Note
Since this was written, the U.S. presidential election has gone from worse to far worse due to Joseph Biden’s disastrous performance in the June 27 debate with Donald Trump. Though I am no expert on these matters, Biden seemed to show signs of dementia. Dementia is not at all unusual for a man of his age.
All types of dementia are progressive, which means they get steadily worse over time. It’s hard to see how Biden will be able to serve as president until January 20, 2029.
The Democrats are discussing whether they should dump Biden—which would seem to be a no–brainer—and how to do that. As things stand, there appears to be almost nothing between Donald Trump and the White House. The truth is that the U.S. political system is ill-designed to handle this type of situation. I will have more to say on this next month.
The ongoing U.S.-supported Israeli genocide in Gaza has created a massive headache for the Democratic Party, the two-party system of Democrats and Republicans, and President Genocide Joe Biden in particular.
Democrats depend on the votes of labor-union-conscious workers, the most exploited workers, members of oppressed nationalities — especially African Americans, Latinos, and Native peoples — as well as progressive intellectuals, members of religious minorities, young people, people who support the new role of women in society, rights for LGBTQ+ people, and young idealist students who ally themselves with the struggles of the oppressed.
The Republican party, like parties in other countries that are to the right of the bourgeois center, depends on white fears of “nonwhite” people, on those who oppose the new role of women in society, who have bigoted views toward LGBTQ+ people — reactionary intellectuals and students.
While much of the Republican base opposes or doubts the Israeli genocide in Gaza, the Democrat base — not the leadership—is appalled by the administration pouring tens of billions of dollars into and supplying the Zionist entity with 2,000-ton bombs as it continues the war. This is true of Arab Americans, Palestinian Americans in particular, as well as Muslim Americans. We add to this list many young Jewish Americans and some older ones who, in growing numbers, are seeing through Zionism and recognize that the real anti-Semitism menacing the future of American Jews must be fought by annihilating anti-Semitism’s twin, Zionism.
African Americans who have experienced centuries of slavery and national oppression identify with the people of Gaza, as do many Latinos and Native peoples. These are the people who hate everything Trump stands for but say: How can I vote for a president who makes possible the ongoing genocide?
The mass movement against genocide has forced the Biden administration to try to put some distance between themselves and the Zionist leaders. Biden periodically announces an imminent ceasefire. There’ve been a few reports of the administration delaying weapons supplies, but the killing continues. What does the two-party system offer as an alternative to Genocide Joe? The racist, law and order candidate, a now convicted felon, Donald Trump! Like Biden, Trump is a nominal Christian and a staunch Zionist.
The Democrats claim the 2024 election is the most important in history — nothing less than democracy itself is at stake. They say if Trump wins, there will never be another election; he will impose a fascist dictatorship on America. What is overlooked is that whether or not fascism comes won’t be decided at the ballot box, nor by the electoral contests between the two parties, but in the streets and shops as happened in Germany and Italy, in Spain on the battlefields, and other countries that succumbed to fascist dictatorships.
One thing is certain: If we depend on voting for the Democrats to stop fascism, when the time for fascism arrives, its victory is assured.
As I have explained in earlier posts, what I call the Party of Order (which includes leaders of both parties) is opposed to Trump for its own reasons. They view him as unwilling to listen to advisers surrounding all presidents, a man who doesn’t respect the rules of the game governing presidential politics. Instead of congratulating Biden after his 2020 election defeat, Trump claimed the election was stolen, and on January 6, 2021, launched a failed putsch in a last-ditch attempt to remain in power. After January 6, the Party of Order assumed Trump was a political has-been who would fade away.
When it became clear Trump had every intention of returning to the White House, the Party of Order tried to stop him in the Republican primaries, but every candidate they put up against him was crushed. That only left the criminal justice system.
Trump faces criminal charges in federal courts in a documents case involving his careless attitude toward state secrets and the January 6 events. He also faces charges in Georgia and New York state courts. The federal and Georgia cases have bogged down, but the one in New York state drew blood. On May 30, 2024, the former President and presumed Republican presidential nominee was convicted on 34 felony counts by a New York jury. He is scheduled to be sentenced on July 11.
Here we have several firsts: Trump is the first U.S. president to be convicted of a felony. As the top law enforcement official, it doesn’t create the best impression if the president, present or former, is himself a convicted felon, though no law says a felon can’t be president. As there are laws restricting felons’ voting rights, there’s been some discussion on whether he can vote for himself in the next election.
I’ll clarify: all members and supporters of the workers’ movement should oppose laws preventing anyone convicted of a felony from voting. Criminal justice is class-based and reflects the country’s history of African slavery and genocide against Native peoples. It’s more likely a working-class person will be convicted of a felony than a billionaire like Trump. It is more likely for a person descended from enslaved African-Аmericans or of survivors of the genocide of Native peoples to be convicted of a felony than white descendants of European colonizers.
Second, Trump is the first major party presidential candidate to be convicted of a felony. He won’t be the first convicted felon to run for president. Eugene Debs (1855-1926) ran on the socialist ticket in 1920 from a prison cell. The felonies he was convicted of stemmed from his opposition to the imperialist slaughter known as World War I. It’s not surprising that a leader of the oppressed class running for president would be considered a felon by the capitalist state. From our class’s point of view, Debs’ conviction is not a disgrace but a badge of honor.
In his statement to the judge who sentenced him to ten years in prison and lifetime disfranchisement, Debs explained, “Your Honor, years ago I recognized my kinship with all living beings, and I made up my mind that I was not one bit better than the meanest on earth. I said then, and I say now, that while there is a lower class, I am in it, and while there is a criminal element, I am of it, and while there is a soul in prison, I am not free.” (1)
It is inconceivable that Trump would make a remotely similar statement. In character, he is the opposite of Debs. In 1989, Trump launched a campaign against the Central Park 5. They were young African American men falsely accused of attacking and raping a white young woman jogger. They were convicted but later proved innocent.
When they were arrested, Trump issued this statement: “Mayor Koch has stated that hate and rancor should be removed from our hearts. I do not think so. I want to hate these muggers and murderers. They should be forced to suffer … Yes, Mayor Koch, I want to hate these murderers and I always will. … How can our great society tolerate the continued brutalization of its citizens by crazed misfits? Criminals must be told that their Civil Liberties End When an Attack On Our Safety Begins!” Trump launched a campaign for a return of the death penalty. (2)
It’s not only differences in character that separate Trump from Debs. The biggest is the class each represents: Trump is a member of and a political representative of the capitalist class. Debs was a leader of the oppressed class, the one forced to sell its labor power to the capitalist class to survive.
What felonies was Trump convicted of? He was convicted of falsifying business records. Under New York state law, this is usually a misdemeanor — a minor crime — punishable by not more than one year in jail or a fine. In practice, misdemeanor convictions involving members of the capitalist ruling class result in no jail time, with penalties easily within the means of the wealthy defendant.
Trump’s crimes stem from his affair with porn star Stormy Daniels, carried out while his wife Melania was pregnant with his child. From the moral point of view, this seems shabby, but it’s legally a personal matter, not a concern of the criminal justice system.
Trump’s charges were for falsifying business records to hide the affair, which is normally a misdemeanor. However, he was running for president at the time, which broke campaign finance laws, affecting the outcome of the 2016 election. He lost the popular vote by about two million votes to Democrat Hillary Clinton but won in the electoral college. This is U.S. democracy in action.
The legal theory of the prosecution is that Trump falsified business records to cover up other crimes, inflating his misdemeanors to the level of felonies. One problem? Trump hasn’t been convicted of any of the underlying crimes. His lawyers announced an immediate appeal.
For a typical defendant, appealing a criminal conviction is a long shot. It’s a basic legal principle that a defendant is considered innocent until convicted, but this does not prevent the majority of criminal defendants from being convicted. On a personal note, I had to go to court on a jury duty summons a few years ago. When the judge explained the presumption of innocence doctrine to the prospective jurors, half had never heard of it — so much for the educational system.
Once a defendant is convicted of a crime, whether misdemeanor or felony, the defendant is considered guilty before the law. The chances of a working-class person getting a conviction overturned on appeal are remote. However, wealthy defendants often find technical errors that cause their convictions to be tossed out. The possibility of technical errors plus the shaky legal theory by which his crimes were raised to felonies, causing his appeal to be granted, is good. Until that happens, he will remain a convicted felon.
Judge Juan Merchan is scheduled to sentence him for his New York felonies on July 11. Four days later, the Republican convention is expected to nominate him as their presidential candidate.
Now, we come to the second and third firsts. Judge Merchan will have two unprecedented tasks: sentencing a former president and sentencing the presumptive Republican presidential candidate. Trump attacked Judge Juan Merchan as a crooked judge, a tactic not generally recommended by lawyers for clients convicted of crimes, especially felonies, and facing sentencing by the same judge. Judge Merchan could send him to prison or house arrest immediately. Either would prevent Trump from traveling around the country to campaign in the usual way.
In addition, Trump faces three other cases, one in Georgia and two in the federal system. The federal ones involve the so-called documents case—his insistence on holding on to top-secret documents, including plans to wage war against Iran; the other involves the events of January 6, 2021.
Prosecutor Fani Willis’s hiring a former boyfriend to help with the Georgia case has compromised it. The federal documents case is partly bogged down because Judge Aileen Cannon, a Trump appointee, is doing everything possible to slow the proceedings. Neither the two federal cases nor the Georgia case is expected to be tried before the November 2024 elections.
If Trump carries the electoral college and returns to the White House on January 20, 2025, his administration would be expected to drop the two federal cases. In Georgia, the post-Jim Crow Republican Party retains a political stranglehold on much of the state. In the event of a Trump victory — or a loss — the Georgia Republican Party will likely find a way to drop the case or pardon him. (3)
That leaves the New York case. If it is not thrown out in the state appellate or the Supreme courts, the state will certainly not imprison the duly elected president. Any action against Trump will be postponed until he leaves office.
The only question about the outcome of the election is whether or not his legal status as a felon will convince enough conservative voters who would otherwise vote for Trump to vote for Biden, a third party, or sit out the election, allowing Democrat Genocide Joe to carry the electoral college. Polls since his conviction show some shift to Biden, but Trump is ahead in most swing states by reduced margins.
The Republicans have good news of their own from the criminal justice system. On June 11, in a federal criminal case, Biden’s son Hunter joined Trump in the ranks of convicted felons. The charge against Hunter Biden involved his lying about his illegal drug use when he applied for a permit to own a gun. Hunter’s dad, the president, said he would not use his pardon power for Hunter but left the door open to commutation of any prison sentence his son might receive.
Unlike Trump, Joseph Biden is not a convicted criminal in the criminal justice system, though the world considers him guilty of genocide and crimes against humanity.
This is a matter of greater gravity than Trump’s falsifying business records or, for that matter, his son Hunter’s convictions. However, the criminal justice system does not consider genocide against the Palestinian people a crime. The genocide is being carried out to advance the interests of imperialism, not Biden’s personal interests. Under criminal law, a person is not considered guilty for the crimes of their offspring, though it doesn’t look good that the president’s son is a convicted felon facing possible prison time.
I think it can be safely said that never in the history of the two-party system has a worse choice been offered to the American people. One candidate, Democrat Biden, is dripping in the blood of tens of thousands of Palestinians, the majority women and children. The Republican alternative, the law and order candidate and convicted felon, is the racist demagogue and putsch-prone Trump.
So far, this amounts to quantitative, not qualitative, change in the political system. It’s always been corrupt and drifting toward Bonapartism for a long time. At a certain point, quantity changes into quality. When that happens, the two-party system will be torn asunder.
The U.S. economy between stagflation and recession
The economy is threatening to go into stagflation or recession. Recession follows stagflation. The question is not whether but when a recession will come. Stagflation isn’t inevitable; it depends on the Federal Reserve. Its chances are increased by the Party of Order’s desire to prevent Trump’s return to the White House. It is difficult enough to reelect Biden even without a recession. But if mass layoffs come before then, Biden’s reelection will be impossible.
To raise the stakes further, some of Trump’s aides propose putting the Federal Reserve under direct White House control. (4) In effect, this would make Trump the head of the Federal Reserve. This would be a major threat to the dollar when many nations are already building up their gold reserves — as opposed to dollar or euro reserves — as they try to become less dollar-dependent. Under Jerome Powell’s chairmanship, the Fed is dominated by Republicans who likely share the view of the Party of Order that Trump is unfit for the presidency.
Assuming this, they’ll be tempted to spice up the economy ahead of November 5. The last Fed chief to do this was Arthur Burns in 1972. Then, the capitalist ruling class opposed Democratic presidential candidate George McGovern, who was viewed as too far to the left. In reality, he was no threat to capitalism, though you don’t have to be very left to earn the opposition of the capitalists. Instead, the capitalist class majority and Burns personally were determined to reelect Richard Nixon to a second term. Burns delivered the boom, but the long-term results weren’t pretty, as shown below. Even if successful, would the results of a similar operation today be any prettier?
The economic crisis of 1973-75
If you understand the 1973-75 economic crisis, you’ll understand all the cyclical crises that have hit the global capitalist economy since 1825. But if you don’t understand the crisis of 1973-1975, you understand none of them. With the end of the gold exchange standard in August 1971, economists believed they’d entered a new era.
They believed that as money would no longer be a commodity, the monetary authorities could create any amount of money they wanted without worrying about defending the gold hoard that backs the currency.
Keynes and his followers, who’d dominated economics since the end of World War II, shared this view with Milton Friedman and his supporters, who challenged them from the right in the 1970s. This dominance ended with the Volcker shock of 1979-82, forming perhaps the biggest political and economic turning point between the end of World War II and today.
Industrial cycle and the dollar standard
From August 1971 until June 2024, the international monetary system was dominated by the dollar, which had been the central international currency since the end of World War I. Between the end of WWI and August 1971, the dollar was convertible into gold at a fixed rate, though its nature changed.
Between the end of WWI and March 1933, the U.S. maintained a gold coin standard. This reflected the fact that the lion’s share of the world’s monetary gold was in the U.S.
Under the standard, dollars were redeemed for full-weight dollar gold coins. The gold dollar was defined as 1/20.67 of an ounce of gold. With the current dollar price of gold fluctuating around $2,000, in terms of actual money material, the pre-1933 penny is about equal to today’s dollar.
Between 1933 and 1934, Roosevelt devalued the dollar by almost 40%. One of his reasons was that the British pound was devalued by a similar amount after the 1931 global banking crisis.
In addition, the Democratic party’s base included indebted small business people and farmers, who then represented a greater portion of the total working population than today. These people knew that if the dollar were devalued, their debts in gold terms would shrink. They didn’t realize their costs in devalued dollars would rise, forcing them to borrow more.
The fundamental factor forcing policy changes was the Great Depression itself. Its first phase, the super-crisis of 1929-33, dramatically lowered world agricultural prices. Low prices drove small farmers and non-agricultural businesses into bankruptcy.
Countless other businesses were on edge and wanted higher dollar prices to ease their debt burden. In March 1933, Roosevelt suspended the convertibility of the dollar, suspended the coining of gold, and forced coin owners to exchange them for paper dollars at the old gold price of $20.67. In addition, a law was pushed through Congress, making it illegal for citizens to own monetary gold. The law also made it illegal for citizens to own gold certificates. (5)
Gold certificates were a type of dollar bill issued by the Treasury — not the Federal Reserve, which began operations in 1914 — in exchange for gold deposited in the Treasury. For example, a $100 gold certificate stated that a hundred dollars worth of gold was deposited at the Treasury and was payable in gold to the bearer on demand at the Treasury. Federal Reserve Notes, in contrast, merely said they were payable in “legal money.” (6)
The Roosevelt administration feared the Supreme Court might hold the government in breach of contract if gold certificates continued to circulate.
The certificates, printed with the phrase “payable in gold,” had to be handed in like gold in exchange for other types of dollar bills, such as Federal Reserve Notes or silver certificates, which were payable in silver. In the 1960s, the U.S. Treasury stopped redeeming silver certificates in silver, and their further issuance was discounted. Not only private citizens but also the twelve federal reserve banks that make up the Federal Reserve and the central bank were required to turn in their gold.
In exchange, the Federal Reserve got the last gold certificates ever issued by the Treasury. These gold certificates are, to this day, gathering dust in their vaults. The right to buy and sell gold on international markets was transferred from the Federal Reserve to the Treasury. (7)
Unlike the Federal Reserve—legally a creature of Congress—the Treasury is an organ of the executive branch of the government, under the control of the White House. Roosevelt’s reforms put all world money—monetary gold—under White House control, which in the 1930s meant Roosevelt himself. This monetary reform increased presidential power relative to Congress and the Federal Reserve.
Though the dollar devaluation worked against Britain’s trade interests, Keynes hailed the monetary reforms because he hoped this would be the start of a global system of non-commodity money. Much to Keynes’ chagrin, Roosevelt’s reforms fell short as they continued to define the dollar in gold terms. Its new definition was 1/35 an ounce rather than 1/20.67. The Treasury purchased gold sold to it by foreigners at $35 an ounce and was exchanging dollars owned by foreign central banks for gold at the same exchange rate. (8)
This became the central pillar of the Bretton Woods System, negotiated in New Hampshire in 1944, which dominated the international monetary system after World War II. It established a worldwide system of fixed exchange rates centered on an ounce of gold for $35.
There was no mechanism under Bretton Woods to change the central rate at which the Treasury exchanged dollars for gold at the demand of foreign central banks. Instead of holding gold directly, foreign central banks had an incentive to hold dollars or short-term Treasury notes. Short-term treasuries had the advantage in that they pay interest. As long as the chance that the Treasury could renege on its promise to exchange the dollar at $35 per ounce fixed exchange rate was remote, it was more profitable for central banks to hold dollar-denominated Treasury bills. This is known as a gold-exchange standard. (9) It collapsed in August 1971.
Unlike the classic gold standard where central banks of capitalist countries used gold directly to back their currency, the gold exchange standard had the advantage of the centralization of the global gold hoard. A greater quantity of currency could be created by central banks based on a given quantity of gold. The dollar was backed by Treasury’s gold hoard.
Other countries could use interest-bearing dollar-denominated Treasury notes to back their currencies while retaining some gold reserves. (10) More foreign currency could be created on the basis of U.S. dollars held by foreign central banks. The centralization of the gold supply, in turn, made possible the creation of a greater quantity of commercial bank-created credit money throughout the capitalist world. This meant that more commercial bank-created money and credit could be issued based on a given quantity of gold.
Ultimately, the quantity of gold available at any time, at a given price level, limits the total amount of currency, credit money and credit, and effective monetary demand. The gold supply, therefore, is still limited in the size of the world market. This was not a problem as long as there was a gold surplus, which showed that there were still pools of idle money capital left over from the Great Depression.
As the post-war boom continued, this idle money was drawn into circulation. If gold could be replaced by some type of world non-commodity money created by the Federal Reserve or more democratically by some international monetary authority such as the International Monetary Fund, there would be no limit on the monetarily effective demand that could be created. This meant that in the future, the ability of the market to absorb commodities at profitable prices would no longer limit capitalist production.
It was believed that once non-commodity money was created, the only limits on capitalist production would be the supply of raw and auxiliary materials, the development of the means of production, and the total number of workers who produce surplus value. If the monetary authority working with the commercial banks created more demand than there were commodities produced, inflation would result. In that case, the central bank would have to dial back demand to match the physical ability to increase production. From the 1930s on, all the Keynesian economists, including Keynesian Marxists who mix Keynes with Marx, assumed that money would be able to be created by a monetary authority rather than for-profit gold miners and refiners.
Contrary to Keynes’ hopes, the international monetary system was still centered on gold until August 1971. Gold production was in the hands of miners and refiners. That changed in August 1971.
The main global currency, the dollar, was now what Marx called paper or token money, not credit money convertible into gold at a fixed rate of exchange. At first, this was blurred somewhat as the Nixon administration’s official position was that suspension of the dollar’s convertibility into gold at a fixed rate was temporary, pending a new agreement on fixed exchange rates that would strengthen the U.S. position against allegedly unfair competition coming from West Germany, other European countries, and Japan.
During crises that occurred before the war of the slaveholders’ rebellion — the Civil War — banks would sometimes temporarily suspend payment on banknotes and deposits in gold or silver coins called specie payments. Gold and silver payments on banknotes and deposits would be resumed as soon as the panic was passed.
The official Treasury position was that gold payments would resume as soon as a new schedule of fixed exchange rates was agreed to. It became clear that the suspension of gold payments was not temporary like a 19th suspension of specie payments or even the more lasting suspension of gold convertibility of the Bank of England’s notes under the 1797 Bank Restriction Act. This law suspended the convertibility of Bank of England banknotes between 1797 and 1821. The closing of the Treasury gold window was to be permanent and designed to end the role of gold in the internal monetary system.
Cyclical crises are preceded by periods of tight money and high interest rates, indicating a shortage of loan money capital. As long as the central bank is forced to maintain gold convertibility at a fixed rate of at least the central global currency — the dollar since the end of World War I — a shortage of gold leads to a shortage of currency and eventually a contraction of global credit and effective monetary demand. The global gold shortage that plagued world capitalism after World War I ended with the Great Depression.
If non-commodity money could be established, Keynes argued, the central bank would acquire the power to see to it that there was an adequate quantity of the means of circulation needed to match the growth in the number of commodities produced by the world capitalist industry. At bottom, all Keynes’ amendments to neoclassical theory boil down to this.
The world economic crisis of 1973-75
The attempt to build an international monetary system around non-commodity money makes the economic crisis of 1973-75 of special interest to students of crisis theory. This is the crisis that would not have occurred if non-commodity money were possible under a capitalist system. The crisis of 1973-75 showed in practice, not only in theory, that non-commodity money is not possible under capitalism. It’s important to examine what happened in the course of this crisis.
The crisis was preceded and accompanied by a huge decline in the value of the central capitalist currency, the dollar, against gold. Between 1970 and 1974, the dollar price of gold rose from $35 in 1970 to a peak of $195 in December 1974.
If gold had ceased to be money, this would have had little overall effect because its role as an industrial raw material is limited. But if it retained its monetary role, and the dollar represents gold in circulation, such a drastic depreciation of the dollar would cause a surge in dollar prices. This is exactly what happened.
The Federal Reserve wasn’t creating dollars at the same rate they were depreciating against gold on the open market. Capitalists tried to increase dollar prices to match the growing depreciation against gold, but dollars weren’t being created fast enough to enable them to do this.
The golden prices of commodities dropped between 1970 and 1975. Capitalists increased dollar prices as much as the Federal Reserve allowed them. The consequence was that the remaining stagnant dollar hoards in the banking system were forced into circulation.
As dollar prices rose, businesses had to borrow more from the banking system to meet their rising dollar cost prices. The velocity of circulation of the dollar and other dollar-backed currencies rose. Though growing in absolute terms, bank reserves shrunk relative to the quantity of credit money. The liquidity of the banking system and the economy declined, and interest rates rose as a consequence.
The Federal Reserve faced a dilemma. Keynesian theory indicated that the Fed should fight the rise in interest rates because keeping them down was crucial to avoid a recession. Since August 1971, the Federal Reserve no longer had to worry about defending the gold reserves, which is what Keynes desired.
But the Fed faced inflation. Gold demand would spike if they followed Keynes’s advice and kept creating dollars to drive down interest rates. Rising gold demand showed that despite what the economists and the financial press claimed to the contrary, gold was not being demonetized.
Between 1970 and 1974, the Fed did not create enough dollars to justify the rise in the dollar price of gold from $35 to $195 — an increase more than five times over four years. The dollar prices of commodities couldn’t rise near this rate between 1970 and 1975 because there weren’t enough dollars to support them.
Prices rose more slowly, forcing interest rates up. A growing number of capitalists feared that in a last-ditch attempt to prevent a recession, the Federal Reserve would create dollars after the fact to support the dollar’s depreciation, which would have driven gold demand up even higher.
This would have resulted in a greater acceleration of inflation. The Fed would have found itself chasing the rising dollar price level. This is the road to hyperinflation and currency collapse.
Keynesian economists and progressives — but not the supporters of Milton Friedman — urged the Federal Reserve to ignore the rise in the dollar price of gold and the lesser rise in other commodity prices and create the number of dollars necessary to prevent interest rates from rising any further, arguing that only such a policy could prevent a recession.
Keynesians and their supporters justified this policy by claiming the OPEC oil cartel caused the inflationary surge. Despite evidence to the contrary, Keynesians, progressives, and most academic Marxists cling to this day to the belief that the demonetization of gold succeeded. A close examination of the 1973-75 economic crisis shows it was a failure.
Ignoring the gold market, Keynesians argued that the Federal Reserve could safely lower interest rates and prevent a recession. They thought inflation would fade away as soon as the price of oil fell. All that was required was for the upstart Arabs to be crushed and money wages stabilized. The labor unions also had to be held in check to achieve this.
Despite the arguments, as the dollar price of gold kept soaring and dollar inflation continued to accelerate, the Fed began to lose its nerve. Its leaders are practical people, after all. (11)
Fearing inflation was getting out of control, the Burns Fed pragmatically concluded that there was less long-term danger to the capitalist system of allowing interest rates to rise, even if it meant a recession with high unemployment than allowing inflation to continue to grow toward hyperinflation. The Federal Reserve policy successfully prevented hyperinflation at the cost of deep recession that arrived by the fourth quarter of 1974.
The “metal barrier” Marx described in Capital Volume 3 Chapter 34, “The Currency Principle and the English Bank Legislation of 1844,” had not been overcome by abandoning the gold exchange standard; after all, it had merely changed its form. By the middle of 1974, double-digit federal funds rates and the growing demand for dollars as a means of payment began to check any further rise in the dollar price of gold.
By early 1975, under conditions of a growing dollar famine and the consequent rising demand for them, interest rates could fall without increasing gold demand. The danger of hyperinflation and complete dollar collapse was avoided for the time being.
The fact that gold demand was declining indicated that the overproduction crisis was being resolved the only way it could be under capitalism. Periods of overproduction must be followed by periods of underproduction — recession.
The dollar famine triggered a decline in production and employment throughout the capitalist world, which was needed to stabilize capitalism economically. The basic underlying problem — the overproduction of non-money commodities relative to the money commodity gold — was being resolved by a global fall in capitalist production and employment.
The overproduction crisis of 1973-75 signaled to global capitalist society that it should produce more of its wealth in real money form — gold — and less in non-money commodities.
This process involves two elements. One is a reduction in the production of non-money commodities, which means declining industrial production, employment, and domestic and global trade. The second aspect involves increased production of the money commodity gold.
During the 1930s Great Depression, when the production of non-money commodities constituting the bulk of the world’s wealth was restricted, capitalist society produced more than enough wealth in gold form.
Due to a fall in commodity prices, the gold mining and refining industries were one of the few that were profitable. While the production of non-money commodities was curtailed, the production of gold, the money commodity, increased. As a result, interest rates fell, and hoards of money accumulated, making the banking system and the economy as a whole extremely liquid. (12)
Since the end of the Great Depression and the world war that followed, capitalist society produced too much wealth in non-money commodities and not enough of the money commodity. By the end of 1974, this was being resolved, with mass unemployment throughout the capitalist world.
The metal barrier that was not eliminated
In Volume III of Capital, Marx explained the need for the Bank of England to raise its discount rate periodically to defend its gold reserve, indicating that capitalism faced what he called “a metal barrier.” The Bank periodically raised its discount rate to such an extent that vast amounts of wealth were destroyed, and the workers who produced it were thrown out of work, all for the sake of saving the Bank’s gold reserve.
Even in the 19th century, the Bank of England’s decision to raise its discount rate, which induced a recession and mass unemployment, seemed irrational, but Marx argued that it was a necessary feature of capitalist society. The only way to get rid of it was to transform the capitalist system into a communist system of production.
Marx writes, “The central bank is the pivot of the credit system. And the metal reserve, in turn, is the pivot of the bank. The changeover from the credit system to the monetary system is necessary, as I have already shown in Vol. I (Ch. III) in discussing means of payment. That the greatest sacrifices of real wealth are necessary to maintain the metallic basis in a critical moment has been admitted by both Tooke [the leader of the banking school -SW] and Loyd-Overstone [the leader of the currency school -SW]. The controversy revolves merely round a plus or a minus, and round the more or less rational treatment of the inevitable. A certain quantity of metal, insignificant compared with the total production, is admitted to be the pivotal point of the system. Hence, the superb theoretical dualism, aside from the appalling manifestation of this characteristic that it possesses as the pivotal point during crises. So long as an enlightened economy treats “of capital” ex professo, it looks down upon gold and silver with the greatest disdain, considering them as the most indifferent and useless form of capital. But as soon as it treats of the banking system, everything is reversed, and gold and silver become capital par excellence, for whose preservation every other form of capital and labor is to be sacrificed. But how are gold and silver distinguished from other forms of wealth? Not by the magnitude of their value, for this is determined by the quantity of labor incorporated in them; but by the fact that they represent independent incarnations, expressions of the social character of wealth. [The wealth of society exists only as the wealth of private individuals, who are its private owners. It preserves its social character only in that these individuals mutually exchange qualitatively different use-values for the satisfaction of their wants. Under capitalist production they can do so only by means of money. The wealth of the individual is realized as social wealth only through the medium of money. It is in money, in this thing, that the social nature of this wealth is incarnated. –F.E. [Frederick Engels, who edited Volume III of Capital for publication –SW] This social existence of wealth assumes the aspect of a world beyond, of a thing, matter, commodity, alongside of and external to the real elements of social wealth. So long as production is in a state of flux, this is forgotten. Credit, a social form of wealth, crowds out money and usurps its place. Faith in the social character of production allows the money form of products to assume the aspect of something that is only evanescent and ideal, something merely imaginative. But as soon as credit is shaken— and this phase of necessity always appears in the modern industrial cycle—all the real wealth is to be and suddenly transformed into money, into gold and silver—a mad demand, which, however, grows necessarily out of the system itself. And all the gold and silver which is supposed to satisfy these enormous demands amounts to but a few million in the vaults of the Bank [the Bank of England, Britain’s central bank –SW]
“Among the effects of the gold drain, then, the fact that production as social production is not really subject to social control, is strikingly emphasised by the existence of the social form of wealth as a thing external to it. The capitalist system of production, in fact, has this feature in common with former systems of production, in so far as they are based on trade in commodities and private exchange. But only in the capitalist system of production does this become apparent in the most striking and grotesque form of absurd contradiction and paradox, because, in the first place, production for direct use-value, for consumption by the producers themselves, is most completely eliminated under the capitalist system, so that wealth exists only as a social process expressed as the intertwining of production and circulation; and secondly, with the development of the credit system, capitalist production continually strives to overcome the metal barrier, which is simultaneously a material and imaginative barrier of wealth and its movement, but again and again it breaks its back on this barrier.”
Keynes versus Marx on the metal barrier
The important thing that was demonstrated in real life in the mid-1970s crisis was that the abandonment of the Bretton Woods gold exchange standard failed to eliminate the metal barrier but just changed its form.
Keynes was also aware of the dangers of this barrier. He saw it as a technical problem to be eliminated by technical reform — getting rid of gold’s role in the national and world monetary system. In contrast, Marx saw the metal barrier as an indication of an approaching political and social revolution.
Keynes knew that the metal barrier was not only significant in short-lived acute crises like those of 1973-75. Just as important were the aftermath of the crisis, with long periods of high unemployment and idle machinery. This post-crisis stagnation kept gold production high, creating a stagnant monetary hoard in the banking system.
This hoard finances the next boom at the risk of prolonged unemployment, which undermines support for capitalism — a central concern for Keynes. It also meant that different capitalist nations faced insufficient outlets for their industries’ production, tempting them to seize markets from their competitors through military force.
Industry of one capitalist nation solves its market problems at the expense of its rivals. Keynes believed non-commodity money would ensure global full employment as well as hold market competition in check. There would be enough markets for all, ending commercial wars. It all hinged on non-commodity money existing under the capitalist system.
As we examine the concrete course of the economic crisis of 1973-75, we see Marx was correct, not Keynes. It’s true that after August 1971, the Federal Reserve no longer had to worry about defending the Treasury’s gold reserve, as it was no longer paying out in gold in exchange for dollars. But gold demand soared on the open market, leading to a sharp depreciation of the dollar over a short time.
The Fed had to rescue what was left of the dollar’s gold value even though it meant destroying real wealth and throwing millions of workers out of their jobs, the ones who produced this wealth. The metal barrier changed its form, not its essence. Within about three years after the gold exchange standard ended, capitalist production again broke its back on the metal barrier.
The crisis of 1973-75 and the production of gold
The solution to capitalist overproduction involves a temporary reduction in the quantity of produced commodities as well as an increase in gold production.
Increased gold production — whether there is a gold standard, a gold-exchange standard, or inconvertible into gold legal tender paper money—makes possible an expansion of the world market. Under the gold standard, crises came with price declines, expressed in pounds sterling or dollars.
These currencies were defined as fixed specific weights of gold. When prices fell in currencies, they also fell in gold. After 1971, this was no longer true. If commodity prices rise in dollars but less than gold’s dollar price, the prices of (non-money) commodities fall in terms of the use value of gold.
Falling commodity prices in gold terms reduce non-money commodity production and, at the same time, increase gold production. To understand this, we have to understand how the movement of prices affects the profit rate in gold mining and refining and in other branches of production.
Let’s return to the gold standard world. We will see that transforming the system of a fixed exchange rate of currency against gold to a floating one changes little, only adding elements of instability. Under the classic gold standard, miners and refiners sell the gold produced to the central banks in exchange for the currency of the banks issued at a fixed rate of exchange.
When prices fall, as during crises, the currency price of the money commodity — gold — remains unchanged. During the crisis, the capitalists producing gold found their costs falling — labor power, mining and refining machinery, etc. Profit is the difference between the cost price and the selling price, so the more the prices of other commodities fall, the higher the gold producers’ profits will be, reckoned in terms of central bank issued currency as well as gold’s use value.
Unlike other commodity producers, gold producers have no trouble selling their product, as the central bank will buy all the gold offered in exchange for bank-created currencies. The more they buy with their currencies, the higher the ratio of their gold reserves — the asset side of their balance sheets — to the liabilities side of their balance sheets. This makes their currency more solid.
Their increasingly solid position enables them to create more currency without risking a run on their gold reserves. A portion of the currency created forms reserves in commercial banks, allowing them to make more loans, creating credit money. Increased credit money expands credit in general, as well as the market.
Let’s examine the converse case. We’ll assume a general rise in commodity prices. Gold producers experience rising costs, their sale prices are frozen, and their profit rate falls.
In a capitalist economy, capital flows from production sectors with lower profit rates to those with higher. During an economic boom, most commodity prices rise, and the profit rate declines absolutely and relatively in the money commodity-producing industry. In boom times, capital flows out of the gold industry, lagging behind the growth of commodity production in general.
The quantity of commodities is measured in terms of their price tags — or quantities of gold. It is not an accident but an economic law that as a capitalist economy expands, the quantity of gold lags behind the rise in the quantity of non-market commodities. This process is the essence of capitalist overproduction.
During an economic boom, the quantity of commodities measured in terms of their various use values rise, as do their prices in terms of the use value of the money commodity. The growth rate of the use value of the money commodity slows as the boom drives up the general price level. The rise in the quantity of commodities measured in their use values and the quantity of commodities measured in the sum of their price tags increases, and with it, the need for additional currency to circulate the rising quantity of commodities. Crucially, the profit motive means that less and less additional money material is produced as the need for more money as a means of circulation grows and leads to an overproduction crisis.
As long as there are sufficient reserves of stagnant money, the widening gap between the growing quantity of commodities measured in their price tags and the slowing production of new money material is filled by mobilizing the remaining hoards of stagnant money.
The velocity of circulation rises, and when this is insufficient, sales on credit replace sales for cash. Or, as Marx said, a credit system replaces the monetary system.
This cannot continue indefinitely. As the stagnant money is drawn into active circulation, the money market tightens, causing a rise in interest rates.
The quantity of credit depends on the quantity of money. Credit can replace money as a means of purchase, but money must be used to pay off the resulting debts. The more sales on credit expand, the more money’s role as a means of payment instead of a means of purchase comes to the fore.
The more money is used to settle debts, the less money is available to purchase commodities. As credit contracts, commodities pile up in warehouses, and commodity orders are cut as inventory accumulation gives way to inventory liquidation, causing production and employment to decline. Initially, it appears to be a credit crisis. As the market contracts, the crisis is revealed to be a commodity overproduction crisis.
During a crisis or post-crisis stagnation, the opposite occurs. Low commodity prices mean those producing the money commodity have lower costs while the currency price to the central banks remains unchanged. The profit rate for capitalists producing the money commodity rises above the profit rate of other branches of production. During a severe crisis, the money commodity-producing industry is often among the few that are profitable at all.
This means the growth rate of money commodity production accelerates as other commodity production falls. As the need for circulating money declines, the amount of money material rises, piling up in the banks instead of circulating. Some of it falls out of circulation as more is produced. The money market relaxes, and interest rates fall. Tight money — the symptom of overproduction — gives way to easy money, the symptom of underproduction.
Crises of overproduction are not accidental. As production is unplanned, there’s no way to control the amount of money material production needed to meet circulation demands. If production were planned, there’d be no need for money material at all. The laws regulating it work through the anarchy of capitalist production.
These laws dictate that during periods of rapid expansion of capitalist production, the quantity of additional money material will be produced in increasingly inadequate quantities.
As the economy expands, it’s forced to rely on extra money produced during the preceding crisis and post-crisis stagnation to create the increased circulation needs required by more commodities. When this supply is fully utilized, the creation of additional means of circulation is exhausted. The amount of currency falls below the socially necessary amount, and the crisis begins.
This is why Keynes was so determined to get rid of commodity money. As long as prices and profits are measured in terms of the use value of a money commodity, there’s no way out of this vicious cycle.
Booms herald an approaching crisis. If only the money quantity could be planned, the monetary authority could ensure that it grows at the necessary rate to meet the rising needs of circulation.
Keynesian theory advocates that the monetary authority targets not the quantity of money but the interest rates. For this to work, it is necessary to replace the commodity in whose use value the value of all other commodities — and profits — is measured by non-commodity money. Marx showed that this is impossible under a capitalist economy.
If the exchange rate between the central bank-created currency and the money commodity is a floating rate rather than a fixed rate, which is perfectly possible in a capitalist economy, nothing fundamental will change.
Marx showed in great detail in the first three chapters of Volume I of “Capital” and elsewhere that the value of one commodity is measured in the use value of another.
With the development of commodity exchange, a special commodity emerges that uses its own use value to measure the value of all other commodities. If we have mastered the first three and most difficult chapters of “Capital,” we realize there is no way a non-commodity can replace commodity money.
A necessary consequence of commodity money serving as the universal measure of value is that profit, the economic category that serves as the only motive of production in a developed capitalist commodity economy — where labor power itself becomes a commodity — must be measured in the use value of the money economy. There is no way that pure fiat money independent of a particular money commodity can perform this role. This is an objective economic law.
Well, that’s the theory. Let’s see how it was proved in practice during the crisis of 1973-75.
As the dollar price of gold rose from $65 per ounce in early 1973 to over $195 at the end of 1974, it became more “profitable” to hoard gold rather than carry out almost any kind of capitalist production, except mining and refining gold itself.
Production of most commodities was still profitable when calculated in non-money commodity terms. However, profits are not measured in non-money commodities but only the use value of the money commodity.
During 1973 and 1974, though profits remained positive in dollar and in real terms, they were negative in terms of the use value of gold, the money commodity. To the practical capitalist, the most profitable activity was to buy gold, sit back, and watch its dollar price — and purchasing power — rise.
As capital flows from fields of lower to higher profits when hoarding gold is the most “profitable investment,” the demand for gold grows at an explosive rate. It doesn’t matter whether the capitalists realize they are protecting but not expanding the value of their capital (the correct way to view it) or imagine they’re making fantastic profits by buying and hoarding gold.
During 1973-74, the profit rate of the gold-producing industry rose, encouraging capital to flow in. However, the fact that other industries were still profitable in dollar terms held back this process somewhat.
As inflation accelerated, commodities were bought before their prices rose even more. As prices rose, more dollars were needed to circulate commodities, drawing down remaining hoards of surplus dollars that backed bank-created credit money. This caused interest rates to rise even more.
For example, the federal funds rate increased from 3.38% in January 1972 to 12.60% in July 1974. Keynesian theory encourages the central bank to target interest rates; that is, the Federal Reserve should have increased the rate at which it created dollars to drive down the interest rates to avoid recession. The Federal Reserve realized that if they did this, they would fall into an inflation trap. They would have to create dollars at an ever faster rate to prevent interest rates from rising higher. If the Fed hadn’t escaped the developing inflation trap, the dollar as the central global currency would have collapsed.
As the Fed didn’t want to be responsible for the dollar’s collapse and the resulting hyperinflation, it had no alternative but to forget Keynes and allow interest rates to soar. Rising interest rates meant the dollar was growing scarce relative to the need for it to circulate commodities at rising dollar prices because its growth rate lagged behind the rising dollar price of commodities.
The demand for the dollar as a means of payment began to increase and once gained, it began to accumulate in the banking system. The reversal of the rise in interest was possible because the rise in the dollar price of gold was finally halted. The threat of hyperinflation was over for the time being, at the cost of a worldwide recession that sent official unemployment up to 9%. Once again, capitalist production broke its back on the metal barrier.
After the crisis of 1973-75
The onset of recession meant a decline in capital’s turnover rate. Dollar profits fell in most sectors while the boom in the dollar price of gold was over. The dollar gold price closed out the year at nearly $145 an ounce, still well above the $35 it was less than four years earlier. When commodity prices are calculated in gold terms as opposed to sharply depreciated dollars, commodity prices were far lower than they had been before the 1973-75 crisis.
There was an upside for the world capitalist economy. With the collapse of dollar profits in industries other than gold mining and refining, capital began to flow into the gold bullion-producing industries, where profits were higher.
The gold-producing industry had a higher rate of profit absolutely and relative to other branches of production than before the crisis. In gold terms, the costs of mining and refining declined, meaning that for every ounce of gold invested in its production, more was produced than before the crisis. In dollar terms, the rise in the dollar price of gold rose more than the rise in the cost of its production.
Once the dust began to settle in 1975, the dollar profit rate in the gold industry was absolutely and relatively higher than before the crisis. The decline in world gold production that had occurred since 1970 was halted, but that is all it did.
The growth rate of gold production was declining at a slower rate. Stabilizing gold production was not enough to form the basis of a solid recovery. To do so, gold production had to rise substantially, which necessitated another crisis.
For the time being, money markets relaxed, and interest rates fell. From the spring of 1975 on, the world economy began to recover as capitalist industry moved to rebuild inventory. As there was little upswing in global gold production, the recovery was on shaky grounds. Soon enough, as we will see next month, it began to show signs of aborting.
To be continued
(1) Debs was pardoned by Republican President Warren Harding in 1921. (back)
(2) This refers to New York Mayor Edward Koch (1924-2013). From 1978 to 1989, Koch served as mayor of New York and earned a reputation as a racist. His racism fell well short of the level that Trump demanded. (back)
(3) In Georgia, it is not the governor who issues pardons; it is a special pardon board. (back)
(4) If this were to happen, in addition to putting the dollar and dollar-dominated international monetary system in peril, it would be a major step in the direction of Bonapartism. (back)
(5) In a still obscure episode in history, it seems that in reaction to Roosevelt’s monetary reforms, a group of powerful capitalists attempted to convince Marine General Smedley Butler (1881-1940) to lead a coup against President Franklin Roosevelt. Butler refused to go along and exposed the plot and imperialism in general. It seems that what concerned the capitalists was not so much the devaluation of the dollar but a law prohibiting citizens from owning monetary gold. This law was repealed in 1974. (back)
(6) This phrase has since been replaced by “This Note is Legal Tender for All Debts, Public and Private.” It reflects the attempt to establish the idea that dollar bills are somehow actual money as opposed to a monetary token that merely represents real money — gold — in circulation. (back)
(7) The move that transferred control of the gold and foreign currency reserves of the United States from the Federal Reserve to the Treasury — and ultimately the president — was itself a move in the direction of Bonapartism. (back)
(8) The dollar price of gold is not really a price but an exchange rate. A price is the ratio at which a commodity — a product representing a definite quantity of socially necessary labor exchanges with the money commodity, which is also a product representing a definite quantity of socially necessary labor. Since real prices are defined in terms of the use value of the money commodity, the money commodity — gold — itself has no actual price. The price of gold is a rate of exchange with the various currencies that represent it in circulation. I use “the dollar price of gold” as a convenient expression, but if we are scientific, the term the price of gold or its dollar price is incorrect. (back)
(9) The gold exchange standard began before World War I. For example, colonial India maintained the Indian rupee convertible not into gold but into British pounds that, in turn, could be converted into gold at the Bank of England. The gold exchange standard represented India’s colonial status relative to Britain. The fact that the European imperialist countries and Japan found themselves in the same monetary relationship to the United States that colonial India had been regarding Britain shows the overwhelming power the United States exercised over the rest of the imperialist world since the end of World War I. (back)
(10) Most of these gold reserves are held in the vaults of the Federal Reserve Bank of New York located in lower Manhattan. In a crisis, these reserves could be physically seized. This happened with Czechoslovakia’s gold reserves after the socialist revolution of 1948. Today, it’s hard to imagine that Russia or, China, or any other nation that respects its own independence would want to store its gold in the vaults of the Federal Reserve Bank of New York or anywhere else in the United States rather than on its own territory. This is especially true after the U.S. and its European satellites seized Russia’s dollar and euro reserves and are now using this stolen money to finance the war against Russia in the Donbass. (back)
(11) Federal Reserve head Arthur Burns, though a conservative Republican in politics, belonged to the institutional school of economics. This school emphasizes the empirical study of economic phenomena but lacks any overall theory. They are pragmatists and impressionists whose theory is that they have no theory at all. (back)
(12) This liquidity made it easy to finance World War II, especially for the United States. (back)
A Critique of Crisis Theory 