80th anniversary of the Wall Street Crash: Capitalist failure – then and now
Scant attention has been paid in the media to the 80th anniversary of the October 1929 Wall Street crash. Preoccupied with their own present devastating global crisis, the capitalists can hardly repeat their theme of yesterday – “it can never happen again” – when dealing with 1929.
Peter Taaffe, general secretary of the Socialist Party, takes a look at how much of it really has happened again, and spells out the underlying cause.
Socialist Party ‘bankers’ appeal for more cash, photo Senan
In the past, anyone, particularly Marxists, who anticipated something similar to the 1929 crash reoccurring – and the Socialist Party and the Committee for a Workers’ International did – were considered ‘economic catastrophists’ or ‘primitive slumpists’. However, we never approached economic prospects in such a crude manner as this. In fact, we opposed those who prematurely saw that ‘another 1929’ was just around the corner.
Some Marxists fell into this trap in 1987. But before this crisis erupted, we did predict that this time it was likely to be a serous crisis, which the capitalists would be unable to avoid and get out of easily.
The capitalists, on the other hand, were in denial about the workings of their system. Something similar also existed prior to 1929, as John Galbraith in his celebrated book The Great Crash 1929 demonstrated. On 4 December 1928, the outgoing US President Calvin Coolidge – about to hand over to the infamous Herbert Hoover – declared: “In the domestic field there is tranquillity and contentment… and the highest record of years of prosperity… [We] can regard the present with satisfaction and anticipate the future with optimism.”
Andrew W Mellon, Treasury Secretary under Hoover, declared: “There is no cause for worry. The high tide of prosperity will continue.” An ex-Marxist, Werner Sombart, was also seduced by the 1920s’ boom. In 1928 he wrote: “Karl Marx prophesied… the catastrophic collapse of capitalism. Nothing of the kind has come to pass.”
End of boom and bust?
Does this have a topical ring to it? Amongst others, Alan Greenspan, chairman of the US Federal Reserve for 19 years from 1987 to 2006, made similar statements extolling the ‘free market’ and Gordon Brown joined in, boasting that he had tamed capitalism and the economic cycle of ‘boom and bust’ had been conjured away.
As with 1929, we said that the massive financial bubble would inevitably end in a ‘bust’. The economic cycles of capitalism, as Leon Trotsky pointed out, are as organic as “inhaling and exhaling” for humans.
Capitalism reached an impasse by the time of the First World War. The productive forces – science, labour and technique – had outgrown the narrow limits of the nation state and private ownership by a handful of billionaires.
After the war, the economic cycles, like the slowed-down breathing in an aged body, became shorter, the booms weaker and the crises deeper. However, the US, as a newly rising economic power – it had overtaken Britain in this regard by the late 19th century – seemed to have escaped the economic difficulties affecting the rest of the world in the ‘roaring twenties’.
Under capitalism, the trigger for a crisis can come from different factors. Indeed, history never repeats itself in exactly the same way. The immediate impulse for the 1929 crash was the sudden collapse in shares on 24 October (Black Thursday) and another, greater collapse on 29 October (Black Tuesday). The current world economic crisis was triggered by a banking crisis and then spread to shares and the rest of the economy.
But the ‘impulse’ is not the main cause of a capitalist crisis. Karl Marx pointed out that capitalism is a system based on the production of profit and not of satisfying social need. Profit comes from the ‘unpaid labour’ of the working class. Therefore built into the very foundations of capitalism are inequality and the tendency of the working class to be unable to buy back the full value of what they produce.
Capitalism overcomes this contradiction for a time by reinvesting part of the surplus back into production. The only justification for capitalism historically is to use this surplus to develop the productive forces, with the capitalists, according to Marx, acting as the ‘trustees’ of society. Once they abandon this mission – not developing but destroying wealth and industry – they forfeit this role. And in a crisis – spectacularly demonstrated in 1929, the Great Depression and also in today’s crisis – capitalism abandons its mission.
Investment in factories and increased production result in a greater supply of goods and services. But both in the period up to 1929 and in the last 20 years the capitalists cut the share of wealth going to the working class enormously, while at the same time piling up their own wealth. As Stephen Foley pointed out in the Independent: “Tell me if this is a coincidence. The income of the top 10% of earners in the US has accounted for about 50% of the total [of national income] on only two occasions in the past 100 years, first in 1928 and then again in 2006-7”.
Rottenness of the system
Economists like Paul Krugman assert that the social after-effects of the Great Depression curtailed the more avaricious appetites of the capitalists in the ‘Great Compression’ which followed in the 1950s and 1960s. Capitalism made enormous profits in this period but because of the huge expansion of industry, the working class’s real living standards also increased. At the same time, the income gap was kept in check up to a point by the renewed strength of the labour movement on the back of the boom.
But this began to be undermined in the Reagan counter-revolution in the US and also by Thatcherism in Britain. The biggest US companies – not just in finance – paid their Chief Executive Officers 275 times the average of their staff’s pay in 2007, ten times the ratio of the 1960s.
In both 1929 and today we saw the spectacle of overaccumulation or overproduction – a glut of goods, services, agricultural production, etc. The consequences of the 1929 crisis, beginning in the US, were devastating. By 1932, US unemployment had reached 23%, peaking at 25% in 1933.
The Hoover administration’s approach was summed up by Mellon, who declared: “Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” Shades of David Cameron’s Tory party?
In June 1930, the US Congress approved the Smoot-Hawley tariff act, which raised barriers to imported goods from abroad. This in turn triggered a ‘beggar my neighbour’ trade war which reinforced and extended the crisis. Unlike in the current crisis, 5,000 banks, mostly small ones, collapsed. In this crisis just 103, mainly small, banks in the US have gone under so far. With the notable exception of Lehman Brothers, the capitalists have learnt from the Great Depression and bailed out the big banks. This has been an international phenomenon with the US and Britain to the fore.
Worldwide, credit lines have been expanded and extended to the banks, to the tune of $10 trillion, approximately 80% of the total annual gross domestic product (GDP) of the US, the biggest economic power on the globe. In Britain, the figure is $1.2 trillion in the form of directly guaranteed loans and equity investment, more than two thirds of the annual output of the entire economy. All of this will be paid for ultimately, of course, by ‘consumers’, largely the working and middle classes.
An economic crisis, particularly one as devastating as 1929 or today, has the same effect as a war. It results in the ‘slaughter’ of capital, resulting in idle factories and workplaces together with ‘idle hands’, that is mass unemployment.
A recent report of the European Commission bluntly declared: “The crisis is the equivalent of capital destruction, reducing – at least for a time – the productive potential of the economy”. This means “the economy will not return to its pre-crisis expansion path but will shift to a lower one. In other words, the crisis will entail a permanent loss in the level of potential output.”
In the US, the working week now is at an average of 33 hours. A victory for the labour movement’s demand for a shorter working week? On the contrary, it is the result of the forcible eviction from the factories and workplaces of millions of workers who may never work again. In the first three months of this year three million jobs went in the US. When taking into account part-time work and those who have given up looking for a job, the unemployment rate is far higher than the official figure of just below 10%. In Britain, 750,000 workers have just disappeared from those “seeking work”.
Green shoots or green weeds
But hope springs eternal. “We have avoided a repetition of the Great Depression,” say the spokespersons of capitalism. There is probably some truth in this. Marxists always recognise that there is no ‘final crisis of capitalism’. At a certain stage, unless the working class seizes hold of the direction of society through socialist planning, capitalism will find a way out, albeit on the basis of continued suffering of the working class and the poor.
Is there presently a recovery, ‘green shoots’, or is it rather ‘green weeds’? The latter seems to be the case in Britain, as the latest figures showing a continued slide in production indicate.
Even if there is a ‘recovery’, it will be so anaemic that many workers will not notice it. Parts of the capitalist world are already in a ‘depression’, such as Latvia. California is an economically “failed state”.
Moreover, two economists, Barry Eichengreen and Kevin O’Rourke, in their paper A Tale of Two Depressions indicate that the jury may still be out as to whether capitalism is ‘over the worst’. The massive worldwide stimulus packages, historically low interest rates, etc, are bound to have had an effect, they concede. Industrial production is slowly recovering and this diverges from the Great Depression when the decline in industrial production continued for fully three years. But has ‘demand’ increased, leading to rising production? Consumer spending is down, house prices continue to fall and production is largely building up stocks.
Global stock markets have recovered some of their losses, as Eichengreen and O’Rourke concede, “Nonetheless, the proportionate decline in stock market wealth remains even greater than at the comparable stage of the Great Depression”. There is a “collapse of global trade [which], even now, remains dramatic by the standards of the Great Depression”.
In industrial production, the big four EU nations – Germany, Britain, France and Italy – are doing badly: “Today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse. The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis”. Japan has the worst figures, with industrial output in February “25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March”.
In Britain, if David Cameron puts the already weakened public services to the sword, this will enormously aggravate the situation. The effects of such methods were shown in the 1930s. In 1936, the US Congress passed a bonus bill for veterans of the First World War. But then in order to balance the budget in 1937, Roosevelt withdrew this and other measures, which led to a 13-month long recession and unemployment soared again to 19%.
The US was on the verge of an even greater crash than 1929. What saved capitalism then and underpinned the whole of world capitalism for a long period afterwards was massive arms production before and during the Second World War.
1929 and the Great Depression became etched into the consciousness of people in America, Britain and worldwide. Restrictions were introduced in an attempt to control and curb the greed of the bankers. The Glass-Steagall Act and other measures remained in place for over 65 years. It took a ‘liberal’ US President Clinton in 1999 to remove these restrictions. These, together with Thatcher’s ‘Big Bang’ of financial deregulation in Britain set the scene for the orgy of speculation which prepared the way for the present crisis.
Have the capitalists – particularly the bankers – learnt from the present crisis, never mind that of 1929? On the contrary, swollen with public money, they have once more unleashed capitalism’s ‘animal spirits’ and awarded themselves colossal bonuses – worth at least £6 billion in the case of Britain.
In the US, Goldman Sachs awarded its top bankers $23 billion in bonuses for 2009. This prompted one journalist, in Rolling Stone magazine, to call this firm “a great vampire squid wrapped around the face of humanity”. One Wall Street banker simply said the directors are “a bunch of clever thugs”. This company was bailed out with $10 billion from the US government, which has now been generously ‘paid back’, but it has also issued $21 billion in bonds, backed up by the Federal Deposit Insurance Company.
The Independent declares that not to bail out the banks would “result in a depression”. Mervyn King demurs: “If the banks are too big to fail, then they are too big”. He wants to break them up and separate their retail and investment functions.
Yet this crisis is not just in the banking and financial sector but, as in 1929, is rooted in the contradictions of capitalism itself. Moreover, nothing can fully check these ‘vampires’ or ‘squids’ – not even obscene bonuses can be eliminated, only curbed, as Obama has proposed – within the framework of capitalism.
Only by nationalising the banks and the main giants of the financial sector would it be possible to begin to introduce measures which benefit the mass of the people and not a handful of ‘coupon clippers’. This in turn could be a step towards the establishment of a state monopoly of foreign trade and a socialist planned economy.
The most crucial difference at this stage between the events of 1929 and the current crisis is the political effect. In both crises the result was a massive increase in ‘social tension’. In the US, for instance, in the ten years following 1929, millions poured into the Congress of Industrial Organisations (CIO) trade unions. The Teamsters’ rebellion in Minneapolis unfolded, led by Trotskyists. Huge battles took place in the US with many workers killed in bloody confrontations with the police and other state forces.
Worldwide, the 1930s were characterised by revolution and counter-revolution. Capitalist commentators usually concentrate on the rise of Hitler and the triumph of Franco. But before this, the working class of Germany was enormously radicalised, as was the Spanish working class from 1930 onwards. The working class and the labour movement had the opportunity to take power but failed because of faulty leadership. This allowed the Nazis in Germany to triumph, followed by Franco’s fascists in Spain, despite the heroic resistance of the working class who initially controlled four fifths of Spain.
On the industrial plane – particularly in the US – so speedy and deep was the industrial decline that trade unions and the working class appeared to be paralysed. Nevertheless there was enormous political fermentation, leading to substantial growth of left and socialist parties.
Despite the monstrosities of Stalinism, the planned economy in Russia proved a great attraction for workers against the background of mass unemployment. ‘Non-capitalist’ Russia was economically immune from the Great Depression. When 6,000 positions in Russia were advertised by a New York agency, 100,000 workers applied!
Capitalism – failed and will fail
Today, the mass of the working class is angry and disappointed with economic developments but has not yet moved decisively towards the left politically. If there are “dispersed agencies of opposition” to capitalism, as some have argued, then this results from the lack of a pole of attraction for the mass of the working class in the search for an alternative. This is the crucial difference at this stage between 1929 and its aftermath, and today.
But such are the blows that capitalism is preparing against the working class that, in time and with the help of socialist and radical forces, a layer of workers will find a road to a socialist alternative. They in turn will affect and galvanise the mass of workers into action.
We will experience not just one crisis but a chain of crises of capitalism over the coming years. There is no prospect of world war as a way out for capitalism. The only ‘war’ being prepared is by the capitalists against the rights and conditions of the working class.
The most powerful factor in society is the working class but it is presently politically disarmed, because there are no mass independent workers’ parties.
Capitalism offers no way forward. It has failed and will fail; the working class is the bearer of all real progress. But in order to play this role, it must organise, as Marx said, as a “class for itself”. For this to happen it should discard discredited leaders and organise new parties which can act as levers to combat capitalism and change society in a socialist direction.
See details of Socialism 2009 where Peter Taaffe and others will discuss and debate the ideas of socialism.