The New Banking Crisis

On Wednesday, March 8, California-based Silvergate Bank announced it was voluntarily winding up operations. The same day, Silicon Valley Bank, the favorite bank of the area’s companies and venture capitalists, announced it was selling off its portfolio of government bonds to raise cash. This triggered a run on the bank, forcing the Federal Deposit Insurance Corporation (FDIC) to shut it down on March 10. (1) On Sunday, March 14, the FDIC announced it was shutting down New York-based Signature Bank. Both Silvergate and Signature were commercial banks heavily involved in lending to cryptocurrency companies. Problems leading to their collapse can be traced back to the collapse of Sam Bankman-Fried’s FTX cryptocurrency exchange last year.

Under U.S. law, bank deposits are insured up to $250,000. The idea is to insure small and medium-sized deposits. They wasted little time announcing that all deposits would be fully redeemed. The sound (or not-so-sound) commercial banks will be asked to cough up the money to make up for the massive losses FDIC will incur by paying off large capitalist deposit owners who weren’t supposed to be insured.

The FDIC hopes to stave off a general collapse of the currency system, which is based on using bank deposits as currency instead of traditional dollar bills and coins. If the bank deposits as currency were to collapse, it would lead to an economic crisis worse than the bank runs of 1931-33. Those marked the transformation of the recession that began in 1929 into the Great Depression. In bygone years, in capitalist countries, spending money mainly meant using coins and some paper banknotes redeemable in gold (or silver) at the government treasury or the central bank. At this earlier stage of capitalist development, extreme monetary crises in the form of bank runs did not threaten the purchasing power of the basic currency. (2)

After years of repeated dollar depreciations, coins — except special gold and silver coins, meant as a means of accumulation — are almost worthless except in large quantities or for making change. Even paper Federal Reserve Notes — green dollar bills — printed in denominations of $1, $2, $5, $10, $50, and $100, buy little these days. Today people use their bank accounts as a day-to-day currency that circulates through credit cards, debit cards, and smartphones — to purchase weekly groceries (and morning coffee). If a run on the banks paralyzed the banking system, even if only for a short time, the circulation of commodities would contract to an extent impossible at earlier stages of capitalist development. A Great Depression worse than the 1930s would quickly develop.

This situation gives today’s capitalists great extortion power. In normal times, capitalists, the government, and the media assure us of a strong, well-capitalized, and sound banking system. Banks may be on the verge of collapse in China or Russia but not here. But this time, once again, the crisis broke out — in the U.S., not Russia or China — capitalists insist the FDIC, the Federal Reserve System, or the Treasury bail out the large depositors or tens of millions will lose their jobs and face hunger if they are lucky, and starvation if they’re not, in a new and worse edition of the Great Depression.

Over the weekend of March 11-12, the Biden administration gave in to this extortion — though with Biden’s history of loyal service to the capitalists, giving in is not exactly the correct expression. They wasted no time claiming the taxpayer — unlike in 2008 — would not have to pay anything because the losses incurred by the FDIC would be paid with a special levy on the commercial banks. The levy to bail out the FDIC will tend to contract bank credit. If this happens, the world economies — including the U.S. — would sink into a deep recession, causing mass layoffs within a few months.

And there’s another danger if the capitalists become convinced their bank deposits are as good as the dollar bills issued by the Federal Reserve Banks. In that case, they may decide Federal Reserve Notes are no more secure than bank deposits without the FDIC, Federal Reserve, and government guarantees. This would trigger a run on the dollar and paper currencies linked to it under the dollar-centered international monetary system into gold, the money commodity. One of the monetary roles of gold is as the coin of last resort. This danger is real, as shown by the movement of the dollar price of gold since the crisis began.

Just before the crisis, on Friday, March 11, the dollar price of gold closed at $1872.70 an ounce. After the first week, on Friday, March 18, gold closed at $1993.70. The rise reflects, in part, the fall of the yield on 10-year government bonds from 3.6950% to 3.3950%, a significant drop for one week. This is a typical flight to the safety of government bonds. It also reflects speculation that the Federal Reserve System’s open market committee won’t raise its target for the federal funds rate as much as expected, or maybe not at all, to contain the crisis by creating more dollar-denominated currency. If the Fed eases in a bid to secure a soft landing from the COVID aftermath boom, it’ll trigger a run on the dollar into gold, leading to stagflation.

With stagflation comes the reduction of the purchasing power of our wages and any bank accounts we have. Recession will follow as the Federal Reserve System is forced to engage in a new and perhaps even more extreme version of the Volcker shock to save what’s left of the dollar-centered international monetary system. Stagflation would guarantee a hard landing.

In the current crisis, the Federal Reserve is forced to prop up bank deposits as the currency system on one side while staving off the collapse of the international monetary system on the other. These are contradictory goals. The end of the first week of the banking crisis resembled the situation that prevailed between August 2007 and 2008 before the September 2008 crash. Then, what was called the subprime mortgage crisis threatened a credit and banking collapse, but the weakening dollar undermined the Federal Reserve’s ability to counteract the crisis.

The crisis was finally resolved with the collapse of Lehman Brothers, transforming a mild recession into the Great Recession. Millions lost their jobs worldwide. However, the dollar-centered international monetary system was saved. But will Biden get through this new crisis without a Depression 2.0 or the end of the dollar-centered international monetary system?

The actual cause of the crisis

Writing in Time magazine, Andrew R. Chow wrote, “Most banks, by nature, [because they are by nature profit-making businesses -SW] use their customer deposits to make loans, and then make money off the spread, which allows them to earn income and their customers to earn interest. But financial institutions are currently facing a changing economic climate, in which the free-money era of ultra-low interest rates has ended as the Federal Reserve tries to rein in inflation by making it more expensive to borrow.”

Remember that the current crisis wasn’t caused by the Federal Reserve System but by commodity overproduction that developed as the COVID shutdowns of 2020 were relaxed and ended, a process I’ve examined since the second half of 2021.

To review, after the crisis of 2007-09, businesses were cautious about accumulating inventories — expanding commodity capital — after having been burned in 2008, as well as carrying out fixed investments to enable them to produce more commodities. This prevented a new worldwide overproduction crisis for years at the price of lingering unemployment and eroding living standards. However, by late 2019 signs of overproduction were again developing, causing a spike in interest rates, though the situation had not yet reached a crisis.

But then came COVID. In March 2020, the ruling class feared the virus would decimate the working-class population to such an extent their ability to squeeze surplus value out of the survivors would be impaired. They used state power to shut down much of the economy, throwing millions out of work overnight. These fears were not without foundation. More than a million people died in the U.S. alone and millions worldwide. Many who survived have ended up with “long COVID,” severely limiting their ability to work and produce surplus value.

What normal cyclical mechanisms of multiplier and accelerator effects failed to accomplish for a decade following 2007-09 when it came to brewing up a boom, the forced underproduction of the COVID shutdowns finally accomplished. The shutdowns caused a forced inventory reduction or contraction of commodity capital. The underproduction crisis triggered a mad dash of the industrial and merchant capitalists, financed by the financial capitalists, to rebuild their inventories as soon as the shutdowns eased out of fear of losing customers to their competitors. The normal inventory controls businesses employed to avoid an excessive inventory build-up was thrown out as commodity demand soared.

Demand exceeded supply at prevailing prices, resulting in high prices and higher profits. We can denounce the individual capitalists for their corporate greed, but the truth is the laws of competition force them to act this way. (3) The aftermath boom also meant a rise in the demand for labor power. But real wages declined, resulting in strikes and union organizing.

The Federal Reserve System, headed by Trump appointee Jerome Powell, hoped inflation would disappear as the economy reopened. But once set in motion, the multiplier and accelerator effects operations accelerate a boom — and associated inflation — until they run into the barrier of a shortage of ready cash. At that point, they go into reverse. The boom is replaced by recession to liquidate overproduction at the price of millions of jobs. (4)

Why can’t the Fed produce enough money to avoid the crunch and keep the boom going? This way, the capitalists could continue enjoying profits while the workers have jobs and people previously unemployed find jobs, a win-win situation. These are the policies John Maynard Keynes advocated in “General Theory,” published in 1936. What prevents the Federal Reserve — and other central banks — from increasing the quantity of money to avoid a money crunch replacing the boom with recession is money’s commodity character.

If the Federal Reserve System is not responsible for the crisis, who is? On the left, progressives, trade unionists, and academic Marxists blame the reckless bankers who failed to show the necessary caution, greedy corporations who took advantage of soaring commodity demand to raise prices and profits, and, yes, the Federal Reserve System for raising interest rates. If only the bankers were more cautious, the corporations less greedy, and the Federal Reserve System didn’t raise interest rates, capitalism could purr along without crises, except those caused by natural disasters.

The right finds other villains. Some blame Vladimir Putin and the Russo-Ukraine war for causing primary commodity prices like oil and natural gas to rise. In the past, Arab Oil sheiks and Jewish bankers, or just Jews, have been blamed for causing crises. After all, they say, back in the day, the Jews killed Christ — God Himself — so causing an economic crisis would be an easy job.

Today the mainstream press blames the working class for the crisis. Economists claim wages determine the general price level. They say that we wage earners have somehow taken advantage of the labor shortage to push up our wages. Economists and the media say the rise in wages led to inflation. Inflation indeed led to a decline in real wages. But if we are to believe the economists, the increase in money wages was what lead to higher prices, which, in turn, is responsible for the drop in wages. Economists claim the key to raising real wages in the future is to lower money wages now!

How do they propose to get out of this situation? They say the only way out is for the Federal Reserve System to raise interest rates to slow employment growth. Slower employment growth will increase competition for jobs and stop the growth of wages, which will reduce inflation to the Fed’s target of 2% per year. Reduced inflation will then allow real wages to rise as productivity rises.

They say the rise in Fed-engineered interest rates caused an increase in the interest rate on government securities — the price of government securities dropped. The well-meaning bankers of Silicon Valley Bank, who put their money in government securities, saw their investment depreciate, making it impossible to pay back their depositors when a run developed. Higher interest rates also brought down the price of cryptocurrencies, causing the collapse of FTX last year and Silvergate and Signal bank this year (2023). But if the rise in wages had not happened in the first place, none of this would have happened because there would have been no inflation.

The only problem with this explanation is that it’s false, as I have explained throughout this blog.

But if neither the workers, Putin, nor the Federal Reserve System caused the crisis, then who did? The answer is the capitalists as a class. Bankers did make reckless loans to industrial capitalists who produced too many commodities because the merchant capitalists ordered them. At the same time, the consumer bought the commodities either directly on borrowed money lent to them by the banks or with money borrowed by the government and sent to them by the government during the COVID shutdown. The current crisis was caused not by any individual capitalists or corporations, the Federal Reserve System, the federal government, or Putin but by the capitalist class as a whole.

The capitalist class didn’t want it but produced it all the same. So how did they cause this crisis and all those preceding it since the first crisis of general overproduction of 1825, some 198 years ago?

The answer is that the capitalist class insists on maintaining the private ownership of the now highly socialized and globalized means of production, retaining the commodity character of production. Among the consequences is the commodity nature of money despite attempts to overcome it. Behind prices in terms of dollars, euros, rubles, yuan, and rupees, there lurk prices in terms of the money commodity, gold. So profits must be reckoned in gold terms.

Yes, rising prices in terms of gold swell profits even in gold terms, but once they rise above the value of commodities measured in gold, these prices sooner or later will crash, wiping out profits in gold terms. This is how the law of the value of commodities works. The details are dealt with throughout this blog.

If the Federal Reserve System continues to create more dollars not backed with gold to keep the boom going, profits in dollar terms remain high for a while but turn negative in gold terms. This causes capitalists to try to transform as much of their capital as possible into gold. The resulting run on gold accelerates dollar inflation and threatens to bring down the dollar-centered international monetary system. Carried to its logical conclusion, the dollar currency system would collapse even within the U.S., bringing the circulation of commodities almost to a standstill. It would result in the worst “Great Depression” possible.

On the other hand, if the Federal Reserve System allows the bank money system to become paralyzed by bank runs, the dollar will be saved, but the economy will fall into a second Great Depression worse than in the 1930s. So the Fed is attempting to find a middle way to keep the system of bank deposits as currency functioning without bringing down the dollar’s role as the world currency and the other currencies linked to it.

The aim is to achieve a relatively soft landing, even if that means a world recession with millions losing their jobs. But if the Fed is successful, it’ll keep the recession from turning into Depression II while saving the international monetary system. Whether they can pull it off this time remains to be seen. But even if they do, the world will face a similar crisis again in about ten years.

Rising danger of war

Ultimately, the developing recession will give way to a new upturn in the industrial cycle. But the upturn will contain a danger of its own — an increased risk of war. Last year when Liz Truss’ new Tory government presented a plan to cut taxes for the capitalists, the British government bond market crashed, and Truss was out of office within days.

The overproduction of the COVID aftermath boom made the global money market tight. However, the situation in that market will reverse as overproduction gives way to the underproduction of a world recession. In the wake of every crisis, huge amounts of money fall out of circulation and accumulate in the banks.

This gives capitalist governments an increased ability to borrow money to finance war. In the wake of a major capitalist crisis, war spending makes an ideal post-crisis stimulus program from their viewpoint. Whether or not the developing recession and upturn in the following industrial cycle lead to a war among the great powers in the coming years will depend on the course of the class struggle. Only a world revolution transforming the worldwide capitalist system into a global socialist system can stop war.

Last month I had expected to write more about the war danger as regards the Chinese island of Taiwan and the semiconductor industry, which I had already examined a month earlier. The banking crisis that broke out just as I was about to start writing about the war danger forced a change in plans. I’ll return to this theme as soon as possible, which the prospect of a world recession is only making more urgent. For now, I’ll turn to Anwar Shaikh’s claim that there’s no such thing as monopoly capitalism, only what he calls real capitalist competition.

Two different theories of monopoly capitalism

Shaikh believes capitalism is characterized by real competition, not the perfect competition of the neoclassical mathematical models. This is the theme of his monumental “Capitalism.” However, he rejects not only perfect competition but also the view dominating the Marxist left since the early 20th century that capitalism has entered the stage of monopoly capitalism. Shaikh is opposed not only to orthodox neoclassical bourgeois economics but also to the Leninist theory of imperialism as the monopoly stage of capitalism. This view dominated the Third (Communist) International (1919-1943).

The theory that capitalism has a distinct monopoly phase comes in two flavors, though Shaikh’s “Capitalism” lumps them together. On one side, we have the views that dominated the Third International based on the work of the Austrian-German Marxist Rudolf Hilferding (1877-1941) in his book “Finance Capital” first published in 1910. Before 1914, Hilferding was — with Karl Kautsky (1854-1938) — the leader of the Marxist center of the German Social Democratic Party, which was then the leading Marxist party in the world. (5) The Hilferding-Kautsky center opposed the revisionism of the right as well as the revolutionary left represented by Rosa Luxemburg (1871-1919) and Karl Liebknecht (1871-1919).

Hilferding claimed a handful of Berlin banks dominated the German capitalist economy. The banks controlled the monopolistic industrial corporations. Monopolistic corporations are corporations that are able — through trusts, cartels, and syndicates — to charge prices above the price of production. As a result, they could appropriate more than the average profit rate on their advanced capital.

The banks were originally money capitalists who had turned themselves into industrial capitalists through their investments in monopoly industrial corporations. Hilferding defined bank capital invested in industrial corporations as finance capital. In the period of monopoly capitalism, Hilferding held that finance capital, a hybrid of banking and industrial capital, had become capital’s dominant form.

Lenin’s “Imperialism,” first published in 1916, praised Hilferding’s finance capital, though he noted the work showed a tendency toward opportunism and made a mistake in the theory of money. Lenin did not elaborate on the latter point — it seems to be a reference to Hilferding’s view that if a single world capitalist state were established, it would be possible to eliminate the metallic base backing the banknote currency created by the central banks. (6) Hilferding, writing at the peak of the international gold standard, was opening the way to the view (that today dominates academic Marxism) that it’s possible to establish non-commodity money without abolishing capitalism.

In reality, even if a global, overall single capitalist state could be established with a common global currency, it would be impossible to transform it into non-commodity money. The only way to end the role of commodity money is to abolish commodity production itself, meaning that commodity money can’t be abolished under capitalism since capitalism is the highest form of commodity production where labor power is a commodity.

In later years, Hilferding opposed the 1917 October revolution and the Soviet Union. He was the German Minister of Finance in 1923 and again in 1928-29. Forced into exile after Hitler’s rise to power in 1933, Hilferding was handed over to the German Gestapo in 1941 by the Vichy Government of France. He died in Gestapo custody. (7)

During World War I, Hilferding developed the idea of organized capitalism, which he saw as part of a peaceful evolution toward socialism. All that was necessary to transform capitalism dominated by finance capital into socialism was for the SPD to gain a majority in the Reichstag and establish its supremacy over the government and the banks, which already pretty much ran industry in a planned manner. Through his influence on Lenin’s “Imperialism,” he greatly impacted the Marxism of the era of the Third International (1919-1943) and Marxism itself to the present day. This was true even though, as a member of the post-World War I German SDP, he was an anti-Communist opponent of the Russian Revolution and the Third International.

Influenced by Hilferding, Lenin defined imperialism as the monopoly stage of capitalism. Shaikh considers capitalism to be imperialistic but rejects Lenin’s definition because he rejects the very concept of a monopoly stage of capitalism as put forward by Hilferding and Lenin.

Lenin’s theory of monopoly capitalism is more subtle than many other writings on the subject, which emphasize only monopoly. Lenin sees monopoly capitalism-imperialism as a combination of free competition and monopoly in conflict. In Lenin’s view, commodity production still reigns but is undermined by monopoly capital. While Hilferding defined finance capital as bank capital invested in industrial corporations, which leads to the domination of the banks over the industrial monopolies, Lenin defined finance capital as the bank capital fused with industrial capital to form finance capital based on the fusion of monopolistic bank capital and monopolistic industrial capital. I’ll examine Lenin’s view closely in a future post. (8)

During World War I, as a war measure, capitalist governments began to determine what capitalist corporations could produce rather than the market. This created what Lenin characterized as state monopoly capitalism.

State monopoly capitalism

During World War I, workers were armed and organized in military units by the state. Lenin and other Marxists hoped this would enable the European working class — now in uniform and armed — to seize political power. A workers’ state, the dictatorship of the proletariat, is nothing but the organized and armed workers holding state power.

At the same time, under the pressure of military events, the capitalist state was forced to dictate to the corporations what they were to produce. Usually, capitalists — driven by competition to earn the maximum profit rate — produce only to satisfy market demand. But during WWI, for the first time, the state told capitalists what to produce according to the needs, not for profit, but for the war. During the war, imperialism brought the European economy to the brink of transforming production for profit into production for use. (9)

This opened a gateway between wartime state monopoly capitalism and a socialist planned economy to meet the needs of the associated producers. But this gateway couldn’t be crossed without a revolution that would have replaced the wartime military dictatorship of the capitalists with the power of the armed and organized working class, the dictatorship of the proletariat.

If the armed and organized workers had overthrown the wartime military dictatorship and replaced it, the way would have been opened in Europe to replace capitalist production for profit with planned socialist production. However, a lasting seizure of power by the workers (supported by the poorest peasantry) happened only in the former Russian Empire, where conditions were least favorable for establishing large-scale planned socialist production.

After the war ended, attempts of the capitalist state to directly determine production were abandoned. Direct state planning of production fundamentally contradicts capitalist production for profit. Government mandates to monopoly capitalists are only adopted under the most extreme conditions. A recent example of such policies was the move by the U.S. government to order corporations under the Defense Production Act to produce masks and vaccines to fight the COVID-19 pandemic.

Despite the emergency threatening to reduce the size of the working class, making the production of surplus value more difficult, the Trump and the Biden administrations were reluctant to use the DPA powers to force production to counteract the pandemic when profit interests dictated otherwise. As a result, these state monopoly measures have been abandoned even as people continue to die from the virus, and production for profit again reigns supreme.

The fact that state monopoly capitalist measures are used only in emergencies did not prevent many former members of the Third International from claiming most forms of state intervention in the economy, especially Keynesian demand management policies, are state monopoly capitalist measures, and the extension of such measures can lead to a gradual, peaceful transition to socialism. (10) In the hands of increasingly opportunist communist parties, especially after World War II, the theory of state monopoly capitalism played a similar role to Rudolf Hilferding’s earlier theory of organized capitalism in the post-WWI social democratic parties.

Of course, Shaikh is opposed to the theories of organized capitalism as well as the theory of state monopoly capitalism presented as orthodox Marxism-Leninism by the post-WWII communist parties. But as mentioned above, another concept of monopoly capitalism is associated with Paul Sweezy, Paul Baran, and the Monthly Review school. Shaikh’s criticism of the theory of monopoly capitalism is aimed more at the MR school than the older Hilferding-Lenin theory, though Shaikh doesn’t distinguish between the two.

If the original theory of monopoly capitalism is represented by Hilferding’s “Finance Capital” and Lenin’s “Imperialism,” the MR school’s theory of monopoly capitalism is represented by Sweezy and Baran’s “Monopoly Capital,” first published in 1966. We must remember that Hilferding and Lenin were working-class politicians, not professional economists, even though they represented different tendencies within the workers’ movement.

In contrast, Paul Sweezy and Anwar Shaikh are academically trained professional economists who never belonged to working-class political parties. Sweezy, Baran, and Shaikh were all exposed to neoclassical theory during their academic studies, and they all came to reject that theory to varying degrees. As a result, their economic thinking is colored by neoclassical theory, which is not the case with Hilferding and Lenin, who had a Marxist foundation. Hilferding and Lenin’s monopoly theories are built on Marxist foundations, while the Baran and Sweezy theory is built on neoclassical economist theories. Shaikh makes a good case explaining this.

Shaikh holds that the monopoly capital theory accepts the neoclassical view of perfect competition.

Like the related Austrian school, the neoclassical school claims economic value arises from the scarcity of goods — produced by human labor or nature — relative to human needs. In both Austrian and neoclassical systems, surplus value — the interest on capital in the Austrian and neoclassical schools — arises from capital scarcity, not the working class’s unpaid labor.

In the neoclassical system, as long as perfect competition prevails and the economic system is in equilibrium, the workers receive the full value produced by their labor in the form of wages — there is no exploitation of workers by capital. While the Austrian and the neoclassical schools accept these basic views, the neoclassical system is more mathematical than the Austrian. Perfect competition is a mathematical concept similar to Plato’s theory of forms in philosophy rooted in Greek mathematics — claiming to analyze what a capitalist economy would be like if it were in perfect equilibrium.

While neoclassical economists know that capitalism is never in perfect equilibrium — a purely platonic concept — they assume the real-world capitalist economy is in a reasonable approximation to it. If we study the neoclassical claim of the form of a capitalist economy in perfect equilibrium, we learn how the real-world capitalist economy operates. State intervention in the economy is undesirable because the more it intervenes, the further away the real-world economy will be from its ideal form of equilibrium.

But how does an ideal — platonic — capitalism achieve perfect equilibrium? It can (if only ideally) through perfect competition. Labor unions tend, by curbing “perfect competition” in the labor market, to create involuntary unemployment and chronic poverty.

As the 1930s Depression rolled on, Sweezy graduated from Harvard and became acquainted with Marxism. However, it took a long time for him to unlearn the scarcity — marginalist — theory of value that had been drilled into his head at university. Even once he came to accept Marx’s labor-based theory of value, he seemed to think that the neoclassicals were saying the same thing as Marx when he explained that prices of production rule market prices. In Sweezy’s view, Marx was more profound socially than the neoclassicals, but the neoclassicals had a more mathematically developed theory. Sweezy didn’t see the two theories as incompatible.

Sweezy believed the marginalists — Austrians and neoclassicals — and Marx analyzed capitalism as it was in its competitive phase when perfect competition existed in the real world. Now it was necessary to examine the laws of monopoly capitalism, meaning analyzing how an economy dominated by monopoly competition works. Marx’s “Capital” was already on the verge of obsolesce when its first volume was published in 1867. The same was true of the works of the marginalists. Sweezy and Baran’s “Monopoly Capital,” published a century after “Capital, Vol. 1,” was an attempt to fill the gap. As they saw it, “Monopoly Capital” would do for the monopoly phase of capitalism what Marx and the marginalists had done for the competitive stage.

In the late 1930s and after, Sweezy held three economic theories. One was the neoclassical theory he learned at Harvard in the early 1930s. The second was the incompletely assimilated Marxism he’d learned as a kind of second language. The third was the Keynesian system, an amendment to the neoclassical system.

Sweezy was less attracted to Keynes’ theoretical analysis of the Depression but more to the practical implications of his work. While the neoclassical (and Austrian) school considered any intervention by the government in the economy as harmful, Keynes’ theory implied massive public works programs were necessary for full employment. While the neoclassical and Austrian theories slam the door on social reforms through government action, Keynes implied such measures were necessary and desirable. This reflected the spirit of the New Deal, which Sweezy — like so many others of his generation — enthusiastically embraced from the left.

Keynes and overproduction

Keynes had no concept of the relative general overproduction of commodities in the Marxist sense.

With Marx, once a commodity containing surplus value is produced, it’s an open question of whether the value and surplus value contained will be realized in the use value of the money commodity. The separation of money from other commodities and money capital from real capital makes it possible for every commodity (except the money commodity) to be overproduced relative to the money commodity.

Capitalism is not a system of production for human needs but for profit. (11) Capitalism produces commodities for the working class only for the production of surplus value and only when it is realized in terms of the use value of the money commodity.

During the downward phase of the industrial cycle, surplus value can be increased if capitalists employ unemployed workers. The problem is that the additional surplus value produced during a downturn cannot be realized. This is because capitalism has two internal, specifically capitalist, barriers to production. One is that production isn’t carried out if surplus value is not produced. The second is that production won’t be carried out if surplus value can’t be realized on the market as profit.

Keynes, overproduction, and degrowth

Keynes never challenged the marginalist theory of value that holds that goods have value because they are scarce relative to the subjective needs of the population. For Keynes, economic growth is fueled by the demands of a rising population. The greater the population, the scarcer the goods relative to the subjective needs of the population unless the production of goods increases. Keynes didn’t go beyond the marginalist view of surplus value arising from the scarcity of capital. In “General Theory,” he distinguished between profit appropriated by the industrial capitalists and interest collected by the money capitalists. (12)

Keynes reasoned a surge in production during a boom reduces the scarcity of commodities relative to the population’s needs. Industrial capitalists respond to a boom by increasing their plant and equipment investment and hiring more workers. This reduces the scarcity of capital, causing the profit rate on real capital to fall. If the monetary authority took timely action to reduce the interest rate as the profit rate on real capital falls, there would be no overproduction and thus no need for recession with associated mass unemployment to liquidate the overproduction.

To the extent there’s a concept of overproduction in Keynes, it’s the overproduction of capital relative to the prevailing interest rate. If the interest rate on money capital exceeds the profit rate of real capital, that economy will sink into recession. So the key to avoiding the evils of recession caused by overproduction is to reduce the interest rate in line with the falling profit rate. This way, there is no overproduction , recession will be avoided, and full employment can be reached and maintained.

If the monetary authority fails to reduce interest rates as the economy booms and capital becomes less scarce, it would be only a matter of time before the interest rate would exceed the profit rate. The result is the piling up of unsalable goods, with mass involuntary unemployment.

To this extent, Keynes believed overproduction lay behind recessions and cyclical unemployment. Overproduction for Keynes, however, is just a technical problem due to an avoidable shortage of money capital. In contrast, Marx held that the capitalist system underproduces relative to human needs. Because Marx’s concept of overproduction depends on his theory of value, which includes his theory of commodity money as the form of value, it escapes Keynes (and most Marxists today). That’s why you can read long articles and interviews of modern Marxists on crises (including the crisis brewing as I write these lines — March 2023) that fail to mention the term overproduction. (13)

As the population rises, the need for more goods increases. Keynes reasoned that capitalist industry expands to meet the rising need for goods, but it can’t continue forever. Keynes was an admirer of Malthus and his population principle: If the population keeps growing, a point will be reached where it will exceed the earth’s ability to support it, and the population will crash due to famine and other disasters. (14)

Population growth must slow down and eventually cease to prevent such a catastrophe. Then it’ll only be a matter of time before capitalist production can meet the material needs of the entire population, capital will cease to be scarce, the marginal efficiency — profit rate — of capital will fall to zero, and so will the interest rate. While classical economists like Adam Smith and David Ricardo feared the end of capitalist economic growth brought on by the declining profit rate and wanted to postpone it as long as possible, Keynes embraced it. Applying the marginalist theory of value to a post-scarcity world — Keynes reasoned the means of producing goods capital to Keynes — would cease to be scarce. This means zero profit rates and zero interest rates. Zero interest rates would mean the end of idle money capitalists living off interest and dividends (per Keynes, one of the most repulsive, though temporary, features) of the capitalist system.

But Keynes’ post-scarcity world of zero profit rates and zero interest rates wouldn’t mean socialism in the Marxist sense. There would still be entrepreneurs earning high wages and privately owning the means of production. But every non-disabled person would have some type of job because nobody could live off interest and dividends. Once capital ceased to be scarce, it would stop contributing to the value of commodities. Commodities would then exchange according to the value of the labor necessary to produce them. The economy would settle into an equilibrium where a zero interest rate would equal the zero profit rate with full employment, a stable population, and zero economic growth.

Keynes believed the world was approaching this happy situation of abundance and degrowth in his own time — the 1930s. Population growth was already declining in the imperialist countries. If we ignore immigration from the Global South, it’s largely negative in the developed capitalist countries today. It should only be a matter of time before abundance and degrowth spread to the Global South. But in the years after WWI, Keynes detected a rising technical problem.

Due to the declining scarcity of capital, the profit rate had fallen to historically low levels, and with it, interest rates also fell. In the years ahead, the profit and interest rates were expected to fall even more as they headed to zero. Entrepreneurs would make just enough to meet their personal needs at zero profit rates, but there would be nothing left to plow back into the business, as expected in an economy of abundance and zero growth.

But Keynes saw that it was proving difficult in practice to reduce interest rates sufficiently to maintain full employment in the low-profit rate environment. He figured if the interest rate is 6%, it’s easy to reduce it to 4%, or even 2% if that’s what’s necessary to restore full employment. But if the interest rate is 1% while the expected profit rate is only 0.50% at full employment, it’s not so easy to reduce the interest rate to 0.50% or lower, which Keynes thought necessary to restore full employment.

This type of situation is called a liquidity trap. As a result of the decreasing scarcity of capital, in the years after WWI, the economy was getting stuck in equilibrium where the interest rate equaled the expected profit rate at less than full employment. The result was the Depression.

Keynes didn’t believe the world of the 1930s had reached the point where the entire population’s needs could be fully met. Capital was still scarce, and some additional economic growth was still needed. To re-fire, a final wave of further capitalist economic growth, ending what was left of the gold standard and establishing non-commodity money would be necessary. He believed it would be necessary for the central government to engage in deficit-financed public works at times until the age of abundance, degrowth with full employment arrived.

Deficit spending by the central government would increase demand and raise the profit rate. By achieving the correct mix of low but not zero interest rates and deficit spending when the economy needed a boost to achieve full employment, Keynes believed the capitalist economy could return to and maintain full employment as it approached the end of zero population growth, zero interest and profit rates, and zero economic growth with full employment. He thought this situation could be achieved in 30 years, which would be sometime in the 1960s. If he’d been right, we’d now be enjoying a growth-less economy, zero profit, and interest rates, meaning no idle money capitalists and full employment and prosperity for all for about 60 years.

Sweezy, Keynes, and monopoly

To the young Sweezy — and many other economists in the 1930s attracted to the Russian Revolution and Marxism but with their heads full of the neoclassical ideas of their university studies — Keynes’ government spending program on public works was highly attractive. The universities’ marginalist economics concluded government could do almost nothing to improve society or the position of the poor and oppressed. They insisted that government should stick to its role of defender of private property and enforcer of contracts. Today these views are called neoliberal.

Though still resting on neoclassical principles, Keynes’ work justified a far more positive role for government. As the world struggled to lift itself out of the Depression, Keynesian economists believed the central government should build public works and public housing and create jobs to meet the human needs of the poor outside the domain of the profit motive.

The New Deal was viewed as a kind of toned-down version of the Soviet five-year plans. As a result, young radicals like Sweezy, who supported the New Deal, believed Roosevelt should be pressured by the left to tune up the New Deal. On the right, traditional neoclassical and Austrian economists saw things in the same light. To them, the New Deal was a step in the direction of the Soviet system and had to be stopped before full-fledged socialism arrived.

Keynes himself was somewhere in the middle. He was more cautious about government intervention in the economy than many of his supporters, but he also opposed the opposition by orthodox economists to any government action to combat the unemployment crisis of depression. He feared that if their neoliberal approach (using today’s terminology) prevailed, it would lead to further radicalization and play right into the hands of the Marxists. The danger posed by the Depression to the survival of capitalism — that Keynes remained loyal to the end of his life in 1946 — would only be intensified.

However, radical but neoclassically-trained young economists like Sweezy were not so impressed by Keynes’ analysis of the cause of the Depression. They thought he overlooked the primary force they believed lay behind it, the growth of monopoly.

Let’s review the theory of perfect competition. For competition to be mathematically perfect, the number of industrial capitalists producing in each production branch must approach the limit of infinity. Taken individually, each must produce almost none of the total quantity of a commodity, and each will have no choice regarding pricing. If one attempted to charge more than the prevailing market price, they’d lose all their customers. If they charged less, they’d gain no additional market share because they can already sell all their commodities as long as it’s at the prevailing market price.

Having no control over price, they exercise control only over their individual costs, and each increases production until marginal costs (that of producing the last unit) equals the market price. Marginal costs include interest on capital as well as the wages of labor, including the wage of the active capitalists. Marginal costs fall as the individual capitalist increases production from zero to the optimum level. But beyond the optimal level, they rise. The optimum production level is where the marginal cost is the lowest. If capitalists produce beyond this, the cost of production increases and wipes out the interest on capital and the wages of the workers (as well as their own wages earned as active industrial capitalists). If each sets production at a level where marginal cost is lowest, the resulting revenue will equal the production costs, including the interest on capital and the workers’ wages.

The point in the cost curve where marginal costs are lowest corresponds to where the total production cost is lowest, and production is most efficient. Then the capitalist can meet interest and wage costs — the value of capital itself being no more than accumulated interest and wage costs — including their wage. All other capitalists producing the same type of commodity will have the same marginal costs, as perfect competition assumes that every capitalist will adopt production methods yielding the lowest production costs at a given level of technique.

If an invention appears that allows the marginal cost to be reduced, all industrial capitalists will have to adopt it as well. In equilibrium, all capitalists will produce with the same method at the general level of technique that’s cheapest. The economy will quickly return to equilibrium even when some outside shock pushes it away, as long as the government keeps its hands off and there are no trade unions.

Capitalists will keep hiring workers until the value produced equals the wage costs. If there’s still unemployment, the unemployed have a choice of remaining so, in which case they are voluntarily choosing leisure over the income they could earn, or they can reduce their wage demands until it falls to the value their labor produces. Assuming no trade unions and no minimum wage laws, there will be no involuntary unemployment. And if it does appear due to some outside shock — for example, an incorrect decision on monetary policy on the part of the central bank — competition will quickly move the economy back to full employment.

Imperfect competition

But as the young Sweezy was aware, as capitalism advances, the number of independent industrial capitalists in a branch of production declines. Marx called this the centralization of capital. Once capital becomes concentrated in a few firms, the decision of any firm to change production level will significantly affect the total supply of the commodity produced and thus will have a definite impact on price. The capitalist is no longer a price taker but a price maker because each controls a significant percentage of the total production of that type of commodity.

Instead of a flat demand curve where cutting prices by an individual capitalist will fail to increase the demand for that particular commodity, under monopoly, the individual industrial capitalist can increase the demand for their commodity by reducing its price. This means the more centralized capital becomes, the more the demand curve from the viewpoint of the individual capitalist slopes downward.

Under a monopoly, industrial capitalists exercise control not only over their marginal costs but over prices. The greater the portion of the total quantity of a commodity produced by an individual capitalist, the greater the influence of that capitalist over prices. The influence exercised over prices reaches its maximum when a single capitalist monopolizes 100% of the production. But a monopoly doesn’t have to reach that level before the individual capitalist gains considerable power over prices.

With the theory of imperfect competition under partial or total monopoly, the individual industrial capitalist has to watch two variables when setting the production level. One is the marginal cost; the other is the price. It is generally assumed marginal cost first declines and then rises as an enterprise increases its output. This is true whether perfect competition or monopoly prevails.

Under perfect competition, the price remains unchanged as the individual enterprise increases production. Under imperfect or monopolistic competition, the price declines as the production increases if the total output is to be sold. If production is increased beyond this point, marginal costs rise, and prices continue to fall. The rational point to set production is that at which prices equal marginal revenue. The industrial capitalist sets production and employment at a lower level under monopoly than in perfect competition. It means the industrial capitalist will produce under conditions of imperfect competition — monopoly — at levels less technically efficient than under perfect competition, and perhaps more importantly, they will produce less and employ less.

Paul Sweezy: From the kinked demand curve to monopoly capital

In the late 1930s, Sweezy explored this idea. He called it the kinked demand curve. Usually, when the price of a given commodity is reduced, demand increases. Let’s adopt the viewpoint of an industrial capitalist where only a few competitors produce the same commodity. Let’s assume the capitalist charges a higher price than the others. Our capitalist will experience an increase in commodity demand if the price is reduced to that of the other capitalists. But what happens if our capitalist continues lowering prices? Will demand increase further? Sweezy said no.

If our capitalist continues to reduce the selling price, the others will cut prices, too, and no one will be able to increase market share through further price reductions. Demand for the commodity will show a kink, rising rapidly before it but very little after. Sweezy concluded that it’s irrational for one producing in a monopolistic industry to reduce selling prices below the prevailing level. Once the demand curve kink is passed, any increase in market share will not regain what is lost in lower prices. While those in a monopolist industry will increase prices if demand exceeds supply, they won’t cut them when demand slumps.

There’s no assumption of any cartels or other forms of conscious collusion to keep prices high, though that’s possible when there are only a few capitalists in a branch of industry. Sweezy posited that once the centralization of capital has progressed to a certain point, price competition progressively dies away, even in the absence of cartels and syndicates. To the extent capitalists continue to compete, it takes the form of advertising, packaging, and other sales gimmicks, but there is no price competition.

The full theory of monopoly capitalism

Sweezy believed early capitalism driven by perfect competition tended to full employment and growth. Then in the late 19th century, growing monopoly with its kinked demand curves began to undermine the economic laws governing capitalism up to that time. Sweezy thought that after the 19th century, the old laws analyzed by Marx and the marginalists operated only in the competitive sectors of the economy. But the overall economy is dominated by the monopolist sectors where giant corporations hold sway.

Here kinked demand curves rule, and competition, especially price competition, withers away. Neither the Marxist nor the marginalist analysis was meaningful in the age of monopoly capitalism, Sweezy thought. Hilferding and Lenin’s analysis of monopoly had been a start but had not gone far enough. What was necessary was a new theory to explore the specific laws of motion prevailing under monopoly capitalism.

According to Sweezy, while competitive capitalism has a natural tendency to full employment, monopoly capitalism tends toward excess capacity and permanent mass unemployment. Under perfect competition, individual industrial capitalists must achieve the lowest possible cost of production because they have no control over prices. Under monopoly, the individual corporation can produce at the level where marginal cost equals marginal revenue. To achieve this, they halt any further production increase before the optimum — lowest possible cost — production level is reached. And instead of full employment of machines and workers, we get massive unemployment of workers and machines: stagnation/depression.

Keynes believed the 1930s Great Depression was caused by the approach of abundance, combined with interest rates that remain too high for full employment at the reduced and falling profit rate caused by declining scarcity of capital and commodities. Sweezy believed, in contrast, that the growth of monopoly caused it. The 1930s Great Depression was simply the natural state of monopoly capitalism.

However, in Sweezy, Depression is not inevitable under monopoly capitalism. It’s just its natural tendency. Since the monopoly corporation restricts production to generate a surplus, the question arises of what to do with the surplus accumulated through monopoly pricing. “Monopoly Capital” claims the tendency of the surplus to rise replaces the tendency of the profit rate to fall under monopoly capitalism. The law of the tendency of the rate of profit to fall so central to Shaikh’s work applies only to competitive capitalism. If the monopoly capitalists invest in expanding production, their swollen monopoly profits disappear. If they instead sit on the surplus, investment stagnates, and the economy sinks into chronic depression as it did in the 1930s, and the potential surplus won’t be realized. Even the monopoly corporations will see their profits shrink or disappear due to ongoing depression. If the surplus is not absorbed — spent — it disappears.

If a tremendous technical revolution occurs, production stagnation/depression will be staved off because the new industries centered around the technological revolution will absorb “the surplus.” In the late 19th century and into the first years of the 20th, the railroad and industries that grew up around it absorbed the surplus. But by WWI, railroad-centered industries could no longer absorb sufficient surplus to stave off stagnation. After the crisis of 1907, the economy started to stagnate. But then, an innovation emerged: the internal combustion engine-powered automobile.

Automobiles made it possible for workers to live farther from their place of work, creating suburbs. This led to new waves of construction, as gasoline stations, automobile repair businesses, and new homes appeared. Vast amounts of surplus were absorbed, and the economy thrived during the 1920s. By the end of the 1920s, the surplus became so large that automobilization could not absorb enough to stave off depression. A new great technological innovation that could, in theory, absorb the surplus monopoly capitalism generated through monopoly pricing failed to appear. The result was the Depression of the 1930s.

There are, however, other ways of absorbing the surplus if a new industry, like the railroad in the 19th century or the automobile in the early 20th century fails to appear. An increasing amount of surplus is absorbed by the growing armies of salespeople and those employed in the advertising industry. But this isn’t enough. The government, especially the central government, is the only entity that could do the job of absorbing the surplus adequately.

If the money spent by the government were raised through increased taxation on corporate profits, there would be a multiplier of one. For every dollar the government raised and spent through taxes, the GDP will rise by a dollar. Sweezy and Baran assumed the monopoly corporation would not otherwise spend its surplus but would not reduce investment in the face of higher taxes.

Monopoly corporations would want to be taxed because it would allow the surplus generated through monopoly pricing to be fully absorbed — spent. If funds were raised through borrowing, the multiplier would be greater than one. In either case, as long as government spending is high enough, depression, stagnation, and unemployment can be avoided. “Monopoly Capital” predicted monopoly corporations themselves would do everything they could to increase the taxing of profit and government spending and that the Republican Party’s opposition to “tax-and-spend” policies was just for show.

That raised the question of what would the government spend its money on. In the 1930s and 1940s, Sweezy hoped it would be spent on an extended version of the New Deal. He was excited about the New Deal’s public housing programs. It also fitted in with the politics of the time. Roosevelt’s USA and the Soviet Union were united — from 1941 — in a grand alliance against Nazi Germany, Imperial Japan, and the other “fascist” powers. (Germany was certainly fascist, but imperialist Japan had a monarchy combined with a parliamentary system with a wartime military dictatorship.) Internationally, democracy — represented by Roosevelt and Churchill — had allied with socialism, represented by the USSR.

Within the advanced capitalist countries dominated by monopoly capitalism, the working class could join hands with the more enlightened parts of the capitalist class on a program of government spending designed to meet human needs. As a result, monopoly capitalists would be relieved of their unspent surplus by the government, which would spend on commodities produced by the monopoly capitalists but meet the needs of the workers. This made it possible for the monopolies to realize their surplus generated by monopoly pricing in the form of monopoly profit.

In Sweezy’s view, both the capitalist and working classes would gain. Once the fascist powers were defeated, the workers would benefit directly through public housing, libraries, schools, theaters, and other public works. The capitalists would benefit through the prosperity stirred up by the high level of government spending. Good business means high profits. In Sweezy’s view, once the effects of the surplus of demand — or lack of it — were factored in, high profits and wages naturally go together.

Sweezy didn’t believe higher wages won through trade union struggles could help absorb the surplus because the corporations would merely pass on the increased costs through higher prices. What the workers gained in their paychecks would be lost in paying higher prices.

Baran and Sweezy didn’t think this was true regarding government spending. They didn’t explain why the capitalists can pass on higher wages into higher prices but not pass on higher tax costs — to meet government expenditures or to finance servicing the government debt — in the form of higher prices. The key was the election of a popular-front government that would launch progressive public spending programs in the interests of the workers and capitalists alike. In the long run, Sweezy hoped the public sector would dwarf the private sector and capitalism would gradually be phased out without a violent revolution.

After WWII, however, things evolved differently. Further expansion of the surplus-absorbing New Deal was halted. Increased spending on arms continued to absorb huge amounts of surplus, which they thought staved off a new depression. But depression was being prevented in the most reactionary way through growing militarism that threatened to end in a nuclear world war. What had gone wrong?

Monopoly Capital” attempted to address this problem. The problem was that political decisions on government spending were determined not by the interests of the capitalist class as a whole, which would have supported the expansion of the New Deal, but by the narrow interests of certain groups of capitalists. The chief example given in “Monopoly Capital” involved the question of public housing. Real estate interests opposed spending on public housing because it would be in direct competition with the private, for-profit rental housing industry. The industry was able to block all proposals to expand or even maintain New Deal-era public housing programs. The Cold War era, dominated by red-baiting, made it impossible to create a popular-front government capable of overcoming the real estate industry’s resistance.

Baran and Sweezy’s explanation that the real estate industry is opposed to public housing programs is correct as far as it goes. But they were weak when analyzing the production of surplus value, or as Sweezy called it, the surplus. The real estate industry has a special interest in fighting any suggestion to provide, improve or expand public housing, just as the insurance industry is interested in opposing medical care as a human right. However, they failed to see that the capitalist class as a whole has an interest in curbing public housing just as they have in opposing medical care for all.

Without government-provided public housing, workers face increased danger of homelessness. This is what the capitalist class wants. Fearful of facing eviction if they can’t meet rent or mortgage payments, workers are forced onto the labor market. If they happen to be homeowners, they live in fear of catastrophic hospital bills that can force them to sell their homes to raise the funds to pay those bills. Forcing people onto the labor market sharpens job competition and drives up the rate of surplus value.

Sweezy later admitted he and Baran had neglected in “Monopoly Capital” what was the central question for Marx, the production of surplus value. Sweezy thought his strong point was his emphasis on the necessity of realizing the surplus value — in the language of “Monopoly Capital,” the absorption of the surplus. He didn’t understand how value and surplus value are actually realized because he never paid much attention to Marx’s theory of money. Perhaps he avoided the subject because he sensed it undermined his reformist popular-front politics. Marx’s theory of money is unpopular among academic Marxists and progressives because it points to the limits of what even a left government can accomplish under the capitalist mode of production.

A striking feature of “Monopoly Capital” is the authors’ profound pessimism. The book is “the Bible” of the Monthly Review tendency. Sweezy and Baran present a gloomy view of the future of advanced monopoly capitalist societies. The working class was bought off and not an agent for revolutionary change; the only hope for change was outside the monopoly capitalist world.

Sweezy first put his hopes in Soviet socialism. Then, like many others, as he became disillusioned with the Soviet Union after Nikita Khrushchev’s attacked Stalin, he shifted his hopes to Mao’s China. But here, too, he was disappointed by the development of Chinese society after Mao.

As painted by Sweezy and Baran, monopoly capitalism was a profoundly irrational society but was basically stable, lacking any internal agents for revolutionary change. “Monopoly Capital” had a generally demoralizing effect on the New Left radicals of the late 1960s.

Therefore, we have two theories of monopoly capital. One is that of Hilferding and Lenin, based on Marx and his analysis of the centralization of capital. The other is that of Baran and Sweezy. Shaikh’s critique of the theory of monopoly capital is principally a critique of Baran and Sweezy’s theory and, thus, not so much a critique of the work of Hilferding and Lenin.

Next month I’ll examine Shaikh’s rejection of both the theories of “Monopoly Capitalism” and the weakness of Shaikh’s own theory of real competition.

(1) Since the 19th century — beginning in Britain, then the most developed capitalist country — regulators aim to shut down insolvent banks before runs develop. As capitalism developed, (checkable) bank deposits increasingly functioned as currency, first in transactions among capitalists and, more recently, at the retail level. Under these conditions, bank runs would either destroy or freeze deposits for long periods, effectively destroying a large part of the currency. This contracts the circulation of commodities, causing production and employment to contract.

Starting in the 19th century, to avoid this situation, bank regulators seized insolvent banks, wiped out the stockholders and bondholders, and kicked out the bank’s managers. This way, the contraction of bank credit that occurs during an overproduction crisis proceeds more orderly. In a world where bank money makes up the bulk of the currency even at the retail level, if bank runs cripple the system of bank money, the global capitalist economy is crippled even more severely than in the super-crisis of the early 1930s. But if bank regulators abuse their power by, for example, guaranteeing all bank deposits, they risk spreading the crisis from the sphere of bank-created credit money to the sphere of central bank-created legal tender paper money that can lead to an even greater crisis.

The only real solution to the ever more threatening periodic crises of overproduction lying behind bank crises, such as the current one, is to recognize the socialized nature of modern production. Private appropriation of the product allowing the capitalist class to live in luxury without working must be ended. Any other solution merely kicks the can down the road preparing the way for more devastating future crises. (back)

(2) Before the U.S. Civil War, commercial banks created their own banknotes. These notes resembled modern-day paper money but could become worthless if the bank issuing them failed. In those days, government-created currency took the form of coins, both gold and silver, as well as base metals. In those days, even base metal coins had considerable purchasing power and were the basic form of money most people used daily. No matter how bad a bank run became, the value of the coins minted by the Treasury was never bought into question. After the war of the slaveholders’ rebellion — the Civil War — the Treasury either directly issued its own currency notes or backed up the banknotes of commercial banks printed by and backed by the full credit of the Treasury. Bank runs no longer threatened the value of paper money. Today, when even petty retail trade is carried out with currency consisting of bank deposits transferred through credit cards, debit cards, and smartphones, a general run on the banks would quickly destroy the domestic and international currency system. (back)

(3) Blaming individual capitalists and corporations for their greed sounds radical but is conservative because it falsely implies that it’s possible to have the capitalist system without such greed. (back)

(4) Whenever a large number of capitalists simultaneously build up inventories — what Keynesians call the multiplier involving increased demand for commodities for personal consumption — an accelerator of increased business investment is triggered. The result: an expansion of the demand for commodities, including the labor-power commodity. Once started, the multiplier and accelerator effects intensify the boom until the demand for loan money exceeds the supply to the extent that credit begins to seize up. As the multiplier and accelerator take full effect, what appears as an inventory shortage conceals overproduction. When this overproduction has developed to a certain point, a credit crisis occurs, accompanied by a cash crunch and the multiplier and accelerator effects reverse, and recession develops. (back)

(5) The SPD, the Social Democratic Party of Germany, still exists today, and as of March 2023, the SPD’s Olaf Scholz has been the German chancellor since 2021. However, today’s SPD, though still labor based, has long followed imperialist labor liberal policies that support imperialism in general and, since 1945, U.S.-NATO imperialism in particular. It’s far from what the SPD was before 1914. (back)

(6) The view that it is possible to establish non-commodity money under capitalism makes it impossible to understand the true nature of capitalist crises, such as the one currently developing in March 2023. These crises are actually crises of the general overproduction of commodities. (back)

(7) Hilferding was forced to flee Nazi Germany not only because of his former role as a prominent Marxist leader and his continuing role within the labor-based Social Democratic Party in the 1920s and 1930s but because he was of Jewish descent. Even if he had been completely non-political and never a socialist, his Jewish ancestry would have guaranteed he would face persecution by the Nazis and probable death. The Nazis blamed Jews for the defeat of Germany in World War I; for the Versailles peace treaty’s “war guilt” clause that condemned Germany for that war and established brutal reparations on Germany, and for the economic depression that devastated Germany in the early 1930s. Ultimately, eliminating the greater part of the Jewish population from Europe led to the formation of apartheid Israel and the expulsion of much of the native Arab population from Palestine. False explanations of the cause of capitalist crises can lead to unexpected and disastrous consequences. (back)

(8) After World War II, a common criticism of both Hilferding and Lenin was that they exaggerated the power of bank capital in their day or that the power of bank capital was reduced in the post-war era. These criticisms reflect the fact that money capital was more plentiful after the war due to the 1930s Depression. This meant that the power of bank capital did not take the brutal form it takes during periods of acute shortages of money capital. (back)

(9) A good description of how state monopoly capitalist planning operated during the 1940s war economy is found in the February 2023 edition of “Monthly Review” in the article entitled “U.S. Economic Planning in the Second World War and the Planetary Crisis” by Martin Hart-Landsberg. (back)

(10) The Third International was dissolved in 1943. The communist parties that had formerly been sections of a single international became separate national parties. Over time, these separate national parties evolved in different directions. In Western Europe, they turned to so-called Eurocommunism following the same basic cause of class collaborationist and increasingly pro-imperialist policies of the social democratic parties after the outbreak of World War I and the Russian revolution. (back)

(11) Shaikh correctly stresses this point. However, he doesn’t understand that to become profit, surplus value must be realized in the form of the use value of the money commodity. It is not sufficient that a surplus product be produced, though profit can’t exist without a surplus product. But it is possible for surplus value and surplus product to exist without profit. (back)

(12) Keynes distinguished between interest and profit (profit of enterprise) in a way that was different than Marx. To Keynes, all profit earned by industrial and merchant capitalists was profit, while income earned by money-lending capitalists was interest. For Marx, industrial and merchant capitalists earn both interest and, beyond that, a profit which he called the profit of enterprise. Contrary to what Keynes believed, the capitalist economy does not tend toward an equilibrium where profit and interest are equal. However, as Shaikh points out, Keynes, like Marx, was aware that if the economy is to grow — expanded capitalist reproduction — the profit rate on industrial capital must exceed the interest rate on money capital. (back)

(13) Absolute overproduction, as opposed to relative overproduction, would be the overproduction of commodities relative to human needs. The production of fossil fuels that leads to disastrous climate change is an example of absolute overproduction since, by definition, production that destroys the environment making human life impossible, by definition, exceeds human needs. When Marx and Engels wrote about economic crises caused by overproduction, they were not referring to absolute overproduction. As far as the needs of the majority of the earth’s people, capitalism doesn’t overproduce. Today it underproduces the wealth necessary for a decent life for most humans, just as it did in the days of Marx and Engels. (back)

(14) Malthus claimed that as soon as wages rose above bare biological subsistence, the workers would have more babies, and the population would increase geometrically. No matter how much production developed, poverty will never disappear, and most of the population would continue to live in poverty. Keynes was far more optimistic and believed population growth would slow down, though he warned of dire consequences if it did not. Marx and Engels considered Malthus’ views on population to be a libel on the human race. Modern population trends confirm Marx, Engels, and Keynes were correct — versus Malthus — on the relationship between increasing wealth and population. (back)