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Arne Swabeck

Inflation and the Arms Economy

(March 1952)

From Fourth International, Vol.13 No.3, May-June 1952, pp.76-82.
Transcribed & marked up by Einde O’ Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

The Council of Economic Advisers to the President has been engaged for some time in “charting a new path for the economy” of the United States. In its midyear report to the President, July 20, 1951, this “new path” – the armaments economy – is elaborated in great detail. Special emphasis is placed on the problem of inflation. Proposed measures for counter action are grouped together under the subtitle, The Stabilization Effort, and have one objective: to direct an ever greater share of the purchasing power of the people to financing the armaments program.

“Stated most simply, inflation develops when there is a general excess of demand over supply at current prices.” Such is the verdict of the high-placed councilors. It is as simple as it is grotesque.

The councilors do admit, however, that this simple statement “does not penetrate very deeply into the manner in which inflation is generated or how it affects the economic and social structure.” Still they persist that “the most fundamental cause of inflation we are facing, is that a rising defense effort leads to the creation of additional income, without a corresponding increase in the supply of civilian goods.”

Their explanation is

“that while there were two buying waves set off by events in Korea, the inflationary trend resulted from demand, backed by ability to pay, expanding more rapidly than production. As more spendable dollars became available in ratio to the available volume of goods, prices rose; and, in turn, price increases were among the factors producing further increases in other incomes.”

Apparently as an afterthought, the councilors indicate a slight recognition of the part played by the credit system in the inflationary process.

“The significant rise in the general price level, since the outbreak of hostilities in Korea” they say, “has been accompanied by a rapid expansion in private credit, particularly bank loans. The loans, of all commercial banks increased by more than $9½ billion in the 9 months period ending March 31, 1951.”

Everything here is turned upside down. The manifestations of inflation are singled out and made to appear as its causes. A situation in which the purchasing power of the people is seriously curtailed is presented as one of too much income. Credit expansion is viewed as a mere corollary to a rise in price levels.

By such perversions the distinguished councilors brand themselves as vulgar economists. They are not far removed from the mountebanks who cry out constantly about the “wage-price spiral” of inflation which is a cruder way of saying the same thing and has no other purpose than to conceal the predatory character of the capitalist system of production and distribution. In both instances the real cause and nature of inflation is completely obscured.

Production and Consumption

Moreover, the case presented by the Council of Economic Advisers on inflationary trends since the Korean war began, flies in the face of the facts. Statistics submitted by the Council showed the rate of industrial production in June 1951 to be 12 percent higher than June 1950. During this same year personal consumption expenditures rose by 8.7 percent. But during the period from 1939 up to the beginning of the Korean war, personal consumption expenditures had increased at an average annual rate of 16 percent. In other words, there was an actual decline in the peoples’ purchases during the first year of the Korean war. The increase of wholesale prices during the year by 16 percent makes the decline all the more evident. Most assuredly, there is no evidence here of too much income for the broad masses of the people.

However, the real way to measure personal consumption expenditures, not only in the sense of the well being of the people, but also from the point of view of stability of the economy, is to relate these expenditures directly to production. And, following the same official statistics, we find that in 1929 personal consumption expenditures were 75.9 percent of the gross national product. By 1939 these had dropped to 73.9 percent and by the first half of 1950 there was a further drop to 68.8 percent. But during the first year of the Korean war, from June 1950 to June 1951, personal consumption expenditures were only 66.1 percent of gross national product. Yet corporate profits, after taxes, which had maintained an average annual increase of 25.4 percent from 1939 to the first half of 1950, rose by 28.9 percent during the first year of the Korean war.

These figures tell the sordid story of capitalist exploitation; but they also delineate the shape of the brutal effects of inflation.

In face of a substantial increase in the physical volume of output and of a corresponding rise in corporate profits, the people were able to buy only a constantly diminishing part of the goods they produced. Their wages fell below the rising price level. That wages always fall in relation to output and profits, thus restricting the purchasing power of the people, is here illustrated with compelling bluntness.

Unquestionably a part of this steep rise in the cost of living during the first year of the Korean war can be accounted for by the monopoly practise of forcing prices upward to the very limit of what the traffic will bear. Capitalism always remains true to its rapacious nature.

Armaments appropriations and business credits, flow with equal ease into the economic structure. Speculation and gambling, along with reckless business spending filling the pipelines of inventory in anticipation of extraordinary profits, grow by leaps and bounds. To the extent that wages follow the upward trend, this is a consequence of inflation not its cause. All of these factors become a part of the inflationary spiral, interacting on one another.

However, to understand the real nature of inflation it is necessary to start out from basic objective laws of capitalist economy, finance and credit. Let us turn to Karl Marx, who understood them best:

Marx on Money

“The first chief function of money,” he said, “is to supply commodities with the material for the expression of their values as magnitudes of the same denomination, qualitatively equal, and quantitively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money.” (Capital, Vol.I, p.106).

But gold, Marx says further,

“serves as an ideal measure of value, only because it has already, in the process of exchange, established itself as the money commodity. Under the ideal measure of value there lurks the hard cash.” (Ibid., p.116).

Money is the measure of value inasmuch as it is the socially recognized incarnation of human labor. For example, the value of a ton of steel is expressed by a quantity of money containing the same amount of labor as the steel. In this instance money is employed in its ideal or abstract form. In its concrete form, however, money performs the function of a socially recognized means of circulation, or medium of exchange. (Including the function of means of deferred payments or credit.)

The circulation of the material products of labor, according to Marx, is brought about by the following changes of form: Commodity–Money–Commodity (C–M–C). It is the transformation of commodities into money, and the change of money back again into commodities that serve as use values, or selling in order to buy. Money here performs a transitory function in the process of exchange; the amount of money required is determined beforehand by the sum of the prices of all these commodities. But in the acts of exchange, money, as the equivalent commodity, is capable of performing its function in repeated succession. After having mediated here, between purchaser and seller, it moves away to repeat its office elsewhere.

“Hence,” says Marx, “for a given interval of time during the process of circulation, we have the following relation: the quantity of money functioning as the circulating medium is equal to the sum of the prices of the commodities divided by the number of moves made by coins of the same denomination. This law holds generally.” (Ibid., p.135).

Because of this transitory function, Marx observes that the mere symbolic existence of money suffices:

“Its functional existence absorbs, so to say, its material existence. Being a transient and objective reflex of the prices of commodities, it serves only as a symbol of itself, and is therefore capable of being replaced by a token ... It is capable of being so replaced only insofar as it functions exclusively as coin, or as the circulating medium, and as nothing else.” (Ibid., pp. 144-145).

The Circulation of Money

Marx observes further that the circulation of paper money is subject to the laws that regulate the function of money itself. “The issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols.” (Ibid., p.143). If that limit is exceeded-the paper money will in reality represent a lesser quantity of gold. It will represent less money value. Prices move upward accordingly.

As we have seen, the simplest form of circulation of commodities is C–M–C. The circulation of money as capital takes place by the inverted order of succession M–C–M, or buying in order to sell. In the first form the movement is brought about by the intervention of money; in the second form by that of a commodity (labor power). Money is advanced to buy the commodity in order to recover money through the process of reproduction; but to recover money plus an increment in the form of surplus value, i:e. the value created by labor over and above what it receives for its own subsistence. It is this movement that converts money into capital.

“The value of money, or of commodities, employed in the capacity of capital,” says Marx, “is not determined by their value as money or commodities, but by the quantity of surplus value, which they produce for their owner.” (Capital, Vol. III, p.418).

The Function of Loan Capital

Capital, therefore, exists only in its actual function, only in the process of reproduction, in the process by which labor power is exploited. When we observe the function of Joan capital, or interest-bearing capital, we notice a difference; and it is precisely this difference which constitutes its special character. Loan capital is advanced by a person or by a bank to another person or to an industrial concern to be returned within a stipulated time. But to return as capital, it must return as money plus an increment, in this case interest. It is that portion of the average profit realized in the process of reproduction out of the surplus value produced by labor which falls to the share of the lender or the money capitalist.

Due to the firmly established practice of definite rates of interest, money capital appears in the hands of the banker as an independent self-expanding value. This is merely appearance, not the reality. Interest-bearing capital is a derivative form. The individual owner has the choice of lending his capital out for interest or investing it directly in production but insofar as this total money capital is concerned, the interest is derived from surplus value which is created only in the process of reproduction. In the final analysis interest-bearing capital can have no independent existence separate and apart from capital employed in the process of reproduction.

Interest-bearing capital, or rather loan capital and usury, appeared in its primitive form at the very dawn of civilization, following closely upon the heels of the invention of money. A new power had emerged, and the debtor was entirely at the mercy of the creditor. This form of money was condemned by Aristotle.

Commerce he said, is

“with justice disapproved (for it is not based on nature, but on mutual cheating) therefore the usurer is most justly hated, because money itself is the source of his gain, and is not used for the purpose for which it was invented. For it originated for the exchange of commodities, but interest makes out of money, more money.”

From the primitive brutality of its youth, the power of money has advanced during the intervening centuries to employ the more subtle means of the modern banking business and the credit system. But the more subtle means have proved no less fraudulent.

The Credit System

The credit system, as analyzed by Marx, arose, out of the growing volume of values and as an indispensable accompaniment to the increasing distance of the market. By mutual interaction, the development of the process of production expands credit which again leads to an extension of industrial and commercial operations.

The credit system enhances the formation of monopoly combinations and with it the fusion of industrial capital with financial capital. Inordinately large and speculative profits accrue from promotion of stock companies, holding companies, trust companies etc. Developing alongside the socialized mode of production, credit endows capital directly with the form of social capital as distinguished from private capital. Its enterprises assume the form of social enterprises. But as an inseparable and integral part of the capitalist mode of production, the credit system also serves to magnify and sharpen all of its contradictions.

In the words of Marx, the credit system develops, “the accumulation of wealth by the appropriation and exploitation of the labor of others, to the purest and most colossal form of gambling and swindling, and reduces more and more the number of those who exploit the social wealth.” At the same time, however, it “accelerates the violent eruptions of capitalist antagonisms – the crisis – thereby, the development of the elements of disintegration of its mode of production.” (Ibid., p.522).

Banking capital forms the essential basis of operation within the credit structure. Marx subjected the various components of this capital to a most careful examination and he found that its greater proportion was fictitious. First and foremost in this category are government bonds. The state, of course, pays interest on the money borrowed for which the bonds are deposited. But the creditor cannot call for the principal. He can merely sell the certificate of indebtedness. The capital itself has been spent by the state. It does not exist any longer.

It. does not matter for what purpose this capital was spent, whether for public construction or for the manufacture of weapons of destruction; only the bonds remain, gilt-edged bonds to be sure, but still only pieces of paper. Thus the capital – whose progeny, interest, is paid by the state – is illusory, fictitious capital. It consists of certificates of indebtedness. Moreover the interest and principal on these bonds can be paid only by taxing the production of real capital.

“Not only does the amount loaned to the slate exist no longer, but it was never intended at all to be invested as capital, and only by investment as capital could it have been transformed into a self-preserving value.” (Ibid., p.547).

Mountain of Fictitious Capital in US

Today the amount of government bonds held by American banks has reached enormous proportions. In fact the constant growth of such fictitious capital has already reached the point at which the quantative difference has been transformed into a qualitative change. What appears as an accumulation of capital is in reality an accumulation of debt. The heavy fictitious proportion has left its decisive imprint on all banking capital and on the whole money supply and the liquid assets of the nation. All these arc debased beyond recognition.

At the end of 1950 the indebtedness of line United States government totaled 256.7 billion dollars. Of the bonds issued in the same amount, the sum of $61.8 billion were held by commercial banks, $20.8 billion were held by Federal Reserve banks, and $60.5 billion were held by non-banking private corporations. The remainder were distributed among individuals, state and local governments and trust funds. These bonds, which are in reality only a shadow of capital already spent, enter the banks as deposits upon which new loans are made. They become a part of the money supply of the nation. Thus the fictitious capital flows as an element of dissolution into every pore of the financial and economic structure. There it remains as a parasite feeding upon productive capital, drawing value away from all money capital.

Marx made the observation that,

“with the development of the credit system and of interest-bearing capital all capital seems to double, or even treble itself by the various modes, in which the same capital, or perhaps the same claim on a debt, appears in different forms in different hands.” (Ibid., p.553).

In the year 1863, about the time when the first volume of Marx’s Capital appeared, total deposits of all the banks in the United States were $394 million. By 1929, total deposits and currencies (the money supply of the nation) amounted to $54,742 million and by the end of 1950 these had reached the stupendous sum of $180,574 million. Of course it is not savings of workers that are embodied in these figures. They would be only an infinitesimal part of the total sum. These figures reveal both the enormous accumulation of capital due to the fabulous profits extracted out of the exploitation of labor and the extraordinarily bloated portion of fictitious capital – bank-made money – the purest form of gambling and swindling.

Such tremendous sums of money capital could not have accumulated without “pyramiding credit,” to use a banker’s expression. New credits were piled on substrata of other credits. Long established rules of traditionally conservative banking were thrown to the winds and new forces were then set into motion which have since escaped the control of the ruling class and its financial experts.

Wars Speed the Process

Two world wars accelerated the process. Money was literally manufactured to meet the enormous expenditures of World War II. The government borrowed about one hundred billion dollars from the banks, giving government bonds as security. The transaction took the form of a sale of the bonds, and in “payment” the banks “created deposits” on their books in equal amount, on which the government could draw. These deposits were created out of nothing. The government spent that capital; it does not exist any longer. Not only was that capital created out of nothing, but the government is now paying interest to the bankers on loans spent for bullets and shrapnel fined long ago, for planes shot down long ago, for battleships sunk long ago, for tanks blown to bits long ago, and for a huge remaining war surplus sold to speculators and gamblers for a song.

Leon Trotsky already called attention to this problem after World War I. The following illustration which he gave in 1921 applies with even-greater force to the present-day situation:.

“When a government issues a loan for productive purposes, say for the Suez Canal, behind the particular government bonds there is a corresponding real value. The Suez Canal supplies passageway for ship, collects tolls, provides, revenue and, in general, participates in economic life. But when a government floats war loans, the values mobilized by means of these loans are subjected to destruction, and in the process additional values are obliterated. Meanwhile the war bonds remain in the citizens’ pockets and portfolios. The state owes hundreds of billions. These hundreds of billions exist as paper wealth in the pockets of those who made loans to the government ...” (The First Five Years of the Communist International, Vol.I, p.185).

Bourgeois economists attempt to find comfort in the fact that the World War II period also witnessed a great expansion of productive facilities. But even they have some difficulty concealing their apprehension of the disproportionate growth of money capital. From 1929 to the end of 1950, gross national product increased by 172.3 percent, while total deposits and currencies (the money supply of the nation) made a leap of 229.9 percent. Thus the ratio of growth of accumulation of money capital, including its fictitious component, proceeds at a pace outstripping the growth of productive forces and outstripping the growth of production. In this is to be found the real cause of inflation, as well as an explanation of its real nature.

We recall the observation made by Marx, that money, in its transient function, is capable of being replaced by a token; but he added emphatically, “only insofar as it functions exclusively as coin, or as the circulating medium, and as nothing else.” Gold encounters the commodity as an equivalent. The value of both are measured by the socially necessary labor embodied in them. The value of paper money, on the other hand, owes its existence only to the function it performs in circulation; outside that function it is worthless.

Experiences of currency inflation have clearly demonstrated the fact that, whenever the quantity of its emission exceeds the limit imposed by organic laws of economic development the paper money depreciates accordingly. Let us say that the sum of the prices of all commodities appearing in the process of circulation represent a certain given value, no matter how great the quantity of paper money functioning as the medium of exchange, the sum of the latter will always represent the same total value. Conversely, the actual value of its unit (the dollar) – or its purchasing power – depends upon the quantity of paper money in circulation.

Motor for Inflation

This analysis may appear to apply only to direct currency inflation, but that is not the case. It applies equally to the more indirect method of “creating” money capital as it is practiced in the United States. Whether this capital enters circulation as bank loans to the government for the manufacture of weapons of destruction or as loans to industrial enterprise, whether it enters circulation as subsidy to uphold parity prices or as medium of exchange of every day necessities, it is all part of the geqeral money supply. And the preponderant growth of money capital relative to growth of production, must of necessity have the same disastrous, long range effect as if printing presses were grinding out ever larger volumes of paper currency. The outcome in either case is inflation.

The quantitative increase of the money supply, beyond a certain point, resulted in its qualitative decline. The dollar represented less purchasing power. And the forces thereby set into motion generate their own internal dynamics. This qualitative decline of the monetary unit compels a further expansion of its total supply at an increasingly accelerated ratio.

There is no other way to evaluate the significance of the recent budget presented by President Truman. For the fiscal two-year period ending June 30, 1953, eighty-five percent of the steeply rising budget expenditures are to be thrown to the molochs of war. These will cover rearmament at home and abroad, veterans’ services and interest payments on the national debt. Despite the biggest tax collection in history, the budget anticipates a deficit of $22,647 million. The inflationary whirl is likely to be moving at a more breath-taking speed.

Capitalism’s Universal Disease

Inflation is inherent in, and grows directly out of the development of the credit system and its heavy component of fictitious capital. Doubling and trebling of capital leaves inflation as its residue. Armament expenditures and war production accelerates this process and invests it with, an especially acute form. For world capitalism inflation is a universal phenomenon. The rulers of the system have no means of controlling the forces which they have themselves set into motion. Inflation has become a distinguishing characteristic of capitalist economy in its decay. Even the almighty American dollar, the “sovereign” of international finance, has suffered a precipitous decline. In less than twelve wars it has lost about half of its value. Inflation is ravaging the workers’ living standards in European capitalist nations, the same uncontrollable forces are also on the rampage in the United States.

In real life the superabundance of money capital, which is now available, resolves itself into an accumulation of claims upon future yields of production. In turns this generates an inexorable pressure for new and greater fields of investments, inasmuch as the use value of money capital consists precisely in it being able to serve as capital and thereby produce interest. But money capital can yield interest only by performing a productive function and thus realize surplus value of which interest is but a part. And so, the financial overlords, whose role is speculative, adventurous, and wholly parasitic, were the first line promoters of the current arms program. It embodied their fondest hopes not only as preparations for world conquest but also for the stimulation of production and large scale employment of capital.

But this cannot under any condition reduce the disproportionate growth of accumulation of money capital as compared to the growth of production; nor can it in any way serve to control or check the scourge of inflation. On the contrary, the effect will be the exact opposite. A yet greater preponderance of money capital, including its fictitious component, is the inevitable outcome of the gigantic arms expenditure.

Only an increase of production of use values, serving the needs of the people, and growing up to the same level as the money supply could begin to counteract the inflationary pressures, But that would presuppose a constantly rising standard of living of the people, reflected most directly by an increased purchasing power. Such a change the armaments program prevents. Moreover, such a change is no longer within the realm, of possibility under the capitalistic property relations of production.

The transformation of the individual limited means of production of past stages of society into social means of production, and the development of the material forces of production, was the historic mission of capitalism. But the fundamental character of the capitalist mode of production subjects it to the interplay of effects from uncontrolled forces set into motion by its own inherent contradictions. Capitalist property relations, formerly an aid to the development of production, turn into their opposite. During the earlier progressive stage of capitalism the material forces of production advanced with giant strides. The hideous reality now in stage of decay is the transformation of these mighty forces of production into terrible forces of destruction. An advance in one sector of the capitalist world is paid for by destruction in other sectors. Redivision of the world market could take place only by one capitalist sector destroying the productive powers of others. The true physiognomy of capitalist decay is revealed in crises, armaments and wars.

The enormously expanded productive capacity of the United States collides against the limits of a shrunken capitalist world market that no longer includes one-third of Europe – not to speak of the USSR – and is now being pressed back even further by the raging flames of colonial revolution. From this flows the aim of the American imperialist rulers to reconquer the world and again subject it to capitalist exploitation – an aim, that can find its full realization only through war. The whole economic structure of the US is therefore being transformed to meet the requirements of the merchants of death. All major economic activity is increasingly geared to the strategic plans of the armaments program.

However, the salient fact here is that the present arms program is superimposed upon an economy carrying already a terrific overhead of the unliquidated great depression and the astronomic costs of the last war which can never be recouped. This economy is saddled with the burden of sustaining alone a declining, decaying and fearfully impoverished world capitalist economy. In turn, this serves as a gigantic drain upon the wealth and the resources of this country. Alongside of this we witness the debasement of the whole capitalist currency system which now also includes the “sovereign” dollar. Due to this colossal undergrowth of capitalist decay, the fearful consequences of the armaments program are infinitely multiplied.

Arms and Economic Activity

The imperialist rulers initiated this program to provide the material resources for their predatory war plans. But it was designed in such a way to fulfill also the purpose of sustaining the economy which would otherwise, once again, run head-on into a crisis of overproduction. Ostensibly, the most immediate aim of the armaments program was to continue the high level of production and assure full employment of the labor force in order to maintain the hitherto prevailing equilibrium of social relations.

Armaments expenditures now serve as a stimulus to economic activity. Stimulating production, no matter what is produced, helps to provide both profits and wages. And, what is far more important, postponing the crisis of overproduction is of the greatest political concern to the bourgeoisie. It avoids, for a time at least, the possible eruption of social upheavals which otherwise might prove fatal to their system. It is like playing with dynamite.

The outlays together with companion expenditures of world wide capitalist aid for armaments approach ever closer to the financial stratosphere. But these outlays are not transformed into capital employed in the production of commodities serving as use values, either for the needs of the people or for the further accumulation of real wealth of the nation. In essence they are unproductive capital investments which impose a staggering load of overhead expense on the economy. This exerts a terrific pressure for higher taxes, higher prices, and greater exploitation of labor.

The execution of the armaments program presupposes that the floodgates of easy money, credit and deficit financing be left wide open. It could not operate on any other basis. The very fact that the expenditures involved consist of social capital, which is employed by people who do not own it, tends to remove all restraints, all caution in the production of implements of war. At the same time, the elements of inflation grow in direct proportion to the debauchery of the credit system- And the dynamic interplay of the effects of these uncontrolled forces – the terrific pressure for higher taxes, higher prices, and for greater exploitation of labor, on the one hand, and inflation on the other – tend to disrupt the social equilibrium that the armaments economy was expected to maintain.

Such is the process of economic developments today. And from Marx we have learned that the general character of any given historical epoch is determined by the prevailing mode of production. But it is important to remember also, that by “mode of production” Marx did not refer merely to the technical aspect of the operation of the forces of production. He included within this category especially and specifically the “social relations of production.” These are the relations into which men enter with one another by reason of the various positions which they occupy in the productive process. In its essence these are the relations of social classes.

Wages, prices, interest and profits, together with taxes and inflation, become ever more crucial elements of contemporary capitalist economy and its world wide arms race. These are capable of final explanation only in terms of the class relations which underlie them, and any decision concerning these questions is subordinated entirely to class interest.

The Giant State

Under the focus of the armaments program existing class relations in the U.S. are more sharply defined; the role of the political state in relation to social classes is more clearly illuminated. The government has taken over the direction of all major economic activity. It stockpiles and allocates raw materials, and decides industrial and manpower build-up; it decides tax policy, credit policy and investment policy, as well as wage and price policy. Due to this overall direction by the political state, capital, which rests on a socialized mode of production, attains a higher form, that of social capital and the government appears in the all-embracing role of its collector and dispenser.

While this provides conclusive evidence of the decline and decay of the so-called free enterprise system, it should not lead to the mistaken idea that the preponderant power of the dominant capitalist monopoly owners has been replaced. On the contrary, what is taking place is a more complete integration of both function and interests between the latter and the political state, “the ideal collective body of all capitalists.” The role of the political state as the manager of social relations, on behalf of monopoly capitalism is more openly, more clearly revealed. At the same time corporation agents, financiers and industrialists, who stand to profit the most from the dispensation of social capital, have personally taken over the chief posts in Washington in the growing integration of monopoly capitalism with the government apparatus.

Monopolies Plunder the Nation

Once this relationship is clearly understood, no room for doubt is possible about the important question that will next arise: In the interest of which class is this social capital dispensed? All the “planning”, all the measures taken to execute the armaments program serve in intent, as well as in fact, only one end: to increase the share of those who exploit the social wealth at the expense of the producers.

There is no evidence that this program will assure full employment of the available labor force which is ruled out by the growing disproportion between the ever rising productive capacity and the relatively declining purchasing power of the people. The parasitic character of the arms program, which in effect eats up national income, thereby imposing further restrictions on the home market, introduces elements of crisis, that exist alongside of the armaments boom. For the workers the result is growth of unemployment, chronic in its implications, while the super-monopolists enjoy the richest bonanza.

The armaments program assures large scale employment of capital at very profitable rates of return. The government collects the capital from the people, employs it as social capital invested in arms producing industry with huge profits guaranteed in advance for the capitalist monopolies. They in turn, by virtue of their power as the ruling class, use the political state increasingly as a means of plunder of the public domain; they live high on the profits of social capital, profits guaranteed at the expense of the whole nation. Most notorious is the example of government grants through accelerated tax amortization. Corporations especially favored with armaments contracts may construct and equip plants in return for which, upon the claim of being “vital for defense”, they receive a certificate of accelerated tax amortization. This enables them to deduct the cost of the plants from federal taxes over a period of five years, instead of the customary 20-year period. Such certificates have been issued in the sum of almost fourteen billion dollars. And after five years, this total amount must appear on these corporation’s books as an outright gift. Indeed, the “Welfare Slate” is not dead. It now really appears in its true form.

Higher prices, resulting from inflation, presents a qualitative difference of positive advantage to these super monopolists. Each price mark-up adds an extra bonus to the lucrative cost-plus profits of armaments production.

“Flexible price controls” do not act as a deterrent because they are, as has been clearly demonstrated, designed to maintain the high profit level rather than to hold prices !n line. In this respect also the prime objective is nothing else than to continue the incentive to capital investments and the accumulation of wealth by the exploitation of labor.

How the Workers Are Effected

Thus the armaments economy aids the further concentration of wealth in the hands of the monopoly capitalists while the country as a whole becomes poorer. The diversion of an increasing share of the purchasing power of the people to finance the arms program has become a monstrous reality. The burden of the costs is successfully unloaded on those least able to bear it – the lower income groups.

An ever greater portion of the working class is being drained off through taxation to finance the guaranteed profits of capitalism. Tax levies, of course, follow also the pattern of class relations. Two individual tax increases have been enacted by Congress since the Korean war began. For a family of a man and wife with two dependents the total adds up as follows: An income of $500,000 gets a modest 14.7 percent increase; but for an income of $3,000 to $5,000 the tax increase is 33.7 percent.

What remains for the worker as a take-home pay is mercilessly reduced by the ravages of inflation. Its qualitative effect is the same as a direct lowering of the standard of living. This could not have been done more completely by a leveling downward of existing wage rates. Not only has labor experienced a relative decline of income in relation to total output; but the overwhelming majority of the working class has suffered an absolute decline of real wages. The cumulative effect of this whole development is a growing disproportion of the relative share of the national income received by the different social classes. Out of this relationship, and out of the ever more explosive political conjunctures, which will inevitably ensue from the American imperialists’ counter-revolutionary role in world affairs, the crucial question arises: What will be their effect on the existing stability of class relations? For adequate treatment, a question of such magnitude will require a separate study. Suffice it now to say that continued and increasing expenditures for war preparations must of necessity lead to more devastating inflation. Simultaneously the pressure for lower costs of production can be expected to take

the form of more direct attacks upon the working class standard of living.

The Real “Prosperity”

This is the reality of the much vaunted armaments “prosperity”. How does this compare with the often repeated claims that the American economy, since the end of the great depression, has succeeded by its own resources in overcoming the cyclical crises of overproduction and thereby refuted the analysis made by Marx?

Newspaper and magaxine editors, radio commentators, have been pouring out a constant barrage of such claims. This is a frantic effort to resurrect the exuberant confidence of the bourgeois propagandists of past decades in the superiority and stability of capitalist ownership of the means of production. It represents also an effort to make the workers accept this gospel. Servile labor salesmen of imperialism echo these outpourings, less skillfully to be sure, but with no less conviction. The reality refutes all these presumptions.

What the American economy has experienced since the great depression has been a series of crises. Following in succession we have witnessed a world war, imperialist assaults on colonial people, cold war, and armaments in preparation for World War III. These have revealed the hideous physiognomy of capitalism in decay. Throughout this period the disproportion between the vastly augmented productive capacity available and the impoverished, disrupted and shattered world market, together with the restricted consuming ability of the masses at home, has grown to more colossal dimensions. Elements of crisis of overproduction have recurred in ever more malignant form. The alternatives of a depression or war are still poised on a razor’s edge.

March 1952

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