Marxism is uniquely qualified to give an in-depth analysis of

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A comprehensive understanding is greatly needed of how the present U.S. economic crisis came about, and how things have considerably worsened not only since December 2007—when the Great Recession began—but also since 1974 (when wages for the working class began a steady downward slide).

Marxism is uniquely qualified to give a real in-depth analysis of how capitalism works. And it can explain the current economic crisis in more ob­ jective terms than most current explanations, which tell us that, willy-nilly, the subjective greed of bankers, billionaires, hedge fund investors, real-estate agents, and financial traders of all kinds led to a “Casino Capi­ talism” and often to deliberate financial fraud.

That’s true enough, but there’s much more to it. We are told by the liberal media that the Financial Ser­ vices Modernization Act of 1999 overturned the parts of the Glass-Steagall Act of 1933 that had put up walls between speculative investment banking on one hand, and commercial banking on the other, forbidding the financial industry to group together mortgage and other portfolios in order to sell them as investments.

In a word, “derivatives,” which are investments in already existing investments and loans, came into extraordinary wide use based mostly on the boom­ ing real estate market—hence “mortgage securities.” (Subsequently, there were automobile securities, credit card securities, and other securities based on debts). In other words, banks, hedge funds, insurance companies, and other financial institutions made it their business to radically increase the selling of debt.

Again, that is all true enough. However, studying structural changes in the economy over a longer pe­ riod of our economic history will tell us much more about why Glass-Steagall was overturned to begin with. And it will also give us understanding of the rather profound ideological changes this nation has experienced since the demise of New Deal liberalism starting in the 1970s, in order to complement and re­ inforce those structural changes.

The mainstream explanations of the financial cri­ sis given above comprise only a surface analysis that doesn’t explain the underlying material forces that greatly pressured investors to buy into home mort­ gage derivatives, and then invent an array of new ones that had never existed before. The implication given us by the mass media and mainstream liberal econo­ mists is that if these risky investments had not taken place, the economy would just be humming along with fairly constant economic and profits growth—in a 6 SOCIALIST ACTION JULY 2013 word, a stable economy in line with the 10-year boom of the 1990s.

U.S. in the world economy since 1945 To begin, we should note the fact that World War II never touched American shores. War production elim­ inated the Great Depression and spurred the greatest decade of U.S. economic growth (5.9%) of the 20th century. By the end of the war average white workers, almost 30% of whom were unionized, saved fully 25% of their gross wages. The U.S. was now by far the #1 economy in the world! Except for the neutral nations, Europe lay in ruins. The stage was set for the U.S. to dominate the world economy.

As early as 1944, when the U.S. and its allies knew it was only a matter of time before they would win the war, the Bretton-Woods Agreement, whose major ar­ chitect was John Maynard Keynes, was agreed to by all the capitalist allies. It called for the dollar to be pegged at 1/35th of an ounce of gold and for the rest of the world’s currency values to be pegged to the dol­ lar. Fixed exchange rates between various currencies were established.

The dollar was the world’s “reserve currency,” which meant that a huge portion of the “commodities mar­ kets” (in capitalist terminology, raw materials like metals, minerals, grains, but most importantly, oil) had to be traded in dollars. Ditto with large balances of payments between most nations.

After the war, even before the famed Marshall Plan was enacted, the U.S. gave $13 billion to the destroyed European countries, including West Germany. Japan was also given substantial reconstruction aid. Another $13 billion was given to Europe from 1948-52 under the auspices of the Marshall Plan.

There was an implicit proviso attached to the United States’ “generosity” toward Europe. Trade barriers were to be brought down—all the way down. Europe was inundated with American products. By 1953, more than 60% of all the world’s goods were pro­ duced in the United States. Europe prospered too, but its bigger ticket items couldn’t compete with those of the U.S.; cars, TV’s, hi-fi record players, and radios, for example, earned booming profits for the U.S.

In response to what was deemed to be too much inflation, the Federal Reserve induced “fiscal tighten­ ing” by raising interest rates, resulting in less business and consumer borrowing, and therefore downturns in production and higher unemployment. This hap­ pened in the first “Nixon Recession” of 1969-71.

The reason this kind of fiscal action is frequently tak­ en in the face of high inflation is because it is deemed preferable to have a temporary economic downturn than to allow the currency instability that arises from rapid growing inflation. There is, among other things, the likelihood that foreign nations with much lower inflation rates will not want to sell their own goods and services to the U.S. at dollar value because the dol­ lar has been devalued through inflation. Hence, they’ll look for markets elsewhere in the global economy, or otherwise lower their production and grudgingly sell what they can at lower prices to the U.S.

In any event, this was the fundamental cause of fiscal tightening back then. In response to higher U.S. defi­ cits, inflation, lower growth, and perceptions of falter­ ing U.S. economic growth, major advanced capitalist nations and their investors asked to be paid in gold for U.S. Treasuries and other American securities they were holding. Under the Bretton-Woods Agreement, this was their right.

In August 1971, another watershed event in capital­ ist history occurred. Nixon took the dollar off the gold standard. The new “floating” value of all world cur­ rencies was still to be pegged to the dollar, but from now on, the dollar’s value was theoretically backed by the value and stability of the U.S. economy itself. This made the question of value very abstract and subject to speculation. For the first time in world history, all currencies were fiat paper currencies, unbacked by precious metals of any kind. The values of currencies were “floated” in currency markets, making for greater currency instability.

But Nixon, an advocate of monetarism (but not quite the same as Milton Friedman) brought forth what was perhaps the first giant step towards neoliberalism. Many monetarists pushed a laissez-faire economic regime. Federal Reserve Bank control over the money supply, primarily by regulating the interest rates on borrowing, would be the solution to prevent the U.S. economy from overheating (overproduction) or ex­ cessively cooling down (underuse of productive ca­ pacity). Milton Friedman was always against increas­ ing the money supply to the point of rapid inflation. Nixon was not necessarily opposed to this.

However, U.S. monetarism supplied no solutions for underdeveloped nations around the world, no matter (continued on page 10, in “New book on Celia Sanchez — key Cuban revolutionary leader”)

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Tony Savino / Socialist Action