Are we headed for another Great Depression?

The Great Depression of the 1930s strikes fear in the hearts of working class people around the world, with memories of skyrocketing unemployment, homelessness and hunger.

Ernest Price looks at the history of the Great Depression and the prospects for the coming year.

THE GREAT Depression of the 1930s scarred generations of working class people around the world. Those who lived through the harshest of economic crises remember exactly what it is like when jobs are near impossible to find, wages hit the floor and everyday living is tough. Even conservatives like French President Nicolas Sarkozy have evoked memories of the Great Depression to point to the severity of the current crisis.

“The world is confronted by the worst economic and financial crisis since the 1930s. We need to reflect on the stakes, how we arrived here, who is responsible, and what happened. And we must draw lessons from it. The world must change.”

Sarkozy’s words reflect the panic that is gripping the world’s ruling classes as they try to prevent the prospect of a complete collapse of the financial system. But the fear of another Great Depression is very real for a working class that knows what it is to go without. We need to understand why the Great Depression happened, what effect it had and why governments of the time failed to prevent the crisis.Are we headed for another Great Depression?

The foundations of the Great Depression

Black Tuesday – October 29, 1929 – is one of the most infamous days in world history. The New York stockmarket collapsed in spectacular and unparalleled fashion. Folklore has it that desperate bankers threw themselves oou of buildings at the shock and sheer desperation of it all.

The seeds of the instability were sown years earlier, in the economic chaos resulting from World War I. The war had decimated the major European economies and the US profited, both from its initial abstention from the conflict and by loaning money to the weakened European powers.

As the Russian revolutionary Leon Trotsky put it after the war’s end:

“Before the war, America was Europe’s debtor. The latter served as the principal factory and the principal depot for world commodities. Moreover Europe, above all England, was the central banker. All these leading roles now belong to the United States. Europe has been relegated to the background. The United States is the principal factory, the principal depot and the central bank of the world.”

As the US’s global standing skyrocketed, financial capital flowed towards New York. At the same time, US foreign investment grew from US$2.5 billion in 1913 to US$18 billion in 1932.

But, crucially, the rise of the US was not confined to the financial sector. Trotsky pointed to the importance of the massive expansion in the US’s productive capacity, particularly during the early, isolationist phase of World War One:

“The United States produces one-fourth of the world grain crop; more than one-third of the oats; one-half of the world’s coal output; about half of the world’s iron ore; about 60 per cent of its pig iron; 60 per cent of the steel; 60 per cent of the copper; 47 per cent of the zinc. American railways constitute 36 per cent of the world railway network; its merchant marine now comprises more than 25 per cent of the world tonnage; and, finally, the number of automobiles operating in the trans-Atlantic republic amounts to 84.4 per cent of the world total!… These figures decide everything. They will cut a road for themselves on land, on sea, and in the air.”

The massive expansion across many areas of the productive sector is what cemented the US at the top of the economic food chain.

So why did it all crash in 1929?

In the wake of World War I the US ruling class had a massive sense of self-confidence. In his history of the Great Depression, the economist J.K. Galbraith described it as “the conviction that God intended the American middle classes to be rich”.

As we can see from Trotsky’s statistics, there was a boom in certain sections of the economy – involving the construction of new factories and new equipment and building certain types of consumer goods like cars.

There was a need for continued capital to invest in factories and equipment. The economy relied upon a boom in the stockmarket to provide this capital.

In 1927 the US Federal Reserve board had cut interest rates to discourage overseas investors from lending to US banks. But it also encouraged investment in US industry and speculation on the stockmarket – leading to a stockmarket boom.

And boom the market did – the Dow Jones Industrial Average, which records movements on the New York stockmarket, went from 191 in 1928 to 381 in September 1929.

So how did things go from a boom in September to a crash in October? To answer this question you have to appreciate the relationship between the stockmarket and the real economy.

Despite the disorientating effects of speculation and artificial stimuli, beneath it all the stockmarket is reliant on the ups and downs of the real economy because a company which is losing money will not be able to pay dividends to shareholders, with the result that its shares lose value.

Industrial production in the US fell at an annual rate of 20 per cent between August and October 1929. This had to have an effect on the stockmarket.

In an attempt to deal with the looming problems, the Federal Reserve continued to cut interest rates. This was designed to head off a credit squeeze that resulted from the collapse of a couple of major banks.

A similar credit squeeze as a result of bad debts held by major banks is a key cause of the current crisis. The fear amongst bankers and investors, following bank collapses, that more banks may have bad debts and face bankruptcy means banks are hesitant to lend anyone money.

But it was too late. Confidence (an important driver of movements on the stockmarket) had already begun to bottom out as prominent individuals lost vast sums of money.

The constant investment needed to continue the expansion in the productive sector all but dried up, as banks refused to lend people money. Between 1929 and 1931 industrial production fell by 28 per cent and the rot well and truly set in to the American economy.

The problems were not confined to the US. Most of Europe had been rebuilt after the war on the back of US loans. As US investors recalled their loans in response to the hard times, economic collapse spread like wildfire.

Banks across Europe collapsed, and the cycle of problems described above decimated economies worldwide by the early 1930s.

As the problems spread across the globe, the Australian economy began to feel the effects. In 1929 wool prices collapsed, followed by wheat prices in 1930. The Australian economy was reliant upon these exports.

Following from this, the collapse in manufacturing on a global scale began to affect the Australian manufacturing sector, which had been growing rapidly in the 1920s.

In addition, as we saw in the case of the US, government policies in Australia only served to exacerbate the crisis. During the 1920s, State and Federal governments had borrowed heavily (from overseas) to fund major fixed capital investment (sewerage, railways, telephone infrastructure etc).

As the crisis took hold on a world scale, this line of credit dried up – besides which government debt had reached the point where they were borrowing simply to meet interest repayments.

So with an increasing debt and little money on offer, combined with mass government investment in unprofitable industry, the crisis had well and truly hit Australia.

What was the impact?

More often than not the real consequences of economic collapse are obscured because they are discussed in terms of abstract statistics sectioned off from the human consequences of unemployment, hunger and homelessness.

The working class across the world suffered greatly during the Great Depression. As production fell in the US between 1929 and 1931, unemployment went from 429,000 to seven million – or 16 per cent of the working population. Over the same period wages fell by 39 per cent, while prices only fell by 31 per cent, meaning there was a substantial real wage cut.

The Ford Motor Company went from employing 128,000 people in 1929 to only 37,000 in 1931. As early as 1930, 140,000 textile workers in New England, half the workers in the industry, were sacked.

By the time Franklin Roosevelt replaced Herbert Hoover as US president after a landslide victory in 1932, unemployment stood at 14 million – well over one quarter of the working population.

There was food, but it became unprofitable to sell and transport it, so shelves were empty. The infamous bread lines stretched for miles. People could not afford their rent so houses sat empty while people lived in garbage dumps.

In 1929 there were already two million people unemployed in Germany. The crisis was a little slower to hit Australia, but it came. The main job losses in Australia were in building and construction and manufacturing industries. In building and construction, employment fell by seven per cent in 1928/1929, another 21 per cent in 1929/1930 and a further 28 per cent in 1930/1931. In metals and machine manufacturing, employment fell 10 per cent in 1929-1930, 23 per cent in 1930-1931 and another eight per cent in 1931-1932.

Fixing the crisis – attitudes at the top

Given the sheer scope of the crisis, both in terms of economic data and human tragedy, it begs the question – exactly how did governments of the day respond to the Great Depression?

The US government had a simple policy on the crisis – do nothing. The government had a strict policy to avoid intervening to prop up ailing firms.

Andrew Mellon, the Treasury Secretary of the time, infamously declared “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate”, adding, “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life”.

As the crisis deepened this strategy became unviable. In the early 1930s the Hoover government took some tentative action, raising tariffs on imports in an attempt to stimulate demand at home for goods produced in the US. This had little effect.

Hoover’s strategy of riding out the storm proved deeply unpopular. During his campaign for the presidency, Roosevelt spoke of a “new deal” for the American people – promising comprehensive action in the face of the Great Depression.

His first move as the new president was to take the dollar off the gold standard, permitting the dollar to fall and increasing the competiveness of US exports. He sought to stabilise and reorganise American capitalism and – importantly – to head off a growing rebellion that had come in the form of unemployed workers’ movements, general strikes and tenant organisation.

The opening gambit of the New Deal was the National Recovery Act (NRA) that took control of the economy. The NRA was a plan to get agreement from all interested parties to a set of principles for running the economy. This meant employers, the government and labour unions agreeing to fixing of prices and wages.

In 1935 the Supreme Court declared the NRA unconstitutional but the general principles applied to many of Roosevelt’s attempts to deal with the Great Depression.

All the measures of the New Deal were aimed at stabilising the economy and giving some help to working people. Almost two and a half million people were employed through government works programmes – building hospitals, schools, sewerage and bridges. Money was spent on wages for these workers and on unemployment relief for others.

The New Deal was a complicated affair – Roosevelt created jobs in some areas where organised labour had been strong, and sacked workers in other areas to save money.

Crucially Roosevelt wound back anti-union laws that had prevented workers from joining unions and organising. This gave sections of the working class more confidence to fight, even in the trying circumstances of the Depression. From 1933 onwards there was a wave of important struggles in Minneapolis, Toledo and San Francisco. These struggles were important for cementing some of the reforms that came as part of the New Deal.

It is important to point out the contradictory nature of Roosevelt’s time in office. There were pressures from the working class to soften the effect of the crisis on ordinary people and pressure from big business to curtail the extent of government reforms.

Whilst there was some recovery in the economy by 1937, 14 per cent of the workforce was still unemployed. The economy slumped again later that year. It would take World War II and the war economy to truly turn the economy around.

Will it happen this time?

The story above is frighteningly familiar – the bank failures, the toxic spread of the crisis internationally, the government paralysis in the face of a growing crisis.

But, despite their initial reluctance, this time around governments are far quicker to intervene. Already Treasury Secretary Henry Paulson has been spurned to intervene, Bush has injected close to US$900 billion into the ailing financial sector and European government heads have been nationalising (at least the debts of) banks at a rate of knots.

The ruling class learnt something from the Great Depression. It learnt that Mellon’s strategy – of letting weak capitals fail and allowing the crisis to spread far and wide – prolonged the crisis and spread it into otherwise healthy areas of the economy, as well as creating the conditions for a mass working class radicalisation.

Today governments have acted quickly to try to fix the problems in the financial sector to encourage banks to start making loans again. Whilst early intervention into the economy is not going to solve the problems – crisis is an inherent part of capitalism – it is likely that it will prevent a crisis on the scale of 1931. That being said, no government or cartel of governments can prevent a complete unravelling of the system if panic really sets in.

Even if we do not see another Great Depression, it is clear that we are in for a serious downturn in the economy. It is unlikely that unemployment will reach 30 per cent, but in the United States, Australia and large sections of Europe it could reach at least ten per cent within the next twelve months.

Along with this we have already seen some of the impact on the working class – surging home loan foreclosures in the US (and a growing number in Australia), retirement savings have been decimated and the squeeze on household budgets is increasing.

It is impossible to predict just how the crisis will spread this time, but now, like in the 1930s, the crisis is at the heart of the real economy – not just in the financial system. In the 1930s those in power around the world showed their true colours – they were happy to let millions of people suffer in the name of purifying capitalism. These crises are endemic to the system. There is the fundamental question of how to deal with them, and who suffers. We need to start preparing to organise now to ensure that it is not us.


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