ABSTRACT
Although all capitalistic crises are basically the same, each one varies with respect to its initiation, its length and depth, and the reactions evoked by it. It is the changing capital structure itself which accounts for these variations. Since capitalism is composed of numerous nation-states of dissimilar configurations but operates on a global scale, the international crises affect different countries differently. The economic crisis of 1929 differed from all preceding crises not only in its greater impact on the world economy but also in its political repercussions and their effects on capitalism’s further development. It is thus necessary to refer to both the identities and the dissimilarities, as well as to the abstract reasons for and their concrete appearances in any particular crisis, even though all crises are grounded in the capitalist system as such.The crisis of 1929 came as a great surprise to the Americans. But this was so only because preceding crises had either been forgotten or were referred to as occurences of the irrevocable past, and also because the lack of a general theory of capitalistic development forbade the recognition of the crisis mechanism as the basic “regulator” of the capitalist economy. To be sure, there were business-cycle theories* based on empirical evidence. However, they were more of a descriptive than explanatory nature and were generally regarded as aberrations, leaving the rule of standard theory — that is, the theory of the automatic self-adjustability of the market — unaffected. At any rate, the relevant discussions were of a strictly academic character and did not reflect a more general awareness of the contradictions inherent in capitalist production. And this the more so because in principle, as well as for lack of
necessary data, there is no way to predict the rise of a crisis that changes a period of prosperity into one of depression. All capitalist actions are, at all times, merely reactions to blindly operating, uncontrollable changes in the socioeconomic relations that underlie the capitalist system and affect it either positively or negatively. However, although a crisis is unpredictable as to the time of its arrival, certain market phenomena indicate its possible approach.Capitalist prosperity depends on the expansion of capital. Due to the fact of profit production, it is obvious that total social production requires the accumulation of capital to employ the same or an increasing number of workers. Only a part of the total social product falls to the working class; another part serves the consumption needs and the competitively enforced accumulation requirements of the capitalists or capitalist corporations. When the part of the social product earmarked for accumulation is reinvested in additional capital, implying its profitability, there exists a state of prosperity, with a minimum of unemployed labor and the maximum utilization of the means of production. In brief, prosperity depends on the rate of accumulation which, in turn, depends on the given profitability of capital. However, the latter is determined not only by the rate of labor exploitation but also by the mass of profit in relation to the expansion requirements of the already accumulated capital. The same or even an increased rate of exploitation may not suffice to yield a mass of profit conducive to further capital expansion. The consequent arrest or reduction of investments initiates the crisis and the depression in its wake.There is no need here to dwell on this matter, the less so be-because everyone dealing with it is agreed on the need for capital investments to overcome depressions or to secure a state of prosperity. Whatever the particular depression theory, be it one in terms of overproduction, underconsumption, or market dispropor-tionalities, all recognize the need for the resumption of capital expansion as a precondition for a “normal” economic development and social stability. In practice, at any rate, it is the restoration of a lost profitability that concerns all capitalist reactions to the crisis situation.Although not recognized as such, the crisis of 1929 was actually a continuation of the unresolved economic crisis preceding 115
World War I. This crisis had been sidetracked by the war, so to speak, even though the war was itself the political expression of the crisis. The rapid industrialization and capital formation of the Central European powers had demanded a larger share of world exploitation, while the older capitalist nations could only defend their privileged positions through their own continuous expansion, regardless of the capitalization needs of other countries. Since the war was fought for relative shares in world exploitation, it involved all nations either directly or indirectly. Since it ended with the defeat of the Central European countries, it led to a reorganization of the international power structure, with America becoming the leading capitalist nation.This reorganization affected all European nations negatively — a point not seen at once. For America, however, war production had provided a great impetus for capital expansion, fully justifying President Wilson’s anticipations when, in 1916, he told his fellow-citizens that “we must play a great part in the world whether we choose it or not. We have got to finance the world in some important degree and those who finance the world must understand it and rule it with their spirits and their minds.”2 The temporary eclipse of European competition gave the United States a foothold on formerly inaccessible shores, and the anarchic conditions of devastated Europe helped to secure the newly won positions. America turned from a debtor into a creditor nation, and her rise to economic dominance changed all existing international relations.America’s postwar prosperity was based on a productive apparatus built to support a worldwide war. The accelerated capital expansion had enough momentum to continue long beyond the existence of the conditions that had been its cause. But finally America, too, succumbed to the postwar realities, and her expansion came to a halt in 1929, not again to be resumed on any significant scale until World War II. The Great Depression had its “start” in America only because in other countries the postwar depression had never really ended. But the American collapse led these nations into even deeper decline and disorganized trade relations almost to the point of extinction. There was no profit in further expansion, and there was no way to organize the economic world
structure in accordance with the profit requirements of a general resumption of the accumulation process.Prior to 1929 depressions were of a deflationary nature, that is, the “laws of the market” were allowed to run their course, in the expectation that sooner or later the supply and demand mechanism would regain a lost equilibrium, restore the profitability of capital, and thus assure its further development. The war economy itself, however, was an inflationary process, as the increasing indebtedness of governments pressed upon the profitability of capital. The increased production had been for “public consumption,” destroying men, materials, and machines and delaying the production of the profitable means of production on which the expansion of capital depends.In a “purely” economic depression the deflationary process merely destroys capital values, through bankruptcies and lowered prices, without seriously affecting their physical counterparts, the means of production. The resulting shift of value relations — that is, the changed distribution of the socially available profit among the capitalist firms — will in time provide the surviving capital entities with a higher rate of profit and thus with incentives for new investments. The capitalistic concentration and centralization process plays a greater mass of profit into the hands of fewer capitals, thereby improving their chances to resume their expansion on the basis of an altered capital structure, which allows for an increase in the productivity of labor and a profitable accumulation. The destruction of capital values during an ordinary depression is thus a precondition for a new economic upswing, which is to say that the deflationary process is an indispensable requirement of capital development.The war economy, however, is of an inflationary nature. Capital values are sustained in the form of the public debt. The postwar depression of the European economies was thus characterized by monetary inflation in order to eliminate the public debt and to change the distribution of the social product in favor of capital. The inflationary measures varied in different countries in accordance with both their economic health and their monetary policies. The victor nations attempted, at first, to restore the international gold standard suspended during the war in order to maintain, or
ployed capital. It was rather this situation, the relative stagnation of productive capital, which led to the speculative boom, which could only enlarge the overall discrepancy between the profitability and the expansionary needs of the economy. Even without the artificial expansion of the market value of capital, the upswing was bound to come to an end, although, perhaps, this might have happened at some other time, with less dramatic impact and fewer disastrous consequences than those released by the stock market collapse and the disintegration of the banking system.As it was, however, the crisis was blamed on the stock market, that is, on the unexplained loss of nerve at the first serious decline of the selling boom, which lowered or wiped out not only the inflated part of stock values but also part of the “justified” market value of capital. Treated as a question of psychology, all that seemed necessary in this situation was to halt the decline of stock prices by the restoration of confidence in the workability and progressive unfolding of the system. But since “confidence” cannot replace money, the capitalists tried first of all to safeguard as much as possible of the money value of their stock by selling at any price, so long as buyers could be found. In a short time the stock market value of capital was reduced to half the size it had reached in 1929, leading to the collapse of many enterprises and financial institutions. Banks began to fail because their loans had served speculation instead of productive investments, and their failures led to runs on the banks for reasons both of fear and of necessity.The productive apparatus of the nation was not affected by these happenings in its financial structure. The reduction of the market value of capital, as registered on the stock market, should have improved the profitability of industrial production, since it could now be related to a diminished mass of capital. The fact, however, that production declined even further demonstrated that the cause of the crisis was not to be found in the speculative boom but was rather the result of an already existing decline of the economy. This showed itself most drastically in agriculture, where prices had fallen to about half of their war-time height, not to rise throughout the 1920s. Industrial workers, as a whole, were not able during this period to reach what was officially considered the
necessary annual minimum wage of $2,000. Though the demand for labor increased, it did not increase fast enough to offset the declining rate of capital expansion which, due to the rising productivity of labor, accompanied an increase of output of about 40 percent. But this was in the main output of consumer goods not destined for the expansion of capital-producing capital. That the existing rate of growth could still be regarded as a prosperous one was precisely due to the frozen wage level and the decline of farm prices, which bolstered the profitability of industrial capital and restricted the prosperity to a privileged minority. According to estimates of the Brookings Institution, “in the boom year of 1929, 78 percent of all American families had incomes of less than $3,000. Forty percent had family incomes of less than $1,500. Only 2.3 percent of the population enjoyed incomes of over $10,000. Sixty thousand American families, in the highest income brackets, held savings which amounted to the total held by the bottom 25 million families.”3In the bourgeois view all production is destined for consumption and therefore determined by the consumers. Actually production is determined by its profitability. Its aim is the transformation of a given capital into a larger one, which can only be realized at the expense of consumption. If consumption were the rationale of production, there would be no accumulation of capital. There might be an expansion of the productive apparatus as a precondition for the expansion of consumption, but not the accumulation of capital as capital. No matter what a capitalist firm or corporation produces, it will always try for the largest difference between its production costs and the selling prices for its commodities. On the social level this implies that there is always a surplus product that does not enter into consumption but takes on the form of additional capital, unless it remains idle money capital. In the latter form, however, it can only comprise a fraction of the total of the unused capital, which finds its augmentation in idle production capacity, unsalable inventories, and a general glut on the commodity markets. With production frozen in the commodity form and unable to take on the money form, the capitalist crisis also manifests itself as an interruption of the circulation process and a general shortage of money. That is to say, the idle money, which cannot
find profitable employment, comes to the fore as a general lack of money and a decreasing effective demand. And thus it seems that the crisis is caused by overproduction or its corollary, insufficient demand, whereas, actually, these are only market manifestations of an interrupted process of accumulation.It is not enough, then, to enlarge the output of consumer goods, as happened during America’s postwar prosperity, unless the larger output is accompanied by a corresponding extension of the productive apparatus through which the expansion of capital is materialized. The increase of consumer goods may be a consequence of accumulation, but it cannot be its source, since it depresses the profitability of capital by reducing the rate of accumulation. It was thus the boom in consumer durables, under conditions of relative capital stagnation, which provided one of the contradictions of the prosperity. Of course, this was not a question of economic policy but an expression of blocked investment opportunities due to the precarious conditions of the world economy. The rate of capital expansion depends on the mass of profit available after social consumption needs have been met. The less consumed, the more can be accumulated, and vice versa. But in the world at large production scarcely sufficed to assure the necessary consumption requirements, and profit rates were consequently low. It was the low rate of profit which prevented American capital exports through direct investments abroad. What capital export there was took the form of short-term credits, which could not be transformed intQ long-term investments. In fact, a great part of this capital returned to the United States via the reparation and allied-debt arrangements. While America financed the German reparations, the latter financed the allied war-time debt to the United States. This circular money flow could not enhance a general upswing and came to an end before capital stagnation turned into the Great Depression.Of interest in this context was America’s inability to expand its capital either internally or externally. Still, money had been made during the war, and was being made after it, to allow for a buying boom suggestive of a real prosperity, even though it was not based on the expansion of capital. But this could only be a temporary affair, not only because it was so largely based on
credit, but also because profits did not rise with the increasing economic activity. It was a period often dubbed in retrospect a “profitless prosperity,” which offered no incentives for further capital investments. Not only was the existing productive capacity able to accommodate the prevailing demand, but it was never fully used throughout this whole period. Production did not exceed the demand formed by consumption goods and was, by that token, capitalistically unjustifiable. There was no overproduction as yet because production had been curtailed to the given market demand, which did not include sufficient demand for new plants and equipment.Socially this implied capital stagnation, which denies a part of capital, namely that part producing for expansion, its necessary profits, thereby reducing the general rate of profit for capital as a whole. To raise the rate of profit, as a precondition for the enlargement of capital, requires a restructuring of the whole of the economy, which leads to the profitability of a still larger mass of the total capital. To this end the reallocation of the social capital in a market economy is only possible by way of crises and depressions. But the crisis must first make its appearance on the surface of the market, even though it was already present in changed value relations in the production process. And it is via the market that the needed reorganization of the capital structure is brought about, even though this must be actualized through changes in the exploitative capital-labor relations at the point of production.Before this happens the depression runs its course. After the stock market collapse production declined progressively, reducing the national income within three years to less than half of what it was in 1929. Apart from enterprises disappearing altogether, production was generally cut, which led by 1932 to 15 million unemployed. Many of the employed workers were on half-time. To give a particular instance, industrial construction, which is an indicator for general production, declined from $949 million to $74 million; steel production was down to 12 percent of its capacity. Five thousand banks closed, wiping out close to 10 million savings accounts. Farm income, which amounted in 1929 to $12 billion, was reduced by 1932 to $5 billion. The price of crude oil, which had been $2.31 per barrel in 1926, fell to 10 cents by the end of 1930.
