The Crisis (Pt 7)

An unprecedented crisis

The current economic crisis has many unprecedented features. Most importantly, it was triggered by a pandemic and the resulting business shutdowns and stay-at-home orders. This led to a sharp decline in the sale of commodities. The result has been a collapse of industrial production, world trade, and employment over a period of a few weeks that is unparalleled in the history of capitalism. Because nothing like this had ever happened before, it is extremely difficult to predict what will happen next.

For example, we don’t know the future course of the pandemic as capitalist governments move, even as the pandemic continues, to lift the shutdowns of nonessential businesses and stay-at-home orders. Will these moves to “reopen the economy for business” cause the pandemic to accelerate? Or will the pandemic decline in the Northern Hemisphere, where the largest capitalist economies are located, as summer conditions set in? Many virus-caused diseases decline in the summer months and accelerate in the fall and winter. Will COVID-19 follow a similar pattern?

Even if we assume the pandemic peters out over the (Northern Hemisphere) summer and doesn’t come back this fall/winter, an extremely optimistic and experts say unwarranted assumption, will the U.S. and world economy revive rapidly in a so-called V-shaped recovery? Or will the recovery be slow and torturous, with Depression levels of unemployment lingering on for years? Or will it be something in between?

As I said last week, the evidence is that this is a dual crisis caused partially by the pandemic and the measures necessary to slow it down and partially an overproduction crisis that would have erupted in the near future in the absence of the pandemic or some other “external shock.”

While the crisis is unprecedented, the Federal Reserve’s response to it is not but is similar to its response to the crisis of 2008. This week, I want to review the Federal Reserve’s response to the 2008 crisis and put it into a historical perspective. We can then examine how the U.S. and world economy responded to the Federal Reserve System’s policy throughout the 2007-2020 industrial cycle.

Let’s begin with the “liquidity trap” that marked the recently completed industrial cycle.

Liquidity trap

As we saw last week, no industrial capitalist will consider an investment if it is expected to yield a return less than the rate of interest on long-term government bonds. Therefore, let’s assume the capitalist economy is stagnant and the level of unemployment is higher than the capitalist central government and central bankers consider desirable from the viewpoint of political stability and the realization of the value of commodities. (1) Under those conditions, bourgeois macro-economic theory holds that long-term interest rates should be lowered.

However, as we also saw last week, it is considered undesirable for the central bank — and the Federal Reserve System is the world’s central bank under the U.S. dollar “fiat money” system — to buy and sell long-term government bonds. Therefore, prevailing standard central bank doctrine holds that the Federal Reserve should limit itself to dealing only in short-term government securities.

If unemployment — whether of workers or machines — is too high, macro-economic theory says the Fed should purchase more short-term Treasuries for its own account. This pushes down short-term interest rates such as the federal funds rate — directly by raising the price of these short-term government securities and indirectly by increasing the quantity of monetary reserves in the commercial banking system. The idea is that falling short-term rates will also tend to lower long-term interest rates, even if to a lesser extent. This, all things remaining equal, should increase productive investments by industrial capitalists.

But as interest rates approach zero, the central bank’s ability to lower interest rates further declines and finally halts, since interest rates cannot be pushed much below zero. If the industrial capitalists still fail to respond by increasing industrial investment to the desired amount, the central bank is in that sense “out of ammunition.” Such a situation is called by Keynesian economists a “liquidity trap.” (2)

But under fiat money systems, unlike the various forms of the gold standard, there is no actual limit on the number of dollars the Federal Reserve can create. Even if interest rates can be further lowered little if at all, there is no technical or legal obstacle to the Federal Reserve creating as many dollars as it wants right up to the mathematical limit of infinity. This is where “quantitative easing” comes in.

Liquidity trap and secular stagnation

While recent years, especially the years since the 2008 crisis, have provided classic examples of “liquidity traps,” an earlier such episode occurred during the Great Depression. Then, too, interest rates fell to very low levels — though not quite as low as today. Still, industrial capitalists did not increase investment to anywhere near a level that by any stretch of the imagination could be called “full employment.”

This is where John Maynard Keynes came in. If we define profit as the long-term interest rate as measured by the rate on long-term government bonds plus the profit of enterprise, there is no guarantee the capitalists will make any profit on new investments, let alone clear the hurdle set by the long-term interest rate. If markets are sufficiently glutted with unsold commodities, the industrial capitalists will not be able to make profits. Therefore, no conceivable fall in long-term interest rates will increase investments. This is not because the commodities produced don’t contain surplus value. Rather, the value and surplus value of commodities cannot be fully realized because the markets are simply not there. (3)

Here the bourgeois economists, though not Marx, are puzzled. According to the reigning theory of value in bourgeois economics — both today and in the 1930s — commodities have value not because they are products of human labor but because they are scarce relative to human needs. The overwhelming majority of bourgeois economists hold that human needs for commodity use values are infinite and can never be fully satisfied.

Here we come to the “liquidity trap” and its companion “secular stagnation.” Keynes, unlike most bourgeois economists, rejected the idea that human material needs could never be fully satisfied. In the future and the not very distant future at that — remember Keynes was writing in the 1930s — he expected that they would be. Therefore, he assumed that capitalist production already in the 1930s must have been approaching the levels where the human needs for commodity use values would be fully met. This meant that the rate of profit for industrial capitalists was very low and the difference between the rate of profit and rate of interest, to use Marxist terminology, was lower still.

For this reason, there was, according to Keynes, by the 1920s and 1930s a growing scarcity of profitable fields of investment — that is, investments where the industrial capitalists expected that their return would exceed the long-term rate of interest on government bonds. But for various reasons involving both political and technical factors, Keynes believed that it was not possible for the central bank — in Keynes’s case, the Bank of England — to lower the long-term interest rate to the extremely low level that would have been necessary to raise capitalist industrial investment to the level that would bring about anything approaching “full employment.”

Keynes’s solution was that the central government should borrow large amounts of money and spend it on something that was hopefully useful for society. (4) But the most important thing, according to Keynes, was that it be spent on something. Keynes, however, recognized that there was always the danger that increased government borrowing would raise the rate of interest on long-term government bonds, which would counteract the stimulative effects of increased government spending. Indeed, conservative bourgeois economists opposed to (central) government deficit spending to increase demand pointed to this danger.

Why Keynes ‘hated gold’

However, if this threatened to happen, Keynes assumed that the central bank could always increase the quantity of money sufficiently to counteract a rise in rates if a fiat standard rather than a gold standard prevailed. Even if, Keynes assumed, the central bank could not lower long-term interest rates any further, it could at least prevent those interest rates from rising as government deficit spending increased. If, however, a gold standard prevailed, there was always the danger, and indeed the likelihood, that there would not be enough gold in the Bank of England’s vaults to cover the quantity of additional currency necessary to keep the rate of interest on long-term government bonds from rising in the face of increased government deficit spending.

It follows that in classic Keynesianism, “expansionary” fiscal and monetary policies plus “fiat money” go together. Therefore, Keynes by the 1930s was an enemy of all forms of the gold standard. He saw the gold standard as the primary obstacle to the expansionary policies, both monetary and fiscal, that he wanted the central banks and the capitalist central governments to pursue. To prevent interest rates from rising, Keynes believed the central bank must be free to create enough additional currency to keep the long-term interest rate on government bonds low enough for “full employment” without at the same time having to worry about maintaining the convertibility of the banknotes into gold.

If these policies were followed, Keynes believed that what he called the marginal efficiency of capital — his fancy way of saying the rate of profit that the industrial capitalists expected on their new investments — would rise above the long-term rate of interest. This would then kick off a new wave of investment by the industrial capitalists and “full employment” would return — or perhaps, Keynes believed, would for the first time be truly realized.

However, as Marxists we know that Keynes’s analysis was superficial. Most importantly, Keynes did not distinguish between the overproduction of commodities relative to the human needs that their use values would satisfy — absolute overproduction — and the overproduction of (non-money) commodities relative to the commodity that serves as money — relative overproduction. Indeed, the very conception of a relative overproduction of commodities was alien to Keynes (and other bourgeois economists) since they have no understanding of Marx’s theory of exchange value as the form of value, surplus value, money, and price, and profit as the form of surplus value. And that’s where the problems with Keynesian economics and its offshoots like the present-day Modern Monetary Theory begin.

Quantitative easing

Today, the term quantitative easing is understood by the leaders of the Federal Reserve System (and other central banks) to mean that once the rate of interest has fallen to near zero they are in a “liquidity trap.” Under the conditions of a liquidity trap, they believe they should forget about the rate of interest and simply create more currency until capitalist investment revives enough to bring about the desired level of employment. If capitalist-defined “full employment” still fails to return, the central bankers proclaim that the ball is in Congress’s and the president’s court since only the central government and not the central bank can engage in the level of deficit spending sufficient to break out of the liquidity trap and restore “full employment.”

The central bankers say to the leaders of the national government: We have done our part in creating the necessary money so you can increase your borrowing without increasing interest rates. Now it is up to the central government to borrow some of this money and spend it on something.

The Bernanke Fed and the crisis of 2008

Ben Bernanke, who served as head of the Federal Reserve System just before and during the Great Recession, is a conservative economist — a Republican — who not only rejects Marx but also Keynes’s idea that the absolute human need for commodities is anywhere near being met. Bernanke, therefore, rejected the notion that the U.S. and world capitalist economy faced the problem of a prolonged “liquidity trap” and “secular stagnation.”

After the 2008 crisis, the Bernanke Fed assumed that the recovery that would follow would see a rise in the rate of interest including the rate on long-term government bonds to levels where they could go back to the “normal policy” of manipulating short-term rates to keep employment and economic growth in the desired range. In rejecting the theory of secular stagnation, the Bernanke Fed shared the assumptions of most bourgeois economists that human needs are infinite. Under Bernanke’s leadership, they assumed instead that the 2008 crash was the result of some freak circumstance that was very unlikely to repeat itself for decades to come.

The failure of monetary normalization

With these ideas, the Fed under the leadership of Bernanke and his successor, Jerome Powell, carried out what turned out to be an abortive monetary stabilization in a series of stages. First, it slowed down and finally brought to a halt its policy of purchasing any security other than short-term Treasury notes for its portfolio. In December 2015, the Fed announced the first in a series of increases in its target for the federal funds rate — the overnight loans that commercial banks with surplus cash make to other commercial banks that are short of cash. It also instituted a policy of not renewing its portfolio of long-term government bonds and mortgage-backed securities as the principle fell due and were paid off. This is sometimes referred to in the media as the Fed “shrinking its balance sheet.”

Then the problems began. First, the post-2008 upturn in the industrial cycle was the weakest on record. Indeed, the well-known bourgeois economist Larry Summers proclaimed that the U.S. economy was facing secular stagnation. As a result of the secular stagnation, interest rates were slow to rise. Then, in December 2018, the stock market experienced a rare sharp December self-off. Finally, in September 2019 — before the COVID-19 pandemic began — the so-called repo market (5) was hit by a credit freeze-up, with the rate of interest on these overnight interbank loans rising at one point to 10 percent. This forced the Fed to intervene to stave off a new credit crisis that would, even without COVID-19, have triggered an election-year recession.

To make life even harder for the central bankers, President Donald Trump was denouncing the Fed for pushing up its target for federal funds in the first place and allowing its portfolio of government bonds to run down. The president demanded instead, not only that the Fed slash its fed funds target, but that it should revive its program of quantitative easing. If the Fed did this, Trump believed — or claimed to believe — the economy would take off ensuring his re-election. And if the economy didn’t take off and an election-year recession arrived in 2020 instead, Trump would have his scapegoat at hand — the Federal Reserve System.

Dangers of quantitative easing

Normally, interest rates rise gradually during the upward course of the industrial cycle, with short-term rates rising more rapidly than long-term rates. Since commodity capital — inventories — grow more rapidly than fixed (6) capital, the rise in short-term interest rates reflects the rapid growth in inventories during an industrial upswing. This causes the tendency for short-term interest rates to rise above long-term rates — the “inversion” that develops late in an industrial cycle just before a recession.

When the recession or more serious economic crisis arrives, it is above all an overproduction of commodities — commodity capital. However, an overproduction of commodity capital is not possible without an overproduction of fixed capital. When the recession/crisis hits, interest rates peak and then start to fall. As commodity capital shrinks through the running down of inventories, short-term interest rates fall more rapidly than long-term rates causing the “yield curve” — the relationship between long-term and short-term interest rates to return to normal with long-term rates exceeding short-term rates.

Changes in currency values affect interest rates

However, interest rates can be affected by more than the movements of the industrial cycle. Among the factors are the expectations of money capitalists about the future gold value of the currency — the price of gold measured in terms of a given currency. If the money capitalists believe the currency will increase in gold value, they will sell gold at the existing currency price of gold, which will put downward pressure on the rate of interest. But if the money capitalists believe the gold value of a currency will decline, they will be inclined to buy gold at the existing currency price, putting upward pressure on the currency price of gold.

One of the advantages of the gold standard for a capitalist regime is that as long as it is expected to persist the money capitalists will assume that there will be no change in the value of the currency. In the absence of other factors, this limits changes in the rate of interest to what is dictated by the successive phases of the industrial cycle as it runs its course from recession/crisis to depression/stagnation, average prosperity, boom and back to recession/crisis.

If, however, the currency is expected to increase in gold value, the effect is similar to having a positive rate of interest on the currency. This means that the capitalists will tend to hold on to the currency for longer periods since it is bearing a positive rate of interest in terms of real money — gold bullion. The turnover of productive capital M — C..P…C’ — M’ slows as the industrial capitalists tend to hold on to M longer. Such a situation tends toward economic stagnation, lower rates of profit due to problems the industrial capitalists have in realizing the value and surplus value of their commodities, and dangerously high levels of unemployment.

When the value of the currency is expected to drop, this means the currency has a negative rate of interest in terms of real money — gold. This encourages the industrial capitalists to spend currency as quickly as possible, and the turnover of productive capital accelerates. While this stimulates business, things quickly tend to get out of hand. Prices start rising at a faster rate than the quantity of currency is growing.

As a result, the velocity of circulation of the currency increases until it can’t increase anymore. Interest rates calculated in terms of currency start to rise and the money market will start to tighten threatening recession. If the central bank still wants to stave off recession, it must further increase the rate of growth of the quantity of money. This can degenerate into a vicious circle that leads first to runaway inflation and, if continued to its logical conclusion, full-blown hyperinflation. Once such a situation develops, the only way out under capitalism is for the central bank to slow or halt its creation of additional currency and allow interest rates to rise sharply. This is what happened during the “Volcker shock” of 1979-82.

A gold standard prevents a positive gold rate of interest on the currency, which encourages currency hoarding and economic stagnation, or a negative rate of interest in gold terms on currency, which leads to accelerating inflation. Under a gold standard, the gold rate of interest on currency is zero, which is ideal for the capitalist mode of production.

How the U.S. and the world economy ended Up with a fiat money standard

As the 1960s approached, U.S. policymakers became aware of a chronic and growing gold shortage in the world economy. The last time there had been this kind of severe global shortage had been in the 1920s just before the Depression. A gold shortage means there is an overproduction of non-money commodities relative to gold, the money commodity.

The increasingly severe shortage of gold in the 1960s meant that a major economic crisis was approaching. U.S. policymakers, both in the federal government and Federal Reserve System, were, however, determined for political reasons to keep the prosperity of the time going indefinitely.

Under the influence of Keynes and other Depression-era economists, the U.S. government and Federal Reserve policymakers believed that gold could and should be replaced as the measure of value on the world market by “paper gold,” which meant in practice U.S. dollars. Like Keynes, they “hated gold.” According to the marginalist or scarcity theory of value, this should have been perfectly possible, though Marx’s theory of value indicated otherwise.

The U.S. policymakers believed that if the U.S. dollar could replace gold as the measure of the value of commodities, a brutal decline in production and a politically dangerous (for the capitalists) increase in unemployment would be avoidable without abolishing capitalism. They, like Keynes, were looking for a solution to the explosive contradictions of capitalism in the sphere of circulation.

The policymakers believed that the key to achieving this was to abolish the limited convertibility of the U.S. dollar into gold that had been agreed to at the 1944 Bretton Woods Conference. While the domestic convertibility of the U.S. dollar into gold had ended in 1933, under the Bretton Woods System central banks and foreign governments could still demand gold at the rate of one troy ounce for every $35 presented for payment at the U.S. Treasury. This was nicknamed the “gold window.”

If the gold window was closed once and for all, the leaders of the U.S. government and the Federal Reserve System believed, the quantity of money and with it the rate of growth of the market could be expanded to match the rise in the physical ability of the industrial capitalists to produce ever more commodities.

By ending gold’s use value as money, economists believed, the need for gold as a use value would fall greatly making gold less scarce relative to human needs. Some economists even predicted the dollar price of gold — believing as they did that the dollar is the measure of the value of gold like it is the measure of the value of all commodities that have dollar prices — would fall as gold became devalued as a consequence of the end of its use value as money.

Under the coming pure fiat system, the U.S. dollar would be just as valuable as gold as long as the Federal Reserve System, which issues it, keeps it scarce. In the age of fiat money, the economists believed the job of the Federal Reserve would be to keep the dollar scarce enough so it retained its value, thus avoiding excessive dollar price inflation, but plentiful enough so that dollar price deflation would also be avoided. Then capitalist prosperity, instead of being a phase of the industrial cycle, would become permanent.

The belief that the U.S. dollar could replace gold as the measure of the value of commodities was supported, notwithstanding their differences on other questions, by both the followers of Milton Friedman and John Maynard Keynes. Friedman, just like the supporters of MMT today, even advocated that the U.S. Treasury sell all its gold reserves since gold was “just another commodity.” Ultimately, however, the U.S. policymakers, pragmatists that they are, rejected Friedman’s advice. We will see the reasons why next week. However, Friedman’s and MMT’s advice to the U.S. government makes perfect sense if you accept the scarcity theory of value.

Keynesian economists at the end of the 1960s, much like Friedman, believed that with the end of the international convertibility of the U.S. dollar into gold the Federal Reserve System would be free to manipulate its fed funds target to keep both the rate of employment as well as the rate of inflation at the levels desired by leaders of the Federal Reserve and U.S. government.

Unemployment would be kept low enough to avoid the depressed profits that an economy suffering from “insufficient demand” causes as well as the dangers of the radicalization of the working class that high unemployment can bring. But unemployment would be kept high enough to prevent the threat of competition among the capitalists for workers from depressing the rate of surplus value.

These policies caused practical money capitalists to realize that the coming of “fiat money” would mean the devaluation of the dollar. In other words, the dollar price of gold would rise. On this score, the practical money capitalists and not the learned economists were right. Dollar devaluation inflation finally ended in the Volcker shock with its record-high interest rates and deep recession.

Bernanke’s policies and the Great Recession

In the light of these lessons, when the next major economic crisis after the 1970s-early 1980s approached in 2006-2007, the Bernanke Fed followed a different policy than was followed in the 1970s. When the initial sub-prime mortgage crisis led to a bond market crisis in July-August 2007, the Fed did not accelerate the rate of growth of the dollar monetary base. With the experience of the 1970s in mind, the Fed announced a series of “bold moves” to combat the developing crisis. It, however, limited itself to simply moving the existing supply of money around creating very few additional dollars.

As the year 2007 unfolded, Bernanke and other Federal Reserve System leaders claimed that the U.S. sub-prime mortgage crisis had been successfully “contained” and the U.S. economy was experiencing only a “mid-cycle” slowdown. However, many money capitalists expecting a full-scale replay of the 1970s assumed the Fed would flood the banking system with newly created dollar reserves. This expectation led to a sharp rise in the dollar price of gold and a surge in wholesale prices.

When it became clear that the Fed was not flooding the banking system with newly created dollar reserves, markets as they always do when their expectations are not met corrected in the opposite direction. The dollar price of gold declined, and when neither the government nor the Fed moved to “rescue” the Lehman Brothers investment bank and allowed it to fail, panic hit Wall Street. It was at this point that the “mild” recession of 2007-08 became the “Great Recession.” Only after the panic struck did the Bernanke Fed move to flood the banking system with newly created dollars, nearly doubling the U.S. dollar monetary base during the fourth quarter of 2008.

As a central banker, Bernanke like Marx was a student of the policies followed by the Bank of England in dealing with the first modern economic crises that occurred in the 19th century. Before the Bank Act of 1844, the Bank of England had expanded the number of its banknotes aggressively to meet the extra demand for them as a means of payment brought on by the crises of 1825 and 1837.

After the Bank of Act of 1844, the Bank of England was forbidden to issue additional Bank of England banknotes without the suspension of the Bank Act, which the legislation allowed. As a result, the crises of 1847, 1857 and 1866 were greatly aggravated as the holders of deposits in the commercial banks rushed to withdraw their money in the form of Bank of England notes. (7) These withdrawals greatly increased the contraction of credit in these crises, which finally forced the authorities to suspend the Bank Act.

However, during 19th-century economic crises, the depositors in British banks who withdrew their money from the commercial banks were not interested in cashing their Bank of England banknotes for gold sovereigns. This gave the Bank of England — once the Bank Act was suspended — the ability to temporarily expand the quantity of its banknotes beyond its gold reserve without any devaluation of the banknotes against gold.

Bernanke did essentially what the Bank of England had done in 1825 and 1837 but with this difference. In 1825 and 1837, the Bank of England was still obliged to pay five gold sovereigns for every five-pound banknote presented to it for payment. Thanks to the reigning “fiat money system,” the Bernanke Fed had no such obligation. It, therefore, was free to create dollars in far greater quantities than the Bank of England had done in any 19th-century crisis without any fear they would be presented for payment in gold bullion or gold coin, though there was always the possibility of a sharp rise in the dollar price of gold.

We will examine next week what conclusions the Jay Powell Fed has learned from the Fed’s response to the 2007-09 crisis in the lead-up to the current crisis.

To be continued.


1 Liquidity traps that combine high unemployment and relatively low interest rates occur to a certain extent during the stagnation/depression phase of every industrial cycle. However, major liquidity traps develop only when there is a prolonged period of lower-than-average capitalist economic growth causing the rate of interest to fall to extremely low levels. These major liquidity traps occurred during the Depression of the 1930s and again during the period of low growth that followed the Great Recession of 2007-09. (back)

2 Keynes believed that the average rate of profit would eventually fall to zero as capital ceased to be scarce. This wouldn’t mean, according to Keynes, that the industrial capitalists would starve, because a portion of the income of the active industrial capitalists — called entrepreneurs by Keynes — are wages. Since entrepreneurial labor is scarce relative to the labor of other workers, the entrepreneurs would still earn higher wages than “ordinary” workers. However, Keynes believed that with the disappearance of profit proper the gap between the incomes of ordinary workers and entrepreneurs would greatly narrow.

Individual entrepreneurs, Keynes believed, might still make what the economists call an “economic profit” — Marx would call it a super-profit — by introducing new or better products. But on average, once the “wage” of the entrepreneur was subtracted, the average rate of profit would be zero. The rate of interest would also fall to zero. This would lead to what Keynes called the “euthanasia of the rentier.” Since the rate of interest would be zero, nobody could be an idle money capitalist. Everybody would either have to be a worker or an “entrepreneur.”

Since in this Keynesian utopia, the average rate of profit would be zero, there would be no net investment or expanded reproduction. In other words, according to Keynes in a world without scarcity, economic growth would come to an end. Keynes believed that the world was not that far from this situation already in the 1930s and that a “post-scarcity” economy without economic growth would likely be realized in about 30 years — which would be by the 1960s. In some ways, Keynes’s vision resembles the “anti-growth” perspective popular today among many “eco-socialists” such as Monthly Review editor John Bellamy Foster.

However, virtually all mainstream bourgeois economists reject the idea of a world without scarcity and economic growth as a utopia. Since capital cannot stand still but must expand or die, the overwhelming majority of professional economists, including those who accept many of Keynes’s ideas, insist that the human need for ever-more commodity use values are infinite and can never be satisfied. To these economists, the expansion of capital, which they equate with economic growth in general, is therefore infinite and will never come to an end. (back)

3 For Marx, a situation where overproduction drives the rate of profit to below zero is temporary. The industrial capitalists will react to such a situation by reducing the production of non-money commodities and increasing the production of money material. Therefore, the founder of scientific socialism believed, there are no permanent crises, only periodic crises. While Marx believed that due to a rise in the organic composition of capital — a rise in the ratio of constant capital, which does not produce surplus value, to variable capital, or purchased labor power, which does — the rate of profit over the long run would tend to fall. However, he did not expect the rate of profit to fall to zero. Instead, Marx foresaw the revolutionary overthrow of capitalism by the proletariat — the class of wage workers forced to sell their labor power to the capitalists. (back)

4 In Great Britain, the mass unemployment that began with the deflationary recession of 1920-21 continued right through the 1930s. During the 1920s, Keynes began to advocate massive deficit spending by the British government to end mass unemployment. Indeed, he believed that the Liberal Party, which Keynes supported, could pull the rug out from under the trade union-based Labour Party if it adopted a program of deficit spending and public works to end mass unemployment.

Contrary to what is often believed, the idea of central government deficit spending to fight economic stagnation and mass unemployment did not originate with Keynes but had been around since the beginning of the 19th century if not longer. What Keynes did in the 1930s was to attempt to reconcile the reality of mass involuntary unemployment with marginalist economic theory, which in its “pure” non-Keynesian form holds that persistent mass involuntary unemployment is impossible as long as the markets, especially the labor market, are governed by “free competition.” (back)

5 Repo stands for repurchase agreement. The Federal Reserve Bank or a commercial bank buys a Treasury bill from a commercial bank with the understanding that the commercial bank selling the Treasury bill will repurchase it on the following day at a slightly higher price. The difference between the price at which the commercial bank sells the Treasury bill and the price it repurchases it for represents the interest rate. Repos are in effect short-term overnight loans with Treasury bills acting as the collateral. One of the clearest indications that a recession was approaching even without the COVID-19 pandemic was the crisis that hit the U.S. repo market in September 2019. (back)

6 In most industrial cycles, even at the peak of the boom, there is still a considerable margin of excess capacity. As a result, the industrial capitalists can considerably increase the production of commodities for quite some time before they have to undertake massive new productive capital investment that increases the production of commodities further.

During the downward stage of the industrial cycle, the industrial capitalists can liquidate their overproduced commodity capital by selling the commodities off at more or less reduced prices while overproduced fixed capital is simply idled. The oldest fixed capital is sold off for scrap, but most of the rest is held onto until the rising phase of the industrial cycle again makes it profitable to put it back into production. (back)

7 Except for the crisis of 1857, the mere knowledge that the Bank of England could expand the number of its banknotes not backed by gold was enough to break these crises without the need of the Bank to increase the number of its banknotes. (back)