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.