In the “super-Tuesday” primaries held March 15, Donald Trump solidified his lead in the struggle for the Republican nomination for the U.S. presidency. He knocked right-wing Republican Senator Marco Rubio of Florida out of the race. (1)
Rubio had been considered one the best hopes of the pro-Wall Street establishment Republicans in their increasingly desperate struggle to stop Trump. The only bright spot for the Republican leadership was that John Kasich, the establishment Republican governor of rust-belt state Ohio defeated Trump in that state’s primary.
However, Kasich has few delegates pledged to him. In normal circumstances, that would mean that he would have virtually no chance of winning the nomination for the presidency. He would simply be a “favorite son” candidate who would be expected to release his delegates to vote for the eventual winner. At most, Kasich might hope to win the vice-presidential nomination.
The super-Tuesday results barely keep alive the hopes of the Republican leadership that Trump might still be denied enough delegates to clinch the nomination before the Republican convention to be held this coming July in Cleveland, Ohio. If this proves to be the case, there remains the possibility a majority of delegates might be scraped together to nominate a more traditional Republican for president, but who that might be is anybody’s guess at this point.
The only other Republican besides Trump and Kasich still officially in the race is Texas Senator Ted Cruz. Cruz mixes extreme “neo-liberal” economics with an appeal to the religious fanaticism of the so-called Christian Right (2). His colleagues in Republican Party leading circles consider him personally obnoxious. They also fear that he is likely to lose big time in November to the presumed Democratic nominee, Wall Street darling Hillary Clinton, due to his neo-liberalism combined with his support of extreme sectarian Protestant Christian religious fundamentalism.
While it is possible that Trump has considerable support among the coupon clippers in the country club locker rooms—I don’t know, since I don’t personally move in these circles—serious political strategists of the U.S. ruling class, whether Democrat or Republican—what Marx called the “political bourgeoisie“—consider Trump completely unqualified to assume the U.S. presidency. This is not because they doubt Trump’s loyalty to the capitalist system. On the contrary, Trump is a multi-billionaire and therefore has a personal stake in the survival of capitalism greater than all but a handful of his fellow billionaires.
Why Trump is unacceptable to the political leadership of the U.S. ruling class
What makes Trump unqualified for the U.S. presidency in the view of the leadership of the U.S. ruling class has everything to do with the fact that the U.S. is the core country of a worldwide empire that holds the entire world capitalist system together. Ruling-class leaders are afraid that if Donald Trump does manage to reach the White House the military and financial stability of the Empire—maintained through a combination of bribery and the mailed fist—would be fatally undermined. Why is this so?
Donald Trump has openly insulted more than a billion Muslims. He has done this by calling for “temporarily” banning the entry of all Muslims from even visiting the U.S. He later “modified” this by saying that he only meant foreign Muslims. Muslims who happen to be U.S. citizens would be allowed to stay—for now anyway.
He has called for the use of torture against suspected Muslim “terrorists” and their families. That would mean that every Muslim man, women, and child anywhere in the world could be seized by U.S. government goons and tortured if any member of their family were suspected of “terrorism” as defined by a Trump administration. If such policies were put into effect, all Muslims anywhere in the world would be held hostage to Trump’s version of the “war on terror.”
He has not only proposed the building of a wall along the Mexican border, he has also insisted that the government of Mexico pay for it. If that were not enough, he has denounced Mexican immigrants as murderers and rapists. Trump, like all Democrat and Republican leaders of U.S. imperialism, not only stands for the oppression and exploitation of the Mexican and other Spanish-speaking people, he also personally and crudely insults them.
Therefore, right out of the box Trump is despised by virtually all Muslims and Spanish-speaking people regardless of what he might or might not actually do if he were to become the next U.S. president. This is not how you run a world empire!
Hitler’s and Trump’s racism compared
Many see parallels between Trump’s racist demagoguery today and Adolf Hitler’s racism during Hitler’s rise to power. Let’s compare the racist demagoguery of Hitler and Trump.
At that time, Germany, which was far from being the core of a worldwide empire, was inhabited almost exclusively by white people of the German nationality. Hitler was a white supremacist and considered people of color as grossly inferior. In this respect, his racist views were not out of line with the views held by other bourgeois politicians throughout Europe and the U.S. and other “white” imperialist countries of the time.
Only when it came to anti-Semitism did Hitler stand out from the crowd. But in Hitler’s time, anti-Semitism was the norm and not the exception among bourgeois politicians to the right of the Social Democracy. For example, both Winston Churchill and Franklin Roosevelt had anti-Semitic attitudes. What they lacked was Hitler’s murderous hatred of Jews, who he considered a demonic—demonic, not inferior—race that was the source of virtually all evil.
This meant that around 98 or 99 percent of the German population was personally “in the clear” as far as Hitler’s racism was concerned. As long as Germans were free of “Jewish blood” (3) and had not been prominent political leaders—especially on the left—and again the overwhelming majority of Germans fell into this category—and they were quiet, they were unlikely to get into trouble with the Gestapo or other repressive organs of the Nazi regime. A German could even express opposition to the Nazis with close family members and friends with some safety. The vast electronic surveillance that exists today that modern computer technology has made possible was still in the future.
In contrast, in the U.S. today, even under “democracy,” if you are an African American male, it is virtually impossible to avoid being harassed by the police and arrested by them at some time or another. You can consider yourself lucky if you manage to avoid spending months or years in jail or prison. And if you are a woman of color, you are in constant danger of being raped by a sexual predator with a badge.
In addition, if you are a Black male, the danger is very real that you will be shot to death if some racist cop decides you “are threatening his life.” Other people of color, whether “brown” or Asian, also face increased danger of false arrests, harassment, and even death at the hands of some passing racist cop because they are not “white.” And this despite the fact that the man in the White House is himself an African American!
How much worse will things get for people of color if the next man in the Oval Office were to be Donald Trump! This would encourage trigger-happy cops throughout the U.S. to harass and arrest people of color on trumped up charges—pun not intended—or even kill in “self defense” if they “look” like a “Muslim,” “Mexican,” or even Asian. If you are “south Asian,” you will be suspected of being a “Muslim terrorist,” and if you are an “east Asian” you are a potential Chinese spy out to steal “our” jobs. What is true of the cops is also true of members of fascist organizations like the Ku Klux Klan and neo-Nazis who infest the Trump movement.
Therefore, the election of Donald Trump would if it came to pass immediately put in greatly increased physical danger a large and growing section of the U.S. population—a greater part of the population than the one or two percent of Germans who were “racial” Jews (4) when Hitler came to power. And unlike Germany’s small, largely middle-class Jewish population, the part of the population in Trump’s racist cross-hairs forms a large proportion of the U.S. working class, soon to be the majority. Even today, it includes the majority of the population in general and the working class in particular in California, the largest U.S. state. Hitler’s career would have been very different if the majority of the German state of Prussia—or even one of the smaller German states—had been Jewish!
The mass demonstrations held by mostly young activists in Chicago forcing Trump to cancel a scheduled appearance was an act of basic self-defense against a very real physical danger that Trump’s racist demagoguery is putting them in. These demonstrations serve as an additional warning to the U.S. ruling class and its leadership that Trump is widely hated not only by people around the world but by a huge number of people within the U.S. itself. If such demonstrations do not continue to occur and get larger, there is a danger that more in the ruling class may come to believe that they could get away with a Trump presidency—or somebody like him, or even worse—in the future.
What a contrast Donald Trump in this respect would be to President Obama, who is scheduled to complete his constitutionally permitted second four-year term on January 20, 2017. As the first African American, and indeed the first non-white president in U.S. history, Obama has enjoyed the benefit of the doubt—though not from this blog, which has emphasized from its inception in 2009 that Obama is as much a representative of U.S. imperialism as any other U.S. president—from the tens of millions of people living within the United States and countless millions more throughout the world! Over the last eight years, U.S. imperialism has been able to use these illusions to its advantage both within the U.S. and around the world.
But the problems that a Trump presidency would pose for U.S. imperialism don’t end there. Donald Trump would be the first Republican (or Democrat) since Herbert Hoover running on a frankly protectionist platform. He has promised to erect tariff walls to make “America Great Again” and bring back the industrial jobs that have been steadily disappearing since 1979. These policies if actually carried out would threaten the access of other countries engaged in large-scale capitalist production to the U.S. market. Such policies would threaten to unravel the whole U.S. world empire that has kept peace among the imperialist countries for over 70 years.
If he were to reach the White House, Trump’s poisonous combination of protectionism, U.S. chauvinism and general racism would encourage not only protectionism but “anti-American” nationalism in other imperialist countries, including but not only Germany. Already in Germany, in recent local elections, right-wing nationalist parties (5) have made gains due the current refugee crisis caused by the U.S.-led wars against the people of the Middle East. A Trump presidency in the U.S. would further fuel the right-wing, racist, nationalist wave that is sweeping through Germany, France and other European countries of both western and eastern Europe.
I explained last month that Trump, unlike all recent Republican presidential candidates, including his current leading Republican rival, Texas Senator Ted Cruz, is not running on a neo-liberal—or in U.S. terms “conservative”—economic platform. For example, Trump explained he would “tell” Apple, the computer-device and software monopoly, to shift the production of its products from China back to the U.S. He also explained that he would similarly demand that General Motors, Ford and so on bring their manufacturing production in Mexico and elsewhere back to the United States.
Trump has also called for a boycott of Apple over the California corporation’s refusal to assist the FBI in accessing information on an iPhone used by one of the suspects in the recent San Bernardo killings. In the light of revelations by Edward Snowden, Apple has been forced to promise its users that it will respect their customers’ privacy from snooping by the U.S. and other governments. It is doing this to avoid losing market share to its competitors.
It goes without saying that U.S, corporations have over many decades become well accustomed to telling the U.S. government and the politicians, both Democratic as well as Republican, what to say and do, and not the other way around. From the viewpoint of the bosses of the monopoly corporations, this is the very essence of freedom and democracy!
Again, it is interesting to compare Trump in this respect with Hitler. Compared to Donald Trump, Adolf Hitler, despite his occasional anti-capitalist language, was a cautious and highly intelligent capitalist politician who always knew how to make clear to Germany’s large corporations as well as large landowners that he was on their side.
What Trump would actually do if he became president is another matter. Finance capital has many ways of keeping a government led by people who were not its first choice to lead the government in line. If nothing else works, a plunging government securities market raising rates of interest on the money that the government must borrow from the banks and other wealthy money capitalists to finance its day-to-day operations will do the trick. In this sphere, the power of finance capital is absolute.
So any of Trump’s supporters who actually expect him to carry out anti-corporate policies in favor of the “little guy” are sure to be disappointed if he were actually to become U.S. president. The same argument, by the way, holds good for a hypothetical Bernie Sanders administration.
The Pentagon versus Donald Trump
Last month, I noted that Donald Trump could prove to be a disaster for the U.S. military as “commander in chief.” It is now clear that the Pentagon is well aware of the problems a Trump administration could bring to a U.S. military whose rank and file is increasingly made up of young people of color forced into the military by the “economic draft.” Retired U.S. General Michael Hayden has openly told Trump that if he as commander and chief were to order members of the U.S. military to torture the families of “terror suspects,” the U.S. military might simply refuse to obey him.
Such talk by a U.S. general, even a retired one, would normally be considered as bordering on insurrection and treason. But Michael Hayden is not just any general. He is a four-star general—the highest rank held by any living U.S. military officer whether active or retired—and the former head of the hated National Security Agency. Hayden is in a position to know what a disaster a Trump presidency would be for the U.S. empire.
The Federal Reserve and Donald Trump
And now the de facto “fourth branch” of the U.S. government, the Federal Reserve System, has chimed in. Wall Street was pleasantly surprised and celebrated with a rise in stock market prices when the Fed hinted on March 16 that it will dial down earlier plans to gradually push up interest rates. While previously, the leader of the Federal Reserve played down the dangers of global recession associated with the “turmoil” in the world financial markets, now the Fed has suddenly discovered the dangers that turmoil represented for the current U.S. expansion.
However, not all is peaches and cream. While the New York Stock Exchange celebrated the Fed’s “dovish” statement, the dollar price of gold rose sharply while the dollar exchange rate with other currencies fell on the announcement. The Trump campaign is throwing a monkey-wrench into the Fed’s “monetary normalization” policy, which as I have explained, is absolutely necessary to save the dollar system—the financial bedrock of the U.S. world empire.
Later, several Federal Reserve leaders—but not members of the Open Market Committee, headed by Janet Yellen, which makes these decisions—appeared to backtrack, hinting that interest rates might be raised after all in April. This led to speculation that there are divisions within the Federal Reserve on how to proceed in light of the current economic situation combined with the Trump candidacy. These apparent divisions within the Fed underline the very real problems the Trump candidacy is causing the Federal Reserve System and the U.S. capitalist ruling class as a whole.
In the long run, the ability of central banks to create currency measured in terms of real buying power—not nominal dollars, euros, pounds and so on—is limited by the total quantity of gold bullion available to function as money material. This quantity is in turn governed by the past and current production of money material—gold. However, during a crisis the extra demand for currency as a means of payment and a means of hoarding allows central banks temporarily to create currency at a rate faster than the rate of growth of gold bullion available to function as money material without a disastrous fall in the currency’s value measured in terms of the use value of money material (ounces of gold). In late 2008, the Federal Reserve took full advantage of this economic law in order to prevent the then ongoing economic collapse from exceeding the scale of the super-crisis of 1929-1933.
To be sure, the U.S. dollar, as measured by the dollar price of gold, has lost value since the panic of 2008. Before 2008, the U.S. dollar price had never reached $1,000 an ounce, and since then it has never been below $1,000. But the dollar’s post-crisis depreciation has not been enough to create an immediate threat to the dollar system, though it was a close call at times in 2011.
However, to avoid a new empire-threatening dollar crisis, the Federal Reserve has been forced to slow down the rate at which it has been creating new dollar liquidity, from the thousands of percent a year at the height of the panic in the fourth quarter of 2008 to around 30 percent in recent years, and last year about 4.6 percent. Last December, the Federal Reserve finally raised the Federal Funds rate and the interest rate it pays the commercial banks on their deposits (required plus excess reserves) kept with the Federal Reserve.
The effects of this “tightening” on the world economy have already been considerable. As U.S. dollars have become relatively scarcer, a scramble for dollar-denominated securities has occurred. The result has been a flow of money—purchasing power—out of the rest of the world economy and into the U.S. economy. This has depressed demand worldwide but boosted demand in the U.S.
Primary commodity prices, including the price of oil, have plunged. Russia, Brazil and Venezuela have been thrown into major recessions. The U.S. energy industry is in deep recession despite booming U.S. car sales.
Recent economic figures show that worldwide industrial production, including U.S. industrial production, is at a standstill. Taking advantage of the still strong demand in the U.S., foreign industrial capitalists under pain of bankruptcy are flooding the U.S. with their commodities.
A few months ago, I wrote that a new recession was clearly approaching in the U.S. and that this recession when it arrived would put to the test the Federal Reserve’s monetary normalization. If the Fed flinched and once again turned to “quantitative easing” to prevent the inevitable recession from getting totally out of control, the result could prove fatal for the dollar system. I also stated that the exact timing of this recession was not particularly important.
Thanks to the political crisis provoked by the successes of the Donald Trump campaign, the last part of this analysis now needs to be modified. The failure so far by the political leadership of the U.S. ruling class to halt Trump’s drive toward the Republican presidential nomination has caused the deepest internal political crisis the U.S. has experienced since the Watergate crisis in 1974 that swept Richard Nixon out of the U.S. presidency. If Trump were actually to be elected, the ensuing political crisis would quickly assume proportions that would dwarf Watergate.
While the Federal Reserve as a “responsible independent central bank” generally ignores U.S. presidential politics that pits a pro-Wall Street Democrat against a pro-Wall Street Republican, it cannot afford to do so now. In 2008, we saw how the financial panic that began in September 2008 with the collapse of the giant Lehman Brothers investment bank marked the transformation of a “mild recession” into the “Great Recession.” These events, combined with the massive bailout of the U.S. bankers, who were seen by the masses of people as the cause of the crisis (6), reversed Republican John McCain’s lead in the pre-election polls and instead resulted in the election of the first African American as president of the United States.
However, the election of Illinois Democratic Senator Barack Obama as the first African American president was perfectly acceptable to Wall Street, as well as the Pentagon, even if most of the generals personally preferred John McCain. Though many on “the Street” preferred McCain as well, many Wall Streeters in the wake of the failed Bush presidency believed that Obama was a better bet for their interests. We can be sure that Obama’s pro-Wall Street views—though an unpleasant surprise to many of his more left-wing backers—were widely known in U.S. ruling circles.
Obama’s role as a representative of “the Street” was promptly confirmed by his support of the bank bailouts. At that time, there was no talk of Pentagon generals refusing to obey the order of Commander-in-Chief Barack Obama. Therefore, the electoral contest between John McCain and Barack Obama—as historic as Obama’s election was—in no way represented a political crisis for the U.S. ruling class.
It was assumed when this election year began that by now a candidate acceptable to Wall Street—and the Pentagon—would have emerged from both the Democratic and Republican primaries. The big money—and it takes huge sums of money to become a “serious” presidential candidate in either the Democratic or Republican parties—would have had no problems in having one of its darlings emerge as “as the people’s choice” from these primaries.
This is exactly the scenario that is unfolding as far the Democratic Party—the supposedly pro-labor and pro-minority, pro-women, and pro-LBGTQ party—though as I explained last month, Bernie Sanders’ unexpected success and the increasing popularity of socialism among the U.S. people—especially the young—is throwing a scare for the future into the hearts of the capitalist class. But even the election of Bernie Sanders to the U.S. presidency would not constitute a political crisis for U.S. imperialism.
As far as the Republican Party is concerned, the “big money” of Wall Street seemed to be behind Jeb Bush, considered a “highly intelligent” and able “conservative”—“neo-liberal” in the language of most of the rest of he world. But if Jeb Bush couldn’t overcome the handicap of his hated brother’s record, surely Wall Street had little doubt that another Wall Street-certified candidate would emerge as the “people’s choice” from the Republican primaries. After all, that is how it has always been. Wall Street could then sleep soundly as the votes were counted on election night. But that, as we know, is not how things have turned out in this election cycle. The unacceptable Trump has now emerged as the presumed Republican nominee. That is the essence of the current political crisis facing the U.S. ruling capitalist class.
If Trump does emerge as the GOP’s official nominee in July, there would be at least a possibility that he could actually win in November. At this point, this seems highly unlikely. The polls show that if the election were held today, he would lose to the unpopular presumed Democratic nominee Hillary Clinton as well as the more popular Bernie Sanders. But what would happen if the U.S. economy experienced a sudden crisis like it did in 2008? Could this turn the election to Trump as it did to Obama in 2008?
Nobody can be sure. Until and if the Republican leadership finally finds a way to deny Trump the nomination, the Federal Reserve will therefore be under unusual pressure to do everything in its power to keep the U.S. economy out of recession territory until the November elections are safely past—even at the price of increased danger to the shaky and highly unstable dollar system.
Even in the event of a 2008 or worse type of financial panic this fall, and yet another massive bank bailout, Trump’s chances of election seem slim. The media will be against him and large sections of the U.S. population have a very real physical stake in keeping Trump out of the White House.
But would you run the risk of taking an airplane flight if there was a 10 percent chance of the airplane crashing? Normally, 90 percent is pretty good odds. Few would fail to buy a $1 lottery ticket if you had a 90 percent chance of winning and being set up for life. At worst, you would be out a dollar, which doesn’t represent much money these days. But few would board a plane that had a 10 percent chance of crashing. This is exactly the position the U.S. Federal Reserve is in at the moment thanks to Donald Trump.
The dollar system and the roots of the current U.S. political crisis
The current U.S. political crisis whose immediate cause is billionaire Donald Trump’s decision to run for the presidency of the United States, which he is financing out of his own very deep pockets, has deep economic roots. The decline and fall of the British empire in the course of the 20th century was marked by a series of crises of the British pound, which for a century preceding August 1914 had been the world’s leading currency. Today, the U.S. dollar dominates the world economy far more thoroughly than the British pound ever did.
For many years now, there has been a growing contradiction in the U.S. dollar’s role as the U.S. domestic currency and its role as the world’s currency. The dollar’s domination was natural in the days between the end of World War I until well after World II, when the U.S. industrial machine was the wonder of the world. How did the U.S. dollar that began life as the domestic currency of a single country emerge as the de facto world currency?
The dollar’s rise was preceded by the astounding development of the productive forces of the U.S. that occurred between the end of the U.S. Civil War and the outbreak of the “Great War.” The events of August 1914 marked the end of Britain’s reign as the most powerful country in the world and with it the domination of the British pound in world finance.
The U.S. dollar was then further strengthened by the rise to power of Adolf Hitler in Germany in 1933. With the rise of Hitler, it was clear that a new general European war was inevitable within a few years. Following the stabilization of the U.S. dollar at the new higher dollar price of $35 an ounce in 1934, many European capitalists moved considerable amounts of their money capital into the U.S. banking system for safekeeping. As a result, the U.S. accumulated even more of the world’s gold reserves. Even before the U.S. had emerged as a military and political “superpower,” it had emerged from the super-crisis of 1929-1933 as the world’s financial superpower.
The gold-dollar exchange standard began to emerge between the outbreak of the “Great War” and the beginning of the super-crisis in 1929. As I have explained in previous posts, the post-World I world had before the super-crisis suffered an acute shortage of gold. The central banks of other countries therefore were forced to supplement their inadequate gold reserves with U.S. dollars—or rather short-term U.S. government securities denominated in dollars.
One difference between the post-World I dollar-denominated world and the pre-August 1914 British pound-dominated world was that while the pound was backed almost 100 percent by gold—the 1844 Bank Act was still in effect—U.S. banking legislation permitted the U.S. Federal Reserve Banks to create one dollar for as little as 40 cents in gold. The remaining 60 cents could be made up of high-quality commercial paper—corporate IOUs.
After the super-crisis of 1929-1933, however, the U.S. Treasury had far more than enough gold to back the dollars that the U.S. Federal Reserve System was creating. Indeed, the big expansion of the U.S. money supply that financed Roosevelt’s New Deal and later world empire-creating world war was caused not by an inflationary running of the printing press but the massive inflows of gold—both gold fleeing Europe and newly mined gold.
In 1944, the gold-dollar exchange standard was formalized at the famous conference held in Bretton Woods, New Hampshire. In the early days of “Bretton Woods,” the U.S. ran a massive trade surplus based on the solid productivity of its agricultural and above all its industrial production. That is, U.S. industry and agriculture could produce commodities of high quality with considerably less labor than their foreign competitors. Thanks to the resulting trade surpluses, the U.S. was able to accumulate huge gold reserves, which backed the U.S. dollar. The dollar’s rise to dominance was therefore a function of the extraordinary development of the productive forces of the U.S.
However, as happened with all the empires that preceded it, once the U.S. emerged
as the core country of a world empire, its domestic production began a drawn-out process of decay. With so much money capital at home and the resulting low rate of interest, money capital began to flow abroad in search of higher interest rates and profits. The financing of the world empire beginning with Marshal Plan aid to rebuild a shattered Europe and continuing with the the need to maintain occupation forces in Europe and Japan and bases around the world, and finally the financing of large-scale hot wars in Korea and Vietnam pumped vast amounts of dollars into the world economy.
The result was that industry began to develop more rapidly first in Western Europe, then in Japan, later in China, and now in Vietnam, India, and other countries than it was developing in the U.S. In the final analysis, the cause of the vast capital outflow that has undermined U.S. industry is the fact that surplus value—the sole source of profit—is not produced by machines, industrial robot technology or software but by living workers and only living workers. The inevitable result of the capital outflow and the decline of the once unrivaled U.S. industrial machine has been first the erosion of the U.S. trade surplus and then, beginning around 1970, its replacement by a trade deficit.
The U.S. balance of payments deficit crisis of the 1960s
By the late 1960s, the U.S. trade surplus was shrinking towards zero in the face of growing West European and Japanese competition just as the ever-growing hot war against Vietnam and the other peoples of Indochina was pumping vast amounts of additional U.S. dollars into the world economy. As more and more U.S. dollars were flowing out, fewer and fewer dollars were being withdrawn from the world economy through the U.S. trade surplus. This was the essence of the U.S. balance of payments crisis of the 1960s.
How the Vietnam’s Tet Offensive broke the ‘Gold Pool bank’
In the early 1960s, the U.S. Treasury along with its Western European satellites formed the “Gold Pool.” The Gold Pool was basically a gold bank that would sell gold on the open market whenever the dollar price of gold bullion threatened to rise above $35 an ounce, thus running down its reserves, and buy gold bullion whenever the price of bullion threatened to fall below $35, which built up its reserves. The economic crisis that hit the world economy beginning in 1957, whose effects were not fully overcome until the mid-1960s, temporally reinforced the U.S. trade surplus. As a result, the Gold Pool at first worked well.
However, as a new economic boom developed in the mid-1960s the U.S. trade surplus again fell. The falling trade surplus combined with the Vietnam War put the U.S. dollar and Gold Pool under increased pressure. The devaluation of the British pound in 1967 further increased the pressure on the U.S. dollar. But it was the Tet Offensive by the Vietnamese resistance that finally broke the back of the gold-dollar exchange standard that had dominated world finance since the end of World War I.
The fall of the gold-dollar exchange standard
As 1968 opened, the U.S. military in Vietnam insisted that it was winning the war. It so happened that 1968, like 2016, was a presidential election year in the constitutionally mandated U.S. four-year presidential election cycle. The Vietnamese leadership had decided to launch the Tet Offensive, which was sure to be extremely costly in terms of the lives of the Vietnamese resistance due to vastly superior U.S. fire power. I believe, though I could be wrong on this point, that the Vietnamese leadership hoped one of the “peace candidates” such as Eugene McCarthy (1916-2005) or Robert Kennedy (1925-1968) would replace Lyndon B. Johnson in the White House.
Politically, this tactic—if this was indeed what the Vietnamese leadership had in mind—failed. Far from a more reasonable U.S. president emerging from the U.S. elections, the winner was Richard Nixon, probably the most hawkish of the Democratic and Republican candidates.
But Vietnam was rewarded in another way. The collapse of the Gold Pool, along with continued Vietnamese resistance-assisted by massive—and many smaller—anti-war demonstrations, finally forced the extremely hawkish Richard Nixon to settle on terms acceptable to Vietnam. How did it all unfold?
In the wake of the Tet Offensive, the U.S. military in Vietnam insisted that it needed hundreds of thousands more U.S. ground troops to finally smash Vietnam’s resistance. The Johnson White House agreed to this request. With the prospect that the war would escalate further, flooding the world with even more U.S. dollars, capitalist speculators began to exchange dollars for gold at such a rate that the Gold Pool would be exhausted within weeks. A run was unfolding on the “Gold Pool bank,” which was at the very core of the gold-dollar exchange standard. This run forced Wall Street to tell Johnson the jig was up.
Within weeks of the collapse of the Gold Pool, President Johnson announced that he would not be a candidate for re-election and that he was opening up negotiations with the representatives of the Vietnamese people. To prevent a runaway rise in the dollar price of gold—or rather to postpone it—Johnson canceled his plans to greatly increase the U.S. occupation force in South Vietnam.
Richard Nixon, after he assumed control in January 1969, was then forced to begin to withdraw the huge occupation force in Vietnam in order to prevent a runaway rise in the open market dollar price of gold. Nixon dragged his feet for as long he could so that the last U.S. occupation troops did not leave until 1973.
As the U.S. occupation army was drawn down, Nixon tried to break Vietnam’s resistance by escalating the air war. He also used diplomacy, playing on the tension between the Soviet Union and the People’s Republic of China, and finally to the astonishment of many moved to normalize relations with China.
Nixon’s campaign of criminal bombardment from the air and sea included both North and South Vietnam, especially the South, as well as Cambodia and Laos—leading to the deaths of countless hundreds of thousands of people. But Nixon’s divisive diplomacy and criminal use of firepower could not break the determination of the peoples of Indochina to win their independence. By 1973, as the dollar price of gold kept climbing on world markets, a reluctant Nixon was forced to end the bombing campaign as well.
From gold-exchange standard to dollar standard
Between 1968 and 1971, the last remnants of the dollar’s convertibility into gold was by stages ended. From 1971 onward, the dollar was and remains a paper token currency that floats against other currencies and the money commodity gold, which despite all the attempts over the decades to depose it remains at the center of the monetary universe.
The question that was posed during the 1970s was whether the dollar could continue to function as a global currency—that is, whether internationally traded commodities like oil, copper, wheat, corn and so on would continue to be quoted in dollars and international debts would continue to be denominated in dollars—or whether instead internationally traded commodities and debts would be denominated in some weights of gold directly. Or to avoid the latter scenario from unfolding, the U.S. would be forced to again make the dollar convertible into gold at some fixed rate in order to save the dollar’s role as the world currency.
If either of the latter two had happened, the U.S. in the absence of a large trade surplus would have been forced to cut back on its international spending, ending not only the war against the peoples of Indochina but also withdrawing troops from Western Europe and dismantling its huge network of bases around the world—much like Britain was forced to do in the face of repeated crises of the British pound after World War II. This would have meant the end of the postwar U.S. global empire, the only force that has prevented a resumption of major wars among the imperialist countries as postwar economic competition increased. Just as importantly, the end of the U.S. global empire would almost certainly mean the end of the united front against all national liberation movements that the U.S. empire enforces.
One of the reasons that the dollar standard has lasted as long as it has is that not only the U.S. but the U.S. imperialist satellites such as Britain, capitalist Germany, Japan and so on have a vital interest in making the dollar standard work. After all, what is the alternative? If you are a German or Japanese capitalist, you will not look back at the good old days when your countries were forced to defend their access to world markets and raw materials through their own military forces.
This situation ended in disaster for both Germany and Japan despite the malign talents of Adolf Hitler. In some ways, Germany, Japan and the other lesser imperialist countries have an even greater interest in maintaining the U.S. empire than the U.S. itself does. When the U.S. empire finally collapses, if the world is still capitalist, they will have an even harder time defending their access to world markets and sources of raw materials than the U.S.
This is why the Soviet Union’s and then Russia’s attempts to win Germany away from its alliance with the U.S. has born so little fruit over the decades. It would be ironic indeed if a President Donald Trump succeeded in breaking up the U.S.-German alliance after Soviet and Russian statesmen from Joseph Stalin to Vladimir Putin have repeatedly failed.
In the early 1970s, the U.S. empire gained a major victory in this regard when the Saudi Arabian oil monarchy agreed to quote oil in dollars, in effect accepting the new paper dollar standard. This underscores the vital needs from the Empire’s point of view of continued U.S. military-political domination of the Middle East. But despite the U.S. control over the Arab oil monarchies throughout the 1970s, the jury was still out on whether the dollar standard could last out the decade. And as the 1970s decade ended, the dollar standard came close to collapse.
The ‘Great Stagflation’ and its aftermath
One group that hailed the transition from the gold-exchange standard to the paper dollar standard were professional economists. Basing themselves on the marginalist (scarcity) theory of value, these economists predicted that the end of the gold-dollar exchange standard would cause the U.S. dollar price of gold to drop. The central banks, the economists—and these included some radical as well as mainstream pro-capitalist economists—reasoned that since central banks would no longer have to worry about safeguarding the convertibility of their currency into gold, they would be able to create any amount of demand necessary to achieve “full employment” with “low inflation.”
The academics believed that the total level of demand in the economy could then be regulated like the water level in a bathtub. The biggest difference among the professional economists from right to left was whether this could be done through monetary policy alone—the followers of Milton Friedman—or whether fiscal policy would also have to employed, as Keynesians and post-Keynesians of the profession believed. I have dealt with this question throughout this blog, so I won’t repeat here what I have written. I will return to this question in detail when I review Anwar Shaikh’s (1945- ) extremely important new book “Capitalism: Competition, Conflict and Crises.” Until then, readers interested in pursuing this question can read this post.
Returning to the 1970s, the dollar price of gold, inflation and interest rates all soared. In order to save the dollar system from early collapse, the Volcker Shock was an absolute necessity. Here I want to examine not the Volcker Shock as such but what happened afterwards.
As inflation faded as a result of the Volcker Shock, what were very high nominal interest rates were transformed into very high real—in terms of commodities—interest rates. This meant that the rate of interest was above the rate of profit in terms of commodities and, ultimately as decisively important, in terms of money material—gold. More on this when I review the Shaikh book.
This meant that the profit of enterprise—the difference between the rate of profit and the rate of interest—was negative. If the rate of interest is equal to or higher than the rate of profit, the incentive for the capitalists to produce surplus value—the sole source of profit—is destroyed. No capitalist will take the risk of investing in an industrial or even trading business when they can earn the same rate of return risk free by simply buying government securities.
This doesn’t mean that capitalism under the circumstances will simply come to an end. Instead, a growing number of industrial capitalists—industrial corporations—will transform themselves into money capitalists. A portion of the money capital instead of entering the circuit of M—C..P..C’—M’—the circuit of productive (of surplus value) capital—or the circuit of trading capital M—C—M’——will instead enter the circuit of loan money capital M—M’. In other words, a period where the rate of interest rises above the rate of profit for as long as it did after the Volcker Shock will be followed by an extraordinary expansion of loan money capital.
This is exactly what happened after the Volcker Shock, and has been given a name, “financialization.” As the money market became flooded with loan capital, the rate of interest began to fall towards the very low levels that prevail today. Indeed, if you look at a graph of interest rates over the last few hundred years, the ups and down of interest rates trace a pattern of low hills with a gradual downward trend—until the end of the 1960s. Then the graph traces a pattern that looks like an extremely high mountain range, rising steeply and then falling steeply. There is nothing like it at any other point in the graph.
There is another important number as well. Starting in 1979, U.S. manufacturing employment—just before the summit in the interest rate “mountain range”—peaks and then begins to decline. Before 1979, manufacturing employment in the U.S. rose during booms and declined during recessions, but the declines during recessions was far less than the rise during booms. Even the super-crisis/Depression of the 1930s did not reverse this historical pattern. However, starting in 1979, the pattern reversed.
Manufacturing employment rose only slightly during booms while continuing to fall during recessions. Overall, the trend in manufacturing employment in the U.S. and in many other imperialist countries—but not worldwide; this is very important—was downward. During the early 1980s, when interest rates were above the rate of profit of enterprise, huge sections of basic industry, especially in the older capitalist countries such as the U.S. and in Britain, were dismantled, giving birth to what is called the “rust belt” in the U.S. Eventually, as interest rates fell a positive profit of enterprise was restored. But when the industries were rebuilt, they were not rebuilt in the old centers of industrial production but in areas of the globe where wages were far lower and the rate of surplus value vastly higher.
The U.S. trade and balance of payments after the Volcker Shock
The Volcker Shock, though disastrous for U.S. industry, did save the dollar standard. As confidence in the U.S. dollar was restored in the wake of the “shock,” money capital flowed back into dollar-denominated assets. Suddenly, the U.S. acquired a huge ability to borrow abroad that it had lacked during the 1970s.
Previous to this from World War I onward, the U.S. had been a net lender. Before 1914, the U.S. had also been a net borrower. But in those days, it was largely industrial capitalists who were building up the vast U.S. industrial machine that borrowed. After the Volcker Shock, it was the “consumer” and the government doing most of borrowing. As the U.S. has become more and more indebted to the rest of world, it has become ever more sensitive to any contraction in the supply of global credit. During the 1980s and 1990s, there was more than enough global credit available to finance the U.S. demands and leave some credit left over to finance capitalist development in some—though not all—previously underdeveloped countries.
Where did this additional loan money come from? As we saw above, a portion came from the diverting of money from industrial and commercial circuits directly into loan money circuits. The rest came from increased gold production after 1980. The collapse of commodity prices during the era of stagflation, when calculated in terms of gold, greatly increased the profitability of gold mining and refining, both relative to other industries and absolutely. The result was a rise in gold production that didn’t peak until 2001.
As a result, during the 1980s the Reagan administration was able to borrow huge amounts of money for arms spending and its regressive tax cuts, while the supply of money for mortgage loans, auto loans and other consumer borrowing expanded within the U.S. and other imperialist countries. All this while interest rates the government and other borrowers had to pay progressively fell. Many American workers and middle-class people maintained their standard of living despite stagnant wages and salaries at the cost of increased borrowing and debt.
After the relatively mild recession that occurred under George H.W. Bush, which limited the first Bush to one term, the Clinton administration realized that the post-stagflation credit bonanza of the 1980s could not last forever. It reduced the size of the federal deficit and even briefly balanced the federal budget by the end of Clinton’s second term.
The Clinton administration was able to accomplish this because the destruction of the Soviet Union under Gorbachev and Yeltsin made it possible to end some Cold War military spending. In addition, the destruction of the Soviet Union was proclaimed as demonstrating the “failure of socialism” for all time. The resulting demoralization among the working class and its allies among oppressed peoples emboldened the Democrat Clinton administration to make further cuts in social spending, including “ending welfare as we know it.” As federal deficits declined under Clinton, U.S. consumers were able to continued to borrow more and more in an attempt to maintain their historic standard of living for a longer period than would have been possible otherwise.
Another factor expanding the quantity of credit available to U.S. consumers during the Clinton years was the economic crisis that began in Asia in 1997. Loan money capital fled from crisis-ridden Asia into the U.S. and other imperialist countries. As a result, home and auto sales soared, just as the federal budget swung into surplus. Many bourgeois economists, exhibiting their usual degree of foresight, predicted that the federal budget would be balanced for years to come. From the viewpoint of U.S. imperialism, the Clinton administration was highly successful despite the president’s notorious sex life.
The failed presidency of George W. Bush
When he was installed as U.S. president in 2001, George W. Bush thought he could repeat Ronald Reagan’s play book. The Bush team, despite the traditional Republican rhetoric about the importance of a balanced federal budget, saw no need to continue Clinton’s balanced-budget policies. After all, Ronald Reagan had run huge deficits, yet interest rates kept falling and inflation remained low.
Believing that Reagan had shown that “deficits don’t matter,” the new administration pushed through new hugely regressive tax cuts while launching its invasions of Afghanistan in October 2001 and then Iraq in 2003 using the 9/11 attacks as a pretext. Clinton’s relatively cautious foreign, military and fiscal policies were thrown to the wind.
What the Bush administration ignored was that the financial and economic conditions when Reagan was president no longer existed. First, the diverting of money capital from industrial and commercial to loan circuits (financialization) had pretty much run its course. In addition, the combination of somewhat higher commodity prices in terms of gold, combined with the nearing exhaustion of the South African gold mines that had been the main source of new gold throughout the 20th century, meant that gold production had begun to decline starting in 2001.
The new decline in gold production was soon felt on world money and commodity markets. Declining gold production meant that gold was getting relatively scarcer, and when a commodity—and gold is a commodity that happens to be the money commodity—grows scarcer, demand for it increases. As a result, the dollar price of gold, which had traced a generally downward path since the Volcker Shock, reversed direction and began to rise. In the language of the market, the long bear market in gold that had begun with the Volcker Shock had ended and a new bull market had begun. Sensitive primary commodity prices, reacting to the renewed depreciation of the U.S. dollar in terms of the money commodity gold, began to rise in dollar terms.
With the threat of a new 1970s-style inflation, that could threaten the dollar system, the Federal Reserve Board began to slow the the rate of growth of the U.S. dollar-denominated monetary base. The Fed feared that if it did not take this step, a new 1970s-like stagflation crisis would arise and the dollar system and the Empire itself might not survive. The slowdown of the growth in the dollar-denominated monetary base at first had little effect on the rising dollar price of gold, and primary commodity prices continued to rise while interest rates were little effected.
What the Fed’s action does show is that while legal laws that had once tied the quantity of currency that the Federal Reserve—and other central banks—could create to gold reserves were long gone, the economic law that ties the amount of token money a central bank can create in terms of purchasing power to the quantity of gold bullion in the world was still very much in effect.
With the exception of a brief upswing in 2003-2004, economic growth in the U.S. was slow and manufacturing employment actually declined, though there was no sharp crisis. But the ratio of bank credit money to U.S. dollar-denominated token money kept growing. Never before had so much credit money, and credit piled on top of it, been created on such a small quantity of hard legal-tender cash. All the classic conditions for an economic crash were now in place. The panic of 2008 was no accidental “black swan” event like many bourgeois economists want to believe.
Starting in 2007, the inevitable unraveling began. What was first called the “sub-prime mortgage crisis” proved to be only the tip of an iceberg. When it broke out, Wall Street assumed that the Fed would flood the banks with dollar reserves. U.S. stocks briefly rose to a new high while primary commodity prices and the dollar price of gold soared. The economy was once again on the brink of stagflation. But the threat to the dollar system prevented the Fed from doing what Wall Street expected. Instead, the Fed waited until full-scale panic broke out in 2008 before flooding the banking systems with reserves. The Great Recession had arrived.
The Great Recession reduced—but didn’t eliminate—the U.S. trade deficit. An even more severe economic crisis would have been necessary to accomplish that task. However, the Great Recession did buy the dollar system and thus the U.S. world empire—and the global capitalist system of both exploiting and exploited countries—some time. As bad as the Great Recession has been for the political stability of the world capitalist system, a financial collapse of the dollar system would have been far, far worse.
With economic recovery from the crisis/depression proper, now comes the attempts of the Federal Reserve System to “normalize” the global monetary system. The Federal Reserve is attempting to return the rate of growth of dollar-denominated token money to 4 to 5 percent—about its growth rate in the period immediately
preceding the Great Recession. The U.S. trade deficit is rising again and with it the rate of growth of the U.S debt to the rest of the capitalist world. The countdown is underway to the next great economic crisis. It is only a matter of time.
And now one out-of-control billionaire, Donald Trump, has thrown a monkey wrench into the increasingly shaky structure of the U.S empire, politically, financially and militarily. How did the U.S. ruling class get itself into this jam? This will be subject of next month’s post.
To be continued.
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1 Rubio’s poor showing in the struggle for the Republican nomination was particularly disappointing to the ruling circles in the U.S. They had great hope that the relatively young U.S. politician—he is 44—of Cuban origins—his family migrated to the U.S. before the Cuban Revolution—would be able to build support for the Republican Party among Latinos beyond the limited circles of Cuban immigrants and their descendants who had fled the Cuban Revolution. Unlike other Latinos, Cuban-Americans have tended to vote Republican, though this is less true of the younger generation.
Well before the Trump campaign, the Republican Party has increasingly been seen as an exclusively white people’s party. With the U.S. gradually ceasing to be a “white country”—whites are expected to be a minority by mid-century—this will mean that the Republicans will at some point cease to be a viable electoral machine in most of the country if they remain an almost purely white party. This has already occurred in the wealthiest and most populous state, California.
The hope among the U.S. “political bourgeoisie” has been to win over a section of the growing Latino population to the Republican Party beyond Cuban Americans with the help of politicians who like Rubio have Spanish surnames. But so far these attempts have failed due to the widespread use of racist code words by mainstream Republican politicians—not just Trump.
The Republican politicians have therefore been forced to use thinly veiled appeals to racism to get elected. Outside of the “country club” vote, the Republicans can’t win on their “neo-liberal” economic program. They have to find other ways to win votes. So far, the only way they have found is appeals to racism, especially the fear that in the future whites will be a minority in the USA, appeals to fear of changing gender roles, fear of LGTQ rights, and fear of social change in general. (back)
2 The Christian Right is comprised of Protestant so-called evangelical Christian politicians and clergymen—they are all men—that mix extreme religious fundamentalism—such as opposition to Darwin’s theory of evolution—with extreme neo-liberal economics. The Christian Right is essentially a device to use religion to get poorly educated white working people who live away from the big cities to vote for super-reactionary Republicans who support neo-liberal policies.
The Protestant ministers who are the backbone of the Christian Right—often outrageously corrupt and wealthy themselves—are well paid by the ruling class for their work. They combine an appeal to racism as well as opposition to feminism and LGBTQ rights such as gay marriage. They appeal to those downtrodden sections of the white population that feel that all economic and social change is going against them. For example, they used to be “far better” than the “Negroes,” but now there is a Black man in the White House. The only positive promise the Christian Right offers its supporters is that Jesus Christ will soon return to Earth and all their economic and social problems will be solved. (back)
3 It is virtually certain that all middle-class Germans—the class from which Hitler drew his main support—have a certain amount of Jewish ancestry if we go back far enough. But since records go back only to the 18th century, a German that had only Christians in his or her family tree was in the clear. The Nazis had a problem in a few cases where Jewish ancestry could be proved—for example, in the case of Field Marshal Erhard Milch (1892-1972) a Nazi war criminal whose father was Jewish. In cases such as these, the Jewish ancestry could be officially expunged by government decree. In Milch’s case, Hitler at the urging of Herman Goering gave the field marshal a German blood certificate that made him an official “Aryan.”
It was also widely believed that Reinhard Heydrich (1904-1942)—the brutal head of the German state security agency that controlled both the so-called criminal police and the Gestapo—in effect Nazi Germany’s FBI—had a considerable amount of Jewish ancestry, though he was never officially “aryanized.” Heydrich compensated for his alleged “Jewishness” by being more anti-semitic than most other Nazis, playing a key role in the actual carrying out of the holocaust. There is an interesting parallel between Heydrich and his U.S. counterpart, FBI chief J. Edgar Hoover (1895-1972). More on that parallel below.
However, “pure-blooded Jews” could not benefit from “aryanization.” The majority of German Jews—men, women and children—who did not leave Germany before the outbreak of World War II were sent to and died in death camps. Germans who were only part Jewish suffered varying degrees of oppression, including the possibility of dying in a death camp. But for the most part, Germans who were only part Jewish fared better than the “pure” Jews, mostly surviving the Nazi regime.
In J. Edgar Hoover’s case, it wasn’t Jewish but African ancestry that was the problem. The notorious head of the FBI, the arch-racist J. Edgar Hoover, is widely believed to have had a certain amount of African ancestry. While Heydrich compensated for his alleged “Jewishness” by being even more anti-Semitic than most other Nazis, J. Edgar Hoover compensated for his alleged “African ancestry” through his over-the-top racism toward African Americans. Perhaps Hoover believed that this was the only way to prove his “whiteness.” Unlike Nazi Germany, the U.S. had no procedures to “officially” make a person with some African ancestry legally white.
The general rule in the U.S. was that if a person’s appearance betrayed any recognizable African American physical features, the person was considered to be officially a “Negro,” though “Negroes” with predominately “white blood” had a higher social status than dark-skinned “Negroes.” Hoover’s physical appearance brought him dangerously close to being considered a light-skinned “Negro” under the prevailing laws and social attitudes.
Hoover proved his “whiteness” through his hatred of the Civil Rights and Black Liberation movements. He organized the brutal repression of the Black Panther Party including the murder of the young leader Fred Hampton. So deep was Hoover’s racism that he even attempted to blackmail Martin Luther King into committing suicide.
Yet no U.S. president between Calvin Coolidge, who appointed Hoover chief of the FBI—officially called the Bureau of Investigations in those days—and Richard Nixon, under whom he died in office, fired the racist chief “top cop” for his grotesque racism toward U.S. citizens who were African Americans. Franklin D. Roosevelt, still considered the great hero of American liberalism, had a particularly close relationship with Hoover. While no building in today’s Germany is named for Reinhard Heydrich, the FBI headquarters to this day still bears the name of J. Edgar Hoover despite the demands by many that the arch-racist’s name be removed. (back)
4 A Trump election would not be reassuring to Jews either. Though Trump is not using overtly anti-Semitic demagoguery at the moment, many of his supporters who form the backbone of the campaign are fanatically anti-Semitic. For example, the media widely reported David Duke’s statement to the effect that any white person who didn’t support Trump was a traitor and Trump’s refusal to immediately disavow Duke. Trump claimed he knew nothing about Duke, an unbelievable statement.
As part of its general policy of encouraging racist anti-Black attitudes among U.S. Jews, the corporate media reported that Duke was a former leader of the Ku Klux Klan but managed to “overlook” the fact that Duke is also a former supporter of George Lincoln Rockwell’s American Nazi Party and its successor the National Socialist White People’s Party. Like his mentor and teacher Adolf Hitler, Duke remains an extreme Nazi-style anti-Semite who consider Jews to be the root cause of all the evil in the world.
Ironically, Palestinian Americans who are participating in the anti-Trump movement in order to defend themselves and their community are doing more to defend American Jews from the anti-Semites like Duke that infest the Trump movement than is the official Israel cheer-leading Zionist “leadership,” which is doing exactly nothing. Or rather much less than nothing, because by defending the extreme and growing racism of the world’s only officially racist state, Zionist apartheid Israel, they are defending racism in general, which sooner or later, history teaches, will turn against U.S. Jews. (back)
5 The European far right is opposed to American imperialism not because they are opposed to imperialism in general but because they want to advance the imperialism of the European countries at the expense of the now-dominant U.S. imperialism. (back)
6 It is important not to forget, if we are to distinguish ourselves from liberal muddleheaded illusions and right-wing demagoguery, that the banks by themselves did not cause the crisis of 2007-2009. In the final analysis, it was industrial overproduction and not the financial manipulations—except to the extent that it facilitated industrial overproduction—that was the real cause of the crisis. (back)
A Critique of Crisis Theory 