic crisis, causing general prices to fall below values and production prices again. The general price level fluctuates around value-determined production prices, first exceeding them in the boom and then falling below them in the crisis. Through successive booms and crises, in the long run production of money material is equalized with the needs of expanded capitalist reproduction.
To be continued
(1) Originally in Europe, the term “middle class” meant the class between the peasantry and the ruling landowning aristocracy. Marx and Engels used the term this way. This class lived in the cities — hence the French term “bourgeoisie.” As capitalism began to take root, the people of the towns split into the capitalist class that owned the means of production and people who had nothing to sell but their labor power — the proletariat. In the countryside, the peasants were splitting more slowly into rich peasants who gradually concentrated the means of production in their hands and poor peasants who lost all the means of production they owned and became agricultural workers who were forced to sell their labor power to the agricultural capitalists.
There were still some people dwelling in cities or the countryside who were between the two main classes of capitalist society. In Europe, they were called the “petit bourgeoisie” — French for the small bourgeoisie — as opposed to the haute bourgeoisie — French for the big bourgeoisie — the capitalist class proper. The 19th-century revolutionary movement used these terms due to the influence of the great French Revolution of 1789-94 and the Paris Commune of 1871.
In the United States, there never was a feudal aristocracy, though some Southern slaveholders liked to pretend they were such an aristocracy. But their mode of production was based not on feudal relations but on modern — as opposed to ancient — slavery based on the labor performed by enslaved Africans. These modern slaveholders — as a class separate from the capitalist class that exploits wage slavery — vanished with their defeat in the war of the slaveholders’ rebellion of 1861-65 (the U.S. Civil War). Thereafter, in current English, the term middle class refers to the people who are somewhere between the capitalist class and the working class, which has nothing to sell but their labor power.
When Biden claims that unions built the middle class, he’s referring to the fact that unionized workers, by winning higher wages and better working conditions and gaining the ability to buy their own homes and — insomuch as their mortgages were paid down — becoming owners of tiny amounts of land, to some extent rose above the pure proletariat that owns no capital or land whatsoever.
In this way, an upper layer of workers emerged who, though they still have to sell their labor power to live and produce surplus value for the capitalists, are somewhat detached from their class and become tied politically to the capitalist ruling class. This is the role that Biden thinks unions should play.
Granting some workers wages high enough to become part of the middle class means a lower rate of surplus value and, thus, a lower rate of profit for the capitalists. To compensate, the capitalists restore their rate of profit by super-exploiting other workers located mainly in the Global South. Biden and the mostly Democratic Party wing of the Party of Order he represents favor an extremely aggressive foreign policy that believes that U.S. capitalism must make up the extra costs of supporting a middle class by achieving U.S. world domination.
In today’s world, this means finishing the transformation of Ukraine into a U.S. neocolony, breaking up Russia, bringing down the People’s Republic of China, crushing the Cuban Revolution, the Palestinian and other Arab peoples, crushing the BRICS countries, etc.
Then perhaps the Party of Order’s pro-labor wing figures a few U.S. workers represented by Gompers-style trade unions might share in some of the resulting super-profits and enjoy middle-class lifestyles. Even if U.S. imperialism succeeds in this — unlikely because the peoples of the world won’t stand for it and the U.S. industrial monopoly that nourished it in the past is gone — most of the remaining U.S. industries will relocate to oppressed countries where workers are super-exploited, and the profit rate is highest.
Therefore, even in the case of a victory of U.S.-NATO imperialism over the peoples of the world, Biden’s political course is a dead end for workers. Instead, if the current labor union revival continues and U.S. workers move onto the next political stage, they will have to identify with the world working class and not aspire to become part of the middle class. (back)
(2) BRICS stands for Brazil, Russia, India, China and South Africa. In August 2023, South African President Cyril Ramaphosa announced that Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates have been invited to join BRICS. As capitalist industry develops in more and more countries, it’s becoming increasingly unlikely that U.S. imperialism will be able to regain the monopoly of industrial production it enjoyed after World War II. (back)
(3) The Big Three automakers are General Motors, Ford, and Chrysler (now known as Stellantis). The automobile industry began in the early 20th century, and early on, the tendency toward the centralization of capital manifested itself. Within a few decades, three auto companies that dominated the U.S. auto market emerged: General Motors, Ford, and Chrysler. After World War II, the Big Three auto monopoly faced competition from automobile manufacturers in Germany, France, Italy, and Japan. This shifted the tendency toward further capital centralization from the national to the international level. To make a long story short, the old Chrysler went bankrupt on April 30, 2009. Its shares were acquired by the UAW pension fund and the U.S. and Canadian governments. Then, in May 2014, Chrysler was bought by the Italian auto manufacturer Fiat. But capital centralization didn’t stop there. On January 16, 2021, the French PSA (Peugeot) auto manufacturer merged with Fiat to form Stellantis, which inherited what was once Chrysler.
Today, the Big Three face a new competitor in the form of Elon Musk’s Tesla Motors. Musk is now considered the world’s richest individual capitalist. As of September 2023, Musk’s personal fortune was estimated at $232 billion U.S. The auto industry faces a technological transition from the internal combustion engine, a major source of carbon dioxide emissions into the atmosphere. This is forcing a transition to electric cars, with an electric motor replacing the internal combustion engine that’s powered automobiles for over a century. Musk hopes to make his company either one of the Big Three, which could mean eliminating General Motors, Ford, or Stellantis or knocking out one or more of the non-U.S. auto companies. Musk’s Tesla is non-union, so unless it’s organized, the UAW will be in big trouble. For the UAW, organizing Tesla may be a question of life or death. (back)
(4) During the long years of slow growth following the 2007-09 crisis, the possibilities of producing surplus value increased, but there were difficulties in realizing surplus value. The COVID aftermath boom helped to remove the difficulties for the time being and caused profits to explode. This illustrates the fact that making profits requires both the production of surplus value — the exploitation of the workers — and the realization of surplus value in money form. (back)
(5) The economy would collapse long before this happened, lowering prices and restoring profitability both relatively and absolutely in the industry that produces money material. (back)
A Critique of Crisis Theory 