Issue 223 of SOCIALIST REVIEW Published October 1998 Copyright © Socialist Review
The days of economic depression were once thought to have gone forever. Now, however, there are many similarities with the economic and political chaos of the 1930s. Lindsey German looks at then and now
Anyone one with a sense of history and a scintilla of
imagination ought to be pretty worried by now.
Not since the immediate postwar years have western
leaders faced such a wide range of challenges. And not since the
1930s has a financial crisis (as opposed to one to the real
economy) appeared to pose such a threat to the world as a whole.'
Martin Wolf, Financial Times, 9 September 1998
Only a few short weeks ago most commentators were dismissing the likelihood of the Far East recession turning into a world depression. Events in Russia have changed that. The prospect of disaster there, added to the huge economic and political upheavals already taking place in countries such as Indonesia and Malaysia, have led to the question on everyone's lips--how bad can it get?
The worst case is the spectre of a rerun of the 1930s, when the Great Depression led to a cut in world industrial production. unemployment rose worldwide from 10 million in 1929 to 40 million in 1932. In the same period world trade fell to a third of its 1929 figure. Nothing that anyone tried to remedy the situation seemed to work in the early years of the depression, as the world economy seemed to be on an unstoppable downward spiral. Industrial collapse led to the collapse of banks which could not collect on their loans, while the huge banking crises which led to bank closures, especially in Germany and the US, in turn led to further sections of industry being pulled down.
The start of the 1930s slump is generally thought to have started with the Wall Street crash of 1929, when millions of dollars were wiped off the values of stocks and shares and many businessmen faced bankruptcy. The crash precipitated a full blown industrial depression. But the crash was itself the sign of much deeper underlying problems. US industry had already begun to slow down in the months before the crash and had fundamental problems which could not easily be corrected.
The US economy expanded through most of the 1920s. The country had emerged from the First World War as the dominant world power and during the 1920s its index of industrial production nearly doubled. Output in manufacturing rose dramatically and consumer durables expanded particularly rapidly. But while the amount produced went up sharply, capital's share increased much greater than the share which went on wages, and very large amounts of profit were invested in further plant and machinery. This meant more and more was spent on production in heavy industry, while the amount that workers could purchase with their wages remained small.
There are a number of studies which show that the disproportion between the amount invested and the amount which workers were able to spend had been a relatively long term problem in US capitalism, even before the First World War, and this had led to a decline in the rate of profit which the capitalists received. The logical outcome of this situation would lead to a crisis of overproduction. Yet the slump did not happen until 1929 because other factors prevailed for a time to prevent the amount of investment in fixed capital rising so quickly. The first was the luxury consumption of the rich--the Marxist economist Lewis Corey claimed that the 'equilibrium of capitalist production came to depend more and more on stimulating the "wants" of small groups of people with excess purchasing power.' The second area of spending was on advertising, marketing and the like, which attracted an increasing block of already accumulated surplus value or profit (such costs grew to two thirds of total surplus value by the end of the 1920s). The third such outlet for accumulated capital were the various speculative booms to which the stock market was central. These gave a stimulus to the economy (for example through property speculation) and a veneer of ever increasing wealth, but in the long run they too depended on the state of the real economy.
By the late 1920s, US industry had far greater capacity than the market could absorb and was therefore heading for a crisis of overproduction. Yet the speculative booms led to further productive investment even in the face of overcapacity. This in turn was exacerbated by the role of credit in the economy. The banking and money markets are a claim on past surplus value (capitalists who make a profit invest some of it in banks or shares on the market); they are also a claim on future surplus value. Some capitalists have to borrow from other banking capitalists, in order to have enough funds to build factories, offices and so on, on the promise that the money will be repaid from future profits. But capitalists tend to borrow at the height of the boom, when interest rates are low and money easily available, and equity capital is easily raised on a booming stock market. When the economy becomes tighter and the rate of profit falls, they have to pay back at higher rates, because there are less funds coming into the bank. Just when it should be easier for them to borrow it becomes harder and this helps to worsen the crisis.
In such a situation, the speculative boom can easily turn into its opposite, when the belief that share prices will always rise is shown to be false and when the real crisis in the economy means that industrialists cannot always meet their loans. They often react by further borrowing which they are less and less able to pay back. Once some companies start to go bust and fail to pay their loans, the crisis can drag down the financial markets, which in turn then refuse to finance new investment. Such was the vicious circle epitomised by the Wall Street crash.
The depression was exceptionally severe and brutal. Banks collapsed, particularly in the US and Germany. Millions lost their livelihoods. Large sections of the middle classes saw their savings wiped out. Politically, there was polarisation on a mass scale as bourgeois democracy and the free market were seen to fail. In Germany, the rise of Nazism was the direct result of the slump. As Trotsky described it, the middle classes were sent mad by the crisis. In the US, Roosevelt's New Deal was seen as a radical correction to the market.
At first ruling classes everywhere stuck to the old policies--deflation, wage cuts and a refusal to use the state to intervene to direct the economy. The split in the Labour government in 1931, when Ramsay MacDonald formed a 'national' government with the Tories, was directly over such policies. But increasingly in each country the state had no alternative but to step in as the only force which could try to restore the profitability of capital. Hitler was backed by large sections of big business in Germany, especially those engaged in heavy industry such as steel production. Roosevelt was forced to introduce a high level of state intervention and regulation. But even with a level of 'pump priming' or attempts to stimulate the wider economy by the state, the system's recovery from depression was weak and fitful. In 1937 the British, French and American economies slumped again, and unemployment remained much higher than in the 1920s. It was only with the drive to a war economy and the full scale outbreak of war from 1939 that the world economy pulled itself out of slump, virtually got rid of unemployment and maintained full production.
The postwar boom, which lasted from the late 1940s through to the early 1970s, was based on very high levels of arms spending, which served to prevent the amount invested on plant and machinery (the organic composition of capital) from rising too much and so maintained relatively high rates of profit. But even this unprecedented expansion of the system came to an end in the early 1970s, since when there have been very high levels of unemployment worldwide. The increasing internationalisation of capital and the growing burden on the major military powers, as opposed to Germany and Japan which were relatively free from the costs of arms spending but still gained the benefits of the arms economy, led to growing contradictions within the system.
The accepted left analysis of the economy during much of the postwar boom was based on the theories of JM Keynes, which said that state intervention could help to sustain a permanently booming economy. But these were discredited by the rapidly rising inflation and unemployment of the early 1970s as the boom came to an end. The 1980s and 1990s have been marked by a supposed divestment of the state from capital with the growth of privatisation, a belief in the total freedom of the market regardless of social cost, and the massive deregulation and internationalisation of capital. Yet this too has led to what may turn out to be an even worse crisis than that of the 1970s.
Today, it is certainly the fear among many capitalists that there will be no easy correction to what at first looked like a local difficulty in the Far East, and that their whole system will come under threat. Not only would this mean personal ruin for many of them, financial disaster on a wider scale for even very big enterprises, but also political instability about which they can only have nightmares. For in the folk memory of the Great Depression little stands out more than the polarisation of politics, the massive disillusionment with bourgeois democracy and the search for radical solutions. Perhaps most importantly, however, the end of the Great Depression only came when rearmament and the plunging of the world into its second war in a generation led finally to full employment and more rapid economic growth.
Is this what we can expect again? In a world much changed since the 1930s capital is much more internationalised, credit in particular cuts across national boundaries and the prospect of nuclear war and the barbarism it entails is even more frightening than was the threat of war in the 1930s.
The truth is that it is impossible to tell the exact outcome of the current recession and what its impact will be on different parts of the world. The US is still growing, although its economy looks like it is beginning to slow down. European countries such as Germany are seeing their economics improving. Britain is moving towards recession in the next year but how severe that will be is still unknown. The real question is whether all of these can be immune from what is happening elsewhere, and that remains in doubt given the level of internationalisation of capital. There is no question, for example, that inward investment is being badly hit in Britain by the crisis and that areas such as South Wales and the north east of England will be badly affected.
In some parts of the world the economic and social situation is already comparable to that which gripped the world in the 1930s. In Russia, the economy is like a black hole--whole sections of the population rely on subsistence crops or barter in order to live. In Indonesia, the revolutionary movement which began earlier this year with the overthrow of the dictator Suharto is continuing with riots, strikes and demonstrations.
There are many similarities elsewhere with the 1930s--the decline in the rate of profit worldwide in recent decades; the frenzied stock market speculation; the crises of overproduction which are already a feature of the Far East and which may well spread to the western economies; the banking collapses and crises which have accompanied events in Russia and south east Asia.
Already there are signs that some of the worst hit countries are moving away from idolisation of the free market--Malaysia has introduced protectionist measures, to the horror of western ideologues, while the Hong Kong state is intervening heavily to prop up its stock market. There will certainly be pressure for more state intervention in order to bail out companies and direct markets. However, given the internationalisation of capital and its movements across boundaries, and given the huge sums of money needed to bail out what are now gigantic companies, there is no easy way out for governments and no obvious mechanism to solve the crisis in this way. At the same time, the fear is that any big company or bank being allowed to go to the wall will cause such a crash, often across borders, that it will have a major effect on many firms and workers, and even on whole national economics.
The depth of the crisis and the inability to find easy solutions has serious consequences. Already the ruling class talk from Russia to Indonesia is that democracy will have to wait until the economy is right--in other words dictatorship is the preferred means to force through pro-market policies when millions oppose them. Even worse, the recession is fanning the flames of national rivalry and possibly war in large parts of the world: between Malaysia and Singapore, between Indonesia and China, between Russia and parts of its former empire. This can only be set to get worse.
Where does this leave socialists in trying to explain and to change the world? We cannot assume that such recession will lead automatically to class struggle; sometimes unemployment has a dampening effect on workers' militancy. However, this depends on how workers go into the crisis--how deep their bitterness with the system is, how confident they are to fight back and so on. The effect of the crisis of the 1930s was to produce some of the biggest struggles of this century. The Spanish Civil War was a bitter three year battle to see whether workers' power or fascism would triumph. In France and the US workers occupied their factories to challenge the effects of the crisis. In Latin America there were a series of upheavals. Whatever the exact outcome of this crisis, we will see mass revolts and protests around the world.
Socialists find their analysis vindicated by the onset of crisis, compared to those who believed that the market would never fail. But we cannot welcome the misery caused by it--the unemployment, hunger and sometimes deaths which result from it.
This crisis is, however, an inevitable feature of capitalism, where production is not planned for need but is based on the blind accumulation of capital for its own sake. The crisis of overproduction could only exist under capitalism. Millions of people need and want the goods produced but have no wherewithal to pay for them. Only a change in the system so that the wealth is produced collectively and distributed according to people's needs can end the misery so many millions are now experiencing. That is why this present crisis is so important ideologically, whether or not the level of class struggle rises, because it demonstrates the bankruptcy of capitalism and the need for an alternative.
But even under capitalism we should not have to put up with this. We should demand that plants are nationalised to provide work for those who need it and goods for other workers; that money is spent on building houses, hospitals and schools which can provide jobs and improve our quality of life; that the rich should be taxed to pay for these projects, as should the big businesses. If the government will not do this, then workers should occupy their factories to fight for jobs. We have to fight every attempt to divide us on national, racial or sexual grounds.
We are not powerless in the face of the crisis, as many bosses would have us believe. We have to fight to ensure that our priorities, not those of the capitalists, win out. That was the lesson which many workers learnt in the 1930s. It is one we have to learn again.