Aug 31, 1984
Underdeveloped countries have been having difficulties making the interest payments on their foreign debts. Major companies, such as International Harvester and utility companies with multi-billion dollar nuclear reactors that are either unfinished or unused, have reneged, or threaten to renege on their loans. If this deteriorating trend continues, could it touch off a series of bank failures, which in turn could bring about a financial collapse, which in turn could bring about a collapse of the economy even on the international scale? There is a growing concern over this possibility. One way to imagine what the future might hold, is to look at the past, at the crisis that brought on the last Great Depression of the 1930s.
The U.S. emerged out of World War I the dominant imperialist power. The other participants in the war, England, France, Germany, both victors and vanquished, came out of the war weakened and bled dry, the flower of their youth killed, their economies in a shambles. The U.S. entered the war last and suffered the least, its industrial production already higher than that of any other country. Its domestic market, with a population larger than Germany and France combined, with a higher standard of living, was far vaster. London was being overtaken by New York as the financial capital of the world. Where before the U.S. had been in debt to England, this was reversed and England and France were in debt to the U.S. In the 1920s the U.S. provided 3 billion dollars in loans to Europe, much of this going to Germany, aiding its industrial recovery. The U.S. became the main motor of the industrial recovery following the war and the boom in the 1920s.
The boom in the U.S. could be measured in several ways. Production grew to be 75 per cent higher than before World War I. Capital goods production increased at an annual rate of 6.4 per cent in the 1920s. The boom in production centered around the auto, the introduction of trucks and tractors, the building of a new network of roads. Electrical appliances, unknown at the start of the decade were commonplace by 1929: radios, refrigerators, vacuum cleaners.
However, agriculture, one of the most important sectors of the economy, underwent a depression throughout most of the twenties. World War I had brought increasing prices for farm products and great prosperity for many farmers. Between 1914 and 1920, prices doubled. There was a big increase in the use of machinery and in the amount of land put into production by farmers. But farmers had to go into debt to do this. And this coincided with a world-wide increase in agricultural production, which deprived U.S. farmers of much of the foreign markets they had been selling to. Commodity prices plunged on a world scale. Farm mortgages increased from 6.7 billion dollars in 1920 to 9.4 billion dollars in 1925. However, not all farmers suffered. The farming industry went through a ruthless shake-out, in which the big, more efficient farmers were able to make a profit and actually prosper, while the small farms went under. The depression in the farm sector of the economy, which still in the 1920s comprised 25 per cent of the nation’s population, exerted a strain on the economy world-wide.
There was also a built-in contradiction to the boom in industrial production during the 1920s: while production and profits increased, and worker productivity increased by 43 per cent, wages only increased slightly. But during the 1920s the capitalists were able to get around the limits of the market place through the use of credit, which allowed them to expand the market, and enabled wider layers of the population to buy big-ticket items. The Federal Reserve, almost up to the October 1929 crash, pursued an easy money policy which encouraged credit at a relatively low interest rate. This facilitated and stretched out the increase in production.
Easy credit went to finance a private home-buying boom. By 1929, 19 billion dollars in home mortgages had been taken out, although credit was not able to sustain the housing market as it peaked in 1925 at the construction of 950,000 units per year, and then drifted downward over the second half of the decade. Installment loans which appeared in the 1920s allowed a wider range of people to buy more expensive appliances and cars. The sales of durable goods, such as cars, dwellings, and home furnishings, that is, those things which had been up until this time, affordable only by the more wealthy, increased at an annual rate of 5.9 per cent throughout the decade. This kind of credit had accumulated to 1.375 billion dollars in 1925 and more than doubled to 3 billion dollars in 1929. This balloon of credit propped up demand artificially.
Throughout all of the 1920s, there was a significant increase in speculation. Much of the construction both in housing and later in office and apartment buildings was speculative. In the early 1920s, there was speculation in land, most spectacularly the Florida land boom, out of which Florida banks were clearing over one billion dollars a year. By 1926, the speculation slowed and prices dropped, bringing down several Florida banks.
Then of course, there was the stock market. The stock market began its fateful rise in the last half of 1924, with the New York Times industrial averages going up 33 per cent in those 6 months. The practice of buying stocks on margin became widespread. This meant that the buyer would pay a fraction of the cost of the stock. The rest of the cost of the stock would be covered by a loan in which the banks held the stock as security. In other words, the only security for the loan was a piece of paper, whose fictitious value could change abruptly, depending on the winds of speculation. This was called a broker’s loan. Interest rates for these kinds of loans were very high for the day, from 6 per cent to 12 per cent. The money for the loans was provided by the major banks, implicating the banks in the speculation. So long as the stock market went up, buying on margin was profitable for all concerned. In the early 1920s, the volume of these brokers’ loans varied from one to one and a half billion dollars per year. But as the rising stock market pulled more money in, brokers’ loans ballooned to 3.5 billion dollars in 1928 and 6 billion dollars in 1929. The stock market rose by 128 per cent between 1926 and 1929. In 1927, the Federal Reserve lowered its rediscount rate from 4 to 3½ per cent. The cheaper money provided further credit for the stock market.
The demand for stocks was greater than the supply. So Wall Street financial wizards invented companies, the sole purpose of whose existence was for their shares to be bought and sold on the various stock exchanges. These were called investment trusts. Again, so long as the stocks went up and people made money, nobody cared.
By 1928, the highly profitable rise in the stock market was sucking in money from all over the world, straining international financial markets. U.S. lending abroad virtually stopped and the flow of capital reversed, as European capitalists put their money in the U.S. stock exchanges.
This speculation often grew out of the credit needs of the capitalists. The stock market, during the 1920s was an important means by which companies raised capital for investment, by issuing new stock. When stocks went up, it became an increasingly popular means to raise capital. However the trading of the stocks became detached from the reality of the productive worth of the companies. They became merely pieces of paper whose worth was governed by how much they could be sold for on the market. Thus credit for investment merged into speculation with little or nothing to do with production. The gap between production and the financial system widened.
While the financial bubble grew through the months of 1929, production in many countries began to contract. The German economy, which had taken off in 1924, with a faster rate of growth than that of any other country, producing more steel than England and France combined, began to slow down by the end of 1928. By mid-1929, inventories in Germany were rising. Unemployment rose to more than double the rate of the U.S. By the autumn, the number of bankruptcies in Germany was also rising sharply. In the other European countries, except France, the business cycle had reached its peak and was turning down.
The same thing began to happen in the U.S. Capital investment fell off, with a very high rate of already unused capacity. The boom in construction had gone into a general decline in March 1929, as speculators’ money was drawn to the stock market. In March, also, auto production began to fall. From August to October, industrial production, prices and personal income were on their way down.
Speculation outlasted the decrease in production for only a quarter of the year. The falling economy began to exert a pressure on the stock market. Fear of worsening company balance sheets and a fall in dividends led to the situation that more people began to sell stocks than wanted to buy. Prices on the stock market rose and fell in an erratic way. Then, for 2 weeks before the crash, prices began to decline. On Thursday, October 24, the market crashed.
The capitalists had been able to make huge profits in the stock market so long as the bubble of speculation continued to grow. The simple flow of capital boosted the prices of stocks. As prices went up, more money was drawn into the stock market. And the more this seemed like a good thing, the higher and faster stock prices went up. But when the doubt began to creep in that, with the economic downturn, the very high stock prices could not be maintained, the flow of money reversed – at first very slowly. But no one wanted to be caught losing money. Suddenly a panic set in.
The capitalists had bought stocks on margin. This allowed them to leverage their money, and buy many more stocks, and make much more money. The banks lent the money, taking a piece of paper, the stock certificate as security. When prices dropped, the system went into reverse – with a vengeance. Suddenly the piece of paper was worth less and less money. If the stockholder wanted to keep the right to hold that piece of paper, he had to cover the loss in price. If he couldn’t, he lost his investment while the stock was sold. As the stock prices fell, the huge number of stocks held on margin were dumped on the market, depressing the market more and more.
Support to keep the market up was hurriedly organized by the major banks: J.P. Morgan, Chase Manhattan and National City Bank, since the banks stood to lose tremendous amounts of money if the stock market continued its precipitous drop. All their broker loans were about to evaporate with the drop in stock prices. But this support was far from able to stem the crash. There was a nationwide stampede to unload, the volume of stocks traded doubled and tripled from previous highs. At the end of the first decline in 1929, the stock prices dropped 39 per cent from their peak. Nearly 26 billion dollars was lost. By the end of 1932, they had dropped a total of 83 per cent from their peak. Seventy-five billion dollars of fictitious value was destroyed. Since the U.S. was the center of the world financial system, not only U.S. capital was destroyed. What started in the U.S. began to unroll into an international catastrophe.
The stock market crash accelerated and aggravated the business slide, through the destruction of vast amounts of capital from all over the world. This brought on a general liquidity crisis in the U.S. As a result, the capitalists couldn’t borrow from the banks, but neither could they go into the stock market to borrow money. So, they couldn’t pay their bills or wages. Inventories were run down in order for the companies to meet their debts. Production dropped. Bankruptcies rose sharply. The whole financial structure, which through the growth of debt had first facilitated and supported the boom, began to crumble, driving down production further. The lack of return on production, and the resulting inability of the corporations to pay their debts further dragged down the financial structure. The banks refused to roll over loans to foreign and U.S. businesses, mortgages on homes and farms, and instead called them in, in their race for liquidity. When the debtors could not pay back the money, they went into bankruptcy. Farms and homes were foreclosed.
The depressive forces spread and reverberated throughout the U.S., the center of the world economy, and spread very quickly internationally. As demand declined, so did output, prices and incomes in country after country. This led to a decrease in demand for the exports of others, thus lowering their income. These nations in turn decreased their demands for both domestic and foreign output. Internal lending and investment fell sharply and then came to a virtual standstill. Trade restrictions followed, and this further depressed production on a world scale.
The collapse of the stock market, then of more and more companies led finally to a complete collapse of the financial system. This phase began in Austria in May 1931. The most important bank there, Credit Anstalt, failed. This failure shook confidence in all Austrian banks, which underwent major runs. Money was drained out of the country. The next victim was Hungary. Then a run on the banks hit Germany, which was known to have heavy investment in Austria, a deeply depressed economy and a large short-term debt to foreign banks – mainly U.S. Withdrawals began in May, and reached panic proportions by July as one very large bank failed and others fell into difficulties. The financial crisis then spread to the two main international financial centers, first London and then the U.S. There was a run on British gold, and the British monetary system collapsed.
This new wave of crisis boomeranged back to the U.S. By the end of 1932, 5,200 commercial banks failed, more than one out of five. A bank panic developed in February 1932, and virtually every bank in the country had closed by the spring of 1933. In a sense, most of the financial institutions that remained open were failing. They were losing their deposits. Their loans were not being repaid. And they were not able to provide further credit. They were almost literally frozen.
There were many measures of the decline in the U.S. Between 1929 and 1933, the U.S. economy declined precipitously. GNP declined by 33 per cent. Investment declined by 89 per cent. Residential construction fell 75 per cent. Iron and steel production fell 59 per cent. Auto production fell 65 per cent. Total national income fell 54 per cent.
In 1928, corporate profits had totaled 9.6 billion dollars. In 1932 there was a net loss of 3.2 billion dollars. Profit and losses varied greatly by asset size of corporations, with smaller corporations generally suffering more than larger ones. That is, the larger the company, the greater the chance that it was still able to make a profit, even though it was usually smaller than before the depression. However, despite the drop in profits and losses, corporations continued to maintain their dividend payments. In the four years, 1930-33, corporations paid out in dividends 16.8 billion dollars more than their profits after taxes. This was a drain on corporate assets which served not only to reduce corporate working capital, but also to jeopardize the financial health of the company, seriously in many cases. Large numbers of corporations faced difficulty because of this. The capitalists used their control over the corporations to cannibalize them.
The workers were not so lucky. They were thrown out on the street with no means to make a living. Unemployment rose to 8.7 per cent in 1930, 15.9 per cent in 1931, 23.6 per cent in 1932 and 25 per cent in 1933. It is not known how many people were in the families of those totally unemployed in 1933, but it is estimated at well over 30 million out of a population of 122 million. In no year before 1941 did unemployment fall below 14.3 per cent. Also 55 per cent of all employed workers were working part-time. These workers were working an average of only 59 per cent of a full week.
Those who worked suffered wage cuts – on top of the cut in hours. The most hard-hit were those in agriculture where it is estimated that wages declined about 50 per cent during the depression; many farm workers received little more than “board and keep” plus a little spending money occasionally. Manufacturing workers had their wages cut by 9.1 per cent between 1930-31. Bituminous coal miners’ wages were cut by 16.2 per cent in the same period.
Between wage cuts and unemployment, the total income to workers was slashed drastically. The total income earned by auto workers declined in 1932 to 37.7 per cent of 1929 earnings. In the iron and steel industries, it was 33.9 per cent of 1929 earnings. In an industrial city like Birmingham, Alabama, in one congressional district, with 108,000 wage and salary workers, only 8,000 had their normal incomes. The government assistance for relief in 1932 totaled 317 million dollars, which would have provided less than $27 for each of the 12 million unemployed.
The Roosevelt New Deal, with its heavy government deficit spending, was an attempt to stimulate recovery, but the New Deal could find no means to end the depression. While the U.S. economy slowly pulled itself up to some sort of small recovery, this recovery aborted in 1937 and the economy plunged once more into the abyss. Capitalism could finally find no other solution to the depression than World War II.
In the 1920s the ballooning financial structure, with the credit that boosted sales, investment and speculation, was perhaps able to postpone an economic crisis. But in the end, it was the cause of a much bigger catastrophe, a more devastating depression.
Today, there is also a ballooning of the financial structure, but on an incomparably larger scale, in all kinds of speculation in the money markets, commodities, the buying and selling of mortgages, in the stock exchange and the futures on the stock exchange; but above all, in the amount of credit in this country, as well as all over the world. This reliance on mushrooming credit has allowed the capitalists to postpone a depression for 10 years, even though there has been a general stagnation in production during this time. But there is nonetheless the overhanging threat that the capitalists cannot put off forever a severe depression like that of the 1930s, or worse. This threat grows as the gap continues to widen between, on the one hand, the increase in credit and speculation, and the stagnation of production on the other.
Confronted with what happened during the depression, the working class in most industrial countries, responded with big social or political movements. These movements contained the potential that once and for all, the capitalist system which was the cause of the crisis, the misery, the devastating poverty amidst unprecedented wealth, could finally be destroyed, and a new economic system built up.
If the working class could have taken power in even one country, it might have provided the impetus for a series of workers’ revolutions. But the working class failed to achieve this goal in any country. The policy of the working class parties and unions, which held the working class’s confidence, tied the working class movements back to the bourgeoisie. In all the industrial countries, the bourgeoisie’s rule was allowed to continue. Thus, the socialist revolution, in which the crisis of the old society could finally lead to the creation of a new society, was put off. And the bourgeoisie in country after country imposed itself anew. It smashed the workers’ organizations through fascism and military dictatorship, and it militarized society in order to go to war. Or else, as in the U.S. which, owing to the fact that it was the dominant imperialism, still had enough wealth to have a certain room for maneuver, it used the unions that had been built up by the working class movement to impose the bourgeoisie’s discipline on the workers, and prepare the workers for the sacrifices of imperialism’s coming world war for the further redivision of the world. The bourgeoisie’s solution to the depression was a new world war, a war in which 100 million lives were destroyed.
This enormous catastrophe, in all its aspects, was a logical development of the capitalist system. And because the capitalist system still exists, and with it, the development of the same contradictions, today the same possibility exists to have a new period of economic and social crises and convulsions.