The Global Capitalist Crisis:

Its Origins, Nature and Impact

Prof. Berch BerberogluDepartment of Sociology

University of Nevada, Reno

© Copyright 2011 by Berch BerberogluNo part of this power point presentation can be used for any purpose without prior

written authorization and permission obtained from the author.

Introduction The U.S. and the global economy have been – and

continue to be – in serious crisis, and the current global recession is the worst economic downturn since the Great Depression of the early twentieth century

The Dow Jones plunged more than 50 percent from its highs of 14,000 in late 2007 to below 6,500 in early 2009, with more than a trillion dollars of value lost in the stock market in little over a year

Although the Dow rose to around 12,500 a little over two years after its worst decline, the recent turmoil on Wall Street over the past two weeks, which pushed the Dow down to the the 10,000 level could make things worse – a “double-dip recession” turning into a depression

Clearly, the global capitalist economy is going through its deepest crisis since the Great Depression of 1929, and this signals serious challenges for global capital over the next decade, especially for the United States

The best example of this impact, and what is in store for us over the next few years, is what has been happening with the sovereign debt crisis in Greece, Portugal, Spain, Ireland, and Italy, as well as the United States (and with what has happened to the icons of U.S. big business – General Motors, AIG, Citigroup, and other big corporations and banks)

Let’s take a brief look at these once-powerful icons of the U.S. economy to assess the magnitude of the damage…

Figure 1. Lehman Brothers stock, 2007-2011 (in dollars and volume traded)

$80

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

$18

4 cents

Figure 2. General Motors Corporation stock, 2007-2011 (in dollars and volume traded)

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

$40

4 cents

$5

$1

Figure 3. Citigroup, Inc. stock, 2007-2011 (in dollars and volume traded)

$55

$2.68

$26

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 4. American International Group stock, 2007-2011 (in dollars and volume traded)

$1,450

0$1,000

$600

$22

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 5. Fannie Mae stock, 2007-2011 (in dollars and volume traded)

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

$50

$22

20 cents

Figure 6. Freddie Mac stock, 2007-2011 (in dollars and volume traded)

$70

31 cents

$63

$32

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Origins of the Crisis The periodic crises resulting from the

capitalist business cycle now unfolds at the global level

The current crisis of the world economy is an outcome of the consolidation of economic power that the globalization of capital has secured for the transnational corporations

This has led to a string of problems associated with the financial, banking, real estate, and productive sectors of the economy that have triggered the current economic crisis

Nature of the crisis The central problem of our present capitalist

economic system is the recurrent business cycle which is now operating at the global level. It manifests itself in a number of ways, including:

The problem of overproduction/underconsumption Increasing unemployment and underemployment Decline in real wages and rise in super-profits The sub-prime mortgage and credit card debt Speculative corporate financial activities Increased polarization of wealth and income

Table 1. Share of Aggregate Income Received by Each Fifth and Top 5 PercentTable 1. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households, 1975 to 2009 (in percentages)of Households, 1975 to 2009 (in percentages)__________________________________________________________________________________________________________________________________________

Lowest Second Third Fourth Highest TopLowest Second Third Fourth Highest Top

Year 20% 20% 20% 20% 20% 5%Year 20% 20% 20% 20% 20% 5%__________________________________________________________________________________________________________________________________________

19751975 4.3 4.3 10.4 10.4 17.0 24.7 43.6 16.5 17.0 24.7 43.6 16.5

1980 1980 4.2 4.2 10.2 16.8 24.7 44.1 16.5 10.2 16.8 24.7 44.1 16.5

1985 1985 3.9 3.9 9.8 16.2 24.4 45.6 17.6 9.8 16.2 24.4 45.6 17.6

1990 1990 3.8 9.6 15.9 24.0 46.6 18.5 3.8 9.6 15.9 24.0 46.6 18.5

1995 3.7 1995 3.7 9.1 15.2 23.3 48.7 21.0 9.1 15.2 23.3 48.7 21.0

20002000 3.6 8.9 14.8 23.0 49.8 22.1 3.6 8.9 14.8 23.0 49.8 22.1

2005 2005 3.4 8.6 14.6 23.0 50.4 22.2 3.4 8.6 14.6 23.0 50.4 22.2

20092009 3.4 3.4 8.6 8.6 14.6 23.2 50.3 21.7 14.6 23.2 50.3 21.7____________________________________________________________________________________________________________________________________________

Source:Source: U.S. Bureau of the Census, U.S. Bureau of the Census, Current Population ReportsCurrent Population Reports, P60-235, August 2008;, P60-235, August 2008;Statistical Abstract of the United States, 2012Statistical Abstract of the United States, 2012, Table 694, p. 454. , Table 694, p. 454.

Table 2. Distribution of Wealth in the United States, 2007, by Type of Asset (in percentages)

__________________________________________________________________Investment Assets Top 1% Top 10% Bottom 90%__________________________________________________________________Stocks and mutual funds 49.3 89.4 10.6Financial securities 60.6 98.5 1.5Trusts 38.9 79.4 20.6Business equity 62.4 93.3 6.7Non-home real estate 28.3 76.9 23.1__________________________________________________________________Total for group 49.7 87.8 12.2__________________________________________________________________ Source: Edward N. Wolff, “Recent Trends in Household Wealth in the United States: Rising Debt and the Middle Class Squeeze,” Working Paper No. 589 (March2010), p. 51.

How Did All This Happen?According to Prof. Richard D. Wolff Department of Economics, University of Massachusetts at Amherst Richard D. Wolff, “Capitalism Hits the Fan,” in Gerald Friedman et al. (eds.), The Economic Crisis Reader (Boston: Dollars & Sense,

2009).

From 1820 to 1970, every decade U.S. workers experienced a rising level of wages

In the 1970s this came to an end; real wages stopped rising and they have never resumed since

U.S. workers became more productive, but got paid the same; wages began to stagnate and decline

The gap between labor and capital grew bigger

1859 69 79 89 99 1909 19 29 1939 1947 1955 1965 1975 1985 1995 2005

The large corporations made huge profits and had much money at their disposal

They bought other corporations (mergers and acquisitions) and they put their money into banks

The banks loaned that money (with interest) to workers who didn’t have money to consume

This was done to raise their purchasing power because their wages weren’t enough to buy things

Then What? Since employers no longer raised

workers’ wages, the workers had to go into debt to survive Debt went up and up and things got

out of control The banks continued to loan money

through new loans (secondary mortgages) at high interest rates, and this was a profit bonanza for the banks As corporations increasingly began to

invest abroad (outsourcing production and services), U.S. workers lost their jobs, and this led to greater unemployment and underemployment

Unemployed workers with a lot of debt were unable to make their mortgage and credit card payments, and this led to foreclosures and bankruptcies This, in turn, led to the collapse of

the banking system, necessitating a government bailout of the banks It is only through the nearly trillion

dollar stimulus funds that the U.S. government poured into the economy to save the banks from default that a financial collapse was averted

Here’s a view of the housing bubble in 2006 by looking Here’s a view of the housing bubble in 2006 by looking at the stock chart of one home builder – Hovnanian at the stock chart of one home builder – Hovnanian

Enterprises (HOV)Enterprises (HOV)Stock price: $70 per share in 2006; $1.30 per share in 2012. Stock price: $70 per share in 2006; $1.30 per share in 2012.

Source: http://finance.yahoo.com retrieved on December 28, 2011. Source: http://finance.yahoo.com retrieved on December 28, 2011.

$ 70

Extent of the Crisis The current economic crisis has been deep and

widespread on a global basis, especially in the U.S.

In the epicenter of the crisis, in the United States, unemployment increased from 7 million in December 2007 to 16 million in October 2010

Counting the discouraged and part-time workers, the unemployment rate reached 18% in 2010

Foreclosures have been running over 1 million a year

Poverty is on the rise (now 44 million Americans – 1 in 7 – live at or below the poverty line)

With the steady decline of the manufacturing sector in the United States through outsourcing of production to cheap labor areas abroad, 2.9 million well-paying manufacturing jobs have disappeared in the period 2005-2008 alone. And that’s on top of a loss of more than 3 million jobs in manufacturing from 1998 to 2003, with millions more lost in the entire postwar period.

Long-term Unemployment and Long-term Unemployment and Underemployment Underemployment (as of January 2011)(as of January 2011)

The mean unemployment duration was 36.9 The mean unemployment duration was 36.9 weeks, and the median was 21.8 weeks.weeks, and the median was 21.8 weeks.

The share of unemployed workers who have The share of unemployed workers who have been without work for over six months was been without work for over six months was 43.8%, one of the highest on record. 43.8%, one of the highest on record.

A total of 6.2 million workers have been A total of 6.2 million workers have been unemployed for longer than six months.unemployed for longer than six months.

There were There were 25.1 million workers who were either unemployed or underemployed.   

Average Annual Unemployment Rate, 2007-2010 (in percent)

Source: Bureau of Labor Statistics.

Today, the labor market remains 8.1 million jobs below where it was at the start of the recession over three years ago in December 2007. 

This number vastly understates the size of the gap in the labor market because keeping up with the growth in the working-age population would require adding another 3.4 million jobs over this period.

Thus, with the above 9% unemployment rate today, the labor market is now 11.5 million jobs below the level needed to restore the pre-recession unemployment rate of 5.0% in December 2007. 

So, to achieve the pre-recession unemployment rate in five years, the labor market would have to add 285,000 jobs every month for the next 60 months.

But, more importantly than that, beyond the impact of the great recession and the slow recovery in the years ahead, the big issue is the impact of globalization on the labor force structure and job creation in the United States

And that will depend in large part how the problem of outsourcing is addressed in conjunction with the role of the state in providing stimulus funds to create jobs in the public sector – jobs that private industry is unable or unwilling to create in the era of neoliberal globalization.

A boom in corporate profits, a bust in jobs, A boom in corporate profits, a bust in jobs, wageswagesEconomic disconnect: Corporate profits surge while jobs and Economic disconnect: Corporate profits surge while jobs and wageswagesremain at recession levels remain at recession levels

Paul Wiseman, AP Economics Writer, Friday, July 22, 2011.Paul Wiseman, AP Economics Writer, Friday, July 22, 2011.

WASHINGTON (AP) -- Strong second-quarter earnings from McDonald's, General Electric WASHINGTON (AP) -- Strong second-quarter earnings from McDonald's, General Electric and Caterpillar on Friday are just the latest proof that booming profits have allowed and Caterpillar on Friday are just the latest proof that booming profits have allowed Corporate America to leave the Great Recession far behind.Corporate America to leave the Great Recession far behind.

But millions of ordinary Americans are stranded in a labor market that looks like it's still in But millions of ordinary Americans are stranded in a labor market that looks like it's still in recession. Unemployment is stuck at 9.2 percent, two years into what economists call a recession. Unemployment is stuck at 9.2 percent, two years into what economists call a recovery.recovery. Job growth has been slow and wages stagnant.Job growth has been slow and wages stagnant.

"I've never seen labor markets this weak in 35 years of research," says Andrew Sum, "I've never seen labor markets this weak in 35 years of research," says Andrew Sum, director of the Center for Labor Market Studies at Northeastern University.director of the Center for Labor Market Studies at Northeastern University.

Wages and salaries accounted for just 1 percent of economic growth in the first 18 months Wages and salaries accounted for just 1 percent of economic growth in the first 18 months after economists declared that the recession had ended in June 2009, according to Sum and after economists declared that the recession had ended in June 2009, according to Sum and other Northeastern researchers.other Northeastern researchers.

In the same period after the 2001 recession, wages and salaries accounted for 15 percent. In the same period after the 2001 recession, wages and salaries accounted for 15 percent. They were 50 percent after the 1991-92 recession and 25 percent after the 1981-82 They were 50 percent after the 1991-92 recession and 25 percent after the 1981-82 recession.recession.

Corporate profits, by contrast, accounted for an unprecedented 88 percent of economic Corporate profits, by contrast, accounted for an unprecedented 88 percent of economic growth during those first 18 months. That's compared with 53 percent after the 2001 growth during those first 18 months. That's compared with 53 percent after the 2001 recession, nothing after the 1991-92 recession and 28 percent after the 1981-82 recession. recession, nothing after the 1991-92 recession and 28 percent after the 1981-82 recession. (For full text of this article, see the appendix at the end of this power point presentation).(For full text of this article, see the appendix at the end of this power point presentation).

A Second Great Depression, or Worse?

SIMON JOHNSON, Thursday, August 18, 2011

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers."With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?

The easy answer is "no" - the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction.

The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007.

First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had a relatively small decline in G.D.P. after the latest boom peaked. According to the bureau's most recent online data, G.D.P. peaked in the second quarter of 2008 at $14.4155 trillion and bottomed out in the second quarter of 2009 at $13.8541 trillion, a decline of about 4 percent.

Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site).

Even by the highest estimates - which include people discouraged from looking for a job, thus not registered as unemployed - the jobless rate reached around 16 to 17 percent. It's a jobs disaster, to be sure, but not the same scale as the Great Depression.

(For full text of this article see the Appendix at the end of this power point presentation).

Which Way Out of the Crisis? Economic remedies to save the system from

collapse are bound to fail so long as they remain within the framework of the existing capitalist system

Changes that are required to revitalize the economy and turn things around point to a redistribution of wealth and income to increase mass consumption

This would increase demand for consumer goods, hence increase production, and create jobs for the unemployed, as well as raising revenue for the state through corporate and individual income taxes

All these would require a restructuring of the economy away from failed neoliberal corporate capitalist policies and toward a new set of priorities that promote the interests of working people

Such restructuring requires the transformation of our current capitalist economic system and the existing social order in the direction of providing greater rights and benefits to working people

And this would, in turn, benefit society greatly and set us on a prosperous course that would vastly improve living standards and pull us out of the economic crisis

But, who listens ?

Thank You !

AppendixAppendixCalculation of Rate of Surplus Value and Labor’s Share Calculation of Rate of Surplus Value and Labor’s Share of Production, of Production, U.S. Manufacturing Industry, 1984 (in billions of U.S. Manufacturing Industry, 1984 (in billions of dollars)dollars)____________________________________________________________________________________________________________________

(1) Net Value Added by Manufacture (1) Net Value Added by Manufacture (value added less depreciation) (value added less depreciation) $931.1$931.1 (2) Wages (2) Wages $231.8$231.8 (3) Surplus Value (1) minus (2) (3) Surplus Value (1) minus (2) $699.3$699.3 (4) Rate of Surplus Value (100 x (3) / (2)) (4) Rate of Surplus Value (100 x (3) / (2)) 302%302% (5) Labor’s share (100 x (2) / (1)) (5) Labor’s share (100 x (2) / (1)) 24.9%24.9%____________________________________________________________________________________________________________________Notes: Notes: To determine the rate of surplus value and To determine the rate of surplus value and labor’s share:labor’s share:If wages = w, value added = v.a., then:If wages = w, value added = v.a., then:

Rate of surplus value = Rate of surplus value = 100% x 100% x (v.a. – w)(v.a. – w) ww

Labor’s share = Labor’s share = 100% x 100% x ww v.a. v.a.

Source: Source: Victor Perlo, Victor Perlo, Super Profits and Crises: Modern U.S. Capitalism. Super Profits and Crises: Modern U.S. Capitalism. New New York: InternationalYork: InternationalPublishers, 1984, pp. 43 and 513.Publishers, 1984, pp. 43 and 513.

Contact Information:Prof. Berch Berberoglu

Department of SociologyUniversity of Nevada, Reno

Reno, NV 89557

E-mail:berchb@unr.edu

Web Pages:www.unr.edu/cla/soc/berchb.htm

AppendixAppendix

A boom in corporate profits, a bust in jobs, A boom in corporate profits, a bust in jobs, wageswagesEconomic disconnect: Corporate profits surge while jobs and Economic disconnect: Corporate profits surge while jobs and wages remain at recession levels wages remain at recession levels Paul Wiseman, AP Economics Writer, Friday July 22, 2011.Paul Wiseman, AP Economics Writer, Friday July 22, 2011.

WASHINGTON (AP) -- Strong second-quarter earnings from McDonald's, General WASHINGTON (AP) -- Strong second-quarter earnings from McDonald's, General Electric and Caterpillar on Friday are just the latest proof that booming profits have Electric and Caterpillar on Friday are just the latest proof that booming profits have allowed Corporate America to leave the Great Recession far behind.allowed Corporate America to leave the Great Recession far behind.

But millions of ordinary Americans are stranded in a labor market that looks like it's But millions of ordinary Americans are stranded in a labor market that looks like it's still in recession. Unemployment is stuck at 9.2 percent, two years into what still in recession. Unemployment is stuck at 9.2 percent, two years into what economists call a recovery.economists call a recovery. Job growth has been slow and wages stagnant.Job growth has been slow and wages stagnant.

"I've never seen labor markets this weak in 35 years of research," says Andrew Sum, "I've never seen labor markets this weak in 35 years of research," says Andrew Sum, director of the Center for Labor Market Studies at Northeastern University.director of the Center for Labor Market Studies at Northeastern University.

Wages and salaries accounted for just 1 percent of economic growth in the first 18 Wages and salaries accounted for just 1 percent of economic growth in the first 18 months after economists declared that the recession had ended in June 2009, months after economists declared that the recession had ended in June 2009, according to Sum and other Northeastern researchers.according to Sum and other Northeastern researchers.

In the same period after the 2001 recession, wages and salaries accounted for 15 In the same period after the 2001 recession, wages and salaries accounted for 15 percent. They were 50 percent after the 1991-92 recession and 25 percent after the percent. They were 50 percent after the 1991-92 recession and 25 percent after the 1981-82 recession.1981-82 recession.

Corporate profits, by contrast, accounted for an unprecedented 88 percent of Corporate profits, by contrast, accounted for an unprecedented 88 percent of economic growth during those first 18 months. That's compared with 53 percent after economic growth during those first 18 months. That's compared with 53 percent after the 2001 recession, nothing after the 1991-92 recession and 28 percent after the the 2001 recession, nothing after the 1991-92 recession and 28 percent after the 1981-82 recession.1981-82 recession.

What's behind the disconnect between strong corporate profits and a weak labor market? Several factors:

-- U.S. corporations are expanding overseas, not so much at home. McDonalds and Caterpillar said overseas sales growth outperformed the U.S. in the April-June quarter. U.S.-based multinational companies have been focused overseas for years: In the 2000s, they added 2.4 million jobs in foreign countries and cut 2.9 million jobs in the United States, according to the Commerce Department.

-- Back in the U.S., companies are squeezing more productivity out of staffs thinned by layoffs during the Great Recession. They don't need to hire. And they don't need to be generous with pay raises; they know their employees have nowhere else to go.

-- Companies remain reluctant to spend the $1.9 trillion in cash they've accumulated, especially in the United States, which would create jobs.

Caterpillar said second-quarter earnings shot up 44 percent to $1 billion. General Electric's second-quarter earnings were up 21 percent to $3.8 billion. And McDonald's quarterly earnings increased 15 percent to $1.4 billion.

Still, the U.S. economy is missing the engines that usually drive it out of a recession.

Carl Van Horn, director of the Center for Workforce Development at Rutgers University, says the housing market would normally revive in the early stages of an economic recovery, driving demand for building materials, furnishings and appliances -- creating jobs. But that isn't happening this time.

And policymakers in Washington have chosen to focus on cutting federal spending to reduce huge federal deficits instead of spending money on programs to create jobs: "If we want the recovery to strengthen, we can't be doing that," says Chad Stone, chief economist at the Center on Budget and Policy Priorities, a research group that focuses on how government programs affect the poor and middle class.

For now, corporations aren't eager to hire or hand out decent raises until they see consumers spending again. And consumers, still paying down the debts they ran up before the recession, can't spend freely until they're comfortable with their paychecks and secure in their jobs.

A Second Great Depression, or Worse?

SIMON JOHNSON, On Thursday August 18, 2011, 5:00 am EDT

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of "13 Bankers."With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?

The easy answer is "no" - the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction.

The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007.

First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had a relatively small decline in G.D.P. after the latest boom peaked. According to the bureau's most recent online data, G.D.P. peaked in the second quarter of 2008 at $14.4155 trillion and bottomed out in the second quarter of 2009 at $13.8541 trillion, a decline of about 4 percent.

Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site).

Even by the highest estimates - which include people discouraged from looking for a job, thus not registered as unemployed - the jobless rate reached around 16 to 17 percent. It's a jobs disaster, to be sure, but not the same scale as the Great Depression.

Third, in the 1930s the credit system shrank sharply. In large part this is because banks failed in an uncontrolled manner - largely in panics that led retail depositors to take out their funds. The creation of the Federal Deposit Insurance Corporation put an end to that kind of run and, despite everything, the agency has continued to play a calming role. (I'm on the F.D.I.C.'s newly created systemic resolution advisory committee, but I don't have anything to do with how the agency handles small and medium-size banks.)

But the experience at the end of the 19th century was also quite different from the 1930s - not as horrendous, yet very traumatic for many Americans. The heavily leveraged sector more than 100 years ago was not housing but rather agriculture - a different play on real estate.

There were booming new technologies in that day, including the stories we know well about the rapid development of transportation, telephones, electricity and steel. But falling agricultural prices kept getting in the way for many Americans. With large debt burdens, farmers were vulnerable to deflation (a lower price level in general or just for their products). And before the big migration into cities, farmers were a mainstay of consumption.

According to the National Bureau of Economic Research, falling from peak to trough in each cycle took 11 months between 1945 and 2009 but twice that length of time between 1854 and 1919. The longest decline on record, according to this methodology, was not during the 1930s but rather from October 1873 to March 1879, more than five years of economic decline.

In this context, it is quite striking - and deeply alarming - to hear a prominent Republican presidential candidate attack Ben Bernanke, the Federal Reserve chairman, for his efforts to prevent deflation. Specifically, Gov. Rick Perry of Texas said earlier this week,,referring to Mr. Bernanke: "If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous - er, treasonous, in my opinion.“

In the 19th century the agricultural sector, particularly in the West, favored higher prices and effectively looser monetary policy. This was the background for William Jennings Bryan's famous "Cross of Gold" speech in 1896; the "gold" to which he referred was the gold standard, the bastion of hard money - and tendency toward deflation - favored by the East Coast financial establishment.

Populism in the 19th century was, broadly speaking, from the left. But now the rising populists are from the right of the political spectrum, and they seem intent on intimidating monetary policy makers into inaction. We see this push both on the campaign trail and on Capitol Hill - for example, in interactions between the House Financial Services Committee, where Representative Ron Paul of Texas is chairman of the monetary policy subcommittee, and the Federal Reserve.

The relative decline of agriculture and the rise of industry and services over a century ago were long believed to have made the economy more stable, as it moved away from cycles based on the weather and global swings in supply and demand for commodities. But financial development creates its own vulnerability as more people have access to credit for their personal and business decisions. Add to that the rise of a financial sector that has proved brilliant at extracting subsidies that protect against downside risk, and hence encourage excessive risk-taking. The result is an economy that is at least as prone to big boom-bust cycles as what existed at the end of the 19th century.