Nov 13, 2008
The following text was adopted by Lutte Ouvrière, the French Trotskyist organization, at its annual conference and reprinted in the December 2008 issue of its political journal, Lutte de Classe. In a few places, we have added or substituted U.S. examples for French ones.
The crisis of the capitalist system has taken on different forms, simultaneously or successively striking real estate, raw materials, the banking system, the stock market, slowing down production itself. But these were all manifestations of the same crisis – undoubtedly the most severe since the crisis that began with the stock market crash of 1929 and was prolonged by the Great Depression.
On September 15, 2008, the bankruptcy of Lehman Brothers, one of Wall Street’s major investment banks, marked a brutal aggravation of the financial crisis. Economists – very clever when it comes to forecasting what has already happened – have since blamed the crisis on deregulation, liberalism, globalization, or the lack of control over the financial system.
These factors played a role, and they explain some aspects of the sequence of events that led to the present financial crisis and the form that it took. But they do not explain its fundamental reason: the capitalist economy cannot function without crises. Commenting on the 1920-1921 crisis, Trotsky wrote: “So long as capitalism is not overthrown by the proletarian revolution, it will continue to live in cycles, swinging up and down. Crises and booms were inherent in capitalism at its very birth; they will accompany it to its grave. [...] In periods of rapid capitalist development, the crises are brief and superficial in character. In periods of capitalist decline, the crises are of a prolonged character while the booms are fleeting, superficial and speculative.”
Imperialism emerged more than a century ago, with its trusts spreading their tentacles all over the world, increasing the complexity of economic activity. These developments have rendered the periodicity of economic cycles less predictable. They have multiplied the ways crises can occur and have worsened their damage, but they have not allowed capitalism to avoid crises. Crises constitute essential phases of capitalist reproduction. In fact, it is through crises that the market economy, the motor of which is blind competition, re-establishes the equilibrium between production and solvent demand, between the different sectors of the economy – notably that of the means of production and that of consumer goods – or between the different companies engaged in the successive phases of the production process. Crises express the fall in the rate of profit resulting from the saturation of the market. By destroying part of the capital engaged in production, by getting rid of non-profitable companies, crises create the conditions for launching a new cycle, in which the rate of profit begins to increase, investments start back up, and hiring begins.
On August 9, 2007, when the U.S. and European central banks announced they were injecting massive amounts of liquidity into the financial system, and the French bank BNP-Paribas announced it was suspending the listing of three of its funds specializing in mortgage-backed securities, it became clear that the U.S. housing credit crisis had transformed itself into a financial crisis. This was not one of those “short-lived, superficial” crises. The crash of the U.S. mortgage market not only set off the financial crisis; it also brought it out into the open. Today’s financial crisis itself is only the latest in a long series of financial or stock market crises which have hit since the 1980s, striking every three years or so: 1982, Mexican crisis; 1987, stock market crash; 1990, “junk bond” crash and the wave of failures in the U.S. savings and loans; 1994, crash of U.S. corporate bonds; 1997, financial crisis in South East Asia; 1998, financial crisis in Russia and Brazil; 2001-2003, bursting of the Internet bubble; without speaking of the long-lasting crisis of Japan’s financial system.
Today’s financial crisis is distinguished from its predecessors by its severity, its global extension, and its complete disruption of the entire worldwide banking system.
The frequency of financial or stock market crises, having repercussions on production, is in itself an indication that the current crisis is not the simple result of an isolated cycle. It is, in reality, the most acute phase of a long protracted crisis, beginning in the early 1970s, announced by a crisis in the monetary system, followed by the first oil shock in 1973, leading to a crisis of overproduction, and then to a fall in production in all the industrial countries in 1974-1975. For the first time since the end of World War II, the spread of a recession throughout the planet showed that the vast capacities of production had run up against the limits set by solvent demand in the market. The loss of 2.2% in the U.S. Gross National Product was by itself the equivalent of the total GDP of a country like Turkey and twice that of Portugal.
More significant than the drop in GDP – which mixes production that creates value with services which don’t – was the drop in manufacturing. Every industrial country was hit. In 1975, production dropped by 7% in the United States, 8% in France and 15% in Japan. The year saw the first explosion in unemployment.
Since the 1974-1975 recession, the capitalist economy has gone through periods of expansion, each time interrupted by a recession. But it has never regained the level of growth of the preceding period. The global capitalist economy has never come out of its long, protracted crisis.
In the early 1990s, the capitalist class brought the level of profit back up to what it had enjoyed in the early 1970s. But this was not produced by a new dynamism, nor by the expansion of markets due to growing solvent demand, which would have encouraged new investment in production. The capitalist class increased its profit by carrying out a war against the working class – increasing exploitation, freezing wages, increasing the intensity of work. Using the fear of unemployment, the capitalist class drastically reduced the workers’ share of the national income in each country. In the U.S., the wage-earners’ share of income in private industry went from 30% in 1982, down to 27% in 1998.
Even when the rate of profit had been restored, the capitalist enterprises weren’t much interested in investing in production, instead they looked to the financial markets for spots to place their capital. This development, with its multiple consequences, put in place all the ingredients for the current financial crisis. Referred to as the “growing financialization of the economy,” it is characteristic of the way capitalism functions today.
The tendency of the exploiting class to prefer financial placements to productive investments has nothing to do with their collective psychology. There are material reasons for their distrust of their own economy. In reducing the workers’ share of income, the enterprises have certainly increased their profits. But they have, by the same means, reduced the workers’ capacity to buy consumer goods.
The re-establishment of profit did not come from an expanding market; on the contrary, profits were increased at the expense of the laboring population, and this reduced solvent demand for consumer goods. That is to say, it aggravated the fundamental cause of the crisis.
Using credit to enlarge solvent demand is as old as capitalism itself. But over the last 25 years, this scheme was developed on an unprecedented scale. Armaments budgets (a classic ploy of the capitalist economy) and cheap credit (that is, quick indebtedness) have been the two sources of capitalist growth during all the phases of expansion over the past thirty years. The expression “growth” itself reflects the bourgeois view of reality, and not reality itself. It was customary, for example, to say that the United States’ or even Spain’s “growth” was pulled forward by real estate. However, statistics of this growth reflected not only newly constructed housing and new construction sites (that is, the production of real goods), they also mixed in the increasing prices of land and houses caused by speculation. National accounts and statistics have always lumped together the production of real goods and finance, in other words, real growth and financial growth. The so-called period of growth that came just before the present collapse was one of growing profit for businesses, growing prices in the stock market, and above all the growing volume and return on financial products. But it was not a period when total wages of the laboring population grew. Just the opposite: the share of wages in the national income has declined. Nor did wages grow for individual workers – at best their wages were stagnant. And unemployment hardly went down – except in official reports, as statistical manipulations became more prevalent. But official lies could not hide the widening gap between the growth of capital and the diminishing purchasing power of ordinary people – this gap which is precisely the basis of the present crisis.
The mechanisms that would ultimately accelerate the economy’s financialization and push indebtedness up to unprecedented heights were implemented after the deep recession of 1982, which was even more severe than the one of 1975. In order to slow down inflation, governments decided to borrow massive amounts of money instead of cranking up the printing press. Issuing securities for pubic debt – treasury bonds and state obligations of different sorts – they were able to compensate their growing deficits. It also suited capital owners who could invest their money more profitably than if they invested in production.
The following figures give an idea of this development. The U.S. public debt, which stood at 305 billion dollars in 1963 and 370 billion in 1970, just before the crisis, reached 907 billion in 1980, 3.23 trillion in 1990, and 5.67 trillion in 2000. By the beginning of October 2008, U.S. debt had reached 10.024 trillion dollars! (And these figures take into account only the Federal government’s debt, and not the debts of the different states, local governments, public school boards, sewage and water boards, airport commissions, etc.)
The same evolution marked the debt of individuals: the total indebtedness of all U.S. households, going from 7.4 trillion dollars in 2000 to 14.6 trillion in 2008.
An economic functioning pulled forward by credit and indebtedness aggravates inequalities both inside and outside its borders. Those with money lend to the wealthy – this is true for individuals and for states. (Although – as the sub-prime affair proves – under certain circumstances, bankers will lend money even to the poor if they can cheat them.)
The United States is the most indebted state in the world, at least in the absolute amount of debt, if not in relative terms. But an important portion of the world’s population, those in the poor countries, are completely shunned by the credit system, though they bear the burden of it. Local governments force them to foot the bill for loans the governments take out to pay for armaments and luxury goods – plus the interest owed, of course!
The consequences of the economy’s growing financialization are most devastating in the underdeveloped countries. As everywhere else, capital in search of a big return is not interested in developing production, that is, in investing. The owners of capital want only to swallow up as much profit as possible from the existing plants and production. But given the backwardness of the existing equipment in the poor countries, this signifies a general decline. Today, the underdeveloped countries are being bled dry by financial capital – that is, by the mechanism of indebtedness. It builds no roads, no railways and no other facilities that could benefit the population. Even colonialism had once constructed some things, leaving them behind.
Banks and credit play an irreplaceable role in the capitalist economy. It is thanks to the banks and to credit that capitalist reproduction rolls on without a break and that industrial companies do not have to wait until their goods are sold before launching a new production cycle. In making money available to businesses, the banks are instrumental in converting money into productive capital. They are paid for carrying out this function with the interest appropriated from the surplus-value made in production.
However, there has been a rapid and vast increase in the share of surplus-value that the banks have appropriated. Instead of facilitating the transformation of money capital into productive capital, this diverts capital from production into financial operations, which seem to have the miraculous ability of producing money directly from money, without going through the vulgar phase of production.
In this creeping 30-year crisis, the growing role of finance was, at the beginning, a consequence of the crisis itself. With markets saturated, capital could not transform itself into productive investment, so the owners of capital sought other places to put their money. After the first oil shock in 1973, the oil companies and a handful of oil sheiks accumulated gigantic sums of money, and neither wished to invest their “petrodollars” in more wells nor refineries. Since then, vast sums of capital, searching for places that would provide a good return, have only continued to grow.
Starting as a by-product of the crisis, the growing role of finance soon became one of the factors prolonging it. Mechanisms were set up that favored financial profit in the short term instead of investments in production over the long term.
It seemed miraculous: despite a globally weak economy with limited growth, financial placements were increasingly profitable. Added to the “old classics,” like placements in the stock exchanges or loans to states, speculative schemes based on fluctuating currency rates or real estate market prices were added to many other financial operations that had not previously existed. With the vast growth of money available for financial operations, a new industry emerged, the “financial industry.” Its function is to manage these growing quantities of money capital, and to invent “financial products” and the markets in which they could be bought and sold. The surrealistic coupling of these words, “financial” and “industry,” is characteristic of our epoch of usurious capitalism. “Private equity” firms, “investment funds” of all sorts rapidly proliferated. Abandoning the essential activities of classic banks, these companies specialized in financial placements offering a much greater return in keeping with their much greater risk. The word “investment” itself soon lost its significance directly tied to production. It came to designate all placements of money, those which contributed to create real value and surplus-value, as well as the most fantastic ones, creating nothing, destroying much.
The deregulation policies of the 1980s did not cause the explosion of finance, but they did facilitate and globalize it. They smashed the barriers that separated institutions in the financial sector itself (between commercial banks and investment banks, between insurance companies and banks), as well as the barriers between the production sector and the finance sector.
Even manufacturing companies, at least the largest ones, were drawn into financial operations, which appeared to be more profitable than production itself.
All this seemed to keep the effects of the crisis at bay. In fact, it merely prevented crises from carrying out their function, that is, “regulation” of the system. But hiding crises does not eliminate them. Production can be replaced by financial frenzy, but only for a short time.
Financial activities create no value. They merely appropriate one part of the surplus-value created by exploitation in the sector of production. To put it bluntly, financial capital either gobbles up industrial capital directly, or indirectly through the intermediary of the state and of the public debt. Industrial capital is “the only mode of existence of capital whose function consists not only in appropriating surplus-value, or surplus-product, but simultaneously in creating it.” (Marx, Capital, Volume II.)
Not only does the uninterrupted ballooning of the financial sphere since the 1970s come from the worsening exploitation of the working class, but it also contributes to the strangulation of economic growth.
Nonetheless, 1992 marked the beginning of a period enthusiastically described as “the longest period of economic growth in the U.S. economy since the war.” Between 1994 and 2000, the United States GDP recorded a 32% increase. And even unemployment seemed to go down. Given the development of new technologies (computers, semiconductors, electronic networks, cell phones, etc.), these years were supposed to usher in a “new economy.” Investment in production was also growing, bringing with it a growth in productivity. However, even during this period, the rate of growth of the U.S. GDP was lower than during the 1960s. As for new investments, they were practically all limited to the new technology sector which, even in the United States, represented less than one-tenth of overall economic activity. Investments in the traditional sectors continued to stagnate or even, according to some recent studies, lost ground. No problem – since profits were swelling, stocks prices were skyrocketing (especially those of companies specializing in new technologies, listed on the NASDAQ Index), and low interest rates were encouraging company mergers and takeovers. It is at this time that the chairman of the U.S. Federal Reserve, Alan Greenspan, warned of “the irrational exuberance of the stock market.”
The market for computers and cell phones, despite its original dynamism, was not large enough to absorb the enormous quantities of accumulated money-capital, nor could it transform that money-capital into productive capital.
In fact, the main effect of the “new economy” primarily was to open up a new field for stock market speculation. This was encouraged by the cheap credit policy of the Federal Reserve, which had lowered its interest rate and kept it low. This is the rate at which banks can get new money from the Fed, and it determines the cost for the whole hierarchy of credit. With the Fed keeping this rate low, banks and financial institutions extended credit all the more easily since they knew they could refinance themselves easily and cheaply from the central bank.
This low interest rate policy was sometimes said to have been tailor-made to encourage the development of the computer industry. In a period when the founder of any new “start-up” was seen as the latest Bill Gates, the mere promise of future dazzling developments was enough to get easy credit. It soon turned out, however, that none of these “start-ups” was tomorrow’s Microsoft or Google in embryo.
In fact, from the beginning, the credit extended to information technology financed speculation much more than it did production. It was used to buy out companies that for some reason seemed to have a promising future and whose shares were skyrocketing. A sign of this speculative craze was the fact that the market capitalization of Amazon.com, in other words, the total value of the shares issued by the “world’s number one on-line bookshop” (which was just coming into existence), was more or less the same as that of General Motors, with its hundred and some factories and its 200,000 workers.
In May 2000, the speculative bubble burst and the internet crash sent the NASDAQ Index into a nose dive, destroying many “promising” start-ups and the money that naive people had used to buy up their shares.
The expansion of the “information” sector had not primed the pump for a general recovery.
Nonetheless, after the crash of this sector, finance, benefitting from the injection of government money, continued to balloon. In a context marked by recession and then by the political consequences of September 11, 2001, the U.S. central bank lowered its interest rate still further in order to maintain liquidity in the financial system and to prevent an epidemic of bankruptcies. If one took inflation into account, the new interest rate was as close to zero as it could get.
This policy prevented the bursting of the internet bubble from turning into a brutal financial crisis, but only by pushing back the deadline. The financial crisis was postponed in 2001, but it returned like a boomerang in 2007. And it returned with much greater force, given the ballooning of the financial system and the increasing number of financial products, which were more and more artificial and opaque even for those who created them.
The crisis of the New Economy can be considered the very first phase of the present financial crisis, or its dress rehearsal. The financial practices that resulted in today’s disaster began then.
The interest rate set by the Fed was so low that it was difficult not to take advantage of it. Bankers and industrialists grabbed the opportunity and borrowed profusely. So what if production could not absorb all the money that was circulating? Production was of secondary importance! The “financial industry” was cooking up more and more sophisticated products, mixing together different types of credit, created like magic by a now famous technique called “securitization.” The “mix” was so complicated that in the end nobody knew what was in any of the “securities.” But who cared? As long as the buyer was convinced that he could sell his securities at a higher price, the entire machinery kept running. At the same time, it became more and more detached from real production and from the creation of surplus value.
Nonetheless, production and finance were increasingly intertwined – above all, through the financing of huge mergers and acquisitions. The big companies did not aim to expand the market, but to increase their share of the market by gobbling up their competitors. The numerous takeover bids developed into genuine wars launched by industrial and financial groups against their rivals. These operations, which led to ever greater concentration, developed during the 1990s thanks to the huge sums of money held by companies as well as to cheap credit. The groups which won the rat race increased their profits in proportion to their increased share of the market, or even more, when their winning bid gave them monopoly control. But – whether they borrowed money to defend themselves or to attack their competitors – they increased their indebtedness and their dependence on credit. Today, according to the French economic paper Les Échos, the 40 biggest non-financial French companies owe a total of some 250 billion euros – a 25% increase in the last two years.
These concentrations, especially financial ones, did not entail a rationalization of production or a growth in productive capacity. Huge sums had been thrown into the market for benefitting the financiers, not production. All those deals only increased the domination of financial capital over production.
The Leveraged Buy Out (LBO) was the financial sector’s favorite tool. It was also an indication that capitalism had become self-destructive as well as parasitic. Basically, an LBO allows someone to buy up a big company with very little of his own money, relying instead on credit. In order to repay the debt, the buyer bleeds the company dry. He will tear it apart, empty its reserves, sell the profitable units and get rid of the rest, auction off the land on which the plant was built, etc. In such a case, not only does financial capital fail to transform itself into productive capital and to generate surplus-value; it destroys existing productive capital.
In other words, 21st century rentier capitalism has invented a new, sophisticated form of suicide. However, bankers and financiers are not the only ones to die. Production and the economy, that is, society as a whole, are taken down with it.
It has become fashionable to blame the present financial collapse on speculative funds – especially “hedge funds,” which specialize in the riskiest forms of speculation. But a lot of these funds were created by well-known banks. They speculated not only with the money of individual millionaires but with the money of banks, established businesses and pension funds.
Finance may have spawned more and more specialized entities, but they all belong to the world of finance, just like finance itself belongs to big capital. The financial creations are increasingly usurious and self-destructive simply because that is what is happening to capitalism itself.
Although those who act in the financial sphere and those who act in the productive sphere may be the same people, they have two different functions. Surplus-value can be created only through the exploitation of labor, that is, through the robbery by capitalism of a part of the value created by workers. Finance does not create anything; it merely appropriates a share of the surplus-value thus created in the productive sector.
For any given group of capitalists, it doesn’t matter where profit comes from. If they expect to make more money in the financial sector, they buy financial products – even though, when this behavior generalizes, the capitalist class is digging its own grave by reducing the production of surplus-value.
The preoccupation with finance at the expense of production brought about a multitude of changes in the way industrial companies were managed.
Moreover, the purely financial – or even speculative – groups played a more and more important role in shareholders’ decisions.
Finally, under the pressure of these developments, industrial companies themselves adopted the logic of finance.
Management of industrial companies had their eyes riveted on the stock exchange. They ended up launching absurd “restructuring” plans with the goal of eliminating a fraction of the workforce in order to increase the value of their company’s shares. It was – and remains – an aberration from the point of view of the interests of the capitalist class as a whole. By reducing the number of workers to exploit, they automatically reduce the global surplus-value. But as Lenin said: “A capitalist will sell you the rope to hang himself with, if he can make a profit on it.” That is exactly what capitalists have been doing for years: selling the rope that is currently strangling the world financial system to death! Serge Tchuruk, the ex-CEO of Alcatel (the world’s second largest manufacturer of telecommunications and networking equipment), formulated this approach in a particularly stupid way when he spoke of his plans to transform Alcatel into a “company without plants”! He forgets that “without plants” means “without workers” and that “without exploitation of workers,” there is no profit and hence, no profiteers, no CEOs and no Tchuruk, nor others like him!
It’s been said that the 1929 crisis came like a bolt out of the blue. It’s certainly not the case with today’s crisis. Long before it broke out, its outlines could be seen. It was obvious that the stampede set off by cheap credit would bring about greater speculation and that the whole system was running into a brick wall. A lot of people understood this and said it, including bourgeois economists and Nobel prize winners. Noting that the growth of France’s GDP was around 3% to 4% for years, while the owners of capital wanted a 15% to 20% return on investments, a French economist declared: “Finance’s arrogance gave birth to the global lie at the origin of the crisis. It was mathematically impossible to guarantee more than the average profit to everyone.” Of course, he didn’t say it until after the crisis broke out!
Nothing was done to stop the machine before it slammed into the wall. Basically, nothing could be done in an economy based on making profit. Who or what could have compelled financial groups, companies or individuals to stop speculating up to the very last second when it was still profitable?
The current financial crisis was all the more foreseeable since the real estate crisis followed the same scenario as that of the “new technology” bubble. As the price of houses and apartments rose, it drew the immediate and massive attraction of the owners of capital. Speculation, which had been a consequence of the price increases, fueled much higher prices. According to the British magazine, The Economist, between 1997 and 2006, real estate prices rose by 100% in the United States, 127% in France, 192% in the United Kingdom and... 327% in South Africa! For those who needed a home to live in as well as those who speculated in the housing market, credit was cheap, but also filled with booby traps created by financiers. Cheap credit caused prices to soar in both construction and mortgage loans. Then, in 2007, the real estate bubble burst.
Once the U.S. real estate crisis broke out, it spread through numerous securities that contained some U.S. mortgage-backed credit. This detonated the financial crisis.
Every bank in the world owned mortgage-backed securities! According to the most recent estimates, the total face-value of the toxic mortgage-backed securities owned by European banks stands at around 800 billion euros (more or less, one trillion dollars, depending on the week)!
Distrust toward these securities then caused a general distrust of all “risky” securities. These “risky” securities are found everywhere, because they played an essential role in the growth of the financial system. They are held by banks, financial institutions, industrial companies and even local governments.
The amount of all so-called “derivatives” is much greater than the securities contaminated by toxic U.S. mortgage-based credit. It is estimated at 400 trillion dollars. By way of comparison, the market capitalization of all the big firms listed on all the stock exchanges, in other words, the price at which they could all be bought, is a mere 60 trillion dollars.
If a spark in one sector was able to set the entire financial system on fire, it was essentially due to the fact that heaps of inflammable material had been accumulated everywhere during the past decades.
The general distrust toward any kind of security then generated a panic in the banking system. Those who panicked were not the banks’ clients and depositors, as was the case in 1929, but the banks themselves, which suddenly stopped carrying out most daily transactions among the banks.
The banking system is divided into so many units that, without these daily transactions, credit is frozen or it becomes too expensive, amounting to the same thing.
The capitalist economy has created the absurdity of a financial crisis caused by too much credit, the consequence of which is a lack of credit for production!
The stock market crash soon followed the banking system’s crisis. Monday, January 21, 2008, was a “black Monday” for all stock markets, which recorded their biggest losses since September 11, 2001. Other “black days” soon followed. October 2008 turned out to be a global “black month,” even though it did record a few better days. The lack of credit due to the crisis of the banking system considerably slowed operations in stock exchanges in which credit plays such an important role.
But something else was going on. The stock market is also a thermometer, measuring the health of the capitalist economy. Behind the financial form of the crisis loomed a crisis in the system of production.
Years and years of intense speculation, fostered by the growing profits of industrial companies, have increased the price of shares beyond their normal price.
The “average” price of a share is a theoretical notion, since its price varies permanently according to supply and demand. Still, the value of a share theoretically depends on the dividend, that is, on the income stockholders expect. But speculation had sent share prices way beyond this “normal price.” The bursting of the stock market bubble sent stock market indices around the world into a nose dive. A great number of industrial companies saw their shares slump to 50% or even 20% of their former price. And today’s stock prices have not yet stabilized. This indicates that speculation continues (this time, speculation on falling prices). The stock market’s correction is still incomplete. With the recession, big capital expects a widespread drop in production and profits.
In September 2008, the crisis of the banking system and the crisis of the stock market began to be interconnected. After that, the leaders of the imperialist countries regularly met, discussed and injected fantastic sums of money into the system to reestablish confidence between bankers. To no avail. The states offered the banks new credit lines to refinance themselves or the states directly refinanced the banks. But this did not restore confidence and the banks have not resumed lending to the economy.
The economic press is full of articles in which bosses of small and medium-sized companies complain that they cannot expand their businesses because the banks not only refuse to grant new loans but also the banks no longer authorize them to overdraw on their account.
The banks obviously prefer to use the state’s help to “seize on a good opportunity” – in other words, to buy up vulnerable competitors. The concentration in finance, which appeared during the first days of the crisis, will continue – especially since this concentration is supported by the actions of the various governments.
Having already struck the banking system and the stock market, the crisis could smash the monetary system. The currency market is completely disoriented. The ups and downs of currency rates look like the fever chart for a severe bout of malaria. This situation is bound to have important consequences on international trade.
To a certain extent, trade relations between the countries of the euro zone have not suffered from the crisis. But for how long? The support given by each state to its bourgeoisie will inevitably aggravate the budget deficit of each country, though not all at the same rhythm or to the same extent. It is up to the richest countries to decide whether to defend the euro against the dollar, the pound or the yen. How long will the rich countries in the euro zone go on paying to prop up the poorer ones?
Also, the different countries inside the euro zone do not have comparable imports and exports with the United States. The ups and downs of the euro versus the dollar do not have the same consequences for each one of them. And it seems that after a period during which the euro was stronger than the dollar, the trend has been reversed.
It was a monetary crisis in the early 1970s that began this protracted crisis. The monetary crisis of the 1970s ended the Bretton Woods system, which dated back to the post-war period. Under that system of fixed exchange rates, the rates of other currencies were set in relationship to the dollar, which itself was based on gold. This monetary system greatly facilitated international trade. But in 1971 it collapsed, and in 1975 was replaced by floating exchange rates, that is, rates that vary according to supply and demand. This did not put an end to domination by the U.S. currency. The dollar remained the main currency for international trade and monetary reserves kept by the central banks. However, the new system opened up unlimited possibilities for speculators to play on even the smallest variations in exchange rates over very short periods of time. This has played a major role in the financialization of the economy.
The slightest movement in exchange rates can have an enormous impact on the financial system, given the huge size of the reserves accumulated by states and central banks – mostly in dollars. According to Les Échos, today’s reserves total around 7.1 trillion dollars. In itself, this is a huge sum. Yet even more impressive is how fast it has grown! It is five times larger than a decade ago and 150 times larger than in 1971, when the U.S. unilaterally announced that the dollar would no longer be convertible into gold. The purpose of the reserves held by the different countries’ central banks is to defend their national currency. The rapid expansion in these reserves gives us an idea of the speculative threat on national currencies and is a measure of the parasitic nature of finance capital.
Despite the fact that it has remained the cornerstone of the international monetary system, the dollar has not been in great shape for many years. In the mid-1980s, the United States stopped being a creditor and became a debtor country. The country’s foreign debt is almost three trillion dollars (nearly 30% of the GDP). For years the equilibrium in the accounts has been achieved thanks to the “deposits” made by other countries like Japan, China and a handful of oil-producing countries, which bought U.S. Treasury bonds. However, the United States’ increasing indebtedness has reduced confidence in the dollar and pushed depreciation of the U.S. dollar in currency markets. Those markets have grown tremendously in recent years, not in order to facilitate global trade but because of the growth of financial operations and all kinds of currency speculation. (Apparently only 3% of the exchanges carried out in currencies correspond to real trade transactions.)
For years, the U.S. dollar had lost ground to the euro. In 2002, a euro was worth 86 cents. At the end of 2007, the euro was worth $1.48. The dollar had lost nearly half its value compared to the euro! But the current crisis reversed the situation. At the end of October 2008, the euro had fallen to only $1.23.
The leaders of industrial countries know full well that the currency market’s volatility could have grave consequences on international trade, thereby aggravating the crisis. But they have no means to end speculation, nor do they seek to have any. They often talk about a “new Bretton Woods” – but they do nothing to set it up! In fact, the Bretton Woods Agreement was not really an agreement. The U.S. imposed Bretton Woods on the English, French and other imperialisms that had been weakened by the war. They had no other choice but to accept the conditions dictated by the United States. Today, the U.S. itself is weakened by the crisis and it’s not at all clear that it can impose itself in the same way.
Speculation that strengthens the dollar in currency markets is not based on renewed confidence in the U.S. currency, but on increased distrust of the euro. In this period of financial upheaval, the owners of capital, seeking a haven for their money, look in the direction of U.S. Treasury bonds. Add to this, intervention by the central banks that have invested their reserves in Treasury bonds. China, for example, has just increased its U.S. dollar reserves by 100 billion dollars. Any depreciation of the dollar would mean a severe loss for China. In other words, China and the United States are chained together by the same chains. This is why it is stupid to claim that emerging countries like China, India or Brazil are havens of growth capable of instilling new vitality to the global economy. A collapse of the dollar, a sudden hostile reaction against Chinese imports or the withdrawal of American or Japanese capital could, separately or together, end China’s current growth.
After the crash of 1929, the withdrawal of American capital was the principal means by which the crisis was transmitted to Germany. The same phenomenon is today threatening the countries of Eastern Europe, where the big banking, distribution and industrial sectors are entirely dominated by Western capital – mostly European. Hungary and Ukraine, on the verge of collapse, had to be bailed out by injections of money by the IMF.
Investment funds, especially those that specialize in the riskiest forms of speculation, have been hit by a double squeeze. On the one hand, they have lost a lot of money in their various speculative schemes, and on the other hand, they have to come up with huge amounts of cash to meet big obligations that are coming due. And they can’t borrow more money from the banks, especially since credit markets have been frozen. So these funds have been massively withdrawing their money from emerging markets, such as Eastern Europe.
The auto industry was a rare exception in that it did not just make sweetheart deals to buy up what was left over from the time of the former People’s Democracies. It built new plants in the Czech Republic, Slovakia, Hungary and Slovenia. The crisis of the auto industry and the withdrawal of its capital, ending production, would have much more dramatic consequences in these countries than in the West.
The decline of industry’s needs for raw materials, amplified by speculation, has resulted in erratic price movements for raw materials. After the price of crude oil reached unprecedented highs, it then lost two-thirds of its value in a matter of weeks. The poor classes living in underdeveloped countries who had to pay high food prices due to speculation will now have to pay again (this time because of speculation on falling prices). As the price of exports from these countries falls, their governments will try to force the poor to compensate for lost government revenues.
The crisis has already spread far beyond real estate or finance.
It has hit the auto industry. Not only have vehicle sales already dropped, but the bosses expect an even bigger fall. A drop in car production has repercussions on a multitude of subcontractors and suppliers. This includes the steel industry, whose other main client is the construction industry. Steel already had planned drastic cuts in production and mill shutdowns. Given the auto industry’s economic role and size, including its suppliers and subcontractors, there will be a significant increase in unemployment. as well as temporary layoffs. This will push down the purchasing power of the working class and further aggravate the crisis.
There is nothing “moral” about the way financial markets work, and governments’ interventions in those markets won’t change that. On the contrary. By opening credit lines to bail out financial companies and by helping them recapitalize, governments are not only absolving these companies of their past speculation, they are also encouraging them to speculate even more.
The same is true of the central banks’ decision to lower interest rates under the pretext of encouraging banks to offer credit to companies big and small. Currently, the banking system is not really using the credit offered by the central banks to lend to the production sector. Instead the banks are setting aside the money for a “golden opportunity” – such as buying out a weaker competitor at a fire sale price.
In a panic, the capitalist system’s political leaders promise to reform the global financial system. But each of the big imperialist powers that have a say have different views on how to carry out reform according to the interests of their own bourgeoisie. And more importantly, what can they really reform anyway? What is certain is that the governments are increasingly intervening. Their intervention has been immediate. From the very first day of the financial crisis, the central banks opened the money taps. They established lines of credit for the private banks, justifying this action as a way to deal with the lack of confidence that plagued the banking system, pretending this would allow the banks to lend money to companies for production. To illustrate how the banks use the money: the Wall Street Journal reported that Goldman Sachs, which had received a 10-billion-dollar line of credit, had a total compensation package for its executives, including pensions, etc., of 11.8 billion dollars.
Given the banks’ tendency to keep the money for themselves while lending little or nothing to industrial companies, some governments might be tempted to carry out some kind of nationalization of the banks to set up a public banking service that would come to the rescue of those sectors that really need help. This is precisely what the French government did after World War II: all banks holding deposits were nationalized in the interests of the bourgeois class as a whole.
Next in line begging for government money are the big auto companies. From the United States to Europe, it is fashionable to talk about this or that “stimulus program” for industrial recovery. Governments could even decide to launch a series of big public works programs. Governments never cease using public funds to guarantee the profits of the capitalist class. However, in times of economic crisis – as in times of war – when governments want to guarantee the profits of the owners of capital, they will take the money they need directly from the workers’ pockets, even more than usual.
From the outset, the protracted crisis of the capitalist economy has meant an escalation of the class struggle. But so far, the struggle has been one-sided. At each and every step, it was the bourgeois class that took the initiative. They have been able to make the workers foot the bill, especially by taking advantage of the massive unemployment and the workers’ increased fear of losing their job. They did this with the complicity of all the political parties, including those which, because of their past, had links with the working class.
The last 30 years have been marked by a long period of reduction in the workers’ living conditions and a regression of the whole society. It was by continually reducing wages and brutally worsening working conditions that companies have been able to increase their profits and the capitalist class has been able to maintain the total surplus-value it takes. The ballooning of the financial system was fostered by huge cuts in social programs and the siphoning of fantastic sums of money from useful programs for the entire society, including those that benefit the poorest people. Governments have carried out bigger and bigger cuts of budgets that should have gone to hospitals, schools and community facilities. Instead, the money was used to pay the interests on the government’s debt, in other words, it fed the financial system.
In the United States, for example, the richest and most powerful capitalist country in the world, 40 million people are terribly impoverished. While the government spends 150 billion dollars to bail out a single insurance company (AIG), it has totally failed to set up a health-care system for the 40 million working people currently without any. No need to ask who will pay for the crisis: the working class has already paid more than enough!
However, the workers are not done with paying for the crisis of the capitalist system. The aggravation of the crisis can only aggravate the social war waged by the bourgeoisie. In the coming period, how much the governments intervene will vary from country to country, according to local conditions and the depth of the crisis. But those differences change nothing. The governments will not intervene to alleviate the conditions of the working class, but to help the bourgeois class to emerge from the crisis as strong as possible.
The soothsayers of the International Monetary Fund, the World Trade Organization and the central banks might look at the past in order to find regulations or controls that could allow them to avoid a catastrophe. New G4, G8 or G20 summits might be organized. But they will fail to come up with a system to regulate capitalism. As proof, just look at France, where every Socialist government, including those with Communist Party ministers, carried out the same policy: they sold off portions of the public sector to private interests and supported the financial sector through the French state’s growing indebtedness.
More and more people say that in order to perfect the market economy there must be some control and regulation – as was the case in the 1950s and 1960s. But they do not explain why the regulations of that time did not prevent the crisis of the early 1970s from breaking out. Nor can they explain why out of such a brilliantly regulated system came the generalization of laissez-faire and the frantic development of neo-liberalism, which they denounce today after having praised them for years.
It is absolutely ridiculous to blame the influence of this or that “conservative” economist or the “ultra-conservatism” of Reagan and Thatcher. The fact that a B-movie actor was able to have such an imprint on the evolution of capitalism is an indication that his policies were in line with the aspirations and desires of the capitalist class, in keeping with the whole evolution of capitalism itself. The top politicians are only the servants of the propertied classes.
So far, the working class has not shown that it was prepared for an intensification of the war that the bourgeoisie is about to launch. The parties that claim (though with less and less conviction) to stand for the workers’ interests betrayed the workers a long time ago. The union confederations aren’t any better. The aggravation of the crisis and the expected brutal increase in unemployment obviously do not encourage workers to fight back. However, the blows they suffer can also develop their combativeness and consciousness, both of which could change very rapidly. Remember that in the 1930s, the crisis surprised and disoriented the laboring masses at the outset, but ultimately led to great fights.
The workers’ reaction was not immediate. Massive layoffs, unemployment, plant closings, attacks of all kinds at first surprised and demoralized workers.
It took years before the workers’ counter-offensive began. But it came, and it was massive. During the mid-1930s it shook countries as different as the United States, Spain and France. There were huge strike waves in other countries as well.
In Germany, the response came too late. The bourgeoisie used Hitler’s regime to break that country’s working class. But the coming to power of Nazism showed the workers in other countries the real danger that they confronted and thus played a decisive role in the working class upsurges in France or Spain.
Based on the experiences of these years of massive workers struggles, Trotsky wrote the Transitional Program for the organizations of the Fourth International, which were then being constituted.
The program was published in 1938 when the workers’ march forward was already coming up against a wall, either because it was trapped in a dead-end or because it was betrayed. World War II was on its way. But Trotsky nevertheless issued the Program with the hope that the war would lead to workers’ revolts, as World War I had done.
His program was a tool for a revolutionary organization addressing itself to a struggling working class, offering the workers a series of objectives that would allow them to concretely challenge bourgeois control over corporations and banks. His program’s aim was to transform a pre-revolutionary situation into a revolutionary one.
The history of the present crisis is not yet written and no one can tell how, where and when, confronted with the offensive of the bourgeoisie which will inevitably intensify, explosions of anger on the part of the working class will break out. We cannot even be sure that there will be fights wide enough and long lasting enough to shake up the bourgeoisies and their state apparatuses.
However, the reason for a revolutionary organization to exist is to prepare itself for times like these, when the working class has the possibility to change the course of history. The Transitional Program was written for this kind of historical period. It is in such a situation – if it occurs – that it will gain its meaning.
The evolution of the crisis brings to the fore the partial objectives of the Transitional Program: the sliding scale of wages to protect the workers’ purchasing power; dividing up the available work among all workers without cutting wages to protect against rising unemployment.
But the past has shown that the bourgeoisie and its left-wing political servants know how to divert these two demands that correspond to the interests of the proletariat and transform them from goals for an all-out struggle into kitchen recipes that demobilize them. For many years, Italy had a system that indexed wages to the cost of living. In a sense, France has such a system with a minimum wage (SMIC) that is regularly increased. In the U.S., clever bosses like Ford quickly proposed cost-of-living adjustments (COLA) as a way to rein in struggles. As for dividing up the available work, the idea was recently perverted in France by the Socialist Party’s Aubry Law which claimed that a shorter work week meant more jobs for more people.
The basic demands of the Transitional Program can keep their revolutionary meaning only if they are connected to the control, by the workers and the population, over banks and corporations. Bank secrecy and, more generally speaking, business secrecy are vital for capitalists. It allows them to cover up their plunder of the society’s wealth. The lifting of these “secrets” is a priority because it is the first step towards workers’ control over industry.
These objectives are linked with the means that are used: workers’ democracy in their struggles, the creation of strike committees or factory committees that can transform themselves into a leadership recognized by all workers, including the most exploited who, in normal times, stay on the sidelines, removed from unions and politics.
For working people, the crisis of the banking system has raised the questions not only of the need to control the banks, but also of who does the controlling. It has become obvious that the control of the banks among themselves as well as the control by the state only serves the bourgeoisie's interests with catastrophic consequences. The control of the banks must be wrenched away from the financiers. Not only should the banks be nationalized – and nationalized without compensation – they must also be unified into a single bank run by the state under the control of the workers and the population in the interests of society as a whole.
These objectives are not magic recipes. They will find their true meaning only when the exploited masses take hold of them. A small organization does not have the power to make the working class fight back. But during those time periods when the working class does react, and reacts in an important way, small groups of revolutionaries can grow, and, if they measure up to the situation, they can play a role in the events.
In the 1930s, it was not the working class that failed to confront the necessities of the time period. If the workers’ fights in the U.S., France and Spain could not prevent the bourgeoisie from imposing its solutions to the crisis – the New Deal in the U.S., Fascism in Germany, state intervention in France and, finally, the World War – it was due to the policies put forward by the organizations that had the confidence of the workers.
Despite its cost to society, capitalism will not disappear automatically. It will disappear only if and when a social force manages to get rid of it.
We believe that the proletariat is the only class that can bring about that transformation. The crisis and its consequences, such as the immense waste of human labor, emphasize this necessity. Today, we do not know any more than we did 20 or 50 years ago which path, which collective experiences, will bring the proletariat to the consciousness and understanding of its historic role: the revolutionary overthrow of the bourgeoisie’s rule, the suppression of privately-owned means of production and the reorganization of production to satisfy the needs of everyone under the democratic control by collective social forces.
But what we do know is that for this consciousness to take hold, the working class needs a revolutionary party. The task of the revolutionary party is to defend and spread these revolutionary objectives in all circumstances. It must be able, thanks to its cohesion and common understanding of events, to lead the proletariat in motion to the realization of these objectives.
To make our own contribution to this historical task is the fundamental reason why we exist.