From the 1974-75 Recession to the ‘Volcker Shock’

As I explained last week, the devaluation of the U.S. dollar in terms of gold had temporarily halted by the end of 1974. After peaking at $195.25 an ounce on December 30, 1974, the dollar price of gold had fallen to $104.00 on August 31, 1976.

As a result, during 1975 the rate of U.S. inflation as measured by the government producer price index was “only” about 4.4 percent. Still, the official producer price index rose more in the recession-depression year of 1975 than it had in the inflationary boom year of 1965. This despite a slump that was considerably worse than that of 1957-58.

The U.S. workers—and workers in other capitalist countries—were hit in two ways. One, workers’ living standards were lowered by the rising cost of living in terms of the devalued currency their wages were paid in. In a more traditional type recession-depression, the cost of living would have been expected to fall.

Second, just like was the case in a traditional crisis-depression, wages were under downward pressure from the high rate of unemployment. In the case of U.S. workers, this was on top of the disastrous—for U.S. workers—wage and price controls that had been imposed by the Nixon administration.

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 9)

Because the industrial cycles that have occurred since 1945 have unfolded in a very different political environment than those before 1945, I will devote this post to examining these extremely important political changes.

From the recession of 1937-38 to the end of World War II

The upswing in the industrial cycle—interrupted by the Roosevelt deflation—resumed by mid-1938 as the administration and Federal Reserve System quickly reversed their deflationary measures. However, the recovery that began in mid-1938 started at a much lower level than that of mid-1937 when the Roosevelt recession began. Then before the industrial cycle could reach a new boom—or even get very far into the stage of average prosperity—the war economy took over. As we have already seen, a full-scale war economy suppresses the industrial cycle by suppressing the normal process of capitalist expanded reproduction.

Does Capitalist Production Have a Long Cycle? (pt 5)

History of gold production from the ‘gold rush’ to 1914

In the years 1840-1844, 146 metric tons of gold are estimated by the World Gold Council to have been produced worldwide. Between 1855 and 1859, estimated gold production rose to 1,011 metric tons. This is an increase of 590 percent in a 15-year period. In terms of percentages, this is by far the greatest increase in gold production in the period that reasonable data on world gold production is available.

The reason for this amazing increase was the discovery of gold in California in 1848 and in Australia in 1851. It was this huge mass of newly mined and refined gold that drowned the hopes of Marx and Engels for a socialist revolution in Europe during the 1850s.

Does Capitalist Production Have a Long Cycle? (pt 2)

The long semi-cycles of Ernest Mandel

We saw in earlier posts that most economic historians and economists, both bourgeois and Marxist, agree that the concrete history of the capitalist mode of production shows alternating periods of rapid expansion lasting for several decades followed by periods of much slower growth or semi-stagnation of varying lengths. There has been much dispute about whether these alternations represent cyclical forces operating from within the capitalist economy or are caused by changes of a non-cyclical nature in the “external” environment.

Among the Marxists, we saw that men as different as the U.S. socialist economist Paul Sweezy and Leon Trotsky agreed that the alternations between rapid growth and semi-stagnation are non-cyclical. If these alternations in long-term growth are non-cyclical, this would be in contrast to the the 10-year industrial cycle and the shorter, less-well-defined “Kitchin cycle,” where each stage in the cycle necessarily leads to the next stage.

The Ideas of John Maynard Keynes (pt 6)

Keynes and the falling rate of profit

Keynes, along with Adam Smith, Ricardo, Marx and even the “classical” marginalists, believed that the long-term trend of the rate of profit—marginal efficiency of capital in Keynes’s language—was downward. However, Keynes—and other marginalists—gave very different explanations than Marx for this tendency.

Marx applied his perfected law of labor value, which unlike the Ricardian version distinguished between (abstract) labor, the social substance of value, and the labor power purchased by the industrial capitalists. He showed how the tendency of the ratio of constant capital—fixed capital plus raw and auxiliary materials—to rise with capitalist development relative to variable capital would mean a fall in the rate of profit if the rate of surplus value—the ratio of unpaid to paid labor—remained unchanged.

Marx also demonstrated that even if the rate of surplus value increases, the rate of profit can still fall if the ratio of constant to variable capital—the organic composition of capital—rises sufficiently. In analyzing the effects on the rate of profit of a rising organic composition of capital, Marx abstracted a fall in the rate and mass of profit associated with problems of the realization of surplus value.

An inability to realize surplus value—either fully or at all—will cause a temporary fall in the rate and even mass of profit. In contrast, the long-term rise in the organic composition of capital will cause a permanent fall in the rate of profit.

Keynes, as we have seen, had no notion that surplus value is even produced in the production process, let alone that surplus value is produced by variable capital alone. Keynes, in the manner of vulgar economics, simply assumed that profits arise in the sphere of circulation due to the scarcity of capital.

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.