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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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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The Fed Tapers as Yellen Prepares to Take Over, and the Unemployed Get Screwed Over

In what may be its last official action under Ben Bernanke’s leadership, the Federal Reserve announced in December that it would reduce its purchases of U.S. government bonds and mortgage-backed securities from $85 billion to $75 billion a month as of January 2014. This indicates that the Fed hopes to slow down the growth of the dollar monetary base during 2014 from the 39 percent that it grew in 2013.

Considering that before the 1970s the historical growth rates in the monetary base were 2 to 3 percent, and from the 1970s until the mid-2000s they were around 7 percent, a 39 percent rate of growth in the dollar monetary base is viewed by the Fed as unsustainable in the long run.

The bond market reacted to the announcement in the textbook way, with interest rates on the U.S. 10-year government bonds rising to around 3 percent. The last time interest rates on 10-year bonds were this high was just before the Fed put the U.S. housing market on “life support” in 2011.

It seems likely that the latest move was made to smooth the transition from the Bernanke Fed to the Yellen Fed. Janet Yellen, the newly appointed, and confirmed, chair of the Federal Reserve Board of Governors, is considered a “dove.” That is, she is inclined to follow more expansionary monetary policies than Bernanke in order to push the economy in the direction of “full employment.” As defined by bourgeois economists, this is the optimal level of unemployment from the viewpoint of the capitalists – not unemployed workers. With this move, the money capitalists are “assured” that the Fed will be slowing the rate of growth of the U.S. monetary base despite the new Fed chief’s “dovish” views, while relieving Yellen of having to make a “tightening move” as soon as she takes office.

The gold market, as would be expected, dropped back towards the lows of June 2013, falling below $1,200 an ounce at times, while the yield on the 10-year bond rose to cross the 3 percent level on some days. This reflects increased expectations on the part of money capitalists that the rate of growth in the U.S. dollar monetary base will be slowing from now until the end of the current industrial cycle.

Though the prospect of a slowing growth rate in the monetary base and rising long-term interest rates is bearish for the stock market, all things remaining equal, stocks reacted bullishly to the Fed announcement. The stock market was relieved that a stronger tightening move was not announced. The Fed combined its announcement of a reduction in its purchasing of bond and mortgage-backed securities with assurances that it would keep short-term interest rates near zero for several more years, raising hopes on Wall Street that the current extremely weak recovery will finally be able to gain momentum. As a result, the stock market is still looking forward to the expected cyclical boom.

Long-term unemployed get screwed over

On December 26, Congress approved a measure, incorporated into the U.S. budget, that ended unemployment extensions beyond the six months that unemployment benefits usually last in the U.S., which added to Wall Street’s holiday cheer. During recessions, Congress and the U.S. government generally agree to extended unemployment benefits but end the extension when economic recovery takes hold. It has been six years since the recession began – 60 percent of a normal industrial cycle – and the Republicans and the bosses agreed that it was high time to end the unemployment extensions.

Some Democrats dependent on workers’ votes have said that they are for a further extension of emergency unemployment benefits. President Obama claims to oppose the end of the extended benefits but signed the budget agreement all the same. The budget agreement as it stands basically says to the unemployed, it is now time to take any job at any wage you can find. If you still can’t find a job, tough luck.

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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 2

In this post, I examine two questions: One is whether Heinrich’s critique of Marx’s theory of the tendency of the rate of profit to fall—TRPF—is valid. After that, I will examine Heinrich’s claim that Marx had actually abandoned, or was moving toward abandoning, his theory of the TRPF.

The determination of the rate of profit

If we assume the turnover period of variable capital is given and assume no realization difficulties—all commodities that are produced are sold at their prices of production—the rate of profit will depend on two variables. One is the rate of surplus value—the ratio of unpaid to paid labor. This can be represented algebraically by the expression s/v. The other variable is the ratio of constant to variable capital, or c/v—what Marx called the composition of capital.

Composition of capital versus organic composition of capital

The composition of capital will change if wages, measured in terms of values—quantities of abstract labor measured in some unit of time—changes. For example, if wages fall in terms of value, everything else remaining unchanged, there will be relatively more constant capital and less variable capital than before. The composition of capital c/v will have risen.

However, though less variable capital relative to constant capital will have been used than before, a given quantity of variable capital will now produce more surplus value. All else remaining equal, a rise in the composition of capital produced by a fall in the value of the variable capital will result in a rise in the rate of profit.

Suppose, however, that the capitalists replace some of their variable capital—workers—with machines. Remember, we are measuring the machines here in terms only of their value. Here, in contrast to the first case, we assume the value of variable capital and the rate of surplus value s/v remains unchanged.

Now, more of the total productive capital will consist of constant capital, which produces no surplus value, and less will consist of variable capital, which does produce surplus value. Since here, unlike in the first example, the rate of surplus value has remained unchanged, the fall in the portion of the capital that produces surplus value will produce a fall in the rate of profit.

In order to differentiate between these two very different cases, which produce opposite effects on the rate of profit, Marx called a rise in the composition of capital produced by a rise in the use of machinery a rise in the organic composition of capital.

Capitalist competition forces the individual industrial capitalists to do all they can to lower the cost price of the commodities they produce. The term cost price refers the cost to the industrial capitalist of producing a given commodity, not the cost to society of producing it. (1) The cost price represents the amount of (abstract) labor that the industrial capitalists actually pay for. It is in the interest of the industrial capitalists to reduce as much as possible the amount of labor that they pay for while increasing as much as possible the amount of the labor that the industrial capitalists do not pay for—surplus value.

The cost price of the commodity is, therefore, the capital—constant plus variable—that industrial capitalists must productively consume to produce a given commodity of a given use value and quality.

As capitalism develops, the amount of capital that is used to produce a given commodity of a given use value and quality progressively declines. But capitalist production is a process of the accumulation of capital. Leaving aside temporary crises, the quantity of capital defined in terms of value must progressively increase over the life span of the capitalist mode of production.

Therefore, the fall in the capital used to produce the individual commodities must be compensated for by a rise in the total quantity of commodities produced if the value of total social capital is to grow. Outside of crises and a war economy, the history of capitalist production sees a continuous rise in the total quantity of commodities produced. This is why the capitalists must find new markets or enlarge old ones if capitalism is to continue. Contrary to Say’s Law, the increase in commodity production does not necessarily equal an increase in markets.

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Michael Heinrich’s ‘New Reading’ of Marx—A Critique, Pt 1

The April 2013 edition of Monthly Review published an article entitled “Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx’s Studies in the 1870s” by German Marxist Michael Heinrich. This is the same issue that published John Bellamy Foster’s “Marx, Kalecki, and Socialist Strategy,” which I examined the month before last.

Michael Heinrich teaches economics in Berlin and is the managing editor of “PROKLA A Journal for Critical Science.” His “new reading” of Marx apparently dominates the study of Marx in German universities.

The publication of Heinrich’s article brought about a wave of criticisms on the Internet from Marxists such as Michael Roberts who base their crisis theory precisely on Marx’s law of the “tendency of the rate of profit to fall,” or TRPF for short.

Today on the Internet, partisans of two main theories of capitalist crisis—or capitalist stagnation—are struggling with one another. One theory attributes crisis/stagnation to Marx’s law of the TRPF that Marx developed in “Capital” Volume III. The rival theory is associated with the Monthly Review school, which is strongly influenced by John Maynard Keynes and even more by Michael Kalecki. Unlike the supporters of a falling rate of profit theory of crisis, the Monthly Review school, like Kalecki, puts the question of monopoly and monetarily effective demand at the center of its explanation of capitalist crisis/stagnation.

In addition to publishing Heinrich’s attempt to prove that there is in fact no tendency for the rate of profit to fall, Monthly Review Press published an English translation of Heinrich’s “An Introduction to the Three Volumes of Karl Marx’s Capital,” originally published in German under the title (in English) “Critique of Political Economy—an Introduction.”

Is Michael Heinrich a new recruit to the Monthly Review school? In fact, we will see later that the Monthly Review school and Heinrich have radically different views on the questions of capitalist monopoly and imperialism. So at this point, it is more a question of an “alliance” between the Monthly Review school and Heinrich’s “new reading of Marx” trend against the TRPF school, whose leading academic representative today is Andrew Kliman, a professor of economics at Pace University.

The first thing I must say about Heinrich is that it is clear that he knows his Marx at least as well as any writer whose works have been published in English. He is also a remarkably clear writer. This reflects the fact that he has thoroughly mastered his material. This does not mean that Heinrich agrees with Marx on all questions. Indeed, Heinrich is more than willing to express his disagreements with Marx. And as we will see, Heinrich disagrees with Marx on some very important issues.

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Bitcoins and Monetary Reform in the Digital Age

Recently, there has been a rising wave of interest in a new Internet-based currency called bitcoins. In one sense, bitcoins are the latest attempt to improve capitalism through monetary reform. But unlike other monetary reform schemes, bitcoins are very 21st century, based as they are on modern computer technology and the Internet.

According to Wikipedia: “Bitcoin (BTC) is a cryptocurrency first described in a 2008 paper by pseudonymous developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each bitcoin is subdivided down to eight decimal places, forming 100 million smaller units called satoshis. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution.”

A short history of monetary reform before the Internet

One monetary reform that was popular among small farmers and small businesspeople in the late 19th-century U.S. was bimetallism. The bimetallists proposed that the U.S. dollar be defined in terms not only of gold but also of silver, at a fixed ratio of 16 to 1. Under this proposed reform, the silver dollar coin would weigh 16 times as much as the gold dollar coin.

The supporters of bimetallism argued that this would, by sharply increasing the money supply, increase demand and thereby raise the prices of agricultural commodities. The increased demand would, the supporters of bimetallism argued, put unemployed workers back to work. In this way, the bimetallists hoped to unite the interests of workers, small farmers and small businesspeople against the rising power of the Wall Street banks.

A basic flaw in this proposal was that while at one time the ratio of 16 to 1 more or less reflected the actual relative labor values of gold and silver bullion, by the late 19th century the value of silver was falling sharply relative to the value of gold. Given a choice of using either silver or gold coins at this ratio, people would have chosen to pay off their debts in cheap silver—which is why bimetallism was so popular among highly indebted small farmers and businesspeople—while using the cheap silver dollars to purchase and hoard the more valuable gold dollars. This effect is known as “Gresham’s Law,” named after the early British economist Sir Thomas Gresham (1519-1579).

Under Gresham’s Law, cheap silver dollars would have driven gold dollars out of circulation, leaving the silver dollar as the standard dollar. This would have had the effect of devaluing the U.S. dollar from the value of the gold dollar down to the value of the silver dollar. Fearing that supporters of bimetallism would win the upper hand in the U.S. government during the 1890s, foreign capitalist investors began to cash in their U.S. dollars for gold leading to a series of runs on the U.S. Treasury’s gold reserve as well as the gold reserves of U.S. commercial banks.

A wave of bank runs and an associated stock market crash that occurred in the northern hemisphere spring of 1893 has gone down in history as the “panic of 1893.” This panic was followed by a prolonged period of depression, mass unemployment and plunging commodity prices. This was the exact opposite of what supporters of bimetallism desired.

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John Bellamy Foster’s Latest Attempt To Reconcile Marx and Kalecki

In the “Review of the Month,” entitled “Marx, Kalecki, and Socialist Strategy,” in the April 2013 edition of Monthly Review, John Bellamy Foster once again attempts to show that the views of economist Michal Kalecki (1899-1970) are fully compatible with Marx. Foster even quotes Marx’s “Value, Price and Profit” to show that Marx agreed with Kalecki—and Keynes—that higher wages lead to higher prices.

Foster writes, “Although a general rise in the money-wage level, Marx indicated, would lead to a decrease in the profit share, the economic effect would be minor since capitalists would be enabled to raise prices ‘by the increased demand.’”

Foster’s promotion of the theory that higher money wages cause prices to rise is so out of line with Marx’s whole body of work in general and “Value, Price and Profit” in particular that I could not let it pass without comment.

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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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