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

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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Money, wage-labor and Marx’s ‘Critique of the Gotha Program’

This August marks the 100-year anniversary of the start of World War I, which forever changed the world. This is the first in a series of posts that will center on the causes and consequences of World War I. The most important consequence was the conquest of political power by the working class of the former Russian Empire. Rosa Luxemburg, along with other Marxists of the time and since, saw that the catastrophe overtaking Europe in 1914 had deep economic roots.

At the beginning of this year—2014—I couldn’t help but wonder if a major new European war could break out on the 100th anniversary of the “Great War,” as it was called, that started in 1914. This seemed extremely unlikely, and indeed history rarely respects anniversaries in this manner. But in light of the crisis in Ukraine, a major new war that would mark the anniversary of the events of August 1914 doesn’t appear as unlikely as it did at the start of the year. Many of the ghosts of the last century seem to be rising from their graves once again.

In the coming months, I will explore the economic roots of the Great War in light of the ideas on crisis theory I have been exploring in this blog. Though the Great War itself was not a crisis of overproduction, it did break out during the 1913-14 global recession and was the greatest crisis by far that capitalist society had experienced up to that time. And we have already seen that the Great War played a crucial role in the development, starting in 1929, of what seemed to be an ordinary cyclical recession into first the super-crisis of 1929-33 and then the Great Depression of the 1930s.

The conquest of political power by the working class of the former Russian Empire began in Petrograd (aka St. Petersburg and Leningrad) with the insurrection of October 25 (old calender) or November 7 (new calender). Here I want to examine the fate of that first serious attempt to build a socialist society in light of Marx’s last—and as we will see perhaps least understood—work “Critique of the Gotha Program.”

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Capitalist Anarchy, Climatic Anarchy, Ukraine and New Threats of War and Fascism

The Keystone XL pipeline

President Obama appears to be nearing a decision on approving what is called the Keystone XL pipeline. This proposal by the TransCanada Corporation calls for a pipeline to be built that will, if Obama gives the green light, transport “heavy oil” produced from tar sands in the Canadian province of Alberta to refineries in the U.S. Midwest and along the Gulf Coast.

The U.S. president had indicated that his approval would depend on a State Department report on the proposed pipeline’s effects on the Earth’s climate. Opponents of the pipeline pointed out that the refining of heavy oil releases more carbon dioxide into the atmosphere than the refining of “sweet oil” does.

In late January, the State Department released its report, which claimed that the pipeline would have little if any adverse effect on the climate. The State Department reasoned that even if the pipeline was not built, the Alberta tar sands would be used for oil production anyway. The resulting heavy oil, according to the State Department, would in the absence of the XL pipeline be transported by rail. So, the State Department concluded, there would be little adverse effect from the proposed pipeline project. These conclusions put heavy pressure on Obama to approve the construction.

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Big Challenges Facing Janet Yellen

Yellen testifies

Janet Yellen gave her first report to the House Financial Services Committee since she became chairperson of the Federal Reserve Board in January. In the wake of the 2008 panic, her predecessor Ben Bernanke had indicated that “the Fed” would keep the federal funds rate—the interest rate commercial banks in the U.S. charge one another for overnight loans—at near zero until the unemployment rate, as calculated by the U.S. Labor Department, fell to 6.5 percent from over 10 percent near the bottom of the crisis in 2009.

However, the Labor Department’s unemployment rate has fallen much faster than most economists expected and is now at “only” 6.6 percent. With the U.S. Labor Department reporting almost monthly declines, it is quite possible that the official unemployment rate will fall to or below 6.5 percent as early as next month’s report.

But there is a catch that the Fed is well aware of. The unexpectedly rapid fall in the official unemployment rate reflects the fact that millions of workers have given up looking for jobs. In effect, what began as a cyclical crisis of short-term mass unemployment has grown into a much more serious crisis of long-term unemployment. As far as the U.S. Labor Department is concerned, when it comes to calculating the unemployment rate these millions might just as well have vanished from the face of the earth.

In reality, the economic recovery from the 2007-09 “Great Recession” has been far weaker than the vast majority of economists had expected. Indeed, a strong case can be made that both in the U.S. and on a world scale—including imperialist countries, developing countries and the ex-socialist countries of the former Soviet Union and Eastern Europe, as well as oppressed countries still bearing the marks of their pre-capitalist past—the current recovery is the weakest in the history of capitalist industrial cycles.

The continued stagnation of the U.S. economy six and a half years since the outbreak of the last crisis has just been underlined by a series of weak reports on employment growth and industrial production. For example, according to the U.S. Federal Reserve Board, U.S. industrial production as a whole declined 0.3 percent in January, while manufacturing, the heart of industrial production, declined by 0.8 percent.

Yellen, as the serious-minded policymaker she undoubtedly is, is well aware of these facts. She told the House committee:”The unemployment rate is still well above levels that Federal Open Market Committee participants estimate is consistent with maximum sustainable employment. Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high.”

Over the last several months, the growth of employment, which serious economists consider far more meaningful than the the U.S. Labor Department’s “unemployment rate,” has been far below expectations.

Bad weather

Most Wall Street economists are sticking to the line that the recent string of weak figures on employment growth and industrial production reflect bad weather. The eastern U.S. has experienced extreme cold and frequent storms this winter, though the U.S. West has enjoyed unseasonable warmth and a lack of the usual Pacific storms, resulting in a serious drought in California. So it is possible that bad weather has put a kink in employment growth and industrial production.

But there is also concern—clearly shared by the new U.S. Fed chairperson, notwithstanding rosy capitalist optimism maintained by the cheerleaders that pass for economic writers of the Associated Press and Reuters—that the current global upswing in the industrial cycle has failed to gain anything like the momentum to be expected six years after the outbreak of the preceding crisis.

Two ruling-class approaches

This growing “secular stagnation”–lingering mass unemployment between recessions—has produced a growing split among capitalist economists and writers for the financial press. One school of thought is alarmed by continued high unemployment and underemployment. This school thinks that the government and Federal Reserve System—which, remember, functions not only as the central bank of the U.S. but also of the world under the current dollar-centered international monetary system—should continue to search for ways to improve the situation. Another school of thought, however, believes that all that has to be done is to declare the arrival of “full employment” and prosperity.

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Change of Guard at the Fed, the Specter of ‘Secular Stagnation,’ and Some Questions of Monetary Theory

Ben Bernanke will not seek a third term as chairperson of the Federal Reserve Board of Governors – “the Fed.” President Obama has nominated, and the U.S. Senate is expected to formally approve, economist Janet Yellen as his successor. The Federal Reserve Board is a government body that controls the operation of the U.S Federal Reserve System.

“The Fed” lies at the heart of the U.S. central banking system, which under the dollar standard is in effect the central bank of the entire world.

A professional central banker

Janet Yellen is currently vice-chairperson of the Federal Reserve Board. She has also served as an economics professor at the University of California at Berkeley and chaired President Bill Clinton’s Council of Economic advisers. She headed the Federal Reserve Bank of San Francisco from 2004 to 2010, one of the 12 Federal Reserve Banks within the Federal Reserve System. If there is such a thing as a professional central banker, Yellen is it.

Yellen will be the first woman to serve as head of the Federal Reserve Board and will hold the most powerful position within the U.S. government ever held by a woman. Yellen’s appointment therefore reflects gains for women’s equality that have been made since the modern women’s liberation movement began around 1969.

Like other social movements that emerged out of the 1960s radicalization, the modern women’s liberation movement began on the radical left. The very name of the movement was inspired by the name of the main resistance organization fighting U.S. imperialism in Vietnam – the National Liberation Front. However, as a veteran bourgeois economist and a long-time major policymaker in the U.S. government, Yellen would not be expected to have much sympathy for the 20th-century revolutions and movements that made her appointment even a remote possibility.

Significantly, Yellen was appointed only after Lawrence Summers, considered like Yellen a major (bourgeois) economist and said to be the favorite of the Obama administration to succeed Bernanke, announced his withdrawal from contention. Summers became notorious when as president of Harvard University he expressed the opinion that women are not well represented in engineering and the sciences because of mental limitations rooted in biology.

Summers was obliged to resign as president of Harvard, and his anti-woman remarks undoubtedly played a role in his failure to win enough support to be appointed Fed chairman. In addition, Summers attacked the African American Professor Cornell West for his work on Black culture and his alleged “grade inflation,” causing West to leave Harvard. This hardly made Summers popular in the African American community. His nomination would therefore have produced serious strains in the Democratic Coalition, so Summers was obliged to withdraw.

Ben Bernanke like Yellen is considered a distinguished (bourgeois) economist. He had devoted his professional life to exploring the causes of the Great Depression, much like Yellen has. Essentially, Bernanke attempted to prove that the Depression was caused by faulty policies of the Federal Reserve System and the government, and not by contradictions inherent in capitalist production – such as, for example, periodic crises of overproduction. Bernanke denied that overproduction was the cause of the Depression.

Like Milton Friedman, Bernanke blamed the Depression on the failure of the Federal Reserve System to prevent a contraction of money and credit. Bernanke put the emphasis on credit, while Friedman put the emphasis on the money supply. Blaming crises on currency and credit, according to Marx, is the most shallow and superficial crisis theory of all.

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Michael Heinrich’s ‘New Reading’ of Marx—A Critique, Pt 4

Heinrich on crises—some background

A century ago, a discussion occurred in the Second International about the “disproportionate production” theory of crisis. This theory holds that crises arise because of disproportions between the various branches of industry, especially between what Marx called Department I, which produces the means of production, and Department II, which produces the means of personal consumption.

This led to speculation on the part of some Social Democrats that the growing cartelization of industry would be able to limit and eventually eliminate the crisis-breeding disproportions. This could, these Social Democrats speculated, give birth to a crisis-free capitalism, at least in theory. The revisionist wing of the International, led by such figures as Eduard Bernstein—the original revisionist—put its hopes in just such a development.

Assuming a rising organic composition of capital, Department I will grow faster than Department II. The Ukrainian economist and moderate socialist Mikhail Tugan-Baranovsky (1865-1919), who was influenced by Marxism, claimed there was no limit to the ability of capitalism to develop the productive forces as long as the proper relationship between Department I and Department II is maintained. The more capitalist industry grew and the organic composition of capital rose the more the industrial capitalists would be selling to their fellow industrial capitalists and relatively less “wage-goods” to the workers.

Tugan-Baranovsky held that capitalism would therefore never break down economically. Socialism, if it came at all, would have to come because it is a morally superior system, not because it is an economic necessity. This put Tugan-Baranovsky sharply at odds with the “world-view Marxists” of the time, who stressed that socialism would replace capitalism because socialism becomes an economic necessity once a certain level of economic development is reached.

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Michael Heinrich’s ‘New Reading’ of Marx—A Critique, Pt 3

In this month’s post, I will take a look at Heinrich’s views on value, money and price. As regular readers of this blog should realize by now, the theory of value, money and price has big implications for crisis theory.

As we have seen, present-day crisis theory is divided into two main camps. One camp emphasizes the production of surplus value. This school—largely inspired by the work of Polish-born economist Henryk Grossman, and whose most distinguished present-day leader is Professor Andrew Kliman of Pace University—holds that the basic cause of crises is that periodically an insufficient amount of surplus value is produced. The result is a rate of profit too low for the capitalists to maintain a level of investment sufficient to prevent a crisis.

From the viewpoint of this school, a lack of demand is a secondary effect of the crisis but by no means the cause. If the capitalists find a way to increase the production of surplus value sufficiently, investment will rise and demand problems will go away. Heinrich, who claims there is no tendency of the rate of profit to fall, is therefore anathema to this tendency of Marxist thought.

The other main school of crisis theory puts the emphasis on the problem of the realization of surplus value. This tendency is dominated by the Monthly Review school, named after the magazine founded by U.S. Marxist economist Paul Sweezy and now led by Monthly Review editor John Bellamy Foster.

The Monthly Review school roots the tendency toward crises/stagnation not in the production of surplus value like the Grossman-Kliman school but rather in the realization of surplus value. The analysis of this school is based largely on the work of the purely bourgeois English economist John Maynard Keynes, the moderate Polish-born socialist economist Michael Kalecki, and the radical U.S. Marxist economist Paul Sweezy.

Kalecki’s views on markets were similar to those of Keynes. Indeed, it is often said that Kalecki invented “Keynesian theory” independently and prior to Keynes himself—with one exception. Kalecki, like the rest of the Monthly Review school, puts great emphasis on what he called the “degree of monopoly.” In contrast, Keynes completely ignored the problem of monopoly.

Needed, a Marxist law of markets

A real theory of the market is necessary, in my opinion, for a complete theory of crises. Engels indicated in his work “Socialism, Utopian and Scientific” that under capitalism the growth of the market is governed by “quite different laws” than govern the growth of production, and that the laws governing the growth of the market operate “far less energetically” than the laws that govern the growth of production. The result is the crises of overproduction that in the long run keep the growth of production within the limits of the market.

This, however, is not a complete crisis theory, because Engels did not explain exactly what the laws are that govern the growth of the market. Unfortunately, leaving aside hints found in Marx’s writings, Marxists—with the exception of Paul Sweezy—have largely ignored the laws that govern the growth of the market. This, I think, would be a legitimate criticism of what Heinrich calls “world view Marxism.” As a result, the theory of what does govern the growth of the market has been left to the anti-Marxist Keynes, the questionably Marxist Kalecki and the strongly Keynes- and Kalecki-influenced Sweezy.

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Monetary crisis in Cyprus and the ghost of 1931

In recent weeks, a financial, banking-monetary and political crisis erupted on the small Mediterranean island country of Cyprus. Here I am interested in examining only one aspect of this complex crisis, the banking and monetary aspect.

The Cyprus banking crisis was largely caused by the fact that Cypriot banks invested heavily in Greek government bonds. Government bonds appeared to be a safe investment in a period of crisis-depression. But then these bonds fell sharply in value due to Greece’s partial default in 2012—the so-called “haircut” that the holders of Greek government bonds were forced to take in order to avoid a full-scale default. The Cyprus banking and financial crisis is therefore an extension of the Greek crisis. However, in Cyprus the banking crisis went one stage beyond what has occurred so far in either the U.S. or Europe.

The European Union, the European Central Bank and the IMF imposed an agreement on Cyprus that involved massive losses for the owners of large bank deposits, over 100,000 euros. Mass protests by workers in Cyprus forced the European Union and the European Central Bank to retreat from their original plans to have small depositors take losses as well.

Since the late 19th century, central banks, like the Bank of England, have gone out of their way when they wind up the affairs of failing banks to do so in ways that preserve the currency value of bank deposits for their owners. The officials charged with regulating the banks prefer instead to wipe out the stockholders and sometimes the bondholders.

Why are the central banks and other governmental regulatory organs—like the U.S. Federal Deposit Insurance Agency, which was created under the New Deal in hopes of avoiding bank runs in the United States—so eager to preserve the value of bank deposits, even at the expense of bank stockholders and bondholders?

The reason is that if the owners of deposits fear that they could lose their money, they will attempt to convert their deposits into hard cash all at once, causing a run on the banks. Under the present monetary system, “hard cash” is state-created legal-tender token money. Whenever depositors of a bank en mass attempt to convert their bank deposits into cash, the reserves of the banks are drained. Unless the “run” is quickly halted, the bank fails.

A bank facing a run in a last-ditch attempt to avoid failure calls in all loans it possibly can, sells off its assets such as government bonds in order to raise cash to meet its depositors’ demands, and halts additional loans to preserve cash. Therefore, if there is a general run on the banks, the result is a drying up of loan money capital, creating a massive contraction in demand. This causes commodities to pile up unsold in warehouses, which results in a sharp contraction of production and employment. Soaring unemployment can then lead to a severe social crisis.

This is exactly the situation that now confronts the people of Cyprus. University of Cyprus political scientist Antonis Ellinas, according to Menelaos Hadjicostis of CNBC and AP, “predicted that unemployment, currently at 15 percent, will ‘probably go through the roof’ over the next few years.” With official unemployment in Cyprus already at a Depression-level 15 percent, what will the unemployment rate be “when it goes through the roof”? Throughout the Eurozone as a whole, official unemployment now stands at 12 percent.

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Can the Capitalist State Ensure ‘Full Employment’ by Providing a Replacement Market?

The followers of Keynes believe that when there is a considerable amount of unemployment of workers and machines, the government and the “monetary authority” can create whatever additional purchasing power is necessary to achieve “full employment” by providing a replacement market for otherwise overproduced commodities.

If this is true, the general overproduction of commodities can only arise because of either policy mistakes by governments and central banks or because the governments and central banks deliberately wish to create unemployment. Therefore, according to this view, it is perfectly possible to avoid the periodic mass unemployment created by crises of generalized overproduction without abolishing capitalist production.

If, on the other hand, crises of generalized overproduction occur because the industrial capitalists periodically produce more commodities than can be purchased by the combined purchasing power of the working class, the capitalist class, the middle class, and the state and its dependents, long-term “full employment” is impossible under capitalism.

In order to examine the question of to what extent if at all the capitalist state can create a replacement market for commodities that otherwise cannot find buyers requires an examination of government finance in light of Marx’s fundamental discoveries involving the nature of value, price and money.

It is pretty obvious how the production of commodities can exceed the purchasing power of provincial governments—including the national governments of the euro zone countries—state governments, and local governments—none of which has the power to issue its own currency. During downturns in the industrial cycle, tax revenues of the governments decline. If they spend more than they take in, they must borrow. If the recession is persistent, their debts will grow so that sooner or later they will be forced into bankruptcy, just as happens with private individuals and individual corporations.

But what about the case of governments that can issue their own currency—most famously the U.S. government, whose currency, the U.S. dollar, is widely accepted as a means of payment, not only in the United States, where it is “legal tender for all debts private and public,” but throughout the world? Why can’t the government make up for any gap between the ability or willingness of the “private sector” to purchase commodities and the ability of the industrial capitalists to produce them?

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Economic Stagnation, Mass Unemployment, Budget Deficits and the Industrial Cycle

A few months ago I had dinner with a some friends from the old days. One of them expressed the view that the current economic situation of prolonged economic stagnation, continuing mass unemployment, and falling real wages represented a fundamental change in the workings of the capitalist system. He asked what is behind this change? This a good question and is worth examining in a non-trivial way.

A month or so ago the media, which had been painting a picture of a steadily improving economy, was startled when the U.S. government announced that its first estimate showed that the fourth-quarter GDP declined at an annual rate of .01 percent. Though slight, this would be a decline nonetheless.

Those economists who make a business of guessing the U.S. government’s GDP estimate expected an annualized rate of growth of 1.5 percent for the fourth quarter (of 2012). This would represent a historically low rate of growth, but growth nonetheless.

The media has been working hard to create an impression of a recovery that is at last gaining momentum. Therefore, if we are to believe the capitalist press, a “new era” of lasting prosperity is on the way. This latest “new era” will be fully assured if only the Obama administration and both Democrats and Republicans can settle their differences on the need to bring the current deficit in the finances of the U.S. federal government under control.

This is to be done by some combination of “entitlement cuts” for the working and middle classes and very modest tax increases for the rich. With the tax question settled by the New Year’s Day agreement, the only question now is how deep the entitlement cuts will be, spending on the military and “national security” being largely untouchable.

Thrown somewhat off balance by the estimated fourth-quarter GDP decline, the economists, bourgeois journalists and Wall Street brokerage houses—ever eager to paint the U.S. economy in glowing terms in order to sell stocks to middle-class savers—explained that “special factors” were behind the slight fall in the estimated GDP, not a new recession.

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