Oct 26, 2009
If economic crises were measured on a Richter scale, like earthquakes, the crisis of 1929 would be a ten. It traumatized the bourgeoisie for several generations. It shook the financial system of the entire planet for decades. Hundreds of bankers went bankrupt, even if there were fewer jumping out of windows than most people think. It took until 1950 for trading on Wall Street to recover to its pre-crash level. The stock market crash of 1929 set off the most profound economic depression in the history of capitalism. And it took the military spending connected to World War II to revive the economy.
So what set off the crisis of 1929, and what does it have in common with today’s crisis?
Before the 1929 crash, there was a period of euphoria in stocks and finance similar to that of the last few years.
Starting in 1921-22, the American economy underwent spectacular growth. Economists of the time said that America had entered into a “new economy.” The director of the New York Stock Exchange said, “We are done with the cyclical economic crises that we have seen up to this point.”
This economic growth was spurred by investments that were massive for the time. Automobile production was one of the locomotives of this “new economy.” In 1929, five million cars rolled off the Ford and General Motors assembly lines. Auto manufacturers’ profits skyrocketed, as did the prices of their stocks on the stock market. General Motors was thus able to buy up Vauxhall, in the United Kingdom, and Opel in Germany.
Auto manufacturers needed steel, tires and oil, which they got from Carnegie and Morgan’s U.S. Steel and Rockefeller’s Standard Oil. Building construction, which was booming, also needed steel. The United States produced half the world’s steel, and pumped two thirds of the planet’s oil. Profits exploded.
A few companies already dominated heavy industry, but this was not yet the case in new sectors like auto. Wall Street pushed mergers and acquisitions, just as in the 2000’s.
Credit was the other motor of economic expansion during the 1920s. It became a magic wand for increasing the size of the market, pulling in poorer and poorer layers of the population. There were more than 1.4 billion dollars in auto loans in the United States when the crisis broke out. Credit increased the sale of household appliances. The main manufacturer of radio sets, RCA, experienced rising stock prices comparable to those seen with Amazon or Yahoo between 1999 and 2001. The price of its stock increased seven-fold during 1929 alone.
The Federal Reserve, the U.S. central bank, lowered its interest rates in 1927. The banks could now borrow money much more easily from the Fed, and in turn gave out a lot more loans.
This was the beginning of insane speculation in stock prices. Buyers no longer waited to receive their dividends at the end of the year. They now bought stocks in order to sell them at a higher price. Prices on the stock market took off and soon had no connection with the real value of the companies, just as in 2004 to 2007. Industrial corporations followed the bankers and traders by speculating with their treasuries. Industrial capital surpassed banking capital in speculation in September, 1929. Capital poured in, including from Europe.
Traders borrowed money from the banks to buy stocks. The rising amount of these loans drove up prices on the stock market even more quickly.
Financiers created new stock investment companies, and then listed these companies’ shares on the stock exchange, which drove up prices further!
The bubble had to burst. Every speculator knew this, but no one wanted to be the first one out, because no one wanted to lose out on profits while the market was going up. An economist in 1929 said, “stock prices have attained what appears to be a permanent high plateau,” to reassure those in doubt.
But the plateau collapsed. The crash came at the end of October. Investment companies, deeply in debt to the banks, sold huge amounts of their stock holdings in order to raise cash. Most of them went bankrupt anyway, weakening the banks, which then went bankrupt themselves. The banks froze credit to companies, then withdrew their investments from Europe – especially from Germany. The crisis started on the stock market, spread to the banks and then to production.
In reality, the stock market crash only revealed a much more profound crisis. The economic recession had already started before the stock market crash.
The consequences of the First World War marked the world economy at the end of the 1920’s. France and England emerged from the war weaker, despite their victory over Germany. A big part of their industrial plants was destroyed or needed to be renewed. Farmers couldn’t get chemical fertilizers or machinery; mine owners did not replace machines. Germany was in even worse shape.
European currencies were devalued because their governments printed too many bills. The British and French governments reduced imports and sought to export more at low prices.
Well before the crisis, this policy pushed the European powers to lean on their colonial empires, where they intensified exploitation.
The expanding U.S. industrial sector could no longer count on the European market for its excess production. Its vast interior market was not infinite.
The financial speculation that led to the crash was a way to use capital that couldn’t be used in production. Just as in the current period, development in finance and speculation was brought on by limitations in the size of the market.
Over the next four years, U.S. production fell by half. In 1933, there were 15 million unemployed in the United States – one worker out of five! The big auto companies laid off two-thirds of their workers.
In textile and steel more than half the factories shut down. Those that kept their job were working only a few days a week.
Thousands of tons of wheat and fruit were destroyed, livestock was slaughtered in the hundreds of thousands, all in order to push up the prices of agricultural goods. And at the very same time, thousands died of hunger in the United States. Steinbeck wrote about the millions of small farmers: how they had borrowed from the banks to modernize their farms, and how the banks then threw them off their land when the farmers couldn’t pay their mortgages.
Just as today, the crisis eliminated the weakest and least profitable businesses. The great trusts in steel, oil and chemicals reinforced their already very strong position despite the fact that their business slowed considerably. Concentration sped up in auto. The two biggest auto companies, Ford and GM, absorbed many of the independent manufacturers.
Banks were hit the worst. Nearly a thousand went bankrupt.
The crisis extended from the United States to Germany, whose economy bled out when the U.S. capitalists took their capital back to Wall Street. It hit the rest of Europe two years later. Unemployment lines and other signs of public poverty appeared in France and then in Great Britain.
The crisis hit every country. In Brazil, trainloads of coffee beans were burned in Brazil because the price went too low.
Protectionism had already been strong before the crisis. It became much stronger on both sides of the Atlantic. World trade collapsed. Every bourgeoisie fell back on its own domestic market or those of its colonies. The United States passed high tariffs in 1930.
Franklin Roosevelt replaced Hoover as president a few years into the depression. Roosevelt has gone down in history for setting the “New Deal” in motion when he took office in the spring of 1933.
The New Deal is presented as if its “stimulus” plan jumpstarted the economy, putting millions of the unemployed back to work.
But the New Deal’s aim was not to reduce unemployment, nor assuage the dire poverty of the working class. Roosevelt’s first priority was to get business going again for the American bourgeoisie, at the expense of the working class.
The New Deal was a series of laws passed by Congress in the first one-hundred days of Roosevelt’s presidency. He restored the banking system by guaranteeing the banks’ loans and by reorganizing and taking control of banks that were near failure. The government bought up their shoddy loans. They would use this measure again!
Roosevelt pushed through a law to subsidize farmers so they would cut production, which would bring up prices. This law strengthened the biggest farmers. A law limited competition in industry and fixed wages at low levels and prices at high ones. The biggest companies divided up sectors and markets.
The New Deal is known for its big public works. Dams, tunnels, thousands of bridges and miles of highways were built, whole regions got electricity – all this was progress. But the goal was not to give work to the unemployed. It was to open markets to the construction companies. Wages were kept at a minimum to push up profits, and working conditions on these projects were such that people spoke of “groups of federal slaves.”
The bourgeoisie faced a social explosion in 1934. More than one and a half million workers in different sectors went on strike. Strikes intensified in 1935 and 1936, often taking on a political character by occupying the factories. These strikes bypassed the old union bureaucracies.
Roosevelt pushed a minimum retirement and unemployment insurance in response to the strike wave. Another law allowed unions to get recognition from the National Labor Relations Board – on condition that they confine workers’ mobilization to a very restrictive process.
But another recession broke out in 1937, plunging the economy into the “second dip” of the Great Depression.
Production would not recover until orders for war goods poured in, prepared by state intervention in the economy.
Germany was the state with the most interventionist policy between 1930 and 1945. This policy started in 1930 under the Bruning government, which decreed the reduction of wages and prices and reduced unemployment benefits. Hitler and the Nazis intensified this policy. The Hitler regime launched a program of huge public works. It was able to restart the economy thanks to its ferocious dictatorship, which had eliminated all workers organizations and militarized the workers in the factories. The big capitalists supported Hitler, who imposed regulation on the economy. He centralized industry and the distribution of raw materials in order to boost their profits. Extreme protectionism allowed German imperialism to return.
Every other industrialized country that fought in World War II, including the U.S., militarized its economy. War was the capitalists’ only “solution” for the crisis.
The bourgeoisie began to make profits again, but government imposed control over production and froze wages. General Electric made millions producing electrical goods for both sides in the war. GM got rich making tanks. GM and Ford drew profits from their investments in Germany during World War II up to the time the U.S. entered the war.
Humanity paid a huge price for the capitalist crisis during the 1930's. First, by the suffering endured everywhere during the depression. Then with the tens of millions killed, the massive destruction and additional suffering brought on by the Second World War.