Political and Economic Crises (Pt 3)

On Dec. 20, 2018, it was announced that U.S. “Defense” Secretary James “Maddog” Mattis was resigning. Mattis resigned in protest over President Trump’s decision to withdraw 2,000 U.S. troops fighting in northeast Syria and cut in half the number of U.S. troops fighting in Afghanistan.

It was originally announced that Mattis would stay on until Feb. 28, which would allow time for President Trump to nominate a successor and for the successor to confirmed by the Republican Senate. Within days, however, it was revealed that “Maddog” would at the president’s insistence leave by Jan. 1. Mattis was replaced “on a temporary basis” by Patrick Shanahan, a former Boeing executive. Shanahan’s official title will be “acting” secretary of defense. Unlike Mattis, Shanahan is a civilian who comes from the industrial capitalist side of the military-industrial complex.

Since he assumed office on Jan. 20, 2017, Trump had been surrounded by a ring of generals, the most prominent of which was Mattis. General Mattis was known to be an enthusiastic supporter of the war in Afghanistan as well as all the other colonial wars the U.S. has been fighting around the world, including the war in northeastern Syria. Even more important, he is a strong supporter of NATO, which acts as the military wing of the U.S. world empire.

Trump, in contrast to Mattis and other generals who have surrounded Trump until recently, has expressed skepticism about continuing the wars in Afghanistan and Syria. According to the U.S. government, U.S. troops are in Syria to fight the remnants of ISIS and protect “our allies” the Kurds against NATO member Turkey.

What I call the “Party of Order” (1) is very much in favor continuing these wars. It consists of both Democrats and traditional Republicans. The Party of Order is divided into various factions that differ on some domestic issues. For example, many in the Republican faction believe that Obamacare should be eliminated altogether or at least gutted. These differences do affect the lives of millions of working people living in the U.S., but on the need to uphold the U.S. world empire, which has dominated the world since 1945, the Party of Order is united.

The concept of the Party of Order can be extended to include the factions of the ruling classes in Europe (both Western and Eastern), Asia, and elsewhere that think the post-1945 order has served their interests well and see Trump and the nationalists, including the nationalists in their own countries, as a threat to its continued existence.

All factions of the Party of Order agree that the U.S is the “indispensable nation” whose overwhelming financial and military power has been the only thing preventing a return to the political and military anarchy that characterized the capitalist world between August 1914 and August 1945. They fear that if this anarchy returns under present-day conditions, the result will be either the destruction of modern civilization – which they oppose because it would be bad for profits – or a global socialist revolution – also bad for profits.

Old absolute monarchies and the U.S. world empire

The U.S. role in “the Empire” is similar to the role of a king in the old absolute monarchies of Europe. These monarchies marked the transition in that part of the world from the de-centralized feudal order that emerged from the ruins of the Roman Empire and the triumph of the modern bourgeois nation-state. The European absolute monarchies curbed the direct exercise of state power the individual feudal lords had exercised over their manors in the early days of feudalism. However, the absolute monarchies retained the basic feudal structure of the economy and society.

This compromise between the growing power of the urban bourgeoisie and its need for a unified national market and the feudal lords, who the absolute monarchy represented, worked but only for a while. Eventually, the absolute monarchies were swept away by revolutions that made possible the advance to the next stage of our social and political evolution. This next stage was modern centralized bourgeois nation-states based not on feudal but on capitalist economic and social relations.

Just as the absolute monarchies curbed the exercise of state power by the individual feudal lords over their manors without abolishing feudalism, the U.S. world empire has curbed the exercise of state power by the national capitalists of such states as Germany and Japan, and to varying degrees other capitalist nations as well, without abolishing the bourgeois nation-state.

Today, the compromise represented by the U.S. empire, which has checked the outmoded institution of the nation-state without abolishing it or eliminating the capitalist system on which it is based, is breaking down. It has proven unable to solve such traditional problems of capitalism as chronic unemployment and the mass unemployment associated with the periodic crises of overproduction. Nor has it ended the problem of war, though it has prevented inter-imperialist wars only because of the overwhelming military power of the United States.

Now the U.S. world empire has shown itself to be hopelessly inadequate to lifting billions of people out of poverty or solving the explosive national problem caused by exploitation of the nations of the world by a handful of imperialist countries – quite the contrary – while dealing with the emerging problem of global warming.

There is no alternative. The U.S. world empire must be overthrown and replaced by a world socialist order.

Trump and his ultra-reactionary nationalist counterparts, whose influence is growing across the globe, are not looking forward toward the socialist future but rather backward to the pre-1945 world of fully “sovereign” and often warring bourgeois nation-states. In the days of the absolute monarchy, there were also those who opposed the absolute monarchies, not on the basis of their centralizing tendencies but rather with the aim of returning feudal society to the days where individual feudal lords exercised state power directly over their domains. What was really needed was a social revolution, such as the French Revolution of 1789-94, which uprooted feudalism entirely and replaced it with the modern centralized bourgeois nation-state.

Today, we need another even greater political and social revolution that will sweep away the U.S. world empire and its institutions and replace the outmoded capitalist relations that it is based on with a worldwide socialist order. This cannot be achieved by any faction of the capitalist class, either those of the “internationalist” Party of Order or “nationalists” of the Trump stripe, but only by a global working class that puts itself at the head of all exploited and oppressed peoples. We in the imperialist countries must, therefore, oppose equally Trump-style nationalists and Party of Order globalists.

The U.S. world empire consists of a series of institutions – military, financial, trade, and political. These institutions, whose roles have evolved over the years, include NATO, the United Nations and its Security Council, the World Trade Organization, the International Monetary Fund, the World Bank, and not least the U.S. dollar-centered international monetary system.

At the center of the dollar system is not an international institution at all but a purely national one, the U.S. Federal Reserve System. All U.S. presidents from Harry Truman, who took over after President Roosevelt’s (2) death on April 12, 1945, a few weeks before Germany’s surrender, through Barack Obama have been strong supporters of this interlocking web of political, financial and military institutions.

The specific structure of the U.S. empire emerged because the victorious United States in 1945 realized that it couldn’t rule the entire capitalist world (3) simply through brute force. Though U.S. industry completely dominated the world capitalist market, the U.S. faced the challenge of an emerging socialist bloc led by the USSR and the threat of a global socialist revolution in the wake of the war. The fear of communism by the U.S. ruling class was not simply make-believe but very real.

In order to save the severely damaged world capitalist system from socialist revolution, U.S. leaders were obliged to offer their defeated imperialist rivals – especially Germany – a series of compromises. The U.S. offered Germany and other imperialist countries access to the previously highly protected U.S. home market as well as access to other markets and sources of raw materials controlled by the U.S. These compromises were made possible by the fact that, besides the overwhelming superiority of U.S. industry in terms of labor productivity, the world market, in sharp contrast to the post-World War I period, had entered an expansionary phase in the wake of the Depression and World War II.

In exchange for these very real economic concessions, the U.S. tolerated no serious political, and above all, no military challenges from other imperialist states. Defeated and occupied Germany and Japan had no choice but to accept this “offer,” and soon the U.S.’s “victorious” World War II allies such as Britain and France were forced to fall into line as well. The U.S. has maintained military occupations of Germany and Japan to make sure these countries never again challenge the U.S. either politically in any serious way or above all militarily.

The leaders of the U.S. world empire frequently claim that the U.S. is the one “indispensable nation,” without which the current “world order” simply cannot function. This is not merely chauvinistic boasting – though it certainly is that – but also reflects reality. At least for the foreseeable future, no other imperialist country, certainly not Britain, Germany, France, or Japan, can possibly step into the role of “indispensable nation.”

For almost 75 years, the “absolute monarchy” of the U.S. world empire has dominated the world. Following the 1985-91 capitalist counterrevolution that destroyed the USSR-led socialist camp, its only counterweight, the power of the U.S. world empire has been further extended.

The problem for the U.S. as a capitalist nation-state is that the economic competition it was obliged to allow has gone against it. Trump and some of his advisors such as nationalist ideologue Steve Bannon believe that the price the U.S. is paying to maintain the post-1945 world empire is too high.

However, instead of looking forward to a world socialist order as the only viable successor to the now-declining U.S. world empire, Trump, Bannon and other nationalists are looking backward to the pre-1945 world where independent imperialist nations struggled with each other not only economically but politically and militarily for domination of whole continents and eventually the entire globe. But the latter aim simply takes us back to the same dead end the U.S. world empire itself represents.

According to Trump, “our allies” are not contributing sufficient financial resources to NATO. And anyway, exactly who is NATO defending our “allies” against? It would be better, the businessman president believes, to use some of the funds used to defend “our” now wealthy “allies” in Western Europe for rebuilding the U.S. industrial economy. If our “allies” want to enjoy the continued benefits of a NATO that defends their access to markets, cheap labor power, and raw materials, isn’t it time, Trump asks, that they start paying their fair share?

While the influence of the nationalists now headed by Trump has been growing, the Party of Order still dominates the most powerful Washington institutions. These include the Pentagon, the “intelligence community” headed by the CIA, the mainstream Democratic and Republican politicians, and the bulk of the media. The Party of Order has no intention of fading into the sunset as Trump and his nationalist allies undermine the institutions that have dominated their beloved post-1945 world order. Whenever Trump makes a decision that undermines that order, the Party of Order mobilizes its forces, including the media, to reverse it.

The Party of Order and its various factions remain so powerful that Trump has been unable to form a government – such as it is – without the participation of the Party of Order. Indeed, the current U.S. government headed by Donald Trump can be seen as a highly unstable coalition between Trump and his nationalists, on one side, and the Party of Order, on the other.

The Party of Order, therefore, has worked through its representatives within the Trump administration as well as outside in opposition to Trump. Within the Trump administration, there was no stauncher representative of the Party of Order than the Marine general and until recently “defense” secretary, James “Maddog” Mattis.

Every time Trump expressed skepticism about continuing the Afghan war or about NATO, Mattis talked him out of it. Trump had originally wanted to pull out of Afghanistan, but Mattis convinced him instead to give the Pentagon a free hand, promising Trump if he did that the Pentagon would bring the war to a victorious conclusion within a few months. Whenever Trump expressed skepticism about the value of NATO to the U.S., Mattis explained to him how absolutely vital NATO was.

Mattis is not the only general around Trump who has recently left the White House. He joins General H.R. McMaster, another favorite of the Party of Order, who served as Trump’s former national security advisor. McMaster wanted to launch a “limited” military attack on North Korea – he called it a “bloody nose.” Instead, Trump after denouncing the North Koreans with flamboyant racist rhetoric, much to the disgust of the Party of Order, agreed to a summit meeting with North Korean leader Kim Jong-un. What a comedown for the war lovers!

The organs of the Party of Order have complained that Trump has made too many concessions to the North Koreans and gained nothing in return. McMaster was then pushed out as Trump’s national security advisor and replaced by John Bolton. Bolton as an uber-hawk is very much with the Party of Order, though some factions fear that war-loving Bolton is too much of a hawk.

Just before Mattis was pushed out, John Kelly, the retired Marine Corps general who was Trump’s chief of staff, left. Before Kelly was appointed, he was head of the U.S. Department of Homeland Security, which essentially plays a role similar to the “Ministry of Internal Affairs” or “Home Secretary” in European countries.

Before the George W. Bush administration, the U.S. did not even have a federal police ministry. The U.S. Department of the Interior supervises national parks and federal lands, not the police. It was warmongering George W. Bush – a solid Party of Order man – who created the Department of Homeland Security as part of his “war on terror.”

Today, the leading direct representative of the Party of Order in the Trump administration is the civilian John Bolton, who even the Pentagon generals believe is too hawkish. Bolton apparently talked Trump out of his decision to pull the U.S. troops out of Syria “within weeks.” According to the Jan. 14 New York Times, Bolton instead is advocating even more war in the name of “combating Iranian influence.” Nobody knows in what direction the erratic Trump will move next.

As the battle between the Trumpian nationalists and the Party of Order rages in Washington, we can assume Bolton is now working on reversing Trump’s decision to cut in half U.S. forces fighting in Afghanistan as well. We should remember that not only Trump but President Obama, who unlike Trump can be considered a card-carrying member of the Party of Order, also decided to withdraw all U.S. troops from Afghanistan by the end of 2014. Obama and the faction of the Party of Order that he represented, much like Trump, gave the Pentagon more than a hundred thousand troops and told them to win the war by the end of 2014 and then get out. However, the Pentagon failed to deliver, and the war, now the longest in U.S. history, drags on.

Recently, the war has been going increasingly against the U.S. side. It seems that as the U.S. sinks ever deeper into permanent military conflicts around the world, U.S. presidents under the pressure of the American people to bring to a close the endless wars agree to withdraw U.S. forces by a given date. But when the wars are not “won” by the deadline, they continue with no end in sight.

U.S. government a disorganized mess

As of mid-January when this is being written, the U.S. government is a disorganized mess. The heads of such crucial departments as “Defense,” White House Chief of Staff, and “Justice” all have “acting” in their titles. If this was not enough, the federal government has been in a partial shutdown since late December. Trump is demanding that Congress approve $5.7 billion for his racist border Wall along the Mexican border before he signs a bill that would restore normal government operations.

Under the partial shutdown, many federal workers are facing layoffs or are being forced to work without pay. As a businessman, Trump thinks this is perfectly reasonable. Doesn’t every businessman dream of paying his workers absolutely nothing? Even FBI agents are “working” without pay.

How long, however, will the agents of the U.S. main political police force be willing to work for free? Just before Christmas, the Democrats and Republicans had come to an agreement to avoid the shutdown, but then Trump came under criticism from far-right commentators such as Rush Limbaugh and Ann Coulter. Trump then tore up the agreement. Then, on Jan. 8, Trump in an address carried by all the major capitalist networks made a speech explaining the that a “national security crisis” on the southern border required “the Wall.”

The essence of Trump’s speech was summed up by Trump’s son Donald Jr, who asked, “You know why you can enjoy a day at the zoo?” His answer: “Because walls work.” (Huffington Post, Jan. 8) Though Trump Jr’s remark quickly disappeared from the Internet, this is exactly how the president’s racist base sees things. White America is threatened by an invasion of “brown animals” who may breed with “our women” and destroy the white – also known as Aryan – race by breeding the master race out of existence.

Democracy, Bonapartism and the Federal Reserve System

As the global industrial cycle moves into the “critical stage” of the industrial cycle, a growing conflict has developed between Trump and the Federal Reserve System. Trump has complained that “the Fed,” headed by his own nominee Jerome Powell, has been raising the federal funds rate target too fast. The president is obviously fearful these rate increases point toward an election year recession that could end any chance he has for a second term.

For reasons I have explained in an earlier post, the current dollar-centered international monetary system requires that the Federal Reserve System be independent of the executive branch and indeed all other elected politicians. In fact if not in law, the Federal Reserve System functions, and under the dollar system must function, as the fourth branch of government.

Members of Congress and the president are elected politicians who under the rules of bourgeois democracy must periodically face the voters. It is far easier for incumbent congresspeople and especially incumbent presidents to win re-election if the capitalist industrial cycle is in the prosperity phase (when unemployment is lower than average) than in the recession or depression/stagnation phase (when unemployment is higher than average). U.S. presidents, in particular, take personal credit for the “low” unemployment during cyclical upswings.

As a rule, presidents who run for re-election when the capitalist economy is in recession or a post-recession stagnation phase lose their re-election bids. Therefore, even a “normal” U.S. president and the presidential candidates of the party – whether Democrat or Republican – who hold the White House, put pressure on the Federal Reserve Board to lower, or at least refrain from raising, interest rates before a coming election.

It is a feature of modern Bonapartist governments that the ruling “strong man” assumes control of the local central bank. Then, as soon as local economic conditions deteriorate – perhaps the price of the country’s leading export declines and causes the balance of payments to turn against the country and the exchange rate of the currency to fall – instead of raising interest rates to defend the value of the currency, the strong man orders the central bank to counteract the rise in interest rates by printing more money. The “inflation machine” starts to run and soon a wave of runaway or hyper-inflation sweeps the country. When the inflation becomes intolerable, the strongman falls.

A major tactic of U.S. imperialism against governments of oppressed countries that defy its will – for example, Venezuela and Iran – is to drive down the exchange rate of their currencies. This may be done through trade sanctions or other means. Faced with a falling exchange rate and rising interest rates, the target country’s central bank prints more money to hold down further interest rate increases and prevent a surge of unemployment.

As the rate of exchange falls even further, inflation and interest rates rise even more, and the central bank of the targeted country prints even more money, leading to still higher rates of inflation. This is exactly what is happening in Venezuela and Iran today. We should always oppose sanctions imposed on other countries by the U.S. – or other imperialist governments – for the same reason we oppose military attacks by imperialist countries against other countries, no matter what the pretext.

However, it is one thing for a strongman to ruin the local currency of an oppressed capitalist country but quite another for a U.S. strongman to ruin the currency that functions as the global reserve currency. While U.S. reserves consist mostly of gold, the reserves of other capitalist countries consist largely of U.S. dollars. (4) If the U.S. dollar is to maintain its status as chief reserve currency – especially when it is not convertible into gold at a fixed rate – money capitalists around the world must maintain their confidence in the dollar.

In order to maintain the necessary confidence, the Federal Reserve System must be run by professional bankers. These bankers are not beholden to the “elected representatives of the people” but to the whims of the “collective world money capitalist,” also known as the money market.

Therefore, the victory of U.S. Bonapartism over the Federal Reserve System would herald the collapse of the dollar-centered international monetary system, which forms the foundation of the U.S. world empire. Therefore, if Trump – or any future U.S. president – succeeds in breaking down the barriers that over the years have been erected between the Federal Reserve System and the White House, the role of the U.S. dollar as the world currency and with it the post-1945 “world order” will be toast. For this reason, the Party of Order has to defend the “independence” of the Federal Reserve System and its current chairperson Jerome – just plain “Jay” to his billionaire friends” – Powell, come what may.

Since the New Deal, there has been an increasing centralization of power in the hands of the president of the United States. This has been undermining the famous U.S. system of “checks and balances” for more than 85 years. For example, since 1945 Congress has not declared a single war, though the U.S. Constitution clearly states that it is Congress – not the president – who declares war. In effect, the power to make war has shifted from Congress to the White House. Things are no different in the current trade war that Trump has been waging with China and the U.S.’s “allies”.

Tariffs as a form of tax are, under the U.S. Constitution, imposed by Congress, not the president. However, the president has been given the power to impose tariffs if it involves “national security.” In effect, just as it has done as regards shooting wars, Congress has yielded its constitutional power to declare war in the sphere of trade wars as well.

Using the loophole of “national security,” Trump has usurped the power of Congress to set tariffs. This means that instead of representatives of the sections of the U.S. ruling class deciding collectively what tariffs to impose or remove, a single person sitting in the oval office is making the decisions. These are all examples of the tendency of U.S. bourgeois democracy to evolve in the age of imperialism toward “Bonapartism.”

Trump, the Federal Reserve, and the industrial cycle

As anybody who reads the U.S. media knows, the media have once again been painting the U.S. economy in glowing terms. According to the media, the economists, and the Trump administration, the economy is at “full employment,” with unemployment the lowest in half a century. Consumers are opening their collective wallets, and business confidence is “high.” With “unemployment so low” and consumer spending “so strong,” there is “no recession in sight,” (5) though some sections of the financial media have expressed concerns that Trump’s trade war could trigger a “slowdown.”

President Trump, of course, believes the opposite is the case, as he has used his usurped ability to impose tariffs by decree to grab a larger share of the market for U.S. capitalists. If a slowdown develops, according to Trump, it will only affect Europe and China and not the “great again” U.S.

Trump’s administration has been the most “pro-business” in U.S. history. He has attacked unions, supported a decision by a Texas federal judge declaring the Affordable Care Act – Obamacare – unconstitutional, signed a $1.9 trillion tax cut for the corporations and the rich, slashed regulations, opened up national parks for exploitation by oil and other companies, declared global warming a “hoax,” and withdrawn the U.S. from the Paris Agreement on climate change. During 2017 and beyond, Wall Street celebrated as stocks soared.

But more recent waves of selling have hit Wall Street that the media has blamed on Trump’s trade war policies. The Party of Order-controlled media supports Trump’s “pro-business” actions with the partial exception of his tariff policies. They have joined the Trump administration in claiming that unemployment is at historical lows and the U.S. economy is “incredibly strong.”

Then, on Dec. 19, the Open Market Committee of the Federal Reserve, headed by Powell, announced that it was raising its target for “fed funds” to 2.5 percent. This led to waves of selling on the stock market. To put this in perspective, the stock market even in panic years rarely drops much in December. Reports indicate that as the stock market plunged, Trump was glued to the White House’s banks of TV screens becoming increasingly enraged. He had been boasting that the record prices on Wall Street were proof that he had “made America great again.”

Then reports circulated that Trump was looking into whether or not he could fire “Jay” Powell. If Trump could fire a man like General James “Maddog” Mattis, what is to prevent him from firing Powell, a mere civilian who few outside of high finance have ever heard of? As of early January, Trump was issuing statements that he had no intention of firing Powell – reportedly convinced by his advisors that the president does not have the legal authority to fire a Federal Reserve chairperson.

For now, it would appear that “Jay” Powell’s job is safe. But you never know with Trump. Throughout the two-year history of the Trump administration, it seemed that the job of this or that official was safe, only to have the official leave the White House weeks if not days later. After all, it wasn’t that long ago that Trump was showering praise on “Maddog,” as Trump affectionately liked to call him. What would happen if Trump convinced himself – or was convinced by his nationalist advisors – that as president he does have the authority – or maybe even the duty – to fire “Jay” Powell for “cause.”

Should Powell and his fellow Fed bankers be fired?

The president might reason that Powell is increasing the chances of recession by unnecessarily raising interest rates. This would mean that Powell and his fellow Federal Reserve bankers are threatening to deprive millions of hard-working Americans – and workers around the world, though Trump’s racist base is not so concerned about “the foreigners” – of their jobs. And more importantly from the viewpoint of Trump’s capitalist supporters, of their dividends and rents.

Progressives might ask if “Jay” Powell and the other Federal Reserve bankers are following policies that threaten for no good reason to deprive millions, and around the world tens of millions, of workers and their families of their wages for no fault of their own, why shouldn’t they be fired?

Let’s first take a look from the legal point of view. Can the U.S. president under current laws actually fire the chairperson of the Federal Reserve System, or to be more technical, a member of the Board of Governors of the Federal Reserve System, which of course includes its chairperson. President Trump, for example, can fire a member of his cabinet without giving a reason, though he can only appoint a member of the cabinet through the advice and consent of the Senate. However, once the Senate approves by a majority vote the appointment of a cabinet member, the president can fire that member just like private employers can fire any of their employees.

The president also appoints federal judges, both members of the Supreme Court and lower court judges, with the advice and consent of the Senate. However, the president cannot fire a federal judge because under the doctrine of the separation of powers the federal court system is a separate and equal branch of the U.S. federal government. Federal judges can be impeached by the House of Representatives for high crimes and misdemeanors and removed by a two-thirds’ or more vote in the Senate, but the president cannot fire federal judges. Similarly, the president cannot fire members of Congress, because they are a separate branch of government.

But – and this is a question that sends the minds of lawyers reeling – can the president remove a member of the Board of Governors of the Federal Reserve System? In other words, is the position of a Fed governor comparable to a cabinet secretary, who serves at the pleasure of the president, or is that position comparable to that of a federal judge? The truth is that U.S. law is ambiguous on this point. And one thing markets don’t like is uncertainty.

The Federal Reserve Act says a member of the Board of Governors can be removed “for cause.” But – and here is where the lawyers come in – what constitutes “cause”? For example, a Fed governor who refuses to finance a war lawfully declared by Congress – though there hasn’t been a properly “lawful” war for almost 75 years, and there have been no lack of wars – could presumably be removed by the president. But what about a Fed governor – for example, the chairperson – who the president believes is using his position in the Fed and its Open Market Committee to drive up interest rates to such an extent that it costs the jobs of millions of workers for no valid reason?

Throwing millions of workers out of work would seem to constitute “cause,” though members of the Party of Order will strongly disagree. Didn’t the Nobel Prize-winning conservative Republican economist Milton Friedman “prove” that virtually every recession in U.S. history, including the Great Depression, was caused by harmful if “well-meaning” actions by the Federal Reserve Board?

If we follow Friedman’s logic, President Herbert Hoover should have fired the members of the Federal Reserve Board of his day. If only Hoover had done so, the Great Depression could have been avoided and Adolf Hitler would never have come to power. If preventing another Hitler from coming to power and a consequent world war that could end civilization doesn’t provide enough “cause,” what would?

If Trump, therefore, takes the views of fellow Republican and late Nobel Prize-winning Milton Friedman at all seriously, he should fire not only Powell but all seven members of the Federal Reserve Board. This is all the more so since as wealthy bankers they don’t really need the salaries they draw as Federal Reserve Board governors in order to meet the essential needs of themselves and their families.

These questions do not only involve Trump. Trump is an anti-labor, racist, right-wing Republican, that progressive humanity hopes will leave the White House in shame and disgrace. But what would happen if in the future a “progressive” president surrounded by advisors who believe in Modern Monetary Theory is elected? Assume he or she proposes a green New Deal financed by large federal government deficits. Let’s assume that inflation is low when the new president assumes office. The large federal government deficits are not a problem, the new president’s economic advisors, supporters of Modern Monetary Theory, insist.

The U.S. federal government can never go bankrupt, MMT claims, and the deficits are needed to further reduce unemployment. Through a green New Deal, the progressive administration argues, global warming will be tackled while the deficits will help ensure that everybody who wants a job will get a job. Suppose, however, such a president is facing a Federal Reserve Board of Governors made up of right-wing Republican bankers or corporate Democrats of the Party of Order who are determined to raise interest rates to such an extent that a massive recession occurs, causing the whole green New Deal program to fail.

The United States has never had a “left” government, the closest being FDR and the original New Deal of the 1930s. But other capitalist countries have had left governments. It is therefore not too early to anticipate the problems that U.S. Marxists will face when such a government comes into office, even if there is no immediate prospect of this happening. History suggests that such a “left” (but still capitalist) government will come into power before a real workers’ government takes power.

The real reasons the Fed has been raising interest rates

To return to the present, the Federal Reserve System has for the last three years been carrying out a policy of “monetary normalization.” Under normal conditions, the Fed carries out its monetary policy by manipulating the federal funds rate, the rate of interest commercial banks charge one another for overnight loans. This had been, with the exception of the Volcker shock years, the Federal Reserve policy between 1945 and September 2008.

Then, starting with the panic in September 2008, the Fed carried out a policy it called “quantitative easing.” Leaving aside the technicalities, quantitative easing amounted to “running the printing press” in order to thaw out the frozen worldwide credit system. Quantitative easing came in a series of waves and definitely ended in October 2015. Since then, we have been in a period of “monetary normalization,” which is supposed to be a transition period between quantitative easing and a return to the Fed’s normal policy of carrying out monetary policy through manipulation of the federal funds rate.

During quantitative easing, the Fed said to U.S. commercial banks, in effect, “please bring us your ‘toxic assets’ such as mortgage-backed securities as well any long-term government bonds.” We will transform them for you into crisp newly printed dollar bills. Well, not quite literally, because the Fed paid for the assets it acquired with promises to pay on demand of the holder in crisp newly printed dollar bills – central bank money – but the effect was the same.

The quantity of what economists call “the monetary base,” or “high-powered money,” and what the lay public calls simply “money,” exploded. For a while, the global U.S. dollar-denominated monetary base grew at triple-digit rates.

Under normal circumstances, such a growth rate would have driven annual rates of inflation into the four digits. And some, mostly right-wing economists who champion the “quantity theory of money,” predicted that is what would happen. The reason these economists were wrong is that they considered money’s role only as a means of circulation but ignored its role as a means of payment – especially as a means of payment during crises.

The greater the intensity of the crisis, the more money’s role as a means of payment rises relative to its role as a means of circulation. And the crisis of 2008 was extreme indeed. As capitalists around the world scrambled to call in dollar-denominated loans and built up dollar-denominated cash reserves, what economists call the velocity of circulation, a measure of how fast on average a given piece of money changes hands, sharply declined.

In addition, the ratio between bank money – defined as deposits payable on demand in legal-tender cash but only partially backed by actual cash that can be transferred from one person to another in order to makes purchases or payments – and high-powered money also dropped sharply as commercial banks, businesses and individuals alike moved to pay down their debts and rebuild their cash balances.

As a result, there was virtually no inflation as the monetary base exploded but there was on the other side only a slight decline in the cost of living. Before World War II, a much milder crisis would have brought about a significant decline in the cost of living. Before 2008, though the Fed has had the authority since 1932 to purchase long-term U.S. Treasuries, it has generally avoided doing so since 1945. The purchasing of long-term government bonds by central banks, outside of periods of war or exceptional crises such as 2008 (6), is considered bad policy because it can easily degenerate into a situation where the government finances deficits by having the central bank exchange its newly issued bonds for newly printed money.

When this happens, the supply of paper money expands at such a rate that runaway inflation quickly develops. As part of its policy of normalization, the Federal Reserve System has now halted its purchases of long-term government bonds and mortgage-backed securities. Instead, the Fed is allowing its portfolio of securities to drop at a rate of $50 billion a month as the oldest securities reach their expiration dates without being replaced. In this way, a portion of the high-powered money created during and in the aftermath of the crisis is being destroyed.

This policy has been dubbed by some “quantitative tightening.” The aim is to return to a “normal” monetary policy where the Federal Reserve will neither buy nor sell long-term government bonds and mortgage-backed securities but will confine itself to manipulating the federal funds rate by buying and selling short-term Treasury notes only.

Sound central banking policy

Under the current dollar-centered international monetary system, the Federal Reserve can avoid long-term inflation-breeding devaluations of the U.S. dollar – measured by the open-market dollar price of gold bullion (the money commodity) – by restricting over the long run, not the short run, the rate at which it creates additional high-powered money to the rate that gold mining and refining industries are increasing the quantity of gold bullion in the world.

How fast these industries increase the quantity of gold bullion is ultimately a function of the relative profitability of the gold mining and refining industries relative to the profitability of all other capitalist industries, which lies completely beyond the Fed’s control.

This relative profitability, in turn, fluctuates with the rise and fall of golden market prices around the golden prices of production – prices in terms of some unit of weight of gold bullion. When golden market prices on a world scale rise above golden prices of production, the rate at which new gold bullion is produced by the gold mining and refining industries declines. Conversely, when golden market prices fall below golden prices of production, the rate at which new gold bullion is produced and refined rises.

This is the mechanism through which the law of value keeps golden market prices of commodities in line with golden prices of production in the long run. Golden prices of production are in turn modified golden direct prices that directly express the labor value of commodities.

In order to keep the dollar price of gold fixed, like it was under the various forms of the gold standard and gold exchange standards, the central banking system – which under current U.S. laws is comprised of both the Federal Reserve System and the U.S. Treasury – must in addition maintain a stabilization fund of gold. Under the Bretton Woods system, whenever the market dollar price of gold rose above the official price, the U.S. Treasury had to run down its stabilization fund by selling some of its gold. However, whenever the open market price of gold fell below the official dollar price, the U.S. Treasury had to buy gold, expanding the stabilization fund.

If the Bretton Woods system, which formalized the gold-dollar exchange standard, were still in effect today, the gold stored in the vaults of the U.S. Treasury would rise over time as long as the Federal Reserve System kept the rate at which it allowed the dollar-denominated monetary base to grow at the same rate as the rate of growth of the world’s supply of gold bullion but not any higher. Under such a sound monetary policy, during periods of recession and crisis, the Fed would accelerate the rate of growth of the monetary base beyond the rate of growth of gold bullion in the world but would have to offset this by a slower rate of growth of the monetary base between crises and recessions.

The Fed wouldn’t actually have to know how fast the quantity of gold bullion was growing in the world to follow a correct – for capitalism – policy. It would know it was following the correct policy by the long-term growth of the gold reserves in the vaults of the U.S. Treasury. But during the Bretton Woods era, owing to the increased government spending required by the Vietnam War combined with Lyndon Johnson’s “Great Society” programs, the Fed allowed the rate of growth of the monetary base to exceed the rate of growth of the world supply of gold bullion by a sizable margin. The inevitable crisis came in March 1968.

The real question is not why the Bretton Woods system finally collapsed but why it lasted as long as it did. The reason was the huge gold hoard that the U.S. Treasury accumulated during the Depression, which discouraged gold speculators from betting on a rise in the dollar price of gold for many years following WWII. This huge gold hoard was formed because during and after the super-crisis of 1929-33 one of the few profitable branches of capitalist industry was gold mining and refining. Even after the super-crisis proper had ended in 1932-33, golden commodity prices remained well below the golden prices of production during the remainder of the Depression. As a result, the quantity of gold bullion in the world grew rapidly as capital flowed into gold mining and refining.

The U.S. gold stabilization fund also grew as a result of continuing U.S. trade surpluses as well as, after Hitler came to power in 1933, a growing flight of European capital to the United States as a new European war appeared more and more likely.

Therefore, both existing gold and newly produced gold poured into Fort Knox. This inflow of gold constituted the financial pre-condition for the rise of the U.S. empire. Under these conditions, the Federal Reserve System was for many years able to get away with increasing the U.S. dollar-denominated monetary base at a rate slightly faster than the gold-mining and refining industries were increasing the quantity of gold in the world, but not forever.

The straw that finally broke the camel’s back was the Vietnam War. The combination of the cyclical 1960s boom, the Vietnam War, and the reckless Kennedy-Johnson tax cut of 1964, along with Johnson’s Great Society expenditures, created a situation where the demand for commodities exceeded the supply at current prices. The result was a “golden inflation,” where prices in terms of gold rose, causing gold to lose purchasing power.

As commodity prices rose, the dollar costs of the gold-mining and refinery industries increased while the selling price of gold remained legally frozen at $35 an ounce. Gold production first stagnated and then slumped. This caused a significant decline in the rate of increase of the supply of gold bullion, causing wealthy speculators to bet on a rise in the dollar price of gold in the near future. The demand for gold soared, spelling the end of the Bretton Woods gold-dollar exchange monetary system.

Golden inflations versus devaluation-driven inflations

There are essentially two types of inflation. One I call “golden inflation,” where a general rise in commodity prices occurs in terms of the use value of the money commodity, whether gold or in earlier times silver as well. The other type of inflation occurs when the amount of gold (or silver) that the currency unit represents is reduced.

These two types of inflation should be carefully distinguished, though they can be combined if the value of gold or silver falls against other commodities while the amount of precious metal that the currency unit represents is also reduced. I will call inflation caused by the devaluation of the currency unit “devaluation-driven inflation.”

Throughout history, a general rise of commodity prices measured in currency in excess of a rise in commodity prices measured in terms of the money commodity has been preceded by a reduction in the quantity of money that a given unit of currency represents. In ancient times, rulers would find themselves short of gold and silver bullion in their treasuries. They would slightly reduce the amount of precious metal in the coinage by replacing the precious metal with base metals, hoping that nobody would notice. Hence the term “debasement of the currency.”

For example, if the Roman emperor was informed that the supply of silver in the Roman treasury was running low, he would produce the same quantity of denarii by using less silver and more base metal to mint an individual denarius coin. A denarius is a denarius, the emperor would claim and who cares exactly how much silver it contains. This clever trick never worked. The market did notice, the denarius price of silver bullion rose, and soon the price of all commodities in terms of the denarius rose, bringing about devaluation-driven inflation.

As a result, the emperor would discover that he had to pay more in nominal denarius terms and once this was taken into account he was right back where he started. He would try again and reduce the silver content of the denarius even more. The result was higher prices of commodities in denarii and the operation would be repeated leading to still more devaluation-driven inflation.

In Rome – and other ancient empires – flourishing epochs saw plenty of gold and silver pouring into the empire and the emperor’s treasury. The emperor would maintain the value of the coinage, and commodity prices would be more or less stable in currency terms over time. This was the case despite inevitable fluctuations of individual commodity prices as supply and demand for the various types of commodities on the market ebbed and flowed. In these flourishing epochs, trade would thrive and things would generally go well in political and military terms as well.

During periods of imperial decline, however, gold and silver would flow out of the empire, and the denarius – or whatever the currency was called – would be progressively debased causing prices in terms of the currency to rise. As devaluation-inflation developed, gold and silver bullion, along with old full-weight coins would be hoarded while internal trade contracted. The empire had now entered into a period of decline that would end sooner or later in its downfall. (7)

The principle is no different today when it comes to government finance. If a modern government prints money to finance its deficits, the currency price of gold – and of any currency not devalued – will rise forcing the government to print still more money, leading to devaluation-driven inflation. Thanks to the invention of the printing press, paper currency notes can be produced far more quickly than debased denarii could be minted in ancient times.

The rate of interest and devaluation-driven inflation

The Federal Reserve System – and its satellite central banks – target a specific interest rate such as the federal funds rate. If the targeted interest rates rise above the targets, the central banks create more currency. If it falls below, they destroy some currency. This works fine as long as the currency retains its exchange value defined as the quantity of the use value of the money commodity – gold bullion – that the currency exchanges for on the open market.

As long as these conditions hold, the central banks appear to be in command of the money market. But if the currency price of gold starts to rise and keeps on rising, the currency prices of commodities other than gold start to rise as well. A devaluation-driven inflation is underway. Suddenly, it takes more currency – for example, U.S. dollars – to carry on business and the demand for loan money capital at the existing rate of interest increases. Interest rates rise, or in the lingo of the market place, the “price of money” rises.

When that happens, if the central bank is to keep the interest rates it targets – for example, the U.S. federal funds rate – it must create more currency once devaluation-driven inflation begins. But this will cause the dollar price of gold to rise even faster as the “collective money capitalist” loses confidence in the currency – accelerating the increase in the prices of commodities. Demand for money loan capital at existing interest rates accelerates even more. Soon it becomes impossible for the central bank – the Fed, for example – to keep the interest rate within the target. The vicious machinery of devaluation-driven inflation has set in with its twin rises of both interest rates and commodity prices.

Once this process is underway, the only way the central bank can escape devaluation-driven inflation is to slow down the rate at which it is creating new currency. When this happens, it causes the rate of interest to suddenly increase. Many capitalist go bankrupt, trade declines, merchant capitalists dump their inventories on the market, and unemployment rises sharply. Many gold speculators betting on rising currency gold prices, which are winning bets as long as devaluation-driven inflation continues, then find themselves facing bankruptcy. In a panic, they dump their gold and the currency regains at least a portion of its value. This process is called a “stabilization recession.” As the currency is stabilized, interest rates fall. But if currency devaluation has gone beyond a certain point by then, a lot of damage has already been done.

Modern Monetary Theory and currency devaluation-driven inflation

MMT rejects this analysis, based on Marx’s theory of value and prices, and believes central banks can set any level of interest rates they want. Essentially, they are making the same mistake as the emperors of old Rome and other ancient empires. If the old emperors believed that a denarius was a denarius, MMT believes that a dollar is a dollar. As a consequence, MMT holds that if the federal funds rate rises above its target, the Federal Reserve System can simply create additional dollars and make the federal funds rate fall once again back to its target. They, therefore, believe that even under the capitalist system whoever controls the central bank can ensure full employment if they really want to. Marx, however, believed that this is impossible and the only way to achieve lasting full employment is to replace capitalism with a socialist system. This is the fundamental difference between Marxist theory and MMT. (8)

It is important to understand that we are dealing here only with the laws of capitalist production. As we have seen in earlier posts, the United States has a long history of movements that attempted to tackle the problems caused by the capitalist system by proposing various reforms in the currency system. These, included: the free coinage of silver at a ratio of 16 to 1; giving the U.S. Treasury the authority to issue greenbacks not redeemable in gold or silver at all; raising the official price of gold from $20.67 to $35 an ounce; ending the obligation of the U.S. Treasury to redeem U.S. dollars at $35 an ounce at the demand of foreign treasuries and central banks; ending the system of fixed exchange rates and replacing it with a system of floating exchange rates – supported by both Milton Friedman and Modern Monetary Theory; and, finally, the proposals of Modern Monetary Theory that I have examined here.

It also gives rise to demands for counter-reforms favored by the far right such as the call to “abolish the Federal Reserve System and restore the gold standard.” All these proposals have one thing in common. While they support different and often contradictory reforms of the currency system, they all maintain that the problems of chronic and periodic mass cyclical unemployment and global warming can be solved within the system of private ownership of the means of production and the system of wage labor.

Next month, I will take a concrete look at the evolution of the policies of the Federal Reserve System from the end of the Volcker shock era to today in terms of hard numbers. We will examine how these numbers impact the now rapidly evolving political and economic situation.


1 I borrow the expression “Party of Order” from Karl Marx’s brilliant analysis of French politics between the revolution of February 1848 and the coup of December 1851 that led to President Louis Bonaparte proclaiming the Second French Empire in 1852 with himself as Emperor Napoleon III. The Party of Order represented the various factions of the French bourgeoisie that led a losing struggle against the dictatorial ambitions of President Bonaparte, the first and only president of the French Second Republic.

This expression seems more apt than the various other names being applied to the wing of the “resistance” to President Donald Trump that represents the interest of those sections of the ruling capitalist class who for various reasons find themselves opposed to Trump and what they view – not without reason – as his dictatorial ambitions.

The term “neo-conservative” – or “neocon” for short – is problematic for various reasons. It was first coined by the U.S. social democrat Michael Harrington (1928-1989) to refer to a layer of New York intellectuals, mostly of Jewish and to some extent Irish extraction, who had been radical socialists in their youth but had become increasingly pro-capitalist and pro-U.S. imperialist as they “made it” after World War II and Cold War anti-communism became almost a state religion. Then, in the wake of Israel’s 1967 war against the Arab people, which the “neocon” intellectuals strongly supported, they dropped whatever “liberal positions” on domestic policy they had maintained up to that point and became increasingly racist toward the African-American community – for example, opposing affirmative action.

These intellectuals, especially those of Jewish extraction, were for awhile suspicious of the so-called paleo-conservatives of the traditional right, who had supported the “America First” movement before World War II with its long history of anti-Semitism. These differences melted away after 1967 when “paleo” and “neocon” conservatives united in their support of the state of Israel and the Zionist movement. The “neo-conservative” intellectuals who had once belonged to socialist organizations and registered as Democrats now re-registered as Republicans.

While the “neo-conservatives” or “neocons” of today are known as extreme hawks, many share none of the other characteristics described by Harrington. For example, Hillary Clinton is an extreme hawk and in that sense a “neo-conservative.” However, neither she or her forebears have ever been leftists, and she is not a “New York intellectual” nor is she of Jewish or Irish ancestry. In addition, she is a Democrat, not a Republican.

She is, however, a strong supporter of Israel, whose government urged her husband to bomb Serbia, which she also supported. As a senator from New York, she voted for George W. Bush’s invasion of Iraq in 2003 and as secretary of state helped convince President Obama to bomb Libya and overthrow the Libyan government – a development that led to among other things the shocking reappearance of open slavery and slave markets in that country.

There are other problems with the term “neo-conservative.” It implies that there is still a “progressive” section of the U.S. capitalist class that opposes the reactionary imperialism of the “neocons.”

Therefore, outside the sense it was used by Harrington to describe the political devolution of a narrow section of the 20th-century U.S. intelligentsia from socialist to pro-capitalist, pro-imperialist positions, the word “neo-conservative or “neocon” has little actual meaning and only helps to obscure the real nature of imperialism in general and U.S. imperialism in particular.

The term “neo-liberal” is also not without its problems. The evolution of modern capitalism to ever greater centralization of capital hardly points to a return to the liberal capitalism of the 19th century based on free competition. The only thing liberal about “neo-liberalism” is that it reflects the drive by capital to take back concessions capital was forced to make to the working class as a result of the class struggles of the 19th and 20th centuries, as well as to oppressed nations after World War II.

In reality, the drive of capital to take back concessions is a constant throughout the entire history of capitalism. Like “neo-conservatism,” the term implies that there is still a progressive section of the capitalist class in the imperialist countries that stands in opposition to “neo-liberalism.”

The terms “establishment” and “elites” again lack any specific meaning.

In contrast, the term “Party of Order” describes that part of the world capitalist class and its representatives in the political and intellectual worlds that uphold the “order” established in 1945 through which U.S. imperialism has dominated the world. The Party of Order is doing all it can to put itself at the head of the anti-Trump “resistance” yet defends the deeply unjust “order” that has among other things led to the deaths of millions of people in Korea, Indochina, Iraq and elsewhere since 1945. The Party of Order strongly supports NATO and the state of Israel (as does Trump) and charges Trump with being a stooge or even an outright agent of Russian President Vladimir Putin, as well as selling out to North Korea. It is also extremely hostile to Trump’s decision – such as it is – to withdraw from Syria, praises the “intelligence community,” and paints the FBI as a sterling guardian of American democracy.

Therefore, just as the “resistance” to Louis Bonaparte’s dictatorial ambitions was wrecked by the leadership of the French Party of Order, the growing opposition to Trump’s racism, his encouragement of fascists, and his misogyny and anti-LGBTQ positions will be wrecked if today’s Party of Order achieves hegemony over the anti-Trump resistance. (back)

2 There is no doubt that if he had lived Franklin Roosevelt would have strongly supported the U.S. empire. When he died on April 12, 1945, the construction of many of its key institutions, such as the United Nations and its Security Council and the World Bank and International Monetary Fund, was well underway and ready to go fully into effect as soon as the military resistance of Berlin and Tokyo was crushed. Other institutions, such as the Federal Reserve System, were already in existence while others, such NATO, already existed in essence in the form of the U.S. and British military forces mopping up what was left of Berlin’s resistance in western Germany and would be formalized as the North Atlantic Treaty Organization in 1949.

The international monetary system based on the gold-dollar exchange standard already in essence existed, though it was taken a step further with the creation of the International Monetary Fund, agreed to at the Bretton Woods Conference in 1944. These institutions of course evolved. For example, the dollar-gold exchange standard has evolved – or more accurately devolved – into today’s paper dollar standard.

NATO, originally centered in Europe, now has a global reach as the U.S. empire’s military arm. If Roosevelt had lived only a few more months, to August 1945, he would have seen his and the mentors of racist U.S. President Woodrow Wilson’s dream of a universal empire realized. All serious studies of Roosevelt, even those written by his admirers, concede that personally, Roosevelt held profoundly racist – including anti-Semitic as well as pro-Zionist – views. FDR never issued a word of criticism against the open – not mere “dog whistling” racism of the Southern Democrats. In reality, more than any other individual, Franklin D. Roosevelt is the real founder of both the U.S. world empire and the Party of Order. (back)

3 Even then, the U.S. was trying to figure out how to absorb what was then the USSR back into the now U.S.-dominated capitalist order. (back)

4 Actually, short-term U.S. Treasury notes that are denominated and payable in U.S. dollars. (back)

5 This is a particularly stupid argument because every recession and crisis in the history of industrial cycles is preceded by a period of relatively low unemployment, strong consumer spending, and high business confidence. As a general rule, the more these conditions exist, the closer is the next recession or crisis. If it were otherwise, there would never have been a recession or crisis in the history of capitalism. (back)

6 By the time the crisis of 2008 arrived, the Bretton Woods system was long gone. (back)

7 These ancient crises should not be confused with modern crises of overproduction even if some of the symptoms may have been similar. The ancient crises often occurred when the demand for luxury goods by the ruling class exceeded the ability of the empire to produce them. For example, the Roman ruling class developed an appetite for commodities produced in what is now Yemen, Iran, India, Ethiopia, Sudan, and so on.

Great as Rome’s military power was, it was beyond the power of the Empire to conquer these countries. To obtain commodities from countries beyond the imperial frontiers, the ruling class had to pay for them in gold and silver. The result was that precious metals flowed out of the Empire faster than they could be produced within the Empire.

Since there was no international credit system in the ancient world, the Roman and other ancient empires could not replenish their depleted monetary reserves through borrowing like is the case today. The quantity of gold and silver in the emperor’s treasury would decline leading to a reduction of the precious metal content of the coinage. The result was a contraction of the internal market, devaluation-driven inflation, and the hoarding of the precious metals.

Modern crises of overproduction, in contrast, arise because the rate of production of non-monetary commodities periodically exceeds the rate of production of new money material – gold bullion. These crises only come about once capitalist production arises and develops to the point that it can be increased very rapidly in a short period of time. This was not possible before the end of the first quarter of the 19th century. Crises of the relative general overproduction of commodities are therefore unique to capitalism. (back)

8 Modern Marxists who insist that, contrary to Marx, “pure fiat money” is possible blur this point, making it appear that Modern Monetary Theory is compatible with Marxist theory. These include Anwar Shaikh, but with him we have to distinguish, as Marx did with Ricardo and the other classical economists, between the real scientific side of Shaikh’s work and the vulgar elements within it. (back)