Modern Money (Pt 3)

In this post, I contrast the analysis of foreign trade found in Professor L. Randall Wray’s book “Modern Money Theory” to the analysis of foreign trade that logically emerges from Marx’s theory of commodities, money and capital.

From trade war to war?

The August 10 on-line edition of the British rag The Express has a headline blaring, “China Fires SIX WARNINGS to US Navy in South China Sea.” When Chinese air force planes demanded the U.S. aircraft leave the area, the U.S. pilots arrogantly answered, according to The Express, “I am a sovereign immune United States naval aircraft conducting lawful military activities beyond the national airspace of any coastal state.” Notice, this occurred in the South China Sea near China and not anywhere near the U.S.

Now, if this was an isolated incident, it might not mean much. But the incident occurred against the background of the growing trade war between the U.S. and China. The Trump administration has made it clear that it is determined to reduce China’s share of the world market, especially but not only the U.S. part. If Trump’s policies are successful, it will bring China’s era of rapid development of capitalism to an end. Though China has made amazing progress and now has the highest level of industrial production in the world, it has about four times the population of the U.S. To reach a level of development equivalent to the U.S., China would need to have about four times the industrial and agricultural production of the U.S.

Another weakness of Chinese industry is that Chinese factories are dependent on high-tech components manufactured in South Korea, Taiwan and the United States. In addition, patents for these components are owned by Silicon Valley and British companies. Recent sanctions imposed by the Trump White House against the Chinese mobile phone manufacturer ZTE for allegedly violating U.S. sanctions against Iran and North Korea threatened to destroy the company because its phones depend on high-tech components that are not manufactured in China. Later, the Trump administration backed down amidst rumors that ZTE had to pay a bribe to Trump personally. The fact that a major Chinese company can be shut down at will by a U.S. president shows just how vulnerable Chinese industry is.

The productivity of labor in China, whether in industry or agriculture, is still far lower than that of the U.S. While wages have been rising in China, they are still far lower than the wages of U.S. workers or workers in the other imperialist countries. This means that industrial capitalists in China are far more likely to choose “labor-intensive” as opposed to “capital-intensive” methods of production. Or to use the more precise terminology of Marx, the organic composition of capital of Chinese industrial enterprises is much lower than those in the United States and other imperialist countries.

By shifting production to low-wage countries, capital worldwide maintains a considerably higher rate of profit because of the combined effects of the higher rate of surplus value and lower organic composition of capital. Many Chinese factories are owned by U.S. corporations, while many others produce commodities sold under U.S. brand names such as “Apple.”

The U.S. and British press complain that China aims to produce its own high-tech components. If successful, this would make it far easier for China to resist U.S. imperialist economic blackmail. Not only Trump but U.S. imperialism is determined to prevent this from happening.

Trump’s numerous opponents within the U.S. capitalist class, whether in Silicon Valley or elsewhere, hope the Trump administration succeeds in this respect. They disagree with Trump’s methods, not his goals. These capitalists are fine with the present division of labor, which maximizes the profits of U.S. corporations by forcing Chinese companies to fork over vast amounts of surplus value to U.S. companies while locking China in a pattern of relative underdevelopment.

Under the present international division of labor, Chinese industry specializes in the assembly of these components using 20th-century labor-intensive assembly line techniques rather than 21st-century high-tech manufacturing techniques used to produce CPUs and GPU’s (1) – the actual computers in computerized “devices” such as laptops and smartphones. It is exactly in the old-fashioned labor-intensive manufacturing process where the bulk of surplus value – which when realized in money form becomes profit – is actually produced.

The super-exploitation of Chinese workers is reflected in the fact that in August Apple became the first trillion-dollar corporation – in terms of its share value on the stock market – in capitalist history. The super-exploitation of mostly women assembly workers in China – and other Asian countries – has fueled the high residential ground rents in Silicon Valley, which are making it extremely difficult for people to find shelter in the San Francisco-Silicon Valley area. (2) This had led to growing homelessness despite, and even because of, the ongoing economic boom.

The U.S. media and Reuters of the UK, both largely anti-Trump, have recently speculated about splits in the Chinese leadership. Supposedly, a faction within the government thinks that China has not made enough concessions to imperialist demands. Of course, the U.S. and UK media have an interest in encouraging splits in China’s political leadership and cultivating a pro-imperialist political grouping, which will be presented in the media as “pro-democracy forces.” (3)

In the long run, the imperialists hope that the pro-imperialist forces in China will become strong enough to stage a counterrevolution in the name of “democracy.” The hoped-for counterrevolution would replace the current Chinese government with one that would accept a full-fledged neo-colonial relationship with Washington and its world empire. If this were to happen, Trump – and the supporters of Trump-like policies after Trump is gone – will then be able to claim that Trump’s “tough policies” brought down the People’s Republic of China.

The reports in the media about the real or alleged split in the Chinese leadership are a warning that if Trump appears to be making progress towards his goal of halting China’s further development, his stock within the ruling classes of the U.S. and Britain will soar. Trump, the argument will go, is perhaps a little crude but his methods are getting the job done. The opponents of Trump within the ruling classes – such as the leaders of the Democratic Party anti-Trump “resistance” – will then draw the conclusion that Trump isn’t so bad after all. The “moderate” anti-Trump Republicans will then throw their support behind Trump’s re-election campaign in 2020.

Though Trump is far from the fascist dictator that Hitler was in the 1930s, we can’t forget that Hitler’s initial successes – and they were many – solidified his support within the German ruling class, the military, and large sections of the German people, making World II all the more certain. (4)

Even in the absence of a trade war, China’s rapid economic growth has been waning. This is the inevitable result of the fact that as Chinese-based industry takes an ever larger share of the world market, the rate of economic growth in China must drop toward the overall much slower rate of expansion of the world market. For China’s “capitalist roaders,” the limits of capitalist development are appearing far earlier than they had bargained for. The “capitalist road” not only has a barrier in the contradictions of capitalism but now in the person of Donald Trump and his anti-China trade war as well.

These facts should be kept in mind by those who claim that China is a full-scale imperialist country – or at least a “sub-imperialist” power – that is set to replace the U.S. world empire as the new world global hegemonic power. In reality, despite the great progress China has made, hundreds of millions of Chinese people still struggle with the consequences of imperialist super-exploitation and capitalist underdevelopment.

World War III?

On August 11, our favorite British on-line rag, The Express, served up another sensational headline: “Turkey Lira crisis to ‘spark WW3,’ Erdogan phones Putin in emergency call as Trump hits out.” What was this all about?

On Friday, August 10, world financial markets were shaken by a Trump tweet followed by an announcement by U.S. Secretary of Commerce Wilbur Ross that tariffs on Turkish steel were being increased from 25 to 50 percent and on aluminum from 10 to 20 percent. The reason given was the imprisonment of the U.S. Christian missionary Rev. Andrew Brunson. The Turkish government claims Brunson was involved in the 2016 attempted coup against the Turkish government. The claim that the imprisonment of a U.S. Christian clergyman in predominantly Muslim Turkey endangers U.S. “national security” has strong Islamophobic implications. It is reminiscent of claims of persecution of Christian missionaries in pre-1949 China.

The announcement by Trump and Ross had the effect of pouring gasoline on the raging currency and economic crisis gripping Turkey. The tariffs against Turkey’s steel and aluminum exports caused the Turkish lira to fall sharply against the U.S. dollar as well as the dollar’s satellite currency the euro.

Wall Street shares dropped on August 10 out of fear that Turkish capitalists who have assets denominated in the now drastically devalued Turkish lira but payable in U.S. dollars and euros will be forced to default. Further increasing the pressure on the lira, was the fact that the U.S. dollar rose sharply against both gold and other currencies as investors, fearing that a new global crisis of overproduction is approaching, sought safety in the dollar, which remains the chief means of payment under the dollar system. Bank stocks were particularly hard hit in the stock market sell-off. If the banks get into serious trouble due to defaults by Turkish and other “emerging market” capitalists, world credit could seize up, which could throw the world economy into a new global recession.

These fears, whether or not they materialize in the near future, are reminiscent, all proportions guarded, of what happened after President Herbert Hoover signed the Smoot-Hawley tariff into law on June 17, 1930. In 1928-29, both the U.S. real economy as well as the stock market entered into an intense boom. As a result, interest rates rose sharply in New York attracting “hot money” seeking the highest rate of interest away from the cash-starved German economy. This effectively halted Germany’s 1920s-era economic recovery. Behind this ominous development was massive overproduction in the U.S. economy.

By mid-1929 in the U.S., the growing shortage of money and credit triggered a recession in the real economy. Then, in October-November 1929, the U.S. stock market experienced the greatest crash in its history. As the U.S. sank into recession and the stock market crashed, U.S. money markets eased as interest rates began to fall. Hot money that had flowed into the U.S. during the 1928-29 boom now flowed back toward Germany, where returns were higher. If the renewed flow of money into Germany had continued, the developing German recession would have been moderated. However, after Hoover signed Smoot-Hawley into law, the flow of money back into cash-starved Germany abruptly halted. How could Germany, U.S. money lenders wondered, possibly repay its huge debts to the U.S. if its access to the U.S. home market was severely restricted by even higher tariffs?

As the recession deepened rapidly in Germany, the swelling ranks of unemployed provided recruits to the armies of Nazi storm troopers. The stormtroopers launched violent attacks against Communists, Social Democrats, trade unionists, and Jews on the streets throughout Germany. At the polls, the National Socialist Party, which had the smallest delegation in the Reichstag of any party as a result of the 1928 elections, became Germany’s largest party, replacing the Social Democrats – and the rest, as they say, is history.

The lesson is that, though tariffs seem to be a dry subject, under the right conditions tariff wars can have drastic consequences. The current tariff war, as well as the one that occurred 88 years ago, emphasize the importance of a correct understanding of the laws that govern capitalist world trade and its associated global credit system. Crises in the global trading and credit system under certain circumstances have the potential of rapidly escalating into economic, political, and military disaster.

MMT on global trade

What does Modern Monetary Theory have to say about global trade, and how does its views compare to the ones I have developed over the last decade on this blog? Stripping away the technicalities, MMT supporters believe that money comes into existence when the central government credits the bank accounts of its employees and suppliers. Modern monetary theory then draws the conclusion that the central government – whether its members realize it or not – must levy taxes on its subjects not in order to collect revenue but rather to create money, which then makes possible commodity production, markets and ultimately capitalism.

This then enables the central government to say to its subjects, unless you pay your taxes in the media that I the state create by crediting the bank accounts of my employees and suppliers, I will put you in jail. If you are not an employee of the state or a supplier of the central government, you must obtain the media that I create and accept as payment for taxes in some other way. The usual way, according to MMT, is for producers of use values to sell them on the market as commodities in order to obtain the necessary media – money.

Last month, for purposes of simplification, I assumed that we live under a single global capitalist state. In reality, we live in many sovereign states. However, since 1945 one such state, the USA – currently led by Donald Trump – has been the dominant power. Once we bring in multiple sovereign states to illustrate MMT theory, we need the following full macroeconomic accounting equation rather than the simplified version I used last month.

The full equation is Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0. Remember, according to MMT the private sector includes individual capitalist enterprises obliged by the pressure of competition to maximize profits, households, as well as provincial and local governments that lack the authority to issue legal-tender currency.

MMT acknowledges that capitalist production must expand and consequently so must the market for commodities. And MMT theory realizes that the market cannot expand in the long run unless the quantity of money expands. Unlike the neoclassical marginalist orthodoxy but much like Keynes of the “General Theory,” as well as Marx, MMT does not believe in the neutrality of money. That means that MMT supporters realize that changes in the quantity of money affect overall demand – the size of the market – for commodities, and consequently the level of employment (5).

Combining an understanding of the need for an expanding market with their theory of money, MMT concludes that to “grow the economy” the government must grow the money supply. To do this, if we follow MMT, central governments must over time run deficits. If central governments fail to do this, the capitalist economy will experience recession and unemployment.

Professor Wray’s “Modern Money Theory” was written in the aftermath of the crash of 2008, when economic activity, though rising from its low point of 2009, was still depressed. Wray imagined what the U.S. macroeconomic accounting equation might look like after “a full economic recovery,” which most of the media and capitalist economists claim has now been achieved.

According to MMT, full employment is defined as a situation where production has reached its physical limits. Beyond this point, any further increase in production can only be achieved by the expansion of the capital stock – net capital investment – and/or population growth. Wray provides the following hypothetical values for the MMT macro-economic accounting equation for the U.S. The single-digit numbers provided by Wray represent as many trillions of dollars you want them to. It makes no difference for his illustration. Here are Wray’s numbers:

Domestic Private Balance (+2) + Government Balance (-5) + Foreign Balance (+3) = 0. (Page 37)

Over a year, the Domestic Private Balance has increased its net financial assets (central government securities plus money) by 2. Though we are at “full employment,” we have physical room for growth over the following year as capital investment increases the capital stock and the normal growth of population provides additional workers. If there is still a shortage of workers, more workers can be provided through immigration – though this will reduce the number of workers available to the industrial capitalists of other countries. That could be a problem for them if they also have achieved “full employment.”

By running a deficit of 5, the U.S. federal government is creating an additional demand of 5. However, once we take into account foreign trade, the extra demand can be satisfied by capitalists producing abroad as well as those producing in the U.S. home market.

Suppose the U.S. economy can only increase production by 2 due to physical constraints. The additional demand of 3 must be supplied by commodities from abroad if inflation is to be avoided. If this happens, 3 of the 5 in additional demand will be captured by foreign-based capitalists. That leaves an increase in demand for domestically produced products of 2, all that can be met by domestic producers. (6)

A trade deficit sounds bad. But is it? The answer, according to MMT, depends on whether a negative trade balance can be sustained. According to Wray, if the trade balance can be sustained it is a good thing, at least from the viewpoint of the residents of the country running the trade deficit – in this case, the U.S. Why is the U.S. trade deficit, according to MMT, a good thing for residents of the U.S.? Because it enables U.S. residents to consume more than they produce. In the above example, in the absence of foreign trade, consumption in real terms can only increase by 2. But thanks to foreign trade combined with a U.S. trade deficit, consumption in the U.S. in real terms actually increases by 5.

When the U.S. buys a commodity from another country, the seller of that commodity receives dollars. But the foreign seller cannot stay out of jail by paying taxes in dollars. Instead, following the logic of MMT, the seller must obtain a currency issued by the seller’s own government. Therefore, following MMT, the seller must purchase local currency – the local stay-out-of-jail cards – with the dollars or go to jail. However, since the U.S. trade balance is negative, more people will be selling dollars than buying them at current exchange rates. All other things remaining equal, the dollar will fall in price against other currencies.

A falling exchange rate of the U.S. dollar will, according to MMT, not impair its ability to purchase commodities as long as they are produced within the U.S. with only U.S.-produced inputs, but it will reduce the dollar’s ability to purchase foreign commodities or U.S.-produced commodities that include foreign components. As the dollar falls against other currencies, however, the ability of foreign currencies to purchase U.S. commodities will rise.

If the U.S. only imported and did not export, the dollar’s ability to purchase commodities produced outside of the U.S. – that is, by producers who do not have to fear that the U.S. government will send them to U.S. jails (if we follow MMT) – will fall to zero, effectively ending the U.S.’s ability to import commodities as the ability of foreign currencies to purchase U.S. commodities will soar.

Therefore, neither the U.S. nor any other country can import without exporting, at least not for long. Since one country’s surplus is another country’s deficit, according to MMT, world trade balances zero out. However, what happens if exporters to the U.S. – which can include U.S. companies operating within foreign nations – desire for whatever reasons to hold on to dollars rather than exchange them for the local currency?

For example, foreign exporters might desire to accumulate dollars so they can import from the U.S. at some future date. If you are going to hold on to dollars rather than spend them immediately, you will buy interest-bearing securities denominated in dollars rather than hold on to Federal Reserve Notes (or their electronic equivalent) that bear no interest.

When foreign exporters decide they have accumulated enough dollars, they can use them to purchase U.S. commodities. When that happens, it will then become more profitable for U.S. capitalists to export rather than sell on the U.S home market. The U.S. foreign trade deficit will then turn into a surplus. The shift from a foreign trade deficit to a surplus will have the effect – all things remaining equal – of lowering the standard of living of the residents of the U.S. So MMT draws the conclusion that the best possible situation for residents is for the U.S. to continue to run massive trade deficits for years to come.

Wray is optimistic that the U.S. trade deficit can indeed last for many years. Eventually, the willingness of other countries to hold dollars rather than “cash them in” for U.S. commodities will wane and the international monetary standard will be less dollar-centered. But this process, Wray believes, will be gradual, without a sharp crisis. When U.S. foreign trade finally moves toward balance – or surplus – it will simply mean that the distribution of commodities to the ultimate consumers will be relatively more favorable to residents of foreign countries and relatively less favorable to residents of the U.S. than it is at present.

But that could be many years away and by then everybody could be absolutely better off – especially if leaders of central governments around the world have finally understood MMT and discovered that central governments do not have to worry about running persistent deficits because they can always create additional money by crediting the bank accounts of their suppliers and employees.

For now, the dollar rules the global monetary system. Remember, the dollar standard is based on the fact that the prices of most internationally traded commodities – such as oil or soybeans, to give two examples – are quoted in U.S. dollars. As a result, the bulk of international loans are also payable in dollars. This obliges large capitalists who operate internationally, as well as central banks and governments, to hold the bulk of their money in dollars or in dollar-denominated securities that can be quickly converted into U.S. dollars – called by the economists “near monies.” The U.S. government, in turn, holds some of its reserves in foreign currency but most of it in gold.

Consider Chinese exporters, which might include a U.S. corporation operating in China because of the excellent infrastructure that is the product of (1) the great people’s revolution of 1949, and (2) the high rate of surplus value, a product of China’s history that includes being colonized by European, Japanese, and not least the United States. Our Chinese exporters have imported some commodities that were produced – or assembled – in China and exported to the U.S.

The China-based exporters have received U.S. dollars. But they need Chinese yuan to pay suppliers, for the labor power of the workers, and yes to pay taxes to stay out of China’s jails. The Chinese exporters will, therefore, sell dollars to the People’s Bank of China – the central bank of China – in exchange for Chinese yuan. The larger the Chinese trade surplus the larger, all other things remaining equal, will be the inflow of dollars. And the greater the inflow of dollars the more the yuan will depreciate against the dollar.

The People’s Bank will then purchase dollar-denominated U.S. Treasury securities in order to earn interest – at very low rates in recent years – while selling the Chinese exporters local currencies, which will again, following MMT, keep the Chinese exporters out of the Chinese prison system, but also – and far more important – enable the exporters to purchase Chinese labor power and locally produced supplies. The People’s Bank of China then gets to collect interest from the U.S. Treasury, and the Federal Reserve Notes and U.S. Treasury notes – or their electronic equivalent – stand as a reserve backing the newly created yuan-denominated currency.

The U.S. people are the winners, or at least some of them are because they get to consume commodities produced in China without having to send U.S.-produced commodities in return. Instead, China settles for U.S. Treasury IOUs that are redeemable not in any actual commodity but in U.S. Federal Reserve Notes – or their electronic equivalent. If you are a Chinese consumer, would you consider that a fair trade?

But wait just a minute. Isn’t the aim of capitalist production to accumulate wealth in the form of exchange value – that is, isn’t capitalist production about profit that is always measured in terms of money? True, individual capitalists have to consume commodities. As long as we have capitalist production, capitalists are, as Marx pointed out, absolutely necessary as functionaries – and Wray agrees with Marx on that point. And capitalists like everybody else have to engage in personal consumption in order to stay alive and reproduce the class of capitalists.

But insofar as capitalists act as capitalists, they don’t engage in personal consumption but rather productive consumption – M—C—M’. Therefore, capitalists, if they were ideal capitalists, would live at subsistence – or even on air if that were possible – just like they insist that their workers do, though as we know, not all capitalists live up to this high ideal. We are all, after all, imperfect human beings. So if we view each individual country engaged in capitalist production as a kind of “collective national capitalist,” shouldn’t the aim of each nation, in direct contradiction to MMT, attempt to run as large a balance of trade surplus as possible in order for the nation to make as much money as possible? This is what the mercantilists advocated.

Two common mistakes

There are two common mistakes made about the aim of capitalist production. Mainstream bourgeois economists treat capitalist production as production for use. In other words, they assume that capitalist production is socialist production and the contradictions of capitalism vanish! The other common mistake, especially among modern Marxists, is to see the aim of capitalist production as the accumulation of money capital, much like the mercantilists did, rather than as capital.

Of course, no modern Marxist believes the aim of capitalist production is to literally accumulate gold bullion like the misers of old did. We all know the story of King Midas. However, many modern Marxists believe that under a “non-commodity monetary system” like they believe exists today, all commodities are equally money. This is expressed in the MELT concept – monetary equivalent of labor time.

One modern Marxist who supports MELT is Fred Moseley, author of “Money and Totality” and a professor of economics at Mount Holyoke College. “The inputs” Moseley writes, “of constant capital and variable capital in Marx’s theory of prices of production in Volume III [of “Capital” – SW] are the same actual quantities of money capital [emphasis Moseley – SW] advanced in the real capitalist economy that are inputs in Marx’s theory of total surplus-value in Volume I.” (Page 17)

Money capital advanced in the real capitalist economy? The problem is that the commodities that make up constant capital (fixed capital like machines and factory buildings as well as raw materials and auxiliary materials) and most importantly variable capital, the labor power of workers, are not the same as the money used to purchase them. However, according to MELT theory it really doesn’t matter because real capital is also money capital. Therefore, the accumulation of real capital is at the same time the accumulation of money capital.

However, every practical business person – and here Marx agrees with them – knows that unsold commodities are not the same as money! This difference may be blurred in a boom but becomes obvious when a crisis hits. A capitalist cannot avoid bankruptcy by paying off debts in unsold commodities. In contrast to the views of Moseley and other champions of MELT, money capital is separate from real capital. The great bulk of capital is not money capital. What gives rise to the recurrent illusion that real and money capital are the same is that real capital must be measured in terms of money.

Moseley as a Marxist – unlike Wray, who either rejects or ignores labor value – knows that the value of commodities is determined by the quantity of socially necessary labor required to produce them under the prevailing conditions of production. However, capitalists as a rule don’t know this, and even if they did, there would be no way for them to measure their capital directly in terms of socially necessary labor time – value. The practical capitalists have no alternative but to measure the value of their commodities in quantities of money expressed in currency units such as dollars, pounds, euros, yen, rubles, yuan, and so on.

We have the advantage over both Wray and Moseley of knowing that the units of currency refer to definite weights of gold bullion. The difference between the gold standard and the present dollar standard is that under the gold standard dollars, pounds, and so on referred to constant weights of gold bullion, while under the present dollar standard currency units refer to variable quantities of gold bullion.

Moseley imagines that the commodities that make up real capital are money because like gold under “commodity monetary systems” they represent definite quantities of abstract human labor measured in some unit of time.

Moseley fails to understand the true nature of money because he adheres to an incomplete version of labor value. Wray, in contrast, holds to a theory of money – chartalism – that has no relationship to any concept of value based on labor. What Moseley fails to fully understand – and Wray does not understand at all – is that value, whose essence is a definite quantum of human labor congealed in a commodity, must always take the form of exchange value. Therefore, under capitalism the exchange value – money value – of a commodity is its value measured in terms of the use value of the money commodity measured in terms of its appropriate unit of measure (weights of gold bullion). Therefore, the practical everyday capitalist measures the value of his or her capital and profits in quantities of money.

On the asset side of corporate balance sheets, assets are measured in terms of money. Here we see money’s role as money of account, which flows from money’s fundamental role as the commodity that in terms of its own use value measures the value of all other commodities. In a balance sheet, the asset is first described in terms of its material use value measured in terms appropriate for that particular use value and then valued as a definite sum of money.

Money and foreign trade

Now let’s return to the question of whether a trade deficit is a good or bad thing. First, a trade deficit concerns an entire nation-state and not an individual capitalist or capital. A nation-state is a tool in the hands of a group of capitalists that is used as an instrument to improve the position of “national capitalists” at the expense of other “national capitalists.” This is actually a derivative of the state’s fundamental role that would persist in a world where there was only one capitalist state, which is to defend the ability of the capitalist class to extract surplus value from the working class.

However, the ability of a particular capitalist class to achieve this is determined in no small measure by how successful its capitalist nation-state is in the struggles against other nation-states. Everything else remaining equal, the greater the percentage of the world market commanded by the capitalist class of a given nation, the more money the capitalist class will have to build up a large middle class to act as a buffer between it and its “national” working class.

Capitalists are well aware that a large and relatively prosperous middle class is a necessary precondition for political stability. In addition, the greater the quantity of money, measured in terms of the use value of the money material, in a given country, the greater opportunities will be to bribe the upper layer of the working class. In this way, the upper layer of the working class can be detached from the global working class and combined with the national middle class. Especially important in this regard is the encouragement of home ownership – actually ownership of the land under the home – for working-class families. (7)

In the early days of capitalist production, mercantilists taught that the aim of the government in foreign affairs should be to accumulate as much gold and silver – money material – as possible. Unless gold and silver production was located within the country, or in the empires built around the hub of emerging nation-states, which was the case in practice, the only way that a country could increase the supply of gold and silver was to run a positive balance of trade. For the “first-born” countries of capitalism, running a positive balance of trade was crucial to the formation of the home market.

Today, what is called the export-led growth strategy follows the same mercantilist principle and remains decisive in the formation of the home market. Once a country has developed to a certain point, it can attract money capital in the form of loans and foreign direct investment in its capitalist enterprises. But before it can do that, it must develop the home market to a certain point; otherwise, it will not be able to attract foreign loans. And the only way to do this – remember, I am referring only to a capitalist economy here – is through an export-led growth strategy – that is, by following mercantilist policies. The problem with mercantilism is that running a positive balance of trade for one country – again leaving out the gold- and silver-producing countries – means a negative balance of trade for another. Mercantilism inevitably leads to war among the nations engaged in capitalist production.

When MMT analyzes foreign trade, it reverts to the view that capitalist production is really a system of producing use values in order to maximize the enjoyment – or utility – brought about by consuming the use values of the commodities produced. Therefore, MMT turns mercantilism – and Trump-style economic nationalism, a kind of neo-mercantilism – on its head by proclaiming that the country running the largest trade deficit is best off.

Under the dollar system, the U.S. runs by far the largest trade deficit. The U.S. runs a huge trade deficit – especially in actual commodities – as President Trump has correctly emphasized rather than in so-called services, such as financial and “legal” services. As long as the U.S. can do this, the huge trade deficit enables the U.S. to consume far more commodities – measured in terms of U.S. dollars – than it produces. The huge inflow of commodities with their many and varied use values into the United States, compared to a much more modest flow of commodities out of the U.S. enables the U.S. capitalist class to maintain a large middle class that acts as a buffer between the two main classes, the working class and capitalist class. (8)

The real question is why the United States doesn’t run out of money when year after year it runs deficits. And as we will see, it isn’t because the U.S. federal government – or anybody else – has a magic pen that can create money by crediting bank accounts at will, as MMT supporters imagine.

For the post-Volcker shock USA, maintaining a large trade deficit has become the basis of political stability – or rather what is left of it these days of Donald Trump. Many articles have appeared in the U.S. media complaining about the decline of the middle class that formed the basis of the political stability of the Cold War-era USA. And as would be expected, according to the laws of historical materialism, in proportion as the U.S. middle class has declined U.S. political discourse has begun to lose its previous “civil character.”

The contradictions arising as a result of the decline of the middle class, including the labor aristocracy, are sharpening. The leaders of the U.S. capitalist class, whether Democrats or Republicans, liberals or conservatives, pro- or anti-Trump, are all looking for ways to reverse this trend. They are, however, advocating different policies to achieve this.

Professor Wray, like many other middle-class reformers, seeks ways to ease class contradictions through social reforms without challenging the capitalist private ownership of the means of production. Wray very much wants to reverse the erosion of the U.S. middle class. Not surprisingly, he is counting on the ability of the U.S. to continue to run huge trade deficits for many years to come. If the U.S. continues to run large trade deficits – and Wray sees no reason why it can’t – and the U.S. federal government is wise enough to run deficits large enough to generate “full employment” both in the U.S. and abroad, he believes capitalism can be made “to work” for virtually all Americans and made at least bearable for people around the world through policies based on MMT.

Trump, in contrast, believes that the U.S. trade deficit must be reduced now through trade wars, tariffs, and sanctions against countries who refuse to play along with his policies. This is what Trump means by “Make America Great Again.” Trump does not believe that the current U.S. trade deficit is sustainable, and the president has a point. The fall of every empire in world history was preceded by the core nation becoming increasingly dependent on foreign as opposed to domestic production. However, Trump and his supporters realize in their own way – even if they don’t want to admit it publicly – that given the size of the U.S. trade deficit a fall in the standard of living of the U.S. people is inevitable.

These days, the main difference between U.S. liberals and conservatives is that the liberals believe the U.S. can continue to run large trade deficits for many years to come and continue to muddle along, while Trump-style “conservatives” do not.
Since Trump and his supporters believe that a decline in the U.S. standard of living is inevitable, they count on dividing the U.S. working class along racial and national lines to stave off the emergence of class consciousness and a mass socialist movement they fear will be the consequence of such a decline in living standards.

Under the Trumpist approach, white workers will be pitted against African-American workers, native-born against immigrant, and Christian against Muslim. The logic of “Trumpism” requires that scapegoats be found, ranging from Latin American immigrants who along with African-Americans increase “street crime, murders and rape” to Muslim “terrorists” and “international Jewish bankers” who finance “liberal causes” while plotting to destroy the U.S. economy. Though the Trump administration is far from fascist itself, it has given thinly disguised encouragement to the still small fascist groups, that have yet to mount a demonstration of more than 500 people. (9)

The rate of exchange

National currencies are exchanged for other currencies on the foreign exchange market. In addition, currencies can be sold for gold. The “price of gold” is actually a rate of exchange that measures the amount of gold that any particular currency represents at a given moment. In the past, governments sometimes fixed the rate of exchange of their currencies against gold or silver. A situation where the government – or national/central bank – does this is known as a gold or silver standard. Between the 1870s and 1914, the currencies of the major capitalist powers such as Great Britain, the United States, and Germany, and from 1900 onward Russia, were defined in terms of a fixed quantity of gold. The mechanism was more complex in the United States, which lacked a central bank, but the principle was the same.

Units of gold bullion, in turn, at given point in time represented a definite quantum of value. As for all commodities, from chewing gum to Elon Musk’s rockets, a given quantity of gold represents a definite quantity of abstract human labor measured in some unit of time.

Unlike other commodities – and this is what MELT fails to understand – the abstract human labor represented by gold bullion, or whatever commodity serves as the money commodity, is directly social. This means that abstract human labor embodied in a given quantity of the money commodity doesn’t have to prove that it is socially necessary labor by finding a buyer. If all commodities were money – which is what in effect MELT assumes – there would be no way to determine in an economy lacking an overall plan whether a particular act of labor meets any social need. This is why a “non-commodity monetary system” remains impossible as long as capitalism survives.

Under the classic gold standard, the central banks and/or the Treasury promised to redeem their currencies to the bearer on demand in gold coins of a specific weight. By 1900, all the main world powers – the imperialist countries – were on the gold standard. Under the classic international gold standard, the rates of exchange among the main currencies, though not absolutely stable, varied in a narrow range called gold points. The shipping of gold from country to country involved shipping and insurance costs, since there was always the chance a ship could sink taking its gold with it to the bottom of the ocean. Within the limits of the gold points, currency exchange rates could vary without any international movements of gold.

Since all countries both exported and imported, the volume of world trade was vastly greater than the gold bullion stored in the vaults of the central banks. For the most part, a country’s imports were balanced off by its exports. Only when foreign exchange losses exceeded the gold points established by the costs of shipping and insurance did gold bullion move between nations. When gold was shipped, the gold coins of the nation sending the gold would be melted down into bullion and then re-coined in denominations of the nation receiving the gold.

The flood tide of the international gold standard

This system had the advantage of predictability, since foreign exchange rates within narrow limits were known in advance. During the flood tide of the international gold standard, between 1900 and 1914, with the monetary role of silver by then largely a thing of the past, the world came as close as it ever was to a common currency – in the form of gold bullion. As it turned out, this situation was short-lived and ended in the disaster of August 1914. It is important to note that it wasn’t the breakdown of the international monetary system that triggered World War I. Rather, it was World War I that triggered the breakdown of the international monetary system.

From the viewpoint of today’s reigning economic theories – whether neoclassical marginalism (also called “neo-liberalism”), neo-Keynesianism, or on the left Modern Monetary Theory and post-Keynesianism – the international gold standard was fatally flawed. For the international gold standard, or international gold exchange standard, to work properly, the central banks – and the U.S. Treasury – had to be careful to maintain the internal convertibility of their currencies as well as the international convertibility of their currencies into gold.

Suppose a country suffered a gold drain typically caused by an unfavorable balance of trade. As soon as its currency fell below the gold points, gold would start to flow out. Such a situation was called a “drain.”

The effects of a ‘drain’ on the internal market

Faced with a drain, the central bank of a country on the gold standard had no alternative but to raise its discount rate. This would attract “hot money” – money capital seeking the highest rate of interest – from abroad, which would end the drain. The country would be running a deficit on its current account but would balance it with a surplus on its capital account. However, it would also mean that the capitalists in a country with a negative balance of trade would have to pay higher rates of interest on borrowed money, which would, everything else remaining equal, lower the profits of enterprise within the country. Remember, the profit of enterprise is the difference between the total profit and the rate of interest. In this way, a negative balance of payments on the current account would be balanced off by a positive balance of payments on the capital account under normal conditions.

Periodically, however, global overproduction would reach a critical point where countries experiencing gold drains could not borrow enough money to halt the drain. When this happened, trade imbalances – deficits and surpluses – could not be corrected through the mechanism of the countries that were running deficits borrowing money from the countries running surpluses. The adjustments would then have to be made through the trade in commodities, and that was far more painful. Countries that were running deficits would have to import less and export more, while countries running surpluses would have to export less and import more. In this way, the periodic capitalist crises would eliminate, or at least reduce, international trade imbalances.

This would mean that a country that is running a trade deficit that cannot make up for it by increased borrowing or domestic gold production would experience a contraction in its internal money supply. Its currency would literally be draining away. This would cause the home market to contract. Market contraction means recession and declining employment, leading to mass unemployment.

Domestic recession forces businesses to search for alternative markets abroad under pain of bankruptcy. Businesses abroad that had been importing into the country hit by recession would have to either shift to home markets or find alternative markets in other countries. Again, businesses that were not able to find alternative markets would face bankruptcy or liquidation. The recession continues until a positive balance of trade is restored leading to a new expansion of the domestic money supply.

After a more or less prolonged period of economic depression/stagnation, the national market would expand again, leading to recovery. Of course, as countries that had been running trade deficits shifted to trade surpluses, countries previously running trade surpluses would now run trade deficits and the recession would spread to those countries. A contraction of international credit therefore leads toward a situation where both trade surpluses and trade deficits shrink.

The combination of lower prices in terms of gold and increased gold production restores global demand leading to a new rise of the global industrial cycle. However, this process can take years. In the meantime, mass unemployment can threaten the capitalist system. Eventually, global credit expands again, leading to new trade imbalances and the process repeats. Because of this, economists sought alternatives to the international gold standard, which was blamed for the periodic crises of overproduction and unemployment crises. Let’s examine what New Monetary Theory has to say about this.

MMT opposes fixed rates of exchange

MMT theory is in general opposed to fixed rates of exchange, whether between other currencies or gold. MMT believes that gold is only money to the extent that taxes are payable in it. Otherwise, gold is simply another commodity. MMT believes it is pointless for either governments or central banks to stockpile gold. Like Milton Friedman did, Wray believes that the U.S. should simply sell off its gold reserves. Nor does MMT believe as a rule that a country should attempt to fix the rate of exchange of its currencies with other currencies. Instead, MMT believes, currencies should float freely, largely eliminating the need for countries to maintain reserves of foreign currencies.

Faced with a negative balance of payments, a country should simply allow its currency exchange rate to fall. There is, MMT believes, no need for it to contract the quantity of money within the country and therefore no need for the home market to shrink. The only consequence will be a fall in the domestic currency’s ability to purchase foreign commodities. In this respect, MMT supporters, though they as a rule stand on the opposite end of the bourgeois political spectrum, agree with Milton Friedman. They believe that if a country is running a trade deficit and it cannot borrow money from abroad, rather than raise interest rates the “monetary authority” should simply allow the currency to depreciate against other currencies.

MMT supporters believe that a combination of the reduced purchasing power of the local currency to purchase commodities produced in foreign countries, plus the increased ability of foreign currencies to purchase commodities produced in one’s own country, will balance trade without the need for painful recession.

An exception arises if a country is vitally dependent on foreign-produced commodities. For example, a country overly dependent on the export of a single commodity, whether grain, sugar or oil, might need to maintain a fixed exchange rate against the currencies that supply it with vitally important commodities. But as a country diversifies its production, maintaining fixed exchange rates should become less and less necessary. Once a central government has freed itself of the need to maintain a fixed rate between its currency and other currencies and gold, the central government can create as much demand as necessary for “full employment” by simply crediting the bank accounts of its workers and suppliers.

MMT and ‘independent central banks’

Neo-liberals, who unlike the left do not mind a “little” – really a lot of – unemployment, stress the importance of the independence of the central bank from the government. Conventional economists fear that politicians with their eyes on the next election will push for the central bank to follow easy monetary policies and monetize government debt leading to inflation. MMT, in contrast, sees little point in “independent” central banks. Indeed, MMT sees the whole distinction between the Treasury – or Ministry of Finance – and the central bank as artificial and harmful. Instead, the Treasury and central bank should be merged, doing away with the whole concept of the “independence” of the central bank.

The current situation in the U.S. gives us an example of why MMT believes that this would be desirable. On the fiscal side, Trump’s tax cuts combined with the military buildup are swelling the annual U.S. federal deficits towards a trillion dollars. According to MMT, the federal government as it procures its war supplies should be busy crediting the bank accounts of the U.S. arms manufacturers, swelling demand in the process and pushing the U.S. economy toward its physical ability to produce.

True, to be fair, most – maybe all – supporters of MMT deplore the regressive nature of Trump’s tax cuts and his military buildup. MMT supporters know of many better things to spend – and create – money on, such as finding ways to deal with the developing global warming crisis. However, they see the trillion dollar deficit as a good thing in and of itself, because it means that a lot more money can be created and the economy pushed closer to “full employment.” However, though President Trump and the Republican-led Congress seem to understand MMT, the independent Federal Reserve System is yet to be so enlightened.

MMT supporters believe that the U.S. federal government cannot go bankrupt, since it has the power to create as much money as it needs by simply crediting bank accounts up to full employment. MMT supporters also believe they have proved that if the federal government keeps running deficits – and crediting bank accounts – after there is “full employment,” it will not go bankrupt nor will there be a financial crisis. The only consequence will be some inflation, which according to MMT is not all that bad. In any event, even double-digit inflation is better than unemployment. Only if inflation reaches extreme levels, beyond 50 percent annually, does it become a serious problem, and we are very far from that today.

However, the “independent” Federal Reserve System is getting in the way. Unlike Trump and the Republican Congress, the Fed still does not understand Modern Monetary Theory. The Federal Reserve Board under Democrat Janet Yellen and now under the new Republican Fed chief Jerome Powell has refused to purchase U.S. government bonds at the rate they were under quantitative easing. Instead, Powell, following Yellen, is following a policy of “monetary normalization.” Indeed, the Fed has been moving, if so far very cautiously, toward selling some of its huge portfolio of securities it accumulated during its quantitative easing frenzy after the Great Recession. The net result is that instead of the federal government crediting bank accounts of its employees and suppliers, the U.S. Treasury and Federal Reserve System, taken as a unit, are choosing to create “net financial assets” in the form of Treasury notes and bonds as opposed to money.

As the private sector gains momentum, it will indeed create more “financial assets” but zero net financial assets. Every financial asset created by the private sector is another person’s liability. The seeds of the next recession are being laid because though President Trump and Congress appear “to get” MMT, the Federal Reserve does not. Recently, President Trump has expressed similar frustrations with the Fed. Why does the Fed always insist on taking away the punch bowl – in the words of one-time Fed chief William McChesney Martin – just as the party is getting merry. Why not simply let the party go on, both MMT supporters and, more cautiously, President Trump are asking. Why does the party always have to end?

To be continued.


1 Central Processing Units, or CPUs, are the famous “computers” on a chip inside every computer-based device such as laptops and smartphones. Graphical Processing Units are computers on a chip that specialize in the numerical-intensive calculations needed for modern computer graphics. GPUs can be used for other types of computer processing as well. CPUs and GPUs running in parallel, combined with the Libre GNU/Linux operating system, the same operating system I am using to write this post, create the world’s most powerful super-computers. These super-computers are, among other things, used to study the effect of rising carbon dioxide emissions into the environment and other extremely computer-intensive problems. (back)

2 The super-exploitation of Asian workers means super-profits for Silicon Valley companies whose assets consist mostly of “intellectual property” rather than actual productive capital plus commodity capital. The resulting super-profits enable these companies to pay their engineers, who create the intellectual property in the form of computer code, very high money wages. These high money wages, however, when concentrated in relatively limited geographical areas such as Silicon Valley have the effect of driving up residential ground rents, which take the form of sky-high home prices and apartments rents. The high rents are then pocketed by Silicon Valley landowners, who are among the chief beneficiaries of the super-exploitation of Asian workers.

The engineers themselves have far lower real incomes than their high money salaries suggest because housing costs are so high in – and, increasingly, anywhere near – “the Valley.” However, for local working-class and even middle-class residents who have not built up considerable equity in their homes, the results are disastrous as rents and mortgage payments leave little income left over to pay for anything else. People in the San Francisco Bay Area are forced to double up, live in their cars, or face outright homelessness or leave the area where many of them have grown up. Anything that tends to reduce the super-profits of the Silicon Valley companies, whether higher wages in Asia or a larger role for “libre software,” such as the GNU/Libre operating system, relative to proprietary software works in the direction of relieving the situation. (back)

3 One of the most important principles of bourgeois democracy is the right of oppressed nations to develop independently. Imperialism, in contrast, attempts to halt or severely limit the development of oppressed nations, because such development tends to destroy imperialist super-profits. Those in oppressed countries who want to knuckle under to imperialism are falsely presented in the imperialist media as the “pro-democracy forces.” In reality, the exact opposite is the case. This is true whether in socialist Cuba, Venezuela, Nicaragua, Vietnam, Syria, Turkey, Russia, China or any country subject to or threatened by the super-exploitation of imperialism. (back)

4 Another example is provided by the policy of capitulation of the Gorbachev leadership in the Soviet Union during the extreme right-wing administration of Ronald Reagan. When Reagan – a Hollywood actor by profession – was elected U.S. president in 1980, he was widely derided in the “establishment media” as an inexperienced right-wing, has-been actor who had no idea how to run the government and U.S. foreign policy, much as Trump is today.

But when the Gorbachev leadership capitulated to Reagan’s ever-escalating demands against the Soviet Union, Reagan’s opponents within the capitalist class were silenced. Reagan’s “tough approach” was bringing unheard of results. Reagan would make a demand and Gorbachev would agree to it! Then Reagan would make an even more outrageous demand and Gorbachev would agree to that as well!

Today, U.S. bourgeois historians who denounce Trump as a clown consider Reagan one of the “great” U.S. presidents, right up there with Franklin D. Roosevelt, who presided over the rise of the present-day U.S. empire. Roosevelt founded the empire but Reagan, pro-imperialist historians observe, through his “tough policies” consolidated it by crushing its chief opposition – the Soviet Union and the socialist camp. Today, Republicans never tire of boasting what a great president Ronald Reagan was, ranking him with Abraham Lincoln.

If other countries adopt a policy of appeasement to Trump, bourgeois historians of the next generation will regard him as one of the greatest U.S. presidents ever, alongside Ronald Reagan! Any successes Trump has will encourage more aggressive policies by the U.S. – and other imperialist countries – making an eventual World War III all the more likely. (back)

5 Milton Friedman claimed that changes in the quantity of money though not neutral in the short run were still neutral in the long run. Most neo-classical economists uphold this position today. (back)

6 Professor Wray is well aware that in a given year the market can expand without an increase in the money supply if there are idle hoards of money available, the velocity of circulation of currency can be increased, the quantity of credit on the given supply of money can be expanded, or additional clearing facilities where payments cancel out can be developed. But if we assume that not only the workers and “capital stock” are fully employed but the existing stock of money is also “fully employed,” further growth in the market without a fall of prices – which indicates a crisis – can only be achieved through an expansion in the quantity of money. Therefore, in the long run the money supply must grow if the market is to expand. (back)

7 This point deserves much more consideration than it is has been given. Google currently plans to build a huge engineering campus in downtown San Jose. A movement against Google’s plans has sprung up among working-class people who rent their homes. Many could face homelessness or at best be forced to leave the area if the Google plans go through.

However, people who have accumulated equity in their homes, even if they are by no means capitalists, are in a different position. They can sell their lots to Google at a price far in excess of the price they bought them and use the money to buy larger homes and lots in other areas of the U.S. where ground rents are far lower. Many people are now moving from Silicon Valley to do just that.

Renters, however, do not have this option. Therefore, the position of workers who are full proletarians in the literal sense – not owning any property, including the land under their homes, that entitles them to a portion of surplus value – and the otherwise working-class homeowner is by no means the same. I believe that the massive de-radicalization of the U.S. working class that took place after World War II largely reflected the explosion of home ownership among working-class families that was strongly encouraged by the policies of the U.S. government and especially the Democratic Party. (back)

8 The U.S. trade deficit rose sharply in the years leading up to the 2008 crash. For example, the trade deficit rose from $411,899 million in 2001 to $816,200 million in 2008. By 2009, however, thanks to the crisis, the U.S. trade deficit had fallen to $503,583 million. The crisis was not severe enough to end the U.S. trade deficit, but it did end the runaway growth of the deficit and reduced it significantly. The decline in the trade deficit, however, meant a decline in the standard of living of U.S people. The resulting unrest was reflected negatively in the election of Trump and positively in the growing interest in socialism in the U.S.

With the economic recovery, the U.S. trade deficit has begun to grow once again. It rose from $503,583 million in 2009 to $795,690 million in 2017. Trump hopes to halt this growth with his tariff war before a new “Great Recession” or worse halts the growth in the U.S. trade deficit by means of the market, or, in the worse case for political stability of the U.S., even forces the U.S. to run a trade surplus. In either case, a reduction of the trade deficit means a lower standard of living for working and middle-class people in the U.S. (back)

9 The tiny size of the August 12 “Unite the Right 2” fascist demonstration held in Washington to mark the one-year anniversary of the Charlottesville fascist march illustrates this point. Estimates of the number of fascists who showed up range from 13 to 30. This tiny handful, who enjoyed massive police protection, faced off against about 15 thousand multiracial, anti-fascist demonstrators. Fascism is far from victorious in the U.S. But in the long run, fascism can only be defeated for good when the capitalism that breeds it is replaced by a socialist society throughout the world. (back)