Capitalism's Economic Foundations (Part IV)

Part IPart IIPart IIIPart IV

From the Commanding Heights(1) of the State to Globalisation

The growing incompatibility between the productive development of society and its hitherto existing relations of production expresses itself in bitter contradictions, crises, spasms. The violent destruction of capital not by relations external to it, but rather as a condition of its self-preservation, is the most striking form in which advice is given it to be gone, and to give room to a higher state of social production.(2)

Karl Marx, Grundrisse

In the 20th century world, imperialist war was the outcome of capitalism’s cyclical crisis writ large, the means by which “a great portion of capital” (Marx later in the same passage) was annihilated, thus providing the basis for a renewed round of accumulation. Yet there is a marked contrast between the inter-war years and the post-Second World War years when both the upturn (the boom) and, especially, the downturn of the cycle (since the collapse of Bretton Woods) have been much more prolonged. This is due in no small part to international capital having learnt from history to fear a return to the trade wars and autarchic policies of the Thirties which led to the Second World War.

First, a reminder of the significance of the agreement brokered by JM Keynes and Harry Dexter White at Bretton Woods in 1944. Above all, it was confirmation that the United States had ousted Britain as the world’s top imperialist power, a position it aimed to maintain by obliging all signatories to link their currencies to the dollar, thus making the US currency the unit of international trade outside of the Russian bloc (Comecon). As an assurance to the rest of the world that its currency was reliable, the United States offered a system of exchange rates based on the direct convertibility of the US dollar to gold the price of which was fixed at $35 an ounce.

Despite this apparently indomitable position in the world economy, a position secured by military might, the prime export position of the United States was quickly challenged, notably by its recent wartime enemies, as first West Germany, then Japan recovered and eventually South Korea, jumping from a largely agrarian society, rose to be one of the world’s top economic powers.

The West German boom began in 1950. With a new stabilised currency, a “modern stock of capital” and a skilled workforce reinforced by migration from the East, the industrial growth rate was 25.0% in 1950 and 18.1% in 1951. By 1960 industrial production had risen to two-and-a-half times the level of 1950 and far beyond any level reached by the Nazis during the 1930s in all of Germany.(3) In 1951, as the Cold War materialised, the United States encouraged consolidation of West Germany into its ‘Western bloc’ by promoting the creation of the European Iron and Steel Community (forerunner of the EEC and then the EU), thus encouraging exports and continued industrial expansion. Indeed, the Cold War proved a major stimulus to West German economic growth:

(Exports were) initially centered on the high value trade of armaments, as shown by the export of weapons from the FRG to NATO members. This fell within the “policy of strength” held between the US and Adenauer as a way to ‘roll back the frontiers of the Soviet Empire’. This exporting of armaments was further aided by the Korean War in 1950 and as such, these high value exports help account for the value of exports between 1950-1960 growing from 10%-19% of gross domestic product, which represents a much greater amount of money entering the domestic circular flow of money.(4)

A number of factors greatly aided Japan’s economic resurgence during the 1950s and ’60s, not least the complete destruction of the country’s industrial base by the war. This meant that Japan’s new factories, using the latest technology, were often more efficient than their competitors. The outbreak of the Korean War in 1950 created a huge demand for Japanese goods and the state began pursuing strong export policies which spurred employment, in turn promoting an expanding domestic market. Growing demand overseas for Japanese goods led to annual trade surpluses, which became constant by the late 1960s.

As for South Korea itself, the devastation of civil war (or rather, imperialist proxy war) and the subsequent loss of productive infrastructure and raw materials allowed first US and then Japanese capital investment to create the foundations of a technologically advanced capitalist economy. Under the aegis of military rule, labour intensive, ‘light’ industries (textiles, footwear) were the basis of the state-sponsored export oriented economy which grew in the 1960s. (In the 1970s the focus would turn to capital intensive, heavy industries (steel, shipbuilding etc) equipped with the latest machinery and techniques, followed by electronics and vehicles in the 1980s.)

While it is true that in a world subject to imperialism the strictly economic forces at play can be modified by political policies of the most powerful capital/states, the post-war economic growth of both West Germany and Japan cannot simply be attributed to Marshall Aid, and other extra-economic measures employed by the USA to secure its own interests. The devaluation of capital through the destruction of war enabled them to engage in a new round of accumulation with machinery and equipment at least as technically productive as that of the United States, but generally with a much lower wage bill.

As trade had picked up after the war and countries like West Germany and Japan began to account for a bigger share of international trade, demand for dollars outside the United States grew, as did financial wheeling and dealing on the Eurodollar market. By the early 1960s there were more dollars outside the USA than could be matched by the gold in Fort Knox. As inflation edged up towards the end of the 1960s those dollars were more and more converted to gold, increasingly not at the official rate of $35 per ounce. The system was unsustainable. The impact of the falling rate of profit had asserted itself.

The United States was already running a growing budget deficit, largely due to expenditure on the Vietnam War. But in 1971 the US balance of trade showed negative for the first time since the war. In that year US President Nixon announced the “temporary” cancellation of this mainstay of the post Second World War agreement. The ‘Nixon Shock’ spelled the beginning of the end of the Bretton Woods economic frame for the world economy. By the time Nixon confirmed the permanent end to a fixed exchange rate with gold in 1973 the price of gold had reached $100 per ounce. The equivalent price today (at the time of writing) is around $2,034. Clearly there can be no going back.

Goodbye to All That

The de-linking of the dollar from gold allowed the US Treasury to ‘print’ dollars at will and was effectively a devaluation of the currency which rebounded on the price of commodities traded mainly in dollars on the world market, notably oil. This not only upped the cost of raw materials for competing Japanese and European (largely West German) manufacturers, it sparked continual price increases throughout the Western world for typical working class consumer goods. The prime architect of the ‘Nixon shock’ was treasury secretary John Connally whose infamous quip (at the G10 meeting in Rome) that the “dollar is our currency but your problem” had not prevented him from imposing a 10% tax on imports and a 90-day wage and price freeze for workers in the United States. Indeed the working class in the United States found themselves in the same boat as workers elsewhere in the world’s ‘advanced countries’ and beyond.

The UK had emerged from the Second World War with heavy debts and in 1949 had already abandoned an unsustainable initial exchange rate in the Bretton Woods system. In 1967 the IMF had obliged a further devaluation in return for a £1.4bn loan. Yet the UK was still seeking to preserve privileges from its former empire and trying to maintain the ex-colonial ‘sterling area’ — mainly the Commonwealth.(5) The floating of the dollar was the beginning of the end as overseas holders sold off sterling when the exchange rate against the dollar rose prohibitively.

In 1974 the oil producing states of OPEC opted to offset the declining value of exports priced in the now steadily depreciating dollar with their own price increases. Inflation rose worldwide. In the UK the Conservative government, under Edward Heath, imposed a three day working week as part of a battle with coal miners who were demanding higher wages to compensate for inflation. As the economy headed into stagflation (a combination of recession, rising unemployment and high inflation) Labour won a narrow majority in a ‘who rules Britain’ election. In 1976 the newly elected Labour Party leader, James Callaghan famously announced a policy U-turn at the Labour Party conference:

We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour, that option no longer exists.(6)

Thus, before the advent of ‘Thatcherism’, this signalled the beginning of the realisation that Keynesian deficit financing: the invention of money is no real solution to a problem that was deeper than the running up of a fiscal deficit. So it was that Dennis Healey, Chancellor of the Exchequer, found himself agreeing to the conditions for another IMF loan: $3.9bn in return for £2.5bn cuts in government spending, tax increases and rises in interest rates. More fundamentally, between 1946 and the early 1950s much of the UK’s heavy industries and public utilities had been nationalised without very much in the way of updating constant capital. (Arguably state ownership of industry was more about placating the working class into believing they were benefitting from something ‘socialist’ than a means to update plants and machinery or ‘reskill’ the workforce. By 1979, public sector employment had reached its highest level of 7.07 million, representing 28.1% of total employment.)(7) Not only had the general rate of profit in the UK fallen steadily since 1945, in the birthplace of industrial capitalism it was now lower than most of its rivals.

Thus industrial restructuring in the UK, though not limited to ‘de-nationalisation’ during Thatcher governments, has involved the ‘privatisation’ of around 113 former state-owned industries and firms,(8) allowing for either their subsequent break-up and outright closure or restructuring and take-over by finance capital in search of easy financial returns. Deficit financing — the essence of Keynesianism — used to prolong the life of enterprises that are either unprofitable or of very low profitability is in itself no solution to the crisis of profitability. In the long term this calls for the devaluation of constant capital and its restructuring on the basis of a higher concentration and centralisation of capital to revive the rate of profit — just as Marx explained follows every capitalist profitability crisis.

But as we have seen, it was the economic malaise of the richest, most powerful country in the world, the United States, which had triggered global inflation and — despite the US treasury secretary’s complacency — the dollar’s devaluation had not only sharpened the crisis for its economic rivals, it provoked a post-war record rise in inflation for the US itself and a crisis of profitability which triggered massive shut downs and job losses, especially in the steel-making and manufacturing cities of the north-east which came to be known as the Rust Belt.

Already in the 1970s, US firms were beginning to relocate production to newly industrialised, cheap labour areas like South Korea, Hong Kong, Taiwan and Singapore. Many displaced workers were obliged to seek work in lower paying service industries. According to the Bureau of Labor Statistics, employment in manufacturing industry peaked in the United States in 1979. The trend towards ‘tertiarisation’ of the domestic economy had begun.

As for Western Europe and Japan, the end of the post-war boom and the subsequent crises of declining profitability and low ‘growth’ was generally attributed to a political decision of the Arab oil exporting countries to raise the price of crude oil, especially after the second ‘oil crisis’ in 1979.

Yet the fact is that the oil price rises were provoked by a United States which enjoyed the ‘exorbitant privilege’ of being the issuer of the currency required for most of global trade. While on the one hand there was the Rust Belt, on the other there was the possibility of financial benefits accruing from the recycling of petrodollars flowing from OPEC to the USA. Meanwhile, the major economic rivals of the USA in Japan, Germany and the OECD countries found themselves facing a general rise in the price of raw materials, and — at least until the mid-1980s — a higher price for oil than the United States. This, all in the general context of a ‘reduced rate of return on capital’, in other words, the crisis of the falling rate of profit. Domestic inflation rose, businesses were going bankrupt and many more insolvent firms escaped bankruptcy via state deficit financing. The problem of the falling rate of profit had to be addressed and a general pattern of economic ‘restructuring’ emerged on the basis of installing new technology (largely computerised electronic equipment) and introducing new working practices to improve the ‘productivity and flexibility’ of the reduced workforce.

Typically European states reduced their direct control of industries, allowing the possibility of injection of international finance capital and at the same time providing the opportunity for so-called cross-border mergers and acquisitions by domestic firms. Thus according to Bundesbank statistics, the role of the state in the West German economy declined from 52% to 46% of GDP between 1982 and 1990.

Typically also German growth never again reached the pre-crisis levels of the early years of the Federal Republic.

As for Japan, without an alternative domestic source of energy, the surge in the price of oil prompted the state, via MITI (Ministry for International Trade and Industry) to review its economic policies and in 1979 proposed a new ‘Vision for Industrial Policy’ whereby Japan, as a “technology-intensive nation”,

would move from “an industrial pattern of “reaping” technologies developed in the seedbeds of the West, to a pattern of “sowing and cultivating” that displays greater creativity. ... With the century of catch-up modernisation at an end, from the 1980s onwards we will enter a new and unexplored phase.(9)

This is the context of the USA’s next move on the international stage.

The Plaza Accord

While the United States had set out to use the ‘exorbitant privilege’ it enjoyed, by virtue of the dollar being the predominant currency of international trade and finance, a decade on from the abrogation of Bretton Woods, the Chairman of the Federal Reserve, Paul Volcker, found himself dealing with an unexpected consequence: the massive appreciation of the dollar. Variously explained by pundits as the result of Volckers’s tight monetary policy in the face of President Reagan’s fiscal profligacy or simply the consequence of an influx of petrodollars from OPEC states searching for a place to park their oil bonanzas(10), from the beginning of 1980 to its peak in March 1985, the dollar appreciated by over 47.9% against the famous basket of currencies. The strong dollar put pressure on the US manufacturing industry because it made imported goods relatively cheap and provoked a protectionist campaign by many major companies from Caterpillar to IBM and Motorola who lobbied Congress to step in and impose protectionist trade barriers. Thus, the US avoided outright protectionism and instead came up with the Plaza Accord.

The Accord, between the United States, Japan, West Germany, France and the UK, aimed to push down the US dollar. The US pledged to reduce its federal deficit while the other parties were to boost domestic demand through policies such as tax cuts. All parties agreed to directly intervene in currency markets to “correct current account imbalances”, i.e. to sell off dollars. The immediate upshot was a dramatic increase in the yen and Deutschmark against the dollar which in turn depreciated by as much as 25.8% in the following two years.

Although the Accord significantly reduced the US trade deficit with Germany and the rest of Europe it did not have the same impact on the trade deficit with Japan, and the US continued to press for ‘structural revision’ to Japan’s ‘unfair’ economic policies of state support for new industries and erecting import barriers to preserve declining industries. As for Japan, ever since the mid-1980s it has faced a declining share of global trade: a fact often attributed to the loss of competitive edge as a result of the re-evaluation of the yen in 1985. What this simplistic cause overlooks is the rise of competing national capitals ready to install the latest technology, move into electronics and vehicle manufacturing to exploit a plentiful supply of much cheaper labour power — notably, by the mid-Eighties, South Korea, itself a major recipient of Japanese foreign investment.

As for the Plaza Accord, this has gone down as the “high watermark” of international coordination of economic policy. It was followed two years later by the Louvre Accord aimed at halting the dollar’s decline! More generally the Plaza Accord gave way to the variously tagged G7, G20 and so on group which meets annually to coordinate increasingly vacuous economic policies in a global capitalist world — a world in which neither China nor the former Soviet empire can hide behind non-convertible currencies.

In 2001 China joined the World Trade Organisation (WTO) and confirmed its place in capitalism’s global economy. Despite all the ideological mystifications, the modern history of China has never been anything other than capitalist and its post-war economic odyssey only confirms this.

Even before the Tiananmen Square massacre of 1989, the creation of Special Economic Zones at the beginning of the decade had opened the door to foreign capital investment confirming the capitalist nature of the economy. Thus,

In little more than 20 years, from 1978 to 1999, there has been an inflow of about a third of the total foreign investment of the entire world in the celestial empire, amounting to an annual rate of $40bn.(11)

As for the USSR and the Warsaw Pact countries, despite staying out of Bretton Woods and attempting to rely on the internal exchange of goods (oil and gas from Russia in return for manufactured products) the global crisis impacted first the Warsaw Pact countries with more economic ties with the wider world economy. Poland in particular suffered from inflation which provoked massive working class struggle in the 1970s and 80s. In the event, despite its superior scientific and technological advances in space, the USSR became bogged down in its own inertia by its inability to reequip manufacturing with new technology, partly because the USA deliberately placed embargoes on the export of new technology to Russia. This isolation from the rest of the world economy, plus the complete fiction of official statistics issued by a corrupt nomenklatura more concerned with feathering their own dachas than the health of the wider economy, eventually morphed into the Russia of competing billionaire oligarchs we know today. In 2012 that Russia joined the WTO.

Since then, for the first time since before the First World War, capitalism has been running free reign throughout the globe. In the next part of this series we will be examining the consequences of this ‘fully global’ globalisation.

Communist Workers’ Organisation


(1) The term ‘commanding heights’, once familiar in Labour Party and other left capitalist circles, was first coined by Lenin in some notes he made in 1922 where he was working out how to explain that, despite the NEP conceding a certain role for private capital, “all commanding heights in the sphere of production” remained in the hands of the state. The nature of the state, of course, not being dealt. See Lenin, Collected Works, Progress Publishers, 1971, Moscow, Volume 36, pp 585-587.

(2) The quotation is from the Grundrisse, p.750, Pelican Marx library, Penguin Books 1973

(3) Economic Revival of West Germany in the 1950s and 1960s, Cameron Payne, Aug 7 2011,

(4) ibid

(5) The sterling area countries kept most of their reserves with the Bank of England and, in return, had access to London financial markets. In 1979 Britain removed all its exchange controls and the sterling area effectively ceased to exist.

(6) This quotation is so ubiquitous, it is easily found on the internet. Here, for example, it is part of book review (on Labour orators!)

(7) Between 1979 and 1998, what the ONS calls the “contribution of public corporations to public sector employment” decreased from 27.7% to 7.1%. Yet, this by no means signals the end of the state as employer of labour power. The latest ONS figures (December 2023) show public employees today = 17.8% of the workforce.

(8) See Wikipedia’s list of ‘Former nationalised industries of the United Kingdom’, as at 15.6.21.


(10) Itself not an entirely spontaneous move: the OPEC states had been ‘persuaded’ to park their dollars in the United States in return for a promise of regional military protection.

(11) China: Economic Giant with Feet of Clay in Internationalist Communist no.22,

Wednesday, February 7, 2024

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