COVID’s Long Economic Shadow

The COVID-19 global pandemic has been with us now for more than two years. In recent weeks, with winter in the Northern Hemisphere, the pandemic has once again gained momentum. The new variant called omicron is hyper-contagious. Hospitals and their ICU units are again filling up. The vaccines still provide good protection against serious illness and death. It remains very important to receive all the doses, two shots plus a booster for most vaccines — if possible. This time however the capitalists are determined to avoid business closures.

It appears the new omicron variant causes less serious illness and death. This may reflect that in imperialist countries a large part of the population has been at least partially vaccinated. In the Global South far fewer have been vaccinated, and many have already been infected by COVID and survived, gaining natural immunity. The same is true for those in imperialist countries who refused the vaccine. Or it might be the genetic code of omicron makes it inherently less pathogenic than earlier less contagious variants.

In response to the milder nature of omicron, the CDC has slashed isolation guidelines from 10 to five days. “If a 5-day quarantine is not feasible, it is imperative that an exposed person wear a well-fitting mask at all times when around others for 10 days after exposure.” In other words, if the bosses consider it not profitable for the workers to isolate for even five days, they can go to work sick.

Sara Nelson, President of the Association of Flight Attendants, pointed out: “Already the lack of paid sick leave creates pressure on workers to come to work sick. … Corporations that fail to recognize this with paid sick leave, or pressure workers to come to work sick or face discipline, are failing their workers and their customers.” The capitalists resist any more lockdowns and shutdowns, hoping not enough workers will die, or experience long-term disabilities so the supply of labor power will not be curbed in the years ahead.

An important reason the pandemic is still with us is the monopolistic system of drug patents built on top of the capitalist system. The vaccine patents granted by the U.S. and European governments mean the prices governments pay to purchase vaccines are well above the price of production. As a result, vaccine access has been limited outside the imperialist countries. China has developed its own vaccines and socialist Cuba developed its own vaccines and has vaccinated, and boosted, almost the entire population from the age of two years and up. However, in countries of the Global South many — especially on the African continent — lack the money to purchase the vaccines in adequate quantities to vaccinate their populations.

As a result, as of January 7, 2022, about 50% of the world’s population is fully vaccinated (one or two doses as required), but almost 40% of the world’s population remains completely unvaccinated, not even one dose. Cuba has a vaccination rate of 93.7%, China 89.9%, and Vietnam 81.5%. The United States lags behind Vietnam with a vaccination rate of 75.2%, with only about 62% fully vaccinated.

Israel has a vaccination rate of 71.2% — well behind blockaded socialist Cuba. However, the Palestinian territories, the West Bank and Gaza, are only 39.6% vaccinated. This is Israeli apartheid in action. Ex-socialist Poland has a vaccination rate of 57.6%, and ex-socialist Russia only 50.6%. The lowest rates are found in the poorest countries, e.g. Afghanistan which after decades of active war as well as an economic war, and seized currency reserves, has a rate of 10.4%. But that’s better than Tanzania with only 3.4% of the population vaccinated.

The African continent, since the days of the trans-Atlantic slave trade, is the most exploited continent of all and is the least vaccinated. The irony is the virus does not respect national boundaries, Israel’s apartheid wall, nor does it respect racial differences. White North American, Black African, Israeli, Palestinian Arab are equal targets for the virus. As long as vast numbers of people remain unvaccinated, no one is safe.

In the past, humans as members of the animal kingdom were helpless before pandemics. Today as the successes of vaccines for those lucky enough to receive them show science and medicine have advanced to the point where we can largely prevent or quickly stamp out dangerous pandemics. But the capitalist system, especially the U.S. world empire, prevents that power we now possess from being effectively deployed.

Despite earlier promises by U.S. President Joseph Biden to back a suspension of patent protections for drug companies, he has done nothing. The result is millions of unnecessary deaths and perhaps permanent disability for those suffering from long COVID. The failure to vaccinate the global population has allowed variants to continue to evolve among unvaccinated populations and then break through to the vaccinated. We can only hope a variant won’t emerge that causes even more severe illness and death, that can evade the immunity from vaccination or prior infection.

Even assuming the best, where the virus fades away or mutates into a milder form, the pandemic will cast a long economic shadow over the world capitalist economy that will be felt for years to come. It is important to understand why.

Capitalist expanded reproduction expresses itself through successive industrial cycles. These cycles run from crisis, stagnation, average prosperity and boom, and then a new crisis. The crisis marks the end of one industrial cycle and the beginning of the next.

However, capitalist expanded reproduction with its successive industrial cycles can be disrupted by shocks of extra-economic origin. Such disruptions can be caused by war, pandemics, or perhaps massive harvest failures due to climate change leading to global famine. Modern capitalism has avoided global harvest failures and famine for centuries. However, during the 20th century capitalist expanded reproduction was disrupted on two occasions by world wars. Now early in the 21st century, we have seen it disrupted by the global pandemic of 2019-?. Let’s compare and contrast these disruptions caused by the 20th century’s two world wars and the disruption being caused by the COVID-19 pandemic.

The laws of a capitalist war economy

In a full-blown war economy such as during the two world wars, many capitalist enterprises that normally produce capital goods – commodities entering the process of economic reproduction — shift to the production of the means of destruction. Similarly, some capitalist enterprises shift from the production of means of personal consumption for the productive (of surplus value) workers to the production of consumer goods for non-productive (of surplus value) soldiers.

As far as expanded capitalist reproduction is concerned the means of destruction act economically much like luxury consumer commodities consumed only by the capitalists that do not enter economic reproduction. As a result, large peacetime military budgets and small wars slow capitalist expanded reproduction. In a full-scale war economy, however, expanded capitalist reproduction gives way to a process of contracted reproduction. Let’s explore what happens during such a process.

Under conditions of normal expanded reproduction the greatest difficulty the individual industrial capitalists encounter is the transformation of their commodity capital – commodities having absorbed surplus value or C’ — into money capital M’. In this process, the capital — beginning as money capital — returns to its form as money capital. But with this difference: The original capital now contains additional money. This additional money is the money form of surplus value – called profit. Assuming an industrial capitalist is successful in transforming the commodity capital into money capital, the industrial capitalist then uses a portion of the profit to purchase additional means of production and labor power to carry out a new cycle of production on an expanded basis.

However, if the industrial capitalists are not successful in selling their commodities at a price that realizes a profit, or if the industrial capitalists cannot sell the commodities at all, then the process of expanded reproduction is disrupted. If a crisis of overproduction is severe enough, expanded reproduction can be halted altogether for several years. Such generalized disruptions of the process of expanded capitalist reproduction are not accidents but are rather periodically necessary to maintain the correct proportions between the reproduction of real capital on one hand and the production and accumulation of money capital in the form of money material — gold bullion — on the other.

In contrast, during a war economy, the industrial capitalists encounter a problem that is the opposite of a crisis of overproduction. The problem is the transformation of money capital into the elements of real capital. Real capital consists of factories buildings, mines, machinery, raw and auxiliary materials, and, last and most important of all, additional labor power.

Factories, mines, farms, etc. normally produce the commodities making up real capital. They are instead now producing commodities for the capitalist military, including the means of subsistence for the soldiers who do not produce value and surplus value. During a war economy, the industrial capitalists are obliged to use their money capital to purchase war bonds – fictitious capital. If the war lasts too long – leaving aside direct war damage like bombed-out factories – the industrial capitalists end up with a lot of worn-out equipment and a lot of government bonds, promises by the government to pay money with interest at some future date.

Generally, only the industrial capitalists of the countries on the winning side of the war get their bonds and interest on their bonds paid in full. The industrial capitalists on the losing side of the war generally lose their capital invested in war bonds either through hyperinflation — as happened in Germany after World War I — or outright repudiation of war debts — as happened in Germany after World War II. Capitalists on the winning side have their war loans repaid at the expense of capitalists on the losing side. This ties capitalists of warring countries to their respective governments.

War booms versus real booms

Overall however war is a loss for the capitalist economy since the global quantity of capital contracts rather than expands. Since the capitalist economy, even during periods of industrial boom, operates well below its physical capacity, the beginning of a war causes capitalist production as opposed to capitalist reproduction to expand rapidly. Unemployment quickly falls as workers are either absorbed directly into the military or war industries. This is the prosperity of a war economy and leads to the illusion that war spending can bring endless capitalist prosperity. However, a full-scale capitalist war economy cannot be maintained over the long run because far from accumulating capital, capital is being destroyed. (1)

The shift from a war economy to normal capitalist reproduction

Now let’s examine the shift of a capitalist war economy back to normal capitalist reproduction. This transition goes through a series of stages. This is not only of historical interest but the current situation bears some resemblances, and important differences, with the transition of a capitalist war economy back to a peacetime economy.

After the period of war economy ends, the industrial cycle must be reset. The first stage is sometimes called the reconversion crisis. It occurs as soon as the war ends. War orders are canceled and factories that have been producing means of destruction lay off workers. These layoffs occur just as soldiers are demobilized and thrown back onto the labor market. As a result, unemployment — virtually nonexistent during the war — reappears. Just as industrial production increased sharply during the war, it now declines sharply, more than it usually declines during -a cyclical recessions. After World War I there was a reconversion crisis in 1918-1919 and after World War II there was a reconversion crisis in 1945-1946.

The reconversion crisis is short-lived. During the war, the war industries act like a malignant tumor on the body of capitalist reproduction. It becomes so bloated, that civilian production is sharply curtailed. War prosperity hides the fact that the production of commodities, both capital goods and consumer goods produced for the consumption of the productive (of surplus value) workers, have been sharply curtailed. (2)

When the war economy ends, commodities necessary for normal capitalist reproduction are in short supply relative to normal demand. Industrial capitalists eager to rebuild their inventories of civilian commodities scramble for commodities necessary to carry out normal capitalist expanded reproduction. With the tumor of a war economy suddenly removed, the economy now suffers from underproduction. This quickly ends the reconversion recession and is replaced by the Aftermath Boom. During this boom, capitalists scramble to rebuild their depleted inventories.

During the boom, normal processes of capitalist inventory management break down as individual industrial and merchant capitalists scramble for commodities. Commodity shortages appear everywhere. These shortages began as a result of the curtailment of civilian production during the war but continue because the capitalists withhold commodities from the market in the expectation that prices will rise even higher. This unleashes a process of inflation that feeds on itself. During the Aftermath Boom, commodities pile up in warehouses — not because sales are slow, as happens during a crisis of overproduction, but because prices are rising. The longer the sale of a commodity can be postponed by the seller, the higher the price — and the profit — on the sale will be when the commodity is finally sold.

Labor unions, strikes, and the Aftermath Boom

Anybody who knows about U.S. labor history – a history similar to that in other countries – knows that the years 1919 and 1946 saw tremendous waves of strikes. On one hand, workers’ real wages were under downward pressure due to the rising cost of living and sometimes difficulty getting desired commodities at any price. But as capitalists move to take advantage of these unusual profit opportunities created by the Aftermath Boom, they became more likely to grant increases in money wages than in normal times.

During the first Aftermath Boom of the 20th century, in 1919, the United States saw huge strikes in packinghouse and steel industries — led by the future U.S. Communist Party leader William Z. Foster. In the same year, a general strike swept Seattle, giving the strike committee tremendous power. But in the end, with the help of a wave of massive repression — especially against immigrants — and the accompanying Red Scare, the unionization drive was crushed.

During the next Aftermath Boom, in 1946, perhaps the largest strike wave in U.S. history occurred. It was spearheaded by the industrial unions of the Congress of Industrial Organizations, the CIO. Unlike those of 1919, these strikes were victorious on the economic front. Since the U.S. capitalists now had a worldwide monopoly and the world market was entering a period of major expansion, those capitalists did not attempt to smash the unions as before. (3)

Instead, they granted considerable economic concessions to unions as long as they were led by right-wing, anti-Communist, pro-imperialist leaders. The bosses and their government were concerned with destroying the influence of the U.S. Communist Party and other left-wing tendencies within the unions. The capitalists feared if they attempted to crush the unions outright it would radicalize the workers and the influence of communists and other leftists would only grow.

At that time, U.S. imperialism was launching a global class war, a Cold War, against the Soviet Union and the emerging socialist camp. To carry out this global class war successfully they first had to secure the home front. They did this by a combination of economic concessions to the trade unions and the launching of an anti-Communist witch hunt. This began in the CIO industrial unions but did not end there.

The Reset Recession

The Aftermath Booms of 1919-1920 and 1946-1948 lay outside of the normal industrial cycle. During these booms, the industrial and merchant capitalists bought up the elements of real capital before their prices rose even higher. All capitalists are forced to act this way by the pressure of competition, thus increasing prices. Rising prices then reduced the real money supply. This caused interest rates to rise and the money market to tighten. Eventually, rising interest rates caused loan money to dry up at the existing rate of interest.

Industrial and merchant capitalists withhold commodities from the market as long as their prices are rising. This creates the appearance of commodity shortages long after they have been overcome. Then money capitalists withhold loan money from the market when interest rates rise rapidly. This causes interest rates to rise even more as loans become increasingly difficult to obtain.

Eventually as happened in 1920 and 1948, as the money market tightened, prices finally stopped rising. Suddenly the capitalists no longer expected higher prices but feared lower prices. All at once, they dumped their hoarded commodities on the market in an attempt to sell them before prices fell even more. As a result, seemingly overnight, shortages of commodities were replaced by gluts. Capitalists then scrambled to pay back the loans they had used to build up their inventories. Money’s role as a means of payment once again came to the fore. As capitalists scrambled to conserve cash, production was cut back and layoffs swept the economy driving up unemployment. What I call the Reset Recession was on. I call it a reset because this type of recession resets the industrial cycle interrupted by the war — or some other reason such as a global pandemic — which then resumes its normal course.

The recession of 1920-21 after World War I is a classic example of this. The global industrial cycle that began with the world recession of 1913-14 was interrupted by World War I. The war economy that lay outside of the industrial cycle replaced the recession. With the end of the war in November 1919 came the reconversion recession of 1918-19. This recession was short-lived and was succeeded by the inflationary Aftermath Boom of 1919-20. The Federal Reserve System raised its (re)discount rate (4) in 1920 to defend the dollar against a drain on its gold reserves. The 1920-21 deflationary recession, which replaced the Aftermath Boom, marked the beginning of a new industrial cycle that continued until 1929.

A somewhat similar if less dramatic pattern can be seen after World War II. The brief reconversion crisis of 1945-46 gave way to an inflationary Aftermath Boom between 1946-48. The boom was followed by the Reset Recession of 1948-49. Though this Reset Recession, was milder than during the 1920-21 recession, it does feature the only significant fall in the dollar-denominated general price level that has occurred since the 1930s. Like 1920-21, the 1948-49 recession reset the industrial cycle after that cycle was interrupted by the World War II war economy. The industrial cycle beginning with the 1948-49 Reset Recession, continued until 1957.

COVID-19 shutdowns versus war economy

Once the seriousness of the COVID global pandemic became apparent to the U.S. government in March 2020, shutdowns swept the capitalist world economy in a desperate and failed attempt to bring it to a halt. Like World War I and World War II war economies, normal capitalist expanded reproduction suddenly stopped, though for different reasons. Industrial production plunged at an unprecedented rate in March and April 2020 and remained depressed throughout 2020. It began to recover as shutdowns were prematurely eased and industry was reopened.

The curtailment of industrial production effectively ended the industrial cycle that began with the 2007-09 crisis. Demand collapsed as well in many sectors of the economy in 2020 as well but not because credit dried up as happens in crises of overproduction. Instead, demand contracted because people were sheltering in place at home and were afraid to go to the malls lest they become infected.

This sudden curtailment of the production and sale of commodities, even if not due to an overproduction crisis, threatened to cause a credit crisis. It could have caused demand to contract even more and then remain depressed for a longer period than it did. However the Federal Reserve System, and its satellite central banks, greatly expanded the quantity of currency created. This staved off a general credit collapse.

Governments then distributed some of this newly created paper money to the general population. But the lion’s share of the newly-created central bank money went to large corporations and banks. Demand then began to return to normal — more so in some sectors than others — as capitalist governments prematurely eased restrictions and people resumed more or less normal spending. The huge amounts of newly created central bank money pumped into the economy during 2020-21 caused a sudden surge in demand. This surge obliged the industrial and merchant capitalists to rebuild both commodity capital or inventories, and circulating capital, or raw materials and parts. This created an extraordinarily strong demand for commodities throughout the capitalist world, which has proven to be highly inflationary.

The shutdowns had the same effect as restrictions in civilian production seen in the economies during World War I and World War II. However, unlike those war economies, there was no war prosperity fueled by surging war production and new jobs opening up in the military. Instead, there was the COVID depression. During the war economies of the world wars, high levels of production — largely of means of destruction — consumed large amounts of fixed capital through unusual wear and tear. In addition, much more so in World War II, there was the destruction of fixed capital through bombing and shelling in Europe and Asia, though not in the United States.

In contrast, during the COVID shutdowns, there was nothing like the consumption and physical destruction of fixed capital that occurred during the wars. There is one striking similarity however between the shutdown economy and the war economies. What they have in common is a massive contraction of civilian production. The result was what I call the COVID Aftermath Boom. It is similar to the post-war Aftermath Booms of 1919-1920 and 1946-1948.

Striketober and the COVID Aftermath Boom

The most important similarity between the current situation and the 1919-20 and 1946-48 aftermath is the rise in the number of strikes. October 2021 has been nicknamed Striketober in the United States as workers went on strike against John Deere, Kellogg’s, and Kaiser-Permanente among others. These strikes followed decades of labor union retreat. They have created the best possibility for a revival of the labor union movement. Will Striketober turn out to be the beginning of a massive revival movement that could persist beyond the COVID Aftermath Boom?

If the answer is yes, it could lead to a new rise in the broader workers’ movement in the United States and worldwide not only regarding the trade unions but also building or rebuilding workers’ political parties. Whether this becomes a reality will be determined by struggles on the shop floors, picket lines, and the streets over the next few years.

During the COVID shutdown, commodities fell in quantity not only relative to newly-created central bank-money but also relative to actual money material — gold — that ultimately gives the central-bank-created money its value. Though gold production was affected by shutdowns, the reduction of gold production during the COVID shutdowns did not reduce the global gold supply. Unlike most non-money commodities, gold is not consumed but accumulated, as it does not function as actual currency.


In 2020 the quantity of non-money commodities relative to the world supply of gold shrunk, leading to the depreciation of gold in 2021. This caused capitalist speculators to complain that gold has been a poor hedge against inflation during the current COVID Aftermath Boom. The same phenomena were observed during both the World War I and II war economies and their Aftermath Booms.

The COVID shutdown economy saw no war boom. Consequently, as the economy reopened in stages, with each reopening accompanied by a new wave of COVID-19 infections, there’s been no reconversion crisis. One important similarity is the shortage of commodities relative to effective monetary demand and the global supply of accumulated gold bullion that triggered an inflationary Aftermath Boom.

The mechanism of the Aftermath Boom

An article in Reuters Sept. 13, 2021, by Howard Schneider and Timothy Aeppel, describes the problems that the inflationary Aftermath Boom is causing for Ms. Lauren Rash, a small industrial capitalist. Ms. Rash owns a factory producing tents for hikers. The writers reported, “Her company, Diamond Brand, just launched a new line of high-end wall tents called the Liminal, thick with vents and fasteners demanded by discerning campers.” But like all industrial capitalists, Ms. Rash needs raw materials produced by other industrial capitalists to produce her products. Among the raw materials she needs is Velcro. “Before” the writers report, “supply chain breakdowns and shortages swept the world in the wake of the COVID pandemic, buying the bits and pieces for an assembly line was often as easy as clicking a button and waiting a few days or, at most, a few weeks for delivery.”

Before, Ms. Rash could easily convert her money capital into raw materials like Velcro. All she had to do was to place an order and the raw material arrived. But not now. And it isn’t only a question of Velcro. There are shortages “of metals, plastics, wood and even liquor bottles are now the norm. The upshot is a world where buyers must wait for delivery of items that were once plentiful, if they can get them at all.” And with shortages, Ms. Rash now “has piles of tents she can’t ship because she can’t get the right aluminum tubing for their frames, for instance, while others lack the right zippers. Along with the shortages come hefty price increases, which has fueled fears of a wave of sustained inflation.”

All industrial capitalists must protect themselves by buying the commodities needed to produce the commodities that sell — such as Velcro, aluminum tubing, and zippers in this case — before prices rise even more or they become unavailable. This means the perfectly rational acts of individual capitalists to protect themselves from the inflation-generating shortage make the shortages and inflation even worse. More dangerous for the capitalist economy, the shortages may appear to persist because the industrial and merchant capitalists are hoarding raw materials and parts, even though in reality the shortages are being replaced by overproduction.

This raises the question of whether the COVID Aftermath Boom will — like those of 1918-20 and 1945-48 — be followed by a Reset Recession? If the answer is yes, when might this recession occur? How severe will it be? Historically Reset Recessions associated with the world wars were precipitated, not caused, by moves of the central banks or other government authorities to restrict the supply of credit to defend their currencies. Jerome Powell, speaking for the Fed leadership, recently indicated the Fed will begin ending quantitative (5) easing ahead of schedule. It will then begin to push up the Fed’s target for the federal funds rate, now set at the historical low of between 0% and 0.25% later this year. This will likely set the stage for the Reset Recession, perhaps in 2023-24 which will mark the beginning of a new industrial cycle.

A trap for the working class

Many trade unionists and progressives will ask why can’t the Fed just continue to create enough dollars to allow the current Aftermath Boom to continue indefinitely? If rising prices are beginning to reduce the real money supply causing interest rates to rise, why can’t the Fed and other central banks offset this by creating more dollars? Why are Federal Reserve System leaders indicating it will do the exact opposite and start reducing the rate at which it has been creating dollars? While inflation has caused Biden and the Democrats, in general, to plummet in the polls, wouldn’t the mass unemployment that will accompany a Reset Recession do even worse to Biden’s and the Democrats’ popularity? There is no denying a Reset Recession and the unemployment it would bring would be a major obstacle to the present revival of the trade union movement. From the viewpoint of the trade unions it would seem, the longer the COVID Aftermath Boom continues the better.

However, we have seen the Fed already is indicating it is beginning a tightening cycle. Why? Capitalist economists say the Fed must tighten now to prevent inflationary expectations from becoming entrenched.

Capitalist economists, especially followers of John Maynard Keynes, claim that if workers and their unions keep demanding higher wages to compensate for current inflation, those wages will drive up the cost of production. The rising cost of production will force businesses to raise prices further to compensate. The danger is that once established, a wage-price spiral is hard to stop without a long, deep recession. Economists like the well-known Democratic Party economist Larry Summers think the Fed has already waited too long to tighten.

The law of labor value was first developed by David Ricardo and other classical political economists. It was later perfected by Marx. It proved that rising wages, everything else remaining the same, will reduce the rate of profit but not cause a general rise in prices. (6)

In contrast to Ricardo and Marx, John Maynard Keynes held that money wages — not the real wage supposedly (7) determined by the productivity of the workers’ labor — determines the general price level. This theory of prices being determined by money wages plays a key role in the branch of bourgeois economics called Keynesian economics. This false economic theory is repeated in the capitalist media as though it was a fact.

A more Marxist explanation of the Fed’s current moves toward tightening is that it is aimed at the newfound militancy of the labor union movement. According to this view, the Fed is aiming to crush this labor militancy. This view indeed has some truth in it but is far from the whole story.

Some economic and political history

In the early 1970s, during Richard Nixon’s run for a second term in office, the rate of inflation was accelerating, for different reasons than today. At that time, capitalist macroeconomists were divided between monetarists — today we call them neoliberals — led by Milton Friedman and followers of John Maynard Keynes. The Keynesians claimed the only way to end accelerating inflation was for the labor unions to moderate wage demands. One way to moderate inflation, monetarist and Keynesians agreed, was for the Fed to tighten credit and induce a recession with its sharply rising unemployment. The rise in unemployment, the economists argued, would end the rise in money wages, breaking the wage-price spiral. With money wages stabilized, if not falling, inflation would then fade away.

But Keynesian economists claimed there was an alternative to the traditional policies of ending inflation through recession and mass unemployment. If the labor unions would only adopt a policy of voluntary wage restraint, inflation could be ended without recession and rising unemployment. Strangely enough, the supposedly pro-labor Keynesian economists never urged a policy of price restraint on the part of the bosses. If voluntary wage restraint was not sufficient to end wage inflation, the government should step in and impose mandatory wage controls or wage-price controls. In this way, Keynesians promised inflation would be stopped without recession and mass unemployment.

In contrast, Friedman and his monetarists insisted that only recession-inducing tight monetary policies could halt the growing inflationary spiral. The monetarists admitted that their remedy would lead to a temporary rise in unemployment. But they insisted there was no other way to stop inflation.

In those days the labor union movement was far stronger than today. But the U.S. labor union movement was hobbled by a right-wing leadership that became entrenched as a result of the post-World War II witch hunt. Marxist influence in the labor union movement, while never dominant, was at an all-time low. Labor union leaders were advised by Keynesian economists, not Marxists. Keynesians claimed they had finally beaten the business cycle and developed policies that would ensure permanent capitalist prosperity and near-to-full employment.

In the early 1970s, permanent prosperity was threatened by inflation.

Keynesians acknowledged inflation could be stopped by Friedman’s tight money remedy. But tight money meant a return to high unemployment and no worker wanted that. Keynesians claimed it would be better for the labor unions to practice wage restraint. If that were not enough, the government could impose wage controls. In this way, Keynesians promised inflation could be stopped without rising unemployment. Real wages would continue to rise with the growth in the productivity of labor. Because Keynesians in opposition to Friedman and his followers opposed recession-generating tight-money policies, Keynesian economists were considered friends of labor.

And so the trap was set.

In August 1971 a run developed on the U.S. dollar. Believing the U.S. Treasury would be forced to break its promise to exchange dollars for gold at a rate of one ounce of gold for every $35 presented at the U.S. Treasury, the Bank of France and some other central banks began to demand gold for dollars. The crisis of the dollar put President Richard Nixon’s administration in a bind.

Nixon’s conversion to Keynesian economics

Nixon narrowly (8) lost the U.S. 1960 presidential election to Democrat John F. Kennedy. Nixon had been a victim of an earlier run on the U.S. Treasuries gold reserve that developed when the Fed lowered interest rates too rapidly during the 1957-1958 recession. The run on gold that developed obliged the Fed to tighten credit to defend the dollar starting in 1959. The Fed tightening of 1959-1960, necessary to defend the dollar, led to an election-year recession in 1960, sinking Nixon’s first run for the White House.

The classic response to the 1971 run on the dollar would have been for the Fed to do what it had done in 1959-60 and move to tighten credit. These time-tested policies would have stopped the 1971 run on the gold reserve and slowed or ended inflation. But it would also mean another election year recession and rising unemployment in 1972. Nixon feared such a recession would make him a one-term president.

The right-wing Republican and ever-opportunist president instead turned to the Keynesian solution and imposed mandatory wage-price controls to halt — or as it turned out briefly disguise — inflation. Instead of defending the dollar, the administration let it sink and soon moved to formally devalue it, raising the official price of gold first to $38 an ounce, and then to $42 an ounce, where it remains to this day. Nixon also announced that he was imposing compulsory wage-price controls as Keynesian economists had advocated. These economists — and many liberals, supposedly friends of labor — hailed Nixon’s move. Recession and mass unemployment had been avoided, they proclaimed. Now labor had to do its part and cooperate with wage-price controls. On the other hand, Milton Friedman, a Nixon supporter at least up to that point, bitterly denounced Nixon’s “socialist” policies.

Nixon later admitted that while the controls supposedly applied to both wages and prices, their real aim was to hold down wages, which according to Keynesian doctrine would halt inflation. Whether Nixon believed wage controls would end inflation, or cared, is unknown.

But Nixon’s friend, Federal Reserve chief Arthur Burns, continued easy money policies in the belief that wage controls would end inflation, making traditional recession-unemployment inducing tight-money policies unnecessary. Indeed, a 1972 recession was avoided. Instead, a brief boom was triggered as businesses built up inventories in expectation of being able to sell at higher prices when controls were lifted, which is exactly what happened. But before the wave of price increases hit, Nixon was reelected by a landslide in the November 1972 presidential election. (9)

Long term consequences

The wage-price controls — which were really only wage controls — could only have been defeated through massive class struggle, perhaps through a series of political strikes or even a general strike. There would have been a legal argument to back up such strikes because the wage controls effectively broke labor agreements, which are contracts that are legally binding under the law. But the right-wing leadership of the AFL-CIO unions had no stomach for the kind of struggle that would have been necessary to challenge Nixon and his wage controls.

But it wasn’t only a question of the right-wing bureaucratic labor misleadership. The rank-and-file workers overwhelmingly went along with the wage controls because they seemed to make sense. Wasn’t it better, the labor union workers reasoned, to show some wage restraint than to face recession and a return to mass unemployment? And so the workers of that generation fell into the trap.

The immediate result was a blizzard of price increases just after the 1972 election, causing real wages to plummet. The dollar price of gold soared. Sharp rises in the dollar price of gold is the form that a run against the U.S. dollar takes under the present so-called fiat-money dollar standard established by Nixon in August 1971.

The Fed was forced to tighten money in 1973-74 since the wage controls had failed to halt inflation. This led to the Great Recession of 1973-75 with its mass unemployment. The Keynesian theory of money wages determining prices had been proven false in practice and the sacrifices of the labor union workers had been in vain. But falling real wages was not the only consequence. Far worse was that the working class in the United States — and increasingly worldwide — fell into a disastrous pattern of giving in to the demands of the capitalists. This led to the neoliberal era with all its counterrevolutionary consequences.

There’s another reason that’s pressuring the Federal Reserve System to tighten credit. But first, we must peek below the surface of the capitalist economy and understand the real nature of value, money, profits, and prices. Many progressives complain central bankers have a superstitious fear of inflation. Over the decades, they proclaimed that a three or four percent rate of inflation is preferable to massive unemployment. What these progressives don’t understand is that under the capitalist mode of production, prices are not arbitrary. Fluctuations in prices are ruled by the Marxist law of (labor) value.

The fallacy of non-commodity money

A major mistake that even otherwise sophisticated Marxists make is they imagine modern money is non-commodity money. But a careful study of Marx shows that non-commodity money is logically impossible under capitalism. This is not because Marx held that it was impossible, though he did, but because the logic of his analysis reflects the objective realities of the capitalist economy.

Marx defined the labor value of a commodity as the quantity of labor necessary to produce that commodity under the average prevailing conditions of production. He showed that it cannot be measured directly by the number of hours of labor necessary to produce it. Instead, it must be measured by a quantity of use value of some other commodity called a counter-value. The reason is that under capitalism the individual industrial capitalists producing for their private account can never know in advance what the demand for their particular commodity will be. (10)

From the late 1850s onward Marx distinguished between a commodity’s value and the form of value that the mature Marx called exchange value. Exchange value is the form value must take. Exchange value is measured in terms of the quantity of the use value, not the value, (11) that serves as the counter-value.

The commodity whose value is to be measured is the relative form of value. The commodity serving as counter-value, Marx called the equivalent form of value. This fundamentally is the reason non-commodity money is impossible under any system of commodity production including within the capitalist system.

A dollar, pound, euro, yuan, rupee, ruble, etc. is simply a bookkeeping unit created by the government and used by the central banks and the commercial banks, which might take the form of legal-tender paper notes. Such bookkeeping units and paper notes are not commodities. They represent the commodity that serves as the universal equivalent in circulation.

In primitive, simple commodity production and exchange any commodity can be used to measure the value of any other commodity. But as commodity exchange develops, a few commodities such as gold and silver and then under advanced capitalism gold alone comes to function as the universal equivalent. Bookkeeping units such as dollars, euros, pounds, yuan, rubles, etc. merely serve as pseudonyms for given quantities of gold bullion the currency unit represents at any given time. Like any other commodity, a troy ounce of gold represents a quantity of abstract human labor socially necessary to produce it under the current conditions of production.

The quantity of abstract human labor of the money commodity differs from the quantity of abstract human labor of all other commodities only in one respect. The quantity of abstract human labor non-money commodities represent is indirectly social since the social nature of the labor it represents is shown to the extent it is convertible into the money commodity on the market. In contrast, the abstract human labor embodied in the money commodity is directly social.

Under the present dollar-dominated international monetary system, the value of other currencies is measured in terms of dollars while the dollar is measured in terms of a definite, though ever-changing, quantity of gold bullion. This fact is not any state law but an economic law to which the capitalist state(s) and their central banks are subordinated.

In the past, currencies were often directly convertible into gold or silver, either in the form of coins or gold bars of a legally established weight at the monetary authority. This authority was usually the central bank but it was sometimes the Treasury as in the United States before the Federal Reserve System began in 1914. The job of the monetary authority is to redeem to the bearer on demand in gold coin or bars the currency notes presented to it. This is called the gold standard. (12) Where the central currency is convertible into gold while subordinate currencies are convertible into the central currency, which is itself on a gold standard this is called a gold-exchange standard. The post-World War II Bretton Woods system was a form of this standard.

Colonial India was on the gold-exchange standard. Rupee notes were convertible into British pounds, which before World War I were convertible into gold coin by the Bank of England. After World War II, the main imperialist countries adopted the gold-exchange standard, making their currencies convertible into U.S. dollars. That dollar, for governments or central banks, was convertible into gold bars at the rate of $35 per one ounce of gold. (13) Since August 1971 when Nixon closed the gold window at the U.S. Treasury, the entire capitalist world has been on a paper money system. Here the value of the U.S. dollar against gold constantly fluctuates and the exchange rates of other currencies fluctuate against the U.S. dollar.

An important corollary is a need for commodity values to be measured in terms of the use value of the money commodity (weights of gold bullion). Profit, the most important category in a capitalist economy, must also be measured in terms of quantities of gold bullion. If corporations are making money in terms of paper dollars and real commodity-value terms, but are losing money in terms of gold bullion, they are running at a loss. This is not because they are not squeezing surplus value out of the workers but because they are not realizing this surplus value on the market in terms of the money commodity’s use-value. When the economy appears profitable in currency and real terms, but is losing money in gold terms — as happened during the 1970s stagflation — the capitalist economy is in an unstable situation.

When there is stagflation, the capitalist central banks must take action to defend the currency. They must allow interest rates to rise sharply. This halts the depreciation of the currency but induces recession and mass unemployment. Conditions are then restored, enabling capitalists to realize surplus value in use-value terms of the money commodity. If the central banks resist the necessary rise in interest rates, runaway inflation and hyperinflation develop, as in 1923 Germany, bringing the economy to a halt.

While many currencies have experienced runaway, even hyper, inflation this hasn’t happened to the central capitalist currency. In the 19th century, it was the British pound. Since the end of World War I, it’s been the U.S. dollar. The governments of subordinate capitalist countries — colonial, semi-colonial, or neocolonial — will sometimes be forced to hyperinflate their currencies. However, the United States cannot do this without destroying the financial base of its world empire. Today, when a subordinate capitalist country hyperinflates its currency, its capitalists calculate debts, interest payments, and, importantly, profits in U.S. dollars. They continue paying their workers in hyperinflated local currency.

As a result, real wages, as well as money wages, are driven down sharply. This is an ideal situation as far as the capitalists are concerned. But if the United States were to hyperinflate the dollar, capitalists around the world would be forced to calculate debts, interest payments, and profit directly in gold bullion, bypassing the dollar. Could the U.S. world empire survive under these conditions?

Over the last year, prices of commodities have been rising sharply in dollar terms. Since the dollar has been holding steady against gold bullion, even gaining, prices have been rising in terms of gold bullion. It’s the latter — the commodity prices in gold bullion terms — that is crucial here. While the price of a given commodity, say a pair of shoes, can be expressed in terms of any quantity of dollars or other paper currency, this is not true of commodity prices in gold terms. It is commodity prices calculated in terms of quantities of gold bullion that are regulated by the law of (labor) value.

If the price in terms of gold of a pair of shoes rises above its value, or price of production (14), the struggle of industrial capitalists in competition with each other to appropriate as much surplus value as possible will inevitably drive the price of the shoes back to their value — or price of production — and below their production price for a while. Again, prices of production must be defined in terms of quantities of gold.

If commodity prices on average, the general price level, rise above their production prices, above their values, market forces are unleashed, lowering them again to their production prices, and below. How does this economic law express itself in practice? When the commodity prices — market prices — rise above their production prices, gold production, mining, and refining become less profitable than other branches of commodity production. If commodity prices rise high enough, mining and refining gold will become completely unprofitable.

Capital responds to falling profit rates in the gold-producing industry by flowing into other more profitable branches of production. Thus the production of gold declines. So when the general market price level rises above the general price level in price of production terms, the quantity of non-money commodities grows more rapidly than the quantity of gold. Gold will grow scarce. Capitalist speculators will buy gold with the expectation that its exchange rate will rise. Then profits in terms of gold are wiped out. An economic crisis is then imminent. Neither the government nor the central bank can stop it. Only the working class has the power to stop the impending economic crisis by taking political power and abolishing capitalist production.

If the Federal Reserve system fails to tighten sufficiently as market commodity prices rise above their production prices, the current COVID Aftermath Boom will transition to stagflation. Production is profitable in dollar and real terms but is negative in gold terms. We will know if and when this happens if the dollar price of gold rises sharply, not for a day or even a few weeks, but over a few months at a fast enough pace to make holding gold more profitable than to run a business under average conditions of profitability.

If the Federal Reserve System allows stagflation to develop (15), capitalists will dump other financial assets for gold and inflation will accelerate. At this point, the Federal Reserve System can no longer hold down interest rates. Credit-sensitive branches of production, such as residential construction, and automobiles and other durable consumer goods bought on credit, will slump. Spending on capital goods will remain strong at first as industrial capitalists buy more equipment and build more factories until the dollar costs of doing this rise. This then will cause growing disproportions between branches of production that produce the means of production (Department I) and production that produces the means of consumption (Department II).

If stagflation develops and the Federal Reserve System tries easing the money market by accelerating the rate at which it’s creating additional dollars, gold prices will accelerate even more. This will drive prices in dollar terms higher, again tightening the money market at a higher rate of inflation and interest rates. The result: higher rates of inflation while the slump in the housing, auto, and other credit-sensitive industries continues. This is the short road from 1970s type inflation, to runaway inflation and finally hyperinflation and uncontrollable economic collapse.

Why you wouldn’t want Jerome Powell’s job

To avoid further destabilization of the U.S. world empire, the Federal Reserve System concluded it must take steps to tighten credit and to rein in the COVID inflationary Aftermath Boom before it turns into stagflation. While central bankers cannot explain the problems in Marxist terms, centuries of experience taught them that an inflation rate of just 3% or 4% a year is dangerous and must be stopped by the only means available to them — tightening credit. If such inflation is not stopped, market prices will rise above the price of production. Then the economy becomes increasingly destabilized until a crisis and the stabilization of the currency accompanying the crisis again makes it possible to realize surplus value in terms of gold.

This is why Jerome Powell hoped the rising inflation triggered initially by a combination of the COVID shutdowns and massive Fed-financed government stimulus — an attempt to counteract the effects of the shutdowns — would fade away as the economy reopened. But the Aftermath Boom forcing individual capitalists to scramble for supplies before prices rise more has not allowed this. Larry Summers warned the Fed made a mistake by not tightening earlier. Now Powell and the rest of the leadership are forced to acknowledge their mistake, really wishful thinking, and finally, recognize the need for tighter credit.

A soft landing? 

The Fed aims as always for a soft landing. But the high level of corporate debt increased further during the COVID shutdowns when the government and the Federal Reserve System encouraged banks to make huge loans to big business to carry them through the crisis. This makes a soft landing difficult to achieve, to put it mildly. The danger is, such a gradual policy may not be sufficient to stop the boom before it turns into stagflation. And here is where there is a danger of the inflationary boom turning into dangerous stagflation.

Here the legacy of the 1970s last period of stagflation comes into play. At the end of the stagflation crisis in the early 1980s interest rates were high, not low as normally in the trough of the industrial cycle. This was the price that U.S. and world capitalism paid for the repeated failure of the Fed to tighten during the 1970s. The result was interest rates above the profit rate in the early 1980s, not well below the profit rate as is usual at the bottom of the industrial cycle. Once the value of the dollar was stabilized, some industrial and merchant capitalists transformed themselves into money capitalists. They loaned money at high interest rates. This was more profitable than producing commodities. An explosion of loans flooded the money market with loan capital. This finally brought the high interest rates down to today’s very low level. But a quantity of debt was created, leading to financialization. When this debt bubble collapses the result likely will be a period of deep depression and high unemployment, lasting for a long time.

Because of the abnormally high level of debt, the Fed indicated it will only gradually tighten. This will allow the Aftermath Boom to continue for a while. Then they hope it will fade away without a nasty aftermath recession. This carries the danger that Fed tightening will prove insufficient to prevent the boom from turning into stagflation.

Even if the Fed tightens enough to prevent immediate stagflation, how will it respond when prices stop rising and signs of recession appear, perhaps accompanied by a sharp fall in the stock markets as well as the dollar prices of primary commodities? Will the Fed refrain from sharply accelerating the rate at which it is producing dollars as in 2007-08, ending the great danger of stagflation, when debts, particularly government and corporate debts, were lower than today, but at the cost of the Great Recession? Or will the Federal Reserve System give in to the pressure to prematurely flood the money markets with newly created dollars causing stagflation?

Another danger faces the Fed — increasing every day that it allows the COVID Aftermath Boom to continue. That danger is the Fed appearing successful in halting inflation and stabilizing the economy, but with market prices, in gold terms, above their values and prices of production. This is what happened after the Reset Recession of 1920-21. If this happens again, the gold production will be depressed during the next industrial cycle much like the 1920-29 industrial cycle. Back then gold production remained below pre-World War I levels despite the growth of world production and trade. The U.S. economy, and the world economy, recovered from the Reset Recession of 1920-21 and appeared to be doing fine with normal growth and stable prices. But at the end of the industrial cycle in 1929, it faced a severe crisis whose consequences we know all too well today. Will a new Great Depression happen again? Every day that the current COVID reset boom continues, the more likely the answer will be yes. The conclusions: From the viewpoint of the relative stability of capitalism over the next 20 or 30 years or more, the sooner the Federal Reserve System halts the current COVID inflationary Aftermath Boom the better. (16)

To be continued.

(1) The mistake of those who think war prosperity is a model for permanent peacetime prosperity is that they confuse production with reproduction of the economy. If the means of production are not replaced as they are used up, in value terms and physically, the capitalist economy is headed for collapse. A surge in war spending stimulates production and employment but weakens reproduction. A full-scale war economy suppresses reproduction without which the capitalist economy cannot persist for long. (back)

(2) Much of the variable capital that alone produces surplus value is destroyed when potential productive workers are either killed or permanently crippled in military operations. (back)

(3) The strike waves associated with the Aftermath Boom did not necessarily last throughout the entire boom. For example, after World War II the Aftermath Boom continued until late 1948 but the strike wave was largely confined to 1946. Thus it’s possible the biggest strikes associated with the COVID Aftermath Boom still lie ahead. But the opportunities created by the current COVID Aftermath Boom to rebuild the labor union movement will not last forever. (back)

(4) Before the 1930s Depression the central banks, including the newly formed Federal Reserve System, used the discount rate it uses to purchase commercial paper to tighten or ease credit. Today the main tool central banks use is buying and selling short-term Treasury notes. The central banks buy and sell short-term Treasury notes to manipulate the interest rate commercial banks charge each other for overnight loans — called federal funds in the United States. (back)

(5) In the crisis of 2008 and later and again during the COVID-19 pandemic the Fed also purchased long-term government and mortgage-backed securities. Thus IOUs are transformed into actual Federal Reserve System-created dollars. This not only manipulates short-term interest rates, which it does in normal times but floods the banking system with newly created Federal Reserve System dollars to prevent a run on the banks and consequent collapse of the credit system. Since the policy aims to increase the quantity of currency rather than to manipulate the interest rate, the latter policy is called quantitative easing. (back)

(6) In the event of a general rise in wages, the commodity prices produced by labor-intensive industries — in Marxist terms, industries with a lower than average organic composition of capital — would rise in price. However, these prices are offset by a fall in the commodity prices by capital-intensive industries — industries with a higher than average organic composition of capital.

The reason is that since capitalist competition equalizes the profit rates between industries. A general rise in wages increases the costs of labor-intensive industries more than it would increase the costs of capital-intensive industries. The result is that labor-intensive industries now make a lower rate of profit than capital-intensive industries. But competition between capitalists causes capital to flow out of labor-intensive industries with a lower profit rate into capital-intensive industries with a higher profit rate. The outflow of capital causes the price of commodities in labor-intensive industries to rise but it is offset by a fall in the commodity prices produced by capital-intensive industries. Therefore a rise in wages causes some shift in relative prices. The overall price level remains unaffected. This was one of David Ricardo’s most important discoveries. (back)

(7) Since 1970, real wages in the United States have changed little through the productivity of labor has risen considerably. If Keynes and other modern bourgeois economists were right, real wages should have risen with labor productivity. So Keynes is wrong about the effects of rises in money wages and the laws governing the level of the real wage. A general rise in money wages does not cause a rise in the general price level. Instead, it lowers the rate of profit.

A rise in labor productivity doesn’t necessarily lead to a rise in real wages. A general rise in labor productivity lowers commodity values, including commodities consumed by the workers, making it possible for real wages to rise without lowering the rate of profit. However, this does not mean that they will. In reality, the real wage is determined by the traditional standard of living of the country, the level of unemployment, and the organization and leadership of the working class. Contrary to Keynes and other bourgeois economists, labor productivity can rise while real wages fall. (back)

(8) A case can be made that Nixon won the 1960 election but had the election stolen from him by the Chicago Democratic machine and its mob allies. However, Kennedy’s successful stealing of the election would not have been successful if Nixon had won by a more decisive margin. This would have been the case if the 1960 recession — actually a renewal of the recession starting in 1957 but interrupted by an abortive upswing in 1958-59 — had not occurred. (back)

(9) The AFL-CIO leadership not only failed to struggle against Nixon’s wage-price controls, but it also supported Nixon’s bid for a second term because the 1972 Democratic presidential candidate, South Dakota Democratic Senator George McGovern, was considered too far to the left by the AFL-CIO leadership. (back)

(10) If industrial capitalists could realize the value of their commodities by receiving a certificate declaring their commodities had taken a certain quantity of labor to produce, they would be unable to produce the different types of commodities in the proper proportions required to continue social production. To make continued social production possible it would be necessary to develop an overall plan of production for the entire economy. But this requires the abolition of private property in the means of production, commodity production, and therefore of capitalism itself. (back)

(11) The commodity whose value is to be measured is measured by the use value, not value, of the commodity serving as the measuring unit. This relation between money and other commodities hides the nature of value as a quantity of abstract human labor embodied in a commodity not only from the capitalists themselves but also from our modern economists. (back)

(12) Or the silver standard when currencies were convertible into silver. (back)

(13) This shows how overwhelming the domination of U.S. imperialism became beginning in the post-World War I era and climaxing after World War II. Other imperialist countries found themselves on the gold-exchange standard like colonial India had before World War I! Today countries that find themselves in opposition to U.S. imperialism, such as Russia and China, have moved to increase the quantity of gold in their reserves as opposed to dollars and euros. To the extent a country’s reserves consist of gold as opposed to dollars it moves away from the dollar standard that dominates the international monetary system. (back)

(14) Prices of production are the prices that equalize the rate of profit among capitals invested in all branches of production. This means equal quantities of capitals — measured in terms of weights of gold bullion — will in equal periods of time earn equal amounts of profits despite their varying organic compositions of capitals and turnover periods. Prices of production vary somewhat from direct prices, which are the prices directly reflecting value. If all prices were direct prices then the quantity of gold that a given commodity exchanges for would always have the same labor value as the commodity it exchanges for. When economists and laypeople say that prices are determined by the cost of production, they mean more or less what Marx meant by the price of production. (back)

(15) During the first phase of the 2007-09 crisis a situation of stagflation was developing. Contrary to the conventional wisdom at the time, the Federal Reserve System did not respond to the developing crisis as they had to many earlier crises by flooding the banking system with newly created dollars. The Fed only moved to massively increase the number of dollars it creates when the Lehman Brothers Wall Street investment bank failure in September 2008 finally created such a demand for dollars as a means of payment that the danger of stagflation disappeared. But by then it was too late to avert the Great Recession with its mass unemployment. (back)

(16) To clarify I am not advocating the Fed take strong action to quickly halt the current Aftermath Boom. I am merely pointing out the objective reality of the capitalist economy. The objective reality means the interests of the ruling class are in hopeless conflict with the interests of the working class. Non-Marxist progressives, however well meaning, are always searching for policies that will somehow reconcile the irreconcilable conflict between the capitalist class and the working class, which go far beyond the exact rate, the rate of surplus value, by which the capitalists exploit the workers. (back)