On April 2, President Trump announced his “Liberation Day” tariffs. As this blog concentrates on economic questions, this was the biggest event of the last month. But before I get to the tariff, I’ll look at other developments.
Kilmar Abrego Garcia lived and worked legally in Maryland since 2019. The Trump administration accused him of belonging to a gang, arrested and put him on a plane heading for a notoriously brutal El Salvadoran prison. He had not been convicted of any crime. They then claimed they’d committed an administrative mistake.
On April 10, the Supreme Court unanimously ordered the return of Kilmar Abrego Garcia. As of this writing (April 28), he remains imprisoned, and Trump has refused to follow the court’s order. [I wonder whether the high court regrets last year’s decision that even after leaving office, a president cannot be criminally prosecuted for any action taken while in office in pursuit of their duties? I don’t know the answer, but it seems the court is like a man sawing off the branch he is sitting on. -SW]
Trump takes other actions against the co-equal judicial branch of the government. The U.S. Immigration and Customs Enforcement (ICE) agency has arrested non-citizens, or those it claims are non-citizens, using plain-clothes agents who do not identify themselves while seizing people off the streets. This includes using night-time arrests, or when victims show up at government agencies to work on their cases, then throw them into unmarked cars and lock them up in prisons awaiting deportation. People from the Spanish-speaking neighborhoods and Palestinians and their supporters living in the United States have been the prime targets so far.
On April 25, plain-clothes ICE agents stalked the court of Wisconsin Judge Hannah Dugan with plans to arrest Eduardo Flores Ruiz, an alleged “illegal alien,” as soon as he left her court. Judges generally make sure police agencies don’t arrest those with business in their courts. Such behavior discourages potential defendants from showing up. So after the judge was through with her business with Flores-Ruiz, she had him leave the building through a back door to avoid his arrest. The ICE agents had no trouble grabbing Flores-Ruiz shortly after he left the courtroom. As it turned out, the ICE agents were not the only federal cops staking out Dugan’s courtroom that day. Plainclothes FBI agents were there as well, and they arrested Dugan herself, charging her with two felonies that could land her in prison for six years for allegedly helping Flores-Ruiz escape from the ICE cops.
In a recent post, I examined the ideas of Curtis Yarvin, a blogger, computer programmer, and Silicon Valley entrepreneur, who argues that the current form of government enshrined in the U.S. Constitution should be replaced by a monarchy or dictatorship where all state power would be centralized in the hands of an autocratic ruler. The judicial branch would have no independent power, and Congress would be reduced to an advisory body or abolished altogether.
Trump has been acting much like a Yarvin-style king or dictator. After losing in 2020 to Joe Biden, Trump claimed the election had been stolen from him. Then on January 6, 2021, he encouraged — or did not discourage — an armed mob to disperse Congress in a last-ditch attempt to stay in power illegally.
Trump’s autocratic power grabs are not confined to the courts. He’s usurped Congress’s constitutional right to set tariffs, which threatens to throw the world economy into chaos (more on this below), claiming alleged “emergency wartime powers” made necessary by, among other things, alleged Chinese smuggling of fentanyl over the Mexican and Canadian borders. In the meantime, the U.S.-Israeli Gaza genocide continues with the avowed aim of driving all Palestinians out of the territory, as well as Trump’s attempts to annex the Panama Canal, Greenland, and Canada. And the war in Russia-Ukraine continues despite ongoing negotiations.
Against this background, there have been a series of important street demonstrations involving hundreds of thousands or more people against Trump’s dictatorial policies, led by liberal and progressive groups linked to the Democratic Party — but not revolutionary groups. Progressive slogans, as would be expected considering the leadership, were mixed with attempts by Democratic Party supporters to raise demands against Trump’s alleged betrayal of the Euro-Maidan coup regime in Ukraine while trying to suppress criticism of the genocidal policies in Palestine. Some raised the Palestinian question in these demonstrations — as was the case in the demonstration I attended personally — though it wasn’t given the centrality it should have.
The current wave of demonstrations is not yet a movement of revolutionary-minded people. Taken as a whole, the demonstrators just want to see a return to the norms of traditional U.S. bourgeois democracy. But revolutions begin as a movement of ordinary people fed up with the status quo. To take one classic example, on January 9, 1905 (old style), a mass demonstration occurred in the Russian city of St. Petersburg, capital of Czarist Russia. The demonstrators viewed themselves as loyal to the “little father,” as the Czar was known. They requested Czar Nicholas II use his autocratic power to halt factory owners’ growing abuse of workers — nothing more.
The Czar replied by ordering the army to shoot into the crowd, injuring and killing many. The workers of St. Petersburg were radicalized, leading straight to the revolution of 1905, and less than 13 years later, the Russian working class seized political power. This example from history should be a warning to Trump if he tries to stop the growing wave of demonstrations by using the army against people, as he has threatened.
Many demonstrators demand that the Trump administration be removed, though the current political system offers few avenues to do so before his term expires on January 20, 2029. Trump failed to get a majority of the vote in last year’s presidential election, and polls now show he’s rapidly losing support. There is little doubt that the majority of the American people want to see him removed, though there appears to be no way to do so before the 2028 elections, and he won’t have to give up power before January 20, 2029. At that time, Trump will be 82 years old, and unless the Constitution is amended, he won’t be eligible to serve a third term. This has not prevented him from hinting he might somehow run anyway. All these are important developments I will examine in future posts. Now I must turn to the question of Trump’s “liberation day” tariffs.
Trump’s tariffs
When Trump announced the tariffs on April 2, they were supposed to liberate the U.S. from being taken advantage of by almost every other country in the world and would result in the reindustrialization of the United States. The announcement caused world financial markets to crash. But this was no ordinary crash.
Let’s examine what happened. On Friday, March 29, just before the tariffs were announced, the Dow Jones Industrial Average closed at 41,583.90, the interest rate on ten-year government bonds closed at 4.2550%, while the dollar price of gold closed at $3118.00. The Friday after Liberation Day, the Dow closed at 38,314.87, the rate of the ten-year bonds dropped to 3.9850%, and the dollar price of gold closed at $3035.60. During the week, gold’s dollar price fell below the psychologically important level of $3,000. These movements are typical of stock market crashes, whether the crash reflects problems within the stock market itself, a developing recession, or some other cause.
Regardless, when the stock market falls, we usually see a rally in government bonds — the price of bonds rises, and interest rates and the dollar price of gold fall. The dollar price of gold, ignored by so many left-wing commentators, is of crucial importance because a falling dollar price of gold allows the Federal Reserve to flood the banking system with newly created dollars to prevent the crash from spreading to the banking system and turning into a general credit collapse.
Why do stock market crashes follow this pattern?
When stock market prices fall, whatever the cause, margin loans are called in by the stock brokers. Stockholders must raise money to pay off loans or sell some of their stocks at a loss. To avoid this, market speculators have to raise cash to pay off the loans. If they have any gold (they usually speculate in stocks as well as gold), they’ll sell some of it to meet the margin calls from their brokers.
Here we see the dollar’s role as a means of payment. The fall in the dollar gold price, or more precisely, the rise in the quantity of real money (gold) represented by the paper currency, makes it possible for the Federal Reserve to lower the federal funds rate and take other action to lower interest rates if the Fed judges that such action is necessary. During a market crash, as there is a more than usual demand for dollars as a means of payment, the Federal Reserve can create more dollars than usual without raising the dollar gold price (highly inflationary). The movement of the dollar gold price is therefore crucially important.
With stock prices lower, fewer dollars are needed to circulate the stocks. Fewer dollars are needed to circulate the sum of corporate stock ( pseudo-commodities) plus the total of the prices of actual commodities within the economy, even when the fall in prices is confined to the market. Speculators who sold when the market crashed put some of the dollars they raised to buy government bonds. As a rule, when the market crashes, the cash flowing out of it usually goes into the government bond market, as the federal government is not expected to default even during a recession. Even in the depths of the 1929-33 super-crisis, government bonds continued paying interest.
In the days after Liberation Day, the financial markets followed the classic market crash script. Stock prices were lower, government bond prices rose (so the interest rate on the bonds fell), and gold prices fell.
Then something strange happened. If you follow the markets, you’ll notice that when interest rates rise, the demand for gold usually drops along with the dollar price of gold — the demand for gold regulates the interest rate. If the Federal Reserve sets interest rates too low, demand for gold spikes, and the exchange rate of the dollar falls against gold, forcing up interest rates – the opposite of what was intended.
In the week of April 7, these normal relationships broke down. The stock market crashed, and government bonds shot up. At the height of the bond market panic, the interest rate on ten-year bonds briefly hit 5%. Normally, such a sharp rise in the bond interest rate would cause the dollar’s gold price to drop. Put another way, the amount of gold represented by the dollar would rise.
But not this time. Instead, the dollar price of gold rose sharply. This was not a normal panic. The rise in gold’s dollar price was of special importance as it indicated that the Federal Reserve could not deal with the crisis in its usual way, by creating more dollars.
The rise in gold’s dollar price meant that, as sharp as the rise in the interest rate on bonds was, the market said it was not enough. At the same time, the market told the Federal Reserve: don’t keep the interest rate down by creating more dollars because if you do, they’ll just burn up in an inflationary storm. If this across-the-board panic had not been stopped, all interest rates would have soared higher before dollar gold prices turned down. Speaking through the financial markets, finance capital told Trump that he had to change his policy immediately — he got the message. Within 48 hours, he announced the postponement of most tariffs for 90 days against all countries except China. Markets were relieved but not satisfied. Within a few days, he also retreated on the tariffs on China. He announced that electronic items such as smartphones, laptops, etc., would be exempted temporarily. Markets calmed somewhat with the stock and bond markets recovering, and gold’s dollar price retreated.
Market movements showed that though relieved, they were not fully reassured. Trump then started a feud with Federal Reserve head Jay Powell, threatening to fire him (which Trump has the dubious legal authority to do), claiming Powell should lower interest rates. The market didn’t like this and acted up again. Within a couple of days, Trump retreated, saying he wouldn’t fire Powell after all. He then signaled further retreats on China, saying that the tariffs against Chinese imports would be lower than the prohibitive levels that Trump had announced. Tariffs were changing by the day, and sometimes it seemed by the hour.
Businesses complained that with tariff rates in such flux, they couldn’t plan what country to produce in because they had no idea what the tariff would be when their plants were completed and went into production. Building a new plant in the United States might be profitable if tariffs are high on commodities produced in Mexico. If reduced or eliminated? Build it in Mexico.
The financial panic triggered by the tariffs points to a legal one. Tariffs are taxes, and the U.S. Constitution is clear. Tax rates, including tariffs, are set by Congress, the legislative branch of government, not by the executive or the president. The president’s job is to see that taxes/tariffs are collected, with no authority to set them.
This constitutional provision makes economic sense from the capitalist point of view, as there are now one hundred senators and 425 congress members, and congressional decisions on taxes and tariffs are set only after much debate. Once a tax bill is passed by the two houses of Congress and signed by the President — or Congress overrides a presidential veto — tariff rates will not be changed again so easily. This is leaving aside the question of who in the world gave the President the authority to impose and fix tariffs in the first place.
Similarly, according to the Constitution, the ability to make war is vested in Congress, not the President. Since World War II, the President has usurped the power to make war. Now, Trump is claiming a state of emergency by claiming that China is pushing fentanyl and somehow smuggling it across the Canadian and Mexican borders, an emergency that gives him the authority to impose tariffs by executive fiat.
Did Europe also get involved with the alleged smuggling? What gives Trump the authority to tariff Europe if it isn’t involved? He claims the U.S. is at war due to an invasion by Latin American criminal gangs.
It would be easy to blame the current crisis on Trump’s unstable and autocratic personality (and there would be an element of truth to that). But how did such an unstable and erratic personality become president in the first place? As is true with any serious crisis in capitalist society, whether economic, financial, political, or military, the roots of the crisis extend deep into the economy. I intend to examine these deeper roots in this blog.
Trump attempts to build a “Chinese wall” around the United States
Karl Marx wrote in The Communist Manifesto:
“The bourgeoisie by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilization. The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate.”
Though written in 1847-48, the Communist Manifesto retains its validity until the working class overthrows the rule of the capitalist class around the world and begins constructing a communist society. But like all political literature, the Manifesto is a document of its time.
In the days when the Manifesto was written, capitalist Britain was battering down the physical and other walls surrounding the decaying Chinese Empire, forcing its rulers to accept British free trade. As the civilization of ancient China developed, it was subjected to attacks by tribal people from the north who attempted to break into the wealthy empire. To protect itself, successive dynasties built a wall. Protected by it, Chinese civilization grew and flourished for centuries, its wealth far exceeding that of Britain and Western Europe. (Remnants of the wall are a major tourist attraction for visitors to China today.) That was until the rise of steam power.
By the mid-nineteenth century, times had changed. Industrial Britain now looked down on “barbarian” and “xenophobic” China. Britain had many weapons, including gunboats and opium — but its greatest weapon was cheap commodities. Old China was doomed. That’s where things stood when the Manifesto was first published in London in 1848.
Almost 180 years later (April 2025), much has changed. A new China was born out of China’s resistance to Britain, later Japan, and then the United States. Now, a new China is shaking the U.S. empire, the heir to the British empire of 1848. And China’s chief weapon against the U.S. empire? It’s cheap commodities! It turns out that, like all walls, the “Chinese wall” has two sides.
I have no idea whether Donald Trump has any knowledge or interest in Chinese history. On April 2, the day he announced staggering high tariffs against China and other countries, he declared it “Liberation Day.” I am struck by the fact that the Chinese describe the victory of their revolution in 1949 as “Liberation.” If Trump has ever read the Communist Manifesto, he should know he’s fighting a losing battle against cheap Chinese commodities just as old China was fighting a losing battle against cheap British ones. I will dare to predict that out of “barbarian” capitalist America’s doomed struggle against cheap Chinese commodities — and those of other countries — a new socialist America will be born.
The Liberation Day tariffs represent a dramatic reversal of the free trade policies the U.S. has pursued since World War II. He called it Liberation Day because he claims that in world trade, the U.S. has been taken advantage of by almost every other nation in the world. Trump also raised tariffs during his first term, and many of them continued under Democrat Joe Biden’s administration. Therefore, the trend toward increasing protectionism goes beyond Trump.
What is a tariff? It is a form of taxation. It’s a tax paid by importers levied by a nation state on commodities produced outside the nation state. Depending on market conditions, the importer passes the tax onto buyers within the nation state that levies the tariff, to be paid by the final consumer as a kind of sales tax, and like a sales tax, it is highly regressive. Billionaire Trump loves this regressive aspect. His administration proposes a new series of income tax cuts that will increase the already large budget deficit. Like other recent Republican administrations, Trump’s proposed income tax cuts are, in principle, reducing or eliminating progressive taxes where those with large incomes pay a higher percentage than people with lower incomes.
Trickle-down economics
Regressive means, for example, if the price of bananas goes up due to tariffs, you’ll pay the same price as Elon Musk. The tariff will swallow a higher percentage of your income than that of Mr. Musk, Mr. Bezos, Mr. Trump, etc. Naturally, capitalists prefer these types of regressive taxes over the income tax.
When income taxes are cut or made less progressive, the after-tax profit rate on capital rises. Republicans argue that rising after-tax profits will stimulate capital investment, causing the economy to boom and employment to increase. They claim rising after-tax incomes that go to capitalists then trickle down to the working class in the form of more jobs, raising the standard of living for all. Based on this theory, they try to get the working class to vote for them. So-called liberals (in the Democratic Party sense) and progressives, in turn, denounce Republican trickle-down economics.
As we see today, Republicans pass cuts in income taxes, making them less progressive. To make the cuts more palatable, they make them “temporary.” When Democrats come to power, they often claim they will repeal the Republican cuts, but fail to do so. When Republicans return, they push to make the previous cuts permanent, then propose additional ones, and the cycle repeats.
Republicans want to make the tax cuts of the first Trump administration permanent while proposing more cuts. Trump supports this and wants to go further. In his opinion, the income tax should be abolished entirely, and the federal government’s main source of revenue should be tariffs on imports. Republican President William McKinley did this at the turn of the 20th century. I remember when I was a little younger than I am today, Democrats accused Republicans of wanting to go back to the “days of McKinley.” Trump now openly says this is what he wants. In his first term, Trump said that of all the former presidents, the pro-slavery, genocide against Native peoples, Andrew Jackson was his favorite. He chose “high tariff” William McKinley as his favorite during his second term. (1)
Shifting world trade patterns
During the age of mercantilism, corresponding to the period of manufacture which was dominant in the early 18th century, early capitalist governments pursued protectionist policies. These included high tariffs and exchange controls to prevent the export of money. Mercantilism was based on “beggar thy neighbor” principles. Closely associated with it was “the monetary system.” Early economists declared that the essence of wealth was the money metals: gold and silver. Mercantilists believed that government policy should be to acquire as much of the world’s supply of gold and silver as possible. These polices caused commercial wars that finally led to the world war between major European powers, which was called the Seven Years’ War of 1756-1763, and called the French-and-Indian War in what was soon to become the United States.
Mercantilists thought that a country’s main way of accumulating money was by running a positive balance of trade. The problem? Not all countries can run positive balances at the same time. The positive balance of one is balanced off by a negative balance of trade of another. Mercantilist policies meant wars between countries as each tried to improve its position in the world market to achieve trade surpluses and the greatest accumulation of gold and silver. With the lower development of the productive forces than today, wars were less destructive than they are now.
It’s easy to ridicule the monetary system view associated with mercantilism that gold and silver are the only wealth. When I first heard this view, I think it was in a high school history class, I wondered how intelligent people could have believed something so obviously false. The early economists concluded that gold and silver were the essence of wealth because, under capitalism, all social wealth is measured in terms of the use value of the money commodities. From this viewpoint, one’s social (not personal) wealth is only measurable to the extent it’s convertible into money material.
Starting in Britain in the late 18th century, the first liberal economists began to challenge these views. They saw that commodities, not just money commodities, form wealth under capitalism, and gold and silver appear as unimportant. After all, we all know what happened to King Midas.
This change in view corresponded to an important change in production itself. In Britain, manufacture proper was giving way to what Marx and Engels called modern industry. Under manufacture, little machinery was used. Workers were gathered together in a building called a factory and were assigned a particular task, which, through constant and increasingly mindless repetition, they achieved what was, for that time, high productivity. They divided production into as many sub-tasks as possible. Manufacturing enterprises became productive by deepening the division of labor, but not yet the application of machinery to production.
The main motive power was human muscle power. Starting in the late 18th century in Britain, human and sometimes animal muscle power began to give way to steam power. The use of steam-powered machinery drastically lowered the amount of labor needed to produce commodities or their value and consequently their cost prices. (2)
At first, steam’s widespread use was limited to Britain, so the cost price of British-produced goods was lower than those produced elsewhere, and British industry achieved a monopoly on the world market that no other nation had done before. This monopoly lasted through the middle of the 19th century.
It was during the era of British monopoly that Britain scrapped mercantilism and the associated monetary system, replacing it with the doctrine and practice of free trade. The more trade was free, the more British industry could penetrate the markets of the world.
The overwhelming superiority of British industry did not apply to its agriculture. Early 19th-century British politics revolved around the demand coming from industrial capitalists that the protective tariffs on agriculture, called the “corn laws,” be repealed, while landlords resisted to defend their ground rents. By repealing the corn laws, capitalists could lower the money wages of their workers by importing cheap grain from abroad. Cheaper grain made up the bulk of the workers’ real wages, making it possible to lower wages below subsistence levels, and thus raise the rate of surplus value. In 1846, the free traders won and the corn laws were repealed.
The repeal left Britain potentially vulnerable to a naval blockade during a war that would cut off its food supply. So it built a huge navy, or as it was said in those days, “Britannia rules the waves.”
The chief free trade theoretician was David Ricardo. His theory of comparative advantage incorrectly claimed free trade was equally in the interests of industrially developed nations (then it was only Britain) and underdeveloped countries. The comparative advantage theory migrated from Ricardian economics into the neoclassical economics that dominate university economic departments today. Anwar Shaikh, who is among the smartest modern Marxist economists, has correctly stressed that it is, in reality, absolute advantage, not comparative advantage, that rules world trade as it does trade within a capitalist nation.
In the wake of World War II, the United States enjoyed a monopoly on productivity. After 1945, the U.S., which had practiced protectionism for decades, now preached free trade to the world. As its productivity monopoly faded, first due to rising competition from Western Europe, then Japan, and more recently China, and now other rising Global South countries, the U.S. has moved away from free trade just as Britain did beginning in 1931. As a result, the post-1945 “rules -based system” (as the U.S. calls its free trade empire) is falling apart before our eyes as the U.S. itself abandons free trade.
To understand why eras of free trade give way to rising protectionism, you need to see that under capitalism, the forces of production develop faster than markets do. Official economics does everything to hush this up (if they don’t deny it outright). If markets developed as fast as the industrial capitalists expanded production, we would live in a different world. (3)
In this hypothetical world (that economists, particularly the neoclassical and the Austrians, palm off as reality), even if a country’s share of the world market declines in relative terms, it increases in absolute terms. If the market did not expand, the country would experience an absolute decline in its exports as soon as its share of the world market declined even slightly. Conversely, if the world market grew as fast as production, our country would still have rising exports in absolute terms even while losing its percentage share of the world market. In reality, the truth is somewhere in between.
The world market grows. If it didn’t, capitalism would be finished. However, it does not grow as fast as the industrial capitalists can increase production. The rise of one group of countries is balanced by the decline of others. This is the law of uneven development, the opposite of what neoclassical and Austrian economists claim based on the theory of comparative advantage. In eras when one country has a productivity advantage, like Britain in the first three quarters of the 19th century or the U.S. in the first decades after World War II, it will champion free trade. In eras like the current one, when no country has the advantage, protectionist tendencies spread as state power is used to expand their share at the expense of others.
Consequences of the U.S. trade deficit
Since the 1980s (the end of the stagflation crisis of 1968-82), the U.S. has run a chronic trade deficit. It ran a trade surplus during the post-war period of 1945-68. During the stagflation crisis, its trade was roughly in balance. No country can run a chronic trade balance deficit unless it borrows from abroad or progressively sells off its capital and landed property to foreigners. If it doesn’t, its domestic money supply will be drained away, causing its home market to contract. If a gold standard prevails, the banks will lose their reserves, and interest rates will rise until a recession hits.
As the national market contracts, imports dry up while industrial and commercial businesses are forced to export or go bankrupt. The trade balance then returns to balance — at the cost of rising unemployment and a falling standard of living. There is no way the U.S. could have run trade deficits for more than forty years unless it went into debt while a certain portion of domestic capital and landed property fell into foreign hands. This is where the dollar system comes in. It gives the U.S. extraordinary, though not unlimited, power to borrow money.
The dollar system
Under the dollar-denominated international monetary system, capitalists — foreign or those with plants in other countries — sell commodities to the U.S. in return for dollars. Instead of selling them for local currency, they buy dollar-denominated assets such as real estate, stocks, and bonds, or just use a dollar-denominated bank account. This is because until recently, the U.S. produced more with less labor than any other country, it’s militarily the most powerful country by far, and it’s viewed as the most politically stable.
If they sell their dollars to their local central bank in exchange for local currency instead of for gold, as under the international gold standard, the central bank will buy U.S. Treasury notes, helping to finance the government deficit. For foreign banks, the advantage is that, unlike gold, U.S. treasury securities bear interest. For this reason, the dollar is (or used to be) considered better than gold.
Critics complain that while other nations run deficits short-term, U.S. deficits are long-term due to the dollar’s unique privilege within the international monetary system. When the Bretton Woods system ended in the early 1970s [link to posts on this] the question was whether foreign capitalists would continue to accept the dollar (a national currency declared legal tender by the U.S. government for all debts private and public within its borders) as a means of purchase and payment when after 1971 it could no longer be converted into gold even by central banks a fixed rate of exchange.
Since 1971, the dollar has been convertible only at a variable rate of exchange on the open market. The dollar might represent 1/40 of an ounce one day and 1/42 a few days later.
In the end, the answer is that the dollar is the world currency because the U.S. empire exercises state power throughout the world (more so after the Russian counterrevolution of 1985-91). What happens if the empire collapses? Wouldn’t that spell the end of the dollar as world currency?
As world trade increases, more currency is needed to circulate the increasing amount of commodities. From the 1980s onward, the dollar as the world currency grew mainly through the U.S. trade deficit. The growing demand for dollars means the U.S. can run a trade deficit without sending its exchange rate into a downward spiral, quickly ending the deficit at the cost of crashing the world economy. Because of this, the dollar has remained the world currency, giving the U.S. a seemingly unlimited ability to borrow money and run deficits.
It has been costly for the U.S. economy. With cheap commodities flooding into the U.S., the domestic production of commodities — as Trump and industrial workers, even more so, are all too aware — has taken a severe hit. The result has been deindustrialization, with millions of manufacturing jobs lost and factories shuttered across the country. Even U.S. agriculture has been hit.
The ongoing deficits show that the U.S. consumes more than it produces. If (more likely, when) the dollar loses world currency status, there will not only be a temporary depression but a permanent decline in the U.S. standard of living.
This will end the relative political stability of U.S. capitalism.
Naturally, the decline in the standard of living will not hit the classes equally, but would fall overwhelmingly on the working class and the lower middle class, potential allies of the working class. Revolution — once considered entirely implausible in the United States — may no longer be so far-fetched, especially as the already escalating political polarization makes such dramatic change seem increasingly possible.
This is one reason why Democratic and Republican administrations since World War II – the Trump administration is no exception – have been so determined to defend the dollar’s role as the reserve currency, which makes the U.S. world empire possible.
It is not true that the U.S. can pump dollars into the world economy without limit through its deficits. It can act as the world currency because there is enough real money, gold, to support it. Since the 1980s, when the flood of dollars pumped into the economy by trade deficits has gotten out of line with the slower increase in the amount of gold in the world, the dollar slumped. As gold gets scarcer, the dollar price of gold rises. Then, as night follows day, when gold prices and interest rates rise enough, recession and unemployment follow. Recession then reduces the trade deficit to a more sustainable level, as occurred in 2007-09.
The U.S. trade deficit and the industrial cycle
I have explained before that when the production of non-money commodities rises faster than that of gold (as they do during the rising phase of the industrial cycle), the money market tightens and interest rates rise. If the Federal Reserve fights the interest rate rise, the dollar slips against gold. Inflation rises, interest rates follow, and then a recession occurs.
Inflation is the market’s way of raising interest rates when the Federal Reserve attempts to hold interest rates down.. This is the lesson of the 1970s, when attempts to keep interest rates down led to the highest rates in the history of capitalism. Interest rates forced up by inflation lead to recession, causing U.S. imports to contract and U.S. exports to rise, reducing the U.S. trade deficit. With recession, the demand for the dollar as the chief global means of payment increases as the quantity of dollars on the world market declines or at least grows at a slower rate. So up to now (April 2025), after passing through a crisis, the dollar system gains a new lease on life for a number of years. This happened after the stagflation crises of 1968-1982 and the crisis of 2008.
The rise of the U.S. empire
The world market rose in the 16th century with the discoveries of gold and silver in the Americas. No state of that time could dream of putting the market under a common authority. However, the newly emerging capitalist system was incompatible with the patchwork of small states run by local feudal lords that dominated Europe.
Over the coming centuries, the centralized modern capitalist nation-state arose in Europe and spread worldwide. The modern nation state rules over a larger geographical territory than the old feudal states. The new nation state developed common languages, units of measure, currencies, and religions. During the age of mercantilism, emerging nation states were surrounded by tariffs and other trade barriers while free trade prevailed within the nation state. Its rise set the stage for commercial wars over access to each other’s national markets and colonies that collectively made up the world market.
The rise of the nation state was a step forward compared to what existed before. As productive forces clash within the limits set by private property, so do they clash within the limits imposed by the nation state. The clash with private property finds its sharpest expression in periodic crises of overproduction and, over time, the rise of cartels and trusts. At this point, productive forces clash with the nation state as they did centuries earlier against the old feudal order. This contradiction found its greatest expression so far in the two World Wars of the 20th century.
During the rise of capitalism in Europe, the needs of the emerging economy demanded a new political organization that became the modern nation-state. Before this new bourgeois state was consolidated, a compromise emerged between the medieval decentralized political order of the past and the centralized capitalist nation state to come — the absolute monarchy.
Under the old order, feudal kings and emperors were weak, and most of the state power was exercised by local lords. Under absolute monarchy, kings and emperors became more powerful, centralizing state power. Ultimately, this centralization was insufficient to meet the needs of the emerging capitalist economy.
Bourgeois revolutions — the French Revolution was the classic one — overthrew the absolute monarchies and replaced them with the modern centralized bourgeois states. Under the capitalist mode of production, as the productive forces continued to develop, they reached a stage where the continued existence of the bourgeois state became an obstacle.
After the 20th century’s two world wars, U.S. imperialism attempted a compromise akin to the absolute monarchies at the dawn of capitalist production. This is a compromise between the nation state and the need for a global economic organization to meet the needs of modern productive forces.
The two bloody world wars indicated that productive forces had grown beyond the limits of the bourgeois nation-states. The original Soviet Union, as envisioned by Lenin, was seen as the international political form which the rule of the international working class would take. As it is the historical task of the workers to end private property in the means of production, it’s also necessary that the political rule of the workers goes beyond the nation state.
In Lenin’s vision, other countries would join the Soviet Union as soon as their working classes came to power, whether or not they had been previously part of the Russian Empire. Eventually, all countries would join, and the Soviet Union would become the political form that would make the transition to a worldwide communist society that would transcend the nation state as well as end capitalist private property.
Unfortunately, the political development of the 20th century did not follow this path. After Lenin, the Soviet Union retreated and adopted the idea that it could be a nation-state of a special type, building a socialist society within its national limits. This socialist nation-state was surrounded by capitalist ones.
Any type of nation state is too small to build a truly communist society, one that embraces the entire globe. Productive forces adequate for a modern communist society demand nothing less. Within these limits, Soviet society could not in the long run remain on the socialist path toward a communist society but — at the cost of destroying a huge part of the productive forces it had already acquired through seventy years of socialist planning — revert to the bourgeois nation state that rules modern Russia. Despite claims to the contrary, the Putin government is not trying to reestablish the Soviet Union or the Czarist empire. It is just trying to consolidate a modern Russian version of the bourgeois nation state.
After World War II, it was beyond the power of the United States to establish a full-scale global capitalist state. First, it could not absorb the Soviet Union and other socialist states without first overthrowing these workers’ states. Even if the Soviet Union had not existed or had not survived World War II, U.S. imperialism did not have the power to organize a world government, abolish currencies other than the dollar, establish English as the sole language of humanity, U.S.-style Christianity as the sole religion, impose the U.S. Constitution, units of measures and weights, and so forth on the entire world.
Instead, it established a world empire that was a compromise between a single capitalist state and the old system of many sovereign bourgeois nation-states. The compromise is a world empire that calls itself a “rules-based order,” with other states having limited sovereignty.
The dollar’s role as the world’s reserve currency is a key pillar of the U.S. empire. With few exceptions, nations still use local currencies within their home markets. Dollar domination is managed by the U.S.-run International Monetary Fund. Tariffs and other trade barriers were not entirely abolished, though they were reduced. The institution managing tariffs and other trade barriers was originally called the General Agreement on Trade and Tariffs and is now called the World Trade Organization. NATO, formally launched in 1949, was originally designed to ensure U.S. domination of Europe. It has become the military arm of the entire empire. The United Nations replaced the League of Nations after World War II, included the Soviet Union and other socialist states, and served as a kind of parody of a world government.
The Party of Order, made up of the Democratic and Republican parties, supports this worldwide empire. Local branches exist in Europe, in Japan, and elsewhere. After the counterrevolutions of 1985-1991, in all of Europe west of Russia, the Party of Order is made up of the Christian-Democratic-Conservative and Liberal parties on the right, Social Democratic parties on the left, and the newer Green parties in the center. Within the capitalist political spectrum, these parties are being challenged by new reactionary bourgeois nationalist parties on the extreme right, such as the Alternative for Germany (AfD). This international Party of Order rules the U.S. world empire.
Origins of the Party of Order
On the eve of World War II, U.S. politics was divided into internationalists and isolationists. The internationalists wanted to ally with the Soviet Union to destroy Nazi Germany with the expectation of crushing a much weakened Soviet Union in the process. Isolationists preferred an alliance with Nazi Germany to destroy the Soviet Union directly. After WWII, the differences between them disappeared. Most bourgeois politicians united to crush any move toward socialist revolution anywhere in the world while crushing the Soviet Union and the new workers’ states in Eastern Europe. Today’s Party of Order was born.
Can tariffs restore America’s bygone industrial glory?
Capitalist industrialization, including a hypothetical U.S. reindustrialization, involves an accelerated process of expanded capitalist reproduction. Capitalist expanded reproduction requires the production of surplus value, realizing it in money form, in terms of the use value of the money commodity, the definition of profit. This must then be plowed back into the economy to produce more profit, and so on.
Certain conditions are needed for this process. First, there must be enough workers to produce the surplus value. From where are they recruited? Overwhelmingly, from the peasantry, or in U.S. terms, small working farmers. To a greater extent than city folk, peasants are accustomed to long hours of hard manual labor. Separated from their small farms, they make ideal recruits for the role of workers working in large-scale industry, producing huge profits. If surplus value is not produced, realizing it is impossible.
Second, the home market must be expanded so that the increased production of surplus value can be realized in profit form. Surplus value produced but not realized is not profit. To realize it, you need the money material. This is why a positive trade balance is so important in capitalist industrialization. (4) This alone can supply adequate amounts of the money needed to expand the home market to support large-scale capitalist industrialization.
Tariffs and protectionism play a crucial role in the early stages of capitalist development. The world market is just the sum of the national markets. For a country embarking on developing capitalism, the most important task is to conquer the home market while assuring its maximum development by running a positive trade balance. This has been dubbed export-led growth.
Mercantilism attacked the problem at both ends. It used high tariffs and other trade barriers to exclude foreign commodities while using state power to make it difficult to send money out of the country. Even if a country is rich in gold mines, not enough gold can be produced to sustain the rapid pace of industrialization needed to transform a weak nation into an industrial powerhouse. Under capitalism, the only way is to run a strong positive trade balance or export-led growth.
Once Britain and later the United States emerged as the dominant countries on the world market, they maintained that domination for decades because of their overwhelmingly superior productivity of labor — their capitalists produced commodities of a given use value and given quality with less labor than their competitors. In monetary terms, the cost prices of the commodities produced were lower than those produced in other countries.
Under modern conditions, a country with little development ironically enjoys certain advantages when it comes to the rapid development of capitalism. When a country produces a large percentage of the commodities produced worldwide, rapidly increasing exports can flood the world market, leading to a global overproduction crisis, causing industrial development to temporarily grind to a halt. When a capitalistically backward country commands a small portion of the world market, including its home market, this is not the case. For example, let’s assume a given nation’s commodities command 0.5% of the world market. Assume that within a few years, our still underdeveloped but now rapidly industrializing country increases its share of the world market to 1%. It will experience rapid growth but command only a small part of the market, and this can occur without an overproduction crisis.
Now, assume a country commands 50% of the world market, like the U.S. right after World War II. If it doubles its market share within a few years, it will control 100%. (No country has yet managed to control the entire world market, but suppose one day one does.) By definition, it will no longer be able to increase the percentage of the world market — because one cannot control more than the whole. If it maintains 100% control, from that point it will, by definition, only be able to grow at the rate of growth of the world market.
In the real world, some countries are growing at a rate faster than the market’s growth, while others grow at a slower rate — capitalist development is an uneven process. You have rich old capitalist countries growing slower than the market and decaying, and young countries with soaring export surpluses, growing more rapidly than the market.
The old countries have further disadvantages. In the past, they went through a time of rapid capitalist development, and the value of their labor power was higher, and their rate of surplus value was lower. The peasantry or small working farmers from which the industrial workers are recruited have long since given way to modern capitalist agriculture. Immigrants must be attracted to the country to recruit more manual workers accustomed to long hours of hard work. But you can’t expand the number of industrial workers through immigration as easily as recruiting ruined peasants from within.
Another problem aging capitalist countries face is that they have a lot of old, out-of-date fixed capital. If new capital is created, the fixed capital of the “old” capitalist falls in value. The accumulation of new capital under those conditions can lead to the contraction, not the expansion, of the total capital. Idle capital inhibits new investment as it makes no sense for a capitalist who cannot utilize a large percentage of the fixed capital they already have to add still more. Newly industrializing countries start with little fixed capital. As they accumulate new capital, this new capital represents the most modern technology.
Another problem with using tariffs to revitalize industries in declining countries is that they tend to hit industry inputs. This threatens to further reduce competitiveness. Even if tariffs are targeted to hit only personal consumption items, prices increase. These items enter into the consumption of the working class, raising the money price of labor power and thus reducing surplus value.
Donald Trump’s program is not a serious plan to re-industrialize
Trump says he “wants to Make America Great Again” by reindustrializing it. Maybe he is sincere, but achieving this will take more than high tariffs. Since the 1980s, the U.S. has become accustomed to running trade deficits — it’s consuming more than it’s producing. Trump’s tariffs presumably are designed to reduce or end the deficits by slowing the flood of cheap foreign commodities that have caused deindustrialization.
Tariffs are not enough. A huge export drive will also be necessary to attract money — purchasing power — from abroad. Enough U.S. industry survives, so any success in this direction will flood foreign markets, tipping the world economy into recession and slowing reindustrialization. High tariffs will do nothing to overcome the problem of aging capital stock to a massive capitalist reindustrialization of the United States. And to the extent that they succeed in extending the lifetime of aging factories, they’ll only make the problem worse over time.
This raises another question: Where will the industrial workers come from? As explained above, they’ll have to come from abroad. During the first period of rapid industrialization, the U.S. depended on immigration by impoverished Europeans willing to put in long hours at low pay in factories and sweatshops. Today, such immigration can come only from countries of the Global South. To attract them, Trump will have to drop his hostile attitude toward immigrants.
If Trump is serious about reindustrialization, he’s going about it the wrong way. His attacks on science, including the proposed budget cuts for research in general, will have to be reversed. A start in this direction would be to withdraw his proposed budget, now making its way through the Republican-controlled Congress. He should draw up a budget emphasizing a sizable spending increase for science, engineering and medicine. Therefore, he needs to do a complete U-turn on his attitude toward education as well. His attempts to dissolve the Department of Education will have to be immediately reversed. His attacks on immigrants will also have to be repudiated and reversed. The U.S. has to become a comfortable and welcoming place for immigrants, especially from the Global South. This would require the most radical policy reversal by any administration in U.S. history. So far, there is no sign of any such reversal.
Trump is therefore not serious about reindustrialization. Either he is a complete muddlehead or just lying about it for short-term political gains. Here I want to emphasize again that I am talking about a hypothetical capitalist reindustrialization, since it’s pretty obvious that the billionaire president is no socialist!
Some of Trump’s supporters say that the hypothetical factories of a newly reindustrialized United States will be filled with robots. This points in the right direction. These technological marvels point to a higher mode of production, a communist mode beyond capitalism, though Trump, for his part, has sworn the United States will never be socialist. As far as capitalism is concerned, robots have a problem — robots produce no surplus value. Without surplus value, there are no profits —and no capitalism.
Maybe you insist that Trump really wants a capitalist reindustrialization that will “make America great again.” If so, his program is in hopeless contradiction to his goal. In the end, the individual members of the ruling capitalist class that Trump himself represents so well are interested in enriching themselves personally above all else, even if it means that nothing will come of their dreams of a capitalist reindustrialization — if they have such dreams. In reality, reindustrialization means the overthrow of the capitalist ruling class and its replacement by the working class, which desperately needs socialist industrialization.
A possible sudden end of the dollar system?
The long-term decline of the dollar system is rooted in the declining percentage of the total mass of commodities produced in the United States. It was because U.S. industry produced more commodities than any other country that made the dollar a world currency. After all, the U.S. produced about half the world’s commodities, and U.S. factory farm owners accepted dollars. There was a chance that commodity producers outside the U.S. would accept them as well — so they could buy cheap, high-quality U.S. goods.
The end of the U.S. domination of world production means the dollar’s days as world currency are numbered. It could be a gradual change as the percentage of dollars relative to other currencies slowly declines. As this process unfolds, the U.S.’s ability to run trade deficits will decline as well, leading to downward pressure on the standard of living of the U.S. working class and middle class. This happened in Britain as the international role of the pound sterling faded away, and it is already happening in the United States. Will the dollar system go quietly into the good night?
In the years before the 2008 crash, U.S. banks granted a lot of home equity loans to homeowners. It was said that homes were acting as ATMs (Automated Teller Machines). When panic hit, these loans suddenly dried up (homes were not ATMs after all). Then came 2008. The trade deficit declined as homeowners could no longer get loans (the loans were largely against the land under the houses), and were forced to reduce commodity purchasing, causing a fall in imports.
Meanwhile, the sudden contraction of the home market forced industry to export more of its output. The deficit decline combined with the demand for dollars as a means of payment saved the system, though not before a drop in the working-class (and middle-class) standard of living. The crisis ended before the trade deficit was fully eliminated, and the deficit then began to grow again.
In addition to the decline in the percentage of total commodity production produced by U.S. industry and agriculture, the Biden administration grossly abused the dollar system. In 2022, Biden seized the Russian currency reserves held in the U.S. and Europe to try to “transform the Russian ruble into rubble,” as it was put. After seizing Russia’s currency reserves, the U.S. Treasury Department prohibited Russia from using funds held in U.S. banks to make payments on its sovereign debt, effectively blocking over $600 million in payments due to bondholders. This was not unnoticed in Beijing.
This encouraged other countries to shift their reserves from dollars to gold.
How safe would China’s reserves of dollar-denominated Treasury notes be in the event of a war with the United States? Gold is another matter — as long as the banks keep physical control of their gold, the U.S. is powerless to wipe out their reserves. Unlike Treasury notes, gold bars are a universal money. For some years now, the banks of Russia, China, and other countries have been shifting reserves from dollars and euros to gold. Even the generally servile German government has asked that the gold Germany has entrusted to U.S. storage be returned.
With the erratic Donald Trump again in the White House and in light of the tariff war launched on “Liberation Day,” more countries are getting nervous about keeping their reserves in Treasury notes. They are like the person who fears their bank might seize their savings. It used to be asked whether you would buy a used car from Richard Nixon, and the answer was presumed to be a great big no. Would you entrust your life savings to Donald Trump? Many central bankers would now say that the old standby, gold, increasingly looks like the better choice.
For a few hours during the week of April 7, the financial market feared the dollar system was going into a death spiral. The stock market was crashing; the bond market was crashing, causing the interest rate to be paid on the ten-year bond to soar to 5%. As this was happening, the dollar price of gold was soaring. Then, somehow, the markets were partially stabilized as the interest rate on the bonds fell below 5%, though the stock market continued to see sell-offs punctuated by brief recoveries, while the dollar price of gold has continued to be above $3,000 an ounce, as the Trump administration retreated. Over the next few weeks, the markets have continued to calm down. But the danger of a sudden dollar death spiral remains real.
Significantly, the relative market stabilization occurred as Trump backed down on the tariffs issue. He announced a 90-day suspension — except for China. Did some government (rumors said it was Japan) dump Treasury notes or other securities on the market and buy gold with proceeds to get Trump to retreat? The one thing he seems to understand is the power of money. Someday we may know the details.
The U.S. Constitutional crisis
In 2022, the new Tory prime minister of Britain, right-winger Liz Truss, introduced a mini-budget bill to parliament featuring large tax cuts for the rich. She claimed it would cause a surge in the growth of the British economy.
Normally, capitalists applaud such policies. But Ms. Truss ignored something: the condition of the world money market. Her move occurred as the world money market tightened in response to the COVID aftermath boom and its associated overproduction. Throughout the world, capitalists were borrowing money to rebuild inventories depleted by the COVID shutdowns in competition with the British government, which would have had to borrow to make up for revenues that would be lost to Truss’s proposed tax cuts.
Bracing for the expected surge in government borrowing, the British government-bond market crashed. The Bank of England supported the bond market but informed the government it could not do this for long, as this would run down its foreign currency reserves and what was left of its gold reserves. This would send the British pound into free fall with all its consequences for inflation and interest rates. The Conservative Party got the message. Like Trump, the British Tories understand the power of money. Within weeks, both Truss and her mini-budget were gone. Could this happen in the United States?
The U.S. Constitution was copied from the 1780s-era British one. Then, the British monarch played a similar role to today’s U.S. president. There is no mechanism to quickly eliminate a U.S. president in a crisis in the way the Tories got rid of Ms. Truss. Republican Party leaders cannot meet and simply dump Trump. If Truss had refused to resign, Parliament’s Tories would have lined up with the Labor Party and passed a no-confidence vote, causing her government to fall. Truss decided to resign rather than face ouster.
Under the U.S. Constitution, there are only two ways Trump can be removed. One is by impeachment and conviction by a two-thirds vote in the Senate. This process takes time, as the protracted Watergate Crisis showed. In contrast, once they get going, financial crises can unfold with lightning speed, as Liz Truss found out to her sorrow. The only other way that Trump could be legally removed from office before the end of his term would be through the 25th Amendment, another time-consuming process.
This increases the chances that in the coming days, weeks, or months, an uncontrollable financial crisis could break out, perhaps triggered by some reckless action by Trump, that could sweep away the entire dollar system. Once the system is gone, it cannot be restored as the conditions that led to its rise in the first place no longer exist. Such a sudden end of the dollar system would lead to a global economic depression without parallel — and the end of the U.S. empire.
Such a crisis, especially for the U.S., would be worse than 1929-33. Back then, U.S. capitalism-imperialism and its empire were on the rise. The crisis was devastating, but within a few years, the economy recovered, and U.S. imperialism was more powerful than ever before. A collapse of the dollar system will mark the end of the U.S. empire. It means a fall in the working class standard of living, and it will not go away when the global industrial cycle turns back up.
I am not predicting such a collapse. Trump appears to understand the power of money in a way that Truss did not. But its bare possibility underlines the depth of the crisis brought on by the second Trump presidency that the capitalist ruling class is now facing. We must remember that Trump is himself only a symptom, not the cause, of the political and financial crisis now threatening the power and the existence of the U.S. empire. Whatever happens to Trump personally, the forces that led to the current crisis have been gathering for decades, and even if the financial markets stabilize for now, they will erupt again. It could be a sudden mega-collapse or a series of crises. I am only saying that a sudden mega-crisis that could rapidly wipe out the dollar system cannot be ruled out, especially if the U.S. continues such reckless actions as the Biden administration’s seizure of Russia’s reserves or Trump’s reckless tariff policies — or any similar actions of a future president. More on this in next month’s post.
(1) William McKinley (1843-1901), a Republican, introduced the McKinley Tariff when he was a Representative in Congress from Ohio, which raised tariffs to 50% in 1890. He became the 25th president on March 4, 1897, after he defeated “silver” Democrat William Jennings Bryan in 1896. In 1898, he presided over the first modern imperialist war, the Spanish-American War, and as a result, the U.S. seized Cuba, Puerto Rico, and the Philippines. McKinley was assassinated on September 14, 1901, and succeeded by his vice president, Theodore Roosevelt. McKinley was assassinated by Leon Czolgosz, a steelworker and anarchist, who killed him as a symbol of capitalist oppression, an “enemy of the good working people.” (back)
(2) The cost price of a commodity measures the cost of producing it for the capitalists. In contrast, the selling price, the price paid by the ultimate consumer, measures the cost of producing the commodity in money for society as a whole. (back)
(3) The doctrine that the market expands as production does is called “Say’s Law.” According to this law, commodities are purchased by other commodities so there can never be a general overproduction of commodities; only an overproduction of some commodities backed up by an underproduction of different commodities. (back)
(4) The Soviet Union achieved rapid industrialization without having to expand its internal market by running a massive export surplus because it didn’t need money to expand its home market due to its planned economy. The only kind of reindustrialization that Trump can imagine is a capitalist one that must follow the economic laws of the capitalist mode of production. (back)
A Critique of Crisis Theory 