Modern Money (Pt 5)

In recent weeks, U.S. politics were dramatically shaken by the Republican drive to get Trump’s Supreme Court nominee Judge Brett Kavanaugh confirmed by the U.S. Senate despite charges that he violently sexually assaulted women in high school and later while a student at Yale University. (1) Though Kavanaugh was an extremely right-wing federal judge, his nomination was expected to go smoothly, with virtually unanimous support from the Republicans and some Democrats. That changed when a respected California professor of clinical psychology, Dr. Christine Blasey Ford, revealed that a drunken Kavanaugh had tried to rape her at a high school party. According to Dr. Ford, when she attempted to cry for help, Kavanaugh put his hand on her mouth causing her to fear that he might accidentally kill her.

Normally, a nominee for high office, let alone the Supreme Court, facing charges for crimes far less serious than attempted rape would be expected to withdraw his candidacy for the sake of “the nation and his family.” But not this time. Demonstrators, mostly women, descended on Washington demanding that the Senate reject the Kavanaugh nomination. After riveting testimony by Dr. Ford and a temper tantrum rebuttal by an outraged Kavanaugh, the Senate by a 50 to 48 vote confirmed Kavanaugh as one of nine Supreme Court justices. Every Republican with the exception of Senator Lisa Murkowski of Alaska, who voted “present,” voted for Kavanaugh’s confirmation. Every Democrat, with the exception of West Virginia Senator Joe Manchin, who voted to confirm Kavanaugh, voted against the nomination.

The Republicans hope the backlash against the women protesters, horrified that an accused rapist (2) like Kavanaugh could ever be seated on the high court, will electrify their racist misogynistic base and limit the expected Democratic gains in the November 2018 mid-term elections. The conventional wisdom is that while the Democrats will win a somewhat larger majority than previously expected in the House they will face defeat in their bid to retake the Senate. If the Democrats against current expectations do win a majority in the Senate, they will have the power over the next two years to reject future Trump nominations to the Supreme Court.

However, many within the ruling U.S. capitalist class fear that Kavanaugh’s approval might mark the beginning of the end for the Republican Party. The older Republican Party was badly discredited as a result of the Great Depression and the GOP’s opposition to popular New Deal reforms and never fully recovered. However, after Jim Crow fell to the Civil Rights Movement in the 1960s, a new Republican Party emerged that combined the traditional businessmen’s core of the historic Republican Party with the racist base of the old Democratic Party.

This new party was built on the “white backlash” against the gains (3) made by African-Americans in the wake of the Civil Rights Movement and Black Power era. Now the Republicans are hoping to duplicate this in next month’s election by riding the white male (4) backlash against the new demands of the women’s movement, which include holding men to account for their sexual attacks against women.

Unlike African-Americans, who are around 13 percent of the total U.S. population, women make up slightly more than 50 percent. In addition, 100 percent of the population have or had mothers. Even if the GOP has some success in riding a “backlash” among the most backward sectors of the population in next month’s election, it is hard to see how an anti-woman strategy can save the Republicans in the long run.

This is why the Republicans are increasingly attacking a basic principle of modern bourgeois democracy – universal suffrage. Republican attacks against universal suffrage include strict voter ID laws; having few polling stations in African-American neighborhoods; and disenfranchising African-Americans, Latinx, and other people of color through criminal convictions. Republican tactics to limit the franchise are made more effective because the U.S. is virtually unique in holding elections on a working day.

As “white America” gives way to “brown America,” which is expected to arrive by mid-century, GOP officeholders, overwhelmingly aging white men, desperately seek to prolong the GOP’s stranglehold over all three branches of the federal government as well as many state and local governments.

Besides fears that the GOP may have fatally wounded itself by ramming through Kavanaugh, ruling-class circles fear that long-term damage has been done to the quasi-religious mystique surrounding the Supreme Court. The argument goes that you may disagree with their decisions, but the black-robed “justices” of the Supreme Court are above politics, and their decisions must be respected and obeyed. This will be much harder to sell when one of the “justices” is suspected sex criminal Brett Kavanaugh. The Kavanaugh debacle has deeply shaken two pillars of capitalist class rule in the U.S. – the Republican Party and the Supreme Court.

However the 2018 elections turn out, they will soon be over. Attention will shift to the 2020 elections, where not only the House of Representatives and a third of the Senate seats will again be in play but – barring some catastrophic event like a coup d’etat that declares Trump emperor (Donald I) – the presidency will be as well. (5)

Though revolutionary-socialist organizations are growing, most of today’s newly minted socialists are still inclined toward democratic socialism. Many – although not all – of the new socialists are willing to give the Democratic Party one more chance. But the new generation of progressives and democratic socialists insists that the Democrats democratize the nomination process – get rid of the super-delegates – and run progressive candidates that refuse to take corporate money. The idea is that even before the election of Trump, the role of corporate money, including corporate funding of Democratic as well as Republican candidates, had transformed the U.S. from a democracy into an oligarchy.

New Monetary Theory and the struggle between ‘corporatists’ and progressives within the Democratic Party

It remains to be seen whether U.S. politics is about to break out of its traditional vicious circle where the Democrats and Republicans regularly succeed each other in office. Despite the growth of the progressives movement within the Democratic Party, the corporatists, represented by such figures as former President Barack Obama, Hillary Clinton, Senate Minority Leader Charles Schumer, and House Minority Leader Nancy Pelosi, retain the upper hand.

Over the next two years, the progressives and their left wing, the surging democratic-socialist movement, will attempt to oust the entrenched corporatist leaders of the Democratic Party. With polls showing a majority of Democratic Party activists favoring socialism over capitalism, it would appear the prospects have never been better to transform the Democratic Party into at least a European-style social-democratic party.

The socialism that a majority of the supporters of the Democratic Party favor might not be socialism in the Marxist sense, but it would mean vastly expanded labor rights, single-payer medical insurance for all, and not least a “green New Deal” to tackle what is perhaps the greatest challenge facing humankind today, the problem of global warming.

Of course, those of a certain age have been through this before. In the 1990s, after years of Republican domination and Reagan reaction, the election of Bill Clinton and a Democratic Congress raised hopes that an era of progressive reform was at last at hand. The end of the Cold War, progressives of the day believed, would finally allow a major reduction in military spending, opening up the possibilities of reforms unprecedented since New Deal days. (6) Progressives even had a name for it – the “peace dividend.”

The new administration promised to launch a major health reform program that would provide medical insurance to those who lacked it, which seemed to progressives a good place to start. But the Clinton proposals soon petered out in Congress. Instead, Clinton focused on “balancing the budget” to keep long-term interest rates down. With the economy emerging from the Bush recession of 1990-91, it was explained that this was the key to keeping the recovery going and reducing unemployment. This method of “fighting unemployment” only reduces unemployment as long as the cyclical expansion lasts. As soon as the industrial cycle turns down, unemployment rises again.

One policy of the Clinton Administration that actually did reduce long-term official unemployment was to greatly expand the prison population. Prisoners are not counted as “unemployed.” Instead of the expected peace dividend, the administration “ended welfare as we know it.” Backed by claims of many professional economists, the administration claimed that welfare was no longer needed because the “Internet revolution” guaranteed prosperity and “full employment” as far as the eye could see, as long as the federal budget moved toward balance in order hold down long-term interest rates. As we now know, the boom ended about the time Clinton left office, and unemployment began to rise first during the initial “mild” recession of the early 2000s and with much greater force with the Great Recession of 2007-09.

History repeated itself after the election of Obama, held at the height of the 2008 panic. Instead of pushing for single-payer health insurance or at least a public option, Obama’s much-touted health care reform amounted to a series of subsidies to enable people to purchase private insurance. It did lower the number of uninsured people somewhat, but millions remained uninsured. In addition, people struggling to purchase health insurance were plagued with paperwork trying to prove that their incomes were low enough for them to qualify for subsidies.

As a result, the program was extremely unpopular and the Republicans regained control of Congress by promising to “repeal and replace” it. Obama and the Democrats also promised to establish “card check,” which would have made it easier to organize trade unions within the National Labor Relations Board system, which keeps labor organizing on a tight leash. But the Obama administration made no serious attempt to pass it in Congress. While Obama launched a few public works projects, they involved only contracts between the federal government and private capitalists. There was no revival of the popular but short-lived New Deal-era Works Progress Administration. Under the WPA, the federal government directly hired the unemployed to build city halls, libraries, and sewer systems.

The new generation of progressives seeks to avoid what it sees as the “mistakes” of the Clinton and Obama administrations. These produced Democratic administrations and Congresses followed by Republican administrations and Congresses. The way out of this vicious circle, many progressives including democratic socialists believe, is to elect a progressive Democratic president and Congress that will follow policies inspired by Modern Monetary Theory.

MMT policies for a new progressive president and Congress

Modern Monetary Theory supporters propose that the federal government act as employer of last resort. They propose that the government provide a job at a decent wage – perhaps $15 an hour or more – to every person who needs or desires a full-time job but can’t find work in the private sector. In this way, the scourge of unemployment will be abolished forever. However, for reasons I will examine below, the dominant corporatist wing of the Democratic Party can be expected to oppose this demand with far greater vigor than they have the far more modest demand for single-payer health care.

However, the arguments the corporate Democrats will raise will be determined in part by the evolution of the industrial cycle between now and the 2020 elections. If the current economic boom lasts – which Trump, the Republican Party, and the corporate Democrats predict and hope will be the case – the corporate Democrats will claim there is no reason to demand that the federal government act as employer of last resort because “we already have full employment.”

The real problem, the corporatists will claim, is not lack of jobs but a mismatch between the skills of workers and the demand for labor in the “high-tech” information-driven economy. The way to deal with the fading problem of unemployment in the “thriving” economy of 21st-century U.S. capitalism is to offer job-training programs to disadvantaged youth so they can compete on an “even playing field” for the high-tech jobs of the future. These are arguments Clinton and his corporate Democrats used in the 1990s.

But let’s assume the current boom has come to an end before the end of 2019 or early 2020, as historical experience and the current condition of the global money markets and trends in home and auto sales all indicate is likely. Then, cyclical unemployment will be added to the long-term unemployed who are not even counted in the official unemployment figures. However – and this is where Modern Monetary Theory comes in – the federal budget deficit will also grow.

Recessions always bring both a drop in federal revenues and an increase in payments for unemployment insurance. In addition, the Trump-Republican tax cuts, combined with military spending increases and ongoing colonial wars supported by both Republicans and the Democratic leadership, will have increased federal spending and reduced federal revenues independent of the industrial cycle.

If that happens, the corporate Democrats will blame the recession, not on the inevitable overproduction crisis that has doomed every successive capitalist boom since the early 19th century, but on the Trump-Republican policies. These include abandonment of “free trade” combined with the administration’s reckless fiscal policies. The corporate Democrats will promise to revive the Obama “boom” by a combination of resuming the drive to cut and eliminate tariffs and other trade barriers combined with a more prudent fiscal policy.

They will explain that, while they share the aims of the supporters of the federal government acting as employer of last resort, the exceptional size of the federal deficit due to Republican “mismanagement” makes such a policy “too expensive” at this time. The money is simply not there. The real way to “fight unemployment,” the corporate Dems will proclaim, is to follow policies that create a “strong economy” that will create jobs in the private sector. This cannot be achieved by looking back to the “make work” old New Deal WPA program but by encouraging and strengthening the dynamic private sector driven by 21st-century technologies such as artificial intelligence.

The progressives and their MMT economic advisors will strongly disagree. Remember, MMT supporters believe that no matter how many trillions of dollars the federal deficit reaches, the very fact of unemployed workers and machines shows that the deficit is not too large but too small. The progressives and their MMT economic advisors will say that there is no possibility that the federal government will go bankrupt. Nor is there any danger that huge federal deficits will cause a financial crisis in the private sector because the U.S. government has an unlimited ability to create money right up to full employment without serious inflation. The very worst that could happen would be a rise in the rate of inflation by a few percentage points, which the progressives will insist is a minor problem compared to the disaster of unemployment.

If the money isn’t there, the federal government can create it by crediting the bank accounts of its suppliers and employees with its “magic pen.” The argument that you can have your cake and eat it too will be attractive to the new generation of progressives and democratic socialists, who are not well versed in Marx’s great economic discoveries and their revolutionary implications – and older Marxists who have never understood these discoveries in the first place.

Particularly dangerous is the idea that the U.S. can continue to spend eight times what the rest of the world spends on the military and still have plenty of money left over to launch a full-employment program where the federal government functions as employer of last resort, tackles the problem of global warming, and continues its colonial wars while preparing for a major war against China and possibly other major powers. Within the progressive and new socialist movements, it will be argued, why raise issues like Palestine, the wars against Syria and Yemen, and other divisive matters when we should seek the widest unity around the demand that the federal government function as employer of last resort?

The federal deficit and the industrial cycle

As we have seen throughout this blog, recession not only increases the deficit in the federal budget but also increases the ability of the federal government to run budget deficits. During a recession, a portion of the money that circulates commodities during the boom falls out of circulation and accumulates as idle funds in the banks. Facing a declining demand for loans on the part of a stagnant private sector, the banks use the idle funds to purchase Treasury notes and bonds. In addition, as stock markets fall – as they do during the first part of a recession – the capitalists pull money out of the falling stock market and put it into the relative safety of government bonds. Therefore, a “bear market” in stocks – everything remaining equal – leads to a rise in demand for government bonds.

As a result, during a recession even though the federal deficit rises, the interest rates at which the government borrows falls. If a recession hits anytime before the 2020 election season, the supporters of MMT will point to the fall in the rate at which the federal government is paying to borrow money as proof that there is no limit to the ability of the federal government to borrow.

However, during the next recession, the federal budget deficit will be especially large due to the pro-cyclical Trump-Republican tax cut, which was changed at the last minute to take effect this year (2018) in a bid to boost the chances of the GOP in the upcoming mid-term elections. Capitalist stabilization policy developed since the days of John Maynard Keynes, however, warns against the kind of pro-cyclical tax cuts the Republicans rammed through at the end of 2017. To review, a pro-cyclical fiscal policy, instead of restraining the boom by limiting over-trading, overproduction and speculation, whips it into a frenzy.

Ideally, stabilization teaches that the budget should be balanced at the cyclical peak.. Or if that is not possible, the deficit should be as small as possible during the boom. In this way, the competition between the central government and the private sector for a shrinking quantity of loan money should be avoided, or at least minimized, as much as possible. However, as the current boom approaches its end thanks to the pro-cyclical Republican-Trump tax cut, the high demand for loan money by the federal government will be added to that of the private sector. This will intensify the crisis and the recession/depression cycle that will follow.

The answer to the corporatists provided by Modern Monetary Theory

In the event of a recession between now and 2020, corporate Democrats will claim that no matter how low interest rates are, failure to deal with the trillions of dollars in deficits will mean higher interest rates as soon the economy picks up again, strangling future economic growth. The corporatists will advocate a repeat of the Clinton policies of the 1990s, except this time it will be Social Security, Medicare-Medicaid, and unemployment insurance that will end “as we know it.”

Progressives armed with MMT theories will object that these arguments are false because the Federal Reserve System has the power to set interest rates at whatever level it desires. Therefore, the U.S. federal government is not restrained by a lack of money to act as employer of last resort even in the face of deficits running into the trillions, record-breaking military spending, and continuing colonial wars. The only problem that might arise is that the Federal Reserve is dominated by Republican bankers who simply don’t understand the discoveries made by Modern Money Theory.

Therefore, the election of a new Democratic Congress and president during or immediately after a cyclical downturn will inevitably raise demands for monetary reform along the lines indicated by Modern Monetary Theory. MMT supporters will ask, why is the president and Congress denied control over monetary policy? Especially if the Republicans suffer huge defeats in the 2018 and 2020 elections, the reformers will ask, why should Republican bankers appointed to the Federal Reserve Board by the despised Trump be allowed to hold what amounts to veto power over the fiscal policies of a Democratic successor elected by an overwhelming majority?

Progressives, supported by MMT economists, will demand an end to the “independence” of the Federal Reserve System and that monetary policy be put under the control of the White House. Some may go further and demand the Federal Reserve Banks be nationalized. This demand is popular among both left- and right-wing “populists”. They will expect the Democrats in Congress – under U.S. law the Federal Reserve System is a creature of Congress – to introduce whatever legislation is needed to put the Fed under the control of the White House. It can be safely predicted in advance that the corporate Democrats will oppose this demand on the ground that it would put the dollar-centered international monetary system in great danger.

The deeper reason the corporatists will oppose the federal government acting as employer of last resort

While concerns about “monetary stability” play an important role in the opposition of corporate Democrats and Republicans to any move toward ending unemployment by having the federal government act as employer of last resort, there is an even more fundamental reason for their opposition. Capitalism is distinguished by the predominance of “free labor” as opposed to “forced labor” in production and society in general. Under capitalism, labor is free in a double sense.

First, unlike under chattel slavery, workers are not the property of an individual master or owner. Also, unlike in a feudal system, where serfs had the right to remain on the land, capitalists may or may not actually buy workers’ labor power. Serfs had no right to leave the land, but the feudal lord had no right to evict the serfs. Serfs were therefore attached to the main means of production of the time – the land. Under capitalism, in contrast, workers are free from any attachment to the means of production. Under the present system, the means of production, with the sole exception of workers’ labor power, are owned by another class, the capitalist class.

Unlike the earlier forms of exploitation, capitalism therefore appears as a collection of “freedoms.” For example, modern landowners – unlike their feudal predecessors – have the freedom to rent – or not to rent – their land to another person. Any person can choose to sell or not sell a potential commodity in his or her possession. For example, General Motors might choose to sell a factory in Michigan to Volkswagen, or it might choose not to sell it. Similarly, “ordinary” persons have the freedom to offer their labor power for sale on the labor market or to withhold that labor power. A person may accept a job offer by a capitalist at a given wage, or a potential worker may turn it down. And once persons are employed, they can walk away at any time, though of course at the price of not getting any more proceeds from the sale of their labor power.

However, there is no guarantee that persons seeking to sell their labor power to a buyer at a certain price – let’s say a living wage – will actually find a buyer any more than there is any guarantee that if General Motors attempts to sell a Michigan auto factory to another corporation it will find a buyer.

The problem of finding a buyer for their labor power was one problem that slaves or serfs did not have. Slaves were told what to do by the master – or agent of the master. For example, pick cotton from that cotton field from sunrise to sunset under the baking southern sun. If the slaves refused, they would at best be whipped and at worst killed.

The serfs knew that according to the feudal division of labor, they had certain tasks they had to perform. For example, serfs were told to perform certain tasks on the lord’s fields. If they refused, the serfs could be whipped or otherwise punished for violation of the “feudal contract.” In return, the serfs got a strip of land to cultivate. The serfs never had to worry about being laid off because “business was bad.”

Surplus labor and surplus value

Capitalism is a system of both “freedoms” and markets. For example, there are markets where commodities are offered at a certain price for sale. There is the money market where money is lent out at a certain rate of interest. There are also stock and bond markets where stocks and bonds are offered in exchange for a certain sum of money. However, the most important market of all is the labor market, where workers offer their ability to work – labor power – to capitalist buyers at a prevailing price called a wage. (7) For the labor market to function normally, there must be a certain surplus of those who are seeking to sell their labor power relative to those who are seeking to buy.

Since classes arose, workers, whether slave, serf, or free wage labor, have always had to work a certain portion of the workday for a class of non-workers and a certain portion of the workday for themselves. However, this basic fact is often obscured by the existing relations of production and their legal expression in property rights. Under slavery, whether the ancient slavery of Greece, Rome, and other ancient societies or the modern African slavery of the U.S. South, it appears the slave was paid nothing.

But if the slaves got nothing, how did they stay alive? If the slave master gave the slaves absolutely nothing in exchange for their labor – no food, water or shelter, they would soon die. Under the slave system, the master has a considerable amount of capital sunk in the person of the slave. Therefore, in all chattel slave systems, whether ancient or modern, slave masters must provide some means of subsistence in exchange for a portion of the labor the slaves perform in the course of the workday.

We call the “paid” portion of the labor provided by slaves the necessary labor – necessary in the sense that this labor must be paid. Naturally, the slave owner – especially under market-oriented commodity slave systems – wants to keep the paid necessary labor as a percentage of the total labor the slaves perform as low as possible, but it can never be reduced to zero.

How slaves were paid

In the U.S. South, slaves were paid in various ways. Sometimes they were paid a small money wage and could use the money to purchase some “extra” means of subsistence. Another way slaves were paid was that they would have the use – not the ownership – of a certain plot of land. After they had performed their exhausting duties in the cotton fields, they could farm these plots for subsistence. The labor the slaves performed on these plots of land so generously provided for their use by the master was part of the necessary – or paid – part of the labor performed. The slave masters also “paid” their slaves by providing them means of shelter in the form of miserable cabins in the shadows of the luxurious accommodations of the slave owners and their families.

Under the system of wage labor, it appears that workers are paid for all their labor. The false idea then arises that the difference between chattel slavery and modern capitalism is that under slavery workers worked for nothing but under capitalism workers are paid for all their labor.

If workers work 20 hours a week, they get X amount of money. But if they work 40 hours a week, they get 2X the amount of money. The more labor workers sell – or can sell – the more they earn. It appears here that the workers are working only for themselves. If workers desire more money, they simply have to sell additional labor. If workers desire more leisure, they can simply sell less labor.

In reality, workers under the capitalist system do not actually sell their labor to the boss but rather their ability to work, or labor power. This is a crucial distinction. For a period of time – whether a day or a week – the workers put themselves at the disposal of the boss. Since value is nothing but a quantity of labor measured in some unit of time embodied in a commodity or service, workers receive in return for their sold labor power a sum of money called a wage. The value represented by the money wage – and the value that the workers create in the course of the working period, however, are two quite separate things.

During part of the workday, workers reproduce the value the boss advanced in the form of the money wage. During the portion of the workday workers reproduce the value of their money wage, they are performing necessary labor, just as was the case with slaves. The other portion of the workday is the surplus labor performed free of charge for the boss, just as was the case for the slave in the cotton fields. This labor performed gratis for the boss is equivalent to the surplus labor performed by the slave. In this respect, there is no difference between the situation of the chattel slave, the feudal serf, or the modern wage worker.

Under the capitalist system, the boss must sell the product that is the fruit of the workers’ labor on the market. Because this product is a commodity, the surplus labor under capitalism takes the form of surplus value – which may or may not be the case under chattel slavery. Then assuming all goes well, the surplus value is realized in the form of a money profit. Actually, the use of the term money here is redundant, because by definition profit is always measured in terms of the quantity of the use value of the money commodity.

Prison labor and chattel slavery

What distinguishes the slave from the free wage worker was not the meagerness of the payment the slave received. Indeed, in the case of Roman slavery, there were “white collar” slaves who were paid quite well, considering the conditions of production and general living standards of the time. The real difference between free wage labor and slaves is that if slaves attempt to escape – that is, quit their jobs – and get caught, they would get a beating at best or at worst death. If wage workers “escape” – that is, quit their jobs – they simply lose their wage income.

Indeed, the modern police forces of the United States have their origin in patrols that were charged with tracking down escaped slaves. Today, one of the duties of the present-day police forces is to track down escaped prisoners. We periodically read in the papers – or these days on the Internet – that a group of escaped prisoners were recaptured and safely returned to prison, or alternatively, that some or all of the prisoners were shot and killed in a gunfight with the police.

The slave-like conditions of prisoners consist not so much in that they are forced to work for a dollar or less a day but they cannot freely quit their jobs and leave the premises. After all, in addition to tiny money wages, the jailer does provide prisoners with room and board, just like the slave masters of the old South did. In the case of the slave master, it took the form of tiny cabins, while today it takes the form of tiny cells, or in the “minimum security prisons” dormitories similar to college dorms. But again, unlike college students, prisoners are not free to leave the premises without permission of the wardens. Prisons also provide three “free” meals a day, and some even provide a plot of land where the prisoners can grow vegetables to supplement their prison food.

In the United States, an increasing number of prisons are run by private for-profit companies. The government pays the prison companies to “house” the prisoners. The prison companies can loan out the prisoners to private companies, which slave owners in the old South did as well. The system of loaning out prison laborers to plantations and other private enterprises was an important transitional form of labor between full-scale chattel slavery and modern capitalist wage labor in the post-Civil War South. Indeed, this “transition” continues today.

Prison slaves as loan capital

When we talk about loan capital, we usually assume that it is money loaned. However, other forms of capital can be loaned, including slaves in the old South or prisoners today. Much as the case of a bank loaning money capital to an industrial capitalist, these private prison companies as well as government-owned prisons loan out their prisoner slaves in return for interest on their loaned out capital. The provider of the loan capital – for example, a private prison – gets to pocket the share of the surplus value – called interest – much as a bank pockets the interest on its money loans. The capitalists who borrow the prisoner-slaves get to pocket the part of the profit that Marx called the profit of enterprise.

To make matters worse, the slave-prisoners are disproportionately African-Americans and other people of color. The system through which the descendants of African chattel slaves are disproportionately imprisoned is known as the school-to-prison pipeline. African chattel slavery is, unfortunately, far from dead in the U.S.

Despite the role of various forms of modern chattel slavery – legal and illegal – that exist in the world today, the main mode of exploitation of workers is wage labor. While wage workers are free to work or not to work for another person (including corporations), wage workers face starvation – or at least severe material want – if they refuse to work for members of the exploiting class. As a practical matter, economic pressure makes it impossible for most people not to work for and provide surplus labor – surplus value – to the exploiters. This is why the system of wage labor is sometimes called wage slavery.

The advantages of wage slavery over chattel slavery for the capitalists

The great advantage of this system for our modern “masters” – called capitalists – is that they get to treat their variable capital – workers – as circulating rather than fixed capital. Industrial capitalists attempt to minimize as much as possible the portion of the productive capital they keep in the form of fixed capital. Fixed capital, such as machines, factory buildings, mines, farm machinery, and so on, is not very “liquid.” Industrial capitalists are in great danger of losing their capital if too much of it is in the form of fixed capital, which cannot quickly be converted into money.

Under slavery, masters could not simply let their slaves go when times were slack. Unless the slaves were raised on a plantation, masters had to go to the slave market and purchase slaves in exchange for money, just like the masters might also use money to purchases a plow, a cotton gin, and similar forms of fixed capital. Masters could sell their slaves to another “master,” turning the slaves back into money, much like modern capitalists can sell machines or even whole factories to other capitalists. But compared to the markets for cotton, such markets were “illiquid” and masters risked losing an important part of the fixed capital represented by the slaves, just like industrial capitalists facing bankruptcy will in all probability take major hits if they have to sell one of their factories in a desperate move to raise cash to pay the debts falling due.

The reason slavery lasted so long in the old South was that there was an acute shortage of “free labor” – that is, persons who are forced under the whip of hunger to sell their labor power “voluntarily” to the capitalists. Under the wage labor system, capitalists – or their agents – can simply lay off their workers if business is “slack,” or for any other reason. True, capitalists have to contribute a sum of money to maintain the pool of unemployed workers until they can be profitability employed once more, but the bosses always struggle to keep this support as low as possible.

In a situation where virtually all products are commodities, the general state of business and the demand for particular commodities keeps changing. The freedom to lay off workers at will for the capitalists is an extremely valuable one that the slave owner, still less the feudal lord of old, enjoyed. The earlier exploiters could live without this “freedom” because they operated in economies where commodity production was limited. Even in the southern U.S. plantations in the 19th century, a significant portion of the products produced was consumed on the plantation rather than sold as commodities on the market. For these reasons, the capitalists as a whole do not desire to return to chattel slavery as their main form of exploitation.

Why capitalism needs unemployment

If everybody who wants a job can get a job that pays a living wage, the position of workers on the labor market would be transformed. Workers would feel free to quit and look around for employers offering higher wages or better working conditions. Since they would know they could get a job at a living wage if they needed more money for some emergency, workers could take their time looking for work and wouldn’t have to take the first or even second or third job offered to them.

Under circumstances of genuine full employment, the capitalists themselves enter into competition with one another to find scarce workers. When competition among capitalists for workers heats up, their main weapon is to offer higher pay. During cyclical booms, demand for skilled workers begins to exceed supply at current prices – wages or salaries.[link to post of why this true]. The bosses hate this situation and at the slightest sign of it complain about labor shortages. We see this in every boom. The capitalist media explains that the real problem in the economy is not unemployment but “a shortage of labor.”

If a capitalist boom lasts long enough, spot shortages of certain types of skilled labor develop into a general shortage of skilled labor. If the boom continues, a general shortage of unskilled workers can also occur. The competition between workers for jobs then disappears and gives way to a furious competition among the bosses not for certain types of skilled labor power such as we see at present but for labor power in general. Wages for labor power skyrockets as the competition among capitalists – and capitalist nations – for workers intensifies. The rate of surplus value then collapses, making profitable production – that is, capitalist production – impossible.

This is the absolute overproduction of capital Marx wrote about for illustrative purposes in “Capital,” Volume III. The disappearance of conditions that make the production of surplus value possible brings about the disappearance of profits and a return to unemployment just as surely as a general overproduction of commodities that impairs the realization of surplus value does in the course of a “normal” industrial cycle.

War economy

The only situation where a general shortage of labor – not just skilled labor – is approximated under capitalism once it has been firmly established is a full-scale war economy. When industries are mobilized for war production, many factories that normally produce means of subsistence, luxury goods, or means of production are converted into producing means of destruction. In addition, much of the young population is provided “jobs” in the military, withdrawing them from the capitalist labor market. Therefore, a war economy, though it stimulates production in the short run, represses expanded reproduction. Capitalism, however, can only exist in the form of expanded reproduction. Therefore, a war economy represents a partial suppression of the capitalist economy.

In order to maintain a positive rate of surplus value during wartime, the capitalist state intervenes directly in the labor market by imposing strict wage controls. To suppress competition among individual capitalists for scarce labor power, the state also imposes restrictions on the ability of workers to voluntarily quit their jobs and seek employment elsewhere at higher pay. A war economy, therefore, introduces an element of chattel slavery into the economy. This along with the suppression of capitalist expanded reproduction shows that crucial aspects of capitalism are temporarily suppressed in a full-scale war economy.

During a war economy, an hysterical atmosphere of patriotism and hatred of the “enemy,” accompanied by extreme racism, is fostered by the government and media, which now work hand in hand. In the U.S., during World War II wartime racism was directed primarily against Japanese and Japanese-Americans – including women and children – who were sent to concentration camps. The war propagandists claimed that enemy agents were everywhere and workers had to be careful what they said to one another lest they reveal critical secrets to the omnipresent enemy. Any worker who resisted the wage freezes and restrictions on the ability to change jobs was pictured as an agent of the reviled enemy.

The most extreme forms of war economy were seen in Nazi Germany during World War II. The oppressed peoples of Europe – which included most famously the European Jews, who were slated for physical extermination; the Roma people, who were also scheduled for physical extermination; along with the Slavic peoples (Russians, Poles, Ukrainians, and Czechs), who were to be reduced to what the Nazis themselves called “slavery” – were driven into concentration camps and forced to work for big German for-profit corporations.

In the case of the Jews and Roma people, prison slave labor was used as a method of physical extermination. The “wages” of these workers were deliberately set below physical subsistence so they died within a few months. People who belonged to these “races” who were judged unable to produce surplus value for the German capitalists – old people, children, sick people – were killed immediately in gas chambers.

Slavic workers were “paid” slightly more and were expected to last a little longer, since the aim of Nazi Germany was to reduce the Slavic peoples of Europe to the level of Africans, Indians and Chinese workers. After the hoped-for German victory, they could then produce huge super-profits on a long-term basis for German capitalists.

The monstrous system that aimed at physically destroying the Jewish and Roma slave workers can never become a permanent form of exploitation – not even in the sense that African slavery in the U.S South was – because a system that aims to destroy its own workforce must end as soon as it has completed its mission.

We also should not forget that a war economy, though it temporarily eliminates unemployment, also tends to sharply raise market prices in terms of gold relative to prices of production, also defined in terms of gold. If market prices measured in terms of gold are high relative to prices of production when a war breaks out – which was the case with World War I but not with World War II – a particularly nasty crisis is likely to follow the first industrial cycle that occurs after the war. This is exactly what happened in 1929-33.

MMT’s highly progressive demand that the government provide jobs for all who desire them at living wages but without wartime restrictions on the ability of workers to quit is very much in the interests of the working class. Indeed, it is so much in the interests of the working class that its realization would make the continued production of surplus value and thus capitalism itself impossible. It is much like a proposal to reform chattel slavery by taking the whip away from the “cracker” while retaining all the other elements of slavery including the legally sanctioned private ownership of human beings.

Therefore, we can be sure that no part of the capitalist Democratic Party leadership will sincerely support the MMT demand that the federal government act as employer of last resort. A capitalist government might make such a promise if it sees doing so as the only way to stave off an imminent socialist revolution. But we can be sure that such a government will soon renege on this promise.

At most, under favorable conditions, the government might hire some of the unemployed as happened with the Work Projects Administration during FDR’s New Deal. The Obama administration failed to institute a WPA-type program during the Great Recession and restricted itself to contracting with private companies for a totally inadequate public works program.

Capitalist governments might offer employment to the unemployed but under terrible conditions and extremely low wages. This was the essence of the British “workhouses” during the 19th century. The idea was to keep unemployed workers barely alive but under conditions so horrible that they would take private-sector jobs under almost any conditions and at extremely low pay. This is clearly not what supporters of MMT have in mind when they demand that the central government act as employer of last resort.

Realistically, no government formed by any faction of the U.S. Democratic Party, whatever individual Democratic politicians may say, will make the U.S. federal government the employer of last resort that MMT supporters demand. We can go further. No government, not even one formed by a labor-based party will be able to fully implement a program where the central government acts as employer of last resort through providing meaningful jobs at decent pay unless it is prepared to go much further and use repressive measures to break the inevitable resistance of the capitalist class. In order to win MMT’s demand that the central government act as employer of last resort, the working class must establish what Marxists call the dictatorship of the proletariat.

In the event that such a government is established, the demand that the central government act as employer of last resort will become part of a broader series of measures – such as nationalization of all large-scale industries and the merger of the banks into a single public bank, not simply a public bank that exists alongside the current banking system. It will mean the introduction of a planned economy that will initiate a process of socialist construction. Therefore, what supporters of MMT believe is a reform that can be won within capitalism is actually a transitional demand that can only be won in the course of a successful socialist revolution.

How would capitalists fight attempts to make government employer of last resort?

The capitalists have many weapons to fight a government – and prevent from being elected in the first place – trying to implement policies considerably less radical than a program mandating the central government act as employer of last resort. This includes everything from the use of the mass media, the financing of reactionary “pro-business” political parties opposing progressive policies, and ultimately a military or fascist coup d’etat that overthrows a democratic government through illegal methods, establishing an open dictatorship.

And even if a party inspired by Modern Monetary Theory managed to somehow win a solid majority in the House of Representatives, the U.S. Senate and the presidency and presented a bill that would mandate that the U.S. federal government act as employer of last resort, Justice Brett Kavanaugh and his fellow “justices” on the Supreme Court would declare the bill unconstitutional.

Money, the capitalists’ ultimate weapon

But even if all these obstacles were somehow overcome, the ultimate weapon the capitalists have in fighting a government attempting to act as employer of last resort is their command of the money market. Why is this true? To understand this, we have to understand the relationship between money and the state power in a capitalist society. That means to have a correct theory of state power, we have to have a correct theory of money.

The repressive apparatus of the state is ultimately made up of human beings that command the material instruments of repression – prisons, guns, tanks, and so on. These people expect to be paid in money in exchange for their labor in carrying out their repressive functions. If a popular government attempting to carry out the MMT program of the government acting as employer of last resort were to be established, the agents of repression, the police and soldiers, will be under great pressure from their families and the people in general not to move against the government, even as the bankers and industrialists and their media and political parties are demanding it night and day.

This will be less true of the police, who are accustomed to carrying out repressive acts even under normal conditions through their day-to-day acts of repression. However, the bulk of the weapons of state violence are not in the hands of the police but rather the military – the soldiers. When soldiers under the pressure of the people turn against the police, the police are unable to resist, ditch their uniforms, and attempt to “melt away.” This phenomenon has been observed in virtually every revolutionary uprising.

However, like the police, the soldiers expect to be paid. They cannot be expected to defend a government – at least not for very long – that is unable to pay them in a currency with enough purchasing power to satisfy their basic material needs.

But in a capitalist society – and even the most revolutionary government, such as those headed by Vladimir Lenin or Fidel Castro, when they first come to power are still operating within a capitalist society – the great bulk of the money is concentrated in the hands of the capitalist class. Just as the generals are the commanders of the soldiers, the bankers are the commanders of society’s supply of money. Faced with a government that is attempting to carry out policies that the capitalists consider intolerable, they will – and have on many occasions – withhold money from the government until the government yields, is overthrown, or in the case of the Lenin and Castro governments successfully crush the capitalist resistance.

The recent Greek crisis provides an example. The so-called troika – the European Commission, the European Central Bank, and the International Monetary Fund – demanded that the Syriza government abandon its progressive program and adopt instead a program of capitalist austerity. The Greek government attempted to negotiate with the troika, which controlled money that the Syriza government desperately needed not only to carry out its program but to simply carry out normal operations. However, the troika refused to budge even after Syriza carried out a referendum that showed beyond doubt that the majority of Greeks supported the Syriza policy and rejected austerity.

But why didn’t the Greek Government exercise its power that, according to MMT, central governments have of creating money through crediting the bank accounts of its employees including the soldiers of the Greek military and its suppliers? If a government can create money by fiat, then a progressive government should be able to carry out its program by creating the money it needs. If enough money can be created, the power of the monopolists over the money supply, the capitalists and their money market “generals,” – the bankers – would be broken. Therefore, if MMT theory is correct, the capitalists do not have the power to deny a sovereign government money. But if the theories of value and money advanced in this blog are correct, the capitalists do have this power.

For example – and this has happened many times – a progressive government will try to create money by “running the printing presses,” but the capitalists will counteract this by dumping the currency and government bonds of such a government at lower and lower rates of exchange against other currencies and the money commodity gold. The rate of exchange of the currency then plunges – both against other currencies and gold bullion – creating galloping inflation and then hyperinflation.

Commodities disappear from the markets, especially if the government attempts to fight inflation by imposing price controls. The workers and their allies find that their wages paid in the collapsing currency buy less and less, and the government’s supporters, including soldiers who originally supported the government, become demoralized and discouraged. Eventually, the desperate soldiers give up on the government whose policies appear to be destroying rather than increasing their standard of living and follow the commands of the officer corp to “march on the presidential palace.”

In the Greek case, things didn’t reach this point. The Greek government realized that if it re-launched the drachma under the prevailing circumstances, the Greek capitalists would dump it for euros and dollars, initiating a process of runaway inflation. Unwilling or unable to suppress the resistance of the capitalists – establish a dictatorship of the proletariat – the Syriza government decided to surrender to the demands of the troika. As a result of its surrender, Syriza up to now has been able to cling to office and avoid the imposition of a right-wing dictatorship.

But what about cases where popular governments of countries with their own currencies have attempted to carry out reforms that the capitalists consider unacceptable? Indeed, we have seen such a process in every capitalist country where governments have attempted radical reforms – usually falling far short of attempting to make the central government employer of last resort. In all these cases, the currency has come under attack, leading to inflation and shortages, and then depression and mass unemployment when the government and its central bank attempt to stabilize the currency. The end result is the victory of extreme reaction. The events now unfolding in Brazil provide only the latest example.

However, there is another possible outcome. One example is provided by the government of Fidel Castro. Castro came to power in 1959 not through an election but as a result of a war waged by few thousand guerrilla fighters who overthrew the brutal dictatorship of Fulgencio Batista. Castro’s guerrillas were able to overthrow the Batista regime not because they were militarily superior but because the soldiers that made up Batista’s army were simply not willing to fight to keep a hated dictator in power. Faced with combat with Castro’s armed guerrilla fighters, militarily far inferior to them, they chose to “melt away.”

Over the next several years, Fidel Castro organized the Cuban working class and their allies into armed militias and organized a new revolutionary army without the old officer corps. The Cuban revolutionary armed forces had no trouble defeating the U.S. organized Playa Girón invasion of Cuban counterrevolutionaries in 1961.

The Castro government suppressed the privately owned media and all capitalist parties. As a result, the capitalists and their allies among the upper-middle-class lost their freedom to organize and agitate legally against the revolution. From the point of view of the capitalists and their upper-middle-class “democratic” allies, the new revolutionary dictatorship was far worse than the Batista dictatorship. Their democratic revolution against the Batista dictatorship had been betrayed!

From the point of view of the capitalist class, which had simply wanted to end corruption and establish a democratic capitalist government, Castro had indeed “betrayed” them. The Cuban democratic capitalists had wanted a greater share of the surplus value squeezed out of the Cuban workers and peasants without having to hand over so much of it to U.S. corporations, mobsters, and Batista personally and his cronies. But the dictatorship headed by Fidel Castro ended the ability of the capitalists to squeeze surplus value out of the Cuban workers altogether!

The breaking of the resistance of the exploiters’ resistance by the Cuban people headed by the armed and organized workers – the dictatorship of the proletariat – in turn made possible Cuba’s stunning achievements in education, health care and science that impress visitors to this day, despite the retreats forced by the destruction of the Soviet Union and its European socialist allies on top of the U.S. economic blockade.

Why the restrictions on freedom in Cuba?

But these visitors and many other progressive supporters of the revolution frequently ask, why did Castro and his comrades impose a dictatorship that shut down the “free privately owned media,” banned political parties other than the ruling Communist Party, and drive the opposition underground? Wouldn’t it have been better to achieve the gains within the framework of democratic freedoms? True, there are many examples of workers’ democracy in Cuba, so in reality, there is far more democracy for the great majority than there is in any capitalist country. But the repression of many democratic freedoms enjoyed by members of the capitalist class and middle classes are also part of the picture.

This is actually a very good question. In reality, there have been many attempts to win Cuban-like reforms in education, health care, and government support of scientific research without the repression of the freedoms enjoyed by the capitalist class and its allies. Why have these attempts always failed?

The government of martyred Chilean President Salvador Allende attempted to do just that. Allende (1908-1973) was a democratic socialist who enjoyed the support of the Chilean Communist Party as well as the Chilean Socialist Party. Allende and his associates wanted to realize the gains the Cuban Revolution had achieved for the people of Cuba but within the existing constitutional framework, thus avoiding the restrictions on democratic freedoms that occurred in Cuba. The Chilean capitalists and their ultimate master, U.S. imperialism, having proved unable to prevent the election of Allende as president of Chile decided to employ the weapons of the money market against the popular Allende government. In the words of then U.S. President Richard Nixon, the Chilean economy was made to “scream.”

As the Chilean currency was dumped – a process called flight of capital but is more precisely the flight of money capital – inflation and shortages caused living standards to decline. Allende’s initial popularity among the Chilean people began to fade when his government proved unable to deal with the crisis caused by capitalist resistance to Allende’s popular programs.

Finally, the Chilean military, led by General Augusto Pinochet with the support of the U.S. government, staged his Sept. 11, 1973, coup – the Chilean 9/11 – and imposed his brutal military dictatorship, which killed thousands of Chileans. A neo-liberal economic program of austerity designed by Milton Friedman and his “Chicago boys” was imposed. In the end, Chile did not avoid dictatorship, but instead of a dictatorship of the working class Chile ended up with the dictatorship of Pinochet, which represented the interests of U.S. imperialism and its local capitalist allies.

The ability of left governments to carry out reforms in the interests of the majority depends in part on the strength of the particular country in the world market. But as we saw above, the capitalist class of even the richest, most powerful country cannot tolerate a government for very long that attempts to make the central government employer of last resort. If such a government assumes office and refuses to retreat from its program, there will be only two possible outcomes. Either the capitalist class overthrows the government, or the government at the head of the working class crushes the resistance of the capitalist class through a dictatorship of the proletariat.

Suppose in the coming years a progressive Congress and president committed to the policies of the supporters of Modern Monetary Theory are elected in the U.S. This won’t be easy under the U.S. political system. The U.S. capitalist class has many methods of preventing such an outcome. These include its monopoly of the media and the Republican and Democratic parties, voter suppression, dishonest counting of votes, and so forth. Nor should we ignore the Supreme Court on which Justice Brett Kavanaugh now sits.

But assume in the coming years that due to an extreme crisis of mass unemployment, all these obstacles are overcome and a progressive president and Congress is elected. The Congress passes a law that declares the federal government employer of last resort and the progressive president signs it into law.

What then is to prevent such a government from surrendering the way the Syriza government of Greece did when the capitalist class denies it the money to hire the unemployed at a living wage or even to carry out the normal business of government?

The supporters of MMT point to the dollar system. They correctly point out that the Greek government did not have its own currency. It perhaps could have relaunched the drachma. However, according to MMT theory, they would only have been able to purchase commodities produced in Greece. Faced with this reality, the Greek government retreated. In Chile, the government of Allende pushed ahead – and unlike Greece – it did have its own currency.

But here, too, MMT will concede that the Allende government ran into the productive limits of the Chilean economy. Chile was ultimately dependent on imports of finished commodities in exchange for its raw materials such as copper. As the Chilean peso plunged, Chile lost its ability to import needed commodities resulting in runaway inflation and shortages of existing goods – creating the political conditions for Pinochet’s coup.

The dollar as world money

But, MMT supporters might say, a progressive MMT-inspired government in the U.S. will not face these difficulties. The U.S. is in a fundamentally different position than either Greece or Chile because the dollar is accepted virtually everywhere. Therefore, MMT’ers believe that once a progressive Congress and administration is established in the U.S. by a democratic vote of the majority of the U.S. people, and the Supreme Court is at least neutralized (8), the capitalist class will be unable to deny the progressive government money. In contrast to Marxist theory, they believe it is not industrial capitalists who create money through the production of money material but rather the central government that creates it through crediting the bank accounts of its employees and workers.

Therefore, as issuer of the U.S. dollar, which functions as the world currency, and with all debts of the U.S. federal government payable in terms of currency that it creates itself, that government can issue dollars right up to full employment, not only within the U.S. but throughout the entire world economy. Even if the future U.S. progressive government overshoots a bit, the creation of “too many dollars” will not risk a federal government bankruptcy or some other type of financial crisis but only “a little inflation.”

We can assume that the hypothetical future U.S. progressive government will eliminate the “independence” of the Federal Reserve System and pass legislation placing the central bank directly under the control of the progressive president. If MMT is correct, the capitalist class will then be deprived of its ability to use the power of money against our future progressive Congress and president. Any attempt by the capitalist class to combat the program of the future progressive government by withholding money will be easily met by the government creating as much additional money as it needs to replace the money withheld and put across its progressive program.

This will indeed be the case if the MMT theory of value and money is correct, but wrong if this blog’s theory – and Marx’s insistence that money is ultimately a commodity – is correct. If this blog and Marx are correct, our future progressive government will either have to retreat before the demands of the capitalists like the Syriza government of Greece did, push ahead as Allende did and then be overthrown when the capitalists dump the U.S. dollar causing runaway inflation and shortages, or the progressive government will have to organize and lead the workers in a final showdown with the capitalists in the spirit of Lenin or Castro. But this will mean a full-scale battle leading to a socialist revolution, even if the government came to power initially on a much more modest program, such as having the central government act as employer of last resort.

But can the capitalist as a class – not an evil individual – actually deny money to the U.S. government, forcing it to change its policies in the interest of the ruling capitalist class. Maybe in Greece, Chile, and many other countries with limited productive capacity but surely not the U.S., where the government issues the almighty dollar, meaning not only what the U.S. has the ability to produce but the productive ability of the entire world. In reality, something like the above has already happened in the U.S. – in the 1970s. While MMT’ers like to refer to the Depression of the 1930s and the much more recent crisis of 2008, they are silent about the 1970s. But like it or not, the 1970s did happen.

Of course, no government has ever existed in the U.S. that attempted to implement a program where the U.S. federal government offered meaningful work at living wages to any unemployed person who needed or desired such employment. The closest was the WPA under Roosevelt in the 1930s, which still left millions who desired work jobless.

However, at the end of the 1960s, the Democrats and Republicans attempted to limit the rise in unemployment that the collapse of the Bretton Woods international monetary system threatened. During the “boom years” from 1945 to 1968, the U.S. federal government intervened to stop recessions quickly by using the well-known Keynesian techniques of federal deficit spending backed by an expansionary monetary policy by the Federal Reserve System.

The political equilibrium of the 1950s and 1960s, which included by today’s standards very strong but politically conservative unions, depended on such policies. The Democrats and Republicans alike feared that if they abandoned it, they would face a radicalization of the still powerful trade union movement, much as happened in the 1930s. But there was a problem. Remember, in those years the planned socialist economies of the Soviet Union and Eastern Europe with their full employment still existed.

There had been plenty of gold in both Fort Knox and the world to support the Bretton Woods international dollar-gold exchange monetary system, the foundation of which was the international – not domestic – convertibility of the U.S. dollar into gold at the rate of an ounce of gold for every $35 presented to the U.S. Treasury by a foreign treasury or central bank. However, a combination of the decline of the U.S. trade surplus as Western Europe and especially Japan emerged as major economic competitors, combined with the decline of the profitability the capitalist gold mining and refining industries, meant they were no longer churning out new gold bullion at a rate sufficient to maintain the Bretton Woods System. By the late 1960s, the capitalist world faced a shortage of monetary gold relative to the production of (non-monetary) commodities. This is our definition – but of course not the definition of the economists – of a general relative overproduction of commodities.

The leaders of the Democratic and Republican parties and the Federal Reserve System figured they had two choices. They could have continued the social and economic policies of the 1950s and 1960s, or they could follow a deflationary policy that would lower nominal – as well as golden prices (prices in terms of gold) – and save the Bretton Woods System. But the price would be a recession – or a series of recessions – far deeper than any since 1945 and a consequent long-term increase in the rate of unemployment.

What as they saw it could not do was save the Bretton Woods System and maintain the economic, political and social policies that had been followed since 1945. To the politicians of the late 1960s, whether liberal Democrat Lyndon Johnson or conservative Republican Richard Nixon and their advisors, the choice was a no-brainer. It would have to be the Bretton Woods gold-dollar exchange standard that had to go. As the conservative Republican Nixon put it, “We are all Keynesian now.” If Modern Monetary Theory was correct, this should have worked even if Johnson, Nixon, and other policymakers were not supporters of what we now call modern monetary policy.

Faced with a run on the U.S. dollar in mid-1971 and rising inflation the run on the dollar was causing, the administration of Richard Nixon decided that instead of encouraging the Federal Reserve System to raise interest rates to halt the run and save the Bretton Woods System, he would impose wage and price controls to solve the inflation problem.

The theories of John Maynard Keynes provided the rationale for Nixon’s policies. Prices, according to Keynes, are determined by prime costs – the costs of circulating capital – and prime costs are in turn largely determined by the level of money wages. If the state steps in and prevents wages from rising, prime costs will stop rising and so will prices. There will then be no need for the monetary authority to raise interest rates to prevent inflation.

However, since controlling wages alone would appear to – and in reality, of course, would – favor the bosses, the Nixon administration also imposed price controls. According to Keynesian theory, this didn’t matter because once the rise in wage-driven “prime costs” was controlled, inflation would taper off. With the inflation problem solved by wage controls, the Federal Reserve Board could continue its policy of monetary expansion that would keep the economy growing and the rate of unemployment relatively low. Nixon’s 1971 policies – ironically called the New Economy Policy, or NEP, the same name given to the retreat towards a market economy initiated by Lenin’s government in Soviet Russia in 1921 – was particularly popular among the liberals and progressives of the time – and ironically the New York Stock Exchange as well, which soared on news of Nixon’s NEP.

Some veteran socialists at the time believed that trade union workers, enraged by cancellations of their scheduled wage increases, would rise up and initiate a new wave of union militancy and working-class radicalization. These socialists based their hopes on their Marxist knowledge that the price controls would not really work or were simply a trick to make the workers accept wage controls. These Marxists were not wrong on these points.

Their mistake was that they assumed U.S. workers had the same level of understanding of the dynamics of capitalism that they did, which was not the case. It seemed perfectly reasonable to U.S. workers that given the choice between a deflationary recessionary policy bringing mass unemployment, on one hand, and planning by the government of the level of both wages and prices, on the other – which indeed would be part of a socialist planned economy – price and wage controls was the preferred course.

Wage and price controls in practice

Under Nixon’s policies, the official rate of inflation declined for a while. But shortages and black markets began to appear as the capitalists refused to sell their commodities at controlled prices expressed in terms of an increasingly depreciated U.S. dollar. While Nixon was making the Chilean economy under Allende “scream,” the U.S. economy if not screaming was itself bawling. And Nixon was no Allende or MMT’er attempting to make the government employer of last resort. He was simply a right-wing Republican determined to avoid a deep recession that would have threatened his reelection in the approaching November 1972 election.

The attempt at price controls was soon abandoned, though the upward momentum of wages – the foundation of the political conservatism of the post-1945 trade union movement that ultimately limited the radicalization of the 1960s – was indeed broken. But the wage-price controls did nothing to stop either the depreciation of the U.S. dollar or the resulting inflation as the Federal Reserve attempted to create money not sufficiently backed by real money – gold bullion. The money that the Fed – and its satellite central banks in other countries – attempted to create melted away through inflation. And as the power of the trade unions declined, it became harder and harder to argue that this was because of “wage-inflation.”

Nixon’s successors, Gerald Ford and Jimmy Carter, hoped that the inflation – and the rise in interest rates that the inflation was driving – would simply go away. At one point, Nixon’s Republican successor Gerald Ford encouraged people to wear buttons with the slogan “Whip Inflation NOW” – or WIN. The move was widely ridiculed and of course, had no effect on the economic situation – except to provide some business for the button manufacturers.

President Carter, out of ideas, at first hoped that the dollar depreciation/inflation problem would simply go away on its own. But in 1979, with the 1980 election approaching, he nominated Paul Volcker to the chairmanship of the Federal Reserve System. Volcker finally got inflation under control the only way under capitalism it could be controlled. He allowed interest rates to soar to record levels at the price of a deep recession, mass unemployment, and the beginning of widespread de-industrialization. The “rust belt” was born.

Politically this was expressed by what is now called neo-liberalism, which first found expression in the reactionary policies of Ronald Reagan, who succeeded Carter as president in January 1981. Since then, all administrations, whether Democratic or Republican, have stayed within the neo-liberal consensus, which a new generation of young progressives is now trying to find a way out of.

Transitional demand

MMT supporters seem to assume that most people would still be employed by private capitalists if the government acted as employer of last resort. The wages paid by the federal government would act as a de facto minimum wage, and most workers would seek higher wages in private industry. But as we see, any serious attempt to implement this, even in a partial way, would immediately run into the fierce resistance of the capitalists, the intensity of which MMT supporters simply don’t comprehend, because they understand neither the real nature of wage labor or the real power and nature of money.

If a government came to power that seriously attempted to implement the employment policies MMT advocates, the result would a financial, social and political crisis that would quickly pose the question of which class rules – the capitalist class or the working class. The resulting crisis could be resolved by the working class taking over and beginning a process of transforming the capitalist economy into socialism. Failing that, the capitalists and their right-wing political agents would blame the MMT government for throwing the economy and society into chaos. This would result in a victory of extreme political reaction, far worse than Reagan or even Trump, perhaps in the form of full-scale fascism.

Still, the demand that the federal government act as employer of last resort is sure to grow as artificial intelligence takes automation beyond anything achieved so far, undercutting the position of workers in the labor market even more as U.S. capitalism and its world empire continue to decline and eventually falls, and cyclical crises of increasing severity continue to make their periodic visitations.

Unlike MMT, we must approach the demand that the federal government act as employer of last resort in a revolutionary, not reformist, spirit. We can say to supporters of MMT that if you seriously organize a movement to implement this demand, we will support you. But we don’t think you can succeed in implementing it within the present economic or political system. You disagree. So let’s conduct the struggle, and we will find out in practice who is right.

We strongly agree with you that the problem of both cyclical and chronic mass unemployment has to be addressed within the framework of dealing with the existential crisis of global warming. There is no lack of work to be done, with both hand and brain. The current situation where hundreds of millions, maybe even billions of people throughout the world, are either entirely unemployed or employed only marginally in part-time or dead-end jobs is intolerable.

But we will warn our MMT allies that once we embark on this path we must be prepared to carry out the boldest, most revolutionary actions to break the resistance of the capitalists that we, armed with Marxist science, unlike MMT supporters, know is coming. The name of these bold and revolutionary measures necessary to successfully implement a program where the federal government acts as employer of last resort is the socialist revolution.

Next month, I will take a look at the current stage of the industrial cycle, the results of the mid-term elections, and the deepening political crisis brought on by Trump’s support of violence against his political opponents and the terrorist attacks against the media and Democratic Party political leaders.


1 Under the U.S. Constitution, the president nominates a person to serve on the Supreme Court and the Senate confirms or rejects the nominee. (back)

2 Kavanaugh has not been legally charged with attempted rape nor can he be because of the statue of limitations. Republicans and other right-wingers have argued that Kavanaugh was entitled to the presumption of innocence that applies in criminal trials where the defendant faces possible jail or prison time. However, the Kavanaugh hearings involved whether or not he would be approved for a lifetime appointment as an associate Justice of the U.S. Supreme Court. Even if his nomination had been rejected, Judge Kavanaugh was in no danger of either jail or prison time or even being fined for an attempted rape he committed as a high school or college student. Nor did he even face removal from his lifetime appointment as a federal judge unless the House of Representative impeached him and two-thirds of the Senate voted to convict him after a Senate trial. (back)

3 These gains now under attack from the Republicans include the end of formal legal Jim Crow in the former rebel states, the right to vote in those states, and the right to run for and win any political office in the land up to and including the presidency. However, this does not mean that the special oppression of African- Americans, whose ancestors came to the United States through the trans-Atlantic slave trade, has been overcome. Nor does it mean that the deeply held racist attitudes of the white population have vanished. This is shown by the continuing success that the Republican Party has enjoyed since the 1960s as the party of the white backlash, the completely disproportionate share of African-Americans in prisons and jails throughout the U.S., and the fact that African-Americans are still the last hired and the first fired. And this is only a partial list. (back)

4 Misogynist attitudes are not limited to white men but are shared by many men of all races and nationalities. However, even misogynistic African-American men generally do not vote for Republican candidates because of their racism, and the same is true of Native American men and if to a somewhat lesser extent of Latino, Asian and Muslim men. While the GOP will probably pick up a few extra votes from Black and brown men, these votes will probably be canceled by an even higher turnout of Black and brown women. (back)

5 Could Trump seize dictatorial power and cancel or at least ignore the result of the 2020 elections if he is defeated? The GOP’s increasing willingness to stretch and even break the law in order to cling to power is certainly pointing in that direction. For example, in the 2000 election, the Republicans used the Supreme Court to nullify the victory of Democrat presidential candidate Al Gore, both in the popular vote and the electoral college, over Republican George W. Bush. If the Florida recount had continued, it has been proven beyond doubt that Bush’s tiny initial victory in the Florida vote would have been overturned.

Acting as a disciplined party fraction, the five Republican Supreme Court Justices ordered that the recount be halted. If the Supreme Court order had been defied on the ground that the U.S. Constitution does not give the court power to halt a state recount, Gore would have become president. This would, at least in theory, have opened the way to the impeachment and removal of all the Republican justices from the Supreme Court, on the grounds that they illegally attempted to reverse the election results.

The ousted Republican justices could then have been replaced by Democratic justices appointed by President Albert Gore. Having lost control of the Supreme Court, the Republicans would not have been able to impose the Citizens United decision and gut the Voting Rights Act, both actions heavily favoring the Republicans. In reality, only the authority of the Supreme Court gave legal legitimacy to the presidency of George W. Bush between Jan. 20, 2001, and January 2005, during which among other things he launched illegal invasions of Afghanistan and Iraq.

What can be expected is that Trump and the Republicans will certainly stretch the laws as far as they can get away with to keep themselves in power after the 2020 elections. And experience shows the Democrats will yield as the Republicans stretch and even break the law. Therefore, if the Democrats are to take office in January 2021 they will have to win overwhelmingly. However, for Trump to break entirely with all pretext of constitutional rule – as Louis Bonaparte did in France in 1851 – is another matter entirely.

The U.S. ruling class maintained constitutional rule right through the Civil War. The regularly scheduled elections for Congress and the presidency were held in the states that did not rebel in 1862 and 1864. The pro-rebel Democratic Party made big gains in the 1862 election, and the victory of the Democratic General George B. McClellan over Republican Abraham Lincoln, which could very well have meant the victory of the slave-owning rebels, was a real danger in the election of 1864.

Roger Taney, the chief justice of the Supreme Court, whose infamous Dred Scott ruling effectively extended legal chattel slavery to all states of the Union and nullified all the previous compromises designed to prevent a showdown with the slaveholders, remained in office right down to his death in 1864. Considering this precedent, those who expect that Democrats to impeach and remove Justice Brett Kavanaugh if they win big in 2018 and 2020 should not get their hopes up too high.

The more than 230 years of uninterrupted constitutional rule in the U.S. has created a belief that a political revolution can never again occur in the U.S. Any move by Trump and/or the Republicans to establish open dictatorial rule would shatter the mystique created by 230 years of uninterpreted constitutional rule and open the door for future political revolutions. With much – though not all – of the U.S. ruling class and the state apparatus and media strongly opposed to Trump, as well as the majority of the U.S. people, it is hard to see how Trump and the Republicans would gain sufficient support to overturn 230 years of U.S. uninterrupted constitutional rule and establish an open dictatorship. (back)

6 Marxists knew, or at least should have known, better. The overthrow of the Soviet Union that followed years of retreats by the trade unions and labor-based parties throughout the world was the greatest defeat, as Cuban leader Fidel Castro explained, that the working class has suffered so far in its history. This defeat exceeds the victory of the Nazi’s over the German workers’ movement in 1933.

Unlike the 1930s, there was no counterpart to the success of the Soviet five-year plans that partially offset the demoralizing effects of the historic defeat of the German workers’ movement. The overthrow of the Soviet Union between 1985 and 1991 virtually precluded a progressive era of reform in the U.S. or other imperialist countries during the Clinton years.

However, unlike many of their 1930s counterparts, the progressives of the time failed to realize the importance of the Soviet Union as the world’s most powerful workers’ state as a counter-weight to imperialism and capitalism in general. Late 20th-century progressives and socialists, for the most part, saw the Soviet Union as simply a self-serving bureaucratic dictatorship run by old white men who had crushed the Russian Revolution long ago. This widespread perception not only among U.S. progressives but throughout the world was to play an important role in the Soviet Union’s downfall. (back)

7 The wage represents a definite quantity measured in some unit of weight of gold bullion that represents a definite quantity of abstract human labor measured in some unit of time. Therefore, like all prices, wages have a definite value. (back)

8 One of the ways the Supreme Court could be neutralized is for Congress to increase the number of justices. In this way, reactionary justices – such as Brett Kavanaugh – could be reduced to a minority. Roosevelt actually tried this in the 1930s after the Supreme Court declared much of his original New Deal legislation unconstitutional. Roosevelt was forced to retreat in the face of a capitalist-organized uproar against his attempt “to pack the Court.” In the wake of the Kavanaugh confirmation, some progressives have again raised the idea of increasing the number of justices to neutralize the reactionary justices the Republicans have placed on the Court. (back)