Modern Money

By the time of the U.S. presidential election in November 2020, historical experience and the condition of global money markets suggest that the current global economic boom will probably have run its course. While the latest government economic figures show the current boom continuing in the United States and Europe, serious crises have already hit the currencies of Argentina and Turkey.

The dollar after a period of weakness has begun rising against the euro and other currencies and against gold. This sudden dollar strength is not only the result of rising U.S. interest rates. Trump’s threat to impose high tariffs on a whole range of commodities starting on July 6 has set off a flight into the dollar due to its role as the international means of payment. We have seen many such flights into the dollar over the years whenever a crisis threatens, whether political, military or economic.

If no compromise is reached by July 6 and Trump’s tariffs – and the retaliatory tariffs of competing nations – go into effect, it is possible that some commodity sales will fall through, which could trigger an international credit crisis. If severe enough, such a crisis would quickly throw the global capitalist economy into recession. This is all the more likely given the very late stage in the current industrial cycle, which has made the global credit system increasingly fragile even in the absence of a trade war. Whatever happens in the short run, Trump’s economic nationalist “America First” policies are undermining the entire world order that has prevailed since 1945. But that is the subject for another post.

Because capitalist economic crises tend to manifest themselves first in the spheres of currency and then credit, many reformers have sought cures for crises through reforms to the currency and credit systems. This creates the illusion in the minds of middle-class reformers, who stand between the two main class camps of modern society, the capitalist class and the working class, that the contradictions of capitalist society can be overcome through reforming the credit/monetary system. The U.S., in particular, has produced numerous monetary reform movements.

Monetary reform in the ‘Gilded Age’

During the years following the U.S. Civil War – known in U.S. history as the “Gilded Age” – the victorious capitalist class, no longer having to share power with a separate class of slaveholders, struggled to consolidate its class rule through the two-party system of Democrats and Republicans. The Southern-based slaveholders, who exploited kidnapped Africans and their descendants, had worked mainly through the Democratic Party. The slave owners had ruled the South with an iron hand and had wielded out-sized political influence over the entire country, dominating Congress and more often than not naming the president. The Democrats claimed to represent the interests of the white farmers and workers.

With the Southern slave-owning class now out of the running, the capitalist class, which exploited wage labor rather than African chattel slaves, struggled to consolidate its political rule by reviving the two-party system, this time on a purely capitalist basis. The Democrats used aggressive, in-your-face racism, falsely claiming to represent the interests of the white farmers and workers. But unlike in the pre-Civil War days, the Democratic Party and the more openly “pro-business” Republican Party were now obliged to serve the interests of a class that exploited wage workers as opposed to chattel slaves. Then as now, the capitalist class was determined to prevent the emergence of a political party that would represent the interest of wage workers.

In between the ruling capitalist class and the working class, there was a huge number of working farmers. Indeed, the Republican Party had actually begun as a farmers’ movement opposed to the spread of slavery but then had fallen under the domination of big business. After the Civil War, attempts were made to form a new party that would represent the interests of the farmers and the workers. At the center of the attempt to build a farmers’ and workers’ party was the struggle for monetary reform.

The “robber barons,” as large industrial capitalists and bankers were often called, were enriching themselves at an unprecedented rate. At the same time, farmers and other small businesspeople were engaged in what was for most of them to be a losing struggle to hold on to their farms and businesses. Farmers in particular were squeezed by high debts and falling prices for the commodities they produced and sold.

To establish a strong credit rating on the London-dominated money and capital markets, large U.S. industrial capitalists needed a strong gold coin standard that would show British financiers that the U.S. dollar was unlikely to be devalued against the British pound. This was especially true of the railroad corporations and emerging heavy industries that needed to raise huge amounts capital on the London capital market.

The large capitalists worked mostly through the now-dominant Republican Party but also, when necessary, the Democratic Party. The now-ruling large capitalists obliged the U.S. government to move toward the restoration of a full gold coin standard. (1) The government promised that the so called “greenbacks” – legal-tender paper currency directly issued by the U.S. Treasury to finance the Civil War – would be made convertible at a rate of one greenback dollar to one gold dollar.

The depreciated greenback dollar

The U.S. gold dollar was defined as 1/20.67 of a troy once of gold bullion. But on the open market, the greenback dollar price of gold bullion averaged $47.02 an ounce in 1864. The U.S. paper dollar was not to drop to such a low rate of exchange against gold before the 1970s. The policy of the U.S. government under the pressure of the City of London (2), the railroads, and heavy industry was to push the greenback dollar price of gold down to $20.67 per troy ounce to make the greenback convertible into gold at a rate of one greenback dollar to one gold dollar.

The only way to achieve this was to contract the quantity of greenbacks relative to the quantity of gold money in the U.S., causing the price of gold in terms of greenback dollars to fall. Contracting the quantity of a currency to increase its value against gold is called a deflationary policy. As the greenback dollar grew progressively scarcer against the quantity of gold bullion and coins in the U.S., the greenback dollar price of gold bullion fell toward the “par” value of $20.67 per troy ounce.

Then, in 1879, the U.S. government announced it would redeem to the bearer on demand each greenback for one gold dollar at the par value, putting the U.S. on a solid gold coin standard. The City of London, Wall Street, and the large U.S. industrial capitalists who owned the railroads and heavy industry were delighted. But the policy had driven many farmers off the land and many small businesspeople into bankruptcy.

As more and more farmers were driven off the land and small businesspeople bankrupted, they were forced to sell their labor power to industrial capitalists putting downward pressure on wages and causing the rate of surplus value and the rate of profit to rise.

Deflation and the ‘Crime of ’73’

Contracting the quantity of greenbacks in circulation was only part of the U.S. government’s policy of deflation. The other was the decision in 1873 to halt the free coinage of silver. Before 1873, any owner of silver bullion could present silver to the U.S. Mint – a wing of the U.S. Treasury Department – and have it minted into legal-tender silver dollars at a ratio of 16 silver dollars to one gold dollar. (3) In other words, a newly minted silver dollar weighed exactly 16 times a newly minted gold dollar.

During the middle years of the 19th century, this ratio corresponded more or less to the ratio between the values of gold bullion and silver bullion. Under the then-existing conditions of production, it took about 16 times as much labor to produce an ounce of gold as it took to produce an ounce of silver. However, by 1873 the amount of labor necessary to produce an ounce of silver had fallen sharply relative to the amount it took to produce an ounce of gold.

Opponents of the U.S. government’s deflationary policies, in an attempt to defend the interests of farmers and small businesspeople facing bankruptcy, turned to a false economic theory called bimetallism. The supporters of this theory claimed that the relative values of silver and gold were determined not by their relative labor values but rather by whatever ratio the government chose for minting the two metals.

In reality, however, if the U.S. government had not ended the free coining of silver at the ratio of 16 to one, it would have rapidly run out of gold as the owners of “cheap” silver dollars exchanged them for more valuable gold dollars. The “cheap” silver dollar under “Gresham’s Law (4) would then have driven gold dollars out of circulation. This would have effectively put the U.S. on a silver coin standard like China and Mexico, which were unable to attract the quantities of foreign capital investment necessary for their capitalist industrialization.

The crisis of 1873 and the double squeeze on farmers and the formation of the Independent Party

The year 1873 saw not only the end of the free coinage of silver at a ratio of 16 to one, it saw the outbreak of a crisis of overproduction that was sparked by a banking and stock market panic in the spring in Vienna, Austria, and then spread to Wall Street in the fall. The crisis left falling industrial production and rising unemployment in its wake. It was no ordinary recession, since it marked the reversal of a trend toward rising “golden prices” – prices in gold terms. This marked the beginning of a long period of falling golden prices, with brief interruptions, that was to continue to 1896. Many economic historians call this era the “Long Depression.”

Between 1873 and 1879, U.S. farmers and small businesspeople were hit by a double whammy. While the greenback dollar was rising against gold, the golden prices of agricultural produce were falling. This meant that greenback dollar prices of agricultural commodities were falling even faster.

Starting in 1874 – a year after the 1873 panic – the Independent Party was formed, which as its name indicated was an attempt to build a new party independent of both the Democrats and the Republicans. The Independent Party was a farmers’ party, and its program centered on opposition to the revaluation of the greenback dollar through the deflationary contraction of the quantity of greenbacks in circulation. Instead, the Independents demanded that the U.S. government expand the quantity of greenback dollars in order to raise farm prices and revive the depressed economy.

Starting in 1880, the Independent Party forged an alliance with the trade unions and became the Greenback Labor Party – an attempt to represent the interests of both farmers and workers. In its effort to win support from the urban working class, the Greenback Labor Party in the 1880 U.S. presidential elections raised the progressive demand for a graduated income tax.

During the 1880s, the deflationary pressure on U.S. farmers eased somewhat and the Greenback Labor Party died out. However, the 1890s was to see an extreme economic crisis in the U.S. creating the conditions for a new attempt to build a party of farmers and workers. In 1891, the People’s Party – better known as the Populist Party – formed with a program similar to the Greenback Labor Party. It combined demands in the interests of workers as well as farmers with demands for an inflationary monetary reform designed to raise agricultural prices.

The crash of 1893

Under the Silver Purchase Act of 1890, the U.S. Treasury was obliged to buy 4.5 million ounces of silver on top of the silver it already possessed. The silver was paid for with newly issued silver certificates, part of the circulating U.S. currency. The problem was that silver certificates were redeemable not only for silver dollars but also for gold dollars. The U.S. Treasury was put in the position of a commercial bank that increases its creation of imaginary deposits through loans that are not backed by a corresponding growth of its reserves. A bank that does this risks a run and failure. The U.S. Treasury was setting itself up for a run on its gold reserves.

However, the immediate negative effects of the Silver Purchase Act was cushioned because the year 1891 saw one of the worst famines in the history of the Russian Empire. Grain prices rose on world markets, and this did much to counteract the damage to the U.S. dollar caused by the Silver Purchase Act, as the balance of payments shifted sharply in favor of the grain-exporting U.S.

But then the far better Russian harvests of 1892 caused the prices of agricultural produce to fall sharply, turning the balance of payments against the U.S. The effect of the Silver Purchase Act of 1890 was now felt with full force. Weakened by the Act, the U.S. dollar – and with it U.S. bank reserves – came under massive pressure as capitalist investors increasingly demanded gold for their dollars.

The conditions for a perfect economic storm had come together. In the spring of 1893, the pressure on gold and banking reserves brought about a wave of bank runs, crashing stock market prices, and soaring bankruptcies, known in U.S. history as the “Panic of 1893.”

As long lines of depositors demanding their money back formed in front of banks, bank loans were called in and credit was paralyzed. Commodities piled up unsold in U.S. warehouses, industrial production plunged, and the U.S. faced the worst depression it had faced up to that time. Unemployment soared well into the double digits, reaching an estimated 43 percent in Michigan. The Populists and Coxey’s Army – named after Ohio businessman Jacob Coxey – organized mass demonstrations and a march on Washington demanding monetary inflation through the resumption of free coinage of silver at a ratio of 16 to one and public works programs to put the unemployed back to work. The Populist Party raised radical demands including nationalization of the railroads to end the gouging of farmers by the railroad monopolies, organized by Wall Street banks headed by J.P. Morgan and Company.

Grover Cleveland, the Democratic Herbert Hoover

The administration of “gold Democrat” Grover Cleveland reacted in much the same way the Herbert Hoover administration did to the even worse crisis of 1929-33. Cleveland suppressed protests by workers and farmers, stuck to the gold standard as demanded by Wall Street and “the City” – still Wall Street’s master, because the U.S. was a debtor of Britain – and did virtually nothing for the unemployed. Cleveland left office as the most hated president before Herbert Hoover. However, because Cleveland was a Democrat, the two-party system of Democrats and Republicans was thrown into crisis.

The Democrats, unable to defend the miserable record of the Cleveland administration, saved themselves and the two-party system by running against their own record. They nominated elegant, “pro-silver” orator William Jennings Bryan, who posed as the champion of the white workers and farmers and other small business people. In addition to being a racist, Bryan, though he has gone down in history as a “progressive,” was, like so many of today’s right-wing Republicans, a strong fundamentalist evangelical Christian. He was to later became famous for his opposition to Darwin’s theory of evolution. The “Great Commoner,” as Bryan was known, though he claimed to champion the interests of both farmers and workers, never said a word against the growing “Jim Crow” reign of terror being carried out by the Southern Democrats.

In the 1896 election, the Populists were under tremendous pressure to support the “pro-silver” Bryan, who raged against Wall Street and its “Cross of Gold” as the progressive alternative to the reactionary, pro-gold, pro-Wall Street William McKinley. Yielding to this pressure, the Populists endorsed Bryan, though they ran their own vice-presidential candidate. Meanwhile, Wall Street and the industrial capitalists, except for the owners of silver mines, who were eager to pocket the remaining gold in the U.S. Treasury Department, backed McKinley to ensure their access to the City of London.

Building a farmer/silver mine owner alliance without the workers

The Populists believed that by supporting the Democrat Bryan they were building a coalition of workers and farmers – and silver mine owners – against Wall Street and big business. The supporters of Bryan and bimetallism claimed that by increasing the quantity of the means of circulation through the resumption of the free minting of silver at a ratio of 16 to one would lift depressed agricultural prices, enabling farmers to pay off the debts they owed to their bankers. Bryan implied that monetary inflation brought about by the resumption of the free coining of silver would by itself be sufficient to restore prosperity for both farmers and workers. Therefore, the more radical demands raised by the Populists such as the nationalization of the railroads, public works, and a graduated income tax were not really necessary.

However, as it turned out, the Populists by supporting Bryan were building a coalition of farmers, small businessmen, and silver mine owners without the working class. For the urban working class, the idea of devaluing the medium in which they were paid was a tough sell. Farmers hoped for higher prices through inflation, but workers feared higher food prices. The industrial capitalists – minus the silver mine owners – took full advantage of this situation to defeat Bryan and ensure the victory of the candidate of Wall Street and big business, Republican William McKinley, in the 1896 election.

As the presidential election campaign of 1896 unfolded, the industrial bosses argued that if Bryan won they would be forced to close down factories. While some of this was scare propaganda, it is true that if the U.S. had been driven off the gold standard and onto the silver standard – along with China and Mexico – the reduced ability of U.S. capitalists to raise money from “the City” would have in the long run slowed U.S. industrial development, thus reducing the demand for the labor power of U.S. urban workers. While the pseudo-populist Democrat Bryan swept the rural districts, saving the Democratic Party from richly deserved extinction, the reactionary “gold Republican” McKinley swept the industrial districts, winning both the electoral and popular vote.

In the wake of the election, a new boom set in as fear of dollar devaluation ended and the U.S. gold coin standard seemed safe for the foreseeable future. More fundamentally, the deflationary trend that had dominated the global economy since 1873 gave way to a new rise of commodity prices that was to last – with the help of World War I – to 1920.

Instead of cheap silver, the long hoped for inflation was to come through “cheap gold” arriving from new discoveries in Canada and Alaska – and from the new cyanide process of extracting gold. The Populist movement was disarmed. The new capitalist prosperity and the Populist support of Bryan caused the Populist Party to fade way along with the silver agitation. The Gilded Age dominated by reactionary politics and populist opposition gave way to the “Progressive Era.” The so-called progressives, including (some) Democrats as well as (some) Republicans such as President Theodore Roosevelt, promised to curb the abuses of the robber barons by breaking up their monopolistic “trusts” through anti-trust laws and expanded government regulations.

The booming economy with its rising cost of living and strong demand for the commodity labor power encouraged the growth of trade unions. In the U.S., the radical Industrial Workers of the World – the IWW – challenged the reactionary racist policies of Samuel Gompers’ AF of L and his craft unions. In Germany, similar conditions of prosperity and a rising cost of living led to the growth of the German Social Democratic Party and trade union movement. Social Democratic Parties were growing in other countries as well, including in newly industrializing Russia.

In the U.S., as the Populist Party faded a rapid rise in the number of industrial workers and the immigration of socialist-minded workers from eastern and southern Europe encouraged the growth of the Socialist Party, led by Eugene Debs. The Socialist Party represented the next challenge to the twin parties of capital. Though the Socialist Party was unable to displace the Democratic or Republican Party, it did succeed in electing mayors, members of city councils, and even a few U.S. congressmen – they were all men – while Debs garnered 6 percent of the popular vote in the 1912 presidential election.

A monetary reform in the Progressive Era

In 1907, a brief but violent crisis erupted that interrupted the capitalist prosperity. Unlike in 1893, the 1907 panic was global. However, the crisis was more severe in the U.S. than in the industrial countries of Europe, which by that time had developed modern central banking systems. Much like the 19th-century panics in the U.S., the 1907 crisis featured bank runs, the calling in of bank loans, and a drying up of new bank loans with all the consequences that followed. Stock market prices crashed and a severe but brief industrial recession ensued with resulting mass unemployment.

The crisis of 1907 was so violent in the U.S. that many thought the world capitalist economy had barely escaped a much greater disaster. The bankers were particularly concerned about the lack of a U.S. central banking system. Nowhere in the industrial world was the mentality of decentralized “free-enterprise democracy” more entrenched than in the U.S. Among the still large if now declining mass of farmers and small businessmen, the trends toward economic centralization were strongly opposed. Therefore, all proposals to create a central banking system were met by such massive opposition that not only Democratic but even Republican politicians feared to defy it for fear of losing their offices at the polls.

However, times were changing. By the time the crisis of 1907 hit, the U.S. had replaced Britain as the leading industrial power. As we have seen throughout this blog, during a crisis of overproduction the demand for money as a means of payment as opposed to a means of circulation rises. If during the crisis the means of payment cannot be quickly increased – either due to bad banking legislation like the British Bank Act of 1844, or the lack of a central banking system such as was the case in the U.S. – the demand for currency as a means of payment leads to runs on the banks. Instead of money accumulating in the banks where it serves to support the credit system, it flows into mattresses. Under these conditions, credit dries up and the economy is paralyzed. This is exactly what happened in the U.S. in 1873 and in an even worse form in 1893 and again in 1907.

As long as the U.S. was still largely an agricultural society whose industry played a secondary role in the global economy, the lack of a central bank could be tolerated. During “panics” and the resulting economic paralysis, many unemployed workers could return to their families’ farms and ride out the crisis. In those days, farmers could still to a certain extent withdraw from the money-commodity economy and directly consume their own produce.

While the central banks led by Britain’s Bank of England had managed to prevent the U.S. banking panic of 1907 from spreading to the other imperialist countries, the economies of virtually all countries were thrown into recession. Next time, as the U.S. role in the world economy continued to grow, the bankers feared they might not get off so easily.

In 1910, Republican Senator Nelson Aldrich from Rhode Island and the son-in-law of Standard Oil president and banking magnate John D. Rockefeller organized a secret meeting of top bankers at Jekyll island, Georgia. It had to be secret because of the strength of continued opposition to central banking. In addition to Aldrich, the meeting included President Frank Vanderlip of New York National City Bank, an ancestor of today’s Citigroup; Henry Davison, a senior partner of J.P. Morgan and Company, an ancestor of today’s J.P. Morgan Chase; Charles D. Norton, president of the powerful Wall Street bank First National Bank of New York, another ancestor of Citigroup; and Paul Warburg of Kuhn, Loeb & Company, a powerful Wall Street investment bank owned by capitalists of German-Jewish origin. The meeting was to plan what became today’s Federal Reserve System.

Despite the opposition of “progressive” Democrat William Jennings Bryan, who reflected a U.S. that was like Bryan himself fading into history, the monetary reform pushed by the big bankers was actually carried out. The Federal Reserve System was thus created in an era that along with the New Deal was a time when the big bankers, not the working-class/farmer majority, actually called the shots in Washington.

End of the era of rising prices revives movement for inflationary monetary reform

World War I severely curbed agricultural production in Europe, greatly expanding the market available to U.S. farmers. During the “Great War” – both before and after the U.S. formally entered the war – those remaining on the farms never had it so good. However, right after World War I as soldiers returned from the trenches, European agricultural production rebounded. Starting in 1920, an era of falling agricultural prices set in. From the viewpoint of the U.S. farmer, the Great Depression began not in 1929 but in 1920. The agricultural depression, then spread starting in 1929 to the industrial cities and throughout the whole U.S.

As agrarian depression returned, demands for inflationary monetary reform based either on a return to the “free coining of silver” – supported as always by the silver mining interests – or for the end of the gold standard, supported by some factions of the Democratic Party, were heard again. As the 1932 election approached, Herbert Hoover and the Republicans, who were hardcore “gold bugs,” resisted any move to tinker with the gold-based monetary system and opposed any move to devalue the dollar. The only concession to the pressure for an inflationary policy that the Republicans carried out was a law allowing the Federal Reserve Banks to count governments bonds, along with gold and high-quality commercial paper, as reserves against Federal Reserve Notes.

Franklin Roosevelt, though he was no Bryan, was much more open to “soft money reforms.” The economic crisis was so severe – and the old safety valve of a return to the farms to weather the crisis was open to fewer people than ever – that whatever fears urban workers had concerning higher food prices were overridden by their desire to end the nightmare of unemployment. This time the remaining farmers – African-American farmers who had traditionally voted Republican were not allowed to vote under Jim Crow rule of Roosevelt’s Democratic Party in the South – as well as the urban working class voted for Roosevelt and the Democratic ticket.

Wall Street’s once strong opposition to dollar devaluation was now greatly reduced. In the early 1930s, thanks to the emergence of the U.S. as the world’s most powerful industrial nation and the massive loans by the U.S. to Britain and France during World War I, and after 1923 to Germany, meant that the U.S. was by far the world’s biggest creditor nation. Wall Street and the Federal Reserve System, not the City of London and the Bank of England, were now the rulers of the money and capital markets of the world. The U.S. capitalists no longer feared that a dollar devaluation would shut them out of “the City.”

In office, Roosevelt and the Democrats did carry out a series of inflationary monetary reforms to kick-start the paralyzed U.S. economy. They increased the purchase of silver bullion by the U.S. Treasury, a move that delighted the owners of silver mines, still an important part of the Democratic coalition. But to the disappointment of hardcore “silverites,” Roosevelt did not restore free coinage of silver. What FDR did instead was devalue the dollar by raising the dollar price of gold from $20.67 to $35 in order to encourage the rise of dollar-denominated commodity prices. In a move to economize gold and increase the centralization of the U.S.’s gold in the hands of the U.S. Treasury, the coinage of gold was halted and gold coins were withdrawn from circulation. The ownership of gold bullion and gold coins was also made illegal.

Gold certificates were the only part of U.S. circulating paper currency that promised to pay the bearer in gold as opposed to silver or “lawful money.” Since gold certificates were legal contracts, the Roosevelt administration feared that the courts might hold the U.S. Treasury in default if it did not pay the owners of gold certificates in gold. This was in contrast to silver certificates, which promised to pay the bear in silver dollars, while other forms of paper currency – Federal Reserve Notes, Federal Reserve Bank Notes, National Bank Notes, and United States Notes – promised to pay the bearer only in “lawful money” on demand.

Gold certificates have not entirely disappeared from the U.S. monetary system even today. The administration required that the 12 Federal Reserve banks that make up the Federal Reserve System sell their gold reserves to the U.S. Treasury for gold certificates. Today, the Federal Reserve banks still own these ancient gold certificates, which once functioned as currency and still appear on the asset side of the Federal Reserve’s balance sheet. The other forms of paper currency – National Bank Notes and Federal Reserve Bank Notes – were discontinued in the 1930s, while silver certificates and United States Notes were discontinued in the 1960s, leaving the Federal Reserve Notes that today serve as the only form of U.S. dollar paper currency.

Greenback Labor Party program for monetary reform implemented at last

The convertibility of the U.S. dollar continued internationally at the new rate of $35 per troy ounce of gold. The next “monetary reformer” was Lyndon B. Johnson, who was forced to float the U.S. dollar on the open market against gold – though he retained the promise to redeem the dollar for gold at the rate of $35 an ounce on the demand of foreign central banks. LBJ also reduced the amount of gold that “backed” Federal Reserve Notes from 40 cents per dollar to only 25 cents.

The last inflationary presidential “monetary reformer” was none other than “Tricky Dick” Nixon. In August 1971, President Richard Nixon halted the international convertibility of the U.S. dollar into gold at any price, which was followed by the end of the system of fixed international exchange rates, ending what was left of the Bretton Woods System – which had already died for all practical purposes.

Nixon went on to promise the American people that the dollars they owned would not be reduced in value. As usual – as the great inflation of the 1970s was to show – Nixon lied. The Federal Reserve banks were freed to issue paper Federal Reserve Notes without having to worry about the quantity of gold backing them in the U.S. Treasury. Ironically, the demand of the old Greenback Labor Party for a paper dollar without legal ties to gold or silver was finally realized, implemented by right-wing Republican Richard Nixon.

Monetary reform in the early 21st century

However, proposals for monetary reform are by no means dead. Nobody of course raises the demand for the free coinage of silver at 16 to one, while today’s “greenbacks” – Federal Reserve Notes – are not backed by any legally mandated quantity of gold. As far as the law is concerned – economic laws are of course another matter – the Federal Reserve System can create as many U.S. dollars as it wants. However, this situation has no more ended the movement for monetary reform than it has ended unemployment or halted farm foreclosures.

Today’s monetary reform ideas are being raised by the political right as well as the political left. First, lets take a look at the proposals supported by the right.

Bitcoin and other “crypto-currencies” appeal to the upper middle class and some members of the capitalist class, especially tech-savvy, highly paid computer engineers. Crypto-currencies are created in limited quantities according to a computer algorithm. They represent an attempt to create a system of payments that the governments can’t track – for example, individuals who may not be particularly eager to pay their taxes and wish to hide their income, or people engaged in the illegal international drug trade or various money-laundering schemes. For these purposes, crypto-currencies promise an alternative to the traditional one-hundred-dollar bills and gold bars and coins carried in suitcases. (5) Insomuch as crypto-currencies are based on an economic theory, they draw their inspiration from the work of the Austrian economist Frederick von Hayeck.

Hayeck wanted to get the government out of the business of issuing currency, which, like virtually everything else, he wanted to leave to the private sector. The Austrian school claimed that if central banking was abolished, the booms and busts of the industrial cycle would be abolished.

Hayek reasoned that just as competition between rival capitalists ensures that the best products are produced at the cheapest possible prices, competition between rival currencies would ensure that the best possible currencies will win out over inferior currencies. Therefore, the public should be free to use whatever they want to use as money – for example, gold, silver, and banknotes issued by private banks such as prevailed under the “free banking” of the pre-Civil War U.S.

In the 21st century, Hayeck’s followers hope that bitcoin and other similar crypto-currencies will replace government/central bank-issued “fiat money.” Inspired by Von Hayek, Texas Republican Ron Paul and like-minded “libertarian” right-wingers demand that the Federal Reserve System be abolished. (6)

Another school of right-wing monetary reformers is rooted in the traditions of the anti-Semitic, pro-fascist, pseudo-populist movements that thrived in the 1930s. These right-wing monetary reformers claim that the reason the U.S. economy experiences booms and busts is the fact that in the U.S. paper currency is issued not by the government but rather by private banks. What these right-wing monetary reformers mean is that the shares of the 12 Federal Reserve banks that issue the paper currency of the U.S. – Federal Reserve Notes – are held by private commercial banks.

Insomuch as there is a coherent idea in this demand, it comes down to demanding that the 12 Federal Reserve banks should be nationalized. Left unexplained is why capitalist countries that have nationalized central banks – and almost all do – also experience the boom and bust cycle.

The Board of Governors of the Federal Reserve System – called the Federal Reserve Board for short – which controls the U.S. central bank as a whole, is a government agency created by Congress. Its members are nominated by the president for seven-year terms and approved by the U.S. Senate. It would nonsensical to demand the “nationalization” of the Federal Reserve Board of Governors, because it already is part of the U.S. federal government, though it is true that the Board of Governors has since its inception served the interests of Wall Street.

These right wingers see the creation of the Federal Reserve System as a plot by “international bankers.” They emphasize the participation of Paul Warburg, who was part of a banking family that had members both in Germany and the U.S. Warburg, represented the “Jewish” banking house of Kuhn, Loeb in the “secret” Jekyll Island meeting that laid the foundation of what was to become the Federal Reserve System. Therefore, the demand to “nationalize” the Federal Reserve System is often – though not always – associated with open or concealed anti-Semitism, although demanding the nationalization of the Federal Reserve System – or the 12 Federal Reserve banks – is not itself anti-Semitic. For example, the left-wing U.S. Green Party, which opposes all forms of racism including anti-Semitism, also demands the nationalization of the Federal Reserve banks.

Left monetary reform proposals in the 21st century

There is, however, a school of monetary reform that unlike those examined above appeals to progressives, called Modern Monetary Theory – MMT for short – which is associated with what is called “post-Keynesian economics.” Post-Keynesian economists take Keynes’s ideas much further than Keynes himself did. They stand on the extreme left wing of present-day bourgeois economics.

The supporters of Modern Monetary Theory hold that as long as there are unemployed economic resources, both machines and workers, the central government that issues the paper currency not only can run deficits but should run deficits. Only when the “real economy” is producing at its physical limits, MMT teaches, will increased deficit spending cause inflation.

Reaching the physical limits doesn’t necessarily mean that every factory, mine and farm is operating at full capacity. As the economy approaches “full employment” of workers and machines, physical disproportionalities in production can cause shortages of raw materials, auxiliary materials, and skilled labor. The supporters of MMT are aware of these problems, which can cause inflation to appear during economic booms even before all machines and workers are fully employed. But even if deficit spending causes inflation, MMT holds that the inflation will not lead to bankruptcy or any other type of financial disaster except under extreme and unlikely conditions. Like the 19th-century monetary reformers, MMT supporters tend to see little downside in inflation. According to MMT, the central government, which has the power to create money, unlike local governments, can never run out of money.

Very often in popular agitation socialists say when demanding more money for jobs, education, and health care that “the money is there.” For example, if the government would only cut military spending or increase taxes on the rich, there would be plenty of money for jobs, education and health care. This is especially true in the U.S., where the military budget is far higher than it is in any other country.

However, what exactly do we mean by “money”? Do we mean wealth or the ability to produce additional wealth – such as available potential unemployed or underemployed workers, idle machines, auxiliary materials, energy, and raw materials – or do we mean something else by money, such as gold? In popular agitation, especially in the U.S. with its huge war budget and lack of taxation of the rich, the money, however we define it, is there. There is no purely economic reason why the the U.S. government could not vastly increase its spending on public works, health care and education and support for scientific research on problems such as global warming if only it would stop throwing away trillions of dollars on wars and war spending and endless tax cuts for the rich.

The Green Party is the party that most resembles the Greenback Labor Party and Populist Parties of old insomuch as it represents people that occupy an intermediate position between the capitalist class and the working class. However, reflecting the economic changes since the late 19th century, the modern Green Party draws the bulk of its support from the urban and suburban middle classes, while the Greenback Labor Party and Populist Parties were farmer-based parties.

The Green Party proposes that the U.S. federal government launch a massive program to shift the U.S. economy from its current fossil fuel basis to a “green economy” that will limit global warming and finally bring it to a halt. The Green Party is strongly attracted to Modern Monetary Theory and has held meetings where economists that support MMT claim there is no “lack of money” to pay for a desperately needed program – we all agree on that – to convert the U.S. and world economy from its current fossil fuel basis to a sustainable “green” basis. However, the MMT economists imply that the U.S. government can continue with its tax cuts for the rich and huge war programs and still have no problem finding the money that would be necessary to shift toward a “green economy.”

This is not to suggest that most – or indeed any – members of the U.S. Green Party want to continue the tax cuts for the rich and the current war spending. But the supporters of MMT suggest that these are not financial barriers for doing so. Indeed, MMT economists – almost all of whom consider themselves political progressives though they may not all be as committed to progressive policies as members of the Green Party are – have indicated that even if they don’t like the regressive nature of the recent Republican tax cuts, they believe tax cuts will stimulate the economy and reduce unemployment. This echoes the arguments made by Paul Ryan, Trump himself, and other Republican leaders.

The MMT economists sometimes argue that the Republicans, unlike most of the current leaders of the Democratic Party, at least “understand Modern Economic Theory” – meaning that they understand that trillion-dollar-plus deficits are actually a good thing. The reason that is the case, according to MMT economists, is that despite claims to the contrary now being made by the media and “mainstream economists” the U.S. – and other capitalist countries – are still far from genuine “full employment.” And here, of course, the MMT supporters are correct.

However, we shouldn’t forget that in Europe, especially in Germany, former sixties radicals formed the first Green Party, which participated in a government that in the 1990s waged war against what was left of socialist Yugoslavia. Though it certainly isn’t the intention of the U.S. Green Party today, the arguments that we can afford guns and butter are dangerous. This was exactly the argument that Lyndon B. Johnson made in the 1960s when he claimed that the U.S. was rich enough to carry out his Great Society reforms at home while pursuing the war against the Vietnamese people and other peoples of Indochina. We know how that worked out.

Radical reform advocated by MMT economists

MMT economists advocate that the central government – the federal government in the U.S. – can and should employ every person who desires to work but cannot find work in the private sector at a living wage. This living wage, the MMT supporters point out, would function as a minimum wage, since no person would work for a private employer who offers a wage lower than the wage the government offers. Assuming such a reform could be implemented under the capitalist system, if your search for private employment comes up empty you would simply go to the nearest government employment office and choose among useful governments jobs. All these jobs would pay you a wage adequate to meet your basic needs for food, housing, education and so on.

If you desired more, as the supporters of MMT assume would be the case for most people, you would seek employment in the private sector. If you didn’t find it, you would still have your government job. Such a reform if it could be won under the capitalist system would be highly desirable, to say the least, from the viewpoint of the working class.

It is important to realize that the supporters of MMT do not see such a demand as part of a transitional program pointing towards a socialist society. Marxists have long raised this demand but see it not as a reform within capitalism but as way of building a movement that would establish a workers’ government that along with other profound changes would transform capitalism into socialism.

Marxists will in the years ahead engage in united-front movements and actions demanding that the government provide jobs for everybody who needs one at union scale wages – while MMT supporters are satisfied with a living wage. The difference between the Marxist and MMT perspectives on the demand that government act as the employer of last resort will be explored in coming posts.

Next month, I will examine Modern Money Theory in depth and contrast it to the Marxist theory of money.


1 During the Civil War, the U.S. government never completely left the gold standard. Tariffs were payable paid in gold and not greenbacks. In addition, businesspeople were allowed to maintain two lists of prices, one for gold dollars and the other for paper dollars. As a result, gold dollars were not driven out of circulation but continued to circulate side by side with paper “greenback” dollars. A return to a full gold standard required that the greenback dollar be made convertible for the bearer on demand at the U.S. Treasury at a ratio of one greenback dollar for one gold dollar. This was achieved in 1879. (back)

2 London’s financial district is known as the “City of London,” or “the City” for short. (back)

3 Before silver bullion began to fall rapidly against gold bullion in the early 1870s, the gold dollar was cheaper than the silver dollar. That is, the labor value of the gold contained in the gold dollar was less than the labor value of the silver contained in the silver dollar. If the U.S. government had not ended the free coinage of silver when it did, the now cheaper silver dollar would have driven the gold dollar out of circulation under Gresham’s Law. This would have effectively put the U.S. on a silver standard. (back)

4 Gresham’s Law holds that “bad” (cheap) money drives “good” (more valuable) money out of circulation. A present-day example involves the gold and silver coins that are minted by the U.S. government and the gold sovereigns that are still minted by the British government. The U.S. mints a one-troy-ounce $50 coin. This coin is legal tender just like the Federal Reserve Notes and coins made up of base metals – the familiar pennies, nickels, quarters, fifty-cent pieces, and one-dollar coins – are. These latter coins circulate because their metallic value is less than their value as representatives of gold bullion – real money. In contrast, the $50 gold piece – and this is true of all gold and silver coins minted by the U.S. government today – and the gold sovereigns minted by the British government are worth far more as bullion than as a representative of gold in circulation.

You could use a $50 gold piece to purchase say $50 of groceries, deposit in your bank account and have it credited for $50, pay a $50 debt, or pay $50 on your taxes. But you can also go to a gold-silver store and sell your coin for $1,000 plus, and use the proceeds to purchase your commodity or pay your debts, or deposit in your bank account, and still have well over $1,000 in legal-tender money left over to do with as you like. Only if the dollar price of gold bullion were to fall to or below $50 would it make any sense to use it as currency. There is no chance of that happening because the deflation that would be involved in driving the paper dollar price of gold down from $1,000 plus would dwarf the deflation that was required to drive the paper dollar price of gold in 1864 from $47.02 to $20.67. These “bullion coins,” as they are called, are not expected to circulate but rather to be used to hoard gold and silver bullion. (back)

5 The highest-denomination Federal Reserve Note issued is only $100. Because of repeated devaluations of the U.S. dollar over the years, a $100 bill represents a very modest amount of real gold money. As a result, it takes a lot of suitcases to make payments of any consequence in the shadowy world of drug smuggling and money laundering with C-notes. Every fresh devaluation of the dollar increases the amount of suitcases that must be dragged around for these purposes. This is why crypto-currencies offer an attractive alternative.

However, unlike real currencies the quantity of crypto-currencies is not controlled by central banks with flux and reflux mechanisms that allow central bankers to maintain some degree of stability of currencies against gold and each other. Unlike central banker-created legal-tender currencies, crypto-currency schemes have no way of adjusting the quantities of crypto-currency to the “demands of commerce” or to a sudden increase in demand for currency as a means of payment such as tends to occur during crises. In reality, crypto-currencies are not a form of money but rather are collectibles, like rare paintings, that maintain a rental value due to scarcity. Like other collectibles, they can be a medium of speculation subject to wild swings in value against real money – gold – and actual currencies. The current crypto-currency craze is a bubble that is sure to burst. (back)

6 U.S. progressives are well aware that no foreign nation is in a position to attack the U.S. homeland except through a suicidal military attack. Therefore, they often demand that steep cuts be made in the U.S. military budget. Marxists, however, take another approach. We demand that not a single penny be granted to this government to spend on the military. We make this demand not because we are pacifists, though pacifists may support it, but because we do not grant political confidence in any capitalist government. And this is doubly true for an imperialist government.

Trump’s recent statements blaming Canada for burning down the White House during the War of 1812, and his vicious personal attacks against Canadian Prime Minister Justin Trudeau, underline the real attitude of the U.S. toward Canada. During the War of 1812, Canada was actually a British colony. it was the U.S. that attempted to invade Canada with the aim of annexing it to the United States during the war, but the invading U.S. forces were repelled. So President Trump gets an F on his knowledge of U.S., Canadian and British history.

While Canada is in no position to invade the United States, the U.S. certainly has the means to invade Canada if it ever chose to do so. In fact, there is no genuine friendship at all between capitalist countries and therefore no genuine friendship between the capitalist United States and capitalist Canada, as the current tariff war shows. What does exist between the two capitalist neighbors is a certain relationship of forces that obliges Canada to remain subordinate to the United States.

If the working class comes to power in Canada before it does in the United States, the Canadian workers’ government would certainly have to maintain a military defense against its not very friendly neighbor to the south, just as Cuba today has to maintain a military defense against that same not very friendly neighbor to its north. However, a class-conscious Canadian worker will give no confidence to a government of Canadian capitalists to defend their interests against the very real threat posed to Canadian workers by the U.S. capitalists and therefore will not vote to give a single penny for the military budget of any Canadian capitalist government. (back)