Modern Money (Pt 4)

U.S. political crisis deepens

On September 5, The New York Times published an op-ed by an anonymous author who claims to be a top official of the Trump administration. The author describes him- or herself as a representative of the “resistance” among high officials working within the Trump administration. The author makes clear that this “resistance” is not “the popular ‘resistance’ of the left.” Instead, the author represents the resistance of the Republican wing of what I call the “Party of Order.” (1)

What is the program of this “resistance”?

The op-ed author hails Trump’s “effective deregulation, historic tax reform, a more robust military and more.” This is the program of the Republican faction – and to a considerable extent the Democratic faction as well (2) — of the Party of Order. It includes an increase in the freedom of capital to pump more carbon dioxide into the atmosphere while leaking additional methane through his “relaxation” of regulation of the natural gas industry.

All these policies aim at increasing the rate of profit for the owners of capital at the expense of the working class and Mother Earth. The author also “supports” deep tax cuts for the rich with the intention of undermining social security, unemployment insurance, Medicare and Medicaid. Again, the aim is to raise the rate of profit on invested capital.

And not least, the op-ed writer supports spending more on the already “robust military,” as the author put it, so the U.S. empire can continue to terrorize the world. So if our Party of Order author is so enthusiastic about Trump’s policies, why “resist” Trump at all?

Trump versus free trade

The official complains that Trump’s “impulses are generally anti-trade and anti-democratic.” Notice the order. The biggest problem with Trump is that he is “anti-trade,” and as a kind of afterthought he is also “anti-democratic.” One is reminded of the words from the Communist Manifesto: “It [the capitalist class — SW] has resolved personal worth into exchange value, and in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom — Free Trade.” So that’s the real problem with Trump. He is against “free trade.”

Our op-ed writer further complains, “In public and in private, President Trump shows a preference for autocrats and dictators, such as President Vladimir Putin of Russia and North Korea’s leader, Kim Jong-un, and displays little genuine appreciation for the ties that bind us to allied, like-minded nations.”

The author presumably has in mind Trump’s undisguised hostility to Germany. (3) The sudden “cold shoulder” by the U.S. to its German “ally” is now leading to a rise in German nationalism, the likes of which have not been seen in the post-1945 world. This is reflected in the growth of support for the Alternative for Germany Party and the fact that polls show that the majority of Germans want U.S. troops withdrawn from Germany. The withdrawal of U.S. troops would free Germany to pursue its own imperialist interests independently of the U.S., in not only the economic but also the political and even military realms.

The political and military subordination by the U.S. of Germany — exercised first through the military occupation of (Western) Germany by the U.S. starting in 1945 and then institutionalized through the formation NATO — is one of the keystones of the post-1945 U.S. world empire. If Trump’s policies were to lead to the fall of the “Atlantist” (4) German government and its replacement by an “anti-American” nationalist government, the entire structure of the U.S. domination of Europe and the world would start to unravel. This is exactly what the op-ed author and his or her comrades within both the Republican and the Democratic wings of the Party of Order are determined to avoid.

Ouster of Trump considered by top cabinet officials

“Given the instability many witnessed,” the op-ed author claims, “there were early whispers within the cabinet of invoking the 25th Amendment, which would start a complex process for removing the president.” This is an astonishing revelation. Under the U.S. Constitution, Trump’s term lasts for four years. It started on January 20, 2017, and will end on January 20, 2021. We are therefore not yet even at the halfway mark in Trump’s constitutionally defined term. Yet “early on” — that is, at the very beginning of the Trump administration — there was apparently serious consideration given by members of Trump’s cabinet to ousting him. As far as I know, this is without precedent in U.S. history.

Why Trump wasn’t ousted

However, removing a newly installed U.S. president is easier said than done. Unlike in parliamentary systems, the U.S. presidential system makes it extremely difficult to oust a sitting president before his or her term expires. The 25th Amendment, which became part of the U.S. Constitution only in 1967 in response to the assassination of John F. Kennedy, is designed to deal with a situation where a president has suffered a major illness such as a stroke, dementia, or severe mental illness that would make him or her completely unable to exercise the powers of the office. For example, what would have happened if President Kennedy had survived the assassination attempt but had suffered massive brain damage? The 25th Amendment is not designed to be a tool for removing a president for political reasons.

In order to oust Trump through the 25th Amendment, it would be necessary for Vice President Mike Pence and at least half the cabinet to get the support of two-thirds of the members of both the House of Representatives and the Senate on grounds that Trump is medically unable to carry out the duties of the office. To oust him through impeachment, it would be necessary for a majority of the House of Representative to find that Trump had probably committed a felony crime. In that case, after a trial in the U.S. Senate, a super-majority, or two-thirds, of the Senate would have to find him guilty of the alleged crime. (5)

Both methods require the support of the leadership of the Republican Party. Even if a “blue wave” establishes a Democratic majority in both Houses of Congress in the upcoming mid-term elections, there is no possibility of the Democrats establishing a two-thirds majority in the Senate. This is true because only one-third of the Senate seats under the U.S. Constitution are up for re-election in November. (6)

Richard Nixon, the only U.S. president to be kicked out of office in the entire history of the U.S. before his term expired, resigned only when Senator Barry Goldwater, the leader of the right wing of the Republican Party, abandoned him. Facing certain impeachment in the House of Representatives and conviction by a more than two-thirds vote in the U.S. Senate, Nixon finally threw in the towel in August 1974.

In the case of Trump, though his supporters — almost all of whom are white — are a minority of the American people, they are extremely loyal to the man they view as the leader of the white race. Without the support of Trump’s racist base, the Republican Party in its current configuration cannot survive as an electoral party. For this reason, Republican members of Congress who intend to run for public office in the future are unwilling to oppose Trump in public. The late Senator John McCain (7), who publicly opposed Trump, did so when his brain cancer diagnosis made it clear that he would never run again for public office.

With a few exceptions — mostly African-Americans — Democratic Party congresspeople and senators, whether in the House of Representatives or the U.S. Senate, have opposed the removal of Trump before his constitutional four-year term is completed. The reason is that the Democrats — and their Wall Street masters — want to preserve the far-right racist Republican Party as the only “viable” alternative to the right-of-center Democratic Party. The thinking is that, faced with the prospect of being governed by far-right racist Republicans, workers, oppressed nationalities, women, the LGBTQ community, and progressives in general will feel forced to continue to vote for the Democrats as the “lesser evil.”

This is especially true in light of the new radicalization that represents the real resistance to Trump and everything he stands for. Socialist organizations ranging from the reformist Democratic Socialists of America to revolutionary socialists are now growing rapidly, indicating the danger this emerging radicalization represents to the U.S. ruling class. Polls consistently show large sections of U.S. people in favor of at least a social democratic European-type “welfare state” if not socialism in the Marxist sense.

The U.S. ruling capitalist class is determined to preserve the Republican Party as the “alternative” to the conservative Democratic Party, where progressives are tolerated as a minority within its leadership and among its public office holders. The capitalists fear that if the Republican Party collapses, the doors to the emergence of a mass working-class party that could challenge them not only at the polls and but in the streets and work places would be opened wide.

Blocked by both the political realities and inflexible nature of the U.S. Constitution and its presidential system from actually ousting Trump, our op-ed author reveals a great deal, and Trump’s constitutional term is not even half over! How much more damage to the cause of “free trade” will Trump accomplish if he is allowed to complete his term?

The hope of the Party of Order is to use the endless scandals and revelations about Trump to “contain” him over the more than two years in his term that remains. Then the hope is that Trump can be removed either through the Republican Party not renominating him — though under the current circumstances that could threaten the very existence of the Republican Party — or more likely through the election of a Democrat to the presidency in the November 2020 election. That is, after all, how the system is supposed to work. Trump would then, under the U.S. Constitution, have to surrender his office on January 20, 2021.

But considering the damage he is doing daily, can the Party of Order really tolerate Trump staying in office until 2021? Our anonymous op-ed author hints that if Trump continues on his current path it might be necessary, despite all the problems, to remove him by other means: “So we will do what we can to steer the administration in the right direction until — one way or another — it’s over.”

As Marxists, we are trained to look beneath the political surface to find the real roots of political crises such as the one posed by the Trump presidency. If the U.S. world empire were in good shape, would a shabby political adventurer such as Donald Trump have reached the White House in the first place? The whole system of primaries and Democratic and Republican Party conventions, combined with the role of “big money” in politics, are designed to prevent this from happening. But none of this stopped Trump, who swept the Republican primaries, and then went on to win an electoral college — but not popular vote — majority.

However, the long-term decline of U.S. capitalism is obscured by the current upswing in the industrial cycle. If you believe either the bombastic Trump or the Party of Order media, the U.S. economy, having shaken off the effects of the 2008 “financial crisis,” is thriving like never before, with virtually “full employment.” The contradictions of capitalism are always on full display in the crisis but are obscured in the boom.

Therefore, under current circumstances an industrial cycle downturn could quickly bring things to a head as regards the Trump presidency. The only real “success” Trump can point to is the industrial cycle upswing that began, as the Democrats constantly point out, under Barack Obama. This fact has not prevented Trump from taking personal credit for the upswing. For this reason, once I have completed this series critiquing Modern Monetary Theory — the pace of events allowing — I will examine in depth the current state of the industrial cycle.

What I will say here is that Trump’s policies are designed in part to place the burden of the coming crisis — whose effects are already being felt in countries such as Turkey and Argentina — on the shoulders of U.S. competitors, above all the oppressed countries. The main — though not the only — target is China. Trump’s hope is that, with the help of protectionist policies, the U.S. will be able to avoid the main brunt of the coming economic storm, somewhat like it was able to do during the “Asian crisis” that erupted in 1997.

Whatever course the next crisis ultimately takes, it will like all crises further intensify the competition among the countries engaged in capitalist production. Long after Trump is gone, the accelerating economic competition between the U.S. and its “allies” and “enemies” alike will continue to undermine whatever survives the Trump administration of the post-1945 “world order.”

We must remember that the causes of the periodic crises that affect capitalism are not rooted as some think in intensifying economic competition, but rather the reverse. It is the ability of the capitalist system to increase production faster than it can expand the market for the commodities produced that lies behind intensifying economic competition.

The new rise of the socialist movement and Modern Monetary Theory

Since we are only in the early stages of the new rise in the socialist movement, it is inevitable that reformist rather than revolutionary forces dominate. Despite the bitter experience of the Obama administration, there are once again great hopes that progressives, including “democratic socialists” who have been winning elections by running within the Democratic Party, can steer the Democratic Party toward a progressive course.

Many of the new socialists — who are not yet socialist in the Marxist sense — believe that Modern Monetary Theory holds the key to the transformation of the conservative Democratic Party into a progressive organization. Even those newly minted socialists who are not yet acquainted with MMT are likely to be exposed to it in the coming months and years. Supporters believe that if the Democrats can be won over to MMT it will become possible to tackle the global warming crisis, end unemployment, and bring an end to constant wars. It might even be possible, some hope, to use a “transformed” Democratic Party to move towards a truly democratic socialist society.

Supporters of Modern Monetary Theory believe that it is actually the state power that creates money. They draw the conclusion that therefore the central government — in the U.S., the federal government — can never “run out of money” and go bankrupt. Therefore, the central government has practically unlimited resources to carry out reforms that can tackle problems such as global warming and unemployment and even move toward a socialist society.

Can the state go bankrupt?

According to Modern Monetary Theory, the central organs of the state power — the central government — can create as much money as it wants to up to full employment. Full employment is defined as the physical capacity to produce under the prevailing conditions of production. In a full employment economy, production is supply-constrained, not demand-constrained.

According to MMT, money is created by the central government crediting the bank accounts of government workers and suppliers. As long as the economy is operating at a level below full employment, the cure is for the government to credit more bank accounts in order to increase demand. Beyond full employment, the state can still create additional money by crediting the banks accounts of state workers and suppliers. However, creating additional money and demand beyond the physical limits of production will increase neither production nor employment.

Under conditions of “full employment,” MMT correctly realizes that supply and demand are equated through a rise in prices — inflation. However, even then MMT holds that the result will only be inflation and not financial crisis or state bankruptcy. Unless it reaches extreme levels, MMT supporters believe inflation is not much of a problem.

However, MMT supporters are well aware that not all organs of state power have the ability to issue currency. Within the United States, whose national currency dominates the world monetary system, neither state nor local governments have the ability to issue legal-tender currency. In the crucial sense of the ability to create money, if we follow MMT, state and local governments function as part of the private sector. Hence, MMT’s claim that the government can never go bankrupt does not apply to state and provincial governments or municipalities.

In order to examine whether MMT’s claim that a central government that has the ability to issue legal-tender currency can never go bankrupt, we first have to be clear what we mean by bankruptcy.

Types of bankruptcies

We sometimes use bankruptcy to mean economic failure. At other times, we use bankruptcy in its strictly legal sense. In the legal sense, bankruptcy is a partial or total forgiveness of debt granted by an organ of the state power — usually a court — to an individual, a corporate entity including a municipality, or a for-profit business enterprise.

Sometimes bankruptcy means both economic failure and legal forgiveness of debt. For example, assume a for-profit corporation cannot raise cash to pay debts falling due. The board of directors decides that the corporation is hopelessly unprofitable and they decide to file a legal petition of bankruptcy with a court. The court then appoints a trustee charged with liquidating the assets of the corporation. The corporation has failed economically as a profit-making enterprise and is now in legal bankruptcy.

The trustee appointed by the court arranges the sale of the assets of the bankrupt corporation. This might mean inventories (commodity capital) in the case of trading businesses or factories and machines for an industrial business. The trustee then distributes the cash among the various creditors on a “fair basis.” Since we live in a class society, “fair” means that bondholders and note holders come first and the workers owed back wages or pensions come last.

Unless the cash raised by the sale of the bankrupt corporation’s or other business enterprise’s assets is enough to cover all liabilities — and it generally isn’t — the stockholders are wiped out. That means they have lost all their capital invested in the bankrupt corporation.

However, most business corporations and partnerships are organized as limited liability companies. This means that the stockholders in such a corporation cannot have any of their other assets — including capital invested in other business(es) and landed property — seized by the bankruptcy court in the event of the bankruptcy of the corporation. Without limited liability, buying corporate stock would be far more risky than it actually is. It is therefore hard to imagine modern capitalism without limited liability. While the assets of the stockholders of the bankrupt corporation are protected, the workers lose their jobs and quite likely all or part their pensions. They must then find another capitalist to sell their labor power to in order to live.

There is a second type of corporate bankruptcy where the corporation is “reorganized” but continues in business. The corporation is in trouble but has not yet failed economically. Here, too, the bankruptcy begins when the corporation is unable to raise cash to pay debts coming due and files with a court a petition of bankruptcy. The court appoints a trustee, and payments on bonds or notes or other creditors are postponed. Dividend payments for stockholders are suspended. A trustee is appointed by the court to oversee the “reorganization” — not liquidation — of the corporation.

If there is a union contract, the contract will be suspended and then renegotiated with the aim of “cutting costs” at the expense of the workers. It will likely be decided that wages are “too high” and must be cut. Any benefits that the workers enjoyed like health insurance and pensions will likely be reduced if not eliminated.

Unprofitable factories or other enterprises owned by the corporation will likely be shut down or sold to other capitalists at prices that will make their operation profitable to the new capitalist owners. Some of the debt may be “written off,” and creditors may be compensated in corporate stock. The suspension of dividend payments will cause the price of the corporation’s shares to fall sharply on the stock exchange.

If the “reorganization” is successful, when the corporation “emerges from bankruptcy” dividend payments will resume and its shares will recover, often rising to new highs. In this case, the stockholders only lose capital if they sell their shares during the period when they are temporarily depreciated. Indeed, “stronger” capitalists like to buy stock of bankrupt corporations expecting to make a killing when the corporation successfully “emerges” from bankruptcy and returns to profitability. The aim of this type of bankruptcy is not to liquidate the corporation but restore it to “health” — profitability. As part of the “reorganization,” some of the workers will lose their jobs while others will “only” experience cuts in wages and benefits.

Finally, a business may be liquidated — cease operation — without going through a legal process of bankruptcy at all. Small “family businesses” are often liquidated when their owners retire or die and their children lack any interest in continuing the business. Often the children are highly paid professionals and use the cash raised when the business is liquidated to either purchase stocks and bonds in other corporations, bank it, or simply use the proceeds for their personal consumption.

An ongoing business won’t generally be liquidated if it is highly — relative to the average rate of profit — profitable. If the deceased owner’s children do not wish to manage it, they have the option of hiring professional managers. Or they might sell it to a larger capitalist or capitalist corporation.

It is therefore perfectly possible for a capitalist business to fail economically — that is, fail as a generator of profits for its owners — but never go through a legal bankruptcy process. Though we often use them interchangeably, legal bankruptcy and economic failure are two different — if usually but not always — intertwined things.

Government bankruptcies

In the case of bankruptcies involving state, provincial or local governments, there is no question of liquidating the government. One way or another, the organ of government must continue to function even though the services it provides might be cut. In the event of its bankruptcy, its creditors might lose their interest payments and some of the principle on their bonds or notes and/or at least experience a delay in their redemption. Some of the state, provincial or local government workers — but not all — will likely be laid off, and the workers that remain will experience wage reductions and cuts of pensions and other benefits.

MMT criticism of the euro system

The eurozone — European countries that have adopted the euro as their currency — is a peculiar system that the supporters of MMT and many other economists consider very bad. Under this system, the governments of countries involved, which include Germany, France, Italy, Greece, Spain, Ireland, and so on, agree to use the euro as their national currency. Like the U.S. dollar within in the United States, the euro is declared legal tender for all debts public — including payment of taxes — and private.

Euro notes and coin — and their electronic equivalent — are created not by national central banks but a special transnational institution called the European Central Bank, or ECB for short. The national central banks of the eurozone members merely distribute euros to the commercial banks. Unlike the case with the U.S. Federal Reserve Banks (8), it is theoretically possible for the individual central banks of the eurozone countries to actually run out money — euros.

Therefore, according to MMT theory, the central governments and central banks of Germany, France, Spain, Greece and other members of the eurozone are part of the private sector as far as the ability to create money — or net financial assets — is concerned. These governments have given up their “magic pens” that previously allowed them to create money by simply crediting the bank accounts of their employees and suppliers.

Under the euro system, no individual government can remove the ECB chief even in theory. Therefore, from the point of view of insulating the central bank from the democratic pressure of the people — as well as political adventurers like Donald Trump (9) — demanding that it adopt “expansionary monetary policies” to lower unemployment ahead of an election — the euro system is ideal.

During the recent Greek crisis, the Greek government found itself in a position where it was quite literally on the brink of running out of money, not in terms of foreign exchange but in terms of the currency that is legal tender within Greece — the euro. This put the left-wing Syriza government at the complete mercy of its creditors — the so-called troika of the European Comission, ECB and International Monetary Fund. These institutions were able to force the Sryzia government to carry out extreme neo-liberal austerity policies at the expense of workers and their allies who had voted for Syriza with the expectation that a Syriza government would resist austerity.

The result was by far the most severe economic Depression with a capital “D” that Greece has faced in modern history. Compared to the current Greek Depression, the Depression that Greece experienced in the 1930s was a tea party. When its depth and length are considered, the Depression Greece has still far from recovered from — even though its GDP is now rising — is every bit as severe as the 1930s Depression was in the United States or Germany.

During the crisis, the Greek government still had one card in its hands that it chose not to play. It could have asserted its sovereignty and relaunched its national currency the drachma. While the new drachma would not have been accepted as payment by its international creditors, who would have demanded euros or U.S. dollars, the Greek government could still have used them to pay off its employees and local suppliers and domestic creditors. MMT supporters believe this was exactly what the Syriza government should have done.

By relaunching the drachma, MMT supporters believe, the Syriza government would have reclaimed the power that it has as a sovereign government to create money by simply crediting the bank accounts of its employees and its suppliers located in Greece proper. MMT supporters believe that this would have considerably eased the impact of the crisis on the Greek people.

Public opinion polls, however, showed that the majority of Greeks were opposed to a new drachma. They feared the exchange rate of a new drachma would fall sharply setting off hyperinflation. While the euro system certainly didn’t save the Greek people from the ongoing Depression and mass unemployment, it has prevented a hyperinflation.

The independence of the central bank

It is not only the Greek government that has given up its “magic pen” that according to MMT theory allows sovereign governments to create money by simply crediting the banks accounts of its employees and suppliers. The U.S. federal government, much to the chagrin of MMT supporters, has also given up its ability to create money by crediting bank accounts. Unlike in the past, the U.S. Treasury under current law cannot issue legal-tender currency. (10) Instead, this authority has been transferred to the Federal Reserve System.

Under the doctrine of the “independence of the central bank,” the central bank is expected to maintain a degree of independence from the central government, even though the central bank — along with the central government, state and local governments — is, part of the State. Recently, Donald Trump has complained that the Federal Reserve System under Jerome Powell, who Trump himself nominated, has been raising interest rates, thereby undermining the economic boom for which Trump has taken personal credit.

Trump fears that if the Powell Fed keeps raising interest rates, as they have indicated they will do, it will end the current business boom before the 2020 presidential election. Such a development would almost certainly doom — especially in view of the determination of the Party of Order to get rid of him “one way or another” — any hopes that Trump has for a second term. In the financial press, some commentators are drawing comparisons between the pressure that then-President Richard Nixon put on Arthur Burns — chairman of the Federal Reserve at the time — to maintain “easy money” through the 1972 election.

The Federal Reserve and Nixon

Nixon, much like Trump is today, was determined to maintain the business boom following the 1969-70 recession going through the 1972 election. Back then, Nixon feared that an election-year recession could cost him reelection. Nixon blamed the 1960-61 recession for his defeat by Senator John F. Kennedy in the 1960 U.S. presidential election. Today, it is a widely held belief that Arthur Burns, once highly respected among academic economists, made a huge mistake when he capitulated to Nixon’s pressure.

What is often forgotten by economic historians today is that in 1972 Nixon was the darling of Wall Street and the U.S. ruling class in general. The U.S. capitalist class, with very few exceptions, very much wanted Nixon to defeat by the largest margin possible Democratic candidate for President Senator George McGovern (1922-2012). McGovern was seen in ruling-class circles as much too far to the left to be president, much as they see Bernie Sanders today.

Therefore, it is perhaps a little unfair to put all the blame on Burns for the Fed’s reckless “easy money” policies of 1972. As far as the election of 1972 was concerned, the Burns Fed achieved its goal of keeping the boom going, thus helping Nixon win the 1972 election by a landslide.

Shortly after the election, however, the situation for the Nixon administration began to unravel both economically and politically. Thanks to Burns’ easy-money policy, the dollar plunged against gold and other currencies and inflation took off, forcing the Fed to reverse course. By the end of 1973, the U.S. economy was entering a recession that turned out to be the worse recession between the Great Depression of the 1930s and the Great Recession of 2007-09.

Indeed, before 2008 it was the recession of 1973-1975 that was referred to as the “Great Recession.” The fear in financial circles is that if Trump succeeds in bullying the Fed to follow an easy money policy in an attempt to win a second-term in the 2020 election, economic history could repeat — with perhaps far more disastrous consequences for the capitalists, both economic and political.

The “independence” of the central bank is not unlimited, and this opens the door for Trump to remove Powell. The U.S. president has the authority remove a Fed chairperson “for cause.” For example, it is hard to imagine a war widely supported by the ruling class being called off because the Fed chief refuses to finance it. Indeed, MMT supporters argue that the laws that prohibit the U.S. Treasury from creating money by “crediting bank accounts of its workers and suppliers” is a formality. They argue that the Federal Reserve System would never allow a
check “cut by the U.S. Treasury” to actually bounce.

But according to unwritten U.S. law, the president is forbidden to remove a Federal Reserve chairperson for failing to pump up the economy just to increase his or her chance of re-election. It is in this sense that central banks are supposed to be “independent.” However, Trump has done many things that U.S. presidents are not supposed to do.

There is much speculation in the media about a possible “constitutional crisis” if Trump fires the special counsel Robert Mueller, who is charged with looking into the Trump campaign’s alleged collaboration with the Russian government in the 2016 election. However, the firing of Mueller by Trump, as serious as that would be for the political stability of the U.S. government, could be minor compared to what would happen both in financial markets and politically if Trump were to remove Jerome Powell for refusing to finance the “Trump boom.”

Is the U.S. federal government facing an actual danger of bankruptcy?

Under current law, the U.S. Congress sets a maximum level beyond which the U.S. federal debt is not allowed to rise. If the debt reaches this limit — which it does on a regular basis — Congress must pass a special law raising the limit. Reactionaries love this law because it enables them to argue that the U.S. government is on the verge of “running out of money.” They warn that unless “runaway spending on entitlements” — but never the military — by which they mean Social Security, Medicare-Medicaid, and unemployment insurance, are slashed, the U.S. government will face bankruptcy sooner or later.

However, it is widely understood on Wall Street and in the financial markets that these “crises” are political theater and not a serious threat of bankruptcy of the federal government. This is shown by the fact that these “crises” have never brought about a serious decline in the price of government bonds — that is, a rise in interest payments that the U.S. government must pay on its debt.

Could a powerful central government like the U.S. ever in reality go bankrupt? To answer this question, we must remember that the legal definition of bankruptcy is a legal process through which a debt is forgiven. Legal processes therefore by definition involve the State. Since virtually all the debt the U.S. owes is payable in U.S. dollars, to go bankrupt the federal government would have to declare itself unable to raise dollars, either by taxation or in the financial markets.

Theoretically, under the current system, this could happen, because the Treasury cannot simply print U.S. dollars as it could in the past. But would the “independent” Federal Reserve System actually allow the federal government to go bankrupt by refusing to issue the needed U.S. dollars? Is the Federal Reserve System really that “independent,” especially considering the fact that the president can fire members of the Federal Reserve Board for cause? And under what conceivable circumstances would the Federal Reserve Board allow the federal government to go bankrupt in the first place?

When the federal government has defaulted on its financial obligations

In fact, the U.S. federal government in the past has defaulted on some of its financial obligations. One example involves the U.S. gold certificates under the Franklin D. Roosevelt’s administration. Gold certificates were a form of currency issued by the U.S. Treasury, which unlike other forms of U.S. paper currency were payable in gold. Other forms of U.S. currency circulating at the time not legally payable in gold included Silver Certificates, payable in silver, and National Bank Notes and Federal Reserve Notes payable in “lawful money.” Though “lawful money” was understood to be gold under the gold standard, it was actually whatever the federal government said it was. After Roosevelt assumed office in March 1933, “lawful money” no longer meant gold as far as his administration was concerned.

The legal problem facing Roosevelt was that a gold certificate was a promissory note — a legal contract — on the U.S. Treasury that was payable in gold and nothing else. For this reason, the Roosevelt administration not only declared private ownership of gold illegal, it declared private ownership of gold certificates illegal. All gold certificates had to be exchanged for Federal Reserve Notes.

Right-wing opponents of the New Deal challenged this in court, and it went all the way to the Supreme Court. Though the Supreme Court — dominated by “hard money” Republicans — was notoriously anti-New Deal, it agreed with the Roosevelt administration that a “dollar” was whatever the federal government — the central organ of the state power in the U.S. — said it was.

In addition to gold certificates, a question came up involving private legal contracts that included so-called “gold clauses.” Because of the populist demands for the restoration of free coinage of silver at the ratio of 16 to one — which would have established the “cheap silver” dollar in place of the gold dollar — or the issuance of paper dollars directly by the U.S. Treasury — some private capitalists insisted that contracts include clauses that specified that contracts were payable in specific weights of gold rather than U.S. dollars as defined by the federal government. These gold clauses protected against a possible future dollar devaluation.

These gold clauses in private legal contracts were voided by the Roosevelt government. Again, the Supreme Court declared Roosevelt’s action legal despite the claim by conservatives of the day that their property was being illegally confiscated. These examples from New Deal days illustrate the fact that it is not the law that creates the State, but rather the State that creates the law.

The fact that the State creates the law and not the other way around is shown by the default by the Nixon Administration of its legal obligation to pay an ounce of gold bullion for every $35 U.S. dollars presented to it by foreign central banks and governments. Did this put the U.S. government into a state of legal bankruptcy? No. (11)

The reason is that there was no state power in the world powerful enough to enforce a bankruptcy petition against the U.S. If such a power had existed, it would have had to have the military power to send troops to Fort Knox and other U.S. government gold depositories, seize the gold, and distribute it at a rate of pennies to the dollar to the central banks and governments that had dollar claims on the U.S. Treasury.

The case can still be made that in these two cases, especially the second case where the U.S. Treasury actually lacked the money — gold — to repay all its legal obligations, the U.S. government was in fact bankrupt even though there was no power on Earth that could have enforced a bankruptcy judgment against the world’s most powerful government.

In these cases, the U.S. government was legally liable to pay in a substance — gold coins of a certain weight — that it could not create itself by simply crediting bank accounts. Today, the U.S. Treasury is not allowed to pay its dollar debts by simply issuing paper dollars. But this is only a policy and could always change in the future as it has in the past. But what about cases where the state owes the debt in a “fiat currency” that it can create itself?

Cases where the state declares bankruptcy for debts owed in a fiat currency

One instance where the state does go bankrupt even when the debt it owes is denominated in terms of “fiat money” is a revolution where the state power is overthrown and the successor state refuses to recognize the old debts. One such example is the case of the debt of the Confederate States of America that were payable in paper dollars created by fiat of the Confederacy. After the Union victory against the rebel slave holders, the Union government refused to recognize the debts of the CSA. The owners of Confederate bonds and notes were wiped out. Another example involves the debts of Czarist Russia. The Soviet government refused to recognize the bonds and notes of the Czarist government payable in paper rubles created during World War I.

Another example involves foreign conquest where the state power of one country overthrows the state power of another country. After World War II, the allied powers that occupied defeated Germany refused to recognize the bonds and notes issued by the government of the Third Reich. These state debts payable in paper Reichsmarks that were the legal tender of the Third Reich were wiped out by the allied occupiers. In principle, the allied occupiers could have honored these debts in whatever they declared a Reichsmark or its legal successor to be, but they chose not to.

Economic bankruptcy

Bankruptcy as we have seen has both a legal meaning — debts canceled by an organ of the state power, either the courts or the government — and a broader economic meaning. For example, an unprofitable business may be liquidated by its owners without any legal bankruptcy process at all. All the creditors of the liquidated business may be paid in full and on time. Though there is no bankruptcy in the legal sense, the enterprise ceases to exist and the entire work force lose their jobs.

There is one case where a state did in fact repudiate the debt it owed to domestic creditors in its own “fiat currency” that did not involve revolution or foreign occupation. That occurred in Russia in 1998. Of course, the conditions were exceptional. The counterrevolution of 1985-91 that overthrew the Soviet government ended in the installation of a capitalist government headed by Boris Yeltsin. In 1998, industrial production, agricultural production and the legal-tender paper ruble were all plunging due to the destruction of the Soviet planned economy under first Gorbachev and then even more radically under Yeltsin.

If that wasn’t enough, the “Asian crisis” of 1997-98 — called that because it began but did not end in Asia — was affecting an already staggering Russia. Desperate to establish the viability of the paper ruble of now capitalist Russia, the Russian government decided to distinguish between the legal-tender currency denominated in rubles and its promises to pay Russian citizens in its ruble-denominated legal-tender currency.

Usually a government, even in a deep crisis, will pay the debts it owes in the currency it creates by simply printing the money. But in 1998, the now hated Yeltsin government felt forced to take drastic measures to establish the viability of the paper ruble as the currency of the new capitalist Russia. It did so by saying that preventing the collapse of the ruble was more important than paying off the internal debt that “we” could but choose not to pay in rubles we create ourselves — though if the Russian government had paid off the internal debt this way, the rubles would have represented very little real money — gold bullion.

By declaring itself in effect bankrupt, the Yeltsin government as its last significant act established the viability of the paper ruble. The resulting stabilization of the ruble, which the state bankruptcy helped make possible, was a necessary condition for the limited Russian economic recovery that has occurred under Vladimir Putin. This shows that — admittedly under extreme conditions — a capitalist state might choose not to repay debts payable in its own fiat currency.

All the cases we have examined above involve legal bankruptcy. But can a central government go bankrupt in the economic sense even it doesn’t go bankrupt in the legal sense? It can. The most famous example involves Germany in 1923. In 1923, Germany as a whole was not occupied though the Ruhr Valley was seized by France in 1923. And unlike the situation in 1945, the German government continued to function within its diminished boarders. However, by late 1923 German citizens who had invested their life savings in government bonds that were worth many millions of dollars could not purchase a postage stamp or a cup of coffee by cashing them in. Legally, there was no bankruptcy. The state owed a debt to the bondholders denominated in Reichsmarks as defined by the German state and paid them back in German marks again as defined by the German state.

As with the U.S. in the 1930s, the German government was no longer willing to pay marks in a certain quantity of gold like it had been willing to do before the war broke out in August 1914. But unlike the Depression-era U.S. where the dollar held its purchasing power despite the end of gold payments, even millions of Reichmarks could not buy a cup of coffee or a postage stamp.

There was no formal bankruptcy in the legal sense. The government was willing and able to pay the debts it owed in what it legally determined were Reichmarks. But the owners of the internal government debt payable in Reichmarks were effectively wiped out. If this isn’t economic bankruptcy, what is? The fact that the German government wasn’t in formal legal bankruptcy was a small consolidation to a German citizen who had put his or her life savings in German government bonds.

MMT on state budget deficits

Leaving aside the extreme case of a 1923-type hyperinflation, does MMT see any harm in excessive budget deficits to the capitalist economy? As MMT sees it, as long as there are enough unemployed workers and productive forces to physically increase production if demand rises, the state can indeed increase its budget deficits, either through tax cuts or increased spending. This is exactly how MMT believes that additional money and ultimately demand comes into the world.

Once the economy is at “full employment,” the situation is different. A rise in demand at this point will not lead to a rise in production, since production by definition is now no longer demand-restrained but supply-restrained. Assume that in a full-employment situation the central government decides to increase its spending without increasing taxes. And further assume that deficits are financed by issuing additional money — as opposed to issuing notes and bonds. What will happen, according to MMT?

If we follow MMT, there will be two effects. Number one, a rise in demand will mean that overall demand exceeds the supply of commodities at existing prices. The market will “correct” this situation by increasing prices. Therefore, MMT concedes that rising budget deficits at full employment will be inflationary. And since we are already at full employment, the larger deficits are not necessary to combat unemployment.

The second consequence is that the composition of production will change. Since total production cannot be increased to meet the increased demand for commodities by the central government, the increased government demand will have to be met by reducing the consumption of commodity use values by the private sector. This is what conventional bourgeois economists mean when they claim that inflation is a “hidden tax.” Assuming that a capitalist economy left to its own devices normally runs at “full employment” — which Keynesians including MMT supporters and Marxists reject — any increase in the production for the state or its employees and dependents will have to be paid for with a reduced supply of commodity use values for others.

According to MMT, whether the government should increase its deficits in a full-employment situation depends on the circumstances. For example, if the country is attacked by a foreign power, there will be little alternative but to increase the production of the means of defense at the expense of production for civilian consumption. The same will be true — if to a lesser extent — if in a situation of full employment the government decides to invade another country. MMT takes no position as such on this question, though I think it can be safely assumed that most MMT supporters oppose aggressive foreign wars.

Another example could be a situation where the government in a situation of full employment makes a political decision that it is more important to have affordable public housing for working people rather than additional luxury housing for the rich and additional office buildings. In such a situation, right-wingers representing the interests of the rich will complain that the freedom of the citizens to spend their money as they wish is being violated. The people and not the government should decide how to spend their money, the conservatives will declare.

Most MMT supporters would be sympathetic to the proposal to build affordable public housing since it will ensure that everybody has shelter and moves us in the direction of a more equal society. But strictly speaking, MMT theory as such is neutral on such questions. Indeed, Professor Wry insists that MMT theory can be equally applied by conservative as well as progressive governments.

The public debt

Here we have been assuming that the central government finances its debt by simply printing — or crediting bank accounts — to create more money. However, under the present monetary system not all “net financial assets” created are in the form of money. Opponents of large-scale deficit spending — war spending excepted — are found as a rule on the political right. One of their favorite arguments is that large deficits increase the debt burden of “future generations.” Eventually, the argument goes, taxes will have to be levied just to repay the debt. And it will be the members of “future generations” that will have to pay them.

MMT supporters have a rather unique view of the public debt and government finance. They deny that the government borrows its own currency at all. According to them, it is the central government that creates money. Appearances notwithstanding, they insist that the government is not really “borrowing” the money it is creating.

However, under the present legal relations, things do not appear this way. As we saw earlier, current law prohibits the U.S. Treasury from creating money by either printing money or simply crediting the bank accounts of federal employees or federal government suppliers. Instead, when the federal government needs to spend money it must write a check against its checking accounts that are held at the 12 Federal Reserve Banks. If the balances in the checking accounts are too low, the government must transfer money from its savings accounts held in private banks into its checking accounts held in the Federal Reserve Banks.

If the money in the federal government’s combined checking and saving accounts is insufficient, the government must raise additional money through either taxation or borrowing money by selling notes and bonds. MMT supporters insist this is an illusion, but it is true nonetheless.

Following the logic of MMT, if there is a central banking system the government can create “net financial assets” in the form of Treasury notes and bonds. However, under the current system it is the Open Market Committee of the Federal Reserve System — not the White House or Congress — that transforms some of the government debt into money. The part the Open Market Committee chooses not to transform into money remains government debt. The price that must be paid for this “fine tuning” is the creation of a strata of creditors of the state or “tax eaters,” as Marx somewhere described them.

The central bank gives the State great power to influence the quantity of money and therefore the size of effective monetary demand at the prevailing price level. MMT supporters believe that the State can pretty much control the level of effective demand — the size of the market over time. But it is hard to do this through fiscal policy — taxes and spending alone, both for political reasons and the slow pace of the legislative process. Following the logic of MMT, the central bank through its “open market” operations fine-tunes demand in ways that cannot be done through fiscal policy.

The problem arises, from the viewpoint of MMT and many other progressives, with the concept of independence, which puts the control of the central bank not in the hands of the government but in the hands of an unelected body like the Federal Reserve System’s Open Market Committee. In the final analysis, the independence of the central bank comes down to insulating the central bank, one of the most powerful organs of the State, from democratic pressure. From the viewpoint of the economists, the great majority of whom support the independence of the central bank, the working class — unlike the capitalist class — does not like unemployment and will therefore always be pressuring the central bank to follow an “easier” monetary policy than is in the “public interest.” The public interest the economists refer to is in reality the interests of the ruling capitalist class.

The economists assume that the politicians that make the government-controlled monetary policy would not be able to stand up to this democratic pressure, which would lead to inflation and possible currency collapse. Therefore, the politicians that control the government must be put in a position where they can argue that while we want an easier monetary policy so we can achieve “full employment,” we have no power over the “independent” central bank. Therefore, don’t blame us for unemployment, blame the central bank.

MMT supporters assume — wrongly as I have shown throughout this blog — that government deficits do not tend to raise interest rates, because they believe — wrongly — that the central bank can fix interest rates at any level it desires. However, they complain that under the current system it is the central bank that determines interest rates and not the elected government. Therefore, the central bank may choose to raise interest rates. In that case, MMT supporters would claim — again wrongly — that it is not the government deficits that are raising interest rates but the central bankers who “do not understand” Modern Monetary Theory. In reality, it is Modern Monetary Theory that does not understand the nature of money.

MMT, the trade unions, and progressives in general desire to end independence of the central bank. Aren’t we supposed to be living in a democracy where the people rule? Why is one of the most powerful institutions of the State — the central bank — then explicitly excluded from the democratic process? This is indeed a good question. However, to answer it correctly it is necessary to peer deeply into the nature of the capitalist mode of production. To do this, we need the sharp tools of Marxism and not the blunt knife of Modern Monetary Theory.

In any event, as long the central bank and government are in different hands, the central bankers are insulated from the democratic process and it becomes possible for the central government to “run out of money” if the independent central bank makes money tight enough. Even if the central government actually running out of money is extremely unlikely, government borrowing will during “booms” raise interest rates, causing a shortage of mortgage money for housing and credit for durable consumer goods. This is exactly what we are seeing at present once again as the Powell Fed moves to raise interest by tightening up the money supply while the federal government under Trump is running trillion-dollar deficits. The rate of interest the U.S. government has to pay on 10-year bonds has risen from 2.36 percent just before the Republican tax cut was passed at the end of last year (2017) to over 3 percent on some days in September 2018. As a result of the consequent rise in the cost of mortgage money, the current home construction boom is now showing signs of “cooling,” which is a classic indicator of an approaching recession.

Modern Monetary Theory thinks that the boom-killing rise in interest rates that occurs during every economic upturn is in great measure due to the failure of the central bankers such as Mr. Powell to grasp MMT. But this blog thinks that it due to the very nature of capitalist production.

Who is right in this debate between anti-democratic central bank “orthodoxy” and MMT? According to MMT, the existence of the central bank — assuming that it is actually under the control of the elected government — gives the government a way to fine-tune the quantity of money and interest rates. In this way, the government can make sure the size of the market is adequate to absorb the quantity of commodities that corresponds to “full employment” without going to the opposite extreme and creating hyperinflation. The government never has to fear that deficits designed to stimulate the economy toward full employment will raise interest rates. The level of production, MMT supporters believe, given the correct policy, even under capitalism, is not in the final analysis demand-restrained. It is supply-restrained.

However, once we apply the sharp tools of Marxist analysis in a consistent way, as I have attempted to do throughout this blog, we see that under the capitalist mode of production it is indeed the money market that is the real “boss,” and the state and its government and central bank must obey. While the role of money in electoral politics is indeed a corrupting factor, it is not through “money in politics” but through the money market that those with the money ultimately exercise their class dictatorship.

The only way to change this appalling situation, according to Marxist analysis, is for the working class to seize the political power and end private ownership of the means of production. It would then be possible to treat human labor as directly social rather the indirectly social. Or in plain language move from a capitalist market economy to a planned socialist economy. Modern Monetary Theory therefore leads to a perspective of gradually reforming present-day society in the direction of a fairer distribution of the social product, while Marxism draws revolutionary conclusions. Reformist tendencies in the socialist movement and progressives in general are strongly drawn to MMT because it promises gradual change without the need for revolutionary upheaval.

MMT and the struggle against unemployment

MMT supporters and Marxists are united on the demand that the central government act as the employer of last resort. This demand is gaining support, and when the current boom ends and chronic unemployment is supplemented once again by mass cyclical unemployment, support for this demand will only grow. Next month, I will examine this demand and whether it is compatible with the continued existence of the capitalist system.

To be continued.


1 This is an analogy with Marx’s description of the capitalist opposition to French President Louis Bonaparte (1808-1873). Bonaparte, a real or alleged nephew of Napoleon, was elected president of the French Republic in elections held in 1848. These followed the overthrow of King Louis Phillipe in the February 1848 Revolution that established the short-lived Second French Republic. The “Party of Order” crushed the French workers in June 1848 when the French workers attempted to defend a government program that hired unemployed workers.

While analogies are far from exact, there are some striking similarities between Trump and Bonaparte. Like Bonaparte, Trump has dictatorial tendencies, a scandalous sex life marked by an over-the-top contempt for women, extreme personal corruption, and ties to organized crime.

The Party of Order resistance to Bonaparte’s drive toward dictatorial power were ineffectual because its reactionary pro-capitalist policies had little support among the French people. The result was that the Party of Order was unable to prevent Bonaparte from declaring himself in effect president for life and then Emperor Napoleon III after his six-year constitutional term of office approached its end. He was finally swept from power in 1870 after his war against Prussia aimed at preventing the unification of Germany ended in disastrous defeat at the hands of the Germans at the Battle of Sedan the same year. (back)

2 For example, the Democrats voted for the increased war spending. They have consistently attacked Trump for not being “tough enough” with Russia, North Korea, and Syria. (back)

3 In another odd parallel between Trump and Bonaparte, Bonaparte’s eventual downfall also involved Germany. Faced by rising German economic competition, France under Bonaparte’s leadership was determined to crush Bismarck’s move to unify Germany. An even better analogy between Trump and Bonaparte, however, involves Trump’s economic — so far not military — war against 21st-century China playing the role of 19th-century Germany with the Trumpist USA playing the role of 19th-century France. An important difference is that the struggle between France and Germany was played out on the stage of Europe, while the struggle between the USA and China is being played out on the stage of the entire world market. (back)

4 So-called “Atlanticism” refers to first West Germany’s and then after 1989 all-Germany’s policies — enforced in the final analysis through NATO — of cooperating with the U.S. against the Soviet Union and then Russia even when Germany’s interests would imply a closer relationship with Russia. (back)

5 Only two U.S. presidents have been impeached. The first was the racist pro-Union but also pro-slavery Andrew Johnson, who became president when Abraham Lincoln was assassinated in April 1865. There were good reasons to remove Johnson, who did everything he could to preserve the essence of slavery and undermine reconstruction. But the Senate fell one vote short of the necessary two-thirds majority that would have been necessary to oust the racist president. The failure of the Senate to oust Johnson was a major setback in the struggle against racism and for genuine equality of the now freed slaves.

The second president to be impeached was Bill Clinton. Officially, Clinton was impeached for lying to government investigators about his affair with White House intern Monica Lewinsky. Clinton’s impeachment was widely seen as a cynical ploy by the Republicans — hardly known for their defense of women from sexual predators, as the Kavanaugh Supreme Court nomination is once again showing — to embarrass the Democrats. Clinton was acquitted in his Senate trial in a 50-50 party-line vote.

Politically, the Clinton impeachment backfired. However, Clinton’s acquittal by the U.S. Senate had the unfortunate side effect of giving a green light to sexual predators, who are under the capitalist system in a position to use their power to fire subordinates — mostly women — who refuse to perform sexual favors for them.

Richard Nixon was never formally impeached because he agreed to resign the presidency when he realized he faced certain impeachment in the House of Representatives and conviction in the U.S. Senate due to his role in the “Watergate” scandal. Nixon was the only U.S. president who failed to complete his constitutional term in office for reasons other than death in office.

When he resigned, Nixon still faced a criminal trial in the criminal courts due to the crimes — which were a very small part of his actual crimes, such as responsibility for the death of millions of people in Indochina — that he had committed in the “Watergate” scandal. But fearing further damage to capitalist rule from the devastating revelations that would emerge from a criminal trial of a former president, President Gerald Ford pardoned him. (back)

6 Most of the senators up for reelection in 2018 happen to be Democrats. So even in the event of a huge Democratic victory, it will be difficult for the Democrats to establish even a small majority in the Senate. Therefore, Trump cannot legally be removed from office before his term expires on January 20, 2021, unless the congressional Republicans agree to his removal, whether through the 25th Amendment or impeachment. (back)

7 John McCain (1936-2018) was a Republican senator from Arizona. The son of an admiral, he modeled himself on a militarist “Prussian-type” conservative, along with the associated pseudo-feudal values of the officer caste. McCain in the 2008 election ran for president on the Republican ticket but was defeated by Barack Obama. Unlike “chicken hawks” such as George W. Bush and Trump himself, whose wealthy parents kept them out of the war, McCain actually participated in the bombing of Vietnam. He was shot down while on a bombing mission against a civilian target in what was then North Vietnam. McCain was captured by the Vietnamese and interned as a prisoner of war for the rest of the conflict.

Unlike many other veterans of the war, McCain remained unapologetic and believed that the U.S. should have won the war against a peasant country on the other side of the globe. After the Vietnam War, McCain enthusiastically supported every war that U.S. imperialism either threatened or actually carried out, in all cases against oppressed countries.

As he lay dying, McCain indicated his disdain for “chicken hawk” Trump by making it clear that he did not want Trump to attend his funeral. When he died, McCain was all but deified by leaders of the Party of Order, the Democratic-Republican “resistance” to Trump. This is a reminder that if the Party of Order succeeds in ousting Trump, whether through impeachment, the 25th Amendment, the 2020 election, or some other way, the war danger will not decline and might even increase. (back)

7 Unemployment might be caused by physical disproportions in production or mis-matches between the skills of the workers and the jobs available rather than a lack of sufficient “monetarily effective demand.” MMT recognizes that in such a situation increasing market demand will not be able to end all “involuntary unemployment.” More on this next month. (back)

8 This wasn’t always true. In its early days, the Federal Reserve Banks were required to maintain collateral behind each Federal Reserve Note they issued, which included gold and high-quality commercial paper backed by actual commodities. If sufficient collateral was not available, the Federal Reserve Banks would in theory have run out of money and faced legal bankruptcy. However, whenever this threatened, the collateral the Federal Reserve Banks were required to hold against its Federal Reserve Note liabilities were relaxed and eventually eliminated altogether. (back)

9 In journalist Robert Woodward’s book “Fear” on the Trump administration, Trump told his then top economic advisor former Goldman Sachs chief Gary Cohn to “Just run the presses — print money.” If we believe Woodward, Cohn responded, “You don’t get to do it that way. We have huge deficits and they matter. The government doesn’t keep a balance sheet like that.”

It seems that Trump, who majored in economics as an undergraduate in college, has at least a rudimentary understanding of Keynesian economics, and is not entirely unsympathetic to the ideas of MMT! What would happen if the current U.S. economic boom were to end — as it likely will — as the 2020 election approaches.

Would a desperate Trump deprived of his only significant “success” in office — the current economic boom — remove Jerome Powell and other Federal Reserve Board governors “for cause” and appoint successors who would “run the printing press”?

If this were to happen, a massive run on the U.S. dollar would almost certainly occur that would have the potential to bring down the international monetary system centered on the U.S. dollar. In that case, the U.S. world empire might not survive the Trump administration. This is the kind of nightmare that keeps the “responsible” leaders — both in and outside of the White House — of the Party of Order awake at night. (back)

10 In the past, when the government issued paper money directly through its Treasury Department, the paper currency was usually denominated in currency units that represented specific weights of gold and the governments promised that they would “eventually” pay in either gold or, in the past, silver.

However, as the government moved away from promises to even “eventually” redeem its currency in gold, it was felt necessary to end the ability of the Treasury to issue legal currency and instead place this authority in the hands of an “independent” central bank run by unelected officials who are accountable not to the people at all but only to the money market. (back)

11 While the Roosevelt “default” of 1933 did not impair the ability of the U.S. government to borrow money at low interest rates, the same cannot be said of the Nixon default that occurred in August 1971.

The Roosevelt default of March 1933 did not reflect anything approaching economic bankruptcy on the part of the federal government but a move by the Roosevelt administration to centralize control over gold reserves. It did this as it prepared itself to deal with any renewed economic crisis or the approaching world war. Therefore, in the years after the Roosevelt devaluation, the rate of interest the U.S. government had to pay on borrowed money continued to decline and didn’t start to rise again until after World War II.

However, in the years that followed the Nixon default — which unlike the Roosevelt default involved the actual inability of the U.S. government to meet its gold obligations — the interest the U.S. government had to pay on borrowed money increased to the highest levels in history, soaring from around 5 percent when Nixon suspended international payments on its gold liabilities to over 15 percent in early 1981. (back)