It was announced on December 1 that Israel’s genocidal bombing and ground attacks on Gaza had resumed. Contrary to media reports, this isn’t an Israeli-Hamas war, but rather it’s a genocidal attempt by Israel, backed by the Genocide Joe’s government, to drive Palestinians out of Gaza into the Sinai, killing as many as possible along the way.
This would reduce the Arab population by about 2.3 million, transforming the current Arab majority in historic Palestine in favor of an Israeli majority. It would prepare the way for finally driving out the Palestinian Arabs from the West Bank into Jordan — again killing as many as possible along the way. The Israeli leadership — not just Netanyahu — hopes that Israel will be consolidated as a nation-state much like the U.S., Australia, and Canada became nations after the genocide and apartheid of the native population. This has been the aim of the Zionist movement and its imperialist sponsors from the beginning of the modern Zionist movement.
Origins of the conflict
Let’s briefly review the process of how Israel was, in the words of Biden, “created.” Toward the end of the 19th century, capitalism was being transformed into monopoly capitalism based on free competition (not the perfect competition of neoclassical capitalist economists).
At the same time, traditional anti-Judaism deeply rooted in Christian Europe began to morph into modern anti-Semitism. In the Czar’s Empire, Jews were subjected to pogroms and other forms of persecution. In Germany, anti-Semitism emerged as a movement among intellectuals and politicians that opposed the assimilation of Jews into German society. Unlike traditional Christian anti-Judaism that emphasized religious grounds for the oppression, anti-Semites opposed equal rights for Jews on the grounds they were an “alien” non-Germanic race.
Christians first created the Zionist movement in the early 19th century and advocated the return of Jews from Europe to Palestine to prepare the way for the return of Jesus Christ. It began to attract Jewish followers as capitalism based on free competition began to morph into monopoly capitalism. At the same time, capitalism began to take hold in Eastern Europe.
The Zionist idea, both Jewish and Christian, was to colonize Palestine with European Jews who would then support the interests of European, mostly British, capitalism by safeguarding the Suez Canal and combating the first stirrings of modern Arab nationalism. A side benefit would be the removal of a troublesome — to the ruling class — section of the population attracted to revolutionary democratic and socialist ideas.
After World War I, the government of newly independent Poland, with the largest Jewish population in Europe, was strongly antisemitic and pro-Zionist. With the support of the Zionist project, this reactionary government aimed to drive Jews out into Palestine. Except for the Soviet Union, which had opened unprecedented opportunities for Jews, other Eastern European governments adopted anti-Semitic pro-Zionist policies similar to those of Poland.
The U.S. government in 1921 and 1924 adopted a series of anti-Semitic immigration laws that closed the door to Jewish immigration that, up to that point, had provided a refuge for European Jews from the deteriorating conditions they faced in Europe. Then, in the 1930s, the ultra-anti-Semitic government of Adolf Hitler came to power in Germany. He at first teamed up with the German Zionist movement in a program designed to force Jews to emigrate to Palestine. When World War II broke out, Hitler shifted to his “final solution to the Jewish problem” — the attempted physical extermination of every Jewish man, woman, child, and suckling baby in Europe.
The Holocaust that never really ended
After World War II, it seemed the Holocaust was over, that anti-Semitism as an ideology was discredited, and “the Jewish question” was solved at last. But the Holocaust had not ended. It merely changed its target from the European Jews to the Palestinian people.
In the words of Genocide Joe Biden, “Israel” was “created” in 1948, rendering the Palestinian people homeless. A side effect was that Jews who had lived in the Muslim world for centuries — and found refuge there from the persecution in Christian countries — were driven out and forced to move to Palestine. It has to be emphasized that the Holocaust and the persecution of Jews that led up to it were carried out by European Christian countries, not Arab or Muslim countries.
Today, in 2023, Israel, supported by the U.S., is attempting to finish the “Nakba” by killing as many Palestinians as possible in the process. The Nakba translates as “The Catastrophe,” and is the name given to the violent displacement and dispossession of Palestinians, the destruction of their society, culture, identity, political rights, and national aspirations that began in 1948.
Since the beginning of October 2023, they have already killed thousands — more than fifteen thousand — and the death count rises hourly. The Holocaust — that never really ended — continues.
Genocide Joe and the crimes of imperialism
A new generation is being shocked by the genocidal crimes of U.S. imperialism and its client state, Israel. For some time, young progressives have been very suspicious of the Democratic U.S. president “Corporate Joe” Biden. But now he has earned a new title, “Genocide Joe,” for his support of apartheid Israel’s genocide against the people of Gaza.
But the problem isn’t that Biden is an awful person — which he is — but rather the economic-political system he represents — U.S. monopoly capitalism. This has happened before. Just sixty years ago, Vice President Lyndon Johnson (LBJ) had just taken over as president from the assassinated John F. Kennedy.
LBJ promised to build a “Great Society.” Today, many progressives looking back see him as perhaps the last truly progressive president. He signed the Voting Rights Act of 1964, which finally gave Southern African Americans the right to vote, a century after the guns of the slaveholders’ rebellion fell silent. (1)
LBJ also sponsored legislation introducing Medicare for seniors and Medicaid for the poor. (Not exactly medical care as a human right like in other rich capitalist nations, but at least a step in that direction.) But then the story goes that LBJ was tragically sidetracked by a little thing called the Vietnam War.
In reality, the Vietnam War was not a little thing. It was the central event of the Johnson presidency. LBJ preferred to kill millions of Vietnamese at the price of 58,000 U.S. soldiers dead and more wounded before Vietnam finally defeated U.S. imperialism. He did this rather than allow the Vietnamese people their basic democratic right to remove the puppet rulers the U.S. had imposed on them against their will in the first place and unify their country.
Young people who filled the streets in increasingly large anti-war demonstrations chanted, “Hey hey LBJ LBJ how many kids did you kill today!” A few weeks ago, in a protest held near where I live against the Gaza genocide, I heard the old chant once again, but with the words, “Joe Biden, how many kids did you kill today?”!
Before that, in 1950, Harry Truman sent hundreds of thousands of U.S. troops to Korea, which led to the destruction of virtually every building more than two stories tall in North Korea. Even more Koreans were killed in that war than Vietnamese in Vietnam. And unlike during Vietnam, the repressive political climate of the early 1950s, called “McCarthyism,” precluded a mass anti-war movement in the streets.
At least during the later war, the U.S. genocidal war machine ran into the resistance of millions of young people in the streets and, finally, U.S. soldiers within the armed forces. They were backed up by international outraged public opinion. Combined with its inability to crush the Vietnamese people and financial difficulties that I hope to explore next month, the U.S. was finally forced to withdraw in defeat from Vietnam and other Indochinese countries.
But this wasn’t Truman’s only crime. In 1945, Harry Truman ordered the atomic bomb dropped on Hiroshima, killing tens of thousands immediately, with tens of thousands later dying from the effects of radiation. Three days later, another atomic bomb over Nagasaki killed tens of thousands more. The number that died in these two atomic bombings was over one hundred thousand, perhaps over 200,000; the exact numbers will never be known.
This was done despite Japan being already defeated in the war. The criminal atomic bombings were carried out to intimidate the Soviet Union. This is how Harry Truman began his administration. And before that, Franklin D. Roosevelt oversaw massive carpet bombings of Japanese and German cities that killed more civilians than the later atomic weapons.
The bombings of Japan and the Korean War were not Truman’s only crimes. In 1948, Truman supported the creation of the State of Israel, leading to the Nakba of 1948 and all the crimes that followed, including today’s Gaza genocide. I could list more crimes, but neither space nor time allows it. Still, today’s young progressives are encouraged by “progressive Democrats” and historians to think of Harry Truman as a great progressive U.S. president.
It’s easy to see the unique crimes of Nazi Germany as flowing from fascism (officially called “National Socialism”). The opponents of the German fascists nicknamed the fascist National Socialist German Workers Party the “Nazis.”
Today pro-capitalist historians encourage us to blame the crimes of German imperialism entirely on the Nazi Party or Adolf Hitler personally. There is no doubt that the Nazis and Hitler were personally responsible, but these crimes did not fall from the sky.
They were rooted in the nature of imperialism, not only that of Germany but also that of Britain, France, Czarist Russia — and the United States. (2) What fascism did was prevent any mass opposition to these crimes from developing within Germany, much as McCarthyism kept opposition from developing against the genocidal crimes the U.S. was committing against the people of Korea.
As the Holocaust against the Jews unfolded, German newspapers could not publish exposures of these crimes, nor was it possible to protest through mass demonstrations in the cities. Today, it is easy to criticize Germans for failing to protest the crimes carried out in their name.
But it wasn’t easy to do this in Nazi Germany. Any attempt to protest led to organizers’ incarceration in concentration camps or execution. Before we criticize those Germans who privately opposed these crimes but did nothing, we should ask ourselves what we would do if we found ourselves in a similar situation.
Without the mass worldwide protests that are occurring and increasing, what prevents Israel from “finishing the job” by driving all Gaza’s inhabitants it hasn’t killed directly into the Sinai? And then, to prevent Palestinians from fighting back within Egypt, what prevents the killing of Palestinians in gas chambers or some 21st-century equivalent? And if that happens, it wouldn’t take long before Palestinians in the West Bank would meet the same fate. Would U.S. imperialism and Israel go that far?
Left to its own devices, this is the direction U.S. imperialism and its Israeli clients are headed toward. It’s not fascism that creates imperialism’s genocidal drive. Fascism allows imperialism to carry out its genocidal drive to its logical conclusion.
This is why we must continue to protest the Palestinian genocide and imperialism’s other crimes while also defending our right to protest against the crimes of “our” government. Attempts by governments in Europe and the U.S. to ban or limit anti-genocide demonstrations and other activities must be strongly opposed.
This, along with the continued resistance of the Palestinian people, other Arab people, and people around the world, is the only way to slow the genocidal drive against the people of Palestine. Without the global wave of demonstrations, it is unlikely that the recent week-long pause in the bombing would have happened.
But no matter how massive the protest, no protest can stop the genocidal drive of imperialism against Palestine today and against other peoples today and tomorrow. Only the complete defeat of imperialism in West Asia and North Africa—called the Middle East in the West — can end the U.S.-Israeli genocide, as the defeat of U.S. imperialism finally did in Vietnam. Only the overthrow of imperialism and the capitalism that breeds it throughout the world can end its genocidal crimes once and for all.
As we noted last month, the ongoing Israeli genocide in Gaza has led to waves of protests in the U.S. and throughout the world, causing a huge problem for the Democratic Party. Polls show that young people have turned decisively against Israel, including an increasing number of young U.S. Jews who realize that Israel is the negation of the progressive Jewish culture they value.
Polls show the Democratic base supports the demand for a ceasefire now, as do a majority of Republicans. Biden’s popularity has declined throughout his administration and is hitting new lows. Recent polls show Donald Trump would defeat Biden handily in the popular vote — and more so in the electoral vote — if the election were held today. Polls also show that people in the U.S. don’t want a choice between Trump and Biden but want something different.
The Party of Order — which controls the Democratic Party — decided some time ago that it would be a good idea for Biden to run for a second term. As a result, no major Democratic politician has emerged to challenge him.
And despite four criminal indictments and numerous counts that could (in theory) send Trump to prison for years — if he lives that long—polls show Trump is a shoo-in to win the Republican primaries. His former vice president —and once presumed political heir — Mike Pence announced on October 28 that he was dropping out of the race. And though Florida Governor Ron DeSantis is still campaigning as of this writing, he’s given little chance against Trump, as is true of all the other declared Republican candidates.
Perhaps Biden will be persuaded in the interests of preserving “American democracy” to drop out. Perhaps Trump will do a “plea deal” in exchange for having most of the criminal charges against him dropped and agreeing to pull out of the presidential race.
Trump is now 77, and Biden has just celebrated his 81st birthday. But time is running out for both parties to find alternative candidates more acceptable to the people in the U.S. But one thing is sure: Never has the bankruptcy of the two-party system been more apparent, nor has the need for a party representing the working class majority been more obvious.
This brings us to the economy. The basic picture is of industrial production stagnation and slowing economic growth. According to Reuters reporter Lucia Mutikani on December 1, “The ISM said that its manufacturing PMI was unchanged at 46.7 last month. It was the 13th consecutive month that the PMI stayed below 50, which indicates contraction in manufacturing. That is the longest such stretch since the period from August 2000 to January 2002.”
And what’s holding industry back? It’s overproduction.
“Makers of computer and electronic products said the ‘economy appears to be slowing dramatically.’ Miscellaneous manufacturing firms said, ‘Customer orders have pushed into the first quarter of 2024, resulting in inflated end-of-year inventory. Producers of food, beverage, and tobacco reported that ‘our executives have requested that we bring down inventory levels considerably.’”
As factories are working at less than full capacity, corporations are building more factories at a furious rate. This “accelerator effect,” as it is called by Keynesian economics, has so far prevented the U.S. from slipping into a full-scale recession.
The financial journalist Wolf Richter wrote, “In October, $18.5 billion were plowed into construction of manufacturing plants in the U.S. ($246 billion annualized), up by 73% from a year ago, by 136% from two years ago, and by 166% from October 2019. The relentless pace of the month-to-month increases is what’s amazing — from $12.5 billion spent in January to $18.5 billion in October.”
Industrial capitalists are building new factories even as their current factories cannot run at their full capacity due to a lack of markets. As the new factories come online, the gap between the ability to produce and the market’s ability to absorb the increasing volume of commodities at profitable prices is growing dramatically.
This process will eventually become unsustainable, and new construction will fall. When that occurs, the “accelerator effect” will reverse, and the economy will fall into recession. This is the threat that now hangs over the U.S. and the world capitalist economy. I will examine this situation as it develops in the coming posts.
The industrial stagnation caused by overproduction is already leading to a gradual rise in unemployment. On December 1, C. J. Atkins reported in “People’s World”: “CNBC, the top television outlet among the business media, reported this week that ‘signs are increasing in the nationwide job market that the post-pandemic era of worker control over wage growth and job opportunities is coming to an end.’”
Atkins writes, “In the network’s latest survey of Chief Financial Officers, some 60% say the balance of power is tilting back in their favor. Compared to a year ago, they believe it’s become far easier to find and hire qualified workers—which means, in simple language, that the labor shortage is beginning to vanish and workers no longer have the edge on salary negotiations.”
The general picture is of an economy bogged down in overproduction and stagnation that hasn’t gone through the kind of massive liquidation of overproduced commodities, called a “recession,” because the industrial capitalists are pushing ahead with the drive to build more factories. When a full-scale recession arrives, the gradual increase in unemployment will be replaced by a more rapid one.
Once the inventory liquidation — recession — occurs, it will pave the way for a renewed upturn in the industrial cycle. The stock market has been rising since November. The money capitalists seem relieved that the stock market, though it declined in October, didn’t crash, unlike the government bond market.
Historically, stock market crashes occur in October as businesses build up inventory ahead of the Christmas season, leading to competition for credit between this and stock market speculators buying on credit. If the stock market gets through October without a crash, experience suggests a crash is unlikely before the northern hemisphere’s spring as business picks back up after a post-Christmas downturn. Once it does, the competition for credit will sharpen.
This year, there is another factor at play. The U.S. government bond market crashed earlier, driving up yields on the ten-year government bond to about 5%. Since many loans, including mortgage and car loans, are tied to these bonds, the economy is very sensitive to the movement of the 10-year bond.
Earlier this year, it looked like the demand for housing was recovering as the bond yield dropped below 4% and home sales showed signs of recovery. This raised “soft landing” hopes on Wall Street. Then government bond market prices crashed (remember, bond prices move in the opposite direction of interest rates), and hopes for a housing rebound faded.
In recent weeks, bond prices rallied, somewhat reviving “soft landing” hopes, suggesting industrial stagnation but not a recession that would hurt profits, dividends, and stock market prices. On December 1, the yield on the ten-year bond closed at 4.23%. Perhaps the economy will emerge from industrial stagnation in 2024. With rising unemployment, this means stellar profits and dividends for 2024. Combined with falling interest rates, this also implies an excellent year for stocks.
There’s a big problem with this bullish scenario. As I have explained before, when dollar interest rates move up, the dollar price of gold (that measures the gold value of the dollar) on the open market tends to go up, and the dollar value of gold moves down. Once a recession sets in, the rising demand for the dollar as a means of payment allows the Federal Reserve System to create more dollars and lower interest rates. As recession liquidates overproduction and gold production is stimulated, interest drops without leading to a rise in inflation, breeding demand for gold.
If an attempt to achieve a soft landing by the Federal Reserve System expands the quantity of dollars it creates before a crisis has done its work, the demand for gold soars with dollar creation. Lower interest rates cause the dollar price of gold to soar, whipping up inflation. Which again drives up interest rates. If the Fed continues to attempt to hold interest rates down, it must create dollars at an accelerating pace. This results in still more inflation and still higher interest rates, followed by deep recession and mass unemployment.
Why has the bond market been rallying in recent weeks? There are several possibilities. One, it’s a law of markets that after a sharp downward move, there’s a rally. If the basic direction of the market remains downward, the rally halts below the previous peak, and bearish moves resume.
Another possibility is that a full-scale recession has begun in recent weeks — for example, the factory construction boom has begun to unwind — causing a fall in credit demand. However, these changes haven’t yet shown up in the statistics, which inevitably lag behind events. If this is what is happening, the stock market rally should fade soon as Wall Street gets word of deteriorating business conditions that will finally put an end to soft landing hopes.
Another possibility is the Fed may be making a last-ditch attempt to pull off a soft landing. The hope is to keep any recession mild, allowing business to pick up later next year. However, the boom in factory construction is creating a major obstacle to this. Soft landings usually occur when factory construction is weak, leaving little room for capital spending to drop. With little negative accelerator effect, the economy simply stagnates until inventory liquidation has run its course. [See Kitchin recessions in “Does Capitalist Production Have a Long Cycle?”]
Recent movements in the dollar price of gold cast further doubt on the likelihood of a soft landing in the current situation. On December 1, the dollar price of gold closed at $2091.70, an all-time high.
Never before has the dollar represented less real money — gold — than now. If the trend continues, inflation will pick up again, followed by interest rates. Stagflation will be followed by recession.
The last time dollar gold prices were close to the current levels was in 2020, right after the COVID shutdown. At that time, the interest rate on the ten-year bond was under 1%. At the beginning of December 2023, despite a rally, they were still over 4%.
Interest rates this high are still not enough to prevent the dollar price of gold from rising above the level of three years ago when the government could borrow at an interest rate of less than 1%. As overproduction has developed since 2020, along with the factory construction boom – which represents growing overproduction of the means of production – it’s taken higher rates to keep the dollar from collapsing into a new 1970s-type stagflation.
I’ll write more on the factory construction boom and interest rates in the coming months. With or without a dollar crisis and another wave of inflation, a recession looms in the not-too-distant future as the overproduction of the COVID aftermath boom is liquidated. The question I want to explore is what the effect of the coming downturn will be on the growing danger of war.
The current factory construction boom played a major role in the recent bond market crash by sharpening competition between the Treasury and industrial corporations for long-term credit. The fear that the Fed will simply “print money” to ease this competition is behind the current weakness of the U.S. dollar against gold.
This encourages a cautious policy by the Washington policymakers around Genocide Joe. U.S. support of Israel’s genocide against the Palestinian people in Gaza is fine from Wall Street’s point of view as long as it doesn’t cost too much money. But a costly war in West Asia against Iran, against Russia in Donbass or Crimea, or China in the West Pacific is another matter entirely.
What happens after the recession finally arrives? How will that change the equation of war and peace?
Whether a big war breaks out depends on many factors, not least the strength of the anti-war movement as well as the tug of forces around Genocide Joe and whoever might replace him come January 20, 2025. It also depends on the evolution of the economic situation. Since this blog concentrates on economic problems, I examine this below.
Last month, we saw that it’s not guaranteed by any economic law at any particular moment that the quantity of currency will be sufficient to circulate commodities at existing prices and meet payments coming due. If the quantity of currency necessary rises due to either a rise in commodity production, their prices, or some combination of the two, there must be a sufficient reserve fund of additional currency that can be drawn into circulation.
As a general rule, there’s a sufficient fund to meet any increase in demand. The banking school was correct in its criticism of the currency school — supporters of the quantity of theory of money. About every ten years, though, there’s an insufficient quantity of currency to meet levels to circulate commodities at existing prices and meet payments due. When this happens, the result is a crisis: Unsold commodities pile up in warehouses, and waves of bankruptcies lead to mass unemployment.
When such a crisis of overproduction occurs gradually, the market corrects the situation. This involves the selling of commodities at prices below their prices of production and values, the destruction of a portion of the existing productive forces, as well as mass unemployment. How does an overproduction crisis correct the problem of too little money?
When prices measured in terms of the use value of the money commodity fall below their production prices, the profit rate of the industry producing money material rises above the general profit rate. This causes capital to flow into the money-producing industry, resulting in an increased growth rate of money material.
A fall in commodity prices (in terms of the use value of the money material) plus a decline in the number of commodities in circulation (in terms of their use values) causes a portion of circulating media to fall out of circulation and flow into bank reserves. The result is growth in the size of the idle reserves in the banking system.
By the time the overproduced commodities are sold off, prices in terms of money material rise back to their production prices, accompanied by a rise in money material production, creating additional bank reserves at an accelerated rate. There are now more than enough idle funds in the banks to meet the rising demand for a currency. (3)
In the long run, the quantity of money in circulation — currency — adjusts itself to the needs of capitalist expanded reproduction. Each successive industrial cycle reaches a higher level than its predecessor, made possible by periodic crises of the relative general overproduction of commodities.
War and the industrial cycle
Israel’s genocidal assault against the people of Gaza raises the specter of larger warfare throughout West Asia and North Africa — the Middle East — as well as increased danger of a U.S. and/or Israeli attack on Iran.
This would be combined with the continuing war between Ukraine and Russia in Europe with the larger hybrid war waged being waged by NATO imperialism against Russia. The danger of an expanded war continues.
This is occurring against a background of continuing tension over control of the Chinese island of Taiwan, the last relic of China’s century of humiliation, as well as control of the world semiconductor market, creating the specter of war. The danger of a general war — World War III — continues to rise.
Even if we avoid a general war over the next few years, continued U.S. occupation of parts of Syria (against the will of the Syrian government) and Iraq already involve a low-intensity war in West Asia between the U.S. and armed resistance organizations in the region. This ongoing low-intensity war has the potential to intensify and escalate.
Since Israel’s genocidal assault on the Palestinians, who have for seventy-five years been forced to live in the Gaza Strip open-air prison, the U.S. has also moved two warships into the Mediterranean to support the genocide.
Even if these ships don’t become directly involved in combat operations, the deployments cost a great deal of money. This money must be raised in taxes or borrowed on the money market. Remember, the U.S. government bond market has just gone through a major crash, increasing the federal government’s costs for servicing its debt. The cost of servicing debt must be paid with more taxes or cuts in social spending.
Can war prevent recession?
All financial indicators point to a major recession soon. Could a large-scale war avoid this recession?
If yes, could the Biden administration or its successor launch such a war to prevent a major economic downturn? This view is in line with the “Monthly Review” school (founded by Paul Sweezy) that continues to exert major influence on the left.
Another idea, supported by Cenk Uygur’s online news show “The Young Turks,” is that major weapons producers — industrial capitalists that manufacture means of destruction — are frantically lobbying for war to ensure demand from the government for their deadly products.
Undoubtedly, these views contain an element of truth, but overall, they miss the big picture that drives imperialist policies.
The economic effects of war spending
First, we have to distinguish between the effects of all-out wars (like World Wars I and II) — sometimes called total war — and so-called limited wars such as the Korean War, the Vietnam War, and the wars against Iraq and Afghanistan.
Today, a total war involving the use of nuclear weapons and other weapons of mass destruction would lead to billions of deaths that could well mean the end of our civilization, if not the human species. It’s pointless to explore the economic consequences of a total war involving these weapons. But what about the economic consequences of a war that avoids the use of weapons that would destroy civilization entirely?
The effects of war depend on its scale. Until the mid-20th century, even a total war didn’t have the potential to destroy civilization. The productive forces and means of destruction weren’t developed enough for that. It is the development of the productive forces that make a global communist society based on abundance possible. It also makes the destruction of civilization possible.
In dealing with the economic effects of war, we have to distinguish between limited wars and large-scale wars involving all the major military powers that don’t involve the most destructive weapons, like nuclear war. Even without their use, such a war would be far more destructive, especially for the United States (largely untouched by either World War I or World War II).
As I mentioned above, the idea is popular on the left is that war, as long as it doesn’t turn into a civilization-destroying total war, is good for business. This view holds that capitalist governments launch wars to avoid major economic depressions. The Monthly Review school largely developed this idea, but it is found more generally in Keynesian economics. Indeed, military Keynesianism is a common term among left-wing economists.
According to the Monthly Review school, monopoly corporations earn super profits by suppressing competition among themselves. This suppression is made possible by centralizing capital in the hands of giant corporations. But to realize these super-profits, monopoly corporations must find something to spend them on.
If they spend them to expand production — classical expanded reproduction as described by Marx in Volume II of “Capital” — the super-profits will disappear as the growing quantity of commodities drives down prices, causing monopoly profits to disappear. In theory, the capitalists could spend these super-profits on high living. However, as far as the personal expenditures of the capitalist are concerned, their profits are so great they cannot spend enough on personal consumption. Mr. Trump, after all, can only live in so many mansions.
If the Monthly Review school figures monopoly corporations cannot spend super-profits on productive investments without having them disappear, nor can individual capitalists hope to consume their profits on personal consumption, a large percentage of the profits will remain unspent.
This means a lack of effective demand, resulting in widespread excess capacity of means of production and mass unemployment of workers — and the disappearance of the super-profits themselves! The normal conditions of monopoly capitalism, the Monthly Review school concludes, as opposed to competitive capitalism, are the Depression conditions of the 1930s. But per its cross-class alliance — popular-front politics — it sees a way out while still retaining capitalism. The central government and its dependents can act as buyers of last resort and absorb the surplus.
The government can spend the money on useful things like public housing (as advocated by Paul Sweezy) or green energy (as advocated by “Monthly Review” today). This would be the program of a popular-front government that the MR’s editors would like to see come to power in the United States, Europe, and Japan. But in their analysis, spending money on useful things, though in the class interests of both workers and capitalists, runs into the opposition of particular capitalist groups.
Paul Sweezy and Paul Baran at “Monthly Review” emphasized public housing in their time. Public housing is both useful and can absorb huge quantities of the surplus — monopoly profits — that need to be spent to keep business humming and, at the same time, maintain high profits for business.
This is good for both the workers who get cheap apartments and are relieved of the problems of homelessness we see in all major U.S. cities today as well as creating the business conditions monopoly capitalists need to realize monopoly profits. But it runs into opposition from the real estate industry, which doesn’t want competition from public housing that would lower their profits. The real estate industry uses its political power to block public housing proposals.
Today’s scientists warn that we must find a replacement for fossil fuels or face runaway global warming. However, fossil fuel capital uses its political power, greater than the real estate industry’s power, to block the necessary transition. The only area of large-scale government spending that doesn’t face massive opposition from some sector of the capitalist class is spending on weapons.
The Monthly Review school doesn’t worry much about whether there’s enough money in the banking system to finance war and the civilian economy simultaneously. They assume the monetary authority can print the necessary quantity of money. They assume the possibility of non-commodity money as an element of faith.
The only problem is whether or not there are sufficient means of production, consumer goods, and workers to meet the needs of civilian production and war at the same time. They assume they are because monopoly capitalism — barring some unlikely great technological revolution comparable to the railroad or the automobile that could also absorb the surplus — tends toward a 1930s-type Depression. As a rule, the amount of military spending they assume can be fine-tuned to prevent that and maintain an employment level necessary to prevent a deep depression without provoking sharp competition between the corporations and the military for labor power.
For a war economy to run smoothly, there must be an adequate quantity of commodities in terms of their use values, including labor power, to support the civilian economy, without which a war economy can’t exist for long. Enough must be left over to produce the means of destruction and enough unemployed workers to recruit as soldiers to fight the war(s).
But this is only half the story.
There must also be enough currency to circulate commodities in the civilian economy at their current prices, pay all debts, public and private, coming due, and leave enough for the central government to purchase the means of destruction, pay the soldiers’ wages, and service the growing central government debt.
War spending and expanded capitalist reproduction
In one sense, war spending reduces the socially necessary quantity of currency. Capitalist production cannot exist without expanded capitalist reproduction. As expanded reproduction unfolds, the need grows for additional currency to circulate the rising quantity of commodities and meet payments coming due.
War spending reduces expanded reproduction and, in a full-scale war economy, represses it altogether. In a war economy, factories that would otherwise produce additional means of production to meet the needs of expanded reproduction and the means of subsistence for additional workers are redirected to produce the means of destruction or meet the means of subsistence for soldiers. By reducing expanded reproduction, the war economy reduces the need for additional means of circulation and payments.
Working in the other direction, shortages of commodities that arise in wartime lead to higher-priced commodities. Rising prices increase the demand for currency to circulate commodities and money to meet payments. Remember, if the quantity of commodities in terms of their use values remains unchanged, but if their prices increase, this makes additional currency necessary to circulate them. Contrary to the claims of the MR school, even under monopoly capitalism, war spending reduces economic growth in the long run by suppressing expanded capitalist reproduction.
In the short run, if excess capacity — idle machines and unemployed workers — is high and there’s an adequate amount of money capital in the banks, a sudden surge in war spending increases production and employment.
These conditions are the norm under capitalism. The onset of war will be accompanied by rising production and falling unemployment — assuming there are sufficient idle machines, workers, and money. Production is stimulated even if expanded reproduction is reduced. Assuming the war is limited, expanded reproduction will not be suppressed completely. If the economy is sufficiently depressed, expanded reproduction can be stimulated by war spending in the short run.
War will lead to a surge in economic growth and a drop in unemployment if average economic conditions prevail before the outbreak of the war or more so if the economy is depressed. While expanded reproduction is needed for sustained economic growth, a surge in economic growth is possible in the short term if existing but idle means of production and unemployed workers are drawn into production. If, however, these means of production are not replaced once they wear out, the economy will eventually contract, though not immediately.
That’s the real side of the war spending question. What about the monetary side?
Money and war
The Monthly Review school is an incorrect generalization of the condition of the capitalist economy in the depression phase of the industrial cycle that follows a crisis of overproduction. During the Great Depression that followed the super-crisis of 1929-33, there was a colossal quantity of money lying idle in the banks. This mass of idle money was available to finance a renewed upsurge in expanded capitalist reproduction or finance a major war.
Under the specific political conditions of the 1930s, this condition led not so much to a new cycle of prosperity but to a war cycle. The lesson: An accumulation of unusual amounts of idle money in the banks and the resulting low interest rates increases the danger of war. However, it doesn’t in and of itself make war mechanically inevitable.
Political and military factors and even accidental factors determine whether an amount of idle money in the banks leads to an actual war. For example, if one capitalist power has overwhelming financial, industrial, and military power, no rival will challenge it, reducing the chances of war.
When the dominant power is in decline, a post-crisis glut of idle money makes war likely. (4)
Because the industrial and financial power of Great Britain had already been undermined by the turn of the 20th century, the accumulation of idle money capital during the 1913-14 world recession led quickly to war. However, the extended long depression of 1873-96, when British industrial supremacy was still largely intact, though already in decline, did not. At that time, no power was strong enough to challenge Britain directly.
To illustrate the play of these factors let’s examine what happened during the 20th century. In the mid-1890s, large quantities of gold were discovered in the Klondike, greatly increasing the production of money material. At the same time, the cyanide process made it possible to squeeze a large amount of gold from relatively poor ore.
As a result, the value of gold, defined as the quantity of abstract human labor necessary to produce a given weight of gold, fell. From the viewpoint of the gold mining industry, the cost price necessary to produce a given quantity of gold was reduced. At the then prevailing price levels measured in terms of the weights of gold, gold production suddenly became relatively and absolutely more profitable. In obedience to the economic law that capital flows towards the most profitable sectors of production, gold production rose sharply.
The accelerated rate of growth of money material caused an acceleration of economic growth — expanded capitalist reproduction. This was similar to the surge after the gold discoveries of 1848-51. When capitalist economic growth accelerates, the unevenness of economic growth also accelerates. Under early 20th-century conditions, British domination of the world market faded as the growth of capitalist industry in Germany, the United States, and Japan increased while British industry lost ground. Obeying the economic laws that we’ve explored throughout this blog, accelerated capitalist economic growth brought with it a new wave of overproduction on a scale that exceeded anything that occurred during the 19th century.
The crisis of 1907 was the first sign of this. Again, the money markets were tightening. The surge of gold production that began in the 1890s was running out of steam as the Klondike gold fields were being depleted, checking the decline in the value of gold. Meanwhile, the rise of commodity prices that began in 1896 meant a rise in the cost price of gold production. This led to a decline in the purchasing power of gold — reflecting the drop in the value of gold relative to other commodities — and a decline in the purchasing power of currency that was then convertible into gold at a fixed rate. The declining profit rates of gold production caused capital that had previously flowed into the gold industry to flow out of it.
Following the law of the value of commodities, as the rise in gold production leveled off, the rate of increase in gold quantity declined in terms of the total supply of gold — and more so in terms of its purchasing power once the effect of higher commodity prices is factored in.
Again, the money market tightened, and interest rates rose. A series of diplomatic crises broke out in the first years of the 20th century among Britain, France, and Germany over which would control the European colonies in North Africa, threatening war among the major European powers.
War was staved off. This might have been accidental because, for the moment, intelligent statesmanship prevailed. But, the declining power of Britain and the rising power of its rivals — Germany, Japan, and the United States — meant a threat of the first general war since those that followed the French Revolution was growing.
For the time being, the tightening money market and rising interest rates encouraged governments to avoid war. The tightening financial conditions was the ally of cautious statesmanship. But all that was lost when the world recession of 1913-14 set in.
In 1913, a worldwide recession affecting all the major capitalist countries broke out and deepened into 1914. The recession idled factories and workers while money fell out of circulation and piled up in the banks.
After fifteen years of generally prosperous conditions, the world appeared to enter a new era of depression. Against this background, a new diplomatic crisis began.
On June 29, 1914, Serbian nationalists assassinated Archduke Francis Ferdinand, heir to the Austrian throne. Thanks to the ongoing global recession, there was enough idle money on the market to finance a short war that would end “before the leaves fell.”
A side benefit was that a short war would provide work for the growing number of unemployed in the armed forces or munitions factories. In Russia, the energy of a new wave of labor unrest was siphoned off into chauvinist patriotism that consolidated the Czar’s position, which had been shaken so badly in the revolution of 1905.
The war economy brought the problem of overproduced commodities for personal consumption to an end. The overproduced means of production could now be put to work, producing means of destruction or means of substance for soldiers instead of for surplus value-producing workers.
High levels of war spending and the absorption of workers solved the problem of unemployment. John Maynard Keynes noted this fact. Despite the world recession of 1913-14, the preceding fifteen years were a period of great capitalist prosperity, and money remained tight during the war.
Loans from the United States were necessary to keep the war economies of Britain, France, and Russia afloat. The United States was in the happy position of financing the destruction of its major European competitors while making a nice interest income in the bargain.
From the viewpoint of Wall Street’s bankers, this was a win-win situation for U.S. imperialism, well worth the tens of millions of deaths the war caused. In 1916, the economy of Russia, the weakest of the major imperialists, began to unravel. Revolution was not far behind.
The German war economy wilted under the effects of shortages of necessary raw materials, creating a decline in industrial production much greater than in any of the pre-war crises. However, with so many young men at the front, there wasn’t any unemployment.
The surplus of idle money capital created by the 1913-14 recession was rapidly absorbed and got tighter as war-time shortages drove up commodity prices. Already high commodity prices relative to production prices on the eve of the war were illustrated as the stagnation of gold production gave way to a growing recession in gold production.
Commodity prices rose far above production prices to a degree never before observed in the history of capitalism. It made gold production relative to other branches of production ever less profitable.
This was a mirror image of what had prevailed in the wake of the gold discoveries of the mid-1890s. Gold production declined, leading the rate of growth in the global supply of money material to decline in terms of weight and even more when the effects of higher commodity prices caused by war were taken into effect.
Never before had basic economic contradictions and the social and political contradictions of capitalism been turned up to such a high pitch. The first to pay the price was the Russian Czar, and soon after that, the landowners and capitalists of what was now the former Russian Empire as the Russian Soviet Republic were born in Petrograd (Saint Petersburg, later Leningrad) on November 7, 1917.
The future of the world hung in the balance. However, capitalism had no intention of dying without a fight.
A deep recession in 1920-21 but no Great Depression
After the war ended in November 1918, the explosive economic contradictions led to the sharp but brief recession of 1920-21. At the end of a normal economic cycle, an excess of commodities measured in terms of their price tags — themselves measured in gold terms — develop relative to the quantity of gold.
The excess of (non-money) commodities relative to gold in terms of their price tags reflects both the increase in the quantity of these commodities measured in terms of their use values—hence the overproduction—and, to a lesser extent, the rise in their prices measured in terms of the use value of gold. The war economy of 1914-1918 that replaced the world recession of 1913-14 restricted the rise in commodity production compared to what would have occurred if the economic cycle that began with the onset of the world recession in 1913 had been allowed to complete its normal course.
During the war, the production of civilian commodities declined. Once the war ended in November 1918, the production of the means of destruction was curbed to make possible the resumption of normal expanded capitalist reproduction. Canceling war orders by the government led to a brief conversion recession that ended within six months, as normal civilian production resumed. At this level, production was about where it had been on the eve of the war among the main capitalists but not higher as it would have been after a normal industrial cycle.
The deep recession of 1920-21 was not so much a crisis of the general overproduction of commodities as a downward adjustment of market prices back toward their prices of production. Like a normal economic cycle measured in market prices, the quantity of gold represented by total prices of non-money commodities was high relative to the amount of gold then in existence.
But in terms of the use value of these commodities, unlike in a normal industrial cycle, there was little increase in commodity production since the previous peak in the industrial cycle that occurred in 1913. The economic crisis of 1920-21 involved the resolution of the high prices of commodities relative to their production prices — and ultimately their labor values — rather than actual overproduction. The crisis saw an unusually sharp price drop, resolving the crisis. A sharp recession followed by a rapid recovery occurred. But there was no Great Depression. (5)
The rapid recovery from the recession of 1920-21 gave the outward appearance that the economic and political crises caused by the world war had been resolved. This was an illusion.
The very speed at which the crisis of 1920-21 was resolved created a problem: The lack of overproduction in 1920 meant that the drop in market prices ended before prices had dropped to and below their production prices. That this is true is shown by the fact that gold production recovered only partially after 1921, remaining below its level in 1914 on the eve of war and remained there throughout the decade.
At the same time, the level of market prices defined in gold terms was higher than in 1914. As the industrial cycle of the 1920s progressed, the level of commodity circulation defined in terms of commodity use values rose above the 1914 level. This planted an economic time-bomb that would only go off at the end of the industrial cycle that began with the 1920-21 recession that had reset the industrial cycle after it had been interrupted by the world war.
The decade of the 1920s was relatively peaceful, with no major wars or pandemics to disrupt the industrial cycle once the so-called Spanish flu pandemic ran its course. The industrial cycle of 1920-29 appeared normal, giving the appearance that global capitalism had overcome crises caused directly by the aftermath of the war, such as the German hyperinflation of 1923 and the impact of the Russian Revolution.
However, beneath the surface, things were far from normal in the sphere of the relationship between market prices, production prices, and values. Until the contradiction between market prices and production prices and values was resolved, a lasting stabilization of capitalism lasting for several decades could not occur despite outward appearances to the contrary.
For the time being — and of great interest for the study of the history of Communist International and the Soviet Union during the 1920s — the conflict between market prices, production prices, and labor values was largely invisible.
But not entirely invisible. The conflict between market prices and production prices and values showed itself first in an abnormally slow growth rate of the total quantity of money material.
As a result, during the capitalist prosperity, money markets were tight. U.S. bank failures were far higher during the 1920s than before World War I, though for the time being, they were confined mainly to small country banks. (6)
Capitalist economists complained about a global shortage of gold. The country most affected by the shortage of money was Germany, which the victorious imperialist countries had forced to make reparation payments.
Germany was obliged to borrow much of its money capital from the United States, now the country that was richest in both money and real capital. Germany was still rich in real capital — industrial capacity in steel, chemicals, and other industries — but it was desperately poor in terms of money capital. In those years, the general global shortage of money capital worked to restrain political and military adventurism on the part of the imperialist countries. Hence their relatively peaceful character.
Germany, which was especially dependent on borrowed money capital from the U.S., was in no position to carry out aggressive political-military policies. The U.S. itself was in a far better position than any other imperialist power. However, the U.S. capitalist ruling class pulled back from the aggressive policies advocated by Democratic wartime president Woodrow Wilson.
With money markets relatively tight, the high level of government spending and borrowing that would have been necessary to finance any move on the part of the U.S. to build a world empire would have driven interest rates higher, risking banking and financial instability. The majority of the U.S. ruling class rejected the world empire-building policies advocated by Wilson’s supporters — forerunners of today’s “Party of Order” — preferring to return to the policies they’d followed in the years after the slaveholder rebellion — the U.S. Civil War.
This was a policy of industrial protection combined with low military spending and limited military interventions. Instead of taxing away profits to spend on the military or borrowing money that would have raised interest, what might be called the “American First” party followed a policy of low taxes and low government spending. These policies were dubbed isolationist as opposed to Wilson’s internationalism.
Wilsonian internationalism involved higher military spending, government borrowing, and higher taxes. The isolationists that had the upper hand, represented by the Republican Party, figured that U.S. industry would dominate the world market because it could produce commodities with less labor, manifesting as the lowest cost prices in the world.
U.S. capitalists believed they didn’t need huge military forces to dominate foreign markets by force when they could simply dominate them economically. Unwanted foreign competition in the domestic market was dealt with through high tariffs following the traditional Republican Party policies. These policies had worked well for U.S. capitalism since the Civil War, and the so-called isolationists believed such policies would continue to work. But they were soon proven wrong.
Great Depression leads to war
There have been many periods of depression in the history of the capitalist mode of production. So far, nothing comes close to the crisis and resulting depression of the 1930s. Bourgeois economists have redefined the term depression to mean a depression at least as extreme as the 1930s. Before then, the term depression meant any period of sluggish business where unemployment among workers and excess capacity were higher than average.
It is no accident that the most extreme of all depressions in the history of capitalism came after an all-out war that led to an unprecedented deviation of market prices from production prices and values. This upward deviation of prices from values — values are determined by the quantity of (abstract) labor necessary to produce commodities, including the money commodity under given conditions of production — led to the continuation of the depression in the level of production of money material, gold, that started during World War I.
As the industrial cycle unfolded in the 1920s, the global gold shortage caused the global capitalist economy to become dependent on credit to an unprecedented degree. The biggest providers of credit were U.S. capitalists.
It’s said in history books and internet videos that the Wall Street Stock market crash of October-November triggered the Great Depression, even if it wasn’t the underlying cause. Contrary to these sources, the 1929 stock market crash did not trigger the economic crisis that became the Great Depression.
The real trigger was a cyclical surge of global industrial production centered in the United States that began in 1928 and continued into early 1929. The credit inflation that accompanied this boom pushed the credit system, built as it was on a small quantity of gold, to its limit. By mid-1929, credit could not be inflated further, and the world economy began to slip into recession. The high stock market prices worked toward further tightening credit, hastening the onset of recession, but the industrial boom was the main cause of the credit crunch.
The stock market crash reduced the value of the stock market indexes in New York by about 40% over three weeks. The rich became aware that something was very wrong with the economy when their stock market portfolios suddenly dropped on average by 40% — in some cases a lot more — with some of them being wiped out completely. Workers became aware that something was wrong as they began to lose their jobs in increasing numbers from mid-1929 onward. But in class society, history is written by the rich for the rich, and it’s the stock market crash that’s remembered.
Before the crisis began in mid-1929, Germany was constrained by its lack of money capital. World War I caused a severe lack of money capital, caused by reparations, and then the hyperinflation of 1923, where the German mark dropped to essentially zero in terms of U.S. dollars and gold, the money material.
In contrast, Germany’s real capital remained intact. But in terms of money capital, Germany was a monetary vacuum. Like nature, the money market abhors a vacuum. In contrast, the United States had not only a huge amount of real capital but also a relatively large quantity of money capital.
As a result, interest rates were far higher in Germany — reflecting the extreme shortage of money capital — relative to the United States, where interest rates were lower, reflecting an abundance of money capital. At the end of 1923 the old German Reichsmark depreciated against gold and the U.S. dollar almost to nothing. It was replaced by the Rentenmark, which was introduced at the end of 1923. A new gold-backed Reichsmark was introduced in 1924 as a permanent replacement for the Rentenmark – which had supposedly been backed by the rental value of German land. Once the new Reichsmark was stabilized, U.S. money capital poured into Germany in search of higher interest rates.
This linked the economies of the two countries. A wave of bankruptcies in Germany would spread to the United States and its banking system. Meanwhile, as long as Germany depended on money capital borrowed from the United States, its ability to carry out aggressive political and military policies not in line with U.S. imperialism was largely nonexistent, reinforcing the status quo that had emerged from the war.
Though it had a relatively large amount of money capital, the U.S. still operated in the global tight money environment. Unlike pre-war, the price of agricultural products and other primary commodities was low. This meant that from 1920 on, rural U.S. was in a depression even as industry boomed. As mentioned above, banks in rural areas went under in considerable numbers even during prosperity. The U.S. economy was paralyzed when these bank failures spread to urban banks in the early 1930s.
The U.S. government reacted to the global tight money environment by spending as little money as possible. The huge military expenditures required to maintain today’s global empire — or rules-based international order as Washington spokespeople call it — were incompatible with the fiscal policies of 1920s Washington. These policies were designed to prevent the U.S. federal government from competing with the private sector for the limited quantity of available loanable money.
The super-crisis of 1929-33 changed all that. The crisis radically reduced the quantity of commodities in circulation while reducing their prices in terms of the use value of gold, causing money to drop out of circulation and flow into the banking system. However, at the height of the crisis, between 1931 and 1933, money flowed from the banks into private hoards. But from 1933 on, this money returned to the banking system.
Due to the decline in market prices, whether measured in dollars or gold, prices were no longer above production prices. They fell below production prices, finally reviving global gold production, which began to rise above pre-war levels. As we have explained throughout this blog, surplus value has to be realized in terms of the money commodity to become profit.
However, gold-producing industrial capitalists do not have the problem of realizing the surplus value contained in the commodities they produce in terms of gold because the surplus value contained in newly mined and refined gold already exists in the form of gold. Gold is the material substance in which profit is measured.
Due to the sharp rise in both the absolute and relative profitability of gold, following the workings of the law of value, global gold production began to rise as production in other industries collapsed. Not only was money falling out of circulation, but the quantity of money material, both absolutely in terms of weight and relatively in terms of the market prices of commodities, began to rise at an accelerated pace as gold production increased. The result was a rapid rise in bank reserves, above all in U.S. bank reserves.
From Depression to war
The money market then relaxed, and interest rates plummeted. It became possible for governments, especially the U.S. government, to borrow great amounts of money without raising the rate of interest. This was all the more true of this because the rise of Nazi Germany caused European capitalists to move money in gold form to the United States.
The New Deal government of Franklin Roosevelt did not have to print money. Instead, gold newly mined and gold flowing in from Europe went into the Treasury, expanding the dollar reserves of the banking system. Despite rising New Deal expenditures, interest remained very low.
Increased government borrowing, all things remaining equal, raises interest rates. However, look at the concrete history of interest rates and government deficits. As a general rule, you’ll find that the higher the central government’s deficit, the lower interest rates are.
The reason for this counterintuitive result is that economic downturns cause money to drop out of circulation and flow into the banks, lowering interest rates. During recessions, tax revenues decline while government expenses rise. The central government has to borrow more money to meet its expenses. This in and of itself raises interest rates, but this effect is swamped by the other effects of recessions and depressions that follow them. (7)
During recessions, reduced borrowing from industrial and commercial capitalists who cancel expansion plans and reduce inventories, reduces the demand for credit and lowers interest rates. Unemployed workers don’t borrow money to purchase consumer durables, and even workers who fear that they may face partial or total unemployment tend to postpone purchases. The increase in the quantity of loanable money capital combined with reduced demand for credit means that the competition for credit between the central government and industrial and commercial capitalists and consumers declines even as central government borrowing rises.
How economic downturns increase the war danger
While this doesn’t automatically result in increased deficit-financed war spending, it does remove the economic and financial obstacles that normally provide pressure against increased war spending. At the same time, mass unemployment produced by recession reduces competition among the buyers of labor power — the capitalists — and increases competition among the sellers of labor power—the workers. The capitalists become less concerned that a rise in the size of the armed forces will increase competition for labor power among the capitalists for the remaining labor power and drive up wages.
Second, a great amount of idle plant and equipment means that much of it is freed up to produce products for war. Workers are freed to work either in munition plants or serve directly in the armed services.
When war spending increases while the employment of both machines and workers is high, war spending reduces the plant and machinery available for the civilian economy. And crucial as idle money piles up in the banks, the government can increase its borrowing and still leave plenty of loan money capital left over for industrial and commercial capitalists as well as consumers to tap into.
Under these conditions, the Monthly Review school is correct that war spending or even a shooting war is an excellent way to lower unemployment without creating any unwanted competition with the private sector.
Let’s see how this played out under the concrete conditions of the 1930s.
The economy of Nazi Germany between 1933 and 1939
Mass unemployment lingered in Britain right up until 1939. In the U.S., mass unemployment didn’t end until 1941-42, when a full-scale war economy replaced the lingering mass unemployment of the Depression. Recovery was faster, however, in Nazi Germany, where something like capitalist “full employment” was achieved already by the late 1930s. Nazi Germany is often viewed as a successful implementation of Keynesian economics. Indeed, a German edition of the General Theory was published in Nazi Germany.
Anwar Shaikh believes that the success of Nazi Germany’s economy is due not only to the stimulative effects of deficit spending and monetary creation by the Hitler government and Reich Bank — the German equivalent of the U.S. Federal Reserve System — but also the result of the destruction of the trade unions, making possible a wage freeze, and price controls that fascism alone made possible. Shaikh believes that the rapid economic recovery in Nazi Germany was rooted in German fascism’s success in crushing the labor unions, without which the “tight labor markets” would have caused wages to soar and the rate of surplus value to drop, which would have soon brought down the rate of profit. This would have quickly led to a new economic crisis.
However, there were other factors at play in the economy of the 1930s at work, which Shaikh’s belief in the possibility of non-commodity money under capitalism prevented him from seeing. First of all, Nazi Germany’s “full employment” was achieved in part by pressuring women to drop out of the workforce.
In “National Socialist theory,” such as it was, the job of German women was to reproduce children who would serve as future workers and soldiers, and do housework and take care of children, freeing the men to work in either industry or serve as cannon fodder in the expanding armed forces.
What Shaikh doesn’t see due to his belief that non-commodity money is possible under capitalism is that the shift from tight to easy conditions on the world money market caused by the super-crisis of the early 1930s, opened up possibilities for German imperialism, which simply did not exist before the crisis.
The replacement of a stringency of money with a glut of idle money worldwide freed the German government to follow a far more aggressive policy. The fascist government of Adolf Hitler was put in place to take full advantage of the new situation that the preceding economic crisis had created.
The German economy, thanks to the large war expenditures of the Hitler government, did indeed recover much more rapidly than the economies of the other capitalist countries, much like Keynesian economics and the Monthly Review school would predict. However, if anything like free trade had prevailed, this would have meant that Germany would have run a large balance of trade deficit, which would have put massive downward pressure on the German Reichsmark. This would have quickly led to a new economic crisis for Germany.
How did the Hitler government deal with this situation?
The response of the Hitler government was to establish strict government control of foreign trade along neo-mercantilist lines. There was no state monopoly of foreign trade as there was in the Soviet Union. Foreign trade continued to be carried out by individual capitalist enterprises and not the state.
However, any capitalist who wanted to import commodities from abroad had to obtain an import license from the government. Import licenses were only granted if they were absolutely necessary or met vital needs that could not be replaced by domestic production or were necessary for rearmament. The aim was to prevent money from flowing out of Germany, which would trigger a new economic crisis if it did.
Working with German Zionist organizations, the Nazi government encouraged German Jews to emigrate to Palestine as part of its anti-Semitic policies to create a Jew-free Germany. However, to prevent an outflow of money from Germany as German Jews migrated to Palestine, the Nazi government worked out a policy that obliged Jewish emigrants to Palestine to use the money they took with them to purchase German manufactured goods. This way, money that was removed from Germany by the Jews being driven out of Germany would flow right back into Germany.
Here, we see anti-Semitism, Zionism, and mercantilism working together. The ability of German citizens — Jews were no longer considered German citizens by the Nazi government — who traveled abroad to use their marks to purchase foreign currencies was severely restricted. Through these policies, the German economy was put into a neo-mercantilist straight jacket as it prepared for war.
In 1938, Germany annexed Austria and pocketed Austria’s gold reserves, increasing the quantity of money in Germany and the ability of the Hitler government to continue to borrow money as it pushed ahead with its military buildup. However, by 1939, the financial pressure on Germany’s economy had increased. This led to a split in the German leadership. The head of the German central bank, Hjalmar Schacht (1877-1970), advocated a policy of austerity that would have meant “tight money,” recession, and rising unemployment that would have reduced the popularity of the Hitler government. (8)
Up to this point, the “full employment” economy, despite the reduced quality of consumer goods due to a lack of imports, had done much to prop up Hitler’s popularity among the German people. Ordinary Germans viewed the lack of imported consumer goods as a much less severe problem than the massive unemployment of the early 1930s.
However, if unemployment returned, the popularity of the Fuhrer and his government was bound to decline. So Hitler decided to fire Schacht and solve Germany’s growing economic problems through war instead. If Germany captured sources of raw materials and integrated them into the economy, Germany would not have to import them, thereby reducing the flow of money out of Germany. And if raw materials produced in conquered territory were exported, the result would be an inflow of money into Germany instead. A win-win situation. This was Hitler’s alternative to Schacht’s policies of tight money, austerity, and return to unemployment. The logic of Nazi neo-mercantilism pointed in one direction — war.
To be continued
(1) During Reconstruction, many African-American males gained the right to vote. But during the reaction against Reconstruction that followed its end in 1877, the right to vote for African-American men was taken away. It was finally regained in 1964 thanks to the Civil Rights Movement, and this time it included African-American women. However, today, the right of African Americans to vote is again under attack, this time through largely Republican voting suppression tactics. (back)
(2) The brutal reparations that the victorious imperialist powers imposed on Germany played no small role in the coming to power of Hitler and his Nazi party. Later, as Hitler’s persecution of the Jews that preceded the Holocaust developed, the United States and other imperialists refused to take them in. This is not to deny the responsibility of the Nazis for their crimes but rather to emphasize that these crimes were made possible not only by the Nazis or German imperialism alone. In reality, the Holocaust was very much the joint product of all the imperialist countries. (back)
(3) The economists and the media credit the new expansion of the “money supply” to the central banks, which have eased monetary policy and “reduced interest rates” to encourage economic recovery. However, in reality, the fall in interest rates and easing of the money market are due to a portion of the currency falling out of circulation due to the recession and the rising production of money material, which allows the central banks to expand the quantity of currency over time without provoking a depreciation of the currency, leading to a wave of inflation that would drive up interest rates. (back)
(4) Large-scale bank runs can cause idle money to flow out of the banks into private hoards. However, as soon as the crisis subsides, this money returns to the banking system. (back)
(5) In Germany, where the Reich Bank was already printing paper money at furious rates, there was no 1920-21 recession. However, the German economy was still badly disorganized, with industrial production remaining low.
In Germany and other countries facing severe inflation, instead of prices falling in terms of paper currency, prices were lowered in terms of gold — and U.S. dollars — through the depreciation of the paper currency, which lowered the market prices of commodities in terms of gold and dollars. (back)
(6) In the 1920s, U.S. bank capital was far less centralized than today, and many small country banks still existed. (back)
(7) Traditionally, and in this blog, depression is defined as a phase of the industrial cycle that follows the lowest point of industrial production reached during the recession but before the production level exceeds the previous peak. According to this definition of depression, which is the traditional definition, every recession is followed by a longer or shorter period of depression. (back)
(8) Schacht eventually ended up in a German concentration camp toward the end of the war. He was then tried at Nuremberg with other German leaders. But being highly respected in international financial circles, he was, over the objection of the Soviet judges, acquitted of the charges leveled against him at Nuremberg. Respected bankers simply don’t serve prison time, let alone go to the gallows in “civilized” capitalist countries. Wikipedia reports that Schacht enjoyed a long post-war career as a financial advisor to various governments after the war. (back)
A Critique of Crisis Theory 