The Industrial Cycle and the Collapse of the Gold Pool in March 1968

Industrial cycles normally last about 10 years—give or take a year or two. The second industrial cycle after World War II began with the 1957-58 global recession. Given the fact that the industrial cycle lasts about 10 years, we would normally expect the next global downturn to occur around 1967. And indeed 1966-67 saw not only the “mini-recession” in the United States but the recession of 1966-67 in West Germany.

However, in 1967 the U.S. government and the Federal Reserve System were determined to avoid a recession on anything like the scale of the recession a decade earlier. As I explained in last week’s post, the bourgeois Keynesian economists believed that they understood the workings of the capitalist economy well enough to develop the “tools” that would allow the capitalists governments and central banks to avoid full-scale recessions in the future. Indeed in 1967, the U.S. economy escaped with only a “mini-recession.”

But just as the Keynesians were celebrating their final victory over the industrial cycle and its crises, there came the March 1968 run on gold, which led to the collapse of the London Gold Pool. The U.S. government and Federal Reserve System, seeking to stave off the complete collapse of the dollar-gold exchange standard, felt obliged to take deflationary measures. The fed funds rate, which on October 25, 1967, had fallen to as low as 2.00 percent, rose to 5.13 percent on March 15, 1968, the day the gold pool collapsed.

The U.S. Economy in the Wake of the Economic Crisis of 1957-61

Thanks to the economic crisis of 1957-61, the U.S. economy entered the decade of the 1960s with high levels of unemployment and excess capacity. The millions of unemployed workers and idle plants and machines meant that industrial production could increase rapidly in response to rising demand.

Since supply was increasing almost as fast as demand, prices rose very slowly. At least according to the official U.S. producer price index, prices hardly changed between 1960 and 1964.

As is typical of the phase of average prosperity of the industrial cycle, long-term interest rates rose very slowly. Still, at around 4 percent or slightly higher they had risen significantly since the Korean War days. Back then, the Truman administration still expected to borrow money long term at less than 2.5 percent. Slowly but surely long-term interest rates were eating into the profit of enterprise.

The 1960s economic boom begins

During most of the early 1960s, the U.S. economy was passing through the phase of average prosperity that precedes the boom. But starting in 1965, the industrial cycle entered the boom phase proper.

The transition from average prosperity to boom is part of the industrial cycle. However, in the mid-1960s this transition was helped along by government economic policies. These were, first, the Kennedy-Johnson tax cut of 1964 combined with the rapid escalation the war against Vietnam. After remaining virtually unchanged through 1964, the official U.S. producer price index suddenly surged 3.5 percent in 1965. That was the year the escalation of the Vietnam War began in earnest.

The Five Industrial Cycles Since 1945

About five industrial cycles have occurred on the world market since 1945. The first industrial cycle that can be traced after 1945 is the cycle of 1948-1957. The second extends from 1957 to 1968. When we speak of the post-World War II economic “boom,” we really mean the first two full industrial cycles after World War II, which were characterized by great capitalist prosperity.

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 normal 10-year cycle resumed in the 1980s, peaking around 1990.

The industrial cycle that began with the 1990 recession peaked between 1997 and 2000. The crisis that ended that industrial cycle actually began with the run on the Thai baht in July 1997, though the U.S. economy didn’t enter recession until 2000. The industrial cycle that began with with the July 1997 run on the Thai currency ended 10 years later with the August 2007 global credit panic, which began in the United States and then spread around the world.

These cycles do not correspond to the National Bureau of Economic Research dates. The NBER is a group of bourgeois economists who decide the “official” periods of what they call “expansions” and “contractions.”

Does Capitalist Production Have a Long Cycle? (pt 10)

The coming of World War II and the end of the Great Depression

According to the conventional wisdom, it was World War II that brought the Depression to an end. At least as far the United States is concerned, it is indeed true that it was the war mobilization that finally ended the mass unemployment that had existed since the fall of 1929.

Mass unemployment that was lingering in the United States as late as 1941 gave way to the “war prosperity” that the United States enjoyed during World War II. As far as many, perhaps most, Americans were concerned—the exception being those who faced actual combat—the wartime shortages and rationing, and even the rigors of military service, were a relief from the chronic idleness and hopelessness that had marked the Depression years.

Lives and careers that had been put on hold through the Depression decade could finally get back on track. People who had not been able to get any meaningful job during the 1930s could finally get jobs, get married, and start to raise families. This is the reason why the United States experienced a baby boom when the war ended.

As I have explained in earlier posts, a full-scale war economy is very different than the boom phase of the industrial cycle, even if both a boom and a war economy reduce or eliminate unemployment. The shift of the United States to an all-out war economy starting in 1942 implied a net consumption of the value of capital in the United States rather than the accumulation of capital that occurs during the boom phase of the industrial cycle.

Does Capitalist Production Have a Long Cycle? (pt 8)

The United States hardest hit by the super-crisis

Many volumes could be written about the super-crisis of 1929-33 and the Great Depression. Among the subjects that would have to be dealt with would be the nature of European fascism and Roosevelt’s New Deal in the United States. I obviously cannot do this in these posts. I will simply highlight the most important economic events of the 1930s with special emphasis on the United States, the leading capitalist—and imperialist—country.

Of all the major capitalist nations, the United States was hardest hit by the super-crisis. Why was this? Before attempting to answer, how do I measure the relative severity of the super-crisis in individual capitalist countries?

The relative severity can be measured by the level of industrial production in 1932—the global trough of the economic cycle—as a percentage of the industrial production of 1929, which represented the peak of the 1920-1929 international industrial cycle.

Does Capitalist Production Have a Long Cycle? (pt 7)

Eightieth anniversary of start of super-crisis

To understand the policies that are being followed by the governments and central banks today as they combat the aftermath of the panic of last fall and winter, you need to understand the events of 80 years ago. The current governments and central bankers are very much haunted by the ghost of the Depression.

Several weeks ago, I explained how World I and its war economy had led to a huge divergence between prices and values. This contradiction reached it peak in the spring of 1920 and was partially resolved by the deflationary recession of 1920-21. Why then didn’t the Great Depression begin with the deflation of 1920 rather than in 1929?

Does Capitalist Production Have a Long Cycle? (pt 6)

Germany and the super-crisis of 1929-33

The super-crisis of 1929-33 is eminently bound up with events, both economic and political, in Germany. Let’s review the events that were to end with the transformation of the German Wiemar Republic into the Third Reich. The roots of these terrible events lie deep in the years before World War I.

For many decades before the outbreak of World War I, there had been a steady erosion of Britain’s industrial powerrelative to the industrial power of the other major capitalist powers, especially Germany and the United States. At a certain point, the continued financial, military and political domination of Britain was in such contradiction to the vastly reduced weight of its industry, British overlordship simply could not continue. Something had to give.

Does Capitalist Production Have a Long Cycle?

The question of whether in addition to the industrial cycle of more or less 10 years’ duration there is a longer cycle extending over several “10-year” cycles has divided both Marxists as well as those bourgeois economists who have shown interest in business cycles.

Some economists, both Marxist and bourgeois, have held that in addition to the 10-year industrial cycle that I have been examining up to now, there are other economic cycles of varying lengths that can be traced in the history of the world capitalist economy. Especially controversial has been the proposal that capitalist production is characterized by a “long cycle” that extends over periods as long as 50 or even 60 years.

Other Marxists and bourgeois economists have denied that there is any evidence to support the existence of a long cycle. The quasi-regular fluctuations of business conditions over 10-year periods is called a cycle because each phase of the cycle leads of necessity to the next phase. In my posts on an ideal industrial cycle, I examined this in some detail. But what would be the mechanism of a longer cycle as opposed to the mechanism of the 10-year industrial cycle?

The Ideas of John Maynard Keynes (pt 5)

Keynes on the ‘trade cycle’

Keynes throughout the “General Theory” was concerned with explaining how his marginalist concept of “equilibrium”—marginal efficiency of capital = rate of interest—could correspond to mass unemployment. The industrial cycle itself was of secondary concern for Keynes. But in chapter 22, entitled “Notes on the Trade Cycle,” he does deal with the industrial cycle, or as he called it in the English manner, the “trade cycle” or “industrial trade cycle.”

When he did deal with the industrial cycle, marginalism hindered Keynes at every step. Unlike the classical economists and Marx, the marginalists do not distinguish between use value and exchange value. As a marginalist, even if an unorthodox one, Keynes therefore had problems in explaining how commodities could be overproduced yet be “scarce” at the same time.

The Ideas of John Maynard Keynes

The ideas of the English economist John Maynard Keynes, 1883-1946, achieved their greatest influence during the 1960s and early 1970s. In those days, Keynes was widely credited by his followers among the economists for saving capitalism itself.

The story told by the Keynesian economists went something like this. In the dark days of the Depression of the 1930s, capitalism to all appearances was approaching the end of its road. When the Depression began, the traditional liberal economists, who had long dominated the economics profession, claimed that capitalism would quickly recover from depression without government intervention. Therefore, these economists urged the government to do virtually nothing to encourage economic recovery.

After all, the traditional economists argued, this had always worked in the past. Recovery had always followed recession. But the Depression of the 1930s, the story goes, was different. The economy was showing no signs of recovering on its own. As a result, many young people, including a certain number from the ruling capitalist class itself, were turning toward Marxist ideas. The replacement of capitalism by socialism seemed increasingly likely in the near future.