Are we heading for a new Great Depression?
STOCK MARKETS crashing, banks failing... as the world tips into an economic downturn. Not since the 1930s and the Great Depression has capitalism faced such a crisis as that of today. But, asks Philip Stott, are we likely to see a repeat of the world slump that followed the Wall Street Crash of 1929?
The Dow Jones in New York fell by 25% between 24 October and 29 October 1929. It was an event described by economist John Kenneth Galbraith as: "The most devastating day in the history of the New York stock market... maybe in the history of markets." Had he been alive today Galbraith would have had a sense of déjà vu as the 2008 crash saw similar falls in markets, albeit over a week between 3 and 10 October.
The 1929 crash, like today's, marked a definitive end to a credit based boom, which had seen the growth of a huge bubble in the value of stocks and assets, including then modern innovations like radio communications. The "roaring twenties" had been a bonanza for the elite Wall Street speculators. The value of stocks had risen by between 400% and 500% in a decade. Low interest rates, tax cuts for the rich and a colossal increase in the availability of credit helped to 'turbocharge' the boom.
The use of 'margin loans', where it was possible to buy up, for example, $50,000 in stocks while only having to pay 10% in cash and borrowing the rest at low interest rates, resulted in a frenzy of speculation. Investment companies, like the modern day hedge funds, were set up and could borrow large amounts of capital to play on the ever-increasing stock market.
But this was a boom for the rich and the speculators that completely bypassed the vast majority of the working class and middle class of the US. By 1929 the richest 1% of US society owned 40% of the nation's wealth. While 93% of the people suffered a 4% fall in real disposable income between 1923 and 1929. But like all bubbles it would inevitably burst, as it did spectacularly in October 1929.
More than 12 million shares were traded on "Black Thursday", a one-day record that lasted until the late 1960s. The stock market continued a general downward trend with some short recoveries until July 1932 by which time it had lost 89% of its value. It would take until 1954 for the Dow Jones to get back to pre 1929 levels.
The collapse in share prices and the bursting of the speculative bubble exposed individuals, corporate America and the banking system to huge losses as many of them had borrowed massively to cash in on rising values of the stock market. Even the British economist JM Keynes, who predicted the crash, lost 80% of his investments when the collapse came.
Immediately after the 1929 crash, the US Federal Reserve marginally lowered interest rates and increased the money supply. But these piecemeal measures had no effect on both the collapsing stock market and the downward trajectory of the economy. Unlike today's estimated $7 trillion financial bailout by governments around the world, banks were allowed to collapse.
The dominant ideology of the capitalist class was to let market forces 'self correct' the 'imbalances' of the market. "Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate" was the brutal remedy prescribed by Andrew Mellon, the then secretary of the Treasury.
But it was capitalism that was almost liquidated. In 1930 GDP in the US fell by 9.4%, by 8.5% in 1931 and by 13.4% in 1932. A colossal collapse which involved the wiping out of one-third of the US economy in three years.
The end of the stock market bubble and the economic crisis, alongside government polices, produced a deflationary spiral with prices falling by around 10% a year - leading to a destruction of wealth never before seen in such severity.
The exposure of banks to stock market losses, rising corporate failures and the shrinking value of the dollar led, by 1931, to a banking crisis. 9,000 US banks collapsed between 1929 and 1933 and billions of dollars were lost in savings because there was no protection against banks becoming insolvent. For the working class it was a disaster. Unemployment rose from 3.2% in 1929 to 24% by 1932, creating a social crisis.
Capitalism was determined to make the working class pay. By 1931 wages in the US were half the value of 1925. To make matters worse there was no social security or government safety net and as a result there was mass destitution and impoverishment of the poor and the unemployed.
Some of the great works of American literature were written against the backdrop of the 1930s, including John Steinbeck's Grapes of Wrath that depicted the horrendous conditions that faced the farmers and agricultural workers in the 'Dust Bowl' of the US.
However, the Great Depression was not confined to the US. There was a widespread general crisis of capitalism, a breakdown of trade, banking failures, devaluations and mass unemployment across Europe and globally in the 1930s.
The dominance of the US economy as a world power, its trade links with other countries, the tying of the dollar to a number of other currencies internationally through the gold standard and the rise of trade protectionism and tariffs all helped to exacerbate the crisis. Unemployment in Britain for example increased from one million to almost three million by 1931.
There was a wave of strikes, factory occupations, mass demonstrations and protests against the pauperisation of big sections of the population by the crisis.
The rise of fascism in Spain, Italy and Germany in the 1930s arose directly from the impact of this crisis and especially the failure of the mass Social Democratic and Communist parties to show a way out of the nightmare that capitalism had become for the majority of the working class. Unemployment remained high throughout the decade as the Great Depression in reality lasted until the outbreak of World War Two.
The election of US president Franklin D Roosevelt in 1932, however, saw a change in policy by the US ruling class in response to the depression. There was a growing fear that the economic catastrophe was bringing into question the legitimacy of the capitalist system. A wave of workers' struggles in the US had begun to emerge beginning in 1933 and 1934.
A new radicalised and more militant generation of workers, including many who looked to the ideas of Trotskyism, led a number of important strikes and factory occupations as workers moved to try and win back some of what had been lost during the 1929-33 period. Hundreds of thousands of US workers moved into the new CIO trade union federation during this period.
Roosevelt's New Deal was aimed at stabilising capitalism and to do this he had no choice but to make concessions to the working class and the workers' movement.
A social security system was introduced as well as investment in public works to provide employment and a new set of rules and regulations for the banking system. In effect it was an attempt to rebuild the largely damaged capitalist system through Keynesian measures. However, these steps had a limited impact. Unemployment remained high, between 10% and 15%, throughout the 1930s.
Then and now
There are some important differences between today and the period of the 1930s. For the ruling classes the experience of that decade was a disaster. It had produced a massive economic collapse, the disruption of trade, collapsing profits, the rise of fascism in Germany, Italy and Spain, World War Two, and a huge loss of influence as a result of the spreading and strengthening of the Stalinist planned economies that followed the end of the war.
This led directly to the abandoning of so-called 'classical economic theory' that counselled against government intervention and fiscal stimulus and said that downturns would simply 'correct themselves'.
Instead capitalist governments across the world, including the US, turned to Keynesian economic ideas - government funding to boost economic growth - in an effort to rebuild the shattered capitalist system through a massive use of state financing. This helped to stabilise capitalism, for a period, and laid the basis for the post-war economic upswing that lasted until 1973.
Today, after almost 30 years of neo-liberal policies we are seeing a return to elements of emergency Keynesian methods by governments across the world, including George Bush and Gordon Brown, in response to the threat of a 1930s-style downturn.
A massive and unprecedented effort has gone into preventing a financial collapse through the nationalisation or part-nationalisation of sections of the world's banking system. Further moves in a Keynesian direction are inevitable as the recession deepens.
However, even if a 1930s-level depression is avoided, a world recession seems inevitable that will have huge consequences for the legitimacy of the capitalist system.
On the basis of capitalism there is no way out of these periodic destructive cycles for the mass of humanity. The ideas of workers' control and management of socialist planned economies internationally, will increasingly be seen as the only solution.