https://dandelionsalad.wordpress.com/2018/08/11/the-life-and-times-of-michael-hudson-from-trotskys-godson-to-modern-monetary-theory/

The Life and Times of Michael Hudson: From Trotsky’s Godson to Modern Monetary Theory

by Michael Hudson
Writer, Dandelion Salad
August 11, 2018

Global University for Sustainability on Jul 11, 2018

I was born in Minneapolis, which is the only city in the world that was a Trotskyist city. During the 1930s it was a center of Trotskyism and my parents worked with Leon Trotsky in Mexico. When I was 3 years old my father was put in jail under the Smith Act as a political prisoner for having the works of Lenin and Marx on his shelves and for being one of the leaders of the Minneapolis general strikes from 1934 to 1936. So I grew up knowing many members of the Russian Revolution, members of the Central Committee when Lenin was in power.

When my father got out of jail we moved to Chicago and where he got a job editing Traffic World and Traffic Supply News. He had graduated from the University of Minnesota with a Master of Business in 1929 and the depression came. He had wanted to go to Latin America to become a millionaire and when the Depression came he thought that capitalism wasn’t fair and that’s what made him a Trotskyist and he became editor of the Northwest Organizer which was the labor newspaper. So when I grew up I had the old German Communist Party members, Americans, they would all come to the house and tell me the stories of the revolution so that when I grew up I was supposed, expected to lead a revolution if conditions were right. So down through my teens we discussed what are the right revolutionary conditions.

But I was not that interested at the time in politics, I was fascinated with physics, with chemistry and more and more with music.

When I went to the University of Chicago which was a grade school and high school for gifted children. My father had the highest IQ in the federal penitentiary system, I’m told, and so they thought his kid must be smart and they gave me a test and put me in a very good school. My formative year was really the tenth grade I think when I was 14 years old. We had a right wing teacher Curtis Edgett in social science. He kept calling me a commie. He had a sign over his blackboard in the room, “Give them all with the Rosenberg’s got.” The Rosenbergs were the Stalinist spies, but when I asked, “What do you mean – the Communists?” he said, “No, I mean the Jews.”

Well, he would call me a Stalinist, a communist. But we also had a Stalinist classmate, Danny Landau. He called me a fascist, because I was a Trotskyist. So in the high school I was the reasonable voice in the middle. “It’s the only time in my life I had been in the middle. My friends and I would come into the classroom, my fellow students would carry the works of Lenin and put them on our adjoining desks, to quote from.

When my father was in jail, one of the things he did was to compile a dictionary of all the things Lenin and Trotsky had said about various subjects. I would raise my hand and the other professor would say where did Lenin say that and I’d say in volume 6 page 322 and my student yes yes here it is. I like being hated by the right wing because it made me a lot of friends and so while the Stalinist called me a fascist and the fascists called me a communist I recruited many members into the socialist youth groups in Chicago.

My parents had worked with Leon Trotsky in Mexico as did many Minneapolis people, so I was very happy being in an adversarial position and somehow being in an adversarial position never hurt at all. My interest was music at that time and I studied piano and basically studied to be a conductor.

When I graduated in 1959 from the University of Chicago where my degree was in Germanic philology and history of culture but while I was there I was also studying full-time music primarily the series of Heinrich Schenker the German music theorist. In 1960 when Leon Trotsky’s widow Natalia died, the executor of his estate Max Schachtman assigned me the copyrights, saying that since I was Trotsky’s godson, I should do a publishing company. So I wrote. I’d had a correspondence with György Lukács, the Hungarian literary critic and he gave me his copyrights and I came to New York, thinking that I would start a publishing company while I studied conducting with Dimitri Mitropoulos, who was the conductor of the New York Philharmonic.

Well I couldn’t get anybody to publish these or other works. Lukács insisted that I have a student of his, Arthur Kahn, do the translation of his work. It was an awful translation. I wanted to edit it and he wouldn’t let any editing be done, so I sort of gave up doing that.

Then, an event happened that changed my life. My best friend growing up was Gavin MacFadyen. You may know him as a famous documentary film maker and founder in London of the Centre for Investigative Journalism. He had introduced me to Terence McCarthy who was an Irish communist and was the translator of Marx’s Theories of Surplus Value. In one evening we talked about changes in the water level in America. The sunspot cycle and the water level would go up and down, causing a crop failure that would lead to an autumnal drain of money from the stock and bond market, causing a periodic financial crisis. To me, that was so beautiful, so aesthetic, that I decided on the spot to become an economist and Terence said that he would become my mentor if I would read all of the bibliography of Marx’s Theories of Surplus Value.

So that’s how I came to meet most of the rare economics book dealers in New York City. I ended up working for Augustus Kelley part time as an editor and writing introductions to some of the reprints of economic classics that he published. In exchange for writing introductions, he would give me books. I had a very large library of books, including many American protectionist writers, many economists that are missing from the normal history of economic thought.

Meanwhile, I had to go and make a living. I got to New York with only $15 in my pocket and in 1959 $15, you know, I could buy a little bit. I spent maybe a little bit in a dirty hotel in Greenwich Village. Then I took a walk and there was a folk music bar and I thought, “oh nice folk music, let me go in.” I went into the bar to listen to a guitar.

Somebody came up to me and said, “Ah, Huck Hudson.” When I grew up my name was Huck because my father’s favorite book was Mark Twain’s Huckleberry Finn. It was John Herold, who had stayed at my house in Chicago when he was going to the University of Wisconsin and visiting my friend Gavin. He had become a folk singer. He offered to let me stay with him until I could get a job and find a place to rent. So I moved out of the hotel into his house after just one night, and got a job as a French typist for Wonder Bread. That was when I went to an employment agency, and the only thing I could do that most other people couldn’t do was to type fast and in French and German. So I did that for a little bit and then I decided to enroll in an economics course and get a master’s degree at New York University.

The advantage of New York University was the teachers were all part-time, they didn’t want my mind, all they wanted was my money. That was fine with me. I got to keep my mind and not be brainwashed. They said, “Do you have any background in economics?” I said, “No, my background’s in music and cultural history. My mentor at Chicago in cultural history was Eugen Jolles, and he introduced me to the work of Spengler and Egon Friedell, Nietzsche and other writers. So that was my literary background.”

I registered at NYU and got a job with the Savings Banks Trust Company, which was the one commercial bank that all the savings banks put their own reserves in. There were 135 savings banks in New York and there are none anymore, they’ve all been cannibalized, they’ve been bought out by the commercial banks. But my job was to trace the savings in New York, how it grew exponentially and compare this to how it was lent out for mortgages. The chart of these deposits was like a heartbeat. The deposits in savings banks would grow every quarter when the dividends were paid. So I saw basically that people left their savings in the bank to grow automatically, exponentially by interest. I saw that this recycling of interest-bearing debt was pushed back into the housing market to bid up housing prices.

Real estate is something that is not taught in any course in the United States economics. 80 percent of bank loans in America, England and much of Europe are real estate loans, but in the textbooks that students learn economics from, it is as if banks lend money to industry. Banks don’t lend a penny to industry to invest in capital goods and hire people. They lend money to buy out industry, to take it over, to cannibalize it and to strip assets, but not to create capital. They lend it as mortgages, they basically lend against assets, against homes, commercial real estate, stocks or bonds or some assets. So that I realized that in the textbooks, picture of how finance works were completely different from what I was taught at NYU. I had to take a money and banking course taught by an ideological Greek professor Stephen Rousseas, who had never worked in a bank in his life — none of my professors had ever worked in a bank, everything they know from the textbooks — and he had an article by a man who subsequently became a friend of mine, Hyman Minsky, who thought that the business cycle could be explained by savings banks putting their reserves in the commercial banking system that would be lent out to the economy. I said, “Look, what you called a commercial banking system is one bank, the bank I work for and we don’t make any loans at all to the economy. We buy bonds.”

So I got a C-plus in the course, he said I didn’t understand textbook economics. I realized that there was an absolute contradiction between how the real economy worked and what was in the textbooks. After I worked for the Savings Banks Trust for three years, in December 1964, I finished all my coursework and went to work as a balance of payments economist for the Chase Manhattan Bank. That was the most formative employment I ever had, because the balance of payments is also a topic that is not taught in any university. I taught it at the New School later, but universities don’t teach about the balance of payments. It’s all a simplistic monetary theory.

What I had to do, after I finished my coursework, was writing the dissertation. Terence McCarthy suggested I write on concepts of productivity, because there are many different — what is productive, what’s unproductive. There was a professor at the New York University, Solomon Fabricant, as in the word “fabricate”. He was the head of the National Bureau of Economic Research. I went into his office he said, “The first thing I want you to do, I want you to join the CIA. I’m recruiting.” He showed me a copy of the CIA’s first published report in America, when the CIA first went public. It was on Russia’s gold stock, saying that it didn’t have enough native gold in its rivers or mines to be credit-worthy. I looked at it and said, “You must know that this is all a lie. I work for the Chase Manhattan Bank. Our customer is Anaconda Copper Co. Anaconda has bought gold bars from the Soviet Union and the gold bars are not made from gold they pan out of the river. They’re made as an electrolytic by-product of copper refining. What you should do is forecast the copper output of Russia, when you electrolytically refine copper, gold and silver fall to the bottom and it’s the residue that is responsible for most of the gold stock, not only of Russia but for other copper producers such as Chile.”

He said, “well okay you’re not good at joining the CIA”. I couldn’t believe he didn’t know about my background, but that didn’t matter. I told him I wanted to write my dissertation about concepts of productivity, as I was interested in classical economics. As a Marxist I’d seen how Marxism grew out of classical economics, grew out of the economics of the French Physiocrats, Adam Smith, John Stuart Mill and so forth. The concept of circular flow was always critical to me, the concept of economics is a systems and systems analysis, which was just becoming popular in the 1960s. Fabricant said, “These theories are worthless. If these theories would have been relevant, then they would have been successful and remained in the textbooks. If a theory is no longer held it’s because it’s died out in a Darwinian struggle for existence and is irrelevant.” So I talked to a professor who had become a friend, a former communist who was a business cycle professor, Gerhart Bry. He was a refugee from Germany. We had a discussion about some of the books that I was buying from other book dealers and I wrote my dissertation on Erasmus Peshine Smith, who wrote the Manual of Political Economy that became the Republican Party doctrine in 1853. I decided to write about the American protectionists with Prof. Bry and had no problem at all getting the PhD until I had my orals. And again, NYU didn’t have anyone teaching money and banking on a full-time basis at Washington Square which is the center of NYU. So I thought there’s a money and banking professor uptown, Walter Haines, who wrote a textbook. He must know about banking. I passed all the orals of all the professors I’d studied with, economic history, third world development, but the money and banking man said I knew nothing about banking, that my idea of how banking worked was not at all what was in the textbooks and I had to retake the orals after reading about a fictitious world. So I became aware of the fact that academic economics is very fictitious. It has nothing to do about the real world. It was really a parallel universe theory, to say that if the world worked this way, then the existing distribution of income would be fair, everybody would get what they deserve, there’s no income that’s unearned, everything is fair, and you have to accept the world the way it is. And I never accepted the way the world as it was, because of the way I grew up. As I mentioned, when I grew up in Chicago I thought that the years of World War Two were when everybody was drafted into jail because everybody who would be at the house was in jail during the war for trying to lead strikes or being political or being left-wing, and only later did I realize there was actual fighting going on and they weren’t just putting in people who read Marx and radical leadership there.

I worked at Chase Manhattan until 1967, then finally I had to quit to finish the dissertation. I spent a year on that. At Chase I had become the specialist in the oil industry’s balance of payments. When the Vietnam War began and escalated, President Johnson in January 1965, right after I joined the bank in December 1964, passed the voluntary – in reality, compulsory – foreign investment rules blocking American companies from investing more than 5% of the growth of the previous year’s investment. The oil industry objected to that. They came to David Rockefeller and said we’ve got to convince the government that we’re ripping off other countries so fast, we’re able to exploit them so rapidly, that it really helps the US balance of payments to let us continue investing more abroad. Can you help us show this statistically?

So David Rockefeller asked me to do a study of the balance of payments of the oil industry. Rockefeller said, “We don’t want to have Chase’s oil and gas department do it, because they would be thought of as lobbyists. Nobody knows who you are, so you’re neutral. We want to know what the real facts are, and if they’re what we think they are, we’ll publish what you write; if we don’t like it we’ll keep it to ourselves, but please just give us the facts.” He said, “You can ask the oil companies all the questions you want. They will fill out the forms you design for a statistical accounting format. We’ll give you a year to write it all up.” To me this was wonderful. Oil was the key sector internationally. It turned out I found out that the average dollar that actually was invested abroad by oil companies was recaptured by the US economy within 18 months. The payback period was that fast.

The report that I wrote was put on the desk of every senator and every representative in the United States and I was celebrated for being the economist of the oil industry. So this taught me everything about the balance of payments which, as I said, is a topic that’s not taught in any university. So I finished that, finished the dissertation, and then I developed a methodology for the overall US balance of payments. Most of the balance of payment statistics were changed when they designed the gross national product accounts. The accounts now treat exports and imports as if they were paid for fully for cash. So if you make a million dollars worth of grain exports, you are assumed to bring a million dollars into the economy. And if you export a million dollars of arms, of military, it all comes back.

What I found out is that only a portion actually of exports actually comes back. And imports have an even lower balance-of-payment costs as compared to their nominal valuation. For instance, all of America’s oil imports are from American oil companies, so if you pay a hundred dollars for oil, maybe thirty dollars of that is profit, thirty dollars is compensation to American management, thirty dollars is the use of American exports to physical equipment, oil drilling equipment and others to produce the oil.

The closest people that I worked with for the study were at the Standard Oil Company, which was always very close to the Rockefellers, as you know. So I went over the statistics and I said, “In the balance of payments, I can’t find where Standard Oil makes the profit. Does it make the profit by producing oil at the production end? Or does it make it selling it at the gas stations, at the retail sales end?” The treasurer of Standard Oil said, “Ah I can tell you where we make them. We make them right here in my office.” I asked how. “What countries could I find this in? I don’t find it in Europe, I don’t find it in Asia, I don’t find it in Latin America or Africa.” He said, “Ah, do you see at the very end of the geography headings for international earnings, there’s something called international?”

I said, “Yes that always confused me. Where is it? I thought all these foreign countries were international.” He explained that “international” means countries that are not really countries. They’re Liberia and Panama, countries that only use the US dollar, not their own currency. So the oil industry doesn’t have a currency risk. They are flags of convenience and they don’t have any income tax. He explained to me that Standard Oil sold its oil at a very low price from the Near East to Liberia or Panama or Lagos, or wherever they have a flag of convenience and no income tax. Then they would sell it at a very high price to its refineries in Europe and America, at such a high price that these “downstream” affiliates don’t make any income. So there’s no tax to pay. For all US oil investment in Europe, there’s no tax to pay because the oil companies’ accountants price it so high, and pay so little per barrel to third world countries such as Saudi Arabia, that they only get a royalty. Standard Oil and other U.S. oil companies – and also mining companies – don’t earn an income there, because they sell it so low, all the profits are reported to be taken in Liberia or Panama. These are non-countries.

That gave me the clue about what people these days talk about money laundering. In the last few months that I worked for Chase Manhattan in 1967, I was going up to my office on the ninth floor and a man got on the elevator and said, “I was just coming to your office, Michael. Here is a report. I’m from the State Department (I assumed that this meant CIA). “We want to calculate how much money the US could get if we set up bank branches and became the bank for all the criminal capital in the world.” He said, “We figured out we can finance, (and he said this in an elevator), we can finance the Vietnam War with all the drug money coming into America, all of the criminal money. Can you make a calculation of how much that might be?”

So I spent three months figuring out how much money goes to Switzerland, from drug dealings, what’s the dollar volume of drug dealings. They helped me with all sorts of statistics on that, and said, “We can become the criminal capital of the world and it’ll finance the dollar and this will enable us to afford the spending to defeat communism in Vietnam and elsewhere. If we don’t do that, the bomb throwers will come to New York.”

So I became a specialist in money laundering! Nothing could have better prepared me to understand how the global economy works! I had all the statistics, I had the help of the government people explaining to me how the CIA worked with drug dealing and other criminals and kidnappers to raise the money so it would be off the balance sheet funding and Congress didn’t have to approve it when they would kill people and sponsor revolutions. They were completely open with me about this. I realized they’d never done a security check on me.

So I wanted to do a study of the balance of payments of the whole United States. I went to work for Arthur Andersen, which was at that time was one of the Big Five accounting firms in the United States. Later it was convicted of fraud when it got involved in the Enron scandal and was closed down. But I was working before the other people went to jail, before they closed down Arthur Andersen. So I spent a year applying my balance of payments analysis to the US balance of payments. When I finally finished, I found that the entire US balance of payments deficit in the 1960s, since the Vietnam War, the entire balance of payments deficit was military spending abroad. The private sector’s trade and investment was exactly in balance; tourism, trade and investment were exactly in balance. All the deficit was military.

So I turned in my statistics. My boss Mr. Barsanti, came in to me three days later and he said, “I’m afraid we have to fire you.” I asked, “What happened?” He said, “Well, we sent it to Robert McNamara.” (who was the Secretary of Defense and then became an even more dangerous person with the World Bank, which probably is more dangerous to the world than the American military. But that’s another story). Mr. Barsanti said that McNamara said that Arthur Andersen would never get another government contract if it published my report.

In all of the Pentagon Papers that later came out of McNamara’s regime, there’s no discussion at all of the balance-of-payments cost of the Vietnam War. This is what was driving America off gold. At Chase Manhattan from 1964 until I left, every Friday the Federal Reserve would come out with its goal, its weekly statistics. We could trace the gold stock. Everybody was talking about General de Gaulle cashing in the gold, because Vietnam was a French colony and the American soldiers and army would have to use French banks, the dollars would go to France and de Gaulle would cash it in for gold.

Well, Germany actually was cashing in more gold than de Gaulle, but they didn’t make speeches about it. So I could see that the war spending was going to drive America off gold. There were three people, known as the Columbia Group, saying the Vietnam War was going to destroy the American monetary system as we know it. The group was composed of Terence McCarthy, my mentor; Seymour Melman, a professor at Columbia University’s School of Industrial Engineering where Terence also taught; and myself. We would basically go around the New York City giving speeches.

My first article that I wrote for publish was at Ramparts Magazine, called “The Sieve of Gold,” about how the Vietnam War was going to force America off gold, which it did, of course, in 1971 when President Nixon in August stopped the gold. Meanwhile, I took my balance of payments study to New York University’s Business School and they said, “Oh this is great! We’ll publish it.” So I was able to immediately get it published.

That led me to be invited to give a lecture at the Graduate Faculty of the New School for Social Research in New York. At the time I was analyzing the Vietnam War, I had to analyze copper prices. Every soldier in Vietnam used one ton of copper per year, I think that it’s as if they were fighting each other with ingots of copper. So I was forecasting copper prices by looking at the troop build-up, one ton of copper per army person, and forecasting that the price of copper would go up. So I was known for a while as Mr. Copper. As I said, Anaconda was Chase’s main client, and Kennecott was the client of Citibank, and they’re a group of commodity people in Wall Street that just love copper. I love copper and when one head of the group said, “Aluminum is a shit metal,” I felt the same way that copper is nice.

By 1968 the largest item of theft in the United States was copper, people were stripping the copper drainpipes off churches, as well as the wires that go into houses. Thieves would pull every copper scrap as prices were going up, so I became aware of the recycling phenomenon and the degree to which the sources of metal were not just mining the earth but the recycling of various things.

I ended up working for a while for Continental Oil as their economist, and then while I was doing it, they bought the Baghdad copper company at my recommendation because I could see the war was going to go on for a while. They also got into real estate. Well then they moved up to Connecticut and I decided to become a professor at the New School, because I never had a course in trade theory and the only way to learn about a topic is to teach it. So I gave the course in trade theory, and then was hired as a full-time faculty member in 1970 and taught national income analysis, using Marx’s Theories of Surplus Value as my textbook. This infuriated the department head, Robert Heilbroner, whose idea of Marx was what he had for breakfast and how he felt later, and did he really have an affair with his maid. There was not much economic analysis, and he was furious that I would teach a national income course. He said, “You’re a Wall Street thug! You know only one third of the economics students are from business, one third are foreign students from the UN, and one third sort of radicals who are left-wing.” He just assumed that I was there for the business school students. I never once discussed politics at the New School. I realized that Heilbroner’s idea of Marxism was Stalinism, as a very crude idea. He brought in a Stalinist, Steve Hymer, ostensibly to teach trade theory, and I said, “That’s fine, I’ll teach monetary theory and banking theory.

Hymer was a proselytizer for LSD. He would tell the students to take LSD and then listen to his course. About a year after he joined, he went to the American Economic Association meeting in Montreal, had students take LSD and stand on their head. On the way back to New York he drove his car into a truck and his group died. It’s really dangerous to take LSD when you’re driving.

The foreign students were coming into my office and saying, “Is this man CIA? Why would he want us to take LSD unless he wants to, you know, deport us or arrest us or make us into a spy?” So I was the guy they would come to and that made Heilbroner think all the more that I must be a Wall Street plant.

Finally, the dollar went off gold in 1971. I took a number of articles that I’d written and wrote my first book, Super Imperialism: The Economic Strategy of American Empire. It came out in September, 1972. Well just at that time I was invited almost every year to give a lecture at the annual meeting of Drexel Burnham. Like Arthur Andersen, they also were deemed a criminal enterprise whose leaders ended up having to go to jail for fraud. They joked that I was their token Shabbat goyim. My friend Andre Sharon there also was a protege of Terence McCarthy said, “We’re going to have an annual meeting, we’re going to introduce you to Herman Kahn,” who was a brilliant military theorist. Andre said, “He’s going to talk to you, he talks very fast, he’s a brilliant guy. After he hears you speak, he’s going to offer you a job. You probably can’t understand what he’s saying, but just say yes. You’ve got to get out of academia, you don’t belong there.” Ctd....