As I write these lines on Feb. 25, 2024, the immediate future of the genocide waged by Israel against the people of the Gaza Strip is coming down to the fate of the small southern city of Rafah. The vast majority of Gazans have been rendered homeless, as Israel’s bombing campaign has destroyed or made uninhabitable most of the housing stock of what was Gaza City as well as the rest of the strip.
Since October, Gaza’s people have been crowded into the city of Rafah along the border with Egypt. In the next few weeks, the question is whether Israel will destroy Rafah, killing or driving out its population, or will Israel be forced to accept a temporary ceasefire. Without a ceasefire, the effects of the bombing and other military actions, plus thirst, hunger, and disease, will kill Gazans or force them out of Palestine altogether. A ceasefire would buy time and pressure the U.S.-led imperialists to allow aid to reach the people so they can stay alive and keep fighting to stay and rebuild in the future. But this presents a danger to Israel.
The danger is when the war — if this kind of genocide can be called a war — ends in some kind of ceasefire — those who’ve survived it will still be in place, fighting and eventually liberating their entire homeland. This would be a defeat for Israel and its aim of transforming itself from the settler colony it is today into a real nation along the lines of Canada, Australia, or the United States. These nations began as settler colonies but became nations, in part, by crushing the native population.
Considering its small population — even if every remaining Jewish person in the world were forced to move to Israel — Israel has no chance of becoming the seat of a world empire like the United States. The U.S. also crushed the native peoples and used the labor of enslaved Africans to build what is now called America.
One difference between the United States and Israel is that Israel doesn’t care what happens to the Palestinians if they are able to drive them out of all parts of Palestine, not just the Gaza Strip. As a world empire, the United States does have a problem with this. Whether the current Zionist entity, Israel, evolves into a nation-state of colonial settler origins subordinate to the U.S. world empire or remains an apartheid regime is ultimately a question of secondary importance to U.S. imperialism.
This is why the U.S. flirts with the two-state solution that would allow some Palestinians to remain in a kind of bantustan. Israel wants all Palestinians gone.
The circles around President “Genocide Joe” Biden are debating whether to allow Israel to destroy Rafah and drive out its population or use its control of Israel to force some kind of temporary ceasefire. To pressure Genocide Joe to cancel Israel’s planned attack, demonstrations have been called worldwide for March 2, 2024. By the time this is published, these demonstrations will have occurred, and before the end of March, we will likely know the results.
What about the long term? Can the massively outgunned Palestinian people ever emerge victorious in the struggle? Will a Palestine “free from the river to the sea” ever be more than a dream? Only the struggles of the Arab nation to win its national liberation and, ultimately, the class struggle against the capitalist system — national liberation struggles are complex forms of class struggle — can determine the answer.
Here, I will examine how another national liberation struggle waged by the people of Vietnam to free themselves from U.S. imperialism succeeded against what seemed at the time to be overwhelming odds. Like today, the Vietnamese were massively outgunned and remained so throughout the entire course of the war.
I hope my examination of how Vietnam emerged victorious will show that a Palestine, free from the river to the sea, is not a dream.
The heroic struggles of the Palestinian people to regain their homeland, combined with the deep contradictions of capitalism, can give rise to surprising and unforeseen manifestations at unexpected times, potentially tipping the balance in favor of the Palestinians, much as they did for the Vietnamese in their struggle.
The year 1968 and the year 2024
The year 1968 was a presidential election year, like 2024. It began with an increasingly unpopular Democratic incumbent, Lyndon B. Johnson, in the White House. LBJ was unpopular because of the forever war in Vietnam. In addition to the war itself, Johnson was also unpopular because of the surge of inflation associated with the war. This inflationary surge — though nothing like the later 1970s inflation — put strong downward pressure on real wages. As the year began, it was assumed LBJ would be a candidate for reelection. (1)
Today, we also have an unpopular Democratic president, Joseph Biden. As in 1968, one reason he’s unpopular is the inflation that has put downward pressure on real wages since the end of the COVID shutdowns.
In 1968, inflation was caused by the Vietnam War on top of the cyclical boom of the 1960s, the tax cut of 1964, and the expansionary policies of the Federal Reserve System. These policies were needed to finance the economic boom, tax cuts, and the war. Today’s inflation is due to the COVID aftermath boom, the inflationary monetary policy of the Federal Reserve System during and after the shutdowns, war spending, and the federal budget deficits associated with it, combined with the effects of the Trump-era tax cuts.
Since October 7, Biden’s been unpopular for another reason: the billions of dollars his administration has doled out to the Israeli government used to finance the ongoing genocide. This has gained him a new title: Genocide Joe.
Like LBJ and later Hubert Humphrey fifty-six years ago, Biden is losing support among voters he can’t afford to lose if he is to have a chance of winning a second term. He’s losing Arab and Muslim voters. Though still only a small percentage of the total, they’re concentrated in so-called swing states, especially Michigan. Without a strong turnout among them, Biden seems to have little chance of carrying the state.
What Genocide Joe and his supporters are hoping for is that faced with the likely Republican being the ultra-right, extreme Zionist, anti-Arab, and Islamophobic Donald Trump, Arab-American and Muslim voters will choose Biden. Biden hopes that in November, Trump will be dominating the news, not the Gaza genocide. This may cause him to use the U.S. power over Israel to postpone the destruction of Rafah for now and accept a temporary ceasefire to get the genocide out of the news. But we can’t count on this.
Even with a ceasefire, the facts about the devastation and the full extent of the final death toll (including people trapped under the rubble and not yet counted by the Gaza Health Ministry, as well as people who will die of diseases caused by the devastation and the almost total destruction of the housing stock, water delivery systems, and medical system) will become even more known than it is now. If anything, the movement to not vote for Genocide Joe will likely gain momentum.
Younger voters are also repelled by Biden’s pro-Israeli and anti-Palestine policies, as are the African American and the working-class Latino community. Without solid turnouts from these voters, Biden stands little chance of reelection even with Trump as the Republican nominee.
Will the Democrats dump Biden?
Some Democrat power brokers are exploring the idea that Biden, like LBJ in 1968, might be convinced to drop his quest for a second term. LBJ didn’t announce his decision until March 31, and I am writing this on Feb 25. It’s still possible he’ll withdraw.
But Biden spent decades seeking the office and seems determined to run again. Even if he agrees to step aside (with the growing fear that he has memory loss and symptoms of dementia, health conditions not uncommon in his age group), any Democrat replacing him would also be expected to support the Israeli genocide. Biden’s record of supporting Zionism is that of the Democratic Party going back to World War II. (2)
A loss to the Republicans seems likely. This happened to the Democrat candidate Hubert Humphrey in 1968. Bitterly disappointed with pro-war Humphrey’s nomination rather than pro-peace Eugene McCarthy, enough young people of voting age (then it was 21, today it is 18) stayed home or voted for third-party candidates instead. (3)
It was this that let Richard Nixon win narrowly in the 1968 election, even though the racist third-party candidacy of George Wallace undermined Nixon’s racist Southern Strategy. Wallace won the electoral votes of five southern states that likely otherwise would have gone to Nixon.
In 2024, Donald Trump has no serious competition for the reactionary vote. The only possible one is Robert Kennedy Jr. As of February 2024, it’s unclear whether Kennedy will make it onto the ballot in most states since he has no party organization. If the Party of Order finds a way to force Trump to withdraw or he withdraws on his own, any other Republican could defeat Biden even more handily. Many would vote for a reasonable Republican but not for the putsch-prone arch-racist Trump.
Biden’s only chance of reelection — a slim one — is that Trump will be the GOP standard bearer. Democrats hope that the fear of a second Trump administration will prompt a vote for Genocide Joe. If that happens, it won’t be because they want him in the White House for four more years or the unpopular Kamala Harris if he becomes unable to do the job. It will be because it’s the only way within the two-party system to keep out Trump. This is what “democracy” has come to in 2024.
There is an important difference between 1968 and now. Then, the political system was flexible enough to offer pro-peace alternatives, New York Democratic Senator Robert Kennedy Sr. (whose candidacy ended when he was assassinated on June 6, 1968) and Minnesota Democratic Senator Eugene McCarthy. By offering peace candidates, capitalist rule drew large numbers of anti-war radical young people back into the system, limiting their further radicalization.
Today, the two-party system offers opponents of genocide and war zero political choices. No anti-genocide Democratic candidate with even a remote chance to win has emerged. Arab Americans, Muslims, working-class Latinos, African Americans, and young Jewish people are turning against Zionism in growing numbers. Any person opposing the ongoing genocide and other wars sponsored by imperialism around the world is not being given even the appearance of a meaningful choice.
There are some striking similarities between the economic situations of 1968 and today. In the late 1960s, the ongoing boom meant, as all economic booms do under capitalism, an overproduction of commodities supported by overtrading financed by credit expansion. Then, as now, people purchased commodities on credit they couldn’t afford, which temporarily maintained a high enough level of business to prevent a rise in unemployment. As it is today, the Federal Reserve System in the late 1960s tried to slow down credit inflation and the rate of economic growth to produce a modest increase in unemployment without crashing the economy.
In addition, in those days, the Federal Reserve System was attempting to save the Bretton Woods system of fixed exchange rates with its centerpiece, the convertibility of the dollar into gold at the rate of one ounce of gold for every $35 presented to the Treasury for redemption by any foreign treasury or central bank. The root cause of the system’s crisis was that market prices of commodities calculated in terms of the use value of the money commodity (its use value measures the value of commodities) had risen above the prices of production and values of commodities.
New gold production declines when this happens, creating a gold shortage over time. The decline continues as long as the prices of commodities remain above their production prices. Facing this situation in an attempt to stave off the devaluation of the dollar, defined as raising the dollar price of gold above $35, the Federal Reserve System was obliged to make dollars scarce relative to the socially necessary number needed to circulate commodities on a global scale. This growing scarcity (or tight money) combined with the deficit-financed Vietnam War led to increasing competition for scarce funds between the Treasury and the rest of the economy, pushing up interest rates.
To reduce competition, the Treasury had to reduce borrowing. That could only be done through a combination of tax increases and freezing, then reducing the number of troops fighting in Vietnam. This ended the political career of LBJ and his guns and butter policy. On March 31, 1968, Johnson addressed the country, revealing he would not be a candidate for reelection. In 2024, we’re also in a time of overproduction, credit financed over trading, and tight money.
In the 1960s, the leading academic and government economists knew that the Bretton Woods gold exchange standard faced collapse unless the Federal Reserve System was able to follow a tight money policy until a deflationary depression occurred, lowering commodity prices in gold and dollar terms. This would have resulted in an unemployment rate that would be the highest since the 1930s Great Depression. Johnson and later Nixon, backed by most economists of the time, were determined to avoid this, believing that a full-blown deflationary depression would mean the end of the capitalist system. (4)
Long before the 1960s, British economist John Maynard Keynes theorized that the only way to avoid periodic mass unemployment was to end the convertibility of the leading capitalist currencies into gold. In 1933, Keynes hailed Roosevelt’s decision to devalue the dollar against gold. Shortly after assuming office on March 4, 1933, FDR ordered the Treasury to start buying gold on the open market at increasingly high dollar prices. He finally stabilized the price at $35 — up from the old official price of $20.67 an ounce, representing a 40% devaluation — where it remained through most of the 1960s. The rise in the dollar price of gold lowered the dollar exchange rate against the British pound. This gave U.S. capitalists an advantage in competition with the British in markets worldwide as it lowered workers’ wages in gold terms.
Although Keynes was a champion of British imperialism, he hailed Roosevelt’s dollar devaluation anyway because he saw it as a step toward non-commodity money. Under the system that Keynes dreamed of, the central banks, whether the Bank of England, the Federal Reserve System, or some other central bank, would be free to issue as much currency as needed, up to the limits of “full unemployment”: meaning the optimal rate of unemployment for the capitalist class, of course.
Keynes believed this would not only end the 1930s Depression but prevent a recurrence. Capitalists need a minimum of unemployment to prevent the surplus value rate — the ratio of paid to unpaid labor — from falling. Within these limits, they prefer a booming business that enables them to realize, in terms of the use value of the money commodity, the surplus value they squeeze out of the working class in the form of profits.
Starting in the 1920s, even before the onset of the Great Depression, Britain suffered from economic stagnation and mass unemployment beyond anything experienced in the 19th century. Keynes advocated for the British government to launch a public works program financed by government borrowing to absorb the unemployed. His suggestions were opposed by conservative economists working for the British Treasury. If the Treasury borrowed on the scale advocated, officials argued, the stimulative effect on the economy would be canceled by the rise in interest rates caused by the borrowing. This rise would crowd out the private sector and reduce business investment, canceling the stimulative effect of government spending.
Keynes knew his plan depended on the state of the money market. If plenty of idle funds were available, the government could engage in considerable deficit spending before interest rates would rise significantly. Only if money were tight would rising interest rates cancel out the stimulative effects of deficit spending. This is a basic principle of modern Keynes-inspired macroeconomics. Keynes believed that as long as the central bank’s hands are tied by the need to convert currency into gold, its supply and demand will ultimately determine the extent to which the central government can borrow money.
If the link between central-bank-created legal tender currency and gold could be broken through the conversion of the currency into non-commodity money, the central bank could then create enough money to support deficit spending without raising interest rates. Under a system of non-commodity money, Keynes believed that the central bank could determine interest rates. (5)
This would prevent competition for loans between the central bank and the private sector from canceling out the otherwise stimulative effects of deficit spending. Under this system, if it were possible under capitalism, the only limit to stimulative government policies would be the physical ability of industry to produce surplus-value-containing commodities. The problem of the realization of surplus value disappears (to realize the surplus value — make a profit — they must sell commodities for a sum greater than the sum of money they used to produce them), leaving only the problem of producing it.
Keynes believed inflation would rise only if the government and central bank created so much demand that industrial capitalists couldn’t meet the demand at existing prices. He assumed that capitalists producing near the physical limits of production would produce full employment. He wanted Britain to leave the gold standard and the government to embark on a program of public works financed by borrowing until employment returned to normal levels. (6)
In 1944, at Bretton Woods, Keynes pressed for a new international monetary system built around non-commodity money. The world’s gold supply was largely in U.S. hands. With an international monetary policy built on non-commodity money, Britain’s lack of gold would no longer be a problem for the declining British Empire since there’d be plenty of non-commodity money to go around. He also knew that without it, the problem of overproduction and all the issues associated with it would reappear. These included periodic mass unemployment, competition between capitalist states for markets leading to wars, and domestic competition for loan money between the central government and the rest of the economy.
He wanted a world where the only limits on production would be physical ones imposed both by human needs and nature and not by the capitalist nature of production. He wanted capitalist production without the consequences of capitalist production! Keynes believed this could be achieved if gold was entirely replaced by non-commodity money. There was only one little problem: Non-commodity capital is impossible under the capitalist system.
At Bretton Woods, the U.S. showed no desire to create an international monetary system based on non-commodity money as it then had plenty of gold. It was willing to set up a system that would economize on using gold to a greater degree than under the old gold standard, but no more. Keynes emerged from Bretton Woods a disappointed man.
Today, the Bretton Woods system and the $35 price of gold with fixed exchange rates are long gone. More importantly, during the 1970s, policymakers learned the hard way they couldn’t allow gold’s dollar price to soar without accelerating dollar inflation spreading to other commodities, ultimately leading to higher interest rates.
Today, the problem confronting imperialism isn’t defending a fixed gold price and fixed exchange rates but defending the dollar’s role as the principal means of payment on the world market. If the dollar is dethroned from this role, it will signal the end of the U.S. world empire.
Under any possible international monetary system allowed by the laws that govern the capitalist system, neither the Treasury nor the Federal System can escape the fact that the amount of money measured in terms of purchasing power is ultimately determined by the supply and demand for gold.
The supply and demand for gold are ultimately regulated by the relationship between market prices and production costs, both measured in gold terms. The prices of production of commodities are, in turn, fundamentally determined by the amount of labor socially necessary to produce them under the prevailing conditions of production, with some modifications.
Therefore, under the capitalist system, neither the government nor the central bank can determine the quantity of money measured in terms of real purchasing power.
If the Federal Reserve System creates too many dollars not backed by a sufficient supply of newly produced gold, interest rates will decline momentarily and then rise above the preceding level. This happened several times in the 1970s. Past a certain point, creating more dollars means higher, not lower, interest rates.
Interest rates cannot rise without limit because it’s only a fraction of total profit. If interest rates rise to the point it swallows total profit, the profit of enterprise (defined as the difference between total profit and the interest rate) falls to zero. If the profit of enterprise falls to zero, the incentive to produce surplus value is destroyed. This can’t last long under the capitalist mode of production, and the economy is thrown into a crisis, with its accompanying mass unemployment. Only such a crisis can lower the interest rate below the profit rate, which alone restores the incentive to produce surplus value. (7)
The price the Biden administration is paying for its support of the Israeli genocide is a war in West Asia that, even if it remains limited without many body bags flowing back to the U.S., is still costing growing amounts of money. The more the war escalates, the greater the amount of money the Treasury has to borrow — barring rises in taxes or cuts in domestic spending. This means greater competition for credit between the Treasury and Pentagon on one side, and on the other side, the corporations, state and local governments, governments worldwide, as well as consumer commodities for personal consumption bought on credit.
This wouldn’t be a problem if the economy fell into depression. Then, plenty of idle money would accumulate in the banks, and the Treasury would have to borrow stupendous amounts of money before interest rates would be forced upward. A war would also stimulate the economy and temporarily reduce unemployment, as past wars have done. But this is not yet the situation at this time, late February 2024.
Here, we find a striking parallel with the situation that prevailed in 1968. Then, the U.S. and world economies faced a high rate of dollar inflation brought on by an ongoing economic boom further intensified by deficit spending associated with the war in Vietnam. The money market was tightening, driving interest rates higher. Due to the ongoing boom, unemployment was low, particularly compared to the higher levels of the late 1950s and early 1960s. This was the prosperity LBJ counted on to ensure his election to a new term.
However, the Federal Reserve System found itself unable to resist the rise in interest rates — despite the false but still widely accepted idea that the Fed determines the interest rate. When the Federal Reserve System tried to lower interest rates under the political pressure of the warmakers in Washington, it brought down the gold-dollar exchange standard based on the Bretton Woods system. This ultimately drove interest rates to levels never seen before or since. We will examine this situation over the coming few months.
This month, I’ll concentrate on the political and financial crisis in the United States in May 1970. The crisis immediately preceded the final collapse of the Bretton Woods system. The following month, I’ll examine its actual collapse. After that, I’ll examine the consequences and lessons of the collapse and how it led to the world we have today.
The Nixon Administration 1969-1974
Richard M. Nixon (1913-1994), the victor of the November 1968 election, claimed he had a secret peace plan to end the war in Vietnam. The plan was actually one to win the war. Unlike LBJ, his predecessor, Nixon, tried to win the war within the financial constraints of the post-Gold Pool world. The election was held on November 5, 1968. Under the Constitution, Nixon didn’t assume office until January 20, 1969.
During the interval between his electoral victory and his assumption of office, Nixon was legally only a private citizen with no right to conduct foreign policy. This didn’t prevent him from illegally interfering with negotiations between the lame-duck Johnson administration and the Vietnamese leaders. Nixon told the South Vietnamese puppet government not to participate in the negotiations because he would win a better deal for them than the outgoing Johnson administration could. This was the first of Nixon’s crimes against the people of Vietnam and Indochina— but far from his last.
Nixon’s horrendous political career is closely intertwined with the 1949 victory of the Chinese Revolution. In October 1949, the People’s Republic of China (PRC) was proclaimed in Beijing. After decades of civil war and resistance to the Japanese invasion, in the words of Mao Zedong, China had “stood up,” and its century of humiliation was over. The Chinese people had emerged victorious against their most dangerous enemy — U.S. imperialism. The last remnants of Chiang Kai-shek’s troops on the mainland, who were still holding out in parts of south China, were cleared out in 1950. He and his KMT (Nationalist Party) were forced to withdraw to Taiwan, where they enjoyed U.S. military protection.
U.S. imperialism reacted with hysteria to the victory of the revolution. And to be honest, the seventy-five years of history that followed shows that the reaction of U.S. imperialism was justified. The world’s largest country in terms of population and one the largest in area, with tremendous, if then latent, economic potential, had just slipped out of the control of the U.S. world empire.
As Chiang’s army faced its final defeat in 1949, the U.S. was in no position to send troops as it was soon to do in Korea and later Vietnam. One reason was the mass movement among U.S. soldiers that developed right after World War II to “bring us home now,” making it dangerous to use them against the Chinese revolution and national liberation struggle. Secondly, the U.S. had to take into account the inability of the Japanese army to crush the armed resistance of the Chinese people.
After 1945, U.S. imperialism under Truman concentrated on the revival of capitalism in war-torn Western and Southeastern Europe while preparing for war against the Soviet Union. There weren’t enough resources to wage a major war against revolutionary China.
The rise of Richard Nixon
After graduating from Duke Law School in 1937, the young Richard Nixon applied to be an agent of the FBI, the U.S.’s leading secret police organization. He was hired, but his appointment was canceled at the last minute because of a budget cut. In 1947, Nixon ran and was elected to Congress as a Republican from a southern California district. One of his campaign points against his Democratic opponent, Jerry Voorhis, was that Voorhis had gained the “endorsement by a group linked to communists.” This was the beginning of Nixon’s career as a red baiter.
Members of Congress are assigned to various committees, so a leading question for any new member is what committees they should join. One of the committees Nixon joined was the House Un-American Activities Committee, known as the Dies Committee before World War II and HUAC after that. This put Nixon at the center of the post-war anti-communist witch hunt that eventually became known as McCarthyism after the most notorious witch hunter of all, the Wisconsin Republican Senator Joseph McCarthy (1908-1957). This appointment transformed an obscure new member of Congress from California into a national political figure.
Wikipedia says, “By May 1948, Nixon had co-sponsored the Mundt–Nixon Bill to implement ‘a new approach’ to the complicated problem of internal communist subversion. … It provided for registration of all Communist Party members and required a statement of the source of all printed and broadcast material issued by organizations that were found to be communist fronts.”
What launched Nixon’s national political career was his charge in 1948 that State Department official Alger Hiss had spied for the Soviet Union before World War II. Nixon and others claimed the Hiss case showed that under the Democrats, the State Department had been infiltrated by communists. Among other things, they claimed Department communist infiltrators had undermined support for Chiang Kai-shek, allowing the Chinese Revolution to be victorious.
These types of charges escalated in 1950 after Senator Joseph McCarthy joined the red-baiting frenzy by making more over-the-top charges of communist infiltration of the government. Led by Nixon and McCarthy, the Red Hunt ruined many lives, and today, the McCarthy era, as it’s called, is remembered as a dark page in U.S. history. McCarthy’s witch-hunting rampage continued until he was finally censured by the Senate in 1954 after claiming that communists had infiltrated the army officer corps. Now that was going too far!
In reality, State Department China experts realized that the repressive, corrupt government of Chiang Kai-shek would not be able to resist the revolution much longer. They advised the government to cut its losses and recognize the new revolutionary government led by the Chinese Communist Party. These experts were aware that while the Soviet Communist Party and the Chinese Communist Party appeared united in the international Communist movement led by the Communist Party of the Soviet Union, there were simmering tensions between the two.
The history of the relationship between them is an interesting one. The new revolutionary generation should study it, though I have neither the room nor time to explore this subject here. We can say that U.S.-China experts realized that the U.S. could use these tensions to drive a wedge between the Chinese Revolution and the Soviet Union. Under the circumstances, this would have been the most intelligent course for U.S. imperialism to follow as the global class war, dubbed the “Cold War,” unfolded.
Republican witch hunters accused these China experts of being communists themselves or at least sympathizers of the revolution. They were accused of treason to the U.S. imperialism they served and were driven out of public life. For decades, anyone even suspected of advocating opening up normal relations with the PRC, or “Red China” (as opposed to Chiang Kai-shek’s “free China” regime in Taiwan), would be driven out of government service and public life. As a result, the government found itself immobilized in dealing with China and unable to take full advantage of the tensions between the USSR and the PRC. This was the price imperialism paid for the witch hunt.
Nixon began his political career as an “expert” on the threat to America represented by the U.S. Communist Party. His real interest was foreign policy — he was bored by domestic policy. As we have seen, his early career as a red-baiting witch hunter, along with McCarthy, limited the government’s ability (under Truman, Eisenhower, Kennedy, and Johnson) to play China off against the Soviet Union.
When he assumed office in January 1969, his history as a red baiter put him in a unique position to open relations with the PRC. As the U.S. became bogged down in the forever war in Vietnam, it became clear to the ruling Party of Order that the question of normalizing relations with China was a question that couldn’t be postponed. Who better to do this than the man who could least be accused of sympathy for the Chinese Revolution — Nixon? Nixon was the Party of Order’s preferred candidate to succeed LBJ in the election.
During the 1960s, U.S.-China policy was confined to propping up the Chiang Kai-shek regime in Taiwan and pretending it was the legitimate government of all of China. Periodically, the U.S. government threatened to unleash Chiang Kai-shek to invade and recover the mainland from the rebels of the CCP. The fierce resistance by the people of Vietnam and other Indochinese countries made continuing this policy untenable. The political atmosphere made it impossible for anybody in capitalist politics to propose establishing normal diplomatic relations with the PRC, “Red China,” without being accused of being a communist sympathizer or a communist dupe.
If it were Nixon who took the lead to normalize relations with China, it would be difficult for another politician to accuse him of selling out to the Chinese Reds. While today’s Party of Order considers Trump a dangerous amateur in foreign affairs, in 1968, Nixon was their ideal person to achieve victory over Vietnam by playing the China card. Nixon offered the PRC normalized relations, including trade, if it agreed to stab Vietnam in the back.
Playing the China card was viewed as the only way the U.S. could win in Vietnam after the London Gold Pool collapse, and the population and working class’s growing anti-war sentiments (and the troops themselves!) made it impossible to continue LBJ’s strategy of increasing the size of ground forces in Vietnam. Nixon would have to win with a shrinking army while increasing the air and naval aspects.
The tale that the Federal Funds Rates tells
To understand the financial reasons why the U.S. couldn’t continue increasing the army’s size, we must examine the movement of the federal funds rate. The federal funds rate is the annualized interest rate that commercial banks short of funds pay on the money they borrow from other banks to make up the difference. These interbank loans are used when their cash reserves fall below the level required to back up customer deposits.
For commercial banks with a surplus, the federal funds market is a convenient way to lend at interest rather than allowing the funds to lie idle. Banks, like other capitalist enterprises, hate having idle money as it yields no interest, does not appropriate surplus value, and does not act as capital.
For commercial banks, deposits are IOUs payable to the deposit owner on demand. If a bank can’t meet the mandated reserve requirement, it can be seized and liquidated by the Federal Deposit Insurance Corporation. The money they keep on hand consists of vault cash and deposits kept at one or more of the twelve Federal Reserve Banks making up the Federal Reserve System. Vault cash is legal tender dollar bills and coins. When you withdraw money from your personal account to meet your expenses, the bank pays you out of vault cash.
The other part of the cash reserve is the money the banks must keep on deposit at a Federal Reserve Bank. For a Reserve Bank, a deposit is an IOU of the bank payable on demand in legal tender cash. Before 1933, deposits at the Reserve Banks were payable at the request of the commercial bank in full-weight gold dollar coins as well.
What legal tender paper dollars were to the commercial banks, gold coins were to the Reserve Banks. After 1933, the Reserve Banks were no longer allowed to pay out their deposits in gold. They were obliged to sell their gold reserve to the Treasury in exchange for gold certificates only they could own. These certificates look like dollar bills but don’t circulate. They’re still collecting dust in the vaults.
Under the New Deal system, commercial banks could only cash in deposits in the paper dollars or coins they, in turn, used to pay their depositors. The Treasury printed the dollar bills and was required to maintain a certain amount of gold for each dollar bill it paid the commercial banks.
For the next three decades, the Treasury vaults were so glutted with gold that maintaining this cover requirement for the dollars it printed and issued was no problem. But by the 1960s, the Vietnam War years, the cover had to be first reduced and finally abandoned, or the Treasury would have to stop printing dollars. This would have resulted in a massive shortage of paper dollars, leading to a run on the commercial banking system and the collapse of the Federal Deposit Insurance Corporation.
Credit would have dried up, and loans called in. This would have led to depression, deflation, and double-digit unemployment. Policymakers were determined to avoid this at any price. In the long run, the only alternative was a massive inflationary devaluation of the dollar against gold. This was the course that was eventually followed. However, the Bretton Woods system of 1944 didn’t allow the dollar to be devalued. This was the heart of the crisis of the international monetary system that was coming to a head as Nixon assumed office on January 20, 1969.
This crisis is documented by the movement of the federal funds rate. Its history can be traced week by week starting in 1954 at this website: Federal Funds Rate – 62 Year Historical Chart. On July 26, 1954, the federal funds rate was 0.25%. This low rate reflects the huge gold hoard that the Treasury accumulated during the Great Depression. It showed that the commercial banking system was flush with cash then. By October 14, 1957, as the first post-war crisis of overproduction was hitting, the federal funds rate rose to 3.50%. This was higher than in 1954, indicating that the banking system had less on hand relative to its deposit liabilities than in 1954. But a rate of 3.50% is still low, especially for a cyclical peak.
By Feb. 14, 1958, near the bottom of the 1957-1958 recession, fed funds dropped to 0.50%, well below the cyclical peak of 3.50% but above the lowest levels of 1954. This showed a secular upward drift of the federal funds rate was underway. Money, abundant in the wake of the Depression and World War II, had become less plentiful as the dollar weakened. The Federal Reserve System created dollars faster than the quantity of new gold pouring in from the world’s mines and refineries. As it turned out, the federal funds rate of 0.50%, unlike the lower 0.25% of 1954, triggered the first serious gold drain from the U.S. since 1931, as foreign central banks began to cash in their dollars for gold at the Treasury’s gold window. They realized the dollar would be devalued, and the dollar price of gold would rise above $35.
The immediate reason for the gold drain was that the Federal Reserve System had created dollars at a rate faster than the increase in gold supply to end the 1957-58 recession quickly. While the economy recovered, so did the federal funds rate. By February 22, 1960, it had risen to 4.00%, higher than the cyclical peak of 3.50%. The rise in interest rates halted the gold drain but threw the economy back into recession. This illustrates an important economic law: In a recession, if the central bank attempts to drive down the interest rate too fast by flooding the money market with newly created currency not backed by gold, the result is that interest rates rise to an even higher peak and the economy is back in recession.
By April 10, 1961, thanks to the renewed recession, the fed funds rate had backed down to 1.75%, and the cyclical upswing of the 1960s was finally underway. As the cyclical upswing began, the 1.75% fed funds rate necessary to stabilize the dollar was far above the 0.25% in 1954, which had been sufficient to keep the dollar and the Bretton Woods system stable. The cyclical expansion of the 1960s was further accelerated by the 1964 tax cuts, followed by a rapid escalation of the Vietnam War. The Johnson administration, drunk on Keynesian economics, was financing a war by cutting rather than raising taxes. This left its mark on the fed funds rate.
By July 18, 1966, the fed funds rate hit 6.00% — high enough to throw the economy into a mini-recession in the first quarter of 1967. The Federal Reserve System moved quickly to lower the fed funds rate to 3.50%, again ending the mini-recession. The quick abortion of the 1967 mini-recession due to the rapid decline in the federal funds rates and the ever-rising expenditures for the Vietnam War was hailed as a great success of Keynesian economics.
LBJ’s Keynesian economic advisers and the leaders of the Federal Reserve chose to ignore the lesson of the 1957-1961 double-dip recession. The lesson is that if the central bank lowers interest rates too fast when a recession begins, the subsequent recovery quickly aborts, and the recession resumes. They were about to get a refresher.
By June 26, 1967, the funds rate fell to 3.50%. The rapid easing of the money market combined with the escalating war was enough to end the mini-recession within a single quarter, much to LBJ’s delight. His happiness was not to last long. The rapid fall in the federal funds rate that ended the mini-recession and allowed the war to continue escalating led straight to the London Gold Pool collapse on March 14, 1968.
A little more than two weeks later, Johnson was forced to announce he was withdrawing his candidacy for a second term. In the meantime, what was happening to the federal funds rate?
On February 26, 1968, just before the March London Gold Pool collapse, the federal funds rate rose to 4.75%. This rise was not enough to save the Gold Pool.
The federal funds rate after the London Gold Pool
As explained last month, the London Gold Pool was created alongside the GATT, the World Bank, and the International Monetary Fund as a fourth pillar of the Bretton Woods system. Its job was to buy and sell gold to keep the free market dollar price in line with the official dollar price of $35. This was the rate that the Bretton Woods system set for the Treasury to exchange gold for dollars to foreign central banks and treasuries.
In the first two weeks of March 1968, the demand for gold was so high that the Gold Pool had to sell so much on the free market to keep the price from rising that its entire reserve would be gone in weeks. In the wake of the Pool’s collapse, the only way to prevent demand from driving up gold’s dollar price well above the $35 official price was to allow the federal funds and other interest rates to rise quickly.
The demand for gold moves – all other things remaining equal – inversely to the rate(s) of interest. When demand soars, if the supply cannot be rapidly increased, the only way to hold the currency price in check is for the central bank to allow interest rates to rise. This happened after the pool’s collapse.
By August 25, 1969, the federal funds rate hit 9.75%. This was about seven months after Nixon assumed office, and the rapid rise in the federal funds rates meant that the economy was on the brink of recession. It also meant that the dollar price of gold was falling. For that moment, the Bretton Woods system gold-dollar exchange standard was saved. Right after the collapse, the dollar-gold price soared to over $40 and remained there until June 1969.
After that, rising interest rates caused the dollar price to tumble, momentarily stabilizing the Bretton Woods system. By late 1969, the dollar price of gold dropped back to $35, at the price of a recession underway by the end of 1969 and a rise in unemployment.
This is the background of the political and financial crisis that erupted in May 1970.
Political and financial crisis of May 1970
While the financial constraints of the post-Gold Pool world prohibited any increase in the number of troops after 1968, the Nixon administration was in no hurry to reduce them. He dragged his feet because he aimed to win the war. During the first phase of the Vietnam War, students pursuing higher education were immune from the draft. In those days, it was common for students to prolong their education beyond four years of college to avoid the draft. They were pursuing their own personal strategy to stay out of the war, hoping to extend their studies long enough for the war to end finally.
As the forever war in Southeast Asia dragged on, the system of student deferments came under criticism because of its obvious class bias. As a rule, college students were drawn from capitalist and upper-middle-class families. Upon graduation from high school, young men (women were not drafted) from working-class families either entered the workforce or were drafted into the military. Men who didn’t go to college and faced the draft were disproportionally members of oppressed nationalities, such as African Americans, Latinos, and Native peoples. People of color were being forced to fight other people of color in Southeast Asia to protect the richest white people in the world.
The class and national bias of the draft forced Nixon to end student deferments. Instead, a draft lottery would be held. Young men were assigned a number, and lower numbers were drafted first. Most college students at the time were not revolutionaries or even leftists. There was, however, a growing number who were attracted to radical politics and culture. They opposed the war on principle and formed the backbone of the anti-war protests. Perhaps most students supported the war, especially before the Tet Offensive. As college students tend to come from families of means, even more in those times, most saw nothing wrong with a war that was fought overwhelmingly by young workers and people of color in uniform. They enjoyed their student deferments and looked forward to lucrative careers in service to the corporations upon graduation.
The first draft lottery was held on December 1, 1969. Students, radical and conservative alike, hoped to get a high draft number so they’d be free of the draft after college. With the number of troops in Vietnam no longer increasing, anyone with a reasonably high number breathed a sigh of relief — until April 30, 1970, when Nixon went on national TV and announced the invasion of Cambodia.
College students, the radical minority and conservative majority alike watched the address in horror. Far from winding it down, Nixon was now expanding it! He claimed the incursion into Cambodia was designed to hit Viet Cong and North Vietnamese bases, where enemy troops established refuges free from attack by U.S. and South Vietnamese puppet forces. Nixon assured the audience that this was no longer true. (8)
The effect on college campuses was electric! The majority of college students had received high enough numbers in the December lottery they thought they’d be safe from being sent to the jungles of Southeast Asia to fight and die. This was based on the assumption that the number of troops serving had peaked and would go down. Now that the war was spreading geographically, those assumptions were swept away. The danger of being drafted was again very real.
The campuses exploded as conservative students joined campus radicals protesting the war. Left-wing students who had long put up with the taunts of patriotic pro-war students suddenly found themselves in the leadership of almost all students. The scope of this campus antiwar movement explosion hadn’t been anticipated among the leaders of the anti-war coalitions or left-wing political parties of the time.
Classes were canceled and final exams postponed as campuses across the nation were transformed into anti-war centers. At Ohio’s Kent State and then Mississippi’s African American Jackson State, students were killed and wounded by National Guard troops. On May 9, as antiwar demonstrators descended on Washington in an unplanned national antiwar protest, a seemingly deranged Nixon met with enraged students at the Lincoln Memorial.
The impact was felt beyond the campuses. It was felt on Wall Street. In an earlier post, I described Nixon working with white job trust labor officials who arranged to have white unionists attack antiwar demonstrators in return for assurances that the administration would oppose the opening up of the trades to African American and Latino workers.
Interesting things were happening inside the stock exchange as well.
As mentioned above, to keep the open market dollar price of gold near $35, necessary for the Bretton Woods gold-exchange standard to continue operating in the post-Gold Pool world, the Federal Reserve System was obliged to keep money tight despite the recession. On July 28, 1969, the fed funds rate peaked at 9.5%.
With the economy entering a recession, Keynesian theory would indicate that the Fed should flood the banking system with newly created dollars to lower the rate. If it did, though, the dollar price of gold would rise well above $35 unless the Treasury dumped its remaining gold on the market. If this happened, the crisis would only be momentarily postponed. It would then break out in an even more explosive form as there would be no more gold, or the remaining hoard would be radically reduced.
In either case, a move by the Federal Reserve System forcing interest rates lower by issuing a flood of new dollars not backed by gold would lead to a run on the Treasury itself, forcing it to close the gold window and end the dollar-gold exchange standard.
The only thing preventing this was the Fed’s tight money policy, which kept the fed funds rate high. While the developing recession began to bring down the Fed funds rate somewhat after July 1969, the rate was still very high by historical standards. In April, three days before Nixon’s nationwide address that triggered the May 1970 campus explosion, fed funds still stood at 8.63%. For context, the current fed funds rate (Feb 2024) is about 5.50%.
The financial markets, like the students, assumed that the number of troops would be reduced, limiting the amount of money the Treasury would have to borrow on the money market. After years of massive spending projects and inventory building to meet booming sales, the U.S. Treasury was competing with corporations running low on cash. Nixon’s April 30 announcement of the Cambodian incursion meant a widening ground war. Nobody knew how many additional soldiers would be needed to achieve victory.
Certainly, any increase would cost more, and the Treasury would have to borrow more on the open money market. The only alternative would be a tax increase, which would take months to pass through Congress while financial and political events were moving at lightning speed.
If increased competition for funds between the Treasury on one side and the corporations, local and foreign governments, as well as consumers buying durable goods (such as cars and houses) on credit on the other side, caused interest rates to continue to climb, the result would be a drop in corporate spending on expansion (enlarging existing factories and building new ones) and maintaining inventory levels as well as a plunge in consumer spending. Such a spending drop would transform a mild recession into a deep depression. Stock market speculators would panic, causing stocks to plunge on the exchange.
The New York Fed’s “Monthly Review” noted, “A deepening gloom settled over financial markets during most of May, but the darkest clouds appeared to be lifting as the month closed. Corporate stock prices first sagged and then tumbled, setting off shock waves that were felt in all sectors of the bond market. The malaise affecting the markets appeared to reflect the concern of market participants about Cambodian developments and their implications for peace, the Federal budget, and domestic tranquility.”
Particularly ominous was that the pressure extended beyond the stock market. Sectors of the bond market and, more dangerously, all the commercial banking systems were squeezed. “Monthly Review noted, “Member banks as a whole remained under pressure, with their borrowings from the Federal Reserve Banks averaging $925 million — as compared with $866 million in April.”
By the end of May, students were leaving campus for summer vacation, and conditions were calming down in the financial markets. Then, on June 21, 1970, the Penn Central Transportation Company, one of the largest railroad companies in the country, declared bankruptcy, the largest bankruptcy up to that time in U.S. history.
After World War II, it was assumed that under Keynesian-inspired “state monopoly capitalism,” the government and the Federal Reserve System would not allow a giant corporation to go under. The danger was that other giants and many smaller businesses would follow, leading to a run on the commercial banking system, a general collapse of credit, and a plunge into a deep depression.
What the ruling Party of Order capitalists feared most was that the explosion of campus protests would spread to the working class and labor union movement when the percentage of the organized workforce was higher than now. The reactionary attacks on antiwar protesters organized by the Nixon administration and their reactionary labor lieutenants in the New York longshore and building trades unions illustrate in their way the capitalists’ biggest fears.
What if the explosion of May 1970 spread to the working class and the labor unions? It wasn’t only students who were horrified about being forced to fight and die in Vietnam and Indochina. Young workers were in the same situation.
It’s harder for workers to protest than for students. The reactionary AFL-CIO bureaucracy was closely linked to the state and its intelligence agencies and designed to strangle any such protest in the bud. Despite this, progressive unions were already joining anti-war demonstrations.
The pro-war white labor union anti-student demonstrations were designed to check any move by anti-war workers in the opposite direction, to drive a wedge between anti-war students and workers. In truth, young workers were no more enthusiastic about dying in Indochinese rainforests than students were. If even conservative students could suddenly erupt with such force, couldn’t potentially the more powerful worker protests erupt similarly? Older workers with draft-age sons could not be indifferent to the possibility of their sons being sent to war. And women, though they did not themselves face the draft, knew that their male loved ones could end up dying in battle.
Unlike students, the workers, both in and out of uniform, had the physical power to halt the war. If the economy collapsed into depression or exploded into hyperinflation, the chances of a worker-soldier version of May 1970 would be increased. The Russian Revolution of 1917 began as an anti-war protest of women workers in Petrograd on March 8, International Women’s Day.
If Nixon intended to increase the number of troops in Southeast Asia, the events of May 1970 on the campuses as well as the financial markets meant these plans were now off the table. May 1970 ended in what was a huge victory for the Vietnamese and other peoples of Indochina. But their struggle was still far from won. Nixon still had cards to play.
Next: From the crisis of May 1970 to the crisis of August 1971.
(1) The rise in prices in the mid to late 1960s represented a rise in commodity prices in both gold and dollar terms. Only after the March 1968 collapse of the Gold Pool did inflation begin to transition to currency depreciation inflation, marked by rising dollar prices but falling prices when calculated in terms of gold. In addition to the change in the quality of inflation, the rate of inflation during the 1970s was quantitatively higher than during the 1960s. (back)
(2) Biden openly calls himself a Zionist. He is not Jewish but rather a Christian Roman Catholic. Most U.S. Zionists are, in fact, Christians. Christian Zionists like Biden support not only Zionism but U.S. imperialism in general. (back)
(3) In addition to the bourgeois third-party candidate George Wallace, there were a few socialist candidates who made it onto the ballot in a few states in 1968. Charlene Mitchell (1930-2022) was the candidate of the U.S. Communist Party. She was the first African American woman to run for president in any political party. According to Wikipedia, Mitchell received about a thousand votes. The oldest socialist party in the United States, the Socialist Labor Party, inspired by the political ideas of the U.S. Marxist leader Daniel De Leon (1852-1914), nominated Henning A. Blomen (1910-1993). Blomen received 45,189 votes. The Socialist Workers Party, an organization that considered itself Trotskyist at the time, nominated the prominent anti-war movement leader Fred Halstead (1927-1988). Halstead received 41,390 votes.
Today, the U.S. Communist Party advocates the defeat of all Republican candidates, meaning for all practical purposes supporting Democratic candidates. They have not announced a presidential candidate as of this writing and are not expected to do so. The Socialist Labor Party has ceased all public activity, including publishing a newspaper and maintaining a national office, though they still have a website at slp.org. Their last presidential campaign was in 1976.
The Socialist Workers Party has undergone a complete political transformation since 1968. While in 1968, they were anti-Zionist, today they support Israel’s genocidal Gaza campaign and criticize the Biden administration for allegedly putting pressure on Israel to restrain this genocidal campaign.
The party also hailed the Supreme Court’s 2022 Dobbs decision taking away access to abortion as a constitutional right. In the past, the party strongly supported the right to abortion and hailed the original 1973 Roe v. Wade decision that established this right.
The SWP is widely perceived as giving back-handed support to Trump, accusing Democrats and the petit-bourgeois left of persecuting the former president and his MAGA supporters. They see the threat to civil liberties as coming from the left and aimed at Trump but see no threat to civil liberties from Republicans. They have adopted other political positions associated with the political right, such as attacking the Black Lives Matter movement for violence while defending police officer Derek Chauvin, who strangled George Floyd. They attack the anti-racist “woke” movement and claim that the right of Christians to worship freely is under attack. There are other examples.
Since 1948, the SWP has run presidential candidates in every presidential election year. It has announced they’re running long-time member Rachele Fruit for president this year. However, considering the party’s political transformation (including support of genocide in Gaza), the Fruit campaign cannot by any reasonable definition of the term be considered to represent a genuine socialist campaign.
So far as I know, the only genuine socialist campaign in 2024 is the campaign of the Party for Socialism and Liberation (PSL), running Claudia De la Cruz (1980-). Founded only in 2004, the PSL did not exist in 1968. It’s best known for its leadership in the Act Now to Stop War and Stop Racism, the ANSWER Coalition, founded just three days after the September 11, 2001, attacks in New York City and Washington, D.C. Its mission is to fight against the war hysteria and Islamophobia that flourished in the U.S. in the wake 9/11. Opposing all imperialist wars, PSL is playing a leading role in the movement against the Gaza genocide and in defense of the national rights of the Palestinian people. (back)
(4) This is not true. No cyclical economic crisis, no matter how severe, will lead to an automatic end of the capitalist system. An economic crisis/depression, even one worse than 1929-1940, will never automatically transform capitalism into socialism. Before capitalism can be transformed, the working class, led by a communist party, must achieve a high degree of organization and class consciousness and win political power. If this doesn’t happen (it didn’t happen during the 1929-1940 Great Depression), capitalism, through its cyclical mechanisms that we’ve been studying throughout this blog, will always be able to mount a new cyclical recovery.
In the world of 1968, the powerful workers’ states of the socialist camp existed, the most powerful member being the Soviet Union. These states were led by communist parties that, based on the power of the organized working class, nationalized all large-scale industry and, to a lesser extent, agriculture and organized, planned economies that eliminated unemployment. More than anything else, the USSR’s planned economy caused the world’s capitalist political leadership to embrace Keynesian economics and promise in the future to pursue so-called full employment policies. Today, these workers’ states have been largely destroyed or, under the pressure of the capitalist world market, forced to accept a growing role for private property and markets, leading to the abandonment of full employment policies.
Despite the less favorable conditions for the working class prevailing today, the capitalists have not lost their fear that a sufficiently deep and prolonged depression will radicalize the working class, leading to overthrowing their class rule and ending the capitalist system. (back)
(5) Even Anwar Shaikh believes the central bank can determine the rate(s) of interest as long as it keeps it below the profit rate, allowing a positive profit of enterprise (defined as the difference between the rate of profit and the rate of interest). He believes this because he believes modern money is pure fiat money or non-commodity money. (back)
(6) Britain was forced to suspend gold payments when World War I broke out in 1914. Gold payments were resumed in 1925 at the old exchange rates, though this time, it was a gold bullion standard, not a gold coin standard. Keynes bitterly criticized the decision to resume gold payments. (Source: Golden Fetters: The Gold Standard and the Great Depression, 1919-1939) (back)
(7) Progressives and most academic Marxist economists consider the Volcker shock that occurred between 1979 and 1982 a tragic mistake. It was no mistake. When he died in 2019, the capitalist class treated Volcker as a hero. The economic crisis and associated mass unemployment and factory shutdowns were the only way that the high interest rates of the time (that had risen above the profit rate) could be lowered without provoking a more serious fall of the dollar (that would have led to still higher interest rates well beyond levels that the capitalist system could have sustained). Thus, Volcker played a crucial role in saving the capitalist system, which is why he is considered a hero by the capitalist class. To argue otherwise is to grossly idealize the capitalist system. (back)
(8) The media called the resistance forces in Vietnam the Viet Cong. This term, meaning Vietnamese communist, was first coined by the puppet regime in South Vietnam in 1956 and then taken up by the U.S. media. While North Vietnam’s ruling party was a member of the international Communist movement, the great majority of resistance fighters were Vietnamese peasants. It would be an idealization of the Vietnamese peasantry to imagine that they were communists. They just wanted an end to the imperialist oppression of the country and the military-police terror they were being subjected to in the name of defeating the Viet Cong, as well as a redistribution of the land.
The Vietnamese resistance was a coalition of anti-imperialist forces called the National Liberation Front, in which Vietnamese members of the international Communist movement played the leading role. As the war went on, the media increasingly described the resistance fighters as the North Vietnamese rather than the Viet Cong, implying that North Vietnam was invading South Vietnam. This overlooks the fact that Vietnam is one country. It was U.S. imperialism who were the real invaders! (back)
A Critique of Crisis Theory 