A Marxist Guide to Capitalist Crises
“A Marxist Guide to Capitalist Crises,” an eBook created from the key posts on the Critique of Crisis Theory blog, is currently in production. We’ll be sharing the completed chapters between our regular postings.
Chapter 26: The Super-Crisis and the Rise of the U.S. World Empire
The severity of the 1929-32/33 super-crisis in a particular country can be measured by the decline in the country’s index of industrial production from peak to trough.
Figures compiled by the League of Nations — the forerunner of the United Nations — for the super-crisis years divide countries into seven groups according to each country’s decline in industrial production. The countries in group one experienced the least decline — less than 10 percent — equivalent to an “ordinary” recession. Those in group seven experienced between 60 and 70 percent declines from peak to trough — economic disaster.
Among the major imperialist countries, rising Japan, then rapidly expanding its share of the world market, was in group one, along with Greece and New Zealand. Britain was in group two, which experienced a 10 to 20 percent decline in industrial production. Germany was in the sixth group, which experienced 50 to 60 percent declines, a position it shared with Canada and Czechoslovakia, then the most industrialized country in Eastern Europe. The United States was in group seven—declines in industrial production from peak to trough of 60 to 70 percent, an “honor” shared only with Poland.
The extreme severity of the crisis in Germany is not surprising. Germany was the biggest loser in the war, stripped of all its colonies and a significant part of its European territories. In addition, due in part to the disastrous hyperinflation of 1923, the German credit system was highly dependent on money market conditions in the United States. When credit froze up, first because of the industrial and stock market boom of 1928-29, then the Smoot-Hawley tariff of 1930, and finally the massive U.S. banking and credit collapse of 1931-32, it is not surprising that effective demand, industrial production, and employment contracted with extreme violence in Germany.
But what about the United States? After all, the United States was the big winner — perhaps the only winner — in World War I. It had the largest gold reserves in the world. Yet its economy collapsed more than that of any other major imperialist power.
Indeed, the U.S. economic collapse didn’t have the disastrous political consequences that Germany’s slightly lesser economic collapse had. Germany had suffered the terrible effects of the blockade of 1914-1918, the shock of the lost war, the abortive revolution of 1918, and the hyperinflation of 1923. The super-crisis of 1929-32 was only the final blow that pushed Germany into the fascist nightmare of the Third Reich.
But this doesn’t change the fact that in a purely economic sense, the super-crisis of 1929-33 was more extreme in the United States than in any other large capitalist country in the world. Why was this? The reason lies in the extraordinary growth of the U.S. economy in the decades preceding the super-crisis.
Market constrains growth of industrial production
Capitalist expanded reproduction is of necessity broken up into industrial cycles because of the contradiction between socialized production and private appropriation. For reasons we have explored in earlier chapters, the ability of the market to expand is far less than the ability of the industrial capitalists to increase the level of industrial production. It, therefore, falls to the periodic crises that mark the end of one industrial cycle and the beginning of another to keep the growth of industrial production in the long run within the limits allowed by the market.
Uneven development among capitalist nations
On average, across industrial cycles, the industrial capitalists and capitalist nations cannot increase their capital faster than the market for the commodities produced by their capital growth. However, what is true on average is not true of each industrial capitalist, individual branch of capitalist industry, or individual capitalist nation.
Individual industrial capitalists, branches of capitalist industry, or capitalist nations can grow faster than the world market. They can do this by taking away market share from other branches of industry, from rival industrial capitalists working in the same branch of industry, or from other capitalist nations.
Inevitably, this means that other industrial capitalists or capitalist nations grow more slowly than the world market grows or are eliminated. This is what gives capitalist competition its desperate, cutthroat character.
How much faster can an individual capitalist nation grow than the world market average? If its industry has conquered only a small portion of the world market, which includes the home market, it can — though it won’t necessarily — grow much faster than a capitalist nation whose industry has captured a much larger portion of the world capitalist market.
For example, if a capitalist nation has 0.5 percent of the world market and it suddenly doubles its share of the world market, it still will have only 1 percent of the world market, all else remaining equal. Even if its production doubled, with the production of all other nations remaining equal, world capitalist industrial production would only rise slightly. But if a capitalist country that commands 50 percent of the world market — the total extent of the world market remaining unchanged — suddenly doubles its production, it would have to destroy the industry of all the other capitalist nations combined or face a disastrous crisis of overproduction much worse than even the super-crisis of 1929-33!
When a capitalist nation represents a small part of the world market, it can grow much faster than the world market as a whole as long as it can keep conquering an ever larger share of that market. But as its production comes to represent a larger and larger portion of the world market, it approaches the mathematical limit of 100 percent of the world market. Under these conditions, its growth rate must begin to slow towards the growth rate of the world market as a whole. If the growth rate does not slow sufficiently, a massive crisis of overproduction will force the necessary slowdown. This is precisely what happened to U.S. capitalism between 1929 and 1933.
As economic growth slows in a given capitalist country, there are relatively fewer outlets for investment for industrial capitalists that yield the average or higher rate of profit. Therefore, an expanding section of the capitalists in such a country becomes money capitalists, who have to be satisfied with the average rate of interest instead of the average rate of profit. Some of their loans will be to foreign countries.
The economic roots of an aggressive foreign policy
Once the rate of growth of a particular capitalist nation has passed its peak, the importance of capital exports grows, and the capitalist nation is under growing pressure to exercise direct political and military control of the nations to which it exports capital to maintain the flow of interest and dividend payments.
Therefore, the growth of an aggressive foreign policy and increased militarism in a major capitalist nation go hand in hand with the beginnings of its industrial decline. We see this in the history of Britain in the late 19th and early 20th century. And from the Depression onwards, we see the same process unfold in a far more explosive fashion in the United States.
The super-crisis of 1929-33 occurred when U.S. industry could not have maintained its previous growth rate even if the world market had been in a highly expansive phase. But in the 1920s and early 1930s, the world market entered an unprecedented phase of stagnation and then contraction. Therefore, U.S. capitalism had a very hard landing indeed, as it transitioned from a period of rapid industrial development to a stage of much slower industrial growth.
It was no accident, then, that U.S. foreign policy under Roosevelt moved from so-called “isolationism” to “internationalism” — as the bourgeois historians call it. By “internationalism,” they mean that the United States could not be satisfied with anything less than a global empire. During the New Deal, the “isolationists” — that section of the U.S. ruling class that wanted to make a deal to divide the world with Britain, France, Germany, and Japan and form a united imperialist front against the Soviet Union — were fighting a losing battle as war clouds gathered over Europe and Asia.
The real essence of the New Deal
Therefore, the New Deal’s real purpose was preparation for World War and empire. Upon assuming office in March 1933, Roosevelt’s main task was to “unify” U.S. society in preparation for the drive for world financial, political, and military domination that loomed ahead. By the fourth decade of the 20th century, global economic development had led to a situation where U.S. imperialism could no longer tolerate independence on the part of the other imperialist powers. It was obliged to reduce them to satellite imperialist powers. Nor, of course, could U.S. imperialism refrain from dominating the colonial and semi-colonial countries previously dominated by the older imperialist powers of Britain and France or by rising Japan.
Not least, the unprecedented economic collapse of 1929-33 had profoundly shaken the traditional equilibrium between the two main classes of the United States — the capitalist class and the working class. The old equilibrium depended on a rate of growth of U.S. industry that was no longer possible.
In contrast to earlier depressions, the U.S. political situation was further complicated by the existence of the Communist, or Third, International, and its U.S. section, the Communist Party USA. By a historical accident, the first five-year plan in the Soviet Union coincided with the capitalist super-crisis. The soaring industrial production and disappearing unemployment in the Soviet Union, combined with the U.S. industrial collapse of 1929-33, began to radicalize significant sections of the U.S. workers, as well as a growing section of the young generation of intellectuals that started to turn toward the working class. The U.S. Communist Party, though still relatively small, grew rapidly, rising from under 10,000 mostly immigrants when the super-crisis began in 1929 to over 50,000 by the late 1930s.
Because of the changed political and economic conditions, the traditional response of the U.S. capitalists to labor union militancy and working-class political radicalization — repression with few or no concessions — was no longer feasible. Real concessions would have to be made, paid for by the colonial and semi-colonial countries that would soon fall under U.S. domination.
Roosevelt and his advisers wanted to make these concessions in such a way that the workers would look toward the capitalist government rather than their own class organizations and strengths. In this way, the radicalization of the working class would be first contained and then dissipated.
Roosevelt’s initial policy — a higher cost of living through dollar devaluation and formation of cartels
Establishing a world empire was the administration’s long-term solution to problems facing U.S. capitalism during the Depression decade. In the short run, the Roosevelt administration’s policy was to restore the profits of the U.S. capitalists by enabling them to raise their prices.
In its drive to increase the cost of living, the administration employed two main methods: (1) cartelization (formal agreements by either the capitalists brokered through the government or, in the case of agriculture — where the decentralized nature of production excluded cartel agreements among the producers on their own — the organization of the limitation of production by the government to raise prices), and (2) dollar devaluation, reducing the amount of gold each dollar represented.
The policy of cartelization of industry and commerce carried out through the so-called National Recovery Administration was eventually declared unconstitutional by the U.S. Supreme Court. However, the government’s payments to farmers to limit their production of certain products continued.
Another form of cartelization that, though illegal, was tolerated during the New Deal years — and beyond — was the organization of cartels by organized crime in industries where capital was still relatively decentralized. For example, in New York City, the garment, construction, garbage collection, and longshore sectors were dominated by organized crime — called “the mob,” “the mafia,” “the syndicate,” or “the underworld” by the media. These cartels were built by making offers to small capitalists that they “could not refuse.”
The syndicate also used unions that they controlled in their cartel-building operations. Though the big capitalists found these cartels costly, they greatly preferred “mob”-controlled unions to left-wing-led unions. Organized crime was willing to use any method, including murder — while the government looked the other way — to fight the left in the unions.
Before it was declared unconstitutional, the NRA contained one other highly significant element. Since the NRA granted the right to industrial and commercial capitalists to form cartels, it indeed encouraged it — it was also forced to grant workers the “right” to unions. In response to the administration’s policy of raising prices and granting workers the right to unionize, at least on paper, a wave of strikes broke out. At first, these strikes were defeated, but the foundations were laid for the rise of the Congress of Industrial Organizations and the unionization of basic industry in the middle years of the Depression decade.
Dollar devaluation
The second leg of the inflation policy was the devaluation of the U.S. dollar. This policy had two aims. One was to wipe out the temporary advantages in world trade that Britain and other capitalist countries had gained through their devaluations. Remember, the British pound has been devalued since 1931. Second, it was hoped that the devaluation of the dollar would quickly raise prices in terms of dollars within the United States.
As soon as Roosevelt assumed office, the administration suspended the convertibility of the U.S. currency into gold. The administration also moved to void “gold clauses” in contracts that made debts payable in specific weights of gold rather than in dollars.
In the 19th century, the dollar had been a much weaker currency than the British pound, and there was a strong tradition of small business and small farm opposition to the gold standard. To protect themselves against the danger of an eventual devaluation of the dollar, many contracts defined debts in terms of weights of gold — real money — rather than in dollars. If the dollar were devalued, many debtors would be obliged to pay additional dollars in proportion to the devaluation to meet debts, thus driving them into bankruptcy.
How the dollar was devalued
To carry out a devaluation between 1933 and 1934, the U.S. president ordered the Reconstruction Finance Corporation — a governmental agency created by Herbert Hoover to grant bailout loans to banks during the super-crisis — to make repeated purchases of gold bullion on world markets to push up the dollar price of gold. The price was raised from $20.67 to $35 an ounce, resulting in a devaluation of about 40 percent.
Roosevelt’s inflationary policies succeeded in raising the producer price index from 10.4 when he took office in March 1933 to 15.2 in July 1937 (1982 = 100), an increase of about 46 percent. This was a much greater rise than would normally be expected during the first phase of an upward movement in the industrial cycle, when prices generally change little.
It should be noted, however, that the price increase was measured in nominal, now-devalued dollars, rather than in terms of gold. In terms of gold, producer prices when the gold value of the dollar was stabilized in 1934 were about 14 percent (calculated by comparing the changes in the producer price index and the dollar price of gold from $20.67 to $35) above the levels of 1933.
However, if we compare prices immediately after the dollar stabilized at its new level of $35 an ounce with the prices prevailing in 1929, prices in terms of gold were about 50 percent below 1929 levels. The huge inflation of prices relative to underlying labor values that had marked the post-World War I period was now resolved. In terms of gold, prices were now below the level that had prevailed on the eve of World War I. The contradiction between prices and values had been resolved, but what a price had been paid by the workers, the farmers, and even many capitalists or former capitalists who had been ruined!
We can confirm that the contradiction between prices and values was now resolved by looking at the trend in world gold production. Between 1930 and 1934, a record 3,730 metric tons of gold were produced, an increase of 23 percent over the preceding five-year period. This, combined with a fall in prices of around 50 percent in terms of gold, eliminated the gold shortage that had plagued world capitalism during the 1920s. Since prices remained low in terms of gold throughout the Depression, gold production continued to rise. Over the next five-year period, gold production increased to 5,387 metric tons, more than 44 percent. (“Central Bank Gold Reserves: A historical perspective since 1845,” by Timothy Green, World Gold Council, November 1999)
https://www.gold.org/goldhub/research/central-bank-gold-reserves-historical-perspective-1845
Rising gold production represented a transition from a period of abnormally slow expansion of the market, ushered in by World War I and its aftermath that ended with the super-crisis of 1929-33, to a new period of accelerated expansion of the world market.
The shape of recovery
The history of industrial cycles shows that the sharper the recession, the sharper will be the initial phase of recovery. The economic recovery from the super-crisis was no exception to this general rule. During the first stages of the recovery, between March 1933 and January 1934, Roosevelt kept pushing down the value of the dollar through his policy of gold purchases. Every morning, the president would determine what the gold value of the dollar — the dollar price of gold — should be for that day and order the Reconstruction Finance Corporation — an arm of the federal government — to purchase gold bullion on the world market at that price.
Until the dollar was again stabilized at $35 an ounce, expectations varied on how much Roosevelt would push down the dollar’s value. When expectations were strong that he would push down the dollar, the industrial and commercial capitalists would step up their purchases of commodities in an attempt to build up inventories before dollar prices rose even more. When the president didn’t devalue as fast as expected, commodity purchases would be slashed, suddenly causing prices and industrial production to decline. It wasn’t until Roosevelt finally stabilized the dollar at its new peg of one troy ounce equaling $35 that these erratic fluctuations ceased, and the recovery assumed a relatively smooth upward curve.
After Roosevelt finally ceased his daily interference, ending expectations of any further devaluations of the dollar, huge amounts of gold bullion began to flow into the United States from Europe. A lot of this gold was brought to the United States for political reasons.
With a new European war now looming, would capitalism even survive it? It seemed far safer for many European capitalists to own dollar-denominated assets in the United States than to keep their money in Europe, whether in the form of European currencies — who would know what they would be worth in the future — or even gold coin, bullion or jewelry, which could easily be seized or stolen.
Even though world gold production was now on a major upswing, the distribution of gold was becoming ever more lopsided as gold flowed from Europe into the United States. Germany, now under the Nazi dictatorship of Adolf Hitler, was particularly hard-pressed, especially since the United States was still refusing to open its market to German exports.
The Hitler government was obliged to establish a mercantilist-type system, putting foreign exchange and trade under strict state control. The state did not engage in much foreign trade, unlike the Soviet Union, with its state monopoly of foreign trade. Rather, capitalists had to obtain state permission to export, import, or sell German marks for other currencies.
Expansion of bank reserves is not the work of the Federal Reserve System
As a result of both the rise of gold production and the flight of gold from Europe to America, U.S. banking reserves expanded rapidly once Roosevelt finally stabilized the dollar in 1934. The Federal Reserve System played virtually no role in this expansion of bank reserves. In addition, under the New Deal, the traditional central bank function of holding and managing the nation’s gold reserves was transferred from the Federal Reserve to the U.S. Treasury, which answers directly to the White House.
The individual Federal Reserve Banks that make up the U.S. Federal Reserve System had to sell their gold holdings to the Treasury in exchange for gold certificates. Indeed, the New Deal made it illegal for private U.S. citizens to own monetary gold or even gold certificates. Though the ban on private ownership of gold bullion and coin was later repealed under Ronald Reagan, only the Federal Reserve Banks can own gold certificates — but not gold. Except for its ability to set bank reserve requirements, the Federal Reserve was reduced to a passive role during the Roosevelt administration.
The administration also purchased huge amounts of silver bullion, greatly enriching U.S. silver mining interests. By the late 1930s, a considerable amount of silver certificates circulated side by side with Federal Reserve Notes. These purchases of silver bullion also helped expand U.S. bank reserves and the money supply under the New Deal. While Roosevelt’s silver purchases benefited the silver mining companies, they did considerable damage to the economy of China and other countries that still defined their currency in terms of weights of silver. By driving up the dollar — and gold price — of silver, the administration, in effect, revalued China’s currency.
Rapid economic growth in the 1930s?
“The recovery [of the 1930s -SW] from the Depression,” economist Christine Romer wrote, “is often described as slow because America did not return to full employment until after the outbreak of the Second World War.” However, according to Romer, “the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid.”
According to Romer, the period from 1933 to 1937 saw the second-fastest growth in the history of U.S. capitalism. “Annual real GDP growth averaged over 9 percent” from 1933 to 1936. And “Unemployment fell from 25 percent to 14 percent.” (The Economist, June 18, 2009) Romer’s picture of rapid economic growth in the 1930s seems to completely contradict the general historical view that the 1930s — not only the super-crisis years of 1929-33 proper but the entire decade — was a time of unprecedented depression and stagnation.
It should be pointed out that unemployment was calculated differently in those days than later. If the latter methods had been used during the 1930s, they would have shown a much lower unemployment rate. For example, the people employed in the WPA programs building many useful public works — some still in use even in the 21st century — were counted as unemployed — because they were not helping a capitalist in the “private sector” make a profit.
Under later methods of calculating unemployment, these people would be counted as employed — on the principle that the government statistics must do everything they can to minimize the extent of the unemployment problem. Under the more recent methods, official unemployment would have been slightly below 10 percent by mid-1936.
So, if we are to believe Romer, far from being a period of terrible economic stagnation that most lay people believe the 1930s to have been, the mid-1930s saw the second-fastest growth rate in U.S. history. And, according to Romer, what was the period that saw even faster economic growth than the mid-1930s? Why it was the “Second World War”!
Expanded reproduction and economic growth versus rise in GDP
What Romer is confusing is a rise in production with the process of expanded reproduction — real economic growth. Since expanded reproduction is a Marxist concept, it is not surprising that a bourgeois economist like Romer is unacquainted with it. The way the GDP is calculated, no distinction is made between the reopening of a factory that has been forced to shut down due to a crisis of overproduction, for example, and a situation where a new factory is built that represents a real expansion of the forces of production.
Nor is any distinction made between the full mobilization of the existing factories and labor force to build means of destruction during a war and the building of new factories to make additional means of consumption, or additional means of production to make still more means of consumption, which is the real essence of economic growth. If economic growth is calculated in terms of expanded reproduction, there was little or no economic growth either during the 1933-37 period or the war economy of 1941-45.
What really happened between 1933 and 1936 — the years of the Roosevelt “prosperity” — was that many of the factories that had either been completely shut down or had sharply curtailed production were reopened or began to operate at more normal levels again. Capital investment remained very low throughout the years 1933-36. Indeed, except at the very end, the consumption of capital exceeded the accumulation of capital. More machines were either wearing out or simply deteriorating for lack of use than were being built. Even as production rose after 1933, reproduction remained negative.
V-shaped recessions
The “recession” of 1929-33 was a V-shaped recession on steroids. The history of the industrial cycle, at least before the 2007-09 “Great Recession,” has shown that the deeper and sharper a recession is on the downward side, the faster the recovery in industrial production and GDP is on the upward side. A “mild” recession — for example, recessions like those of 1990-91 or 2000-03 — means that there is a relatively small amount of idle productive forces that can be reactivated when the recession proper ends.
But in a deep recession, there is a lot of idle plant and equipment, not to speak of unemployed workers, at the bottom of the recession. With so many means of production idle, the tremendous amount of unemployment means that in the wake of a severe recession, industrial production generally rises rapidly between the time production reaches its lowest point and the time it reaches its previous peak.
In reality, the period from 1933 to 1936 represented the depression phase that followed the 1929-33 recession, or crisis, phase of the industrial cycle. Remember, the crisis marks the end of one industrial cycle and the beginning of the next. In the wake of a severe recession — and the “recession” of 1929-33 was the severest of all, up to the time of this writing, in the history of capitalism — it is not surprising that the depression phase of the cycle would be marked by a very high rate of growth, both in terms of industrial production and GDP.
In severe recessions — both preceding and following the super-crisis of 1929-33 — economic growth as measured by GDP would slow down considerably once industrial production and GDP reached the peak levels of the preceding cycle. But only then does the process of expanded reproduction really resume, or to use plain language, does real economic growth start up again.
Excess capacity — productive forces that are unable to function as capital during the crisis — is either eliminated by being closed down or reactivated after the crisis passes. As demand continues to increase, industrial capitalists are obliged to build new factories and, when possible, expand existing ones. But since it takes much longer to expand an existing factory, not to speak of building a new one from scratch, growth as measured in terms of industrial production and the GDP naturally slows down considerably once the previous peak reached in the preceding industrial cycle has been surpassed.
While the recovery phase of the industrial cycle after 1929-33 followed the expected script as far as the growth in industrial production and GDP was concerned, within a year after the previous peak was reached, the growth of industrial production, GDP, and employment didn’t simply slow down. Instead, U.S. GDP, industrial production, and employment plunged. This was indeed an unprecedented development. What caused the U.S. economy to behave in this way in the 1930s?
The 1937-38 recession was strange in many ways. It was not preceded by an economic boom that followed a period of average prosperity. Instead, it broke out just as the U.S. economy appeared to be emerging from what was by far the worst crisis-depression cycle in its history. And then, just as the economy bordered depression and average prosperity, a deep recession — no ordinary “Kitchin inventory recession” — erupted. The violent recession of 1937-38, along with the 1929-33 super-crisis, put the “Great” into the Great Depression.
The U.S. economy on the eve of the 1937 recession
“American banks,” Romer explains, “were holding large quantities of reserves in excess of their legislated requirements.” This, as we know, is typical of depression periods that follow the crisis-recession proper. But, since the crisis-recession of 1929-33 was no ordinary crisis but a super-crisis, the amount of idle reserves held in the U.S. banking system was unusually large. As we saw in our examination of the “ideal” industrial cycle, inventories — commodity capital — are run down during the crisis-recession phase. At some point, no matter how much demand contracts, inventories have to be rebuilt. The falling price level — in terms of gold — has the same effect on the quantity of gold money measured in terms of purchasing power as an expansion of gold money measured in terms of weight with prices remaining unchanged. And since gold production never falls to zero, the quantity of gold money keeps growing in terms of weight. Plus, the fall in the price level in terms of gold stimulates gold production.
Therefore, the real quantity of money — the quantity of money in terms of purchasing power as well as the quantity of gold money in terms of weight — expands. This builds the basis for a new sudden expansion of the market, which allows industrial production to exceed its best level of the previous industrial cycle.
The rise in the quantity of metallic money, both in terms of its purchasing power and weight, now also allows the market to expand on a cash basis as opposed to a credit basis. That is, the new expansion is initially much more “sound” than the previous expansion’s final stages and can therefore reach a higher level. Only later will overproduction, over-trading, and credit inflation develop on a new and higher level, which will end in the next crisis.
In addition, mass unemployment leads to wage cuts and a rise in the rate of surplus value with a consequent rise in the rate of profit. There was certainly no lack of wage cuts in the early 1930s!
This, in a nutshell, is how an upturn in the industrial cycle emerges from the preceding recession.
Were there forces at work in the early and mid-1930s that would be expected to lead to an economic recovery? There certainly were. Indeed, the forces working toward recovery worked overtime in the early 1930s. First, nominal prices fell by about a third. Counting the effects of Roosevelt’s devaluation of 1933-34, prices in terms of gold fell by about 50 percent. This fall in gold prices expanded the quantity of gold measured in terms of purchasing power.
Second, as we have already seen, gold production began to rise — gold production and refining were one of the few profitable industries during the super-crisis, and gold production remained highly profitable throughout the 1930s. Capital quite naturally flowed into gold mining and refining, causing the production of gold to just about double during the 1930s. The quantity of gold, therefore, expanded considerably in terms of weight as well as in terms of purchasing power. This transformed the global liquidity shortage of the 1920s into a massive gold and liquidity glut by the mid-1930s. The foundations of a major upswing in the industrial cycle were falling into place.
Roosevelt’s dollar devaluation, along with high unemployment, worked to increase the rate of surplus value by devaluing the media in which wages were paid. While bourgeois economists seem to attribute every change in economic conditions to shifting government or central bank policies, in reality, while government policies had some effect, the main forces driving the changes in the U.S. economy in the mid-1930s were the “natural” cyclical forces of the capitalist economy. Government policies — claims to the contrary by pro-New Deal economists and historians notwithstanding — played a decidedly secondary role.
These typical cyclical forces, working with much greater vigor than usual in the wake of the worst crisis in capitalist history, compared to an “average” industrial cycle, were responsible for the Roosevelt recovery. The policy of the government that most encouraged the recovery — public works programs that indeed built some useful projects — was largely offset by cuts in spending by cash-strapped state and local governments.
Was inflation a threat in the mid-1930s?
As I already mentioned, the policies of the Roosevelt administration were frankly inflationary. Farmers were paid not to grow crops, and the so-called National Recovery Administration — NRA — encouraged the cartelization of industry and commerce. But the most powerful inflationary force was the devaluation of the U.S. dollar between 1933 and 1934. Each dollar now represented 40 percent less gold — real money — than before, and thus, there was powerful upward pressure on prices measured in dollars.
However, the U.S. economy in 1936 and 1937 was barely entering the phase of average prosperity. It was nowhere near an industrial boom that would represent the development of new overproduction, over-trading, and credit inflation. Indeed, the big “problem” was that there was too much gold in the U.S. Treasury and too many reserves in the U.S. banking system.
On the eve of a typical crisis, the problem is quite the opposite: falling gold reserves, or at least gold reserves that are not growing as fast as the economy is expanding — or depreciating currency under post-New Deal token money systems — and stagnating bank reserves that force the banks to operate at ever lower levels of liquidity. In terms of the industrial cycle, the U.S. economy was still very far from a major new cyclical crisis in 1937. Yet a very sharp, if brief, industrial crisis occurred anyway. If the industrial cycle didn’t cause this crisis, what did?
In a word, government policy did. Right after the 1936 elections, this inflationary administration began to suddenly worry about the inflationary potential of the huge excess reserves that were building up in the U.S. banking system. That is, the Roosevelt administration was suddenly terrified — or pretended to be — by the excesses of a boom that was at least several years in the future.
Under the conditions of a massive glut in idle money capital in the mid-1930s, the Federal Reserve System retained only one significant tool: its ability to determine the amount of reserves — deposits at the Federal Reserve Banks plus vault cash — that the commercial banks had to maintain behind their deposit liabilities. This allowed the Fed to create an artificial shortage of reserves by forcing the banks to maintain very high reserves behind their deposit liabilities. In all other respects, “monetary policy” in those years — such as it was — was directly controlled by the White House and its Treasury Department — U.S. finance ministry — and not the Federal Reserve System.
Starting in July 1936, the Fed used its power to create an artificial bank reserve shortage by increasing its reserve requirement three times. As we saw above, U.S. commercial banks were holding large quantities of reserves in excess of their legal requirements. Romer writes: “Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed. … In July 1936, the Fed’s board of governors stated that existing excess reserves could ‘create an injurious credit expansion’ and that it had ‘decided to lock up’ those excess reserves ‘as a measure of prevention.’”
U.S. economist Michael Bordo, commenting on and criticizing Romer, wrote: “Building upon such evidence, the 1937-38 recession was due primarily to the Fed’s doubling of reserve requirements in 1936-37 and the Treasury’s sterilization of gold inflows, with only a minor role for fiscal tightening. Both monetary actions, as Christy [Christine Romer -SW] explains, were taken to remove what the Fed viewed as potentially inflationary excess reserves from the balance sheets of the commercial banks.”
By emphasizing the effects of “monetary policy” instead of fiscal policy, Bordo is displaying a certain Friedmanite prejudice. But as I explained above, under the conditions of the 1930s, both fiscal and monetary policy were controlled mainly by the White House. Starting in July 1936, the Federal Reserve Board, which governs the U.S. Federal Reserve System, made the first of three raises in reserve requirements. It was working closely with the administration. The rest of the deflationary measures, however, waited until after the election of November 1936.
This enabled Roosevelt to take full political advantage of the cyclical economic recovery that was then underway. But after the election, the administration began to curb the WPA public works programs on the excuse that the depression proper was now over — which was barely technically true, as we have seen, assuming that the industrial production estimates are accurate. On top of this, Social Security taxes were being collected, but no benefits were yet being paid out. This had the effect of taking money out of circulation and burying it in the U.S. Treasury.
The gold sterilization policy was implemented by the U.S. Treasury, not the Federal Reserve Board. Under this policy, for each dollar of gold that the Treasury purchased, it borrowed a dollar and, in effect, buried it in the ground. The Treasury was therefore converted by the Roosevelt administration into a great sink of purchasing power, supposedly to fight the “danger” of a future runaway inflationary boom.
Therefore, within a few months of the end of the official depression in December 1936, industrial production leveled off and then suddenly turned sharply downward in the fall of 1937. As production plunged, unemployment soared. The administration quickly reversed its policies, and the government-induced recession soon ended. But the overall effect was to add about two years to the Great Depression.
First, there was the recession itself, which lasted about a year. Then there was an interval of time — the depression that followed this recession — before industrial production returned to the 1937 levels. The population had grown by then, so unemployment remained above the 1937 levels. As a result, the mass unemployment crisis of the 1930s continued until the war economy began in earnest in 1941-42.
The extremely deflationary policies of 1936-37 by the otherwise inflationary administration overwhelmed the forces of the industrial cycle that were working toward continued economic recovery and pushed the U.S. economy into deep recession. But why did the Roosevelt administration artificially throw the U.S. economy back into deep recession just as it was emerging from the worst crisis-depression phase of the industrial cycle in the history of capitalism?
It is, of course, possible that the administration misjudged the economic situation and didn’t realize the devastating effects that its economic “game plan” for 1936-37 would have. But the administration had, from its own perspective, good reasons for following the policies that it did.
One reason might have been foreign policy. The recession of 1937-38 increased the drain of gold away from Europe — though this made the “problem” of excess U.S. gold reserves even worse — and made things more difficult for Hitler’s Third Reich as the pressure on Germany’s scanty gold reserves increased. However, the German government did manage to double its gold reserves in 1938 by annexing Austria, thus adding Austria’s gold reserves to its own.
Roosevelt’s recession accelerates the coming of war in Europe
Therefore, the 1937-38 Roosevelt recession helped push the European continent further along the road toward war. The recession led to the further growth of U.S. idle bank reserves — supposedly the biggest problem faced by U.S. capitalism — but these idle bank reserves were to come in handy when it came time to finance World War II, while denying this money to imperialist opponents.
What about the relations between Roosevelt and the biggest enemy historically of the U.S. capitalist class — the U.S. working class? Could this be the key to the seemingly irrational deflationary policies of the Roosevelt administration in 1936-37?
Concessions by the New Deal to U.S. workers
The New Deal had made concessions to U.S. workers, though the extent of these concessions has been greatly exaggerated. Roosevelt did create public works for the unemployed, for example. The first steps were also taken to create a minimal system of social security and unemployment insurance. Though these were — and remain up to the time this is being written — skimpy by European standards, they represented an advance over the complete lack of social insurance that characterized the United States in pre-New Deal days.
Roosevelt’s most significant concession to U.S. workers is generally considered the Wagner Act — sometimes called labor’s “Magna Carta.” The Wagner Act gives workers the right to form unions and bargain collectively. But didn’t U.S. workers already have this right? You would think that workers would have the right to organize under the Bill of Rights, which forms part of the U.S. Constitution and guarantees freedom of association.
However, somehow, the freedom of association provision was not interpreted as allowing workers to organize unions! Instead, unions were considered to be “criminal syndicates”! The Wagner Act created the National Labor Relations Board. The idea was that if a certain number of workers in an enterprise want a union, the NLRB holds an election to determine what union, if any, the workers want to represent them. Therefore, instead of strikes and sometimes bloody struggles — because of the traditional fierce resistance of U.S. bosses to unionization — of the past, there would be peaceful elections instead. Very democratic and enlightened — in theory.
But no legislation, no matter how “enlightened,” can change the basic laws of the class struggle that are rooted in the contradictions of capitalist production. Under the NLRB system, the bosses drag their heels and are only gently slapped on their hands when they violate the provisions of the Wagner Act that grant the workers the right to organize a union. The struggle gets bogged down in a judicial process. By the time the bosses are finally forced to hold an election for union recognition, the pro-union workers are fired or have quit in disgust. And scabs — people given jobs in exchange for promises to vote against the union — have been hired and get to vote in the union representation election. Unions, therefore, find it very difficult to win. As a result, it became far more difficult to win union recognition in the United States — not that it was ever easy — than it was in the days before labor’s so-called Magna Carta.
Another unfortunate effect of the Wagner Act has been that it encourages labor union leaders, assuming the union is finally recognized, to depend on the capitalist government rather than the union consciousness and solidarity of the workers. Sometimes, the union becomes so bureaucratized — or even falls into the hands of outright criminal elements — that the bosses can find disgruntled workers to demand a decertification election under the same Wagner Act rules. The unions sometimes lose these decertification elections — the bosses’ agents among the workers claim that the workers would be better off without a union since they would not have to pay union dues. The workers are then left without any union protection whatsoever. It is then very difficult, if not impossible, to get a union back again.
On the eve of the 1937 recession, however, the union movement had such tremendous momentum that the NLRB system, which was just being set up, was not able to as yet “tame” it — all the more since the 1947 anti-union Taft-Hartley amendments to the NLBR still lay in the future. Fighting against both the devastating effects of the super-crisis and Roosevelt’s inflationary policies on the workers’ standard of living, massive strikes broke out in Minneapolis, Toledo, and San Francisco.
The Teamsters Union — at that time the union of truck drivers, but now a wide variety of jobs — emerged greatly strengthened and remained a powerful union for decades, though by the turn of the 21st century, a shadow of its former self. The Toledo strike led to the rise of the initially militant United Auto Workers union, while the San Francisco General Strike led to the creation of the International Longshore and Warehouse Union. Unlike most U.S. unions, the ILWU resisted the anti-Communist witch hunt of the post-World War II years. Though it has taken blows, it is in better shape than the Teamsters, UAW, and most other U.S. unions in the early years of the 21st century.
The unionization movement of the 1930s reached its high tide with the successful unionization of the United States Steel Corporation — the gigantic steel monopoly put together by J.P. Morgan at the beginning of the 20th century — and the recognition of the United Auto Workers Union by General Motors and Chrysler — after a wave of sit-down strikes that marks the highest point the U.S. union movement has reached up to the time of this writing. Henry Ford and his Ford Motor Company resisted unionization until 1941, when the imminent entrance of the United States into World War II finally forced this fascist-minded industrial capitalist to grant recognition to the UAW.
The sit-down strikes and unionization drives were likely the main targets of the government and Federal Reserve policies that caused the Roosevelt recession of 1937-38. If so, these policies were extremely successful from the viewpoint of the U.S. bosses. As a result of the recession of 1937-38, the CIO lost the momentum that it was unable to regain in the decades that followed.
Did Roosevelt worsen the Depression?
A debate has occurred among various bourgeois historians and economists as to whether the New Deal helped recovery from the Depression or rather prolonged it. Those historians and economists tied to the U.S. Republican party claim that the New Deal prolonged the Depression by discouraging industrial and agricultural production through its cartelization policies, its alleged anti-business bias, and, above all, its pro-union policies.
On two occasions, it is hard to deny that the Roosevelt administration made the Depression longer and deeper than it otherwise would have been. The first was in the fall-winter of 1932-33, between Roosevelt’s election in November and his assumption of office the following March. Roosevelt’s vague statements about the dollar encouraged the belief that the administration would devalue the currency — raise the dollar price of gold — when he assumed office. This led to a speculative run on gold reserves that triggered the final banking crisis in the winter of 1933.
This banking crisis featured a highly unusual — under the gold standard — internal as well as external gold drain. This banking crisis temporarily derailed the recovery that had begun in the third quarter of 1932.
The second occasion was in 1936-37 when the administration, assisted by the Federal Reserve System, withdrew a considerable amount of purchasing power from the economy — in effect burying it in the ground in the form of hoarded gold bullion. This sent the U.S. economy into a second tailspin just when it seemed the Depression was finally ending. The result was to give the Depression a whole new lease on life.
On the other hand, Roosevelt’s deficit-financed public works projects, though they were beneficial, were too small to have more than a modest impact on an economy that was already recovering through the cyclical mechanisms of the industrial cycle. Therefore, it is hard to deny that, overall, the New Deal made the Depression both deeper and longer than it would have been otherwise.
But contrary to the claims of the Republican Party, the policies that worsened and prolonged the Depression, especially those of 1936-37, had absolutely nothing to do with “pro-labor” policies. Exactly the opposite! The administration’s desire to weaken the trade unions and the workers’ movement in general lay behind the deflationary policies of 1936-37 that had such disastrous effects on U.S. workers and the U.S. trade union movement.
Would the Depression have been worse and have lasted longer if Herbert Hoover had somehow been re-elected, as the Democrats claim, or would recovery have been stronger if Hoover had been re-elected? Since we don’t know what economic policies a hypothetical second Hoover administration would have followed, there is no way to answer this question. What we can say is that the Roosevelt administration did little to end the Depression and, to a certain extent, made it both longer and deeper.
A Critique of Crisis Theory 