Archive for the ‘Credit Money’ Category

Can Trump Become the Next U.S. President?

March 27, 2016

In the “super-Tuesday” primaries held March 15, Donald Trump solidified his lead in the struggle for the Republican nomination for the U.S. presidency. He knocked right-wing Republican Senator Marco Rubio of Florida out of the race.

Rubio had been considered one the best hopes of the pro-Wall Street establishment Republicans in their increasingly desperate struggle to stop Trump. The only bright spot for the Republican leadership was that John Kasich, the establishment Republican governor of rust-belt state Ohio defeated Trump in that state’s primary.

However, Kasich has few delegates pledged to him. In normal circumstances, that would mean that he would have virtually no chance of winning the nomination for the presidency. He would simply be a “favorite son” candidate who would be expected to release his delegates to vote for the eventual winner. At most, Kasich might hope to win the vice-presidential nomination.

The super-Tuesday results barely keep alive the hopes of the Republican leadership that Trump might still be denied enough delegates to clinch the nomination before the Republican convention to be held this coming July in Cleveland, Ohio. If this proves to be the case, there remains the possibility a majority of delegates might be scraped together to nominate a more traditional Republican for president, but who that might be is anybody’s guess at this point.

The only other Republican besides Trump and Kasich still officially in the race is Texas Senator Ted Cruz. Cruz mixes extreme “neo-liberal” economics with an appeal to the religious fanaticism of the so-called Christian Right. His colleagues in Republican Party leading circles consider him personally obnoxious. They also fear that he is likely to lose big time in November to the presumed Democratic nominee, Wall Street darling Hillary Clinton, due to his neo-liberalism combined with his support of extreme sectarian Protestant Christian religious fundamentalism.

While it is possible that Trump has considerable support among the coupon clippers in the country club locker rooms—I don’t know, since I don’t personally move in these circles—serious political strategists of the U.S. ruling class, whether Democrat or Republican—what Marx called the “political bourgeoisie“—consider Trump completely unqualified to assume the U.S. presidency. This is not because they doubt Trump’s loyalty to the capitalist system. On the contrary, Trump is a multi-billionaire and therefore has a personal stake in the survival of capitalism greater than all but a handful of his fellow billionaires.

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Capitalist Economists Debate ‘Secular Stagnation’ (Pt 4)

August 16, 2015

How gold production drives expansion of the market

Here I assume that gold bullion serves as money material unless I indicate otherwise.

In a previous post, I indicated that there cannot be an overproduction of gold in its role as money material. This has been more or less the received view among Marxist writers over the years.

However, in thinking about this question more carefully I think my earlier post was incorrect on this point. I was correct in stating that from the viewpoint of capitalists as a whole there cannot be “too much” gold as far as the realization of value of (non-gold) commodities is concerned. The more gold there is relative to the quantity of other commodities, everything else remaining equal, the easier it will be for industrial and commercial capitalists to sell their commodities at their prices of production and thus realize the surplus value contained in them in the form of profit.

But what is true for the non-gold producing capitalists is not true for the gold producing capitalists. Indeed, from the viewpoint of an individual industrial capitalist there can never be too much of the commodities produced by their suppliers. As a productive consumer, industrial capitalist A can hope for nothing better than that supplier industrial capitalist B overproduces as much as possible. When B overproduces, all other things remaining equal, A gets to pocket some of the surplus value contained in B’s commodities. But from B’s point of view, the overproduction of B’s commodity is an absolute disaster.

True, the (non)gold producing capitalists do not consume gold, insomuch as gold serves as money material as opposed to raw material. But it is absolutely essential for them that gold is produced in adequate quantities if the value, including the surplus value, contained in their commodities is to be realized.

Even if gold bullion played no role whatsoever as raw material, a certain level of gold production would still be necessary for capitalist expanded reproduction to proceed. And capitalism can only exist as expanded reproduction.

How much gold capitalism needs—with the development of the credit system, banking, clearing houses, and so on being given—depends on the level and vigor of expanded reproduction at a particular time. The greater the possibilities of exploiting wage labor and the higher the rate of surplus value and the potential rate of profit in value terms, the higher the level of gold production must be if the process of expanded capitalist production is to proceed unchecked.

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Capitalist Economists Debate ‘Secular Stagnation’ (Pt 3)

July 19, 2015

Secular stagnation and the Greek crisis

Many on the left have expressed acute disappointment that the Syriza government has agreed to accept more “austerity” in the wake of the No! vote of the Greek people. We must remember that the Syriza government is not a revolutionary socialist government—a dictatorship of the proletariat—and a socialist revolution is not, or rather is not yet, unfolding in Greece or anywhere else in Europe at the moment. The logic of the class struggle does point in the direction of a European socialist revolution, but we are not yet there. This blog will not attempt to lay out strategy and tactics for Greek revolutionaries during the present acute crisis.

Instead, I am interested in another question: Why is the “troika” so unreasonable in its dealings with the Syriza government? The government leaders have made it clear that they are determined to remain within the European Union and the Eurozone. Their program has always been quite modest—an end to the relentless austerity that has led to a depression worse in terms of both the unemployment rate and duration than the early 1930s super-crisis was in the United States or in Germany.

The super-crisis proper of the early 1930s lasted “only” three and a half years in the U.S. and Germany. The Greek crisis has lasted six years. A brief rise in the Greek GDP late last year had already given way to renewed recession before the crisis that shut down the Greek banking system for two weeks. The agreement between Syriza and the troika for still more austerity in exchange for loans that will enable the gradual reopening of the Greek banks threatens to further prolong the Greek slump.

It has been almost 50 years since the May-June 1968 General Strike in France. The French government of the day, headed by General Charles de Gaulle, largely conceded the economic demands of the strikers in order for the ruling class to hold on to power. The French government was prepared to do this through civil war if necessary. De Gaulle’s willingness to wage civil war to uphold capitalist rule combined with a willingness to make concessions in the economic sphere prevented a prolonged social and political crisis in France in 1968 of the type that is now unfolding in Greece. Why isn’t the troika, the de Gaulle of today, following the same policy for Greece that worked so well for de Gaulle and the French capitalists in 1968?

Last week, in a special post on Greece, I explained that behind the hard-line policies pursued by the troika lies the current “tightening” phase of the U.S. Federal Reserve Board monetary policy. This tightening phase is, in turn, rooted in the extraordinary policy of “quantitative easing” that the Fed followed in response to the near collapse of the U.S. banking system in the fall of 2008. But they could not continue this policy indefinitely without incurring a fatal crisis of the dollar system sooner or later.

As the quantity of U.S, dollars has begun to grow relatively more scarce than in the years of quantitative easing, there have been a few shocks—for example, the recent Chinese stock market panic. But for now, the crisis in Greece is the most dramatic. So in order to understand the deep roots of the Greek crisis and the troika response to it, we have to understand the causes of the crisis of 2008 and the quantitative easing it led to. The “Great Recession” itself was embedded in a more chronic problem of prolonged slowing economic growth that economist Larry Summers calls “secular stagnation.”

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Capitalist Economists Debate ‘Secular Stagnation’

May 24, 2015

A debate has broken out between economist Larry Summers (1954- ), who fears that the U.S. and world capitalist economies are stuck in an era of “secular stagnation” with no end in sight, and blogger Ben Bernanke (1953- ). Blogger Bernanke is, no less, the Ben Bernanke who headed the U.S. Federal Reserve Board between 2006 and 2014. Bernanke claims that the U.S. and world economies are simply dealing with lingering aftereffects of the 2007-2009 “Great Recession,” which broke out while he was head of the Federal Reserve System.

In effect, Bernanke is saying that there is nothing fundamentally wrong with capitalism and that healthy growth and “low unemployment and inflation” will return once the lingering aftereffects of the crisis are fully shaken off. Bernanke is, however, alarmed by the rapid growth of German exports and the growing share of the world market going to German industry.

Last year, we “celebrated” the 100th anniversary of the outbreak of World War I. Bernanke’s concerns show that the economic fault lines that led to both World War I and II have not disappeared. Instead, they have been joined by new ones as more countries have become industrialized. And the prolonged period of slow growth—and in some countries virtually no growth—that has followed the Great Recession is once again sharpening them. Competition both among individual capitalists and between capitalist countries is much sharper when world markets are growing slowly. World War I itself broke out when the early 20th-century “boom” was running out of steam, while World War II broke out after a decade of the Depression.

The debate between Summers and Bernanke on secular stagnation has been joined by other eminent U.S. economists such as Joseph Stiglitz (1943- ) and Brad DeLong (1960- ). Summers, Stiglitz and DeLong are Keynesian-leaning economists, while Bernanke, a Republican, leans more in the direction of “neoliberalism,” though like most U.S. policymakers, he is thoroughly pragmatic.

The debate began with Summers’ speech to the IMF’s Fourteenth Annual Research Conference in Honor of Stanley Fisher. Summers noted that the panic of 2008 was “an event that in the fall of 2008 and winter of 2009 … appeared, by most of the statistics—GDP, industrial production, employment, world trade, the stock market—worse than the fall of 1929 and the winter of 1930. …”

At the very least, this was a major defeat for “stabilization policies” that were supposed to iron out the capitalist industrial cycle and abolish panics. But the problem extends far beyond the 2008 panic itself.

“… in the four years since financial normalization,” Summers observed, “the share of adults who are working has not increased at all and GDP has fallen further and further behind potential, as we would have defined it in the fall of 2009.”

The highly misleading unemployment rate calculated by the U.S. Department of Labor notwithstanding, there has been a massive growth in long-term unemployment in the U.S. in the wake of the crisis, as shown by the declining percentage of the U.S. population actually working.

In the days before the “Keynesian revolution” in the 1930s, the “classical” neoclassical marginalist economists, whose theories still form the bedrock of the economics taught in U.S. universities, were willing to concede that some “outside shock” to the economic system (for example, a major policy blunder by the central bank or a major harvest failure) might occasionally create a severe recession and considerable amount of “involuntary unemployment.” But these learned economists insisted that since a “free market economy” naturally tends toward an equilibrium with full employment of both workers and machines, the capitalist system should quickly return to “full employment” if a severe recession occurs.

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Che Guevara and Marx’s Law of Labor Value (Pt 2)

March 29, 2015

Bourgeois value theory after Ricardo

As I explained last month, the rising tide of struggle of the British working class obliged Ricardo’s bourgeois successors to abandon the concept of value based on the quantity of labor necessary on average to produce a commodity of a given use value and quality. They were forced to do this because any concept of labor value implies that profits and rents—surplus value—are produced by the unpaid labor performed by the working class. The challenge confronting Ricardo’s bourgeois successors was to come up with a coherent economic theory that was not based on labor value. Let’s look at some of the options open to them.

Malthus, borrowing from certain passages in Adam Smith, held that the capitalists simply added profit onto their wage costs. Like Smith and Ricardo, Malthus assumed that what Marx was to call constant capital could be reduced to wages if you went back far enough. Therefore, constant capital really consisted of wages with a prolonged turnover period—what the 20th-century “neo-Ricardian” Pierro Sraffa (1898-1983) was to call in his “Commodities Produced by Means of Commodities” “dated labor.”

Malthus held that since capitalists are in business to make a profit, they simply added the profit onto their costs—ultimately reducible to the price of “dated labor,” to use Sraffa’s terminology.

The idea that profits are simply added onto the cost price of a commodity is known as “profit upon alienation.” This notion was first put forward by the mercantilists in the earliest days of political economy. In this period, preceding the industrial revolution, merchant capital still dominated industrial capital. After all, don’t merchants make their profits by buying cheap and selling dear?

But what determined the magnitude of the charge above and beyond the cost of the commodity to the capitalist? And even more devastating for Malthus, since every capitalist was overcharging every other capitalist—as well as working-class consumers who bought the means of subsistence from the capitalists—how could the capitalists as a class make a profit? If Malthus was right, the average rate of profit would be zero!

But perhaps we don’t need the concept of “value” at all? Why not simply say that the natural prices of commodities are determined by the cost of production that includes a profit? But then what determines the prices of the commodities that entered into the production costs of a given commodity? Following this logic to its end, the natural prices of commodities are determined by the natural prices of commodities. This is called circular reasoning.

We haven’t moved an inch forward from our starting point. To avoid a circle, we have to determine the prices of commodities by something other than price. There is no escaping some concept of value after all.

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David Harvey, Michael Roberts, Michael Heinrich and the Crisis Theory Debate

February 1, 2015

Recently David Harvey, the well-known writer on Marxist economics, criticized Marxist economics blogger Michael Roberts’ views on crisis theory. According to Harvey, Roberts has a “monocausal” crisis theory. What Harvey objects to is Roberts’ emphasis on Marx’s theory of the tendency of the rate of profit to fall (FRP for short) as the underlying cause of capitalist crises.

Harvey goes further than simply criticizing Roberts’ FRP-centered crisis theory. He says that he is skeptical that a tendency of the rate of profit to fall even exists. He indicates that he agrees with the views of the German Marxist economist Michael Heinrich on the invalidity of Marx’s theory of the falling rate of profit. Heinrich’s views are developed in “An Introduction of the Three Volumes of Karl Marx’s Capital” (Monthly Review Press, 2004). He elaborated them in this article.

In this work, Heinrich tries to demonstrate that Marx himself in the final years of his life moved away from his own theory of the tendency of the rate of profit to fall. Heinrich holds that an examination of Marx’s manuscripts that form the basis of Volume III of “Capital” show that Marx had moved toward a theory of crises centered on credit. Heinrich accuses Frederick Engels of editing the manuscripts in such a way as to hide Marx’s alleged movement away from an FRP-centered theory of crises to a credit-centered theory of crises.

In his defense of the falling rate of profit school from the criticism leveled by Harvey, Roberts makes an indirect reference to this blog: “… recently, one Marxist economist from the overproduction school called me a monomaniac in my attachment to Marx’s law of profitability as the main/underlying cause of capitalist crises (see Mike Treen, national director of the New Zealand Unite Union, at the annual conference of the socialist organization Fightback, held in Wellington, May 31-June 1, 2014, and a seminar hosted by Socialist Aotearoa in Auckland in November 10, 2014 http://links.org.au/node/4156).”

Mike Treen, a New Zealand Marxist, is indeed an organizer of the New Zealand trade union Unite (not to be confused with the U.S. trade union of a similar name, UNITE HERE, which also organizes fast food and other low-wage workers). The “overproduction school” Roberts refers to is actually the position of this blog, of which Mike is an editor.

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Russia, Oil, the ‘Strong Dollar’ and the Economic Conjuncture

January 11, 2015

A major feature of the current global economic conjuncture is the financial-economic crisis that has hit Russia.

On Dec. 16, 2014, the central bank of the Russian Federation raised its benchmark interest rate to 17 percent from 10.5 percent. This is a far cry from the zero to .25 percent the U.S. Federal Reserve System maintains for its key interest rate, the federal funds rate. During 2014, the Russian ruble fell 45 percent against the U.S. dollar, while the Russian central bank sold some $80 billion of its foreign reserves in an attempt to halt the fall.

By raising its benchmark interest rate to 17 percent, the Russian central bank hopes to stem the bleeding of its reserves while checking the ruble’s decline. The catch is that such a dramatic and sudden rise in interest rates is almost certain to plunge the Russian economy into recession in 2015, with rising unemployment. As demand contracts within the home market, Russian businesses will be forced to sell more of their national production on the world market and import less of the production of other countries, causing a decline in Russia’s standard of living. Eventually, the balance of trade will swing back in Russia’s favor but on the backs of the Russian working class and other Russian working people.

The current financial-economic crisis in Russia is made worse by the sanctions the U.S. and its West European satellites have imposed on Russia. These sanctions are in response to Russia’s defensive move in the Crimean Peninsula. Responding to widespread demands within Crimea in the wake of the seizure of power by far-right anti-Russian forces in Kiev in February 2014, Russia agreed to allow Crimea to rejoin the Russia Federation. The crisis in Ukraine, which at times reached the level of civil war during 2014, resulted from the U.S.-supported neo-liberal/fascist coup after months of right-wing demonstrations in Kiev.

The coup government has severely restricted civil liberties in Ukraine, forcing Ukrainian working-class parties underground while re-orienting the Ukrainian economy towards Western Europe. In addition, Ukraine has all but in name joined NATO, the main military wing of the U.S. imperialist world empire. Kiev hopes to make its NATO membership official at the earliest possible date.

Rising tension between the U.S. empire and Russia

The move by the U.S. empire to draw Ukraine into its military and economic domain has increased tension between Russia and the U.S. to its highest level since the restoration of capitalism in Russia a quarter of a century ago.

The imperialist media and certain people on the left have pictured present-day Russia as a virtual “second coming” of Nazi Germany. Russia, it is claimed, attacked Ukraine without provocation. As a result, a resurgent Russia is now threatening virtually all the countries of eastern and central Europe and ultimately “the West” itself. Unless something is done to check Putin’s “aggression,” it is claimed by imperialist propagandists, there is a danger of all of Europe falling under the Kremlin’s domination.

Other people on the left have drawn a quite different conclusion. They argue that far from a resurgent Russian imperialism, the U.S. and its European satellites have launched a new “cold war” against Russia.

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World War I—Its Causes and Consequences (Pt 4)

October 19, 2014

Could it happen again?

This August marked the 100th anniversary of the outbreak of World War I. Could it happen again? Before exploring this question, I should review how the world has changed since those European summer days of a century ago.

I have already examined in this blog the changes in imperialism—the underlying cause of the “Great War”—over the last hundred years. But before I explore the question of whether something like the Great War could happen again, I should briefly summarize these changes.

The main powers in Europe

At the start of 1914, there were a number of independent imperialist “powers,” as they were called, that were in economic, political and, as events were soon to demonstrate, military competition with one another. In Europe, the main powers were Britain, Germany, France, Russia and Austria.

Britain had been for the preceding century—since the defeat of Napoleon—the most powerful country in the world. Britain’s military power was largely naval. As the British chauvinists put it, Britannia ruled the waves. It was naval power that held the English empire—“where the sun never set”—together. In turn, British naval power was made possible by its highly advanced—for the time—industry.

France, which had been Britain’s primary rival in the world war that followed the French Revolution, was a significant imperialist power in its own right. It had a large empire in Africa, Indochina and elsewhere. Its industrialization, however, had always lagged behind that of Great Britain.

As a result, large amounts of idle money capital tended to pile up in France compared to the situation in the more dynamic capitalist countries. Since the French capitalists converted a relatively smaller amount of their money capital into industrial capital, a relatively larger amount was converted into loan capital—finance capital. Much of this capital was loaned abroad, especially in Russia.

By the beginning of the 20th century, however, France was no longer Britain’s most important rival within Europe. Germany, due to its rapid industrialization, had replaced France in that role. In Germany, capitalist production based on the latest technology was developing fast. Because its industrialization had come later than Britain or France’s—Germany wasn’t even unified as a country until the 1870s—Germany had relatively few colonies.

However, unlike the case in France and increasingly Britain, the German capitalists tended to quickly convert the money capital that passed through their hands into productive capital—both constant and variable. Therefore, finance capital developed somewhat differently in Germany than it did in Britain and France. In Germany, there was a need to mobilize every spare penny and place it in the hands of the industrial capitalists. As a result, Germany’s banking system was ultra-modern, with both commercial and investment banking centralized in a small number of huge “universal banks.”

This stood in contrast to the older British and to a large extent even the U.S. pattern, where commercial and investment banking were conducted by separate companies. The biggest of the German universal banks was the Deutsch Bank, which remains to this day Germany’s most powerful bank.

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World War I—Its Causes and Consequences (pt 2)

August 24, 2014

Wars rarely turn out the way their initiators expect. In our own time, we can point to many examples. George W. Bush and Tony Blair, when they ordered the invasion of Iraq on March 19, 2003, believed that the U.S.-British forces would defeat Iraq’s armed forces—weakened by years of sanctions, continued military attacks, and forced unilateral disarmament—within weeks with hardly any casualties on the side of the invaders. It would then be “mission accomplished.”

But now in August 2014—100 years to the month since the outbreak of the “Great War”—the U.S. has resumed bombing Iraq as the government it created crumbles. The reason this government is failing is that virtually no Iraqi wants to fight and die for it. Why should an Iraqi fight for a foreign-imposed government?

Nor should we forget the war against Afghanistan launched by the Washington war-makers in October 2001 against the Taliban government, which had no modern armed forces, only a militia. Within weeks, U.S. media were writing about that most unequal war in the past tense. But now, 13 years later, the U.S. is still struggling to find a way to exit that war without the return of the Taliban to power. That war didn’t turn out as the Washington war-makers expected either.

Nor has the air war fought by U.S-NATO against Libya in 2011 turned out the way the Obama administration, which launched that war, expected. And the same will probably be true of the most recent war—if it can even be called a war—launched by Israel, with at least the tacit support of the U.S., against the people of tiny Gaza, which has no army, air force or navy.

This August marks not only the 100th anniversary of the beginning of World War I but also the 50th anniversary of the infamous Gulf of Tonkin Incident. If we were to believe the U.S. propaganda of the time, (North) Vietnam’s tiny navy attacked without any provocation the mightiest navy the world had ever seen! This “incident” occurred—or rather didn’t occur—on August 2, 1964, just two days short of the 50th anniversary of the start of the “Great War.”

The U.S. Congress used this faked incident to grant the Johnson administration cart blanche to wage war against Vietnam, which the administration took full advantage of by launching a series of bombing raids on the Democratic Republic of Vietnam that August. This gave way to a steady air bombardment of (North) Vietnam—the South had been subject to steady U.S. bombardment for the preceding five years—the following year after Johnson won re-election as the “peace candidate.”

While the Washington war-makers succeeded in killing millions of Vietnamese people and doing incalculable damage to the environment with Agent Orange and other forms of environmental warfare, in the end the war against Vietnam did not turn out the way the war-makers in the White House, the Pentagon and Congress expected. For example, the renaming of Saigon Ho Chi Minh City was probably not part of Washington’s war plans.

Nor did the war against Korea, which is usually seen as beginning in June 1950 but really began when Washington occupied the southern part of Korea in 1945, turn out exactly as the Washington war-makers intended, though they succeeded in killing millions of Korean people and left no multistory building standing in the northern part of the country.

The rule that wars seldom turn out the way those who start them expect was certainly true of the general European war that began exactly a century ago. To the generation that actually fought, it was known as the “Great War” or “the World War,” ”the war to make the world safe for democracy,” or, most ironic of all, “the war to end all wars.” But as a result of unintended consequences of the war, it had to undergo a name change. It was renamed World War I, a mere prelude to the even greater bloodbath of World War II.

‘Before the leaves fall’

When the general European war commenced on August 4, 1914, each warring imperialist power was convinced that it would be a short war and that it would emerge victorious. Or as was said, the war would be over “before the leaves fall.”

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World War I—Its Causes and Consequences (pt 1)

July 27, 2014

Owing to the author’s and editors’ participation in this weekend’s Gaza protest, the following has been posted a little later on the scheduled publication day than usual.

Almost exactly 100 years ago, on June 28, 1914, shots rang out in the city of Sarajevo, then part of the Austro-Hungarian Empire. Assassinated on that day were the heir to the throne of Austria-Hungary, Archduke Franz Ferdinand, and Sophie, his wife and Duchess of Hohenberg. Serbians and other “south Slav” nationalists struggling to create a federation of the small south-Slav nations—Yugoslavia, in their language—were held responsible. Within little more than a month, the entire world order as it had existed prior to June 28 completely unraveled. First Europe and eventually the world plunged into what was to become known as World War I.

Among the pillars of the world order that collapsed in 1914 was the international gold standard. Under this system, central banks issued banknotes that were actually promissory notes payable in gold coin of a definite fineness and weight to the bearer on demand. As late as mid-1914, in the imperialist countries, gold coins still circulated side by side with banknotes, which along with bank checks were used for large transactions. Everyday purchases and wages were paid in coins made out of silver or base metals.

The fact that currencies of the imperialist nations were defined as a certain weight of gold of a given fineness meant that there was, within the narrow limits of the “gold points,” fixed rates of exchange among the imperialist countries. In effect, a single currency—gold—existed among the imperialist countries, with pound-sterling, dollars, marks, francs, and rubles merely local names for the universal currency, gold.

The international gold standard encouraged a massive growth of world trade and international investment rivaling today’s “globalization.” Individual countries on the gold standard had to remain on it or their access to the London-based capital markets would be undermined.

Things had not always been this way. In the mid-19th century, currencies of most European countries—with the exception of Britain—were defined in terms of weights of silver, not gold. The Russian ruble was a paper currency and was not convertible into either gold or silver at the state bank. In contrast, the United States defined both a silver and gold dollar, along with a fixed legal rate of exchange between the two. This system was known as bimetallism.

But since the value of gold and silver—the quantity of abstract human labor needed to produce a given weight of gold and silver bullion—constantly changes, it was the “cheaper” dollar that actually circulated. Originally, this had been the silver dollar, but by the middle of the 19th century after the gold dollar was made slightly lighter—in effect devalued—the U.S. was, like Britain, for all practical purposes on the gold standard.

By mid-1914, all these currencies, including the Russian ruble, were on the gold standard. Only the currencies of semi-colonial or colonized countries such as China and Mexico were still defined in terms of weights of silver or were paper currencies. And in 1914, after years of populist resistance to central banking, the U.S. Federal Reserve System began operations establishing the centralized management that the U.S. gold standard had previously lacked.

Before 1914, the U.S. gold standard was managed by a combination of private for-profit bankers, such as J.P. Morgan, and the U.S. Treasury. The flaw in this system was that there was no mechanism to meet a sudden increased demand for currency as a means of payment such as tends to develop during crises. Under the old U.S. national banking system, when a crisis hit, panic-stricken depositors would attempt all at once to convert their deposits into cash. As a result, the crisis would rage unchecked until money capital, in the form of gold bullion eager to take advantage of the sky-high U.S. interest rates caused by the panic, arrived from overseas.

The cyclical crisis of overproduction that hit with full force in the fall of 1907, as had happened periodically during the 19th century, triggered a panicky run on U.S. commercial banks as depositors rushed to convert their deposits into cash. But the changing conditions of the early 20th century made bank runs much more dangerous than they had been earlier.

By 1907, the U.S. had emerged as the world’s leading industrial power. Far fewer of the unemployed could return to their family farms to ride out the crisis like many still could during the 19th century. But there was another factor at work. Because the U.S. had now emerged as the world’s leading industrial as well as agricultural power, a run on the U.S. commercial banking system threatened to crash the entire global capitalist economy. Therefore, a U.S. central banking system had to be created to allow a rapid expansion of the quantity of means of payment in a crisis.

The danger was that if this were not done, during a crisis so much money capital in the form of gold bullion in search of the highest rate of interest would be shipped to the U.S. from Europe and elsewhere that the European central banks would be forced off the gold standard. To protect the international gold standard, it was therefore necessary for the U.S. to create a system of central banking just as the European countries already had done that would make it easy to issue extra dollars in a crisis. The very knowledge by bank deposit owners that extra dollars could be created during a crisis would make bank runs far less likely. When the Federal Reserve System began operations at the beginning of 1914, the international gold standard was now secure. Or so it seemed.

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