Wars rarely turn out the way their initiators expect. In our own time, we can point to many examples. George W. Bush and Tony Blair, when they ordered the invasion of Iraq on March 19, 2003, believed that the U.S.-British forces would defeat Iraq’s armed forces—weakened by years of sanctions, continued military attacks, and forced unilateral disarmament—within weeks with hardly any casualties on the side of the invaders. It would then be “mission accomplished.”

But now in August 2014—100 years to the month since the outbreak of the “Great War”—the U.S. has resumed bombing Iraq as the government it created crumbles. The reason this government is failing is that virtually no Iraqi wants to fight and die for it. Why should an Iraqi fight for a foreign-imposed government?

Nor should we forget the war against Afghanistan launched by the Washington war-makers in October 2001 against the Taliban government, which had no modern armed forces, only a militia. Within weeks, U.S. media were writing about that most unequal war in the past tense. But now, 13 years later, the U.S. is still struggling to find a way to exit that war without the return of the Taliban to power. That war didn’t turn out as the Washington war-makers expected either.

Nor has the air war fought by U.S-NATO against Libya in 2011 turned out the way the Obama administration, which launched that war, expected. And the same will probably be true of the most recent war—if it can even be called a war—launched by Israel, with at least the tacit support of the U.S., against the people of tiny Gaza, which has no army, air force or navy.

This August marks not only the 100th anniversary of the beginning of World War I but also the 50th anniversary of the infamous Gulf of Tonkin Incident. If we were to believe the U.S. propaganda of the time, (North) Vietnam’s tiny navy attacked without any provocation the mightiest navy the world had ever seen! This “incident” occurred—or rather didn’t occur—on August 2, 1964, just two days short of the 50th anniversary of the start of the “Great War.”

The U.S. Congress used this faked incident to grant the Johnson administration cart blanche to wage war against Vietnam, which the administration took full advantage of by launching a series of bombing raids on the Democratic Republic of Vietnam that August. This gave way to a steady air bombardment of (North) Vietnam—the South had been subject to steady U.S. bombardment for the preceding five years—the following year after Johnson won re-election as the “peace candidate.”

While the Washington war-makers succeeded in killing millions of Vietnamese people and doing incalculable damage to the environment with Agent Orange and other forms of environmental warfare, in the end the war against Vietnam did not turn out the way the war-makers in the White House, the Pentagon and Congress expected. For example, the renaming of Saigon Ho Chi Minh City was probably not part of Washington’s war plans.

Nor did the war against Korea, which is usually seen as beginning in June 1950 but really began when Washington occupied the southern part of Korea in 1945, turn out exactly as the Washington war-makers intended, though they succeeded in killing millions of Korean people and left no multistory building standing in the northern part of the country.

The rule that wars seldom turn out the way those who start them expect was certainly true of the general European war that began exactly a century ago. To the generation that actually fought, it was known as the “Great War” or “the World War,” ”the war to make the world safe for democracy,” or, most ironic of all, “the war to end all wars.” But as a result of unintended consequences of the war, it had to undergo a name change. It was renamed World War I, a mere prelude to the even greater bloodbath of World War II.

‘Before the leaves fall’

When the general European war commenced on August 4, 1914, each warring imperialist power was convinced that it would be a short war and that it would emerge victorious. Or as was said, the war would be over “before the leaves fall.”

The war certainly didn’t turn out the way the war-makers in Vienna expected. They fired the first shots when they launched their attack on Serbia. When the war finally ended more than four years later, the Austro-Hungarian Empire had disappeared from the map. Its ruling Hapsburg family, which had ruled large areas of Europe since the Middle Ages, lost their throne for good. Against all expectations, the Austro-Hungarian forces had come out the worst against tiny Serbia. In place of Austria-Hungary, Yugoslavia now appeared on the map of Europe.

Nor did things work out exactly the way the war-makers in Berlin had expected. At the end of the war, the Kaiser found himself out of a job, and Germany lost all of its colonies and a significant amount of territory within Europe itself.

Nor did the war turn out the way the war-makers in Paris had expected. France was to see the worst of the fighting. Indeed, in the Great War’s sequel—or should I say continuation—World War II, France decided to opt out of the war even at the cost of German occupation. Marshal Petain, the French “hero” of the Great War, agreed to serve as head of the pro-German Vichy regime, while Paris itself was occupied by the Germans.

And things most certainly did not turn out the way the war-makers in St. Petersburg had expected. As the war began, members of the Russian Social Democratic Labor Party (Bolsheviks) were physically attacked by their fellow workers eager to fight the Teutonic enemies of all Slavic peoples. But in a little more than three years, the Bolsheviks were in power with the support of the Petersburg proletariat. Presumably, this was not what the czar and his advisors had in mind.

Nor did things work out the way the war-makers in London had hoped. True, immediately after the war, London extended the reach of its already extensive colonial empire—the one the sun never set on. The old Ottoman-Turkish Empire was divided up between London and Paris—under the terms of the infamous Sykes-Picot agreement—with disastrous results for the people of the Middle East, not least the Palestinian people, which is still playing out today. More on this next month.

But Britain was no longer the center of world capital and money markets. Instead, Britain emerged heavily indebted to its former North American colony. The Federal Reserve Bank of New York and its dollar currency had replaced the “old Lady of Threadneedle Street”—the Bank of England—as the center of the international monetary system. New York’s Wall Street duly eclipsed London’s “City” as the center of the world capital market. This is not what London had in mind in 1914 when they decided to enter the war on the side of France and its ally Czarist Russia.

But what about the most dangerous imperialist gangsters of all, the war-makers in Washington? A split in the U.S. Republican Party between the supporters of former President Theodore Roosevelt and President William Howard Taft had allowed the extreme racist Democrat Woodrow Wilson to emerge victorious in the November 1912 U.S. presidential election. Unlike the European imperialist powers, the U.S. did not, at least formally, go to war in August 1914. Instead, the U.S. at first quite happily financed its European competitors’ self-destruction—while collecting the interest due on its loans. Led by the House of Morgan—the most powerful of the Wall Street banks—the U.S. financed the war effort of the “allies”—Britain, Russia and France—against the “central powers”—Germany, Austria-Hungary and the Ottoman Empire.

In the November elections of 1916, Wilson won re-election against a reunited Republican Party under the slogan, “He kept us out of war.” As I noted above, people of a certain age may remember the 1964 presidential election when Democrat Lyndon Johnson ran as a “peace candidate” against the warmongering ultra-right Republican Barry Goldwater.

The U.S. enters the war

In May 1915, German submarines torpedoed and sank the ocean liner RMS Lusitania as it sailed from New York to London, leading to the death of 1,198 passengers and crew. As was the case with the Malaysian airliner shot down over Ukraine last month, the owners of the Lusitania, the Cunard Line, had played with the lives of its workers and passengers by steering the ship into a war zone.

In addition to carrying passengers, the Lusitania was shipping supplies to Britain from New York, which made it a military target. The German Embassy in the U.S. had published notices in U.S. newspapers warning would-be passengers that the route the ocean liner planned to sail was a war zone. The Lusitania’s potential passengers who heeded the German warnings saved their lives. Those who didn’t ended up dead.

Despite these facts, the U.S. warmongers’ media whipped up hysteria against Germany. In April 1917, President Wilson, after having been reelected as a “peace candidate,” went to Congress asking for and receiving a declaration of war against Germany to “defend freedom of the seas”–or so it was claimed.

In reality, the Wilson administration jumped into the war at an opportune time. Germany with its dynamic industrial economy was potentially a far more dangerous obstacle to the U.S. drive for economic domination over the entire world market than Britain was. Though British industry was still quite formidable, it was well past its 19th-century heyday when Britain was the “workshop of the world.”

Almost three years of war and blockade carried out by Britain, France and Russia had crippled Germany’s mighty industry by denying it necessary raw materials. Food became increasingly scarce for German civilians. The February Revolution in Russia had overthrown Czar Nicholas II—the October Revolution had not yet occurred—making it easier for Wilson to proclaim the conflict a war for “democracy.”

Wilson and his advisors therefore saw the opportunity to jump into war, turn the tide against Germany, and achieve their real aim, U.S. world domination. This is why Wilson pushed for the formation of the League of Nations after the war. In Wilson’s vision, the League would be an organ of U.S. world empire, similar to the role the United Nations was to play after World War II. With one world empire, there would be no wars among “the great powers” and “democracy”—defined as U.S. world domination—would rule supreme.

However, the U.S. ruling class as a whole was not quite ready to take the road of world empire. The U.S. industrial capitalists were winning the battle of competition without the overhead costs of a worldwide empire. After all, U.S. industry was producing higher quality commodities at lower cost. In Marxist terms, it required less labor in the U.S. to produce a commodity of a given type and quality than elsewhere. Henry Ford—an opponent of U.S. participation in World War I—was convinced his Model T could dominate not only the U.S. market but the world market, as long as markets remained “open” and competition was “free.”

Men like Ford and like-minded U.S. industrial capitalists reasoned, why go to the expense of running a global empire? Wouldn’t the surplus value they were appropriating in such massive amounts be better spent plowed back into U.S. industry, making it even more competitive? Why pay a portion of their profits to the government in taxes to run a worldwide political and military empire that they didn’t need?

In the aftermath of the war, many U.S. voters—this was the first U.S. election in which women were allowed to vote in large numbers—felt, and not without reason, that they had been deceived by Wilson and the Democrats. The Democrats were soundly defeated by the Republicans, who ran on the slogan of “a return to normalcy”—that is, to the “peaceful” and prosperous pre-1914 world. But as it turned out, there was to be no road back to the pre-1914 years.

The Depression as a consequence of the war

This takes us to another consequence that the war-makers of 1914 had not anticipated—the super-crisis of 1929-33 and associated “Great Depression.” I have examined this in the main posts of this blog (here, here and here), but here I will review the main conclusions I have reached about the relationship between the Great War and the Great Depression.

As a rule, after several industrial cycles dominated by the boom phases, the general price level rises above the value of commodities. This causes the rate of profit in the gold (money material) producing industries—mining and refining—to become less profitable than most other branches of industrial production. Capital therefore begins to flow out of gold production and refining.

As the production of money material declines, the quantity of money grows at an increasingly slow rate relative to real capital—productive and commodity capital. As a result, credit increasingly replaces money, eventually stretching the credit system to its limits. Money becomes tight and interest rates rise. This situation, assuming capitalist production is retained, can only be resolved by a crash or a series of crises and associated depressions of greater than average intensity, duration, or both.

One result of a crisis or series of crises of greater than usual violence or duration is a lowering of the general price level—measured in terms of the use value of gold bullion—once again to below the value of commodities. This makes gold production and refining industries more profitable than most other industries. Capital once again flows into gold mining and refining, causing the production of gold bullion to rise once again. The quantity of money then expands with low interest rates and “easy money.”

As the process of liquidating the previous overproduction goes on, especially of those commodities that serve as means of production, the accumulation of (real) capital stagnates. As a result, for a period of time, money capital is accumulated at a faster rate than real capital. But once the accumulated overproduction—especially in the form of surplus productive capacity—is liquidated, a new “sudden expansion of the market” occurs leading to a series of industrial cycles dominated by the boom phases rather than the crisis or depression phases.

This “long cycle” is built into the commodity foundation of capitalist production and is the inevitable result of the commodity form itself once it is fully developed. But this cycle is also affected by accidental events such as discoveries of rich new gold mines and technological improvements in gold mining or refining that can either weaken or reinforce it depending on circumstances, as well as by such “accidents” as wars and revolutions.

The pre-WWI economic situation

In 1914, one such accident began, the Great War. To fully comprehend the years that followed the events of 1914, including the Great Depression and all the consequences of that disaster, we have to examine the concrete evolution of the economic situation over the 20 years that preceded the outbreak of World War I.

As I explained last month, the prosperity that had taken hold after 1896 was greatly strengthened by two accidental factors. These were the development of the cyanide process, which significantly increased the productivity of labor employed in the refining of gold ore of a given quality, as well as the discovery of rich new gold mines in the U.S. colony of Alaska and Canada’s Yukon.

These developments caused a drop in the value of gold bullion—the amount of abstract human labor necessary to produce a given quantity of gold relative to other commodities—as well as a sharp rise in the production of gold. The result was an especially powerful “sudden expansion of the world market” compared to other such expansions that have occurred periodically in the history of capitalism. The “Long Depression,” which had begun with the crisis of 1873, was replaced after 1896 by a period of extraordinary capitalist prosperity that was to last up to the eve of the Great War itself.

During this prosperity, employment in both industry and services, along with world trade, rose sharply. This sharp rise in world trade, while reflecting the generalized boom, was further stimulated by the consolidation of the international gold standard after 1896. The devaluation of gold relative to most other commodities, combined with the prevailing prosperity, caused a sharp rise in the general price level. For about 15 years, prices rose at a pace of about 3 percent a year. This is perhaps the highest rate of global inflation that has ever occurred under a gold standard during peace time.

But by 1913, the forces that powered both the prosperity and inflation were running out of steam. The Alaska and Yukon gold fields were being rapidly depleted and there was no follow-up to the technological breakthrough represented by the cyanide process either in gold mining or gold refining. By 1913, the rise in gold production had all but halted. Once again, the general price level had risen above the value of commodities.

No less a man than Karl Kaustsky, then considered the world’s leading Marxist theoretician, noted this fact, and in what proved to be his swan song as a Marxist predicted the approach of a new era of revolutions. The fact that Kautsky himself was to prove personally unequal to the approaching era of wars and revolutions in no way detracts from his foresight in this matter. The era of rapidly expanding markets, prosperity and world peace, combined with expanding (bourgeois)—more strictly imperialist—”democracy” that the revisionist movement had counted on lasting forever, was about to be replaced by a very different era.

What if war had not come?

If war had not come, there is every reason to assume that the global recession that started in 1913 would have developed into a prolonged depression—or series of depressions—that would have lowered the general price level much like the Long Depression of 1873-1896 had done. Then at some point, falling prices would have stimulated a vigorous new surge of gold production. Perhaps by the 1930s, a new wave of capitalist global prosperity would have begun. (1) But the war did intervene.

It is important to understand that the war broke out when the economic situation had entered a critical period after a long period of exceptional capitalist prosperity characterized by a price level rise that eventually caused prices to rise above the values of commodities—or more strictly above their prices of production.

War economy the cure for unemployment?

Keynesian economists—or those strongly influenced by Keynesian theory, which includes many Marxists—think war or war spending is the ultimate antidote to capitalist depression and unemployment. The argument goes like this: The huge government deficits that war or massive spending in preparation for war brings—combined with the inflation of the quantity of paper money that is necessary to finance these deficits—creates a massive expansion of effective monetary demand. In order to meet this government-created demand, industrial production rises rapidly. As a result, new jobs are created and unemployment vanishes. In the case of 1914, many of the new jobs were unfortunately in trenches.

The Keynesians and Keynes-influenced Marxists draw the conclusion that as long as the government is willing to run a sufficient deficit—and if necessary print enough paper money to finance it—the same results can be achieved in a peace-time economy without the mass slaughter and destruction that accompanies war.

The Keynesians and Keynesian Marxists, in opposition to Marx, then draw the conclusion that at least in principle the problems of mass unemployment can be solved within the framework of a capitalist economy. If governments do not follow such “full employment” policies in practice, this is only because policymakers are misled by bad advice from neo-liberal economists.

A reason often given for resistance to full employment by Keynesians and Keynesian Marxists is opposition thrown up by the “rentier” faction of the capitalist class, which fears that its interest income will be eroded by the “moderate” and essentially harmless inflation. But Keynesian and Keynesian Marxists do not see any inherent economic obstacles to full employment in a capitalist economy—even one dominated by monopoly capital—assuming that a correct full employment policy is followed by the government.

World War I and unemployment

And indeed, just as Keynesians and Keynesian Marxists would predict, the global recession that had begun in 1913 and its growing unemployment vanished as the war economy with its “full employment” took its place. In the United States, which did not immediately enter the war, the ongoing recession was at first intensified as the war disrupted normal trade with Europe. But by 1916, U.S. factories were humming as they filled orders for war supplies for Europe, quickly ending the U.S. recession and its resulting mass unemployment. So far, as Keynesian theory is concerned, so good. But the story does not end here.

When the war broke out, commodity prices were already very high relative to values. We know this was the case because the rate of growth of global gold production was steadily declining. Of course, this means nothing to Keynesian economists, because they have no concept of labor value and price as the form that expresses labor value. But if labor value, or the law of value, does not exist in the minds of Keynesian economists—or other modern schools of capitalist political economy—it very much exists in the real world capitalist economy.

Just before the war broke out, the market was beginning to “correct” the problem of prices that were too high relative to labor values through recession and unemployment. In its own way—at the expense of the working class—the market was “working.” However, this process of “correction” was cut short before it could go very far by the coming of the war economy.

War as economic stimulant

War economy is at first a powerful stimulant to production—a fact that Keynesian and Keynesian Marxists never tire of noting. But at the same time, a full-scale war economy represses capitalist expanded reproduction.

Economic reproduction is the process through which the means of production that are used up in the process of production are replaced. Expanded reproduction—or reproduction on an expanded basis—happens to be the very economic essence of capitalism. Under expanded reproduction, the existing means of production are not only replaced, they are expanded.

However, in a war economy, there exists contracted reproduction. Factories that under normal conditions produce commodities that are used to replace the equipment of existing factories or build new factories are instead shifted to produce means of destruction. The economy begins to consume itself by destroying the productive forces, including in the case of actual war the most important productive force—the workers.

Gold not a good hedge against inflation in wartime

In a war economy, capitalist society begins to eat into its existing capital rather than accumulate additional capital. This is the general law of capitalist war economy. In addition, in the the concrete circumstances that existed in 1914, prices were already “too high” relative to underlying labor values when the war began. They more than doubled over the four years of war in terms of gold bullion itself. During World War I—and this is generally the case in wartime conditions—gold proved a lousy hedge against inflation.

The result was a serious decline in the production of gold as gold production became increasingly unprofitable both relative to other branches of industry—especially war industries—and absolutely. However, despite the decline in gold production, there was little overproduction during the war. On the contrary. Capitalist overproduction is a product of expanded capitalist reproduction, which is suppressed by war economy.

Indeed, a war economy is characterized by under-production, and to this extent the war economy resembles the crisis/depression phase of the industrial cycle more than it does the boom phase with its overproduction. Therefore—and this is what Keynesian economists and Keynesian Marxists overlook—a “war boom” is not at all the same thing as the boom phase of the industrial cycle.

The crisis phase—and to some extent the depression phase—tend to lower (gold) prices—or in the case of depression keep prices low relative to values. But a war economy pushes prices measured in terms of gold bullion sharply higher. Indeed, a full-scale war economy with its commodity shortages is far more efficient at raising prices than any peacetime boom economy is.

In the concrete case of World War I, when normal expanded reproduction resumed beginning in 1919 (2)—the Great War ended in November 1918—the inflated prices in terms of gold became unsustainable as the war-time shortages of commodities began to give way to more normal market conditions. (3)

The only way to prevent a sharp decline of nominal prices—prices in terms of paper currencies and not in terms of gold—was to massively devalue the paper currency against gold. In the concrete conditions of the period immediately after World War I, this automatically meant the devaluation against the U.S. dollar as well, the one major currency that remained on gold.

The defeated countries, and to a lesser extent France, chose the path of devaluation, which in the case of Germany ended in the 1923 hyperinflation that effectively destroyed the old Reichmark. The “victorious” countries, such as the United States and Britain—though the U.S. was the only real victor—chose instead the path of deflation. This was seen as a necessary step towards restoring the international gold standard. In the countries that chose price deflation as opposed to currency devaluation, there was a sharp but brief recession in 1920-21.

The reason this recession was not more serious and was quickly overcome was precisely the lack of overproduction due to the war economy. The quick recovery that followed the 1920-21 recession gave rise to the illusion that the huge social and economic crisis that had been provoked by the Great War had been largely overcome—this mistake was made by the Soviet and Third International leader N.I. Bukharin—when in reality the crisis was just beginning.

But the very lack of overproduction when the Great War ended was actually a great problem for capitalism, though it did not appear that way at the time. Though prices fell sharply during the 1920-21 recession, the fall came to an end “too soon” to restore the conditions of healthy expanded capitalist reproduction. Inventories—commodity capital—were exhausted before prices could fall all the way back to pre-war levels.

Capitalist expanded reproduction proceeds abnormally during the 1920s

Though global gold production recovered somewhat after the deflation of 1920-21, it remained well below the levels that prevailed on the eve of the war. And remember, even that level of gold production was too low to maintain capitalist prosperity, as Kautsky had correctly observed. As a result, expanded reproduction developed abnormally during the 1920s despite what appeared to be a surprisingly rapid recovery from the effects of the war.

In Volume II of “Capital,” Marx had developed tables that illustrate the process of capitalist expanded reproduction. Much has been made of the fact that Marx showed—assuming no qualitative changes in the productive forces—that capitalist reproduction can expand smoothly without crises. As Volume II of “Capital” gradually became widely known in the Social Democracy, it seemed as though Marx himself had proven the revisionist claim that crises were accidents and could even be avoided without abolishing capitalism.

The Austrian Marxist Otto Bauer, taking Marx one step further, developed tables of expanded reproduction that took into account rising labor productivity. Bauer’s tables covered a period of four years smoothly without crisis. Later, in 1929, Henryk Grossman, by continuing Bauer’s calculations, showed that with a rising organic composition of capital Bauer’s model of crisis-free capitalist expanded reproduction does eventually break down. (For more on this topic, see here, here, here, and here.)

Leaving aside the issues raised by Grossman against Bauer, most later Marxists when popularizing Marx’s ideas have ignored his great discoveries regarding capitalist reproduction—both simple and expanded. In order for capitalist expanded reproduction to proceed smoothly, Marx showed, it is not enough to maintain the proper proportions, in terms of both value and use value, between Department I—the industries that manufacture the means of production—and Department II—the industries that manufacture the means of personal consumption.

It is also necessary to maintain proportional production between real capital and money material—gold. In Volume II of “Capital,” Marx assumes these proportions are maintained. He is in effect saying that in order to have a crisis-free capitalism, these proportions—both between Department I and Department II and between the production of monetary gold (demand) and all other commodities—must be maintained. If they are not, there will be disruptions—crises—in the capitalist economy.

If not enough gold is produced, sooner or later the process of capitalist expanded reproduction comes to a halt because the market for commodities will not grow as fast as the production of commodities—overproduction. Here we discover another necessary proportion if capitalist expanded reproduction is to proceed without crisis. In order to maintain the proportionality between the production of commodities and the monetarily effective demand for the same commodities, the general price level has to be proportional to the actual value of commodities.

If this is not the case, capitalist expanded reproduction cannot proceed normally even if all other conditions are favorable. If prices are too low relative to the values of commodities, the rate of profit in gold production will be higher than the general rate of profit. As a result, the market will grow faster than the quantity of commodities. Sooner or later, there will be a powerful economic boom—or series of booms—which will raise the general price level.

This is exactly what happened in the final years of the 19th century and opening years of the 20th century and so impressed the revisionist movement. The preceding period saw a prolonged fall in the general price level during the Long Depression of 1873-1896. This fall in prices combined with the devaluation of gold at the end of 19th century due to the introduction of the cyanide process in gold refining and the discoveries of rich new gold fields in the Yukon and Alaska meant that by the end of the 1890s the general price level was “too low” relative to the labor value of most commodities. Prices were again brought into line with values through the general prosperity (demand exceeding supply at existing price levels) and the subsequent price inflation.

These types of economic conditions were highly favorable for the growth of trade unions and the Social Democratic parties of the Second International, which both organized and based themselves on the unions. The combination of a strong and growing demand for labor power combined with a rising cost of living encouraged workers to band together in unions to make sure their real wages were not eroded by the ongoing inflation.

However, these conditions encouraged illusions that the union struggles combined with the growth of the Social Democratic parties were in and of themselves sufficient to solve the workers’ basic problems. That is where Eduard Bernstein’s slogan “the movement is everything, the goal is nothing” comes from. It seemed to a growing number of trade union workers, who formed the core of the Social Democratic parties, that revolution was not really necessary.

However, during the 1920s the exact opposite economic conditions prevailed, though for the time being this was obscured by the upward movement of the industrial cycle. The basic problem was that commodity prices though much lower than they were at the end of the war were still much too high relative to labor values. Gold production, though it recovered somewhat from the very low levels of 1920-21, remained well below the pre-war levels. But as the postwar industrial cycle hit its stride, world trade and industrial production reached levels well above the 1913 levels. It is hard to think of a better recipe for a crisis of generalized overproduction of commodities far worse than any of its predecessors.

During the 1920s, these contradictions impressed themselves on the consciousness of the capitalist policymakers as a severe shortage of gold. The gold shortage undermined all their attempts to rebuild the international gold standard. In addition to an overall shortage of gold, there was a problem of distribution of the world gold hoard thanks to the huge debts that Europe had built up to the United States. Most of the world’s gold hoard was either in the vaults of the U.S. Federal Reserve System or to a lesser extent in the Bank of France.

Why did France have so much gold? To understand this, we have to understand the position of Britain after the Great War. Britain was attempting to regain its position as the center of the world financial system. In order to do this, British policymakers believed it was necessary to get back on the gold standard as quickly as possible at the old exchange rate. The thinking was that if this could be pulled off, those capitalists who had held their financial assets in “the City”—Britain’s “Wall Street”—would have only suffered a temporary depreciation of their assets due to the pound’s depreciation against gold and the U.S. dollar during and immediately after the war. But, the logic went, they would suffer no permanent losses. They would be encouraged to continue to hold their money capital in pound-denominated assets in “City” banks, just as if the “unfortunate events” beginning in August 1914 had never occurred.

Therefore, in 1925 Britain returned to gold at the old exchange rate against both gold and the dollar. But the new British gold standard was a gold bullion standard, not the gold coin standard that had prevailed before the war. A return to a gold coin standard would have required far more gold than Britain had.

France, unlike Britain, had never been at the center of the world financial system. The French, despite the fact they were among the “victors,” therefore chose to allow the French franc to continue to fall after the war at the price of inflation—though the French inflation never approached the levels of the German inflation.

France thus lowered its prices and wages in terms of gold and the dollar through devaluation, not deflation as Britain had. In terms of gold and in terms of U.S. dollars, French wages and commodity prices were therefore sharply lowered relative to British wages and prices. As a result, France enjoyed a temporary advantage in world trade relative to Britain as gold flowed into France from Britain, putting great strain on Britain’s new gold-bullion standard. France found itself temporarily in a stronger financial position than its industrial power in the world capitalist economy merited.

When Britain returned to gold at the old rate, it faced further deflation and associated recession, which was to play a key role in the events leading to the British General Strike of 1926. These bitter experiences helped turn John Maynard Keynes into an enemy of any form of gold standard. A few years later at the height of the global super-crisis, the Bank of England faced a run on its gold reserves and Britain was forced off gold and the pound was devalued. The attempt to return to the days before 1914 when “the City” had ruled the money markets of the world had failed.

Britain’s problems of economic stagnation and mass unemployment were now exported to France. In France, the Depression really began in 1931, not in 1929. Before the British devaluation in 1930-31, France had experienced not a “super-crisis” but only a slight recession.

The international monetary system during the 1920s

As we see, there was only a partial return to the international gold standard after the war. In Europe, gold coin standards were replaced by gold bullion standards. Increasingly, central banks held U.S. dollars—or dollar-denominated U.S. Treasury bills—as reserves to augment their scarce supplies of gold bullion. The post-World War I international monetary system was taking the form of a gold-dollar exchange standard. This foreshadowed the post-World War II Bretton Woods System and its eventual transformation into today’s unstable U.S. paper dollar standard.

A giant step was taken in the field of finance toward U.S. world domination. But before the dollar standard could completely replace the gold standard through the transitional form of the Bretton Woods gold-dollar exchange standard, there would have to be an even bloodier world war to establish the military foundations of the U.S. world empire.

Another important feature of the post-World War I international monetary system compared to the pre-1914 international gold standard was the reduced gold backing of the world’s primary currency. Before World War I, the world’s primary currency was the British pound. After the war, it was the U.S. dollar. With some modifications, the pre-1914 British pound was backed by a 100 percent gold reserve. New pound notes were created only to the extent that additional gold flowed into the Bank of England’s vaults. This new gold could either represent a flow of gold from other countries into Britain or newly mined gold that expanded the worldwide gold hoard and drove the long-term expansion of the world market.

Under the Federal Reserve System as it functioned from 1914 to 1933, each U.S. dollar—or Federal Reserve Note—required only 40 cents in actual gold backing. (4) As long as there was “free gold” beyond this limit, the Federal Reserve System could create additional dollars through (re)discounting eligible commercial paper if it felt it was necessary.

In addition, reserve requirements on U.S. commercial banks—the amount of dollars the commercial banks were required to hold to back their checkable deposits—was reduced when the Federal Reserve System began operations. After all, the thinking went, the Federal Reserve System could always act as a lender or (re)discounter of last resort to prevent the kind of banking crisis that had last occurred in 1907. This was why the Federal Reserve System was created in the first place.

In the years preceding 1929, the global shortage of gold was made good by an increased use of credit money and credit. In this way, the world’s limited gold supply—at existing levels of production, prices and world trade—was “leveraged” far beyond anything seen in pre-1914 days. Therefore, during the middle and late 1920s, capitalist expanded reproduction was progressing but in an abnormal way due to commodity prices that were too high relative to values—as shown by the insufficient quantity of and production of new gold. However, as already noted, this difficulty was overcome before 1929 by the unprecedented expansion of credit and credit money.

But as was inevitable, this ended up in an unprecedented economic crash. Not the normal cyclical crisis at the end of an industrial cycle but what I call a super-crisis. The problem of prices that were too high relative to underlying labor values was then corrected. In this way, the market “worked,” but at the horrendous price of the super-crisis and its associated Great Depression, which reduced prices overall to a level well below their values. But the situation of prices being too low as opposed to too high relative to labor values, and the associated “gold surplus”—a direct result of the super-crisis—that now replaced the gold shortage of the 1920s, contained a terrible danger of its own.

As we have seen, during a crisis a portion of the circulating money drops out of circulation and accumulates in the banks. The same thing happened during the super-crisis of 1929-33 and its aftermath as happens in every crisis but on a “super-scale.”

The vast hoard of money—centralized in the banking system—made it easy for the U.S. to finance war on an unprecedented scale that was to put even the Great War in the shade. And this is exactly what happened. The super-crisis and Great Depression led straight to World War II and the consequent U.S. world empire—that is, to the world we know today.

The explosion of U.S. imperialism

If the confidence in the banking system is sufficiently shaken, such as happened during the super-crisis proper, a portion of the money that drops out of circulation is hoarded not in banks but by private individuals—or as is said, the money is “stuffed into mattresses.” This is what happened on an unprecedented scale during the second half of the super-crisis, from 1931 to 1933. I have examined this phenomenon in detail in the main section of the blog and I won’t repeat it here.

However, from 1933 onward as the crisis phase proper passed and confidence in the commercial banking system recovered, money that had been “hoarded in mattresses” flowed back into the U.S. banking system. After all, money in a mattress bears no interest to its owner. Such hoarded money in no sense functions as capital—a claim on surplus value—it is only potential capital. The return of money hoarded by private individuals was part of the transition from the crisis phase proper to the depression phase of what is known in history as the Great Depression. This de-hoarding caused U.S. bank reserves to swell.

But there were other more important factors at work behind the colossal growth in the reserves of U.S. banks that began in 1933 and continued right up to the outbreak of World War II. Stimulated by the rapid fall of prices during the super-crisis, combined with the temporary collapse of profits in most other branches of industry, gold production finally rose above the record levels of 1913-14. This increase in gold production continued right up to the outbreak of the war.

When this newly mined gold was sold to the U.S. Treasury, the Treasury issued the seller a check that was deposited in a U.S. commercial bank, causing the bank’s reserves to increase. In addition, with Europe once again heading toward war—or more accurately renewed war—European gold was increasingly shipped to the United States.

To European gold hoarders, U.S. bank accounts denominated in U.S. dollars looked a lot safer than bags of old gold coins or bars hidden away in cellars or mattresses. In addition, the decline in prices in terms of gold—which was greater now than the decline in prices in terms of dollars due to Roosevelt’s devaluation of the dollar in 1933-1934—boosted the purchasing power of gold relative to commodities. European gold began to flow to the U.S. swelling U.S. bank reserves in earnest when Roosevelt stopped the further devaluation of the dollar in 1934. (5)

The Roosevelt administration and the new Democratic Congress proposed and passed laws that centralized the U.S. gold reserves in the hands of the U.S. Treasury. The Treasury is, under the U.S. Constitution, part of the executive branch of the government and is controlled by the White House. The 12 Federal Reserve Banks, including the most important one, the Federal Reserve Bank of New York, were ordered to exchange their reserves of gold bullion for gold certificates.

Up to 1933, gold certificates had functioned as a part of the U.S. currency system and circulated side by side with Federal Reserves Notes. Federal Reserve Notes, only promised to pay the bearer on demand in “lawful money”—which was not necessarily gold, though it was understood to be gold before March 1933. Gold certificates were liabilities of the U.S. Treasury, not the Federal Reserve Banks, and specifically promised to pay the bearer on demand in gold.

Fearing legal complications—gold certificates were legal contracts that Roosevelt was now breaking—the U.S. government made it illegal not only to own monetary gold—coins or bars—but gold certificates as well. Under Roosevelt’s monetary reforms, only the Federal Reserve Banks were allowed to own gold certificates, and these old gold certificates are still locked away in the vaults of the Federal Reserve Banks, which carry them on their books as assets in place of the actual gold that the Federal Reserve Banks directly held before 1933. To this day, the U.S. Federal Reserve Banks don’t hold any gold, only the now ancient gold certificates from 1933.

The significance of this reform was that though the White House does not control the operations of the Federal Reserve System and its 12 Federal Reserve Banks, under the U.S. Constitution it has virtually autocratic control over the U.S. Treasury. Unlike under the system that had prevailed between 1914 and 1933, the White House starting in 1933 established firm control of U.S. gold reserves.

These gold reserves form the core of the financial bedrock of the U.S. empire. This was an empire that was soon to be transformed from being one imperialist power among others—the others being the British Empire, the French Empire, the fast-growing Japanese Empire and the exploding empire of the Third Reich—into an empire that was to progressively absorb all its rivals.

This huge increase in idle money capital—or, strictly, potential money capital—represented both the centralized gold hoard in the U.S. Treasury as well as the swollen reserves of the commercial banking system during the later years of Depression resulting from the almost complete stagnation of U.S. industrial capital.

It seemed to many impressionable young economists of the time that the U.S. ruling class had been transformed from a class of capitalists proper into a class of misers. Instead of M—C—M’, the U.S. ruling class seemed only interested in increasing the amounts of M that were flowing into its hands, either from war-threatened Europe or from the world’s gold mines and refineries.

The different theories of “secular stagnation” attempted to explain this fact in various ways, the most famous and influential being the Monthly Review school. Recently, the influence of the Monthly Review school has been increasing—even in certain bourgeois circles—as a result of the unprecedentedly slow recovery from the 2007-09 global economic crisis.

After every cyclical economic crisis, the capitalists go from a situation where they have accumulated “too much” of their capital in the form of real, particularly productive, capital in the period leading up to the crisis into a period where they largely limit their accumulation of capital to money capital. This continues until the overproduction that occurred in the preceding industrial cycle is thoroughly liquidated—a process that after a big crisis can take many years.

Even when capitalism is operating “normally,” the industrial cycle through its successive stages—depression/stagnation, average prosperity, and boom accompanied by overproduction ending in crisis—is the only mechanism under capitalism that in the long run keeps the accumulation of real and money capital in proper proportions to one another. This is how the proportions between real capital and money capital—gold—that Marx assumes in his Volume II tables on expanded reproduction are maintained in the long run.

But as we saw above, thanks to the unprecedented inflation of prices above values as a result of the Great War, expanded capitalist reproduction did not progress normally during the industrial cycle of 1920-1929. The accumulation of money capital—the accumulation of newly mined and refined gold—and the production of real capital—productive plus commodity capital—was as a result of the war in far greater disproportion than it would have been if the war had not occurred.

The miser-like behavior of the U.S. ruling class during the 1930s was actually necessary—from the vantage point of the capitalist system, that is—in order to correct the under-production of gold relative to real capital that had resulted from the war. But this behavior was of necessity temporary. As huge amounts of money accumulated in the collective pockets of the U.S. ruling class, the U.S. capitalists once again began acting like the capitalist class they were. The operation M—C—M’, or simply M—M’ (lending money at interest) was once again the order of the day.

The expansion of U.S. finance capital

To impressionist young economists of the time, the power of finance capital seemed to be declining in the 1930s. Paul Sweezy wrote a famous article entitled “The Decline of the Investment Banker,” published in volume 1, number 1 of the Antioch Review in 1941.

In part, this supposed decline in the power of finance capital was attributed to New Deal banking reforms, such as the separation of investment and commercial banking. But there were more basic economic forces at work. As long as the Depression lasted, the number of new corporate bond flotations remained very low. Far from being hungry for new money capital—with the intention of transforming it into new industrial capital—U.S. industrial corporations were, miser-like, piling up mountains of money capital and depositing it in banks. The last thing most of them needed to do was to float new bonds.

But far from representing the eclipse of finance capital, the piling up of so much idle—or potential—money capital was paving the way for an unprecedented explosion in U.S. finance capital and U.S. imperialism. In U.S. bourgeois politics, the approaching explosion of U.S. finance capital was reflected politically during the 1930s in the struggle between the “internationalists” and the “isolationists.”

The bourgeois internationalists wanted to see the U.S. world empire absorb all the other imperialist empires—ironically the position favored by political liberals in the U.S. The isolationists—generally supported by old-fashioned political conservatives—believed in a more limited U.S. empire, largely centered in the Western hemisphere, coexisting with the other imperialist empires.

The old-fashioned industrial capitalists, the isolationists, largely defeated the internationalist Wilson—still considered a “great” U.S. president by U.S. liberal historians—in the decade following the Great War. But from the 1930s onward, the internationalists under Roosevelt—who had been a member of the Wilson administration as a young politician during World I—became dominant. After World War II, the isolationists were hardly to be heard from.

Differences between the post-World I and post-World II periods

This brings us to two fundamental differences between the two postwar periods. World War I ended inconclusively. Germany had lost its colonies and part of its European territories. But except for the Rhineland for a few years, it was not occupied by the victorious “allies.” As a result, Germany retained its basic sovereignty. This allowed German imperialism to regain its military and political power during the 1930s under the Nazi regime of Adolf Hitler.

The same basic forces pushing Germany to make a second attempt to organize Europe and build a colonial empire in the east of Europe were pushing the United States onto the path of organizing an empire over the entire world. For example, the permanent stationing of U.S. troops in Europe—unthinkable in the wake of World War I—became a reality after World War II.

This brings us to the most important difference between the two postwar periods. After World War II, the U.S. empire succeeded in imposing a considerable degree of political and military centralization that all the imperialist countries are subject to. As long as this lasts—which won’t be forever—a repeat of 1914 is not possible. But after that? I will examine the possibilities more closely next month.

As we also saw, there were very important economic differences between the post-World War I and post-World War II periods, which caught the Marxists who lived through those years off guard. When the Second World War ended in 1945, there were widespread expectations that a second Great Depression was inevitable. After all, the Great Depression had followed the Great War, so wouldn’t an even greater Depression follow the even greater World War II?

Those Marxists with a rather crude Keynesian view of things—who tended to mix Marx and Keynes—reasoned that this would happen as soon as the massive deficit financing and spending of the war economy ended. It didn’t occur to them—or they simply ruled out—that a sharp rise in private capitalist investment could largely replace the huge amounts of government spending for war, even if not quite enough to maintain the “full employment” of the war economy, but still more than sufficient for normal capitalist prosperity. Other Marxists figured the Depression would return after the postwar reconstruction boom had run its course.

When neither occurred, the conclusion began to be drawn that the capitalists had finally discovered how to avoid serious economic crises under capitalism. Keynesian economic policies appeared to be working. Many of the post-World War II Marxists found themselves as regards crisis theory with positions that were not so distant from the classical revisionists of Eduard Bernstein’s time. The powerful expansion of industrial production, employment and world trade had once again created relatively favorable conditions on the labor market for the sellers of labor power and for the trade unions, just like had been the case in the pre-1914 years.

Not only did this strengthen the hands of the trade unions and parties based on the trade union workers—the Communist and Social Democratic parties—but there was another factor as well that had no counterpart in the pre-1914 period. There now existed the most powerful union of all—the Soviet Union and its allies in the “socialist camp.” In order to “fight communism,” the capitalists were obliged to grant a series of unprecedented concessions—which, however, left the capitalist system fully intact.

These concessions reflected the huge victories won by the workers that ranged from the conquest of political power in Russia and many other countries of the czar’s former empire to the organization of mass industrial unions in the very heart of 20th-century imperialism—the United States. The unprecedented gains realized by organized labor, however, created unprecedented illusions in the possibility that in the future such gains could be peacefully extended without further wars and revolutions.

What really happened?

Both wars had similar negative effects on gold production, but the economic situations preceding the wars were virtually exact opposites. While money was increasingly “tight” during the years leading up to World War I, there was an unprecedented accumulation of idle money capital during the 1930s. These completely opposite economic situations in the period preceding the wars was to make the two post-war economic outcomes economically, and consequently politically, very different.

While the first postwar period was one of a radically destabilized world capitalism, the second was far more favorable for a relative stabilization of capitalism under the hegemony of a single world imperialist empire—that of the United States.

In order to conclude this series of the causes and consequences of the Great War—and of course I can’t examine all of them, since that would require not a book but a whole library of books—I want to examine two questions. This July and August saw the horrific Israeli attack on the tiny Gaza Strip often described as the world’s largest open air prison. These latest events are part of the ongoing Israeli-Palestinian conflict. But what are the origins of this conflict and how are they related to events of a hundred years ago?

And before I am finished, I will examine the all-important question: Can it happen again? I have stated that another inter-imperialist war like that of 1914 cannot happen as long as the U.S. maintains its hegemony. But can the U.S. maintain its hegemony and if so for how much longer?

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1 We might speculate that without the Great War the international gold standard as it existed in 1914 would have continued indefinitely. The Second International would not have collapsed in 1914, and international Social Democracy as it existed in 1914—which included the revolutionary wing that was to become the Communist movement and the revisionists who along with the centrists were to evolve into today’s Social Democratic parties—might have also gone on for many decades. There might well have been no “Keynesian revolution” in bourgeois economic theory and government policies.

The Russian revolution might have been postponed for some decades to come, or if it had occurred earlier, it would not have gone beyond a bourgeois revolution. And what became known as “fascism” would never had occurred. Hitler might well have finished up his days as a minor street artist in Munich. The history of the 20th century would have taken a very different course.

However, we should remember that the basic contradictions of the capitalist system would still have existed and would have found expression through the normal booms and busts of the industrial cycle and in many other ways as well. And we can’t forget that World War I itself was an expression of the basic contradictions of a global capitalist system that had already reached the stage of monopoly capitalism/imperialism by the turn of the 20th century.

And while the exact timing and circumstances under which World I erupted were accidental, the war itself was not. The point is that World War I occurred because of the basic pre-existing contradictions of the global capitalist system. Over the following 30 years the war and its aftermath—which includes the Great Depression and World War II—greatly sharpened them. (back)

2 The abrupt cancellation of war orders after the armistice of November 1918 brought about a brief recession in industrial production throughout the capitalist world—similar to the “recession” of 1945-46 as war orders were halted following World War II. Like was the case in 1945-46, this initial “recession”—sometimes called a reconversion crisis—was quickly overcome. (back)

3 The rapid recovery from the immediate postwar recessions–1919 in the case of World War I and 1945-46 in the case of World War II, as well as the decade of prosperity that followed World I and the much longer period of prosperity that followed World War II, is often attributed to “pent-up demand.”

What must always be kept in mind is that in a capitalist economy, pent-up demand must always be monetarily effective demand. After World War II, thanks to the preceding Great Depression, there was much more idle money (potential demand)—most of it hoarded in the U.S. banking system—than was the case after World I. As a result, the pent-up demand after World War II was much more “monetarily effective” than it was after World War I. (back)

4 The rules that governed the U.S. Federal Reserve System in its early years, 1914-1933, were largely inspired by the British “banking school,” while the Bank Act of 1844, which governed the operations of the Bank of England in the pre-war days, was governed by the rival “currency school.”

Supporters of the currency school reasoned that banknotes were essentially backed by commodities. Therefore, as long as there were sufficient commodities on the market, banknotes were not over-issued and they would not depreciate. In contrast, the banking school believed that banknotes should ideally be backed 100 percent by gold. (For more on this topic, see here.) (back)

5 The Roosevelt administration also purchased considerable amounts of silver, and the U.S. Treasury issued a type of dollar independently of the Federal Reserve Banks called silver certificates. The silver certificates were much like gold certificates but were payable in silver dollars, not in gold dollars.

Silver certificates circulated within the U.S. economy and remained convertible into silver dollars into the 1960s. They circulated side by side with the inconvertible Federal Reserve Notes. During the 1960s, the market price of silver rose above the mint price of silver. Gresham’s law then drove silver dollars out of circulation and further issuance of silver certificates was discontinued. The remaining silver certificates in circulation became inconvertible and were gradually withdrawn from circulation. Since then, all paper legal-tender U.S. dollars have been Federal Reserve Notes. (For a discussion of silver and the New Deal, see here). (back)