'Tulip mania' and today's speculation

June 6, 1982

If you had the opportunity this spring to observe how beautifully some of the flowers have bloomed, you might also have noticed the lovely and graceful tulip. It is a favorite among flower lovers and very highly prized.

For centuries it has been Holland's most famous flower. Would you believe, however, that somewhere near the middle of the 17th century a single bulb of high quality would sell for several hundred dollars? Quite extraordinary, you might say, especially in terms of dollars in those days.

Unbelievable though it may seem, the price of a single bulb of fairly good quality was soon selling, not for several hundred, but for many thousands of dollars. Had money lost all value?

There is no evidence of a currency devaluation or monetary debasement which would explain the fantastic rise in the price of a single bulb.

Had there been a general rise in the level of other commodities commensurate with the rise in the price of bulbs? Again, no.

Had there been a natural catastrophe which would destroy the crops by floods, fires, or quakes? Was there a military invasion? Again the answer is in the negative.

Tulip mania

Among the various historical accounts of the tulip crisis, one writer put it this way:

The immense expansion of commerce [in the Netherlands] encouraged gambling upon profits to be made from speculation in all kinds of products . ... It was the price that had to be paid for the increased efficiency in the complex system of business. But now and again speculation intensified into a frenzy of what the Dutch called windhandel, literally trading in the wind, that is, buying or selling in futures without actual possession of goods.

The most famous example of such gambling was the tulip mania of 1636-37 involving the bulbs of tulips and hyacinths which had become the modish flowers of the day in their myriad new varieties. Rapidly escalating prices spurred the gambling instincts of all sorts of people, especially in the district of Haarlem. ...

But suddenly in 1637 after prices had soared to fantastic heights, the speculative castle in the sky collapsed. For those who lost fortunes there was tragedy."

(See The Low Countries in Early Modern Times, by Herbert H. Rowen.)

Another account says,

Bulbs were bought and sold and resold dozens of times. They were bought and sold unseen. ... One Amsterdamer made 60,000 gilders in four months, when his annual salary as a burgomaster [mayor] was only 500. ...

The fever kept on getting wilder and wilder until suddenly at the beginning of 1637 the market cracked. In a few days hundreds were ruined. The losses were such that the whole credit system, not merely for tulips, was endangered.

Such was the mania. Among the casualties left out in the cold was Jan van Goven, the Leyden painter. It was remarkable that Rembrandt was not involved.

(Jeffery Cotterall, Amsterdam, the Life of a City.)

The collapse of the tulip market was a national catastrophe for Holland and had its reverberations in London, Paris, and other parts of Europe as well.

Three recent crises

Does this example of the collapse of a market so early in the development of the capitalist system really have relevance for modern times, for the contemporary world capitalist crisis, for instance?

Indeed it has. What has been recorded in history as tulip mania has some striking resemblances to three very recent developments in financial and economic history. (We are not taking account at this time of the Wall Street stock market crash of October 1929.)

We have had, first, the very sharp and fantastic rise in the price of gold, to about $800 an ounce, and then its gradual collapse to somewhere less than $400 at this writing.

Secondly, we have the collapse of the silver market. This occurred at a time when a complex attempt was made to corner the market, not by a group or consortium of the silver interests as happened in earlier decades, but by an oil billionaire -- Bunker Hunt, the son of H.L. Hunt.

Notwithstanding the efforts of this billionaire and his stock exchange manipulators and collaborators to corner the market and artificially maintain the price of silver at such extraordinary prices, the market collapsed.

The third and perhaps the most significant of the three was the so-called Drysdale affair, which caused a near panic. A tremor the magnitude of an earthquake was narrowly averted for the time being by the intervention of the Federal Reserve Bank in an extraordinary midnight session with the bankers and securities dealers of Wall Street.

These three consecutive developments, like the tulip market collapse, were the result of wild and untrammeled speculation.

Speculation a symptom of deeper malady

The historical evolution of capitalism over the centuries to the present day teaches us that speculation in and of itself is merely the symptom of a much deeper malady which has consistently accompanied each and every stage in the evolution of the capitalist mode of production and exchange.

Variations in price, no matter how extraordinary, explain only the fluctuations. They do not touch the fundamental causes.

Karl Marx wrote: "All nations with a capitalist mode of production are seized periodically by a feverish attempt to make money without the mediation of the process of production."

What caused the collapse of the tulip market, if speculation was merely the surface manifestation of a deeper cause. This question relates to the very nature of the present phase of capitalist development and can give us clues on where we in fact are headed as the present crisis deepens.

At the time of the tulip speculation, the Netherlands and in particular the city of Amsterdam had become the center of gravity of international commerce and had superseded the Italian cities of Genoa, Venice, and Naples. These at the time had already passed the meridian of their grandeur in colonial exploration, that is, exploitation and robbery of peoples living in pre-capitalist modes of production.

The Bank of Amsterdam was established in 1609. It had what amounted to a stock exchange. There exists even today a list of price quotations from as early as 1585. (See "The Tulip Mania in Holland," Journal of Economic and Business History, Vol. 1, 1929.)

Commerce had become the lifeblood of the merchant class. There were independent handicraft workers, small farmers, an infant bourgeois class in the cities (the burghers) and commodity production was in full swing. Holland at the time of the middle of the 17th century was, in the words of Karl Marx, "on a level of economic development which Britain attained in the 18th century."

Primitive accumulation of capital

This stage in the capitalist mode of production in Holland can confidently be characterized as the period of primitive or primary accumulation of capital.

The primitive accumulation of capital meant, says Marx, in Holland as elsewhere during that period that the agricultural people were to be forcibly expropriated from the soil, driven from their homes, turned into vagabonds, then whipped, branded, and tortured by grotesquely terrible laws into the discipline necessary for the wage system.

Thus, when the collapse in the tulip market occurred it was in the midst of this particular period in the economic history of the Netherlands. The tulip market collapse was a manifestation of a new phenomenon not seen in earlier periods.

The collapse of the market was the result of capitalist overproduction. No, it was not the familiar industrial crisis so characteristic of a later stage of capitalist development. This phenomenon had not become widespread enough to sufficiently give it a worldwide character until, as Frederick Engels correctly says, it occurred in the year 1825, more than a century and a quarter later.

The tulip collapse was a result not of an industrial capitalist crisis but of an agricultural capitalist crisis of overproduction The overproduction unlike earlier was not because of extremely favorable weather conditions or other natural phenomena.

It was the result of commodity production for exchange, which developed into production for a capitalist market. It was production for profit and not for immediate consumption.

The production of the tulips was production for exchange which resulted in speculation in which the relatively new and powerful class of merchant capitalists harnessed the trade and directed it for profit into the channels of world commerce.

The historic function of merchant capital was therefore to subdue, subordinate and in the process destroy the multitude of individual farmers and independent craftsmen, such as weavers and other workers who still owned their own means of production. They were roped in by the finance capitalists at the time, the merchant capitalists, to invest the paltry earnings from their labor to swell the mounting speculation spawned by the merchant capitalists to swell their own profits.

One can imagine what happened after the collapse of the market. You can take the word of the Encyclopedia Britannica that "the collapse of the tulip market left economic scars for decades." That is putting it mildly.

The collapse of the market was such a well-known event in the history of Europe that Alexander Dumas even wrote a novel about it called The Black Tulip.

How the Dutch merchant capitalists thereafter "solved" the chaos and destruction caused by the triumphant emergence of merchant capital we shall see later. Let us return now from the stage of primitive capitalist accumulation to the fully overgrown monopoly capitalist stage and the three significant crises we alluded to earlier. They are related to the further evolution of capitalist development as it affects the worldwide economic crisis today.

Economic summitry produces no answers

The gold crisis, the silver crisis, and the Drysdale affair are symptoms that portend a capitalist catastrophe. The leaders of the capitalist ruling class have been attempting to grapple with this for several years.

On eight consecutive occasions the leaders of the major capitalist countries have met annually to try and find their way out of the dead end into which the capitalist crisis has thrust the bulk of humanity.

On each of these occasions the leaders of the major imperialist countries attempted to find a common solution to the capitalist crisis. Each time, however, they failed more miserably than on the previous occasion. Today at the eighth consecutive meeting the leaders of world bourgeoisdom have declared with singular unanimity their bankruptcy in finding a solution to the intractable capitalist crisis.

Gold and silver crises

The gold and silver crises would have little significance for the operation of the capitalist system of production as a whole if all that was involved were the wide swings in the upward and downward prices of the precious metals.

Were these fluctuations independent of the operations of the capitalist system and unrelated to the nature of the production relations governing capitalist society, they would have little significance and would leave the capitalist economy virtually unaffected in its development.

But the fluctuations in gold and silver prices, and their reflection in the field of currency manipulation worldwide, are singularly representative not only of the current crisis of the capitalist system but of the longer term, general crisis of capitalism.

Throughout the life of the capitalist system gold has functioned not merely as a measure of value, a medium of exchange, and a means of payment, but also, as it is generally known in Marxist terminology, as the universal equivalent in which commodities express their exchange values. Gold is best fitted to perform the social function of money.

During the entire course of capitalist development until the cataclysmic crisis ushered in by the stock market crash of 1929, currency was always convertible into gold (or silver). "Sound as the dollar" meant that the dollar -- paper money -- was convertible, on demand, for gold by the U.S. government.

It was the capitalist crisis of the 1930s which, for the first time, compelled Britain to abandon the gold standard. This meant Britain would refuse to make payment in gold bullion. The capitalist crisis shortly thereafter compelled the Roosevelt administration to also suspend the gold standard. It was never really reinstated as of old, notwithstanding all efforts spanning almost half a century.

The conversion of paper money to gold is important as a barometer of the stability of the capitalist system. And the fact that in half a century it has been unable despite Herculean efforts to accomplish this is a profound symptom of irresistible decay.

It is well worth remembering what Marx, in his monumental critique of the capitalist system, said regarding gold and its function: "The truth of the proposition that 'although gold and silver are not by nature money, money is by nature gold and silver' is shown by the fitness of the physical properties of these metals for the function of money."

Marx then continues to demonstrate that the function of money "is to serve as the form of manifestation of the value of commodities, or as the material in which the magnitudes of their values are socially expressed.

"An adequate form of manifestation of value, a fit embodiment of abstract, undifferentiated, and therefore equal human labor, that material [must be one] whose every sample exhibits the same uniform qualities.

"On the other hand, since the difference between the magnitudes of value is purely quantitative the money commodity must be susceptible of merely quantitative differences, must therefore be divisible at will and equally capable of being reunited.

"Gold and silver," Marx concludes, "possess these properties by nature." (Capital Vol. 1, pp. 92-93, Progress Publishers.)

This remarkable exposition on the significance of gold in the development of the capitalist system of production and exchange is worth pondering.

Reagan's forgotten promise

It is not without significance that Reagan in an exultant mood at the beginning of his administration proclaimed that he would restore the gold standard. This was part and parcel of Reagan's broader plan to free the capitalist economy from "government regulation" so as to revive what he called the "magic of the marketplace."

Shortly thereafter, Reagan appointed a commission to critically examine the gold problem and prepare a plan for the resumption of the convertibility of paper dollars into gold.

Now, such a bold venture, if successful, would be a sign of confidence of the ruling class in its system and would, so they hoped, encourage an upward cycle of capitalist development -- bringing about a "roaring boom," as Treasury Secretary Donald Regan called it.

President Reagan did appoint a so-called nonpartisan group of bankers and distinguished bourgeois economists to exhaustively examine the problem. The gold commission which was hailed by many conservative economists, met and after exhaustively examining the problem came up with a wholly negative answer to the question. Simply put, they concluded that restoring the gold standard isn't practical.

The truth of the matter is that the capitalist system is too unstable for the restoration of the gold standard. It's not only that there is too much fictitious capital floating in the billions. It's that the currency has been badly mutilated by heavy devaluation.

Convertibility of the currency into gold has proven impossible in half a century of capitalist decay. Two world wars, and several so-called local wars, have sapped the foundations of a stable capitalist economy. Gold as a measure of value under these circumstances would be prohibitive because it would reveal how profoundly eroded the securities of the government, as well as corporate stocks and bonds, have become. The experiment of restoring the gold standard is so dangerous that even the adventurous Reagan administration shrank from trying it.

Of course, there is and has been the limited convertibility of currencies, including U.S. currency, into gold. But this generally has been mostly for purposes of international exchange. Even here it is severely limited by monetary restrictions in virtually all capitalist countries.

Most of the bourgeois governments do not have much gold for which foreign currencies can be easily converted. Instead of a gold reserve in their treasury, they retain a bare minimum of gold which is really a supplement to the dollar, pound sterling, or one or two of the other major currencies.

Most of the time many of the bourgeois central banks hold dollar reserves instead of gold. This explains at least one aspect of the domination of U.S. finance capital over much of the world.

It is not a minor matter. At the present moment the heads of the major capitalist governments are meeting to discuss this very problem of the chaos in the international money markets. The wide fluctuations of their currencies and the fact that the U.S. money markets promote high interest rates inevitably attracts the emigration of capital to the U.S., where profits from investments in U.S. securities are much higher than elsewhere because of the high interest rates.

What the imperialist leaders hope to accomplish at the annual summit meeting in Versailles and Bonn is not to reestablish the orderly functioning of the world money markets. That is a dream they dare not consider even for experimental purposes. What they hope to do is limit the wide fluctuations in currency, not really to stabilize them, but just to merely ameliorate the severity and acuteness of the crisis. And even that is questionable.

The Drysdale affair

The gold and silver crises as symptoms of capitalist decay are dwarfed in magnitude by the shadow of an approaching crisis in the government securities market, one of the most sensitive areas in the nervous system of the capitalist mode of production.

The Drysdale affair, which occurred last month, was a forerunner of an impending collapse of the securities market The crisis was arrested early enough to prevent a collapse. It was done by the extraordinary intervention of the Federal Reserve Bank, the so-called bank of last resort. The chairman of the Federal Reserve met in secret session with the bankers, primarily from Chase Manhattan and Manufacturers Hanover Trust, and implored them to avoid the collapse by making good the payment of interest on securities to the amount of $270 million.

What was it all about?

A handful of middle-management executives from prominent brokerage firms supposedly went into business for themselves in the purchase and sale of government securities. This tiny handful of executives, on their own presumably, were able to raise $5 million of capital to start their firm, a paltry sum when measured against the government securities market, estimated at the time to have roughly more than $500 billion.

In a brief period of not more than a few months this small group of middle-management executives was able to generate that is get as customers people who would be able to build up the portfolios of this group -- Drysdale Government Securities -- to the tune of $4.5 billion!

By what means could a small group like this, with such a paltry sum of money -- $5 million -- so quickly earn the confidence of many big securities dealers so as to be entrusted with $4.5 billion? Would anybody know what was really happening or how and by what hocus pocus the interest on this vast sum of $4.5 billion was regularly paid? Nobody, of course, would really know had not the Drysdale firm suddenly been unable to pay the $270 million of interest on this billion-fold portfolio.

The default could have caused a catastrophic collapse. Suddenly the real principals behind this small group -- Chase Manhattan Bank, the third largest in the country and a dominion of the Rockefellers and Exxon, plus Manufacturers Hanover Trust -- were revealed as the real culprits. Had they not made good on this payment, as they initially publicly announced they would not, the collapse would have taken place. It was the midnight session between the Federal Reserve and all the principal parties which momentarily staved off the collapse.

An editorial in the New York Times of May 21, 1982, entitled "The Wall Street Tremor" states, "Nothing in this [Drysdale] case seems to point to any flaw in the system. Those who would tamper with the essentially successful market will have to prove a need."

This editorial is as much of a coverup in the field of operations of the financial market as was the coverup of the Watergate break-in. At that time, the New York Times was most anxious to reveal almost as much as the Washington Post about the criminality of the Nixon administration. The New York Times Company was the outsider in regard to the Nixon administration.

Here, the New York Times Company, along with all of the other dynastic financial and industrial oligarchies, is an insider in every respect. And protecting the system exceeds all its other alleged virtues.

The candid professor

It should however be said in its favor that while it covered up the significance of the Drysdale affair, it was nonetheless obliged to permit at least one voice, that of Albert Gaylor Hart, professor emeritus of economics at Columbia University, to bring to light some of the salient facts which illuminate the odious character of the operations of none other than the world's most famous bank of last resort, the Federal Reserve.

Professor Hart does this in a remarkably frank letter to the Times published May 31, 1982. In this letter he charges that the success of the market in government securities, which handles around $500 billion, should not be judged on the basis of its huge volume of dealings, as the Times does. The volume is so huge that the securities change hands by the many billions literally in hours.

Professor Hart says,

If the U.S. money market were 'successful' in any public spirited sense, how could it permit Drysdale Government Securities within months of its birth to build up a portfolio of $4.5 billion, and to generate interest flows so large as to give scope for a loss of $270 million all on a capital of $5 million?

I fear that this market is judged to be successful not on a record of integrity and responsibility but on the strength of its showing a huge volume of dealings, dealings which nobody fully understands but which enable some people to siphon off large gains from financial manipulations. (Our emphasis -- SM)

He doesn't give any particular names, but that isn't really necessary.

The intimate involvement of major banks in the Drysdale fiasco illustrates the permeation of our financial system by get-rich-quick ambitions and by creative accounting.

Creative accounting is a euphemism for falsifying records. And he adds,

Our monetary authorities are involved as well.

That certainly is a serious charge. But he goes much further when he refers to "another financial distortion with which the Drysdale affair is linked -- the leading role of the banks in the market for repurchase agreements (repos)."

Repos are the sale and resale the possession and repossession and quick turnover of securities. This is the modern form of the way the tulips were handled by the Dutch, buying and selling tulips without really having them.

These transactions must be important not for themselves but as a facade for some other operation.

Now that's an even more serious charge!

"The main operation," he goes on to say, "related to repos is the holding of what the Fed staff has correctly described as checking deposits of large corporations of major New York banks. These add up to more than net demand deposits. (Our emphasis -- SM)

From this he concludes that "here again the Fed cooperates actively in running a shady operation and in a pattern of reporting and description which keeps the situation wrapped in mystery and provides cover for major deceptions." (Our emphasis -- SM)

In a word, he implicates not only the big banks in general, but the individuals in the Federal Reserve Bank and of necessity the chairman of the bank, Paul Volcker. They stand accused of falsification of records and of a coverup for major deceptions.

Considering that the Rockefellers, Volckers and others are involved, it has all the earmarks of a major if not unprecedented financial scandal.

Professor Hart concludes, however, as he must being a "free enterprise" champion, that if a major financial smash is to be averted, then there should be "sobriety and candor in the conduct and reporting of financial operations and not to foster the search for quick gains out of asset churning and creative accounting."

Sobriety, candor, responsibility, integrity, abandonment of quick killings for a profit, avoidance of false reporting -- this is utopia! Yet that is what bourgeois economists in this epoch who want to reform the system must necessarily resort to: childish apologetics not only for the system but for the corrupt and fraudulent individuals involved.

The men personify the system

Our purpose, of course, is not to pillory the individual bankers, money managers, trustees, accountants, and others as examples of corruption and fraud. The public in the prevailing mood of cynicism will readily believe it anyway. Individuals are dealt with here "only in so far as they are the personifications of economic categories," says Marx, "as embodiments of particular class relations and class interests."

"My standpoint," Marx continues in a famous preface to Capital, "from which the evolution of the economic formation of society is viewed as a process of natural history can less than any other make the individual responsible for relations whose creature he really remains, however much he may subjectively raise himself above them."

This is not to excuse the villainy of the Rockefellers and all the others who are involved in this monumental scandal. It is just to put it in the proper historical sociological context.

The professor's admonition against "get-rich-quick plans" shows a woeful lack of understanding of the very nature of capital which economic historians in the classical period were able to see so much more clearly.

Marx quotes T.J. Dunning: "Capital," says Dunning, "eschews no profit, or very small profit . ... With adequate profit capital is very bold. A certain I 0 percent will ensure its employment anywhere; 20 percent certain will produce eagerness; 50 percent, positive audacity; 100 percent will make it ready to trample on all human laws; 300 percent and there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged.

"If turbulence and strife will bring a profit, it will freely encourage both. Smuggling and the slave trade have amply proved all that. ..." (Capital, Vol. 1, page 712 footnote.)

Before proceeding further on the nature of the capitalist crisis it is important to consider some of its other manifestations which continue to agitate virtually all classes of society.

Let us leave aside for the moment the gravest issues concerning the working class and the oppressed people -- unemployment, which is in excess of 11 million, cuts in social services, unemployment insurance, Medicare and health care, and so on.

High interest rates

Let us consider the question of high interest rates. This has become a virtual obsession among large sections of the ruling class as well as the middle class. Unfortunately, many auto workers believe that high interest rates are responsible for the recession along with foreign competition.

The auto barons have again and again denounced the high interest rates as one of the principal causes of their problems. Most of all, however, it has been the farmers, hard hit with so many mortgage foreclosures, who believe that high interest rates are the principal cause of the crisis. And the same is true of real estate and housing construction.

There is absolutely no question that the high interest rates for home mortgages and automobiles and so on are hurting tremendously. But is this the fundamental cause of the capitalist crisis?

One of the striking phenomena of this particular aspect of the capitalist crisis is that while inflation has gone down to a very minor degree, interest rates have stubbornly stayed very high, shrinking only slightly and fluctuating around a very high level.

Almost all bourgeois economists are unanimous in acknowledging that several decades ago, and certainly in the early period of the development of the capitalist system, when an economic crisis occurred it was almost immediately followed first by a collapse of stock and bond prices and then by a fall in commodity prices, even though these fell less precipitously.

The fall in commodity prices was virtually universal. Prices began to lift as soon as a capitalist recovery was on the way and took on greater momentum as soon as the boom developed.

In recent economic crises, particularly since the early thirties and even in the more distant past, while there was a general fall in most prices, some prices did not fall. For instance, what municipal transportation in any major city has known a price decrease in decades?

The price of utilities like gas and electricity for home use also has not known any price diminution for a long time. There are other prices which have shown a consistent tendency to resist reductions, and instead have increased in good and bad times -- the price of telephone calls, for instance. This is the result of highly monopolized industries.

Everyone knows that the huge multi-national corporations which control the steel, aluminum, and chemical industries among others, have for years been able to keep prices at an artificially high level during periods of both depression and recovery. They make price-fixing agreements among themselves, often with the collusion of the government despite antitrust laws.

The rigging of prices has been very common in the highly monopolized industries where there are sometimes no more than a half dozen large manufacturers who dictate the price for all the others.

There are many food stuffs, mostly those canned or frozen, that equally resist price declines. This is due to the powerful influence of agribusiness and its alliance with the pharmaceutical companies which supply fertilizer antibiotics and so on.

It is plain that all these prices are artificially controlled and are not based on the actual cost of production.

This is one of the very significant and fundamental causes of price inflation. The other of course is monetary devaluation. They go hand in hand.

Price of labor declines

It should also be noted that even when there is a general decline of prices, the commodity that declines most is labor power, a factor which the bourgeoisie does its damnedest to conceal. In fact, it is the general reduction in the earnings of workers which the capitalists look forward to as a method for solving the capitalist crisis.

When Reagan says that his policy is responsible for the drop in the rate of inflation, this is a falsehood. The real answer to the slight drop in inflation is due to the enormous givebacks by the organized working class, not to speak of the unorganized multi-millions. The concessions made by the working class as a whole result in a decline in the living standards and purchasing power which has produced the small decline in the rate of inflation.

In other words, the only way the ruling class has found to solve its problem of inflation is cuts in living standards and employment.

Be that as it may, the question still remains that interest rates are high, notwithstanding the price declines in other fields. The results sought by the ruling class have failed to occur.

It is interesting to note that in the search for answers, a leading mouthpiece of big business -- Business Week (April 12, 1982) -- carries a long analysis of what it believes to be the causes and consequences of high interest rates. The conclusion it comes up with is revealing in the highest degree.

Financial gridlock

"In this special report," says Business Week, "we take a fresh look at the high interest rates and their implications. Among the conclusions reached is that there is no one explanation for the interest rate dilemma and that the markets are trapped in a financial gridlock."

(Gridlock is a term borrowed from traffic engineers that describes the condition in which nothing can move in any direction.)

"Nor is there any single solution for high interest rates. Finding an answer," says Business Week, "seems to baffle economists today just as unemployment stymied them in the 1930s. That means that the economy may be plagued by a financial gridlock until the end of this decade. What Business Week is saying is that high interest rates and capitalist stagnation will continue until 1990 if not longer.

It is the most damning admission to come from an organ that speaks on occasion for the ruling class as a whole.

Marxists have always believed that the ruling class has no answer to the capitalist crisis, even less so in the postwar period of monopoly capitalism. But Marxists can explain high interest rates, as well as unemployment.

Earlier we called the attention of the reader to the existence of the market for purchase and sale of U.S. government securities to the tune of $500 billion.

We also called attention to the enormous speculation in government securities which resulted in a near collapse of the financial markets. Government securities are debts of the U.S. government. The U.S. government is a debtor in relation to this $500 billion, which is only part of the total national debt.

(In the early period of capitalism, the national debt was a powerful weapon in economic development. It subsidized irrigation projects, shipping, and highways, and in other ways fostered the growth of giant industry. Today, however, it corrodes the vitals of the system and poisons the bloodstream of capitalist circulation.)

Each security in whatever denomination is really an IOU by the U.S. government. Many decades ago if you had a $10 bill or a $100 bill or a government security issued by the Treasury in any denomination and were fearful about the safety of U.S. currency, you could go to the Federal Reserve Bank and get it back in gold.

This $500 billion, which is just a portion of the national indebtedness, is not worth what the security says at all because the value of the security has become depreciated by the government debasing the currency. How does this work?

Coin clipping

In ancient times all the way down to the early monarchies of the 15th and 16th centuries, when a monarch or a prince was indebted to the merchants, or usurers, he sometimes used to call in his goldsmith and treasurer and ask them to ever so slightly clip pieces out of the gold coins in his treasury.

By clipping these coins, and retaining the clippings, the monarch or prince believed that he would fool the merchants usurers and creditors when it came time to pay them and thereby accumulate a handsome savings. However, the monarch soon learned that the very coins he clipped came back to his treasury in the form of taxation.

Thus, what the monarch gained in one way by clipping the coins and spreading around his indebtedness, he lost by getting clipped coins back in his taxes. Today, the U.S. treasury, along with the treasuries of most of the capitalist countries, have been doing the same thing. Only the form has changed.

The U.S., in order to pay for the Viet Nam war, the Korean war, and the smaller wars which it has instigated around the world, has issued much money in excess of the value of the currency. This amounts to coin clipping on a modern and massive scale. Every time the U.S. purchases some new weapons system from the military-industrial complex, it receives no real value in return.

While there is always a brisk international trade in arms, especially in times like these with two major wars going on simultaneously, only some of the arms that the U.S. produces are paid for by those of its client states that can afford it. To others, they are of necessity given for free just to maintain domination over them.

Overall, the system of arms production is a unique form of capitalist commodity production which, while nominally having an exchange value, in reality has no use value. This necessarily results in debasing the currency, "clipping the coins."

So that at any one moment, the inflationary spiral which has caused the price of commodities in general to rise has even more greatly affected the government securities market. The pile of bonds and corporate stocks is in reality "watered."

(In the old days when farmers drove their cattle to market they stopped at watering holes and deliberately had the cattle drink excessively, so that when they reached the stockyard their weight would be heavier. That's how the term "watered stock" arose.)

The reason interest rates are so high is because the dealers in government securities, including the banks and all money market managers, know this.

They also know that notwithstanding anything the government says or even does the bonds and stocks will continue to be watered. Why?

Arms spending and inflation

They know that the Pentagon's budget over the next five years is $1.6 trillion, and that there will be no return exchange of genuine goods and services to enter capitalist circulation like other commodities.

This gargantuan financial expense of the government will continue whether there is a freeze on nuclear weapons or not. The arms buildup in other weapons would make up the difference if the nuclear ones are frozen. This is inevitable.

That is because of the deep entrenchment of the military and the military-industrial complex, its intimate interlocking connections with the banks, and just as importantly, with Big Oil.

This trinity -- the military-industrial complex, the banks, and Big Oil -- is structurally integrated with all aspects of the capitalist government. So while it is possible that, if unemployment continues to zoom upwards, interest rates may fluctuate here and there, the dealers in government securities, the financial speculators, the stock brokers, and above all the big banks and the Federal Reserve members up to and including the chairman himself know that the watering of the pile of bonds and stocks will continue because of the tremendous flow of inflationary currency coming out of the government. That will be so whether there is a Reagan, a Carter, or a Kennedy in the White House.

The methods of dealing with this phenomenon may be harsher or milder as the case may be, but the cure of this disease is not possible on the basis of contemporary monopoly capitalist conditions.

The basic reason interest rates are high is that the so-called banking community, which doubletalks against interest rates, really anticipates higher inflation with more debased currency coming out of Washington as the consequence of military spending.

If you are a holder of one of the money market funds or a dealer in these securities, and you hold them on a daily basis in the hundreds of millions like Drysdale, or you are a big bank like Citicorp or BankAmerica which holds billions, then you must know that the continuous flow of them depreciates the value of your securities.

You therefore would want to make up for it by charging higher interest rates on the securities. Thus, while you would like the securities to really maintain the full value written on them, you know that in reality the currency will inevitably continue to be debased and so you are compelled to anticipate higher interest rates.

Therefore, all the money managers, bankers, trustees, and securities dealers are continually bidding up the interest rates against their own broad interests as pillars of the capitalist establishment.

The banks, notwithstanding all the profits they make, are in the deepest and profoundest of contradictions because, on the one hand, they are the creditors of the government and are exhorting it to stop depreciating the currency so their securities will be more valuable.

On the other hand, in their capacity as private bankers, they are anxious to make a killing while the high interest rates prevail.

The bankers, from the point of view of the anatomy of the capitalist economy, centralize in their own hands the public debt both as creditors and at the same time as debtors, a contradiction which occasionally leads to powerful convulsions, comparable to the devastation of an earthquake.

However, the financial gridlock which Business Week referred to is a grim and inescapable reality for which the magazine says there is no single solution.

The Dutch 'solution'

Here it is important to go back to the wild speculation in tulips of the Dutch ruling class. The speculation on Wall Street today in securities, as described above, is merely a modern version of the Dutch primary example. The tulip mania took place during the rise of merchant capital and the expropriation by methods of primitive accumulation of whole sectors of the population, which left scars for decades to come, as the Encyclopedia Britannica so well states. But the Dutch did finally come up with a "solution."

We are most concerned with this "solution" because it has such relevance not only to the present financial gridlock situation but to far broader economic and political consequences.

The Dutch, who had become colonizers during the 16th and 17th centuries, were also finance capitalists in the era of merchant capital. They were unable to stimulate the new mode of capitalist production which was still in its infancy at the time of tulip mania. The economy bogged down following this wild speculation in which the merchants had garnered up the capital from the bulk of the expropriated and to some extent pauperized population. So they turned more intensively to dangerous and odious adventures abroad.

Merchant capitalism showed its prowess in its ability to subjugate to its will and garner huge profits by pillaging, plundering, and disintegrating pre-capitalist forms of production in countries where it plied its trade.

The enormous profits obtained from such colonization were not on the basis of the exchange of equivalent commodities of different form, such as exchanging a pound of sugar for a bushel of corn. The classical method of the colonialists was typified by their purchase of the island of Manhattan for $24 from a population whose mode of production was based on production for use, except on rare occasions.

Such robbery would have been considered at the time too small and inadequate a stimulus to set in motion or accelerate the automatic process of the capitalist mode of production. What they embarked upon after the tulip speculation disaster was much closer to what in a different form is the type of solution modern finance capital seems irresistibly headed for.

Even in its early primitive accumulation period, when the system of capitalist production and exchange was still young and full of immense possibilities, it could not after an initial disastrous agricultural crisis resume the automatic processes of capitalist production without the use of adventures abroad as a stimulus and a diversionary strategy.

So the Dutch began to traffic on a huge scale in the slave trade, a form of colonial genocide.

Here is what the historian S. van Brakl in his history of slavery and the West Indies Company says on this point:

Dutch commercial and shipping prowess was applied not only to the ordinary goods of trade, products of the soil and man's industry but also to man himself. During the 17th century, despite the wars with Spain, Dutchmen as well as Englishmen began to supply slaves from Africa to the plantations of America.

The slave trade became the source of the profits for the Dutch West Indies Company and, after Spain made a formal peace with the United Provinces in 1648, the Dutch predominance in the supply in Black human merchandise to the Americas lasted half a century.

The Dutch sold ten times as many slaves as the English in this period. ... The Dutch applied to this dismal trade, in which the overcrowded slave ships lost on the average 15 to 25% of their human cargoes in the 'middle passage' from Africa to the Caribbean, the same meticulous business methods that they used in the purchase or sale of grain or guns." (Quoted in Rowan, The Low Countries.)

Today's solution -- capitalist war or socialist reconstruction?

If the Dutch in their period of ascendancy were unable to stimulate the machinery of capitalist production and permit its spontaneous development, but instead were impelled by greed and avarice to methods of genocide, how then can modern finance capital, which is not in its early, robust days of development but in its period of decline, start up the automatic processes of capitalist production in the midst of a financial gridlock without resorting to the Dutch "solution"?

Is it not a fact that the Viet Nam war and the Korean war, not to speak of earlier wars of imperialism, were the only oil capable of lubricating the corroding machinery of the capitalist system? And is it not now plain that in this world capitalist crisis, with all the heads of the major capitalist governments brutally admitting that they have no solution to the capitalist crisis, they are heading once more in the direction of external adventures as the sole means of starting up the economy, assuming it is not destroyed in the process?

Again and again we hear capitalist politicians declaim against their opponents for failing to "start the economy moving" again.

Starting an economy moving is relatively easy. Starting production is relatively easy. Calling people back to their jobs is easy.

What then is the problem? The problem is that they are not interested in starting just any economy.

They are interested only in starting the capitalist economy moving again. And there they find an insuperable barrier.

"The real barrier to capitalist production," says Marx, "is capital itself." Capital is not merely a thing. Capital expresses through material things a relation between people, a relation between polar opposites.

At one pole is a tiny minority of people in whose hands are concentrated all the means of production. This small minority is the personification of capital.

At the other pole is the multi-million working class, whose unpaid labor is appropriated by this handful of millionaires and billionaires with the wealth of the nation concentrated in their hands.

Capital, therefore, inevitably means production for profit and not for use.

Indeed, it would be easy to get the economy moving rather swiftly if it were transformed into an economic system of production for use. The present system, notwithstanding the wear and tear, still has a splendid industrial and technological apparatus and is fully capable of starting up quickly and absorbing fully the population of the country in useful productive labor.

The barrier, however, is production for profit, not for use. Therein lies the problem.

Until that problem is solved by the working class and oppressed people, a universal nightmare of economic and political catastrophe hangs over the bulk of humanity.

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