Building since October 2023, the final weeks of April 2024 saw an explosion of student protests against U.S.-supported Israeli genocide in Gaza on campuses across the U.S. and the world. The latest, at Columbia University in New York City, was the site of a previous protest in 1968. That one was against Columbia’s ties to the U.S. military during the Vietnam War and was part of a wave of student protests around the country. It spread to France and helped trigger the great workers’ General Strike of May-June 1968.
The 2024 Columbia students demand:
- Divest all finances, including the endowment, from corporations that profit from Israeli apartheid, genocide, and occupation in Palestine.
- Complete transparency for all of Columbia’s financial investments.
- Amnesty for all students and faculty disciplined or fired in the movement for Palestinian Liberation.
As of April 29, protests have swept across so many campuses that we don’t have the room to list them. We can safely say nothing of this scale has been seen since the May 1970 student strikes against Nixon’s extension of the Vietnam War to Cambodia.
As the anti-genocide demonstrations sweep the country, congressional Democrats and Republicans vote for tens of billions of dollars to support the genocide in Gaza, as well as additional billions for the Nazi-ridden regime in Ukraine and the U.S. stooges of Taiwan. President Genocide Joe Biden promptly signed them into law.
As the public, especially among young people, turns against the genocide, the hollowness of U.S. imperialist democracy is being exposed as never before. Having lost the battle for public opinion on the campuses, the ruling “Party of Order” of Democrats and Republicans has launched a broad attack against academic freedom.
University presidents, who represent capitalist ruling class interests, have been grilled by congressional committees, and some have been bullied into resigning for failing to repress the protests sufficiently. Students and faculty face expulsion, and faculty members have been fired, arrested, jailed, and physically attacked by cops. I saw one video online where a Dartmouth College professor, the former chair of the college’s Jewish studies program, Annelise Orleck, 65, taking part in the pro-Palestine demonstration on campus, was grabbed and thrown by two burly cops shouting, “Get onto the ground.” She was zip-tied, arrested, hauled into jail for eleven hours, and then charged for assaulting the cops!
Another sinister technique applied against demonstrators is called “doxxing.” A method used during the McCarthy period against communists or alleged communists, the names of the demonstrators were distributed to corporations and other potential employers. They are urged not to hire the “doxxed” individual. In other words, if you oppose genocide, you can kiss your career goodbye.
Politicians justify their attack on academic freedom by accusing anti-genocide, pro-Palestinian student protesters of antisemitism. In reality, there have been virtually no manifestations of antisemitism among the protesters.
To the chagrin of these politicians — many of whom themselves are far from free of antisemitism — Jews have been especially prominent among the protesters. During the Jewish festival of Passover, Seders were held among the demonstrators at Columbia and elsewhere.
This has made it difficult for the real anti-Semites to crawl out of their rat holes and take advantage of the situation. You don’t have to be a prophet to predict that the reactionaries who today scream “antisemitism” where it does not exist have a different attitude when it comes to fighting real antisemitism that does exist. It remains a deadly and growing danger to the Jewish community as well as the entire workers’ movement and its allies among the oppressed people of the earth.
As campus protests have unfolded, the U.S.-supported Zionist entity, while continuing the Gaza genocide, launched a provocation against Iran that brought the world to the brink of war. That month, Israel bombed a building in Damascus, Syria, housing the Syrian embassy that killed General Mohamad Reza Zahedi and seven other Iranians.
Under international law, embassy buildings are considered part of the territory of the country represented by the embassy. The Iranian embassy complex in Damascus is legally part of Iran. While this feature of international law is something of a legal fiction, it’s necessary in a world characterized by often mutually hostile nation-states (though, in this case, Syria and Iran are allies) to maintain communication. This is particularly true in an age when the destructive power of modern weapons, if they are fully released, could destroy modern civilization.
The Zionist entity has no legal right to bomb either Syria or Iran. The bombing is legally an act of war. In addition, as the bombing was aimed at killing specific individuals, it can be considered an act of murder. The Biden administration was informed in advance but did nothing to stop it, meaning U.S. leaders are equally guilty.
Iran had little choice but to launch a counterattack. The situation was not unlike when then-President Donald Trump in January 2020 ordered the killing of General Qasem Soleimani, and Iran responded with a measured missile attack on a U.S. base. It halted the climb up the escalation ladder toward an all-out U.S.-Iran war. This time, Iran responded to the attack on its embassy in Damascus with a measured counterattack aimed at avoiding military or civilian causalities. As of this writing, it appears to have succeeded, though it could still become an all-out war waged by Israel and the United States against Iran.
According to the Israeli military, on April 14, Iran fired 170 drones and 120 missiles into Israel. The U.S. military was directly involved in shooting down as many drones and missiles as they could. It’s clear that some missiles did get through and did some damage. The point of the Iranian retaliation was not to do any severe damage to Israel at this time but to demonstrate what it could do in the event of all-out war.
In public, at least, the Biden administration said it did not want Israel to launch a retaliatory attack. They claimed Israel won a military victory by shooting down most of the missiles and drones, so there was no reason for Israel to respond. The administration stated it would not join an offensive operation against Iran — leaving the door open for the U.S. to join a so-called defensive operation. Within Israel itself, there was considerable pressure on Netanyahu’s government to launch an assault on Iran that could have led to war.
If this happened, the situation would have escalated so much that it would have been challenging to stop a war between the U.S., Israel, and the U.S. imperialist satellites on one side and Iran and its allies on the other. This would have been the biggest armed conflict since World War II and, in light of the ongoing war in the Donbass between Russia and Ukraine and the threatened war between the United States and China over Taiwan in the Pacific, could easily turn into World War III. (1) Iran made clear that if Israel did attack Iran in retaliation for Iran’s April 14 counterattack, Iran would launch a more massive attack on Israel designed to cause real damage.
The April Israeli aggression against Iran and Syria and Iran’s measured response unfolded against the deteriorating — from the standpoint of U.S. imperialism — situation in the Donbass-Ukraine where Russian forces have been scoring victories against what is, to be blunt, the Ukrainian puppet army.
The Biden administration’s biggest concern isn’t that the Russian army will fight its way to the Polish border. Their concern rather is that the Ukrainian people, becoming increasingly aware their repressive and corrupt right-wing government has betrayed them, will rise against the Nazi-ridden Euromaidan regime in Kiev, which would be a victory for both the Ukrainian and Russian people.
To counter this, congressional politicians quickly allocated $60 billion in additional aid to the war-makers in Kiev, as well as adding another $26 billion for Washington’s genocidal stooges in Te Aviv and $8 billion to the would-be war-makers in Taiwan.
On April 19, Israel attacked Iran in retaliation for Iran’s April 14 counterattack. The attack appears limited in scope and did minor real damage. This means that Iran feels it doesn’t have to make good on its promise to launch a massive attack in response.
Though many in the Israeli cabinet want a big attack — and the Tel Aviv regime has been agitating in the U.S. for war against Iran for decades — it appears Washington restrained Israel into making the mildest attack that Israel’s internal political situation would permit. Iran does not want war with the United States and Israel. And it appears at this time that Washington doesn’t want war — as opposed to its hybrid war combining economic warfare with political subversion that’s been going on since the 1979 revolution — with Iran. One reason Washington is restrained is the setbacks its clients in Kiev have suffered on the battlefield. Another reason is the tense relationship with China over the situation in Taiwan that threatens war in the Pacific. (2)
And there are other factors at play. Not least are the massive protests in support of Palestine that since October have swept across U.S. cities almost daily, not to speak of protests in Britain and other allies. Not since the days of the Vietnam War a half-century ago has the real character of the U.S. been so exposed. If a generalized war does develop, an antiwar movement could grow that might dwarf anything that happened during the Vietnam War era.
There is another reason Washington doesn’t seem to want an all-out military assault on Iran at the moment. That reason is of particular interest to this blog: the increasingly shaky condition of the dollar, the dollar-dominated international monetary system, and U.S. finances. But before I address this, I want to note the contrast between the U.S. using its power to restrain Israel regarding Iran and its failure to use its power to stop the Gaza genocide.
The U.S. could stop the genocide at any time, as it stopped Israel from launching a more serious attack on Iran on April 14. Washington restrained Israel when it came to Iran but not when it came to genocide in Gaza. The genocide is in full accord with the policies of U.S. imperialism. This is true regardless of tactical differences that may or may not exist between the White House and Israeli leaders. Joe Biden has fully earned the nickname that many in the movement in support of the Palestinian people have given him: Genocide Joe.
The situation in the financial markets
In the financial markets, the dollar price of gold (it measures the gold value of the dollar) reached an all-time high of $2,406.70 per ounce at the close of the week ending April 20 due to the Israel-Iran war threat. The inevitable market correction hit the following Monday, April 22, dropping about $70. The correction was long overdue. However, the dollar price of gold remained above $2300, not far above record levels, and later in the week closed at $2349.60.
As gold soared to record levels — or, more precisely, as the value of the U.S. dollar plummeted to record lows between March 30 and April 20 — the interest rate on the U.S. ten-year bond also climbed. Usually, when dollar interest rates rise, the dollar price of gold drops. On March 30, gold was priced at $2,254.80, while the ten-year bond yield stood at 4.2060%. By April 20, the bond yield had risen to 4.6150%, but gold had surged to an all-time high of $2,406.70. This happened in the first three weeks of April 2024, as the U.S. dollar reached record lows against gold. This trend diverges from the usual pattern, as all things remaining equal, rising interest rates mean lower gold prices. If this trend continues, interest rates will have to significantly rise beyond current levels to stabilize the dollar and halt accelerating inflation.
If the government increases its borrowing to finance wars and genocide in Palestine and West Asia, as well as the Donbass, while preparing for a possible war with China in the Pacific, additional upward pressure will be exerted on interest. Rising interest rates will then push the economy into recession.
If the Federal Reserve System then tries to finance war spending by creating more dollars to hold down interest rates, it will accelerate the rise in the dollar price of gold, accelerating overall inflation. Price increases will accelerate the increase in interest rates (for math geeks out there, the second derivative — the price isn’t just increasing, it’s accelerating, the rate of increase itself is increasing). This could end U.S. domination of the international monetary system by accelerating the trend already underway for countries to use gold directly instead of U.S. dollars as their reserve to back their currencies.
The modest fall in the price of gold in the final week of April 2024 illustrates this problem for the U.S. As fears of a U.S.-Israeli war against Iran faded, the dollar price of gold dropped. The rate of interest on bonds continued rising in the final week of April, closing at 4.6690% compared to 4.6150% the previous week. The bottom line for the U.S. empire: the present conjuncture in the world economy makes this a lousy time to launch a war.
As in the early 1970s, we appear to be in the early stages of a currency depreciation inflation different from the demand-pull inflation right after the COVID shutdowns. Then, as now, the U.S. empire is in a vulnerable position politically as the genocidal nature of this empire is exposed, and also financially. Combined with the struggle of the Palestinian people to regain their homeland, the global movement against the genocide of the Palestinian people and sympathy for their cause could open a path for a Palestinian victory. It was such a combination of circumstances that led to the victory of the Vietnamese. But this vulnerable position of the U.S. empire won’t last forever.
When the recession arrives, the dollar will rally against gold, and interest rates on borrowed money to finance the war will fall. This happened in the 1980s during the Reagan reaction, and after the September 2008 crash on Wall Street, the incipient stagflation was halted. The crash then transformed into the Great Recession, which strengthened the dollar’s dominance in the international monetary system and made it possible for the government to borrow money at low interest rates.
This brings us to the Federal Reserve System’s dilemma. The Party of Order — though not all members of the capitalist ruling class — wants to defeat Donald Trump’s return to the White House through a media campaign. Currently, his ability to campaign is being curtailed by his criminal trial in New York City on business records and election fraud charges. The media reports a slight rise in Genocide Joe’s popularity rating as Trump’s legal problems make headlines.
In a few months, if the current stagflation ends in a financial crash, marking the beginning of a new Great Recession, Genocide Joe’s reelection chances will plunge. If the Fed does what’s necessary to keep the economy afloat, even if only through November, the chances of a run on the dollar and a severe and prolonged crisis afterward will increase.
The election season ends in November, but history doesn’t. We live in interesting times with great possibilities for liberation, a time of great struggles and equally great dangers.
Now, I return to the 1970s Bretton Woods System collapse. If properly understood, the 1970s are full of lessons for a new generation of workers struggling against imperialist oppression as well as against the capitalist wage system that breeds imperialism.
After Bretton Woods
As we saw last month, in August 1971, the Treasury faced a run on its gold reserve. The run was triggered by the growing gap between the official exchange rate of $35 per ounce of gold and the dollar price of gold on the free market. By August 1971, the dollar price had risen to $44. The free market said a dollar was worth 1/44 an ounce of gold, while the Treasury still pretended the dollar was worth 1/35 of an ounce.
In terms of real money, a central bank could exchange dollars worth only 1/44 an ounce on the open market for 1/35 of an ounce of gold. This deal was hard to resist. For those who have trouble with factions, we can think of this in terms of the price of gold in dollars. In dollar terms, the Treasury was selling gold to foreign banks at $35 an ounce, and the banks sold that gold for $44 on the free market. Something had to give — and it did.
In March 1968, the run was on the London Gold Pool, not yet the U.S. Treasury. To review, the London Gold Pool sold gold whenever the free market price rose above the par value of $35 an ounce. It bought gold whenever it fell below $35. In August 1971, the Treasury faced the prospect of being emptied if it had tried to support the official dollar price of gold. Something had to be done, and fast.
It is an economic law that the demand for gold moves inversely to the interest rate. There’s always an interest rate high enough to break the demand for gold. In 1971, the most obvious and time-tested solution to a run on gold would have been for the Federal Reserve System to reduce the quantity of dollars on the market by selling short-term Treasury bills. The reduced number of dollars would have raised interest rates, especially the short-term ones. Some owners of gold would then have sold gold for dollars to buy short-term T-bills or put their dollars to work — done not by the investors, but by workers — allowing them to appropriate the surplus value produced by the workers (owners of gold appropriate no surplus value). (3)
This would force the market dollar price of gold back toward $35 an ounce, assuming a sufficient reduction in dollar supply on the market, as happened in 1969 and 1970. If the dollar price fell below $35, some gold owners would sell to the Treasury at $35 an ounce. The gold drain would turn into an inflow, rebuilding the Treasury’s hoard in its depositories, Fort Knox being the most famous.
This was the tried, true, and time-tested solution to gold drains, but there was a problem. After passing through an indecisive recession in 1970, the economy experienced a weak recovery as 1971 began. The recovery was shaky because overproduction had not been adequately liquidated, with the official unemployment rate stuck above 6% and holding.
If the Federal Reserve System had allowed the interest rate to rise enough to reverse the gold drain, the weak recovery from the 1970 recession would have given way to a renewed and more severe recession. If the renewed recession hit before November 1972, history suggests that Richard Nixon would have been a one-term president.
While the capitalist ruling class feared a deep recession that would have been dangerous to the future of the capitalist system, Nixon feared that he would be defeated in the 1972 election if the weak economic recovery didn’t accelerate. The ruling class, in general, and Nixon, in particular, were in the market for an alternative solution to the gold drain that wouldn’t involve rising interest rates and renewed recession. One school of capitalist economists claimed they had a solution: the followers of famous British economist John Maynard Keynes.
During the 1970s, capitalist economists were divided into two main camps. The majority camp were Keynes followers. The Keynesian school, an offshoot of neoclassical economics, has held the upper hand in academia and policy-making circles since the Great Depression of the 1930s.
By the early 1970s, Keynesians faced a challenge from the right, mainly among the younger generation who grew up after the Depression. This camp was led by Professor Milton Friedman, an orthodox neoclassical economist who taught at the University of Chicago. Friedman aimed to overthrow Keynes’ modifications to traditional neoclassical theory that were dubbed the Keynesian revolution.
In the 1970s, the media dubbed Friedman’s views monetarist because of his version of the quantity theory of money. Friedman was declared to be the leader of the “monetarist counterrevolution” against Keynes. Today, we would call Friedman’s views neoliberal.
In his book published in 1936 entitled, “The General Theory of Employment, Interest and Money,” Keynes advocated that central banks lower interest rates by creating additional currency whenever an economic boom threatened to turn into a recession. This went against the traditional policy of raising interest rates to “cool the boom.”
Keynes reasoned that economic booms lower the profit rate by reducing the scarcity of capital and commodities relative to human needs. (4) As long as the profit rate exceeds the interest rate — in Marxist terms, as long as the profit of enterprise remains positive — industrial capitalists will increase the capital investments fueling economic expansion.
Keynes believed that since the increasing quantity of commodities sold during a boom leads to a fall in the profit rate, the central bank should increase currency creation so that the interest rate would fall along with the profit rate, the opposite of traditional central banking policy. The resulting fall in interest rate would, to use Marxist terminology, keep the profit of enterprise positive. It was not just the profit rate that made the difference between boom and recession, but rather the difference between the profit and interest rates.
Keynes’ advice flew in the face of traditional orthodoxy. Since the demand for gold moves inversely to the interest rate, any move to lower the rates during a boom increases the demand for gold. This means that under either a gold or gold-exchange standard, the gold reserve that backs the currency suffers a drain, threatening to collapse the gold or gold-exchange standard.
Keynes’ remedy was a system of non-commodity money. If this system could be created, the central bank would have no gold reserve to defend, as gold wouldn’t be needed to back the currency. The central bank would concentrate on keeping the profit of enterprise positive by lowering interest rates whenever a rise in commodity production associated with a boom threatened to lower the profit rate and turn the profit of enterprise rate negative.
In 1971, the capitalist world faced high unemployment as well as high inflation. The Wikipedia entry says, “At the time, the U.S. also had an unemployment rate of 6.1% (August 1971) and an inflation rate of 5.84%.” This combination was dubbed “stagflation.”
Keynes’ traditional theory says high inflation and high unemployment cannot occur simultaneously. According to neoclassical theory, the level of real wages — the purchasing power of the money that workers are paid for each hour of work — is determined by the value of the marginal product of the worker’s labor. Real wages are the use values of the commodities the workers purchase to reproduce their labor power.
Keynes made a distinction between real wages and money wages. For him, the general level of prices is largely determined by money wages. According to neoclassical theory, double the value of the marginal product of the worker’s labor, and real wages also double. Double the level of money wages, leaving the value of the marginal product of the workers unchanged, and the general price index doubles, leaving workers’ real wages unchanged.
During periods of economic depression and high unemployment, money wages decline. Since changes in money wages drive changes in the general price level, inflation is impossible during high unemployment. These economists believe that significant involuntary unemployment only occurs when wages exceed the value of the marginal product of labor. Or, in plain language, involuntary unemployment occurs when wages exceed the value the workers’ labor creates. If markets are operating freely, when the supply of labor exceeds the demand, the price of labor falls. Wages keep falling until the labor market clears and full employment returns. At that point, wages will have fallen to the level where the value of the wage equals the value the workers create through their labor and full employment returns.
In line with this, workers are constantly balancing the dis-utility of performing labor versus the extra utility of the goods they can buy with their wages. A worker may calculate that the dis-utility of performing a job at the going wage exceeds the utility the worker would get from the extra goods they could purchase if they accept the job. In this case, the worker is considered voluntarily unemployed. If workers needed the job to live, they would accept the going wage. Keynes of “General Theory,” traditional neoclassical, and Austrian economists all agree that lowering wages is the way to get out of a period of high unemployment.
Keynes said that the only flaw in this argument is that it fails to distinguish between money wages and real wages. What is necessary is to lower the real wage, not the money wage. During a period of prolonged high involuntary unemployment — such as the 1920s and 1930s in Britain — a vicious cycle sets in. High involuntary unemployment leads to a drop in money wages. As money wages determine the general price level, the general price level drops as money wages fall. When prices fall, hourly real wages fail to decline, and lower money wages fail to lower unemployment.
During depressions, Keynes complained that falling prices increase the real wage when calculated hourly, though total real wages fall because workers work fewer hours. Keynes claimed that reducing money wages doesn’t reduce real wages, only the general price level. To emerge from a period of high involuntary unemployment, it’s necessary to reduce real hourly wages. The best way is not to drive down money wages but to follow monetary and fiscal policies that encourage prices to rise independently of rising wages. Rising prices lower real hourly wages, leading to higher employment and economic recovery.
According to Keynes, in periods of depression and high unemployment, the fear that deficit spending and monetary expansion by the central bank cause inflation is misplaced. He believed that rising prices are desirable at such times as they lower real wages, increasing the demand for labor and reducing unemployment.
Keynes thought inflationary policies should be followed instead of deflationary policies during depressions. During depressions, central banks should expand the money supply, while governments should increase their spending and borrowing while cutting taxes. Central government deficits are not to be feared but are good in periods of less than full employment. They increase monetary effective demand and encourage prices to rise, bringing the needed fall in real wages.
Milton Friedman, a more traditional neoclassical economist, agreed that real wages must be lowered during depression and high involuntary unemployment. Where he disagreed was that it was the level of money wages that largely determined the general price level. Friedman, a supporter of the quantity theory of money, held that the ratio between the supply of commodities and the quantity of money determines the general price level. Keynes and Friedman agreed that the value of the marginal product of a worker’s labor determines the worker’s real wage.
According to Friedman, if the labor market were really free, the natural level of unemployment would be near zero. Some shock might momentarily raise the level of unemployment. Still, the period of high involuntary unemployment won’t last as long as the government refrains from interfering with the operations of the free market. The only unemployment that will exist for any time would be frictional unemployment, which occurs when workers voluntarily quit their jobs to search for better ones.
Friedman thought that the natural unemployment rate should be close to zero as long as the labor market is free. (5) But Friedman complained that the labor market is not as free as it used to be or should be. In his view, unions are monopolistic combinations of workers that aim to keep wages above the ability of many potential workers to create through their labor an amount of value equal to the monopoly union wage.
Poverty-stricken people lack the experience and skills to create the value of union wages. If these potential workers could get jobs at poverty-level wages that match their ability to create value, they would have the opportunity to increase their experience and skills over time. In Friedman’s view, this is the only way out of the cycle of poverty and chronic unemployment.
According to Friedman, minimum wage laws, though well-meaning, keep wages above the ability of potential workers to create a value equal to that of the minimum wage, making it impossible for them to get jobs and improve their skills. In the interests of the workers, minimum wage laws should be abolished.
Another cause of poverty is welfare programs. If a potential worker gets more welfare than the value their labor could create on a job at a wage that matches the value they could create if employed, the worker has no incentive to accept a job. These workers choose to remain in the swamp of chronic unemployment and poverty, never gaining the work habits and skills they need to earn wages above the poverty line.
Friedman supporters argue that if the unions are busted, welfare eliminated or reduced, and minimum wage laws repealed, then what they call the natural level of unemployment would fall almost to zero, and poverty would vanish. Capitalism gets blamed for creating unemployment and poverty when, according to neoclassical and Austrian economists, it is the well-meaning but false socialist policies that are responsible.
Friedman’s explanation for high unemployment and inflation
Friedman and most capitalist economists complain that governments run by well-meaning pro-union progressives supporting socialist programs are to blame for chronic high unemployment and poverty. But how does this lead to inflation?
They say that when governments and central banks attempt to drive down unemployment below the natural unemployment rate through policies aimed at stimulating demand, the policies seem to work for a time, but inflation accelerates. Inflation is caused by growth in the money supply in excess of the ability of industrial capitalists to increase the production of goods. Too many dollars are chasing too few goods. How does the resulting inflation temporarily lower the actual rate of unemployment below its natural rate?
When prices rise, workers of a given skill who continue to be paid the same wages do not immediately realize that their real wages have been cut. Friedman reasoned that workers who were previously “voluntarily” unemployed because they weren’t willing to work for wages that would match the actual value their labor was capable of creating are tricked by inflation into accepting lower real wages. After a while, the workers catch on and insist on an increase. Since the bosses cannot afford to pay them more because if they did the value the bosses are paying in wages would be greater than the value the workers create through their labor.
The workers again withdraw from the labor market, causing unemployment to rise to its natural level. Faced with a renewed rise in “voluntary” unemployment, the central bank lowers unemployment below its natural rate by accelerating the rate at which it creates additional money. Inflation accelerates while unemployment and poverty decline temporarily but then return to the natural level. Friedman claimed this is what happened in the late 1960s and 1970s. Over time inflation got worse while unemployment and poverty persisted.
Keynes’ and Friedman’s solutions to rising inflation and high unemployment
For Friedman, the only way to end inflation was to reduce the growth rate of the money supply. The money supply was the dollars the Federal Reserve System created when purchasing short-term Treasury securities and the money commercial banks created when making loans.
The Federal Reserve System directly controls the former but not the latter. If the Fed reduces the dollar reserves of the commercial banking system, the system will have to reduce the number of loans it grants. Then, the amount of new money created by the banks through their loans declines, and the growth rate of the money supply slows down. Contrary to Keynes, Friedman insisted that since a capitalist economy is naturally stable, the central bank pretty much controls the total money supply.
According to Friedman’s quantity theory of money, the decline in the growth rate of the money supply leads to a fall in the inflation rate. The workers don’t immediately realize the rate of inflation has fallen. They hold out for wage increases based on the previous inflation rate they mistakenly assume will continue. The bosses can’t grant the increases.
Following this logic, the increases mean the workers’ real wages now exceed the value their labor creates. Unable to afford the increases, the bosses are forced to lay off workers and stop hiring new ones. After some time, the workers realize their mistake and accept lower wage increases as they become aware of the lowered inflation rate.
A reduction in the growth rate of the money supply causes recession and a rise in unemployment. However, the recession and rise in unemployment are temporary. As soon as the workers realize inflation has fallen, they’ll accept lower wages, and unemployment will return to its natural level. The recession ends while inflation remains subdued. For Friedman, recession is a price well worth paying during periods of high inflation.
The only way the government can permanently lower unemployment and poverty is to cut back on social spending and welfare, crack down on the unions (replace collective bargaining over wages with individual bargaining), and repeal minimum wage laws. This reduces the natural unemployment rate, reducing the actual unemployment rate without increasing inflation.
Friedman’s solution to the 1971 high inflation and unemployment involved recession and still higher unemployment in the short run, welfare, and unemployment benefit cutbacks, abolishing minimum wage laws, and busting labor unions. During the 1970s, though this program gained increasing support among neoclassical economists, it was, for obvious reasons, unpopular among labor unionists and progressives in general.
The Keynesian alternative to Friedman
The Keynesian alternative to Friedman’s recessionary policies was to convince the unions to accept lower wages in the name of fighting inflation. Keynes believed wage increases were the chief cause of inflation. If they stopped increasing, inflation would taper off without recession and the unemployment and poverty it brings.
To make it palatable for the workers, the bosses must promise not to increase prices if the unions agree to moderate their wage demands. This approach to fighting inflation was dubbed an incomes policy. Income policies can be voluntary, but they can also be compulsory and enforced through state power: The government can declare wage increases illegal. To make it politically palatable, the government can also freeze prices, though this isn’t necessary as inflation will taper off on its own once wages stop rising or slow.
Neither of these theories, Friedmanite nor Keynesian, is correct. Friedman wasn’t entirely wrong with his claim that if the Federal Reserve System restricts the rate at which it creates new dollars, the rate of inflation declines, and if it goes far enough, prices will fall. However, this theory plays down the extent and duration of unemployment that would result from the deflationary policies advocated.
The capitalist economy is not naturally stable. Keynes pointed out correctly that the level of capitalist investment is particularly unstable. The quantity theory of money is not valid, nor is there such a thing as a natural unemployment rate. The natural unemployment rate claim is a false generalization of classical economists’ correct theory that market prices fluctuate around natural prices, called prices of production by Marx.
And most importantly, workers don’t receive the value their labor creates back in wages. They receive far less value in wages even if paid the full value of their labor power. If this were not true, capitalists couldn’t make a profit, making capitalist production impossible. Nor is a capitalist economy able to grow at the rate of increase in the working population plus the growth of labor productivity determined by the progress of science and technology. The reason: the long-term inability of the market to increase as fast as industrial capitalists can increase commodity production.
Differences between Friedman and the Austrian school
The neoclassical Friedman and Keynesian schools dominate university economics. Further to the right lies the Austrian school. Like the neoclassical school, the Austrians base their analysis on the marginalist — that is, scarcity — theory of value. They see a contradiction with Friedman’s advocacy of strict central planning of the money supply while he, like the Austrians and Keynes, opposes the central planning of production.
Austrians see central planning of the money supply as the opening wedge to socialism. They believe in a natural interest rate that’s determined by the scarcity of capital. They see the function of interest rate(s) as balancing the ratio of capital goods production with consumer goods with society’s desire to save and consume. The more society wants to save instead of consume, the lower the natural rate of interest will be. (6)
The Austrians hold that money creation should be as decentralized as commodity production, and that central banking should be abolished. Early in his career, the young Friedman supported the demand to abolish central banking. He broke from Keynesianism in the later 1930s, turned to the right, and drew close to the Austrian school.
As he became more mainstream, he dropped his opposition to central banking. No serious policymaker believes central banking should be abolished. To be taken seriously in government circles, Friedman dropped his opposition.
The Austrians’ problem with central banking is that under the socialist political pressure of the masses, the central bank will inevitably create more money than it should to drive the market interest rate below its natural rate. Once below the natural rate, industrial capitalists receive the wrong signals from the market about what to produce.
They’ll produce too many capital goods relative to society’s desire to save. Too much capital will flow into the production of the means of production and too little into the production of the means of personal consumption. (7)
The Austrians believe this does not lead to generalized overproduction, as they believe in Say’s Law. But interest rates below the natural rate lead to lopsided production: too many means of production are made relative to too few means of consumption.
To keep this process going, the central bank has to constantly increase the rate at which it creates money to keep the interest rate below the natural rate. Eventually, this leads to hyperinflation — as occurred in Germany and Austria after World War I. The only way out is to stop printing money that drives up interest rates above the natural rate. The demand for capital goods collapses, leading to a sharp but brief depression with massive unemployment. The depression lowers interest back to the natural rate and the market corrects the proportions between capital goods and consumer goods production — and prosperity and full employment return.
Austrians hold that as long as the central banking system is maintained under the pressure of the socialist masses, it will eventually drive down the interest rate, once again unleashing the inflationary process and the lopsided production it causes. This creates a business cycle of boom and bust that’s blamed on capitalism when they believe that it’s really caused by socialism. During the 1970s, Austrian economists proposed a deflationary policy that they claimed would lead to a sharp but brief depression with a high unemployment rate. This did not endear them to the labor unions or workers in general.
Their only long-term solution to the problem of business cycles and periodic crises is the abolition of central banking. The public should be allowed to use whatever money it wants, whether silver, gold, or, nowadays, bitcoin or other cryptocurrencies. The public would choose the best currency that would keep market interest rates close to the natural rate. The capitalist economy would no longer experience boom and bust cycles but would enjoy unending prosperity.
The followers of Friedman, Keynes, and the Austrians falsely claim that the workers receive in wages the full value their labor produces. They believe scarce capital, not the workers’ unpaid labor, creates surplus value. The followers of Friedman and the Austrians, as supporters of Say’s Law, believe that general commodity overproduction is impossible and that the capitalist economy is naturally stable.
The Austrians overlook the fact that the United States economy, during much of the 19th century and into the 20th, lacked a central bank and was far from stable. It was more unstable than 19th-century European countries such as Britain, France, and Germany that had central banking systems. In “the interest of the workers and the poor,” the Austrians oppose unions and all concessions to the working class. The Austrians differ only in being even more stringent in opposition to any so-called socialist policies in the interests of the workers and the poor. Austrian economists are extreme right-wing pro-capitalist ideologues.
Attitudes of Keynes, Friedman, and the Austrians to non-commodity money
Keynes hated gold. He believed that the key to controlling the trade cycle (as the industrial cycle is called in Britain) was for the central bank to lower interest rates by creating money whenever a recession threatened. Under the gold or gold exchange standard, central banks were often prevented from doing this due to their need to safeguard the convertibility of currency into either gold or gold coins. Keynes wanted to end any link between currency and gold and establish central-bank-created currency as non-commodity money.
Friedman agreed that non-commodity money is possible under capitalism. Commodity money systems such as the old silver and gold standards have the disadvantage that since the production of the monetary metals fluctuates from year to year due to the change in absolute and relative profitability of producing them, which makes it impossible to match the growth of the money supply with the ability of industrial capitalists to produce a growing quantity of commodities. Therefore, the commodity monetary system is prone to cyclical fluctuations where deflationary recessions succeed inflationary booms.
From the point of view of the mature Friedman, the ideal monetary system is a central bank-run system of non-commodity money where the annual growth rate of the money supply is planned and linked to the annual growth rate of the productivity of labor plus the growth rate of the working class population. He believed central banks tend to abuse their power to create (non-commodity) money, allowing inflation to develop. He feared if the central banks continued doing this, a return to some form of gold or gold exchange standard would be necessary.
Some modern Austrians believe cryptocurrencies, whose supply is controlled by computer algorithms rather than the government or a central bank designed to keep the cryptocurrencies scarce, are a good alternative to gold and silver. Right-wing tech entrepreneurs boosted by Austrian economics inspired the current cryptocurrency craze.
Workers need to realize that all three schools of bourgeois economics are false. All three believe that workers receive in the form of real wages the full value their labor creates.
Keynes did distinguish between money capital and real capital. He claimed that scarce money capital creates interest while scarce real capital creates profit. Surplus value, leaving aside ground rent, is interest plus profit. Both scarce real capital and money capital create surplus value, not the unpaid labor of the working class. Keynes was fine with capitalist exploitation of workers.
The claim that money wages determine or are the most important factor in determining the general price level is false and was disproved two hundred years ago (even before Marx) by David Ricardo. On this important issue, the Keynesians stand even further from Marx than Friedman or the Austrians. They blame workers, and particularly workers’ unions, for inflation, making these capitalist economists dangerous enemies of the working class and not friends, as non-Marxist progressives claim.
How Ricardo refuted Keynes
Before Marx, the great English classical economist David Ricardo explained that a rise in wages increases the prices of only those commodities produced by capital that employ more than the average number of workers for capitals relative to their size. However, the commodity prices produced by enterprises with fewer than the average number of workers fall.
The reason is that competition tends to equalize profit rates as capital continuously flows from sectors of production with below-average profit rates to sectors with above-average rates of profit. When wages increase, all else being equal, production sectors that rely heavily on labor experience a greater decline in profits compared to others. On the morrow of the rise in wages, these sectors have a profit rate below the average. Some capital will flow out of these sectors, leading to a drop in production, causing prices to rise.
Ricardo pointed out that those sectors of production that employ fewer than the average number of workers experience a smaller rise in labor costs than average. Though their profit rates decline as their labor costs rise, their profit rates decline less than average.
After a general rise in wages, businesses in these branches enjoy a higher-than-average profit rate even if it declines in absolute terms. Since capital flows from sectors of lower to higher profit rates, commodity production in these sectors rises. The rising supply of these commodities causes their prices to fall, offsetting the higher prices of commodities produced by sectors that employ more workers.
Once the dust settles, capitalists will produce more commodities for worker consumption and less for the capitalists. This is good for the workers but bad for the capitalists. But on average, prices will be unchanged. Higher wages mean lower profits but not a rise in the general price level.
Contrary to Keynes, freezing wages or any other type of income policy will not reduce the inflation rate. In reality, changes in wages lag behind changes in prices. If, for any reason, prices of commodities other than labor power rise, the price of labor power must also rise. If it did not, the price of labor power would fall below the level necessary to reproduce labor power. If the government wants to reduce the rate at which prices are rising, slowing the rate of increase in wages will prove ineffective. As Ricardo realized well before Marx, lower wages will increase profits but will not slow inflation.
After August 1971
Richard Nixon was a Republican and a political conservative, much like Milton Friedman. In August 1971, Nixon decided to support Keynesian rather than Friedmanite economic policies. Friedman wanted the Federal Reserve System to reduce the rate of increase of the money supply, defined as the dollars created by the Federal Reserve System plus the bank money created by bank loans.
Such a policy would push up interest rates, induce a recession, and increase unemployment. Keynesians, on the other hand, falsely claimed that inflation could be reduced without a recession if the government used state power to hold back money wages or the labor union practiced voluntary wage restraint. In this way, the Keynesians shifted the blame for recession from the capitalist class (the real cause of recession because they insist on the private appropriation of the product of highly socialized labor ) to the victims of recessions, the workers.
While the Republican Party and presumably Nixon were supposed to believe in the economics of Friedman, Nixon was more interested in winning the November 1972 presidential election than remaining loyal to any particular capitalist economic theory. Nixon had not forgotten that for him, the untimely recession of 1960 cost him the presidency.
In an address on Sunday, August 15, 1971, Nixon announced to the American public his decision to follow the Keynesian, rather than the Friedmanite, approach to the crisis brought on by the run on the Treasury’s gold reserves. Friedman was enraged and denounced Nixon’s “socialist” economic policies. So-called progressives hailed the conservative Republican president’s embrace of Keynesian economics.
The next day, when the stock market reopened, prices soared. Progressives and Wall Street were marching to the same Keynesian tune.
This was one of the few times in Nixon’s career that the arch-red baiter was himself criticized for being a “socialist,” though the New York stock market seemed to be as thrilled as progressives by his embrace of “socialist” policies. What were Friedman’s criticisms?
First, Friedman was not worried about the suspension of dollar convertibility by foreign central banks at the rate of an ounce of gold for every $35 presented for redemption by foreign central banks. The neoclassical economist was just as much in favor of non-commodity money as Keynes and his followers were. As far as Friedman was concerned, gold ceased to be money when the mint ceased to make gold into gold dollar coins, and gold dollars were recalled from circulation in 1933.
The suspension of the dollar’s convertibility into gold merely removed the artificial price support. This idea seems quaint in April 2024, when gold sells for more than $2000 per ounce without price support. Neoclassical economists believed that withdrawing the price support would force down the gold price, which was then around $44 per ounce.
Even if it didn’t happen, it would affect only the jewelry and dental industries but have little impact on the general economy, as gold was virtually demonetized in 1933. Friedman didn’t oppose Nixon’s suspension of the dollar’s already very limited gold convertibility. He even went further and advocated that the Treasury sell off its entire reserve of gold at market prices.
Friedman’s objection was Nixon’s freezing of commodity prices. In neoclassical theory, prices reflect relative scarcities. Prices signal which commodities should be produced in greater or lesser quantities. If the government tries to freeze prices, capitalists won’t receive the right price signals.
What does Marx say about this question? Of course, Marx was not alive in the 1970s, but he did have much to say about prices and their role in a capitalist economy. Marx, like Ricardo before him, believed prices are determined by the quantity of socially necessary labor needed to produce, on average, a given type of commodity of a given quality.
Different organic compositions of capital and different capital turnover times producing different types of commodities, combined with the tendency of competition to equalize the profit rate in different industries, transform prices into production prices that equalize profits among different branches of production. However, as Ricardo (then Shaikh) points out, the production prices are not far from the direct commodity prices.
If we replace “relative scarcities” with production prices, which in the final analysis are determined with the modifications noted above by labor values, it is the deviations of market prices from production prices that signal the capitalists how much of a commodity to produce. Friedman was correct in claiming Nixon’s blanket price controls gummed up the only mechanism a capitalist economy has to determine the type and quantity of commodities to produce.
In theory, under a capitalist economy, capitalists are free to charge anything they want for commodities they produce and sell. In reality, they have very little freedom in the prices they set. If they set prices too low, they won’t make a profit no matter how much they sell. Too high, they can’t sell enough to make a profit.
A monopolist has more freedom to set prices than a capitalist facing free competition. However, the monopolist’s freedom is not without limitations. Like any other capitalist, the monopolist must set a price that maximizes profit — too high, and sales decline along with profits.
The monopolist has another problem. If profits get too high, capital from other industries flows into it, breaking the monopoly and causing a tumble in both prices and profits. The monopolist can’t set prices at any level they like without the prospect of bankruptcy and partial or total loss of capital. In the end, individual capitalists, including powerful monopolist trusts, are the agents rather than masters of the law of the value of commodities that rules capitalism.
If the government tries to interfere with price formation, the law of value will force the capitalist to fight against price controls. They’ll withhold products from the market until the government backs down. Or they might sell at prices higher than allowed by the government on gray or black markets. They might reduce the quality of their commodities sold at fixed prices.
Capitalists do these things not because they are greedy people — though they are — but because the law of the value of commodities forces them to do so. The lesson is we should never depend on government price controls to safeguard our real wages. We should push for the highest price for our labor power — wages — that the economic laws of capitalism allow. We should not limit ourselves to that but push to eliminate the entire wage system — capitalism — altogether.
In 1971, Keynesians and “pro-labor” progressives advocated policies based on the false theory that the level of money wages determines the general price level, so preventing money wages from rising was supposed to end inflation. The traditional way to fight inflation was to raise interest rates, cut or limit government spending, and reduce central government borrowing (even running a government budget surplus). These policies reduced demand and triggered a recession with rising unemployment. Rising unemployment reduced or eliminated wage increases, reducing price increases. The Keynesians agreed that Friedman’s anti-inflation policies would work.
The problem was that these deflationary policies increased unemployment. The Keynesians, supported by labor unionists and non-Marxist progressives, claimed there was a better way to reduce inflation. They falsely theorized that limiting money wages would reduce price increases without increasing unemployment. They wanted labor unions to agree to limit wage demands voluntarily. There was only one problem for the workers: this tactic doesn’t work. All it does is raise the profit rate. While capitalists don’t like price controls, they don’t mind wage controls, which mean higher profits.
Keynesians complained that unions were fueling inflation by failing to limit demands for wage increases. Supposedly, wage demands pushed up prices, which then caused unions to demand still higher wages. The financial press called this the wage-price spiral. If unions were unwilling to limit their wage demands, then the government should step in to use state power to hold wages down and break the spiral.
It was claimed that this was better than the tradition of using rising unemployment to hold down money and real wages. It was further claimed that holding down wages was really in the workers’ interests and that real wages would continue rising in line with rising labor productivity.
A policy of holding down wage increases through state power would help the workers, as real wages would remain unaffected, and recession and rising unemployment would be avoided. The Keynesian fake friends of labor got it backward. It wasn’t a wage-price spiral but rather a price-wage spiral. To the extent that money wages rose, they simply reflected higher prices.
It was also not true that recessions could be avoided if workers practiced wage restraint because recessions aren’t caused by rising wages but by a general overproduction of commodities relative to the market’s ability to absorb them at a profit. The Keynesian diagnosis was wrong, and the proposed cure would neither stop inflation nor avoid recession and mass unemployment.
What caused the inflation of the 1970s
Keynesians’ claim that a wage-price spiral caused the 1970s inflation is false. Currency-depreciation inflation was setting in. Dollar prices — and prices of other paper currencies linked to the dollar — rose because each dollar represented less and less real money — gold.
By the early 1970s, market commodity prices calculated in gold terms rose above production prices. The Great Depression ushered in a time when the general level of commodity prices was below the production prices. As a result, more gold was produced than was necessary to circulate the commodities produced by capitalist industry.
Masses of idle cash accumulated in the banks, driving down interest rates. There was overproduction of gold because the prices of most commodities were below their production prices. As a result, the profit rate of the gold industry — mining and refining — was far above average. World War II, like World War I, raised market prices radically, so by the end of the war and immediately after, market prices were again above the production prices.
There was an important difference between the post-war periods. The pre-World War I years were prosperous, and commodity prices rose above the production prices, halting the rise in gold production. A shortage of gold began to develop.
WWI then pushed market prices still higher. This reduced gold’s purchasing power and reduced gold production profitability. While market prices dropped during the 1920-21 deflationary recession, industry ran out of inventory before the prices of commodities dropped to the prices of production. As a result, the profitability of gold production only partially recovered but remained depressed.
The crisis of 1920-21 was more a crisis of inflated prices — relative to production prices — than a traditional overproduction crisis. After WWI, gold was in chronic short supply relative to the needs of commodity circulation despite the 1920-21 deflation.
In contrast, after World War II, gold was abundant even though the market commodity prices rose above production prices. This made the development of a new gold shortage inevitable, but due to the abundance of gold in the wake of the Depression and WWII, it took many years for a new gold shortage to develop.
In the mid-1960s, a combination of a cyclical boom, the Vietnam War, and the Johnson administration’s guns and butter policies created demand-pull inflation that raised prices at an accelerated rate. This led to stagnation in the already inadequate level of gold production, and the gradual development of a gold shortage suddenly accelerated. If the Vietnam War had not occurred, the London Gold Pool and the Bretton Woods system would have lasted many years.
The slow rise in gold production characterizing the post-World War II years stalled out in the mid-1960s and ceased altogether around 1970, giving way to a recession in gold production. Since the Federal Reserve System was unwilling to follow a deflationary policy to lower prices in dollar terms — while the gold value of the dollar remained unchanged — the number of dollars in world paper currency was increasing faster than the rise in the gold supply. Each dollar came to represent less and less real money; the dollar price of gold rose, reaching $44 by August 1971. In the early 1970s, currency-depreciation inflation was unleashed. Though highly successful in increasing the rate of exploitation of the working class and production of surplus value, Keynesian wage-control policies proved powerless against currency-depreciation inflation and were soon abandoned.
To be continued
((1) The far-right-wing Ukrainian “nationalists” dominating the Ukrainian government do not represent the interests of Ukraine even as a capitalist nation with its own capitalist interests. They represent the Ukrainian compradors tied to U.S. imperialism as their predecessors represented the Nazis and earlier Imperial Germany. (back)
(2) If we add to the already ongoing war between Russia and the neocolonial regime in Kiev in Donbass, a full-scale war between the U.S., Israel, and the U.S. imperialist satellites against Iran, and a war between the U.S. and China in the Pacific, we will pretty much have World War III.< (back)/span>
(3) Owning gold protects the capitalists against the possible loss of capital. Capitalists, however, must expand the value of their capital. When they think the depreciation of the dollar — or other currency — is likely, they increase the portions of their assets held in gold. As interest rates rise, the opportunity costs of owning gold that doesn’t entitle its owner to any share of the surplus value produced by the workers increases. As interest rates rise, more owners of gold dump it on the market to purchase interest-bearing instruments that entitle them to a share of the surplus value produced by the working class. (back)
(4) In reality, capitalist overproduction is not relative to human needs but to the market’s ability to absorb commodities at profitable prices. At bottom, this means a general overproduction of non-money market commodities relative to the commodity that serves as money. (back)
(5) All these arguments are false. Workers don’t sell their labor but their labor power to the capitalists. They are paid much less in wages than the value their labor creates. If it were otherwise, there’d be no surplus value and no profit, making capitalism impossible. Nor is there a natural rate of unemployment. Under the capitalist wage system, unemployment cannot be anywhere near zero for long. If it were, the competition among capitalists for scarce labor would drive up wages so high that surplus value production would collapse. This would lead to a fall in the profit rate to zero, an economic crisis, and skyrocketing unemployment. This would quickly end full employment. In reality, the level of unemployment fluctuates with the phases of the industrial cycle — periods of boom cause unemployment to fall, draining the reserve industrial army of labor. The periodic crises of the relative general overproduction of commodities cause unemployment to rise, replenishing the reserve industrial army. (back)
(6) Just as there’s no natural unemployment rate, there’s no natural interest rate. Interest rates fluctuate according to changes in the supply and demand for money relative to the total supply of commodities. Interest rates fall when the quantity of money material increases relative to the quantity of non-money commodities, such as during recession and stagnation. When the growth of the quantity of money material lags behind the growth in the rate of non-money commodities, interest rates rise, as happens in boom periods. The interest rate can’t rise above the profit rate for long because, as both Marx and Keynes realized, an interest rate above the profit rate destroys the incentive of the industrial capitalists to carry out production. In the long term, the interest rate fluctuates between zero at the low end and the profit rate at the upper end. (back)
(7) In reality, under the capitalist mode of production, the ratios of production of the means of production versus the means of personal consumption are regulated by the fluctuation of profit rates around the average profit rate in Department I, which produces the means of production, and Department II, which produces the means of personal consumption. (back)
A Critique of Crisis Theory 