In the northern hemisphere, May brings the return of warm weather as summer approaches. The school year winds down for students, graduation ceremonies are held, and degrees are awarded. But this year, all this happened in the shadow of the continued genocide in Gaza, with its tens of thousands of martyrs, the majority of them women and children.
In the final month of the 2024 school year, the student intifada against the collaboration of universities and the government with genocide swept U.S. campuses and spread around the imperialist world. In the meantime, Democrats and Republicans responded by launching attacks against academic freedom.
Billionaire capitalists who donate to university institutions forced their presidents, their loyal servants, to resign for not sufficiently repressing students. Under this pressure, some students who had completed their undergraduate studies were denied degrees, faced criminal charges, or punished in other ways.
Through these events, a new generation of students, whether from Christian, Muslim, Jewish, religiously mixed, or completely nonreligious homes, are being acquainted, to paraphrase Rosa Luxemburg, with another face of U.S. capitalism-imperialism — its real face.
For those who are old enough, it brings back memories of the events fifty or more years ago when the people of Vietnam struggled against U.S. imperialism for their independence at the cost of millions of lives. The war had not only a military side; by all conventional measures, imperialism had an overwhelming military and technological advantage. There was also a political and moral side where Vietnam had the advantage, which only grew as the war continued.
The U.S. faced major financial problems arising from basic contradictions of the capitalist system, especially that uniquely capitalist one: the general overproduction of commodities. These factors progressively neutralized imperialism’s military and technological advantages, allowing Vietnam to emerge victorious.
In the Gaza genocide, the U.S. uses what amounts to its armed colony on Palestinian land, which calls itself the State of Israel, but what I prefer to call the Zionist entity, to carry out its crimes. But, the Zionist entity couldn’t continue its assault without the support of U.S. imperialism.
In this month’s post, I’ll conclude my examination of how Vietnam defeated, at the cost of millions of its people’s lives, U.S. imperialism. This dirty war spanned the administrations of Dwight D. Eisenhower, John F. Kennedy, Lyndon B. Johnson, and Richard M. Nixon.
Like Vietnam before it, today’s Palestine has a political and moral advantage. This is reflected by the recent UN General Assembly vote to recognize the State of Palestine, with only a handful of votes against or abstaining. The U.S. is expected to veto the move to make Palestine a full member of the UN in the Security Council.
This is combined with the recent recommendation of prosecutors of the International Criminal Court to issue arrest warrants for the leaders of the Zionist entity for war crimes — though it also issued warrants for leaders of the Palestinian resistance. Though only symbolic, these moves reflect the sea change that’s occurred on the political and moral side of the war that’s been waged against the Palestinian people for more than a hundred years.
This year (2024) is a presidential election year in the U.S. If U.S. democracy were remotely “the rule of the people” — which is what the word “democracy” means in Greek — we’d have a choice between continuing to support Biden’s genocidal policy of financing the Zionist entity’s attacks or the alternative of supporting the Palestinian struggle for their homeland.
If the U.S. shifted its support to the Palestinian people, there would be no doubt of the outcome. But what choice is being offered to people in the U.S. in November? It’s a choice between Genocide Joe or arch-racist putschist Trump, who lost to Biden in 2020! The essence of the democratic capitalist-imperialist regime is the unbridled despotism of capitalist class rule. Imperialist democracy pretends to offer a choice of who is to govern and what policies will be pursued. But on important issues such as genocide, there is no real choice at all.
I’ll briefly examine U.S. imperialism’s current economic and financial situation. The COVID aftermath boom of 2020-23 drove up U.S. and world interest rates. As the aftermath boom declined without the capitalist world slipping into a full-scale recession, the Federal Reserve System announced it was holding its target for the Federal Funds Rate at 5.25-5.50%. At the same time, the commodity shortages caused by the sudden shutdown of industrial production throughout the capitalist world in March-April 2020 faded, and the rate of price increases fell. However, the cost of living continues to rise at a reduced pace.
Most capitalist economists claim the Fed pulled off a soft landing, with inflation slowing, the economy continuing to grow, though at a more sustainable rate, and unemployment either remaining unchanged or rising only slightly.
But the touted “soft landing” conceals the fact that in the absence of a full-on recession, overproduction hasn’t been liquidated. The years of stagnation after the 2008 crash retarded capital spending while driving interest rates to the lowest levels on record. The need to replace aging factories and equipment stimulated increased capital spending, which continued through the March-April 2020 COVID shutdowns. The frantic boom that followed as businesses rebuilt depleted inventories whipped up commodity demand.
For the first time in decades, even in imperialist countries, industrial capitalists were obliged to accelerate building new factories and replacing worn-out equipment. This was further encouraged in the United States by a turn toward protectionism, which had begun under Trump and has been continued by Biden. This resulted in a rise in the production of commodities used to produce other commodities (called capital goods) rather than those produced for personal consumption. Spending on capital goods, as John Maynard Keynes knew well, is very unstable under capitalism. Capital spending can stagnate for years, then surge as aging factory machinery must be replaced and new factories must be built to meet rising demand, only to slump sharply once again.
A few months ago, the Fed indicated it was about to lower its target for Federal Funds, which would signal falling interest rates. Interest rates only fall in an environment of low or negative growth. Under recessionary conditions, the quantity of the money material — gold — grows at an accelerated rate while the supply of other types of commodities shrinks, which drives down interest rates.
During recessions, the supply of gold throughout the capitalist world increases at an accelerating rate while the demand for loan money capital falls. The interest rate needed to equalize the supply with the demand for gold progressively declines. This allows, even obliges, the Federal Reserve System to lower its target rate for Federal Funds. This occurs without the dollar price of gold spiking.
Under the current monetary system, the dollar price of gold is a floating rate, not a fixed rate, as it was under the gold exchange standards of the past. For the reasons described above, the dollar price of gold tends to decline during recessions despite the fall in interest rates. The Federal Reserve System does not determine the Federal Funds rate. The Fed can only manipulate the rate within limits set by the capitalist system’s economic laws.
If the Federal Reserve System sets the rate too low — meaning the Fed creates new dollars not matched by a rising gold supply on the world market — the gold’s dollar price rises. A rising gold dollar price indicates a depreciating dollar, which is highly inflationary.
The faster the rate of increase of the dollar gold price, the more inflationary it is. If the Federal Reserve sets the Fed Funds’ rate too high — as when the world supply of gold increases faster than new dollars are created — the dollar price of gold falls. A falling dollar price of gold means the dollar is appreciating against gold and is deflationary.
A steady gold dollar price means modest daily increases and declines — with up days compensating for down days — which means the Federal Funds Rate is about right. A steady dollar gold price implies that the rate at which the Fed creates dollars is approximately equal to the growth in the quantity of gold.
The Federal Funds Rate is the annualized interest rate charged by commercial banks with extra cash that they use to make overnight loans to those short of cash. The Fed Funds Rate is highly sensitive to money market conditions. It’s low when the banking system is flooded with cash and high when the banks are short of cash.
Before the 1980s, the Fed didn’t target the Fed Funds Rate. Since then, the rate has become the Fed’s primary way of intervening in the money market. Moves by the Fed to raise its target are politically unpopular and trigger criticism by progressives, liberals, and even reactionaries.
During his administration, Trump openly criticized the Fed when it increased its Fed Funds target and, at one point, threatened to fire Republican Fed chairperson Jay Powell, whom Trump himself had nominated for the job. Biden later reappointed Powell, who still holds the job as of June 2024.
If the Fed bends to this sort of pressure and sets the Federal Funds Rate too low, the first effect is a rise in the dollar price of gold. The lower the target is relative to where it should be—the level that equalizes the supply and demand for gold at prevailing interest rates—the faster the rate of increase in the dollar price of gold.
The second effect of this sort of pressure is an acceleration in the rate of dollar price increases as currency depreciation inflation takes hold. The consequent rise in dollar prices means more dollars are necessary to circulate commodities. As dollar prices rise, so do interest rates.
If the Federal Reserve fights the interest rate rise by refusing to increase the target for the Fed Funds Rate — or fails to increase it sufficiently — it will have to create dollars faster in order to keep the rate within the target range. By increasing the rate at which it creates dollars, the Fed undermines confidence in the dollar, further increasing the dollar price of gold and further accelerating inflation.
This becomes a vicious circle. Eventually, capitalists panic.
This further drives up the dollar price of gold, further accelerating inflation. To halt the run on gold and save the dollar, the Fed ended up having to allow the Federal Funds and other interest rates to shoot up. It does this by keeping the rate at which it creates additional dollars below the accelerating inflation rate.
The rise in interest rates then causes the demand for gold to fall. A falling dollar price of gold indicates that the capitalists’ confidence in the dollar is restored, and further depreciation of the dollar is halted. Dollar appreciation begins, and inflation fades. The rise in interest rates necessary to restore confidence in the dollar when confidence in the dollar has been undermined is highly recessionary. Over the next several posts, I’ll examine how this worked out in the last years of the 1970s and 1980s.
Since the Federal Reserve stopped increasing its Fed Funds target in 2023, the formerly stable dollar price of gold has begun to rise. If the Fed hadn’t stopped increasing the Fed Funds Rate when it did, a recession would likely have hit by now.
But in that circumstance, the dollar price of gold would also have dropped. Inflation would also have fallen to or below the target of 2%. The danger of a return to 1970s-style inflation — or worse — would have, for several years, been ended. But this has not happened. It is possible that in the future, the decision to halt the increase in the target funds in 2023 will be seen as a blunder that led to accelerating inflation. However, because the Fed created the impression it was about to reduce its Fed Funds target, any move to increase it now is politically difficult.
Trump threatens the “independence” of the Fed
Some of Trump’s advisers urged him to take control of the Federal Reserve, making him the de facto Fed chief and giving Biden a new campaign issue. Biden defends the independence of the Fed. Biden tells Wall Street: “I am a conventional politician who won’t interfere with the Federal Reserve even if it has to take the politically unpopular step of resuming the rise of the Fed Funds target after saying it would reduce it.” Biden says that Trump, the would-be U.S. “Bonaparte,” might slash the Fed Funds Rate target if he gets control, and he might not only do this to boost his political popularity.
Being the thoroughly venal businessman that he is, Trump might even try to drive down the target to escape his personal business difficulties. Biden says: you better stick with me and do everything you can to keep Trump out of the White House.
We can only speculate how these political and economic contradictions will play out in the months and years ahead. To undermine capitalism and imperialism today in a conscious manner, we must provide all the support we can personally and collectively to aid the people of Palestine who are today on the front line of this battle against imperialism. Palestine needs the support of the peoples of the world and, above all, the worldwide working class if it is to prevail.
We can be confident the defeat of Zionism, like South African apartheid, is, in the long run, inevitable. But how many more Palestinian men, women, and children will have to die in the meantime? As I said last month, as with the war in Vietnam, the contradictions of capitalism might open up a path to victory for the Palestinian people sooner than now seems likely if we consider only the present balance of forces in the world.
Now, let’s see how Vietnam won in the 1970s.
From Nixon shock to the 1974-75 Great Recession
During the first half of August 1971, a run on the Treasury gold reserve reached a magnitude that forced the Nixon administration to act. The U.S. could have lost its entire gold reserve. The question was how to stop the run.
The traditional way of handling it was for the Federal Reserve to slow the rate at which it created dollars. This would reduce commercial banking reserves and increase interest rates. Higher rates reduce the demand for gold. This is true because gold represents the money relationship of production in its purest form. However, unlike the owners of loan capital, owners of gold are not entitled to the part of the surplus value produced by the global working class that is called interest, or indeed any surplus value at all.
The Nixon administration’s problem was that lower bank reserves and higher interest rates were recessionary. The weak economic recovery that began in early 1971, which had not reduced unemployment, might well have collapsed before the November 1972 election, sending unemployment soaring.
Thanks to the ongoing movement against the war in Vietnam and the Black liberation struggles, socialist ideas were growing among young people. The rise in unemployment could have furthered radicalized the working class and other sectors of society, as happened in the 1930s.
As part of the capitalist ruling class, Nixon had the same goals as the capitalist class. He was also pursuing narrower personal goals. He wanted a second term in the 1972 elections. Thus, he had good reason to fear a renewed recession, as the 1960 renewed recession had deprived him of the White House then. He was determined that history would not repeat itself. The economic theorist John Maynard Keynes provided the theory for an alternative course. (1)(1)
Nixon had another reason to opt for a Keynesian solution to the gold drain. He hoped to go down in history as a great president by winning the Vietnam War, or as he called it, “achieving peace with honor.” After the May 1970 student strikes and the near financial crisis the same year, Nixon had to cut the number of U.S. troops in Vietnam. He did it as slowly as possible while at the same time escalating the air and sea war. This still required money, lots of money.
If the Federal Reserve slowed the rate at which it was creating dollars to nudge up interest rates, the government’s borrowing power meant it would have been able to continue the war only by pushing up interest rates even higher and faster, and that would lead to an even worse recession. Nixon was in the market for alternative policies to end the gold drain without setting off a new recession. The policies he adopted inspired by Keynesian economics were called the “Nixon shock.”
Keynes’ followers claimed such policies would avoid a renewed recession, slow inflation and provide enough money to finance the continuing war. Nixon opted for Keynesian rather than the more traditional policies supported by Milton Friedman. Did Nixon’s policies work?
Wikipedia writes, “The Nixon shock has been widely considered to be a political success, but an economic failure for bringing on the 1973–1975 recession, the stagflation of the 1970s, and the instability of floating currencies.” This is pretty much the consensus of bourgeois historians today.
Though an economic failure, why are they considered a political success? While it’s true that Nixon’s policies failed to avoid accelerated inflation and recession, these occurred only after the election. This fact enabled Nixon to win a landslide victory against Democrat George McGovern.
By tearing up union contracts and freezing wages, the rate of surplus value was increased before the renewed recession. High unemployment increased the rate of surplus value even more. The labor unions failed to put up a fight to resist the wage freeze. In the years that followed, this resulted in the decline of the labor union movement. In this sense, Nixon’s policies were a political success.
But they were also an economic failure. Many economic theorists, including Marxists like Anwar Shaikh, argue that an insufficient production of surplus value causes recessions. However, the surge in surplus value produced due to Nixon’s policies did not avoid the deep recession that followed shortly after the election.
If recessions are caused by insufficient production of surplus value, an argument can be made that workers can avoid recession by accepting the bosses’ demands for lower wages. What can we, as workers, learn from the failure of the Nixon shock to avoid either accelerated inflation or deep recession?
Did price controls work?
Nixon’s policies only postponed recession until after the election. What about inflation? Did the price controls stop inflation?
If the price freeze worked, shouldn’t the unions demand a freeze whenever prices surge? The well-known Marxist economist Richard Wolff argued that the 1971 price freeze halted inflation and we should demand similar policies to stop today’s inflation.
Did Nixon’s policy really stop inflation? Did it even slow down inflation? What lessons should be drawn from this experience? Unless a brief pause in the official inflation rate can be considered a success, the answer is clearly no.
Let’s see what lessons our class enemy drew from Nixon’s policies. As reflected in the Wikipedia article, the ruling class concluded that the policy was politically successful in enabling the capitalist class’ favorite, Nixon, to win reelection. (2)
More importantly for the capitalist class, the wage freeze succeeded in increasing surplus value but failed to avoid a deep recession for very long. In retrospect, the ruling class seems to have concluded that it would have been better to follow more conventional policies of allowing rising interest rates while restraining government borrowing. By refusing conventional policies, serious damage was done to the capitalist economy.
Why did Nixon’s economic policies fail?
Instead of raising interest rates to halt the gold run, Nixon ordered the conversion of the dollar into gold at the fixed exchange rate of one ounce of gold for every $35 to be temporarily suspended. Nixon said gold payments would be resumed after a new fixed-rate schedule was worked out. The most important exchange rate — the official price of gold — was raised twice: first to $38 in 1972, then to $42.22 in 1973, where it remains today (June 2024). After that, as we will see below, the market price of gold began to rise so rapidly that the official dollar price of gold would have had to be raised almost continuously to keep up with the rising dollar price of gold on the open market. It was easier just to keep the official price of gold at $42.22 an ounce, where it remains today. (3)
The U.S. never resumed gold payments to foreign central banks and stopped trying to maintain the dollar price of gold on the open market anywhere close to its official price. Today, the dollar price of gold is over $2,000; gold’s official dollar price is still worth 1/42.22 of an ounce and has no relationship to reality. Schedules of fixed exchange rates between the dollar and other major capitalist currencies were negotiated in both 1972 and 1973 but were soon abandoned, bringing the Bretton Woods System of fixed exchange rates to a formal end.
The “magic level” schedule of exchange rates that would balance international trade doesn’t exist. What was supposed to be a temporary suspension of the dollar’s gold convertibility turned into an attempt to establish the dollar as world non-commodity money in place of gold. Both Keynes and Friedman advocated this policy.
Nixon’s policies ended the run on the U.S. Treasury’s gold reserves for the simple reason that the U.S. reneged on its promise to exchange dollars for gold — real money. Instead of a run on the U.S. gold reserve, a run on gold outside the U.S. Treasury was substituted.
This resulted in the dollar’s depreciation against gold, leading to the double-digit inflation of 1974 and the even higher double-digit inflation of the early 1980s. The price controls failed to prevent the accelerating inflation caused by the dollar’s and other currencies’ depreciation against gold.
Instead of relying on government price controls, the labor unions should have fought for a sliding scale of wages. This would protect, to some extent, working people’s standard of living during periods of high inflation. (4)
Price controls failed to slow inflation. Interest rates rose along with dollar prices. Progressives demand that central banks lower interest rates. High rates are unpopular because they hit indebted working people, slow economic growth, and all too often end in recession. (5)
What is not understood is it is not the central bank that sets interest rates. Rates move toward the level that equalizes demand with the supply of gold. When the demand for gold soars, interest rates rise no matter what the Federal Reserve or other central banks do. If they try to stop the rise by flooding the money market with a new currency, inflation will accelerate, leading to even higher rates. This is how capitalism works in practice, as shown by the concrete economic history of the 1971-75 period and even more clearly at the end of the decade, as we’ll see next month.
Nixon’s policies unraveled because so much of Keynesian theory is false. During crises, the workers’ movement will be defeated if it puts its faith in Keynesian policies, such as demanding the central bank lower interest rates and supporting wage and price freezes instead of fighting for a sliding scale of wages and hours. This is perhaps the biggest lesson of the 1970s.
Let’s review how false so much of Keynesian theory is. First, the level of money wages does not determine general price level. Neither income policies nor wage freezes can stop inflation.
Despite the theories of capitalist economists, non-commodity money is not possible under the capitalist system, and the central bank cannot control interest rates.
If the central bank tries to keep interest rates from rising during a period of overproduction by flooding the money market with new money, the demand for gold soars, unleashing currency depreciation inflation. Because such policies destroy capitalists’ confidence in the currency, gold demand goes up, and interest rates rise to equalize that demand with the supply of gold.
It’s a basic economic law that, under capitalism, high interest rates caused by capitalist overproduction can only be lowered by reducing production and employment. The only way out that does not involve these remedies is the abolition of capitalist relations of production. Let’s see how these basic economic laws that, in reality, rule capitalism unfolded from 1971 through 1975. (6)
According to “One hundred years of price change: the Consumer Price Index and the American inflation experience,” published by the U.S. Bureau of Labor Statistics, “Prices rose 6.1% 1969 and 5.5% 1970. By mid-1971, the growth in the All-Items CPI was less than 5%, the slowing of inflation was due at least partly to a recession, and the public was dissatisfied with inflation and with the economic situation as a whole. In this frustrating climate, President Nixon undertook dramatic steps. He issued an executive order taking the United States off the gold standard and instituted a freeze on wages and prices — price controls yet again, as had occurred during World War I, the 1930s, World War II, and the Korean war. Reflecting the public’s frustration, the policies were popular, at least at first. Inflation continued to moderate, with the All-Items CPI rising 3.4% in both 1971 and 1972. Following several phases of varying strictness, wage and price controls lapsed in 1973, after Nixon was reelected.” (7)
Now let’s see what happened to the free market dollar price of gold, which measures the amount of gold each dollar represented on the free market in 1971. The dollar gold price began in 1971 at just over $37, representing a modest depreciation over the official or par value of $35 an ounce. As panic developed in early August, the price rose to over $44. The panic subsided after Nixon’s speech announcing the wage-price controls and other measures, allowing the price to fall back to just over $40. Later in the year, the price again rose briefly above $44 and closed the year just below that.
Rising interest rates somewhat held in check the rise in the dollar price of gold. Remember, rising interest rates reduce the demand for gold.
On January 18, 1971, the Federal Funds Rate was 4.24%. By mid-September, it had risen to 5.44%, keeping the dollar gold price in check. Then, it dropped, reaching 3% on December 27.
The drop indicates that the Federal Reserve, headed by Nixon friend Arthur Burns, was moving to pump up the U.S. economy by flooding the money market with new dollars as the election approached. Then, as interest rates fell, gold demand rose again, driving up the dollar gold price. The gold price again rose briefly above $44 and stayed as 1972 began.
Gold’s dollar price drifted upward during early 1972, reaching $48 by May 1972. This upward trend occurred even as the Fed Funds Rate rose. Though the Fed Funds Rate dipped to 3% in late 1971 as the Fed tried to gun up the economy ahead of the 1972 election, it began to recover as 1972 began.
However, it didn’t match the 1971 highs again until early 1973. The rising interest rate in early 1972 was enough to restrain gold demand somewhat, but as the year advanced, the demand for gold began to pick up.
The price of gold hit $70 in August 1972 on the open market; the dollar had lost half its gold value over just two years. The dollar gold price then fell back due to rising interest rates and closed just below $66 as the year ended.
Official unemployment, still at a high of 6% at the end of 1971, fell back to 5.2% as economic growth accelerated, as Nixon wanted.
With the U.S. economy booming, upward pressure on prices could no longer be contained. Symptoms of what is called suppressed inflation, such as commodity shortages at the official controlled prices and quality reduction of the commodities being offered for sale, multiplied as the growing depreciation of the dollar against gold forced capitalists to struggle against the price controls.
It was against this economic background that the November 1972 presidential election was held, leading to what turned out to be a second abortive term for Richard Nixon.
The temporary suspension of the convertibility of dollars into gold became permanent. Many articles in the financial press explained how gold was being demonetized. They said that countries will back their currencies in the future, not with gold but with the International Monetary Fund’s Special Drawing Rights (SDRs).
The SDRs were really a cover for the dollar’s domination. The Bretton Woods Monetary system was a dollar-gold exchange standard. The dollar was convertible for central banks other than the Federal Reserve at the U.S. Treasury for a fixed rate of $35 for an ounce of gold. Other currencies were convertible at fixed rates in dollars.
After August 1971, the U.S. government decided to establish the dollar as the world’s non-commodity money in place of gold. Marx believed this was impossible, but Keynes’ and Friedman’s followers believed otherwise.
Making the dollar into non-commodity money got off to a rocky start. According to neoclassical economics, the value of gold arises largely from its role as money. Economists believed it was money because governments decided it was so and treated it as such. If governments stopped treating it as money, gold would cease to be money, causing the demand for gold to drop.
They argued that gold maintained its value ($35 per ounce) because the Treasury bought it at that price. Nobody would sell it at a lower price because even if no one else were willing to pay $35, the Treasury would buy it in unlimited amounts.
In reality, gold is not world money just because governments and central banks treat it as such. They treat it as world money because gold is real-world money. Gold rose briefly to around $44 an ounce in August 1971. By 1972, it rose again, hitting $70 by August 1972. At that point, the dollar represented only 50% of the gold it had when the price of gold was $35.
Vietnam and the election of 1972
The November 1972 presidential election was held against this economic background. With the dollar under mounting pressure and interest rates rising, the U.S. was not in good financial shape to boost the number of troops in Vietnam.
The Nixon administration was under pressure to do the opposite. In a dangerous development for the ruling class, the “workers in uniform” who were doing the actual fighting were turning against the war. Soldiers were “fragging” (throwing live fragmentation grenades to kill) their officers and making pacts with local Vietnamese resistance to avoid combat.
Pilots were dropping their bombs at sea instead of on their intended targets to avoid being shot down over North Vietnam. Increasing numbers of people in the imperialist countries, including youth in the U.S., hoped Vietnam would win its struggle against imperialism. Some of the biggest anti-war protests of the entire war occurred in 1971.
Despite this, the Republican Nixon administration was determined to win the war in Vietnam but was in no position politically or financially to follow the strategy pursued by its predecessors to increase U.S. troop numbers. Nixon was forced to increase the bombing of South and North Vietnam from the air and the sea, combined with the diplomatic strategy of trying to convince the Soviet Union and China to put pressure on Vietnam to give in. Key to this was playing China against the Soviet Union.
Nixon hoped to win a victory up to the last moment. In May 1972, the U.S. mined Haiphong Harbor. In December 1972, Nixon ordered the bombing of North Vietnam, causing worldwide revulsion. This led to the last major anti-war demonstration of the time as Nixon was inaugurated for his second term. On January 20, 1973, around 100,000 people gathered in Washington, D.C., to demand an end to the war.
Until 1971, the U.S. was hindered in attempting to play China off against the Soviet Union as it failed to recognize the People’s Republic of China after the victory of the Chinese Revolution in 1949. The media demonized “Red China” while the U.S. government pretended the counterrevolutionary Chiang Kai-Shek regime in Taiwan was the legitimate government of all China.
During the late 1960s, the U.S. softened its line toward the Soviet Union, painting Soviet leaders as “good communists” seeking peaceful coexistence with the capitalist world, compared to the “bad communists” ruling China who pursued a policy of world revolution.
The Soviets took full advantage of the Vietnam War to improve relations with the U.S.. But they refused to do what Washington really wanted: to cut off aid to Vietnam. Soviet aid was crucial for North Vietnam’s increasingly effective anti-aircraft defenses.
As I explained in an earlier post, Nixon was positioned to open relations with the People’s Republic of China as his long career as a red baiter made it difficult to denounce him for “selling out to Red China.” He began with “ping pong” diplomacy in April 1971, followed by Henry Kissinger’s secret China trip in July. This paved the way for Nixon’s trip in February 1972, when he shook hands with the top red himself, Chairman Mao Zedong. This was a shocking development for many people. (8)
Nixon hoped that while he engaged in friendly meetings with the Soviet Union’s Leonid Brezhnev and the People’s Republic of China’s Mao Zedong, Vietnam’s leaders would realize the futility of their resistance to U.S. imperialism. But the Vietnamese were not dissuaded, and the U.S.’s ability to continue the war, both politically and financially, was fading.
Nixon’s friendly moves toward China, combined with the drawdown of troops that reduced the flow of body bags from the battlefield, were greeted with relief in the U.S. Young men had an increased chance of living to marry their sweethearts, raise children, and live everyday lives instead of dying in the Vietnamese jungle fighting people with whom they had no quarrel.
In addition, inflation seemed to be contained while unemployment fell. The chances that returning soldiers might find jobs were improving. Nixon appeared to be “delivering the goods” both in terms of peace — the war was not over, but the number of U.S. casualties was falling — and prosperity. On top of that, the U.S. now had friendly relations with what was now being called the People’s Republic of China rather than Red China. This led to Nixon’s landslide victory in 1972.
In light of these developments, the Democratic Party pretty much wrote off the election. Instead, they pursued other goals for the U.S. ruling class. A significant number of students, recent students, and most importantly, young workers in uniform (or recently in uniform) had their eyes opened to the real nature of U.S. imperialism. The majority still believed the Vietnam War was a terrible mistake or the work of evil leaders such as Lyndon Johnson, Richard Nixon, or Henry Kissinger, who had gotten into power.
Millions of people participated in the anti-war movement in some way: they attended a demonstration or read an anti-war leaflet or newspaper while in the armed forces. To pull them back into the system, it was necessary to give more of an illusion of choice than usual. So, Democrats nominated the pro-peace, liberal-progressive Democratic Senator from South Dakota, George McGovern, for president.
I’ve often wondered what would have happened if McGovern had won and immediately ended the war with the Vietnamese victorious. If McGovern had won, then today, people might argue: How can you not support the Democrats? Yes, they aren’t what we want, but remember back in 1972, if McGovern had not been elected, Nixon would have won a second term and would never have ended the war.
But Nixon was reelected. What happened? The war ended with the Vietnamese victorious. On the other hand, it was Democratic President John F. Kennedy who sent thousands of U.S. “advisers” into combat soon after he was elected in 1960 after defeating Nixon. His Democratic successor, Lyndon B. Johnson, sent hundreds of thousands of U.S. soldiers into battle with no pretext that they were advisors.
The lesson? It’s the nature of capitalism that breeds imperialism that is responsible for war, genocide, and other crimes, not “evil” leaders. This is not to deny that individual leaders can make things worse, and they all bear responsibility for their actions. The problem is that progressives, though they mean well, lack the class compass that Marxists have.
The year 1973
On January 27, 1973, the Nixon administration signed the Paris Peace Accords that were supposed to end the Vietnam War. Their most important feature was the withdrawal of all remaining U.S. military forces combined with a cease-fire. The U.S. continued the secret bombing operations in Laos for months after the cease-fire.
In addition, like the 1954 accords that ended the first Indochina war, the peace agreement had provisions for elections to decide the future government of South Vietnam. As in 1954, the Saigon regime had no intention of holding elections. The accords allowed the puppet government to remain in power until the elections were held. The accords did not end the war.
Except for the Laotian bombing, all direct U.S. combat operations ceased. Thanks to the antiwar movement, it would have been politically difficult to reintroduce U.S. forces in a last-ditch effort to save the Saigon puppet government. The peace agreement, though far from perfect, gave Vietnam what it most needed: the removal of the remaining U.S. combat forces, preventing the full liberation of the country.
The dollar plunges, and inflation accelerates
In early 1973, the dollar price of gold was around $65 an ounce. During June and July the price at times hit $125 and closed the year just under $115. It wasn’t only the price that was rising. Officially, U.S. prices rose only 3.40% in 1972 thanks to the price controls, though there was more hidden inflation. In 1973, all remaining controls were lifted, and combined with the accelerated depreciation of the dollar against gold, the official price index soared to 8.70%. This made it perfectly clear, to use one of Nixon’s favorite expressions, that price controls failed to stop inflation.
In 1973, the Federal Funds Rate continued to rise. In January, it was around 6%; by September, it had hit 10.82%, the highest point of the year. It would go higher the following year.
Did the oil price increases cause the Great Recession of 1973-75?
In October 1973, a brief war broke out between Israel, Egypt, and Syria. Egypt’s Sadat government planned to move into the U.S. camp. Knowing this would be politically unpopular among the people, Egypt desperately wanted some kind of military victory against Israel before it made its move.
Israel had occupied the Egyptian Sinai Peninsula since the 1967 Six-Day War. The Egyptian army briefly pushed back the Israelis in October 1973. In retaliation for U.S. support of Israel, the Arab oil-producing countries, led by Saudi Arabia, announced it wouldn’t sell oil to countries that supported Israel during the war. Countries that had supported Israel were the United States and its imperialist satellites, including apartheid South Africa.
As we’ve seen, in August 1971, the U.S. temporarily suspended the convertibility of the dollar. It became clear that the U.S. had no intention of resuming gold payments but was instead trying to establish the dollar as non-commodity money. That raised two questions: first, would other countries continue to price oil and other internationally traded commodities in a currency that was no longer convertible into gold at a fixed rate? And second, would international debt be payable in dollars instead of gold?
The Saudi Arabian oil monarchy played a key role in answering this question in favor of the dollar. It could have announced that oil would be directly priced in gold until the U.S. Treasury resumed gold payments (that the Nixon administration promised to do but never did).
This would have encouraged other countries to also price their internationally traded commodities in gold. Then, more international debts would be denominated in gold rather than dollars. Under these conditions, the U.S. Treasury would be forced to resume gold payments, quickly burying the dream of establishing the dollar as world non-commodity money replacing gold. U.S. government bonds would be payable in bonds defined in terms of dollars defined in terms of gold instead of the easily printed floating paper dollar with no fixed gold value.
However, Saudi Arabia was entirely dependent on U.S. imperialism and was afraid to defy it on the important question of pricing oil in nonconvertible (into gold) dollars. Defiance could lead to a U.S. military invasion, though this might have been difficult in light of the continuing Vietnam War.
The Saudi monarchy agreed not only to price oil in dollars but also to deposit the dollars it received — dubbed “petrodollars” — in U.S. banks. This played a significant role in allowing U.S. imperialism to impose the dollar standard in place of the gold exchange standard on the world economy.
As the dollar depreciated, the prices of most commodities rose in response, while oil and energy prices remained unchanged. The Saudis found themselves in the position of exchanging the Arab world’s non-renewable natural wealth for increasingly depreciated dollars. The situation became intolerable, and the October 1973 war forced the Saudis to act.
The Arab oil states announced a boycott of the United States and its satellites, including then-apartheid South Africa, which had supported the Zionist entity in all its wars against the people of Palestine and other Arab countries, one result of which was a sharp increase in oil prices in U.S. dollars. This was the least they could do.
According to Wikipedia, “The substantial price increases of 1973–1974 largely returned their prices and corresponding incomes to former levels in terms of commodities such as gold.”
In reality, the oil price increases of 1973-74 were a reflection — though a belated one — of the accelerated depreciation of the dollar and paper currencies linked to it. Instead of seeing the oil price spike as an indication that the attempt to establish the dollar as non-commodity money independent of gold was failing, Keynesians preferred to blame the inflation on the Arab oil sheiks.
As we saw last month, Keynesian theory asserts that the Nixon wage controls, which had done so much to break the momentum of the labor union struggles in the early 1970s, should have halted inflation. When inflation didn’t slow but accelerated, Keynesians instead blamed the Arabs while advocating that the Federal Reserve continue its dollar-printing stimulative policies. They said if inflation wasn’t caused by the increasingly tame unions, it was due to the Arabs, so there was no point in the Fed raising interest rates.
Keynesians in the progressive movement first blamed inflation on the oppressed class. When inflation accelerated, the oppressed Arab nation became the main culprit. In reality, inflation’s cause was the Federal Reserve creating dollars that were not backed by gold.
Though, as a neoclassical economist, Milton Friedman didn’t understand the role of gold, he blamed the Fed for creating too many dollars. As we have often said, his explanation was superficial but seemed reasonable compared to the patently false Keynesian claims.
Non-Marxist progressives, including within the labor movement, preferred Keynes because Friedman’s deflationary policies were frankly recessionary and led to a major rise in unemployment. So the Keynesians, non-Marxist progressives, and labor misleaders believed the inflation problem would go away without a recession and mass unemployment by attacking the Arab world.
Recession and mass unemployment arrive
The year 1974 began with the dollar price of gold at about $115 an ounce. It rose above $195 at one point in December before dropping back to just over $185 at the end of the year.
The Federal Funds Rate began the year around 9.30% and hit 12.60% by July. This spike in interest rates transformed a slight recession that began at the peak of the oil crisis in late 1973 into the Great Recession of 1973-75. As this happened, the demand for credit declined, causing the Fed Funds Rate to decline to 5.25% in March 1975, marking the bottom of the recession.
Unemployment continued rising for several more months. By May 1975, the official unemployment rate rose to 9%, the highest official rate since the end of the Great Depression.
Workers’ standard of living was not only under assault by skyrocketing unemployment. As the dollar price of gold surged, dollar prices of commodities exploded upward. According to official data, after increasing to 8.70% in 1973, prices rose 12.30% in 1974, even as the recession took hold.
During recessions under the gold standard, the pressure on real wages caused by unemployment was somewhat counteracted by a fall in the cost of living. That tended to increase real hourly wages even though fewer work hours were available. This time, fewer hours coincided with higher prices in the medium in which wages are paid: depreciated dollars and those currencies linked to the dollar.
Real wages were under attack from both ends. Fewer work hours were available, just as was the case during traditional recessions that occurred under the gold standard. Like in traditional recessions, there was more unemployment, putting downward pressure on both money and real wages. But unlike old-fashioned gold-standard recessions, prices in terms of the dollar kept rising. This put downward pressure on real wages that was absent in old-time, gold-standard recessions, where the downward pressure on real wages was cushioned by lower dollar prices.
As the recession intensified, the demand for dollars as a means of payment grew. This growing demand finally halted the rise in the dollar price of gold. The demand for money increasingly took the form of dollars rather than gold.
The dollar gold price of just over $195 in 1974 turned out to be the peak over the next few years. The price again approached $195 in March 1975 but then declined, reaching a low of just below $130 in October and closing the year just below $145.
For the moment, at the price of recession and mass unemployment, the runaway depreciation of the dollar was halted. Inflation continued to lower real wages but at a slower pace. But as we’ll see next month, within a few years, the depreciation of the dollar would resume, and inflation would once again sharply accelerate.
The fall of Richard Nixon
If Nixon had faced reelection in 1974 or 1975, he would have had difficulty winning. Fortunately for him — or so it seemed at the time — he faced reelection before the economic crisis of 1973-75.
There were plenty of warnings that crisis was approaching—rising interest rates and the dollar price of gold. However, for those who didn’t heed the warnings, it appeared his policies were working, with subdued inflation and falling unemployment. At the same time, Nixon was forced by the growing unwillingness to continue the war and the growing pressure on the dollar on international gold and currency markets to get U.S. troops out of Vietnam.
The flow of body bags from Vietnam was slowing. These factors combined created a very favorable environment for Nixon’s reelection.
Because Nixon was fearful he wouldn’t win his second term, he also created a special secret police force he called the “plumbers.” This force was designed to prevent “leaks” to the media. It operated outside the normal security apparatus, was controlled by Nixon himself, and served his personal interests instead of those of the capitalist ruling class.
That such a situation could arise reflects the tendency of the machinery of repression represented by the presidency to rise above the contending classes of the U.S. and world capitalist society.
During World War II, the U.S. was transformed into the seat of a world empire. In a society where money is the supreme power, the increasingly bloated state apparatus knows no master except the money market. It must serve the most powerful and wealthiest capitalists who provide it with money. The tendency of the state apparatus under capitalism to seemingly rise above the contending classes Marx called “Bonapartism.”
On June 17, 1972, the plumbers illegally broke into the headquarters of the Democratic National Committee at the Watergate Hotel in Washington, D.C., in search of dirt on the Democrats and to find out what the Democrats had on Nixon and the Republicans.
At first, the situation was treated as a minor incident as both parties played dirty tricks during election campaigns. It was assumed some low-level Republican operatives ordered the burglary at the Watergate as the existence of “the plumbers” was unknown outside the White House.
After Nixon’s landslide victory, the Watergate Affair escalated. It was revealed that Nixon’s top aides had been involved from the beginning. Had Nixon personally ordered the burglary — this has never been resolved — or if not, had he ordered the cover-up?
Concealing a crime like burglary is itself a felony under U.S. law. As 1973 progressed, it became clear that top White House aides, including Nixon’s law and order Attorney General John Mitchell, were up to their ears in both the ordering of and the cover-up of the Watergate burglary. In the end, the top aides, including Attorney General Mitchell, were convicted of felonies and went to prison.
As if that were not enough, Nixon’s “law and order” vice president, Spiro Agnew, who, as far as is known, was not involved in Watergate, was revealed to have taken kickbacks in exchange for granting Maryland state contracts while he was governor and continued collecting as vice president.
Under U.S. laws, taking kickbacks is a felony. “Mr. Law and Order” was forced to take a plea deal. He resigned as vice president on October 10, 1973, in return for pleading no contest on one felony charge — though he was guilty of more.
Agnew served no time in prison, though he’d long denounced releasing criminals — when the criminals were African-Americans or student protesters instead of corrupt politicians like himself, that is. Nixon then nominated — and the Senate approved — Agnew’s replacement, Michigan Republican Representative and House Minority Leader Gerald Ford.
Throughout 1973 into 1974, Nixon claimed to know nothing about the burglary or its subsequent cover-up. Then, it was revealed that Nixon had taped all his White House meetings. The courts forced the release of the tapes, revealing that the president led the cover-up from the beginning.
Nixon faced certain impeachment by the House and a certain conviction and removal from office by the Senate as key Republican leaders turned against him. In August 1974, they met with Nixon in the White House and informed him that the only way he could avoid impeachment and conviction was to resign from the presidency.
After thinking about it for a few days, Nixon decided to resign, effective August 9, 1974. To this day, Nixon remains the only U.S. president to resign from office. As the U.S. Constitution prescribes, Vice President Gerald Ford was sworn in as president on August 9. Ford then pardoned Nixon to avoid the spectacle of a former president standing trial for felonies in a criminal court. (9)
As of this writing, Ford remains unique in U.S. history as the electoral college never elected him as either president or vice president of the United States. This limited his political authority as he served out the remainder of what would have been Nixon’s second term.
Vietnam victorious
An agreement to end the war in Vietnam was signed in Paris on January 27, 1973. The agreement required the withdrawal of all remaining U.S. armed forces and promised free elections in South Vietnam. The Saigon puppet government was to remain nominally in power until the elections were held.
With the encouragement of the Nixon and Ford administrations, the Saigon regime chose to cling to power. By early 1975, the Vietnamese people had had enough. They launched a major military offensive against the Saigon regime. It became clear that the regime could not survive without a major reintroduction of U.S. forces.
The prospect of a revival of the anti-war movement, the questionable reliability of rank-and-file troops to resume fighting, and the still shaky dollar and domestic economy forced the Ford administration to back down.
On April 30, Saigon was liberated, the U.S. embassy personnel were helicoptered out, the city was renamed Ho Chi Minh City, and the country was reunified.
According to Vietnamese government figures, casualties amounted to two million civilians plus 1.1 million armed forces, including those of the armed resistance in South Vietnam. The majority of causalities were civilians. The U.S. military estimated there were 200,000 to 250,000 causalities among the puppet South Vietnamese army. More than 58,200 U.S. soldiers died, as well as 4,000 South Korean soldiers, 350 soldiers from Thailand, more than 500 from Australia, and three dozen from New Zealand.
Vietnam had emerged victorious, but at the cost of the lives of millions, the majority civilians. Their blood is on the hands of the war makers in Washington, D.C., Democrats and Republicans alike.
(1) The recession of 1960 was a renewal of one that began in 1957. At that time, the Federal Reserve had flooded the commercial banking system with reserves to drive down interest rates and end the recession. In 1958, the economy began to recover. The decline in interest rates caused a rise in demand for gold. Some central banks began exchanging their dollar reserves for gold, causing the first drop in U.S. gold reserves since 1931. The Federal Reserve responded in the traditional way: It slowed the creation of new dollars, causing interest rates to rise. The rise reversed the gold drain. A return to tight money policies and rising interest rates caused the recovery, which began in 1958, to abort. The U.S. economy fell back into recession in the election year of 1960, which led to Nixon’s defeat. (back)
(2) In retrospect, the U.S. ruling class regrets its support of Nixon’s presidential campaigns. Thanks to the Watergate scandal, some of the government’s secret operations against the people were exposed. Nixon did serious damage to capitalist class rule that’s never been overcome. (back)
(3) The rise in the official price of gold from $35 to $38 an ounce in 1972 and then to $42.22 in 1973 represented the devaluation of the dollar, as the official price defines the dollar as a certain weight of gold. The dollar is legally depreciated to the extent that the price of gold on the open market is higher than the official price. In the past, the free market price of gold, even when it deviated from the official price, had at least some relationship with each other. Today, while the official dollar price of gold is $42.22, the free market price is over $2000. Since the official price of gold is set by international agreements, it became impractical to change it once the dollar price of gold on the open market rose rapidly above the official price of gold
The gold held by the U.S. government and the International Monetary Fund is valued at the official price of $42.22. In all other respects, the official dollar price of gold is meaningless. (back)
(4) Nominal currency wages should be linked to changes in the currency prices of commodities as reported by workers and consumer committees. So-called COLA (cost of living agreements) clauses in union contracts are a step in this direction. They have the disadvantage of being linked to government-reported prices rather than prices actually reported by workers and consumer committees. Since the government serves the capitalist class, it has an incentive to underreport inflation. In past labor struggles, the demand for a sliding scale of wages was linked to a sliding scale of hours. For example, if the boss installs new machinery that reduces the amount of labor needed to produce a given quantity of output, instead of laying off workers, the hours of labor should be reduced with no reduction in pay. In this way, workers share in the benefits of the rising productivity of labor instead of becoming the victims of it. (back)
(5) Progressives demand the central bank lower interest rates even though it doesn’t determine interest rates. Why? One reason: Rising interest rates end in recession and mass unemployment, so they think recessions can be avoided if interest rates are kept low.
A deeper reason is that progressives are not Marxists and don’t represent the interests of workers. They represent the middle classes that stand between the working and the capitalist classes.
Because they aren’t Marxists, progressives don’t understand surplus value but take the view of the small property owner who is always in debt. They see society’s main contradiction as the relationship between the creditor and debtor as opposed to that between the capitalist and wage worker.
Creditors advance money to a debtor, who later has to return the money plus more in the form of interest. This is represented by the expression M…M’. The M’ – M or interest represents surplus value in money form. Interest represents a brazenly unequal exchange, so its exploitative nature is visible even to non-Marxists. The higher the interest rate, the more time the independent producer must work for the creditor and the less time small producers get to work for themselves.
In capitalist production, the industrial capitalist purchases the labor power at its value and combines it with machinery, raw, and auxiliary materials bought at their value. The capitalist then sells the commodity at a price corresponding to its value. All these exchanges appear to be equal.
Karl Marx explained that this exchange hides the reality of surplus value as unpaid labor. True, workers can be debtors as consumers; if so, they must spend a portion of their workday working for their creditors. This is a secondary form of exploitation under capitalist production. We can imagine a world where workers are never debtors, and all exchanges are equal, yet workers would still be performing unpaid labor — producing surplus value — for the industrial capitalists.
Marx solved this puzzle by distinguishing between labor power sold at its value and the quantity of labor workers perform once their labor power has been sold to a capitalist.
Workers must perform more labor than that necessary to (re)produce their labor power. For example, capitalists purchase four hours’ worth of labor power from a worker with a sum of money representing four hours of labor. This is an equal exchange. But the worker must then perform eight hours of labor. In this example, the rate of surplus value is 100%. The worker performs four hours of paid labor and then has to perform an additional four hours of unpaid labor even though the principle of the equal exchange of commodities is not violated. Before Marx, the term capitalist referred to money capitalists such as bankers or investors. Marx showed that an industrial capitalist such as Henry Ford is as much of a capitalist as a money capitalist such as the Rothschilds or Morgans.
Non-Marxist progressives do not understand this. They understand interest as surplus value because interest arises out of an unequal exchange, but they don’t understand surplus value when it arises out of an equal exchange of commodities. They incorrectly imagine that under capitalist production, if the central bank owners determine interest rates, surplus value itself is reduced.
But even if the central banks had the power to reduce interest rates, assuming pure capitalist relations based on equal exchange, there’d be no reduction in the quantity of surplus value. All it would do is reduce the portion of the surplus value that goes to the money capitalists while increasing the quantity of surplus value that goes to the industrial and merchant capitalists. (back)
(6) These economic laws ultimately derive from the most basic economic law that governs the capitalist system, the law of the value of commodities. (back)
(7) In the 1930s, the big problem was not rising prices but falling ones. Price control refers to forced cartel agreements imposed by the Roosevelt administration to prevent prices from falling. The Supreme Court soon declared Roosevelt’s forced cartelization policies unconstitutional. (back)
(8) In April 1971, the World Table Tennis Championships were held in Nagoya, Japan. The Chinese team invited the U.S. team to visit China, and the U.S. team accepted. Though this might seem a development hardly worth noting today, at that time, it indicated that a radical change in the relationship between the United States and the People’s Republic of China was in the works. (back)
(9) For many years, the U.S. capitalist class hailed Ford’s decision to pardon Nixon because the spectacle of a former U.S. president sitting as a defendant in a criminal court was considered too destabilizing. The idea that a former U.S. president could be a criminal undercut the office itself and revealed still more illegal activities of the state against the people of the United States and the world.
There was a problem with Ford’s decision to pardon Nixon, which only became apparent during the Trump presidency. Ford’s pardon created a situation where a president who did not play by the rules could break virtually any law. Even if caught, impeached, convicted, and removed from office, the president would be pardoned by the next president, effectively putting U.S. presidents above the law.
This would be true even if the law-breaking were carried out not in pursuit of the class and commercial interests of the U.S. ruling capitalist class but for personal reasons.
This made it possible for Donald Trump, after his defeat for reelection in both the popular and electoral votes, to refuse to accept the result and finally, on January 6, 2021, attempt a coup.
If Trump had succeeded, he would have remained president, and if he had failed, the precedent set by Ford would have allowed him to be pardoned no matter what he did. Trump was encouraged in his clearly illegal coup attempt because he had good reason to believe he would not be prosecuted.
Today, Trump is a convicted felon; a jury found him guilty on 34 felony counts on May 31.
The felon, Trump, is not only a former president but also the presumptive nominee of the Republican Party in November 2024 and, if current polls are to be believed, the favorite for reelection. This shows how much further the Bonapartist tendencies within the political system have progressed since Nixon’s days and how these tendencies are progressively undermining the legitimacy of the U.S. government in the eyes of the peoples of the world. (back)
A Critique of Crisis Theory 