The hidden conflict within the fascist state for control of economic policy

by Jehu

This article, Devaluations didn’t work, points to what I think is the real reason the Federal Reserve is desperate to raise its policy rate some time this year. It is becoming increasingly obvious monetary policy hasn’t delivered and the bankers are in danger of losing their control of economic policy.

According to the Economist: “Devaluations today haven’t had the positive impacts the end of Gold Standard did in the 1930s”. In the aftermath of the financial crisis of 2008-2009, bourgeois simpletons are deeply divided over how to replace the extraordinary measures taken to prevent collapse of capitalism with a set of policy tools that can be used to manage the crisis long-term. At the heart of this struggle is the question,

“Why aren’t currency devaluation policies creating inflation?”

To answer this question will require a little bit of economic history.

The means to… inflation?

In his 1930 essay, Economic Possibilities for our Grandchildren, Keynes diagnosed the Great Depression as caused by the improvement in the productivity of labor. Pretty much along the lines Marx predicted about 70 years earlier that reduction in the labor necessary for production of commodities would result in a catastrophic collapse of production, Keynes explained capital was indeed reducing the need for labor faster than it could find new uses for labor. In that essay, Keynes expressed the belief this would lead to a reduction of hours of labor and an end to the morality founded on accumulation of capital.

In a word, communism.

However in his 1933 essay, The Means to Prosperity, his discussion of the Great Depression significantly changed. Although he still seems to imply improving productivity of labor was the cause of deflation, referring to millions of unemployed even as want increased, he no longer spoke of reducing hours of labor. Instead, he suggested the deflation produced by the Great Depression resulted from the collapse of credit, particularly in the US.

Whether he was right in his 1933 diagnosis or not is not the question here. (He wasn’t, since the collapse of credit was only a secondary effect of the depression itself.) However, even in that essay what Keynes advocated as a solution was not currency devaluation — in fact he seems to rule it out — but that the state must intervene and borrow the excess money capital sitting idle in the economy and put the working class to work.

How, asked Keynes, could deflating prices be stabilized? Some of the bourgeois simpletons advocated prices could be stabilized by conventional means: cutting back on production of commodities and reducing their supply until conditions for profitable production improved. Keynes disagreed with this approach: cutting production, he explained, would only reduce investment demand and worsen the general crisis:

“[As] an all-round remedy restriction is worse than useless. For the community as a whole it reduces demand, by destroying the income of the retrenched producers, just as much as it reduces supply.”

Using state deficit spending to counter deflation

Keynes instead proposed to fix the problem of deflation by deficit spending. Spending on commodities had to increase faster than the improvement in the productivity of labor increased the supply of commodities. This meant people had to spend a greater portion of their income and save less. Because of the depression, Keynes observed, people were already saving less and spending a larger portion of their income. Aside from producing more gold, the only way to accomplish increased spending was more exports and more debt. Finally, he argued, trying to increase exports by competitively devaluing the currency might work for one country, but not if every country tried it at once.

Keynes thus concluded:

“We are left, therefore, with the broad conclusion that there is no effective means of raising world prices except by increasing loan-expenditure throughout the world.”

Efforts should be made to make credit available and interest rates as low as possible, but the only real and effective source for increased loan-expenditure in the middle of the Great Depression, Keynes believed, was the state itself:

“Thus the first step has to be taken on the initiative of public authority; and it probably has to be on a large scale and organised with determination, if it is to be sufficient to break the vicious circle and to stem the progressive deterioration”.

The standard myth of bourgeois simpletons is the Great Depression ended with currency devaluation in the 1930s. This is not exactly true. At least in the United States, the contraction phase of the Great Depression ended at that time, but recovery didn’t happen. Much like in 2009, after a very sharp contraction of output, the economy stabilized at a lower level than before. Growth resumed, but recovery did not take place until the outbreak of World War II and the expansion of loan-expenditures for military spending.

In Germany, it was otherwise: sustained war preparations under the Nazis quickly brought the economy to “full employment”. The stimulative effects of wasteful government war expenditures did the trick. Just as Keynes argued in 1933, wasteful government spending  — not currency devaluation — could offset deflation. Moreover, the war itself completed the effort by destroying the productive capacity of the advanced industrial competitors to the United States; leaving it alone and unchallenged as the dominant national capital in the world market.

Deficit spending and hyperinflation

However, within fifteen years of the end of the war, Keynesian policies ended up in the Great Stagflation of the 1970s. Keynesian policies were so good at creating inflation that during the depression of that decade, inflation escalated to the point of borderline hyperinflation, threatening the world reserve status of the dollar.

Since the 1970s the myth has emerged among the bourgeois simpletons that inflation can be generated through monetary policy alone. Friedman and the “monetarists” have argued the state can control inflation by the steady injection of counterfeit currency into circulation. Keynes has been overthrown.

In 2002, for instance, Bernanke quieted fears of deflation by declaring the Federal Reserve could stoke inflation simply by counterfeiting currency.

“[The] U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”

This assertion is straight out of Friedman’s silly theory of inflation; namely that inflation is “always and everywhere a monetary phenomenon”. However, if Bernanke and the Friedman monetarists are right that the fascists can create inflation simply by counterfeiting the currency, why is the Economist running this article on deflation after six years of unconventional monetary policies?

Bernanke wasn’t right, monetarism is bullshit — you cannot increase inflation by printing currency.

“Fiscal dominance”

The idea inflation cannot be stoked by counterfeiting currency has huge political implications. If you want inflation you have to do what Keynes suggested: increase expenditures faster than productivity increases. At the same time, however, Keynes also hinted at why deficit spending would not work as a strategy: the capitalists would resist state intervention in the economy even if it was in their interests.

“Some cynics, who have followed the argument thus far, conclude that nothing except a war can bring a major slump to its conclusion. For hitherto war has been the only object of governmental loan-expenditure on a large scale which governments have considered respectable. In all the issues of peace they are timid, over-cautious, half-hearted, without perseverance or determination, thinking of a loan as a liability and not as a link in the transformation of the community’s surplus resources, which will otherwise be wasted, into useful capital assets.”

In Keynes’ estimation, the capitalists would resist increasing public debt to end the crisis and would accept state control of production only in event of war. The reason is quite understandable: As Engels pointed out fifty years before Keynes, state control of production renders the entire class superfluous. And no one wants to be superfluous.

Thus, despite Keynes advice, the spending necessary to end the Great Depression only began with World War II and preparations for it. Likewise, the Great Stagflation only ended with the Reagan military build out. And, most recently, in 2008-2009, the economy literally had to be brought to the brink of collapse before Washington reversed attempts to reduce its deficits and embarked on a multi-year, multi-trillion dollar, spending spree.

Today, the resistance of the capitalists to state intervention, even at the risk of capitalism itself, continues under the banner of central bank independence and opposition to “fiscal dominance”, i.e., to state control of the production of surplus value.

I will turn to this next.