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 28: Historical Trends in Industrial Cycles
Almost every economic textbook states that post-World War II business cycles were much milder than pre-World War II business cycles. It is claimed that periods of “expansion” have become much longer, while periods of contraction or recession have become much shorter.
How the NBER produced a trend toward longer expansions and shorter recessions
The National Bureau of Economic Research is a private organization that studies economic trends from the pro-capitalist perspective of professional bourgeois economists. Among other things, this outfit dates each economic expansion and contraction, as the NBER calls recessions, that have occurred in the U.S. since 1857.
The capitalist media, along with most professional economists, treat the estimates of the NBER of cyclical turning points as though these were unchallenged facts, much like the orbits of the eight planets around our sun. Even Marxists sometimes treat the NBER calls on economic cycles as though they were the work of objective scholars with no biases whatsoever.
However, if we look into economic history, which all too few people do, we find something peculiar about the NBER cyclical calls. Though the NBER denies it, its contraction — recession calls since World War II — virtually always correspond to drops lasting at least two quarters in the U.S. Commerce Department’s real GDP (Gross Domestic Product) estimates. Sometimes, an official NBER contraction might consist of a quarter of falling real GDP, followed by a quarter of a slight rise in the real GDP, followed by several quarters of once again falling real GDP. But that is the extent of the deviation of NBER “contractions” from the U.S. Commerce Department estimates of the real U.S. GDP.
Changes in industrial production during the 1870s
Prior to World War II, the NBER considered virtually any period of falling prices — which were largely farm prices in the 19th century — as representing contraction, but then shifted to using the GDP data for the post-World War II period.
In the 19th century, agriculture represented a much larger proportion of total output than today. It is well known that, due to the decentralized character of agricultural production compared to industry, prices for agricultural commodities are far more likely to fall than those for finished industrial commodities. In industry, as opposed to agriculture, any difficulty in selling commodities at existing prices is more likely to result in declining production and employment — recession — than is the case in agriculture.
This is not to deny the suffering that U.S. farmers experienced during the “long depression” in agricultural prices — in terms of gold — that began with the financial crash of 1873, which hit first Austria and Germany and about six months later spread to Wall Street with the failure of the Jay Cooke investment banking house. However, industrial recession — falling industrial production and employment with rising unemployment affecting employment in the “service sector” — is not the same as falling agriculture prices, even if they sometimes go together. Periods of falling agricultural prices can and often do last well beyond the industrial recession or even occur in the absence of an industrial recession.
Tendency of monopoly to worsen industrial recessions completely hidden by NBER’s cyclical calls
As the centralization of capital has progressed and the monopoly pricing power of large industrial corporations and cartels has increased, so has the severity of fluctuations in industrial production and employment. The reason is that centralized industrial corporations — trusts — and cartels tend to respond to any difficulty in selling their products at existing prices by cutting production, not prices. In contrast, small producers, especially smaller farmers who are “price takers” as opposed to “price makers,” have no choice but to accept lower prices whenever demand weakens.
Far from cutting production during falling prices, smaller farmers do everything they can to maintain, if not increase, production. By using completely different criteria to define “contractions” in different historical periods, the NBER has manufactured a tendency toward longer “expansions” and shorter “contractions.”
The obviously false NBER cyclical calls are underlined by the fact that economic historians consider the era of fastest economic growth in the history of the U.S. economy to be the late 19th century. But if we were to believe the NBER cyclical calls, almost half of this period represented periods of economic contraction!
The five complete industrial cycles between 1945 and 2007
The first NBER “contraction” for the U.S. economy was in 1945-46. This was not a cyclical crisis at all but a “reconversion” crisis. A reconversion crisis represents a shift from a war economy with contracted reproduction back to normal expanded capitalist production. This is not to deny that there were indeed waves of layoffs that swept industry in the U.S. and other countries in 1945-46.
Reconversion and transition recessions after World Wars I and II
For the two world wars of the 20th century, the transition to a normal peacetime economy involved both a reconversion recession and a second “transition” recession before normal “peacetime” industrial cycles resumed.
The reconversion recession after World War II occurred in 1945-46, and a similar reconversion recession occurred in 1918-19, right after World War I, which ended in November 1918. In both cases, the reconversion crisis represented the fact that war production declined at a much faster pace than civilian production rose in the months immediately following the end of both world wars.
In both immediate postwar periods, prices continued to rise rapidly, not only in currency terms but in terms of gold as well. Therefore, after both wars. Deflationary measures were taken to curb demand and halt these price increases. If these deflationary measures had not been taken, the continued rapid rise in prices in terms of gold would have led, at some point, to a run out of the dollar into gold and massive dollar devaluation.
The massive currency devaluation would have been the market’s way of lowering prices in terms of gold without lowering prices in terms of currency. This, however, could have led to runaway inflation. This is exactly what happened in Germany and other central and eastern European countries after World War I, which did not experience the transition recession of 1920-21.
The U.S. transition recession of 1920-21
In the U.S., since the U.S. dollar had not depreciated against gold during World War I, the rise in U.S. dollar prices in 1919-20 represented a rise not only in terms of dollars but also in terms of gold. In 1919-20, as normal European agricultural and civilian production resumed and exports of war-related items from the U.S. ended, the balance of payments shifted sharply against the U.S.
The Federal Reserve System, which in those pre-New Deal days maintained a large gold hoard of its own, experienced a major external drain. To preserve its gold hoard, the Fed was forced to sharply raise its (re)discount rate. The high-interest rates, though they reversed the gold drain, led straight to the recession of 1920-21 with its 45 percent drop in wholesale prices and considerable, if somewhat smaller, declines in prices at the retail level.
If the inflation of 1919-20 had not been stopped, the U.S. would have been forced off the gold standard, and the U.S. dollar would have faced a major devaluation against gold. In the worst case, the U.S. might have experienced the runaway inflation that occurred in Eastern and central Europe.
Though the 1920-21 recession more closely resembled a cyclical crisis than the 1918-1919 recession, it was not a cyclical crisis either. It did, however, mark the final transition to a peacetime capitalist economy — though prices were still out of line with underlying labor values as we saw in earlier chapters — and the beginning of the 1920-1929 industrial cycle, which turned out to be the only full industrial cycle between the two world wars.
Therefore, the 1920-21 recession relaunched the industrial cycle, which is a necessary component of normal capitalist expanded reproduction even if the capitalist expanded reproduction process was far from fully “normalized” due to the continued inflation of prices above values and prices of production. It took the super-crisis of 1929-33 to correct this problem and finally put the process of expanded capitalist reproduction on a “sound” footing once more.
Comparing the transitional recessions of 1920-21 and 1948-49
The Federal Reserve System halted the inflation and associated gold outflow in 1919-20 by raising the rate at which it (re)discounted commercial paper. However, this method was not available to the Federal Reserve System in 1948 when it moved to halt the continuing postwar inflation.
As long as the Fed was committed to keeping the rate of interest on government bonds and interest rates in general low, merely raising the discount rate would not have ended postwar inflation. The U.S. commercial banking system was flush with government bonds, which were convertible at the Fed into Federal Reserve notes — “green money” — at a fixed price. Or, technically, deposits at the Federal Reserve Banks convertible into “green money” whenever the commercial banks needed cash to meet their depositors’ demands.
Under these conditions, the Fed could not discourage the commercial banking system from making loans and thus halt the inflationary growth of bank loans and the consequent expansion of the “money supply” by raising its (re)discount rate. Instead, the Fed had to raise reserve requirements, much like it had done in 1936-37, just before the Roosevelt recession. This worked, and the post-World War II inflation was halted.
In August 1948, the U.S. producer price index peaked at 28.2. It reached a low of 25.9 in December 1949. This was a decline of a little more than 8 percent. Consumer prices also fell during this mildly deflationary recession. Many people alive then remembered the deflationary recession of 1920-21, when producer prices had plunged by 45 percent. There were widespread expectations in the business world and elsewhere that prices after World War II were due for a similar plunge. Therefore, the fact that producer prices declined by only 8 percent surprised many.
Regarding declines in industrial production and employment, the transition recession of 1948-49 was also mild compared to the 1920-21 recession. The deflation’s mildness was a harbinger of the moderately inflationary era of capitalist prosperity that was setting in. Prices were entering a long-term upward trend. The rise in prices reflected both the effects of Roosevelt’s 40 percent devaluation of the dollar against gold and a rebound of prices in gold from the low levels of the Depression years.
Though the deflation in prices during the 1948-49 recession was mild, this was still the most deflationary recession in terms of the U.S. dollar — as opposed to prices in terms of gold — of any other recession between 1945 and 2007.
At its highest point, in August 1948, according to the official data, producer prices were still slightly below the May 1920 index peak of 28.8. But if you take into account the 40 percent Roosevelt devaluation of the dollar, prices in terms of gold were well below the levels that prevailed at the end of the post-World War I inflation. This was all the more true if we consider the somewhat higher dollar price of gold — about $40 — on the free market as opposed to the “official” dollar price of gold of $35 an ounce. Therefore, though the World War II war economy and its inflationary aftermath had driven up the general price level in terms of gold as well as dollars, it did not drive it up all the way to the levels that prevailed after World War I.
In contrast to the situation after World I, where there was an increasingly acute global shortage of gold leading up to the super-crisis of 1929-33, the world as a whole was awash in gold after World War II. In contrast to the situation in 1919-20, the U.S. experienced no gold drain, though the U.S. Treasury held most of the world’s gold reserves. This is not to mention the gold reserves of other countries that were held for “safekeeping” in the U.S. When these facts are taken into consideration, it is not surprising that the drop in prices in the U.S. during the 1948-49 recession was considerably less than was the case during 1920-21.
Still, there are obvious resemblances between the recessions of 1920-21 and 1948-49, if not in degree, then in kind. Neither of these recessions was a true cyclical crisis, but both represented the resumption of the industrial cycle after the termination of expanded capitalist reproduction and accompanying industrial cycles by both instances of a war economy.
The dating of the first postwar industrial cycle
During the early days of the Korean War (1950-53), it seemed possible that the “local” war on the Korean Peninsula was simply the first stage of a new all-out World War III that would bring a new war economy. This indeed was the perspective of General Douglas MacArthur, who wanted to attack China with atomic bombs — the far more destructive hydrogen bomb had not yet been developed.
Fearing the imminent arrival of a new all-out war economy, the industrial and commercial capitalists went on a massive buying spree, buying raw materials and other commodities before prices rose even higher and before a new war economy might make some unavailable at any price. But after Truman fired MacArthur, it became clear that Washington had decided against launching a new all-out world war at that time.
As soon as this became apparent, the inflationary wave halted, and prices stabilized, though at higher levels. Indeed, businesses now had excessive levels of many raw materials. However, the shooting war in Korea continued with no end in sight, so prices remained high. The U.S. economy, though not in a full-scale war economy, where expanded capitalist reproduction is suspended, was pretty close to it during the Korean War.
In July 1953, the new Eisenhower administration negotiated a truce with the (North) Koreans and the Chinese. U.S. war spending was cut back, though it remained high by traditional “peacetime” standards. But the United States was now the seat of a worldwide empire, and with a world empire came massive militarization. For the U.S., the days of small “peacetime” military budgets were a thing of the past.
The end of the Korean War marked the beginning of the 1953-54 NBER economic “contraction.” The U.S. recession of 1953-54 had some of the characteristics of a “reconversion crisis,” such as those of 1918 and 1945, and some characteristics of a “Kitchin inventory recession,” intensified by the speculative inventory accumulation during the Korean War when fears of a full-scale world war that would pit the U.S. empire against the Soviet Union and the newly established Peoples Republic of China were high.
It does not appear to have marked a downturn in the international industrial cycle proper. One indication was that there was little diffusion of the 1953-54 U.S. recession beyond the U.S.
The first true post-World War II downturn in the global industrial cycle
The first real cyclical downturn in the global industrial cycle after World War II came in 1957-58. The unemployment crisis created by this downturn in the United States was to last into the early 1960s. This slump was far more serious than the recessions of 1945-46, 1948-49 or 1953-54. Unlike the 1953-54 recession, the 1957-58 recession was not confined to the United States; its impact was worldwide.
According to Wikipedia, the global downturn “hit economically disadvantaged countries hardest, because it involved a decline in the purchases of raw materials, both agricultural and mineral, by developed nations.” The article continues: “The terms of trade of the underdeveloped countries was adversely affected. In Europe, no less than in the United States, there was a fairly sharp decline in investment in fixed capital.”
Whether or not particular countries experienced a technical recession, according to capitalist statisticians, the countries of both the imperialist and “developing” worlds certainly felt the impact of the downturn of 1957-58.
“In the United States, unemployment rose, but there was little or no decline in personal income,” Wikipedia continues. “Auto sales fell 31 percent over 1957, making 1958 the worst auto year since World War II up to that time. Unemployment in Detroit stood at a high of 20 percent by April. Imports into the United States from Europe stayed high, but the recession in Europe reduced European purchases of American raw materials. And so the balance-of-payments deficit in the United States sharply increased. In Europe, however, a surplus in their balance of payments developed.”
Compared to the downturns that had preceded World War II, the 1957-58 recession had one major new feature. Prices kept rising right through the recession. Wikipedia notes: “In the U.S., consumer prices rose 2.7 percent from 1957 to 1958, and after a pause, they continued to push up until November 1959. Wholesale prices rose 1.6 percent from 1957 to 1959. The continued upward creep of prices became a cause of concern among economists.
This reflected the changed economic policies on the part of the governments and central banks in the wake of the super-crisis of 1929-33. As we have seen, the U.S. government was determined in the postwar years to do all it could to prevent a recession from turning into a new super-crisis, or even a major depression of the pre-World War I type.
No ‘panic’ in 1957-58
During the 1957-58 world recession, large industrial and commercial capitalists did not panic. They were confident that the governments and central banks would move quickly to expand monetarily effective demand. Working with the central banks, the commercial banks would be able to, if necessary, extend loans to any large industrial and commercial capitalists who might be in trouble with their creditors due to large accumulations of unsold commodities. This would then be followed by deficit spending by the central governments to further inflate monetarily effective demand.
In traditional overproduction crises — those that occurred between 1825 and the 1930s Depression — the industrial and commercial capitalists who had acquired large debts during the preceding boom would often find themselves unable to pay their debts upon the outbreak of the crisis and were driven into bankruptcy. Therefore, when a crisis broke out, these capitalists would often “panic” and dump their inventories — commodity capital — on the market at low prices, even if this meant a major loss of their capital. As a result, the general price level would fall sharply as soon as a crisis broke out. In the short run, this would mean a wave of bankruptcies, banking and credit crises, plunging production, and, not least, sharp drops in employment followed by waves of wage cuts.
But these periodic “panics” played an important role in keeping the capitalist economy “healthy” in the long run. It was precisely these periodic plunges in the general price level that followed the inflation of credit and prices that occurred during the booms that kept prices in line with underlying labor values in the long run. This is, after all, the main function of the industrial cycle within expanded capitalist reproduction.
Periodic price falls increased the purchasing power of money and encouraged the production of gold — money material — as falling commodity prices raised the profits in the gold mining and refining industries. They, therefore, played a necessary role in the expansion of the total global hoard of money material that was a necessary condition for the continued growth of the world market. Without growth of the world market, capitalist expanded reproduction — that is, capitalism itself — would not have been able to continue.
During the Depression, both the governments and most bourgeois economists — especially the followers of Keynes — had concluded that the key to avoiding major depressions was to prevent a fall in the general price level. Of course, the prices of individual commodities or even whole classes of commodities, such as primary commodities, might, and sometimes did, fall, but the cost of living as a whole must continue to inch upward. This was the new doctrine of the (bourgeois) macroeconomists.
As long as the cost of living kept rising, most (bourgeois) economists and capitalist governments believed, a major depression could not develop. Therefore, when the economic indicators began to decline sharply in the fall of 1957, the Federal Reserve System pumped huge amounts of reserves into the U.S. banking system, and the federal government stepped up its spending, allowing a large deficit to develop to increase monetarily effective demand.
In the 1950s, deficit spending in the United States consisted of accelerated spending on arms and the interstate highway system designed to encourage people to purchase automobiles, then the heart of the U.S. industrial economy. Instead of cutting prices on their unsold commodities, the large industrial and commercial capitalists waited until the government’s “demand management” would take effect and allow them to sell off their overproduced commodities at or near high boom-time prices.
The Fed slashes the ‘Fed funds rate’
The federal funds rate, the rate of interest that commercial banks charge each other for overnight loans, fell from 3.5 percent in the fall of 1957 to as low as 0.5 percent during the winter of 1958 and hit 0.36 percent at one point in July 1958. After 1951, manipulating the “Fed funds rate” emerged as the Federal Reserve System’s preferred tool in its attempts to stabilize the economy. It remained so at the beginning of the Great Recession in 2007.
A fall of the Fed funds rate from 3.5 to under 0.5 percent over a few months showed just how concerned the Federal Reserve System was about the sudden drop in economic activity that had occurred during late 1957 and early 1958. The economy bottomed out by the end of the first quarter of 1958, and the economic indicators then resumed their rise. However, the success of the Fed in quickly halting the first real post-World War II crisis of overproduction had important long-term consequences. And as it turned out, despite the rising economic indicators, the crisis was not quite over after all.
An important feature of the 1957-58 global economic downturn in the global industrial cycle was that it was the first downturn of the “Keynesian era.” How did Keynesian “anti-crisis” policies affect the course of the downturn? The first thing to note was that Keynesian policies failed to prevent this downturn in the first place. Later, during the 1960s, Keynesian economists claimed that the downturn of 1957-58 could have been avoided if bolder actions — more deficit spending by the federal government — had been followed and blamed the excessively conservative fiscal policies of the Republican Dwight D. Eisenhower administration.
The other feature was that the 1957-58 recession — compared to 1929-33, the last preceding true cyclical crisis—was both mild and short. Keynesian economists claimed that Keynesian policies had passed their first real test with flying colors. The economists declared severe crises and deep depressions to be a thing of the past.
The “mildness” of the 1957-58 recession, both in length and severity, was greatly exaggerated, however, by comparison with 1929-33. The 1929-33 super-crisis was the only other true cyclical crisis that many people then alive had lived through. As we have seen, the crisis of 1929-33 was very far from a typical cyclical crisis since it was greatly intensified by the aftereffects of World War I, a decidedly “non-cyclical” event.
If the 1957-58 recession were compared to pre-1914 crises, it was worse for the workers in one respect. In the pre-1914 crises — and the super-crisis of 1929-33 as well — the fall in wages and employment was somewhat compensated for by a fall in the cost of living. As a result, real hourly wages rose during recessions. This was not the case in 1957-58, though the growth in unemployment insurance — both government-sponsored and private — did compensate for the failure of the cost of living to fall during the recession.
To what extent the continued rise in the cost of living was compensated for depended, for workers, on the exact percentage of the normal wages received during the period of their unemployment. Workers with strong unions fared best, while workers with no unions were hit hardest by the continued rise in prices during the recession.
Especially when we consider the completely different economic conditions that preceded World II — the unprecedented economic stagnation associated with the Depression decades compared to the strong boom conditions that had dominated the pre-World War I years — the Keynesian “triumph” appears far less impressive.
Between the effects of the Depression and World War II, expanded capitalist reproduction, the essence of capitalist production, was suspended for 15 years! This is an event unprecedented in the history of the capitalist mode of production. Huge amounts of idle money capital had been accumulated in the form of massive growth in the world’s gold hoard. These conditions were the opposite of those that led to the super-crisis of 1929-33 and were highly favorable for a renewed capitalist expansion.
When this is taken into account, the failure of the 1957-8 downturn to approach in either depth or duration the super-crisis of 1929-33 was not quite the triumph for Keynesian “stabilization” policies that it seemed to many people at the time.
Workers gain, bosses lose
The expansion of social insurance, especially unemployment insurance, represented real gains for the working class and cushioned the impact of unemployment on the workers in the imperialist countries. This was especially true if the unemployment was not prolonged, which tended to be the case for many, though not all, workers due to the short duration of the 1957-58 downturn.
The bosses were not particularly happy about this, of course. To the extent the workers receive unemployment checks during recessions, they do not face the kind of extreme pressure to get a job at any wage they did in the days before unemployment insurance. Unemployment insurance makes it more difficult for bosses to use the high unemployment caused by downturns in the industrial cycle to slash wages and thus increase the rate of surplus value and the rate of profit.
Keynesians hoped to use inflation to keep real wages down
Keynesian economists argued that the “permanent creeping inflation,” later dubbed “inflation targeting,” a central plank in their program, put downward pressure on real wages instead of money wages. Based on the arguments we examined in the chapters on Keynes, the Keynesian economists explained that cuts in money wages were not the same thing as cuts in real wages.
In his “General Theory,” the “bible” of Keynesian economics, Keynes claimed that falling wages caused prices to fall. The Keynesian economists — Keynes himself had died in 1946 — told the bosses that if they succeeded in cutting the money wages of the workers, the prices that they charged for their commodities would drop, neutralizing any gains from cutting money wages. The bosses themselves, however, were not entirely convinced by these arguments. They grumbled that the “socialist” policies of governments inspired by Keynesian economics and the “over-strong trade unions” were preventing them from cutting wages.
For those bosses who were still unconvinced, the Keynesian advocates of “enlightened capitalism” had another argument. Times have changed, they explained. The Soviet Union had just launched the world’s first artificial earth satellite, Sputnik, in October 1957, just as the recession of 1957-58 was gaining momentum. If social insurance in general and unemployment insurance in particular were abolished or even cut back, the workers might start listening to “the Communists.” The Keynesian reformers explained to the bosses that it was much wiser to make some concessions that could be at least partially neutralized by the “inflation targeting” policy rather than lose everything.
The price of Keynesian economics that capital cannot pay in the long run
However, there was a price to be paid for the relative “mildness” of the first global post-World War II crisis of overproduction, a price the capitalist economy could not pay in the long run. Since there was no fall in prices, there was also less stimulation to gold production.
It does appear that the 1957-58 downturn provided some stimulation to gold production, which finally rose above the levels of the late Depression around this time. Even in the absence of price declines, the decline in the turnover of capital caused by the drop in sales lowered the rate of profit in most industries during the 1957-58 recession. But no such drop in turnover occurred in the gold industry. In addition, in those years, the gold mining companies — located mostly in apartheid South Africa — could hold wages at very low levels.
Under the Bretton Woods international monetary system that was then in effect, the South African gold mining companies could sell all the gold they could dig out of the ground using super-exploited African labor to the U.S. Treasury for $35 an ounce. The role of South African apartheid in prolonging the period of capitalist prosperity during the Cold War was thereby crucial.
Even without a general fall in prices, the rate of profit of the gold mining and refining industry still rose relative to the rate of profit in other industries, which was reduced by the recession of 1957-58 and its aftermath. Capital, as we know, is always flowing from industries with relatively lower rates of profit to industries with relatively higher rates of profit. However, the stimulation of gold production due to the 1957-58 global recession would have been considerably greater if prices had fallen as they had done in earlier crises.
Despite the apparent onset of a strong recovery in the spring of 1958, it turned out the economic crisis that had begun in 1957 was not quite over after all.
The U.S. economy double dips
As the Federal Reserve pumped money into the U.S. economy to drive down interest rates, the governments of Europe began to wonder how long the United States would be willing to give them an ounce of gold for every $35 they had in their dollar reserves. How much longer would it be possible to keep gold selling at $35 an ounce while the price of everything else was creeping slowly but relentlessly higher under the Keynesian policy of “inflation targeting”?
Sensing that a rise in the dollar price of gold — or what comes to the same thing, the devaluation of the dollar — was only a matter of time, they began to demand gold for some of their dollars. Just as it appeared as though the United States was quickly recovering from the 1957-58 recession, the U.S. faced the first major drain on its gold reserve since the bank runs of 1931-33. Only 14 years after the Bretton Woods agreement of 1944, the Bretton Woods international monetary system was facing a serious crisis.
To save the Bretton Woods system, the Federal Reserve was obliged to quickly raise interest rates again. From a low of under 0.5 percent in the summer of 1958, the Fed funds rate rose to 4 percent by the winter of 1960. Now, as Marx noted, business expansions can continue if interest rates are steady or are rising only slowly. However, rapid interest rate increases soon prove fatal to business by causing credit to freeze up.
The rise in interest rates necessary to save the Bretton Woods system threatened to abort the recovery that had begun in the first half of 1958. As the U.S. presidential election campaign got underway in 1960, the United States began to slip back into recession, though the rate of decline was less than it had been in 1957-58. The resumption of the recession in the United States meant that U.S. unemployment began to rise once again before it had a chance to fully recover from the 1957-58 recession. The U.S. was once again facing a prolonged unemployment crisis, though the new crisis was not as severe as the unemployment crisis of the Depression years.
It is pretty obvious that the brief upswing of 1958-1960, followed by a relapse into “mild recession” in the U.S. economy in 1960-61, was not a true industrial cycle in its own right. The next peak in the global industrial cycle did not arrive until 1969. However, it was foreshadowed by the “credit crunch” of 1967 in the U.S. that led to the so-called mini-recession in the U.S. at the end of 1966 and the start of 1967, and the somewhat deeper downturn in West Germany in 1967. After 1966-67, the economic boom did not resume with the same intensity as in 1965-67. A case might even be made that the actual peak of the global industrial cycle was 1966. Perhaps it is most accurate to say that the global industrial cycle that began in 1957 ended in 1966.
The industrial cycle of 1957-1966(69) and the prosperity of the 1960s
Running against the backdrop of high unemployment left over from 1957-58 and a new rise in unemployment brought on by the renewed recession, the Democratic presidential candidate, Senator John F. Kennedy of Massachusetts, ran on the slogan of “getting America moving again.” This was a definite echo of the 1932 presidential election, even if the crisis was not nearly as severe. The Republican candidate for president, Vice President Richard M. Nixon — known as “Tricky Dick” — who was to be the victor in the 1968 U.S. presidential election, later blamed the Federal Reserve Board for ruining his first attempt to win the White House in 1960.
Since Roosevelt had devalued the dollar in 1933, there was nervous speculation in the international gold market that a new Democratic president might devalue the dollar yet again to “get America moving.” At one point, the dollar price of gold rose to $40 an ounce on the free market. This further pressured the Federal Reserve Board to keep interest rates relatively high, worsening the recession and subsequent unemployment. As it turned out, however, Kennedy rejected dollar devaluation and was determined to keep the dollar price at $35 a troy ounce.
The London Gold Pool
To reinforce the shaky Bretton Woods system, the London Gold Pool was established shortly after Kennedy assumed office. The U.S. Treasury and the European central banks agreed to intervene in the open market to keep the market price of gold at $35 an ounce.
The members of the London Gold Pool and their initial gold contributions in tonnes (and USD equivalents) to the gold pool were:
| Country | Participation | Amount (by weight) |
Value |
| United States | 50% | 120 t | $135 MM |
| Germany | 11% | 27 t | $30 MM |
| United Kingdom | 9% | 22 t | $25 MM |
| France | 9% | 22 t | $25 MM |
| Italy | 9% | 22 t | $25 MM |
| Belgium | 4% | 9 t | $10 MM |
| Netherlands | 4% | 9 t | $10 MM |
| Switzerland | 4% | 9 t | $10 MM |
(source: Wikipedia article on London Gold Pool)
If the dollar price of gold rose above $35, they would sell gold from their reserves; if the price threatened to fall below $35, they would buy gold. The U.S. dollar would be supported not only by the credit and gold of the United States but also by the credit and gold of its European satellite imperialist countries.
In the early years of the Kennedy administration, the Gold Pool worked well. The United States had emerged from the double dip of 1960-61 with a larger trade surplus, and the dollar was once again a strong currency. The Bretton Woods system had managed to survive the first postwar global downturn.
But as prices kept creeping up — very slowly, to be sure — during the first half of the 1960s, the chances of its surviving the next global economic crisis were not good. However, the approaching demise of the Bretton Woods international monetary system was not the worst danger confronting world capitalism in those years. An even bigger problem involved the secular rise in the rate of interest.
The ticking time bomb of secular rising interest rates
The very success of the capitalist central banks and governments in limiting the effects of downturns in the industrial cycles meant that interest rates were ratcheting up. In a classic crisis, the rise in interest rates during the boom was offset by a similar fall in interest rates during the crisis and depression that followed. That is, the fall in interest rates during the recession reversed the rise in interest rates during booms. In this way, the interest rate was kept below the rate of profit. Or, what comes to the same thing, it kept the profit of enterprise — the difference between the total profit defined as surplus value minus ground rent and interest — positive.
But after World War II, though interest rates continued to fall during recessions, they fell less during recessions than they rose during booms. This was a consequence of the very success of Keynesian policies in limiting recessions. At first, the capitalist system could tolerate this because, thanks to the Great Depression, the post-World War II period had started with an exceptionally low rate of interest while the rate of profit rose sharply. But as interest rates kept rising more during booms than they fell in recessions, the profit of enterprise came under increasing pressure.
Falling rate of profit on a collision course with rising rate of interest
A situation of secular rising interest rates would have been sustainable only if the rate of profit as a whole was rising sufficiently to offset this increase in interest rates. But nothing of the sort was happening.
The combination of capitalist prosperity and the consequent rise in the demand for the commodity labor power, expanded social insurance, and the need of the capitalists to make economic concessions to the workers so the workers wouldn’t “listen to the Communists,” combined with the renewed rise in the organic composition of capital stimulated by rising money and real wages — meant that there was once again downward pressure on the rate of profit. Rising interest rates were on a head-on collision path with a gradually declining rate of profit.
As we have seen, profit (ignoring ground rent) is divided into interest, which goes to the money capitalists, and the profit of enterprise, which goes to the industrial and commercial capitalists. If the rate of interest keeps rising, assuming the rate of profit is unchanged, the entire profit will eventually consist of interest alone. And this will happen even faster if the rate of profit declines.
For example, if the best that industrial capitalists can earn is 10 percent — and not without a considerable risk — while the rate of interest on long-term government bonds is 10 percent, it is just as profitable and far less risky for the industrial capitalists to turn into money capitalists and purchase government bonds at 10 percent. But if all the industrial capitalists turn themselves into money capitalists, production of surplus value ceases, and with it, capitalism itself. At the point where the rate of interest equals total profit, the very motivation to produce surplus value — that is, to engage in capitalist production — is destroyed.
South African apartheid prolonged the postwar boom
As we examine the contradictions of the post-World War II economy and its Keynesian economic policies, the question becomes not why the postwar boom—really two industrial cycles that were dominated by their boom phases — ended but why it lasted as long as it did. The basic reason was the huge amount of idle money capital that was accumulated during the prolonged cessation of capitalist expanded reproduction between World War I and World War II.
As mentioned above, another factor that should not be overlooked was the bestial system of South African apartheid. Apartheid rule made normal trade union activity for the African gold miners in South Africa — then by far the world’s leading gold producer — impossible. Or, as Marx would say, the conditions of apartheid made it impossible for the gold miners employed in the South African gold mining industry to obtain the full value of their labor power. In the final analysis, it is the industrial workers employed in the gold mining and refining industry, not the central bankers, who create the additional money that capitalist expanded reproduction needs if it is to continue..
As a result, it took a relatively long time before rising prices finally reduced the rate of profit sufficiently in the gold mining industry to begin to reduce total global gold production. Just as African slavery had played a crucial role in the “rosy dawn” — to use Marx’s ironic words — of capitalist production, the slave-like system of apartheid helped prolong the life of the vampire-like capitalist system during its Cold War struggle against the Soviet Union and its allies.
While the postwar boom and the Keynesian policies that accompanied it were doomed to collapse in the long run, the success of capitalism in maintaining capitalist prosperity for the two decades after the war played a crucial role in undermining the class consciousness of the European workers — in Western Europe, in Eastern Europe and finally in the Soviet Union itself — as well as preventing the growth of class consciousness in the United States. We must never forget the role that South African apartheid played in this success, whose disastrous consequences have cast a dark shadow across our own 21st century.
The 1960s boom
The 1960s are remembered for many things. For example, in the United States, the last phase of the Civil Rights Movement and the Black Power Movement that followed, the great movement against the Vietnam War, and at the end of the decade, the birth of the modern women’s and LGBTQ+ movements.
In France, decades of strong demand for the commodity labor power, which favored the trade unions, climaxed in the great general strike of May 1968. The 1960s were when labor unions and labor-based political parties in Europe were far more powerful in the imperialist countries than they had ever been before or have been since.
In any attempt to understand the growth of radical movements in the 1960s that are in such contrast to the decades of reaction that followed, the strength of “organized labor,” both labor unions and, in Europe, labor-based political parties as well, is one of the least appreciated but perhaps most important factors. The strength of organized labor was made possible by another characteristic of the 1960s that distinguished it from the following decades — capitalist prosperity.
But at the beginning of the 1960s, the economic situation for the world capitalist economy did not seem all that promising. The United States was going through the second dip of the double-dip 1957-61 economic crisis, and unemployment was stubbornly high.
The Keynesian advisors to newly elected Democratic President Kennedy were alarmed that the U.S. economy was growing much more slowly than the planned economy of the Soviet Union. They urged a major regressive tax cut, which they claimed would increase monetarily effective demand and finally overcome the lingering effects of the economic crisis that had begun in 1957. While President Kennedy did not succeed in getting the tax cut through Congress, it was passed under his successor, Lyndon B. Johnson, in 1964. It is sometimes called the Kennedy-Johnson tax cut.
The Vietnam War
This period is also noted for something else: the escalation of the Vietnam War. The combination of the regressive tax cuts of 1964 and the sudden rise in war expenditures in the mid-1960s caused monetarily effective demand and the world capitalist economy to soar. The lingering effects of the 1957-61 economic crisis were finally left behind. The economic boom of the 1960s had arrived.
Keynesian economists, nearing the peak of their influence, claimed that the problem of economic crises had finally been solved. The governments and central banks working together could always boost effective demand whenever necessary. If dangerous inflation developed — inflation over 3 percent, for example — they could use the same “tools” in reverse to slow it down.
Not only anything like a repeat of the super-crisis of 1929-33 but even lesser crises like the crisis of 1957-61 would surely be avoided in the future. Indeed, some Keynesian economists suggested that if society were willing to tolerate a somewhat higher rate of inflation — perhaps 4 percent — continuous “full employment” could be assured, and even “mild recessions” could be abolished.
The stagflation crisis of 1968-1982
Between 1968 and 1982, there were no complete industrial cycles. Indeed, the entire period from 1968 to the end of 1982 can arguably be seen as one drawn-out crisis with fluctuations or sub-cycles within it. The “stagflation decade” of the 1970s and early 1980s witnessed four official NBER “contractions” or periods of falling real GDP. The first was relatively mild, in 1969-70; the next was the more severe recession of 1973-1975; and finally, the “Volcker shock” recession of 1979-82.
The NBER divides the latter into two separate “recessions,” one sharp but brief drop in 1980 and then the more prolonged decline that began in the last quarter of 1981 and lasted through 1982. It is pretty apparent that the NBER’s “expansion” of 1980-81 does not come close to a real industrial cycle but merely represents an episode within a continuing crisis. Nor do the years 1969-73 or 1973-80 represent full industrial cycles. What we have is a series of partial, or in the case of the 1980-81 “expansion,” aborted cycles.
A case can even be made that the entire period between March 1968, when the Gold Pool collapsed, and 1982, when the Volcker shock recession finally bottomed out, has the features of one stretched-out economic crisis with marked fluctuations. This period, therefore, deserves special treatment that cannot be dealt with here but belongs in later chapters.
The industrial cycle of 1979-1990
The Volcker shock, which halted the depreciation of the U.S. dollar, finally allowed the industrial cycle to resume its normal course. What was, therefore, the third full industrial cycle between 1945 and 2007 was allowed to run its course and peaked around 1990 with the savings and loans crisis in the U.S. The ensuing downturn in industrial production and employment occurred at the beginning of the 1990s.
The fourth industrial cycle
The industrial cycle that began with the 1990-91 recession peaked between 1997 and 2000. The crisis that ended that industrial cycle began with the run on the Thai baht in July 1997, though the U.S. economy didn’t enter recession until well into 2000. This industrial cycle lasted a full ten years, beginning in 1997 and ending with the initial August 2007 global credit panic, which began in the United States and then spread around the world.
An important feature of the crisis that began in 1997 was that it broke out in an oppressed country, Thailand, and for a considerable period seemed to be confined to the semi-colonial and neocolonial countries. All the other downturns after 1945 began in the “developed” capitalist countries, mainly in the United States.
The downturn of 1997-2003 begins the fifth industrial cycle
Therefore, the 1997 crisis began the fifth full industrial cycle following World War II. It first affected certain Asian countries, with Indonesia being hit especially hard during the first phase of the crisis. Because it began in Asia, it was dubbed the “Asian crisis.” Still, it was by no means confined to Asia and eventually affected almost all capitalist countries to one degree or another, whether or not they experienced an “official recession,” as defined by capitalist statisticians.
The panic of 1997 led to a major flight of money capital from the so-called Asian tigers like Indonesia and South Korea and then from Latin America into the U.S., Europe, and Japan. Because of this capital flight, the effects of the crisis were far less severe in the United States and Europe than in the oppressed countries of Asia, Latin America, and newly capitalist Russia. Due to the massive inflow of flight capital from Asia and Latin America, the housing and automobile industries entered into strong booms in the imperialist world, which were not to end before the onset of the Great Recession in 2007-08.
One of the reasons why the housing collapse after 2007 was so devastating in the imperialist world was that the housing industry “skipped” its normal downturn due in 1997 because of a massive inflow of money capital from Asia and Latin America into the banking system of the imperialist world. The rate of interest on mortgages against residential property fell sharply starting in 1997.
The flood of money into mortgage lending blocked the normal cyclical housing recession. The “work” of the housing recession that would normally have been expected around 1997 was combined with the “normal” housing recession due around 2007, creating the “super-crisis” in residential construction that began in 2006-07. The housing collapse — both in terms of housing prices and housing construction — triggered the 2007-09 Great Recession.
Though the global effects of the 1997-2003 downturn were relatively mild in the imperialist countries, it did not leave the U.S. economy unscathed. First, in 1998, the Long Term Capital Management hedge fund collapsed, which forced the Federal Reserve System to expand the monetary base to prevent a full-scale panic in the U.S. credit markets at that time.
In late 2000, the U.S. economy entered a period of recession and stagnation that didn’t end until mid-2003. In 2001, we saw a series of corporate bankruptcies, including the infamous Enron Corporation, and the NASDAQ high-tech stock market index crash. Especially hard hit was California’s “Silicon Valley,” which had not fully recovered from the “dot.com crash” when the effects of the Great Recession began to be felt in the Valley.
The spread of the crisis from Asia to the rest of the world
By 1999, the crisis was easing up in Asia as some of the money capital that had fled Asia in 1997-98 returned. This return flow of money capital out of the U.S. dollar and the resulting slight tightening of the Federal Reserve System, combined with a massive rise in imports of commodities from Asia into the U.S. that had begun in 1997, was enough to cause a marked decline in U.S. industrial production and employment by the fourth quarter of 2000. Despite this, the NBER claims the U.S. recession didn’t begin until April 2001.
The true trough of this “saucer-type recession” is especially hard to date because of the effects of the World Trade Center attacks of 9-11. Industrial and commercial capitalists feared that consumers, concerned about the possibility of additional attacks, would stay home, causing retail sales to plunge. They reacted by running down inventories, which intensified the ongoing recession. Within days of the attacks, the media, concerned about a possible sharp drop in retail sales causing a severe recession, opened an “America is open for business” campaign and urged people to go out and hit the malls.
As the initial wave of fear caused by the attacks dissipated, inventories were quickly rebuilt. The NBER pointed to this decidedly non-cyclical eventas the end of the recession. The wave of inventory rebuilding in the fourth quarter of 2001 caused an artificial surge in the GDP, and therefore, as far as the NBER was concerned, the end of the “contraction,” which they proclaimed had lasted only eight months. In reality, the U.S. economy failed to gain momentum until mid-2003.
Only then did the business stagnation associated with the crisis that began in 1997 end. The NBER’s claim that the U.S. recession associated with the global crisis of overproduction in 1997 lasted only eight months — one of the shortest on record — was cited by U.S. economists to claim that the stabilization policy had finally all but ended the “business cycle.”
While in the late 1960s, it was claimed that Keynesian-inspired fiscal policy had all but ended the “business cycle,” this time, it was claimed that the “excellent monetary policy” of the Federal Reserve System, inspired by the work of Milton Friedman, had finally stabilized the U.S. economy after 175 years of industrial cycles. These claims, loudly proclaimed by economists in the universities and by the media for a few years, were left in ruins in the wake of the panic of 2008.
Soon after the end of the fifth industrial cycle since 1945, one fact became terrifyingly clear. Industrial cycles were not getting milder and milder as “stabilization policies,” whether inspired by Keynes or Friedman, improved. Instead, they were becoming more violent.
A Critique of Crisis Theory 