Does Capitalist Production Have a Long Cycle? (pt 10)

The coming of World War II and the end of the Great Depression

According to the conventional wisdom, it was World War II that brought the Depression to an end. At least as far the United States is concerned, it is indeed true that it was the war mobilization that finally ended the mass unemployment that had existed since the fall of 1929. (1)

Mass unemployment that was lingering in the United States as late as 1941 gave way to the “war prosperity” that the United States enjoyed during World War II. As far as many, perhaps most, Americans were concerned—the exception being those who faced actual combat—the wartime shortages and rationing, and even the rigors of military service, were a relief from the chronic idleness and hopelessness that had marked the Depression years.

Lives and careers that had been put on hold through the Depression decade could finally get back on track. People who had not been able to get any meaningful job during the 1930s could finally get jobs, get married, and start to raise families. This is the reason why the United States experienced a baby boom when the war ended.

As I have explained in earlier posts, a full-scale war economy is very different than the boom phase of the industrial cycle, even if both a boom and a war economy reduce or eliminate unemployment. (2) The shift of the United States to an all-out war economy starting in 1942 implied a net consumption of the value of capital in the United States rather than the accumulation of capital that occurs during the boom phase of the industrial cycle.

To a certain extent, real productive capital was replaced by government bonds. However, in the United States the period of contracted reproduction did not last very long nor go very far. The huge U.S. industrial machine—though it had been largely paralyzed during the Depression decade—exceeding by far anything that had existed before—remained fully intact. In Europe and Japan, however, not only did “contracted reproduction” go much further, there was also the mass destruction of factories and infrastructure caused by the war—especially the air war.

How disasters under capitalism stimulate the accumulation of capital

Marx mentioned in volume III of “Capital” that the greatest barrier to the accumulation of capital is capital itself. One of the most important functions of crises is to periodically contract the quantity of capital through the devaluation of capital. Such devaluation sometimes, though not always, leads to the physical destruction of the material use values that represent the capital. For example, I have seen videos of huge U.S. steel plants—once the backbone of the American industrial economy—being blown up during the deep recession of the early 1980s.

The devaluation of fixed capital does not necessarily mean the physical destruction of capital as a material use value. Sometimes the industrial capitalists simply write down the value of the capital on their books. But the physical destruction of the material means of production always means the destruction of the value of the capital that they represent. (3)

The physical destruction of the material means of production that represent capital—factories destroyed in bombing raids, for example—always means the destruction of capital measured in terms of value—hours of abstract human labor embodied in the destroyed means of production. Therefore, by removing some of the obstacles to capital accumulation—namely the existing capital itself—wartime destruction can certainly help kick-start a new wave of capital accumulation.

Natural disasters such as hurricanes, earthquakes, tornados or floods are followed by rebuilding booms that also stimulate capital accumulation. In the wake of Hurricane Katrina, which struck the New Orleans area with devastating effect in 2005, the demand for labor power surged in the affected areas. (4) For awhile, there was something like a real shortage of labor as the bosses—particularly in the construction industry—scrambled for labor power.

Something similar happened after the hurricane of September 1938 that devastated Long Island, N.Y., and New England just after the 1937-38 Roosevelt recession. It has even been suggested that the rebuilding boom that followed that natural disaster significantly contributed to the Depression’s end. (5)

On a smaller scale, the same phenomenon is observed when a tornado devastates a town in the American Midwest, triggering a construction boom as the town is rebuilt. If this is true of natural disasters such as hurricanes, earthquakes, floods and tornados that affect only a limited geographical area, how much more so would this be true of the devastating effects of that most “unnatural” disaster—World War II in Europe and Japan!

The reconstruction boom following World War II in those countries certainly made a mighty contribution to the initial surge in economic activity that began after the launching of the Marshall Plan in Western Europe in the late 1940s. The destruction of material use values that represented capital in Europe and Japan was a definite plus to economic growth, insomuch as it eliminated some of the biggest barriers to the further expansion of capital—the existing capital itself.

Stimulation to technical innovation

The other strongly “favorable” effect of World War II was the stimulation to the development of radical new technologies such as atomic power, jet airplanes, modern rockets that eventually made possible modern satellite communications, and the modern digital computer. The aim of capitalist production is not the expansion of material use values as such but the accumulation of more capital through the transformation of surplus value into additionial capital. The expansion of material use values—what most people think of when they hear the term economic growth—is only a byproduct of capitalist expanded reproduction.

The accumulation of material use values can take two forms. The first form is to have a greater and greater quantity of the existing use values of a given quality—more grain, meat, clothes, housing, radios and automobiles, for example.

The other form is the accumulation of types of use values that were previously unknown. For example, on the eve of World War II, there were almost no TVs, no jet planes, no satellite communications, no room-filling supercomputers, no desktop computers, no laptop computers, no netbook computers, no cell phones, and no Internet. (6) With the possible exception of television, all these new use values that distinguish life in the early 21st century—among those who are rich enough to enjoy these devices—had their roots in military research.

For example, Britain developed electronic digital calculators to break the the code of the German Enigma coding machines. The United States developed the ENIAC electronic calculator—a direct ancestor of today’s digital computers that range from the latest and most powerful supercomputers to cell phones, all of which are many times more powerful than their World War II ancestor—in order to calculate artillery trajectories. (7)

ENIAC wasn’t completed until 1946 and was thus too late for use in World War II. Instead, it was put to work on a far more destructive project: the development of the hydrogen—fusion—bomb. The electronic miniaturization that transformed computers from room-sized behemoths, with by today’s standards tiny amounts of memory and processing power, into today’s computer-based technology was an outgrowth of military research during the “cold war.” The Apollo moon shot, which had purely political purposes, played a huge role in the development of modern computer technology. (8) The room-sized computers of the time were just too big to fit into the cramped Apollo spacecraft.

Why under capitalism do we need war, or at least the threat of war, to develop technologies like computers, satellites, jet planes, and the Internet? Doesn’t capitalist competition stimulate technology and the development of new types of commodities? It does, but only to a point.

The industrial capitalists are only willing to develop new types of commodities when there is a prospect that they can be marketed—transformed into commodities that contain surplus value—within a few years at most. To carry out research to develop new science and technology that won’t lead to the development of new marketable commodities in the near future is simply, from the viewpoint of the industrial capitalists, throwing away capital.

The point of capitalist production is not to throw away capital, after all, but to accumulate capital. To profit-constrained industrial capitalists, rather than use the surplus value produced by the working class to develop new technology that might lead to the production new types of commodities 10, 15 or 20 or more years in the future, it makes much more sense to simply produce more of the existing type of commodities.

Military not constrained by the profit motive

The capitalist military—though it exists to defend profit-driven capitalism—is not motivated directly by profits but by the desire to create more powerful means of destruction—that is, the means to kill more people and destroy more material wealth. (9) Not directly motivated by profit, the military is therefore willing to carry out research into technologies that the industrial capitalists are not.

Later, however, industrial capitalists move in to “commercialize” the new technologies—create new types of commodities—that arise from the military research. For example, the ENIAC electronic calculator, developed to calculate artillery trajectories and then carry out the mathematical calculations necessary to develop the hydrogen bomb, helped give birth to the technology that drives the laptop computer that I am using to write this post.

Therefore, under today’s conditions it is the military and the governmental bodies closely linked to the military such as NASA, the space agency of the U.S. government, and not the profit-driven corporations that are the most powerful engines of scientific and technological progress.

Negative effects on economic growth of World War II

However, the economic effects of World War II on economic growth were not all positive. In my examination of the reasons why the crisis of 1929-33 was so much worse than any other cyclical crisis of overproduction that has occurred so far under capitalism, I stressed the role of World War I in inflating the prices of commodities relative to underlying labor values. This inflation of prices played a crucial part in transforming the “ordinary” crisis of overproduction that began in 1929 into a super-crisis.

One of the “tasks” of the super-crisis of 1929-33 was to bring prices back into line with their labor values and thus undo the effects of World War I on prices. In the absence of World War I, the extreme divergence between commodity prices and values that arose from the war could not have developed. The inevitable crises of overproduction that would have occurred in the course of the industrial cycle would have lowered prices long before the extreme inflation of prices relative to values caused by World War I could have developed. (10)

Without World War I, there certainly would have been grave economic crises and serious depressions, but not on the scale of 1929-1940. The “positive” effects of World War I, in the form of the reconstruction boom and accelerated technological progress and innovation, were offset by the war’s role in bringing on the Depression.

Why then did World War II, which was a much bigger war, after all, seem to have had mostly “positive” effects on economic growth? Why was the impact of World War II “positive” while the impact of World War I was disastrous?

To understand the impact that a given war has on the evolution of the world capitalist economy, we have to look at not only the scale of the war but also the prevailing economic conditions that exist when the war breaks out.

I explained that the Depression through its massive price deflation and currency devaluations had driven the general price level in terms of gold back below the underlying value of commodities. That this was true is demonstrated by the rapid rise in gold production during the Depression decade. On the eve of World War II, the general price level was low relative to labor values, gold production was consequently rising strongly, and there were idle hoards of money in the form of huge idle reserves in the U.S. commercial banking system, leading to very low interest rates.

If World War I broke out in an economic environment that was bound to magnify the destabilizing impact of the war, World War II broke out in an environment that was bound to minimize the unfavorable effects of war. From the viewpoint of the long-term stability of the capitalist system, the late Depression—especially in the wake of the 1937-38 Roosevelt recession, was a great time to start a world war.

World gold production depressed by World War II

Just like in World War I, World War II drove up prices not simply in terms of depreciated currency but also in terms of gold. And just like during World War I, this rise in prices had extremely negative effects on gold production. By raising prices that had been well below their labor values on the eve of the war, and thus once again depressing gold production, a major blow was struck to the long-term ability of the world market to expand.

First, let’s look at what happened to prices as a result of World War II. In August 1939, just before war broke out in Europe, the U.S. producer price index stood at 12.9. In August 1948, the PPI stood at 28.2. The index had more than doubled.

The “free market price of gold” was about $42 an ounce in 1948 when the U.S. producer price index peaked in terms of dollars. Prices in terms of gold showed a somewhat lesser increase, since some of the increases in prices reflected the slight and temporary wartime depreciation of the dollar against gold. Still, even taking into account the wartime depreciation of the dollar, prices in terms of gold—not dollars—still show a rise of about 82 percent.

We would expect such a rise in prices to have a very negative effect on gold production, and it indeed did. There was about a 30 percent decline in world gold production during the first five years after World War II compared to the five years preceding the war. (World Gold Council, “Central Bank Gold Reserves: Historical Perspective since 1845,” by Timothy Green, 1999)

If you look at the trend of gold production in isolation, you might think that a new super-crisis should have broken out after the post-World War II reconstruction boom had run its course. But drops in gold production will have a very different effect if they occur in an economic situation of vigorous capitalist expanded reproduction and prices that are already rising above the underlying labor values of commodities, and where as a consequence money is already getting “tight.” That is, money capital is already in short supply relative to real capital—the situation that prevailed on the eve of World War I.

In a situation such as prevailed on the eve of World War I, a large drop in gold production will have devastating effects. But if economic conditions are the exact opposite, such as was the case on the eve of World War II, the negative effects of wartime price rises on the overall economic situation will be much milder.

Crises are caused by the overproduction of commodities

Marx and Engels did not describe cyclical capitalist crises as crises of the underproduction of money material—gold—but rather as crises of the overproduction of commodities. A crisis of overproduction is caused by a sudden rise in the production of commodities that causes interest rates to rise sharply leading to a seizing up of an over-inflated credit system.

If, however, commodity production fails to rise—even if the production of money material fell to zero—there could be no crisis of generalized overproduction of commodities. And rising commodity production is a an outcome of expanded capitalist reproduction. In other words, no expanded capitalist reproduction, no crisis of generalized overproduction. Naturally, you can get other types of economic crises—for example, the crises in the German and Russian war economies during World War I—but these were not crises of the generalized overproduction of commodities. (11)

Low gold production makes crises more intense

However, in an environment of weak gold production—which means the rate of growth of the world’s metallic hoard of gold is growing relatively slowly—it will take a lesser increase in commodity production to bring about a crisis of overproduction. Or the same increase of commodity production will bring about a longer and or more severe crisis—everything else remaining equal. Crises can break out whether gold production is high or low, but crises tend to be far more serious and profound when gold production is low.

The period between 1929 and 1945 saw the most violent and protracted interruption of expanded capitalist reproduction in the history of capitalism. This interruption was due first to the super-crisis of 1929-33—by far the worst in capitalist history—and then to the war—the most destructive war in the history of capitalism, or indeed all of world history. In these circumstances, the depression in gold production caused by World War II could not have the same dire effects that a similar decline in gold production had after World War I. (12)

World War II greatly increased the debt of the federal government but at the same time virtually wiped out private debt. For example, consumers could not accumulate debts by purchasing newly produced cars, because during the war auto plants were converted to war production. No new cars were produced, and as result, no new cars could be sold either for cash or credit. (13)

Similarly, industrial companies had no reason to float bonds, since their problem under the war economy was not a lack of money capital to transform into real capital, but rather a lack of the material elements of real capital.

Also, though (gold) prices were no longer low relative to the labor values of commodities, they were not as high relative to these labor values as they had been after World War I. Remember, going into World War I prices already had been high relative to labor values of commodities. But going into World War II, prices had been low relative to the underlying values of commodities.

Even though gold production fell during World War II, it never fell back to the pre-Depression levels. (14) And after the war, gold production began a gradual rise. This combined with the great quantity of idle money capital created by the 15-year hiatus in expanded capitalist reproduction, indicated that the world market had a huge capacity to expand for many years, even with rather mediocre levels of gold production. (15)

However, World War II still had negative effects on the ability of the market to expand. If World War II had not occurred, there is no reason why the economic recovery from the Roosevelt recession would not have gradually built up into a full-scale boom. In such an alternate world, the boom would have begun at a considerably lower price level and a consequently much higher level of gold production than the post-World War II economic situation allowed in the real world.

A lower general price level would have meant that gold production—at last initially—would have been much higher than it actually was after World War II. At the start of our alternative history boom—there would have been more money—potential purchasing power—in the world, both in terms of purchasing power of the total metallic hoard—prices would have been much lower—and in terms of the weight of the world metallic hoard due to higher gold production.

Or what comes to exactly the same thing, the post-Depression “long wave with an undertone of expansion” in our alternative history without World War II would have begun in an economy with an even greater degree of liquidity, and there would have been a real possibility of keeping interest rates low for a much longer period than was the case in the actual post-World War II world.

Therefore, in our alternate world, the world market would have had an ability to expand for a much longer period than was actually the case after World War II. World War II, though it didn’t lead to a new super-crisis, almost certainly shortened the “natural” long-term post-Depression upswing of the capitalist economy.

In our alternate post-Depression world—a world in which both the super-crisis of 1929-33 and the Roosevelt recession of 1937-38 occurred but not World War II—prices over a series of industrial cycles would have risen until gold production would have begun to decline at some point. But there is every reason to believe that without the war, monetarily effective demand would have been considerably stronger, leading to a stronger and or longer post-Depression “boom.”

However, without the war there might have been less “innovation.” In such an “alternate world,” there would have been more production of the material wealth use values that existed in the 1930s, and less in the form of new types of commodities that distinguish our world from its 1930s ancestor. Perhaps computer-regulated automobiles, desktop computers, laptops, satellite communications, smart phones, the Internet and its World Wide Web would be the stuff of science fiction if it were imagined at all.

Post-World War II boom not all that long

The length of the post-World II “boom” came to exactly two industrial cycles, which as I will show next week were strongly dominated by the boom phases of the cycles. Its length has been greatly exaggerated by bourgeois historians by dating the onset of the “boom” from the onset of the war economy. The war economy, which was the negation of capitalist expanded reproduction, is lumped together with the period of actual capitalist expanded reproduction. A fine way of prettifying the real history of 20th-century capitalism!

The war economy, which began in the United States in 1941-42, was not the same as the Depression—mass unemployment indeed vanished, and instead of spending their days facing the idleness and demoralization of unemployment, the workers in uniform were busy killing one another in unprecedented numbers. A difference to be sure. And not a small one.

But it was not the same thing as thriving capitalist expanded reproduction either, where workers are busy in productive employment producing surplus value for the capitalist class—which as a by-product leads to a great expansion of humankind’s material wealth. This is even more true of the war economies of Britain, Germany, China and Japan. I am leaving out the Soviet Union here, because it was not a capitalist society, though we should never forget that the Soviet people bore the lion’s share of the burden of the actual fighting.

If we take the beginning of the postwar “boom” as 1948-50, when capitalist expanded reproduction resumed on a global scale after its prolonged hiatus, and the ending as March 1968, with the collapse of the “gold pool,” the whole post-World War II boom—that is, two industrial cycles dominated by the boom phase—lasted all of 20 years. This is more or less comparable to other “long waves with an undertone of expansion.”

So the post-World War II boom is not all that impressive considering the unprecedented economic collapse that preceded it.

The financial-political crisis of 1951

During and for some time after World War II, the U.S. Federal Reserve System had “pegged” the return on long-term government bonds at 2.5 percent a year. The Fed would purchase government bonds if the yield threatened to rise above 2.5 percent. This was highly desirable from the viewpoint of the U.S. government, since the U.S. warmakers could count on not paying more than a relatively low 2.5 percent interest on the huge debt they were acquiring as a result of the war. They paid a considerably lower interest rate during World War II than they had paid during World War I.

But the Federal Reserve’s policies were not the real reason why long-term—and short-term—interest rates remained at Depression lows despite the huge wartime inflation and Federal deficits.

The real reason why interest rates were so low during World War II as compared to World War I—a much smaller war—was that the ratio of real capital to money material—most of which was sitting in the U.S. Treasury in the form of its huge gold hoard—was unusually low thanks to the Great Depression. Therefore, the Federal Reserve System was in a position to keep the rate of interest on long-term government bonds at 2.5 percent without a disastrous rise in the dollar price of gold above the official price of $35 an ounce.

If the free market price of gold had risen substantially above $35, like it was destined to during the 1970s, first inflation and then interest rates would have soared, throwing quite a monkey wrench into Washington’s wartime budget projections to say the least. I will examine this more closely in future posts.

However, as the process of capitalist expanded reproduction resumed after World War II, first in the United States, then with considerably greater vigor in Western Europe and finally Japan, these conditions began to change. Prices were now much higher than they were before the war, real capital was rapidly expanding once more, while gold production was well below the level that had prevailed at the end of the Depression. The consequent rise in the ratio of real capital to the global supply of monetary gold meant that interest rates would have to rise.

Under these changing economic conditions, if the Federal Reserve Board had continued to purchase government bonds at 2.5 percent, it would be only a matter of time before the dollar price of gold would have risen subsequently. Besides leading to a much earlier collapse of the Bretton Woods System than actually occurred, the resulting inflation would have driven up interest rates, first in nominal terms before inflation, but in the end in real terms as well.

If, all the same, the Federal Reserve System had continued purchasing long-term government bonds at 2.5 percent, the Federal Reserve System at a certain point would become the only purchaser of such bonds. Once that happened, the U. S. government would no longer be borrowing money, it would be printing it, which would have implied the hyper-inflationary collapse of the U.S. dollar.

However, in the early 1950s the situation was not yet as grave as it would become by the late 1960s. Unlike in the late 1960s, there was still plenty of excess liquidity left over from the Depression that was holding down long-term interest rates. As a result, unlike the situation in the late 1960s, long-term interest rates were still well below the rate of profit, allowing a considerable margin to the profit of enterprise in the booming post-World War II economy.

Therefore, in the early 1950s a serious inflationary economic crisis could still be easily avoided, but only if interest rates were allowed to gradually rise. But by the early 1950s, the days were coming to a close when the U.S. government—or anyone else for that matter—could borrow money at Depression levels.

The background to the 1951 crisis

In June 1950, the Democratic administration had launched a war against the Korean people that was to leave about 5 million Koreans dead. Like Europe, Korea had been occupied both by the Soviet Union and the United States. The Soviets had occupied northern Korea, north of the 38th parallel, while the United States had occupied Korea south of 38th parallel.

With the collapse of Japanese colonialism, revolution had swept through the Korean Peninsula after World War II. In the North, the Soviet troops had allowed the revolution to proceed against both the landowners and foreign and native capitalists and soon withdrew. But in the South, the U.S. brutally put down the revolution and established a puppet government relying heavily on Korean landlords and capitalists who had collaborated with the hated Japanese colonizers.

In June 1950, the revolutionary government in the North, after continuous provocations along the 38th parallel by the South Korean puppet government, launched a major offensive into the South with the aim of sweeping away the puppet government and unifying the artificially divided Korean nation under the rule of the revolutionary government.

The Democratic administration of Harry Truman—Roosevelt’s handpicked successor—responded by launching an all-out war in Korea with the aim of crushing the revolution—both in the South and the North—once and for all. At first, the U.S. forces were pushed back, but eventually under General Douglas MacArthur, they succeeded in launching a counteroffensive and were approaching the Chinese border in November 1950.

At that point, at tremendous human cost, a combination of Chinese volunteers and revolutionary Korean forces were able to counterattack driving MacArthur’s troops back to the 38th parallel, where the war bogged down in a bloody stalemate. At this point, MacArthur wanted to start a full-scale war against China using the atomic bomb—the far more powerful H-Bomb was still under development.

But Truman, taking fright at the possible consequences of war on such a scale, pulled back and fired MacArthur. (16) The stalemated Korean War dragged on until Truman’s successor, Republican Dwight D. Eisenhower, finally negotiated a settlement with North Korea that left Korea divided along the 38th parallel. Washington had failed in its objective to crush the Korean revolution in the North—though it had largely destroyed the material wealth of North Korea—but it succeeded in the South, which to this day remains under U.S. occupation.

As war raged on the Korean Peninsula and threatened to escalate into World War III, Truman demanded that the Federal Reserve System keep the rate on long-term government bonds at 2.5 percent, just as the Fed had done during World War II, so Washington could fight its war of aggression against the Korean people at a low interest rate. After all, the White House figured the Federal Reserve System had been able to this during World War II, and so it should be able to do the same during the “local” Korean war as well. In doing this, the White House in reality demanded the impossible from the Federal Reserve System.

The Fed, realizing that the U.S. government could not keep borrowing at Depression-level interest rates, indicated that it could no longer keep buying long-term government bonds at a yield of 2.5 percent. The Democratic president, however, imagined that he and the mighty state power he represented were stronger than the basic laws of his beloved capitalist system, which he was committed to defend at the cost of the lives of millions of Koreans and tens of thousands of U.S. soldiers.

The crisis of 1951 took the form of a confrontation between the Truman White House and its Department of the Treasury, on one side, and the Federal Reserve System, on the other. But in essence, it was a confrontation between the power of the capitalist state and the basic laws that govern the operations of the capitalist economy.

“Truman had,” according to Hetzel and Leach in their account, “compelling reasons to freeze interest rates.” The two authors continue: “On January 25, 1951, he froze wages and prices, apart from farm prices. Raising the cost of borrowing, especially on home mortgages, while freezing wages was poison.” (R. L. Hetzel and R. F. Leach, “The Treasury-Fed Accord: A New Narrative Account,” Federal Reserve Bank of Richmond Economic Quarterly, Volume 87/1 Winter 2001)

It certainly put the president, who posed as a “pro-labor” Democrat in opposition to the openly pro-business, anti-labor Republicans, in a awkward position. And indeed, as the Korean War raged on, Truman’s popularity plunged making it impossible for him to seek re-election in the 1952 U.S. presidential election—much like Lyndon B. Johnson, another “liberal pro-labor Democrat,” was unable to seek re-election in 1968.

Truman used every weapon at his command to intimidate the leaders of the Federal Reserve System. Hetzel and Leach report: “Treasury communication with the Fed referred to a possible Soviet attack on the United States ‘within the foreseeable future’ (FOMC Minutes, 3/1/51, p. 119). Truman and [Secretary of the Treasury] Snyder wanted to keep down the cost of financing the deficits that would emerge from a wider war.”

That is, Truman came very close to accusing the leaders of the Federal Reserve of high treason. In reality, there was absolutely no chance of a Soviet attack on the United States. The Soviet Union was still very much engaged in rebuilding its economy in the wake of World War II, which had caused it at least 20 million dead. In addition, the Soviets had only tested their first atomic device in 1949 and had no obvious way to “deliver” any primitive atomic bombs it had at that time to the United States.

In contrast, the United States had the Soviet Union surrounded with bases, and could easily have launched a full-scale atomic attack against the Soviet Union from occupied (West) Germany, Turkey or occupied Japan using its air force if it had chosen to do so. With such a balance of forces, no Soviet leadership would have dreamed of launching an attack on the United States. The only country that could have launched a full-scale shooting world war in 1951 was the United States.

But despite the White House’s ominous threats, it was the White House that blinked, not the Federal Reserve. Truman was backed by the mighty power of the state, but the Fed was backed by the even mightier power of the laws that govern the capitalist economy. And it is a basic tenet of historical materialism that when the laws of economics come into conflict with the power of the state, it is the state that must yield or go to pieces.

The White House, after threatening the leadership of the Federal Reserve System, was forced to back down and agreed to a compromise that effectively allowed the Fed to stop supporting the price of U.S. governments bonds.

In the years that followed, the U.S. government was obliged to borrow money at ever-increasing rates. This climaxed on Oct. 26, 1981, when the rate on long-term U.S. government bonds reached an unheard of 15.21 percent, a far cry indeed from the under 2.5 percent at which the U.S. government was able to borrow during World War II—thanks to the Great Depression that preceded the war.

How and why long-term interest rates reached such a level will be the examined in next week’s post.


1 Nazi Germany largely eliminated unemployment by 1936. But already in the mid-1930s, Germany had in effect a quasi-war economy. Reasons of space and time prevent me from examining the economy of Germany under the Third Reich in these posts. But I can say that Hitler’s economic policies can only be understood in the light of the approaching war. They could not have been long maintained if war had not come.

2 Keynesian economists in particular blur this point. They can do this because bourgeois economics of the marginalist school have no real concept of the difference between production and reproduction.

3 The devaluation of an element of fixed capital, for example a lathe, impresses itself on the mind of its industrial capitalist owner when the price it can be sold for on the market falls below the calculated rate of depreciation on the industrial capitalist’s books.

For example, suppose the industrial capitalist buys a lathe for $100,000 and expects to use it for 10 years. On the company’s books, $10,000 might be subtracted from the lathe’s value each year to account for this. But perhaps after five years, it becomes clear to the industrial capitalist and his or her accountants that the lathe would sell not for $50,000 but for only $10,000. Perhaps a far superior new lathe can be purchased for $100,000, or maybe a new lathe of comparable quality will cost only $50,000. In either case, if the old lathe can only be sold for $10,000, it only represents, as far as the market is concerned, $10,000 of capital, not $50,000. From the viewpoint of the industrial capitalist, $40,000 of this capital has been destroyed. However, as a material use value the lathe continues to function as before.

Suppose instead there is a war and a bomb drops on the factory that effectively destroys the lathe. The physical destruction of the lathe as a material use value also destroys its exchange value. If the metal that made up the lathe can be sold for scrap—that is, if it retains some material use value as metal—the industrial capitalists might salvage some exchange value. But if the lathe is completely vaporized, the industrial capitalist will lose all of its material use value and therefore all of its exchange value.

4 Not all parts of New Orleans have been rebuilt. Many of the African-American neighborhoods remain in ruins four years after the storm struck. But the rebuilding that did occur certainly stimulated the construction industry helping to create a temporary shortage of labor.

5 This certainly overstates the case, since the destruction caused by the New England hurricane of 1938 was confined to a relatively small geographical area. But the destruction caused by this storm through its destruction of “surplus capital” and its stimulation of a reconstruction boom that followed certainly worked in that direction.

6 Television had already been “invented,” and Nazi Germany was taking the first steps to commercialize it. But TV wasn’t widely commercialized until after World War II.

7 The ENIAC calculator was not quite a computer in the modern sense, since it lacked a stored program.

8 Starting in 1957 with the first launch of an artificial satellite, the famous Sputnik, the Soviet Union had staged a series of spectacular space firsts. These included, the first man to be launched into earth orbit, the first women to launched into earth orbit, and the first probe to land on the planet Venus and return photographs from the surface, a feat that has yet to be matched many decades later. This made a mockery of the claims of bourgeois economists that the Soviet Union could not “innovate” and at best could only copy technology developed in the capitalist “West.” Fearful that the Soviet Union would also be the first nation to land a man—or even a woman—on the moon, the U.S. government under President John F. Kennedy launched a massive program to land U.S. astronauts on the moon before the Soviets did.

Since at least during the 20th century, the moon had no economic or military value to U.S. imperialism, there was no follow-through. Much to the astonishment of science fiction writers and fans and the the astronauts themselves, the U.S. government, having successfully avoided the “danger” that the land of the October Revolution would be the first nation to land a human on the moon, simply dropped lunar exploration. As result, many adults alive today have never seen live video of humans on the moon in their lifetimes. It is something only their parents and even their grandparents experienced!

9 The fact that the institution in modern capitalist society most devoted to mass killing and the destruction of material wealth—the military—is also the main sponsor of modern scientific and technological research shows the extent to which capitalist relations of production have come into conflict with the further development of humankind’s productive forces. This is something I will examine more closely in the posts that will explore the “breakdown theory.”

10 The boom phase of the industrial cycle tends to raise prices above their values, but industrial cycle booms represent overproduction, which quickly leads to crises that lower prices once again. This limits the extent to which the general price level can rise above the underlying value of commodities. A war economy, in contrast, which does not represent expanded reproduction and therefore does not lead to overproduction, can drive commodity prices in terms of gold much higher than any industrial boom can.

11 This is just another way of saying that the only way to abolish crises of overproduction is to abolish capitalist production. Notwithstanding temporary suspensions of expanded reproduction during crises or wars, in the long run capitalism can only exist in the form of expanded capitalist reproduction. And crises of overproduction are part and parcel of this. As Keynesian economists like to point out, war economy indeed suppresses crises of overproduction, but only insomuch as it suppress capitalist expanded reproduction itself. In a war economy, crises of overproduction are avoided only to the extent that the very essence of capitalist production—capitalist expanded reproduction—is suppressed. This is why it is foolish to think that any kind of “permanent war economy” can solve the problem of crises of overproduction under the capitalist system.

12 Many bourgeois economists, and Marxists as well, figured that if the extremely destructive World War I had been followed by the most violent economic crisis in history, the much more destructive World War II should be followed by an even worse economic crisis. This shows the danger of such formal analogies. It is only by looking at the relationship between price—the form that labor value must take in a capitalist economy—and value itself that we discover why this isn’t so. But to do this, we have to enter into a sphere that is completely hidden from our modern bourgeois economists.

13 Overproduction of automobiles has played a crucial role in U.S. industrial cycles since World War I. Right after World War II, after automobile production had been suspended during the war years, there was no question of an overproduction of automobiles. This is one example of how a war economy indeed “solves” the problem of overproduction. A byproduct of this suppression of overproduction was the lack of any inflation of consumer debt used to purchase automobiles.

14 This despite the government-mandated suspension of gold production in the United States during World War II.

15 One illustration of how “liquid” the U.S. economy had become as a result of the prolonged suspension of normal capitalist expanded reproduction is the evolution of the ratio of bank deposits to bank reserves. Using figures provided in the appendix of the Friedman and Schwartz “Monetary History,” in July 1929, as the 1920s industrial cycle peaked, the ratio of bank deposits to reserves was 13.14. By November 1938, in the wake of the super-crisis 1929-33, followed by the Roosevelt recession of 1937-38, the ratio had fallen to 4.09!

The ratio of bank deposits to reserves still stood at only 6.14 in August 1945—the month the war against Japan ended—despite the so-called war “boom” and the vast expansion of the debt of the U.S. Federal government. As late as December 1960—15 years after World War II ended—when the statistical series provided by Friedman and Schwartz breaks off, the index still stood at only 10.3, well below the 13.14 of July 1929.

Even after 15 years of post-World War II prosperity, the U.S. economy was still significantly more “liquid,” at least by this measure, than it had been at the beginning of the super-crisis of 1929-33. This shows how unrealistic the expectations of a new Depression really were in the years that followed World War II.

16 Bourgeois liberal historians in the United States give Truman great credit for his standing up to the bellicose Douglas MacArthur and finally asserting his constitutional authority as commander in chief when he fired the insubordinate general. But they forget to mention that Democrat Truman—a great favorite among U.S. bourgeois historians—started the Korean War in the first place. First, by occupying and installing a vicious puppet dictatorship in South Korea against the obvious will of the Korean people, then by refusing to withdraw U.S. occupying troops after the Soviet Union had withdrawn its troops from the North, and finally launching a full-scale war against the Korean people when they moved to remove the hated U.S. puppet government.


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