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 power relative 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.

The “give” took the form of World I. According to the online encyclopedia Wikipedia, there were 5,711,696 military deaths the among the “allied” powers (France, Britain, Russia and the United States) and 3,674,757 civilian deaths. Among the central powers (Germany, Austria and Turkey), there were 4,010,241 military deaths and 3,143,000 civilian deaths. Overall, there were 9,721,937 military and 6,821,248 civilian deaths, counting deaths in the neutral nations of Denmark, Norway and Sweden. This doesn’t include the wounded, nor does it take account of the deaths caused by the flu pandemic of 1918.

Estimates of the deaths caused by the 1918 pandemic range between 50 million and 100 million worldwide. “While World War I did not cause the flu,” Wikipedia notes, “the close troop quarters and massive troop movements hastened the pandemic and increased transmission and augmented mutation and may have increased the lethality of the virus.”

“Some researchers speculate, Wikipedia continues, “that the soldiers’ immune systems were weakened by malnourishment and the stresses of combat and chemical attacks, increasing their susceptibility to the disease.”

Historically, August 1914 to August 1945 marks the period of transition from the domination of Great Britain to that of the United States. British domination was itself established by the British victory over post-revolutionary France in the world war that followed the French Revolution.

To establish the current domination of the United States, it took not one world war but two. The nearly 65 years of “peace” between the imperialist powers since World War II that apologists of imperialism like to brag about is therefore built on a mountain of corpses.

When one considers the huge advantages the United States had over its rivals—its natural resources, including its hydrocarbon and mineral resources and rich agricultural lands, combined with the size of its home market—its seems that short of a victorious worldwide socialist revolution the domination of the United States was virtually predetermined.

Because of the Atlantic and Pacific oceans, the United States had virtual immunity from a military attack by another power, whether located in Europe or Asia. (1) This meant that with the exception of the Civil War of 1861-65—described by Karl Marx as a slave holders rebellion—the United States had to throw away little of its capital on wars. Yet the transition from the British “regime” of imperialist domination from 1815 to 1914 to the American “regime” from 1945 to the present was accompanied by horrors undreamed of in any earlier epoch, of which the Great Depression of 1929-40 was only one.

Any cold-blooded calculation of the resources available should have convinced the leaders of Germany that it had virtually no chance of prevailing against the United States. But the internal contradictions of capitalism that I have been examining through these posts drove Germany to attempt to achieve the domination of Europe as a first step toward succeeding Britain as world master. This despite the virtual certainty of a disastrous confrontation with the United States that Germany could not win.

Even Japan, a nation located on a chain of islands almost totally lacking in natural resources, and whose industrial development at the time of World War I lagged far behind Germany, not to speak of the United States, was driven by the contradictions of capitalism to aim for the domination of East Asia, including China, and the western Pacific in the years after World War I. As unrealistic as it was, the Japanese leaders saw this as only a first step toward Japanese global domination. (2)

However, in the period between the beginning of World I, which marks the definite breakdown of British domination, to the end of World War II, America’s principal imperialist challenger in the economic, military and political spheres was Germany.

World War I not just a struggle over colonies

It is sometimes said that World War I was a struggle for control of colonies. While this is true as far as it goes, it is not the whole truth. In reality, World War I was a struggle for both the control of colonies, including the semi-colonial nations, and the control of the imperialist countries themselves. The entire globe was in play, not simply the colonies.

Even if the leaders of the chief imperialist countries—Britain, the outgoing “boss”; the United States, the heir apparent; and Germany and Japan, the two “pretenders,” along with the other imperialist powers—had been able to agree on the “inevitability” of United States’ domination—something that Marx and Engels had been able to foresee as early as the middle of the 19th century—that would still have left open the exact nature of the “new regime.”

How would the markets, raw materials, money material and labor power, both in the imperialist and the colonial and semi-colonial countries, be divided up? And exactly how would the military and political power be shared between the new boss—the United States—and the other lesser imperialist powers?

Therefore, the collapse of British world domination in 1914 was bound to bring with it a period of political and military anarchy until the new “regime” was firmly—if in the historical sense temporarily—established. Nobody alive in August 1914 could have seen the exact forms U.S. world domination would take when it fully unfolded after 1945.

In last week’s post, we began to see some of the reasons why it was no accident that not only the two world wars but also the greatest economic crisis the capitalist mode of production has so far experienced—occurred in this transitional period of unbridled political and military anarchy. But it is also no accident that the October Revolution of 1917, which marked the highest point the working class’s struggle for its liberation has reached so far, occurred precisely in this period of transition between British and American domination.

U.S. imperialism had one potential challenger that alone could have defeated its drive for world domination. That was the world working class, including the working class of the United States itself.

The position of Germany on the eve of World War I

Beginning with the “mid-Victorian boom,” which followed the gold discoveries of 1848 in California and 1851 in Australia, the German states had embarked on a period of rapid economic development and industrialization. Following the victory of Prussia over France, German industrialization was given a further impetus. Though slowed somewhat by the 1873-1896 “Great Depression,” especially during the 1873-79 period, Germany overall continued to make rapid progress as it emerged as an industrial country of the first rank. This progress accelerated at the end of the century, as a new worldwide “long wave” of accelerated economic expansion replaced the late 19th-century Great Depression.

Since the capitalist development of Germany came late compared to that of Britain and France—as did the development of the United States—Germany like the United States had relatively few colonies. It did acquire parts of Africa, including present-day Tanzania, Rwanda, Burundi and Namibia in Africa; Togo and part of the Cameroons in the Pacific region; Papua New Guinea and other smaller islands in the west Pacific region; and Jiaozhou Bay and Chefoo, now Yantai, in China.

In its own colonies, Germany was a cruel exploiter just like the other imperialist powers. Between 1904 and 1907, Germany brutally put down a rebellion against colonial rule of the Herero and Nama peoples in what is now the African country of Namibia. It is estimated that 50 to up to 70 percent of the Herero people were exterminated and about 50 percent of the Nama people.

These figures are comparable to the percentage of European Jews exterminated by the Germans during World War II. The main difference is that in one case the victims were European whites, while in the other the victims were “tribal black natives.”

But Germany certainly had no monopoly on genocidal sprees among the colonial powers. All the colonial powers had their hands soaked in the blood of native peoples. During World War II, as we will see in a later post, these genocidal campaigns were to come “home” to Europe when Germany attempted to build a colonial empire in Europe itself that would stretch from the Polish boarder to the Ural mountains. (3)

In the days before World War I, Germany like the United States did not need colonies as much as Britain and France needed theirs. Britain and France, with their industries in relative decline, needed colonies as dumping grounds for their—relatively—not so cheap commodities.

In addition, as their industrial growth slowed, British and French capitalists were forced to increasingly turn to loaning out money capital for interest as opposed to transforming these profits into new industrial capital. While some of these loans were within the country, and others were among the imperialist powers themselves, a certain number were extended to the colonized and semi-colonized countries. The repayment of these loans, and especially the collection of the interest “earned,” demanded political domination backed by military force.

On the other hand, the rapidly rising industrial powers of the United States and Germany could increasingly win the battle of competition as long as “free trade” prevailed. Even where it didn’t, American and German industry could frequently emerge victorious because of their much lower cost prices and higher quality commodities. This was one of the reasons why both Germany and the United States were relatively slow to acquire colonial empires as compared to Britain and France. In this sense, the United States and Germany found themselves in somewhat similar positions.

However, in all other respects the situation of Germany radically differed from that confronting the United States. The United States, as mentioned above, was a vast continental country rich in natural wealth. Germany, in contrast, was a geographically small country poor in raw materials and agricultural wealth.

Since the exhaustion of the silver mines in the 15th century, Germany had virtually no internal production of money material. About the only natural resource Germany had in abundance was coal, much of it low quality—and highly polluting—brown coal. Therefore, unlike the United States, Germany faced a huge contradiction between its increasingly powerful industry and its lack of raw materials and limited agricultural potential. It is no accident that German Kaiser Wilhelm II began at the turn of the 20th century to show a growing interest in building up Germany’s naval power in a way that challenged Britain’s domination of the seas.

However, Prussia, the state around which modern Germany was formed, had historically been a land power. Germany’s advantages in ground warfare—inherited from Prussia—rather pointed towards the establishment of an empire in Eastern Europe.

The Eastern European lands were then ruled by the declining Russian Empire of the czars. These regions were—and are—rich in hydrocarbons and agricultural and mineral-bearing lands that Germany lacked. This famous, or infamous, “drive to the east” appealed to many German imperialist leaders, not only because it played on Germany historical military strengths but because they hoped to avoid a clash with the declining but still extremely powerful British Eempire.

If Germany had tried to establish a colonial empire in Africa to obtain the raw materials and agricultural lands it was so short of at home, it would have had to confront the power of British and French empires head on. But if Germany were able to build an empire in the East on the ruins of the Russian Empire, the German leaders hoped, a collision with at least the British Empire might be avoided. This hope was shared not only by Germany’s World War I-era leaders but by Adolf Hitler as well.

In both cases, the German leadership was to be disappointed. It had been a pillar of British foreign policy since the days of Napoleon to oppose the emergence of a dominant continental European power, and Britain refused to change this pillar of its foreign policy as the new century began. Under these conditions, a major European war was just a matter of time.

Even more important, the United States would have found it intolerable if a major new empire emerged on the European continent that combined Germany’s highly developed science and technology with the vast natural resources of the Russian Empire. (4)

Germany defeated

World I, of course, ended with the defeat of Germany. One of the key reasons for Germany’s defeat was its lack of raw materials. Berlin had bet on a short decisive war that would be over within a year. However, Britain and later the United States entered the war, and French resistance was fierce. Instead of a quick victory, Germany faced stalemate marked by protracted trench warfare on the battlefield. The war dragged on leading to crushing raw material and food shortages. There was no war “prosperity” in Germany. Instead, production steadily declined, and food became scarce.

The final winter of the war is known in Germany as the “turnip winter,” since there was little else to eat except this rather unappetizing vegetable. Britain, too, though a nominal victor, was much reduced in power, becoming a debtor of the United States, which now emerged as the dominant creditor nation. U.S. domination in the sphere of industry and agricultural production was now matched by its domination in the sphere of finance. The British pound had to yield to the dollar as Britain’s “old lady”—the Bank of England—was eclipsed by “the Fed”—the U.S. Federal Reserve System.

France, which along with Russia had seen most of the fighting during World War I, suffered devastating human and material losses on its own territory, reducing its power and taste for war for a generation to come. Overall, France had suffered 1,357,800 dead plus 4,266,000 wounded.

Looked at in another way, France like Russia suffered a casualty rate among its soldiers of 76.3 percent. This compared to the casualty rate for the soldiers of the British Empire of 35.8 percent and only 8.2 percent for the United States. The casualty rate of “victorious” France was actually higher than the German casualty rate, which in contrast was “only” 64.9 percent of those mobilized. France attempted to make up for its huge losses in the war by taking it out on Germany.

First, Germany lost all of its relatively modest colonial empire, which it was forced to yield to the victorious robber imperialist powers. The colonies, however, remained enslaved and did not achieve their right to self-determination. Instead, they were divided among the victorious imperialist powers.

In addition to giving up its colonies, Germany had to give part of Prussia to the newly formed Polish Republic. West Prussia was separated from East Prussia by the Polish “corridor.” Danzig (Gdansk in Polish) was made a “free city” under the control of the League of Nations. (5)

All of this was bound to create endless conflicts between Germany and Poland in the years that followed. The Poles did all they could to grab as much territory from Germany while it was weak. Later, in the Nazi period, the Germans more then paid them back with interest through their genocidal occupation of Poland in World War II.

In addition, Germany had to cede the province of Alsace-Lorraine to the French. This province had been grabbed by the victorious Prussians after the defeat of France in the 1870-71 Franco-Prussian War. At the time, Marx had warned the Germans that by seizing Alsace-Lorraine they were laying the foundation of a future major European war.

Marx explained that Germany’s aggression would bring France and Russia into an alliance against Germany, and this is exactly what happened. The war the founder of scientific socialism predicted began when Russia and France—soon joined by Britain—declared war against Germany in August 1914.

After their defeat in World War I, the Germans had to return the province they had so foolishly stolen in the moment of their victory in 1871. The coal-rich Saarland was put under the control of the League of Nations for 15 years—Lenin called this forerunner of the U.N. a den of thieves—during which its coal would be sent to France.

After that, a referendum was scheduled where the residents of the Saarland would have a choice to vote on whether they wanted to be part of France or Germany. By the time the referendum was held, the “democratic” German Republic had been replaced by the fascist Third Reich. The residents of the Saarland decided to return to fascist Germany rather then remain part of “democratic” France.

Germany also had to accept the “right” of the French to occupy the highly industrialized Rhineland, the heart of German heavy industry.

In addition, Germany was forced to accept sole responsibility for the war. In principle, German leaders such as the now-deposed Kaiser Wilhelm II were to be tried as war criminals (though no war crime trials for such war criminals as George Clemenceau of France, Lloyd George of Britain or Woodrow Wilson of the United States were provided for). In the end, this demand was not pressed, and this time no German leaders were tried for war crimes.

However, Germany was forced to assume “sole war guilt.” This was to provide a rallying cry for German right-wing politicians in the years that followed. These reactionary forces claimed that the supposedly “Jewish-controlled” Social Democratic Party had agreed to this demand as part of an imagined Jewish plot to destroy the German nation.

Particularly insistent on this point in the years to come was the leader of the “National Socialist,” or Nazi, party, Adolf Hitler. All in all, the Germans were supposed to pay reparations to the sum of 226 billion gold—not depreciated paper—marks.

A gold mark was about a quarter of the U.S. gold dollar of those years. A gold mark represented a lot more real money than today’s much-devalued U.S. paper dollar. It was acknowledged by all serious authorities that there was no way Germany could possibly pay such a sum, whether in kind in the form of commodities or in the form of money.

In 1921, this unpayable sum was “generously” reduced to a still completely unpayable 132 billion gold marks. Then, in 1923, the French exercised their “right” to occupy the Rhineland when Germany proved unable to pay as required under the Treaty of Versailles. The German government, totally unable to resist the French aggression militarily, called instead for passive resistance and urged the workers to refuse to work under French occupation.

This sent the already sharply declining paper Reich Mark into a tailspin, leading within months to the greatest hyperinflation in world history. By late 1923, the paper mark had essentially lost its quality as (token) money. Capitalists refused to exchange commodities for it, prices quoted in marks were essentially meaningless, and city residents faced large-scale starvation as they were forced to barter any objects of value they had for food.

The owners of government bonds, mortgages and other debts were virtually wiped out. Those who owned stocks did considerably better, since the stocks were still “backed” by the real capital of Germany’s still formidable industrial corporations, and they would be expected to pay dividends in the years ahead once a stable mark was reestablished.

The owners of houses benefited to the extent that the mortgages on their homes, denominated in paper marks, were wiped out by the hyperinflation. The problem for the members of the middle class, however, was that though they now owned their houses free and clear, they were impoverished in all other ways. They were therefore forced to take out new mortgages at high interest rates as soon as a viable new German currency was established.

The inflation of 1923 could not continue for very long, since a circulating currency representing the money commodity with at least some stability is necessary for the capitalist mode of production to function. In late 1923, the new so-called “Rentenmark” was introduced to replace the now worthless Reich Mark. The new German currency was initially called the Rentenmark (rent-mark) because it was supposedly backed by a mortgage on all German landed property. This goes back to John Law, whose false theory held that landed property could function as a form of money in place of the precious metals. (6)

The German middle class and the hyperinflation

But American loans were what really stabilized the mark. The paper rent-mark was soon replaced by a new gold mark, convertible into gold at the old pre-war rate. If these loans had not arrived, middle-class homeowners would have been in a far worse fix. True, they would have owned their homes free and clear, but they would have had no money to buy such essentials as food.

In the absence of American loans, mortgage credit would have been virtually unavailable on any terms for a considerable period of time. Therefore, without the American loans, homes would have been virtually impossible to sell for anything but dirt cheap prices, if that. How much could you afford to pay for a home if you had to pay for it in cash?

On top of this, all the homes would have been dumped on the market at the same time. If the homes could have been sold at all, the prices would have been so low they would not have provided the middle-class families with food—not to mention any other necessities—for very long.

As it was, the arrival of American loans took the edge off the credit crisis facing the middle classes for the time being. American money capitalists were eager to make loans to cash-starved Germany because of much higher rates of interests that prevailed on the German money market compared to those prevailing in most other imperialist countries.

However, starting in 1928 the American economy entered the boom phase of the industrial cycle. The monetary vacuum created by the 1923 inflation crisis had attracted U.S. loan capital to Germany in great quantities. Then when the U.S. economy entered the boom-overproduction phase of the industrial cycle in 1928, much of this money capital was suddenly withdrawn, causing the German domestic money market to begin to seize up. The trigger for the beginning of the economic crisis in Germany was not the stock market crash of October-November 1929 but rather the industrial boom accompanied by the Wall Street bull market that preceded the crash.

By making the German economy, Europe’s leading industrial economy, hypersensitive to conditions on the U.S. money market, the hyperinflation of 1923 can be considered one of the factors that helped transform the U.S. recession that began in 1929 into the Great Depression (7)

Germany’s problems cannot be separated from the whole problem of the war debts. During the war, Wall Street had made huge loans to Britain, France and Russia. This had quickly transformed the United States, historically a debtor nation, into the world’s biggest creditor. Without World War I, this transition still would have taken place. America’s overwhelming industrial superiority, as well as its richness in agricultural lands, fossil fuels and mineral resources, guaranteed it.

But in the nature of things, it would have been a much more gradual process without the intervention of the war. Forced by the U.S. government to repay their war debts, a weakened Britain and a ruined France attempted to finance their debt payments to the United States through the reparations that the Treaty of Versailles had imposed on Germany.

Between 1924 and 1928 a circular flow of money developed among the imperialist powers. Britain and France collected war reparations from Germany and used them to pay off their debts to the United States. Money loaned from New York flowed through Germany to Britain and France in the form of reparations payments and then back to New York as Britain and France attempted to pay down and service their war debts. This “house of cards” could not survive the strain put on it by the first post-World I industrial boom and its associated industrial overproduction.

The coming of the Smoot-Hawley tariff

While the United States experienced industrial prosperity during the 1920s, such was not case with U.S. agriculture. As European agricultural production revived with the end of the war, the high wartime prices received by American farmers collapsed. Things were all the worse, since many American farmers had taken out mortgage-backed loans on the expectation that high wartime agricultural prices would continue.

Beginning with the recession of 1920-21, U.S. agriculture was plagued by depression conditions accompanied by a wave of bank failures. For the time being, however, these bank failures affected only small country banks, whose failure had little immediate effect on the still prosperous industrial economy.

As it turned out, however, this country banking crisis was the harbinger of a much more serious banking and credit crisis, much as the sub-prime mortgage crisis of 2006-2007 turned out be the harbinger of the much more serious worldwide banking and credit crisis of 2008-09.

Because of the ongoing agricultural depression, pressure from the agricultural districts mounted to raise the already high level of U.S. tariffs. The victory of the Republican Party in the 1920 U.S. election and its ensuing domination of U.S. politics through the 1920s meant the victory of the party of high tariffs.

This was very bad news for Germany, whose only hope of getting out of debt to the United States lay in the ability of Germany to increase its exports to the United States and thus run a major trade surplus with America. (8) If Germany were to do this, it would be able gradually to pay off its debts, which had been reduced under the Dawes and Young plans, to more realistic levels.

The alternative was for Germany to renounce the debts. But this would deliver a shock to the already completely undermined international credit system. In addition, this meant renouncing the Treaty of Versailles. It was this latter course that was favored by the right-wing Nationalist Party of Alfred Hugenburg and the still small National Socialist Party of Adolf Hitler. Such a policy implied war with Germany’s creditors—that is, war with the United States.

But America’s policy of protection, a pillar of the Republican Party since the days of Lincoln, now stood as a major obstacle to allowing Germany and Europe as a whole to escape from the debt trap they found themselves in by any way other than bankruptcy. It was one thing for the United States to follow a policy of protection when it was an undeveloped and still largely agricultural country. It was a quite another thing, to follow such a policy when it had become by far the dominant producer of both industrial and agricultural commodities in the world.

And it was especially a contradiction in light of America’s position as the world’s leading creditor. Back in the 19th century when Britain had been the “workshop of the world,” the British had kept their home market open. This made it possible for nations in debt to Britain to sell commodities, mostly agricultural products and raw materials, and thus earn the money to pay off or at least service the debts they owed the British.

During the 1920s, however, the Republican leaders of the United States stubbornly insisted on maintaining a policy of protection that made it virtually impossible for America’s debtors to pay off or even service their debts except by borrowing still more money from the United States. Something had to give sooner or later. But before it did, things were about to get a whole lot worse with the passage of the Smoot-Hawley tariff.

During global crises of overproduction in the days of British domination, once the crisis proper in Britain had given way to the phase of depression or stagnation, the British money market would rapidly relax and interest rates would fall. British bankers and other money capitalists would then find themselves with idle cash burning holes in their collective pockets. They were therefore in a position to make loans to other countries affected by the crisis at relatively high interest rates, with every prospect that the borrowing nations would be able to either pay back the loans outright or service their debts with money earned by exports to Britain.

All this was very profitable for the capitalists operating on the London money market. These loans would in turn cushion the effects of the crisis in other countries. As the British economy began to recover, other countries would be able to gradually repay their loans through increasing exports to the British home market. However, this mechanism did not operate during the super-crisis of 1929-33.

With the end of the U.S. economic boom in the summer of 1929, soon followed by the crash on Wall Street, the New York money market began to ease rapidly. For a moment, it appeared possible that the pattern of 19th-century crises might after all repeat itself, with the difference that New York was now playing the role of London.

The next step should have been a resumption of loans to Germany and other European countries that had been cut off from new loans during the boom in 1928-29. This would have cushioned somewhat the effects of the crisis in Germany and other European countries. However, for this mechanism to work, there had to be some prospect of Germany and other European countries increasing their exports to America as the crisis gave way to recovery. No American money lender would make loans to Germany or other countries if they didn’t expect to be paid back, no matter how much idle cash was burning holes in their pockets.

During his 1928 presidential bid for the presidency, Herbert Hoover promised an increase in protective tariffs to help farmers hard hit by the agricultural depression. In doing this, Hoover was following the traditional policy of the Republican Party, which appealed to workers and farmers—they couldn’t win elections with the votes of the big capitalists alone—by promising protective tariffs that were supposed to guarantee high prices for farmers and jobs for American industrial workers.

As the industrial boom gave way after mid-1929 to recession, protectionist pressures only increased. It is a basic law of competition that whenever the market contracts, like it does during periods of recession, the more intense the competition is among the industrial capitalists for what remains of the market. Under such conditions of intensifying competition, the industrial capitalists depend not only on their own resources and cunning—as important as that is in the war of competition—but turn to the state for assistance. Therefore, during 1929 and early 1930, the various industrial capitalists lobbied the U.S. Congress for increased protection for their particular commodities.

Wikipedia states: “Although rated capacity had increased tremendously, actual output, income, and expenditure had not. Under the direction of Senator Reed Smoot of Utah, the party drafted the Fordney-McCumber tariff act in 1921 with an eye to increasing domestic firms’ market share. Weakening labor markets in 1927 and 1928 prompted Smoot to propose yet another round of tariff hikes.”

Wiki quotes Smoot as writing in his memoirs, “The world is paying for its ruthless destruction of life and property in the World War and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war. (Emphasis added—Sam Williams)

By the time the bill reached Hoover’s desk, frantic lobbying by the various industrial capitalists had succeeded in raising tariffs on some 20,000 imported commodities, according to Wikipedia, many to the highest levels ever.

Many of the professional economists of the day were horrified. After all, didn’t Ricardo’s law of comparative advantage, which they had learned during their college days, prove that “free trade” ensures the most efficient production on a global scale? Some 1,028 economists petitioned Hoover to veto the bill. Certain industrial capitalists such as Henry Ford and others also opposed the bill.

In those days, unlike now, Ford and other U.S. auto manufacturers faced little overseas competition. But all their efforts were in vain. On June 17, 1930, President Herbert Hoover signed the Smoot-Hawley tariff, and it became the law of the land.

Effect of Smoot-Hawley on the development of the super-crisis of 1929-33

The passage of the Smoot-Hawley tariff of 1930 led to a wave of retaliatory actions by other countries. In the years that followed, both U.S. imports and exports declined by more than 50 percent. (Wikipedia)

In the past, many bourgeois economists claimed it was a decline in world trade caused by the Smoot-Hawley tariff and the wave of retaliation by other countries that followed that transformed the quite “ordinary” world recession of 1929-30 into the Great Depression.

One group of ultra-neoliberal economists, called the rational expectations school, claims that it was the mere expectation on the part of the stock market traders of a massive increase in taxation in the form of the impending tariff that caused them to rationally sell off their stocks in October-November 1929. According to the “rational expectations school,” the stock market speculators realized the tariff-tax would cause a major depression and acted accordingly by selling off their stocks.

I don’t think I need to waste the readers’ time in examining the arguments of the rational expectations school. Despite the tariff, U.S taxes overall, especially on business and the rich, were extremely low in those years.

It is therefore absurd to claim that “high taxes” in the United States played a significant role in the origins of the Great Depression. However, that still leaves open the question whether the decline in world trade caused by the waves of tariff increases by the major capitalist trading nations, beginning with Smoot-Hawley, transformed the 1929-30 world recession into the Depression. Or was it rather the super-crisis itself that caused world trade to collapse?

It is quite obvious that the sharp drop in world trade we are experiencing in 2009 was caused by the worldwide crisis of overproduction of 2007-09, and not the other way around. If, however, the major trading nations respond to the drop in world trade rooted in the crisis of 2007-09 like they did in the early 1930s, the depression in world trade will extend far beyond the cyclical 2007-09 overproduction crisis itself.

In general, since the Friedman-led “monetarist counterrevolution” against Keynes, bourgeois economists and historians have played down the role of Smoot-Hawley as a major cause of the Depression. Didn’t Friedman and Schwartz “prove” in their “Monetary History” that the Depression was caused by the one-third drop in the U.S. money supply between 1929 and 1933? And didn’t Friedman and Schwartz demonstrate that the collapse in the money supply resulted from the bungling of monetary policy by the U.S. Federal Reserve System and not any basic contradictions of the capitalist system?

Therefore, the Friedman-inspired economic historians argue, how could Smoot-Hawley have been a fundamental cause of the Depression? Some economists have attempted to support this “monetarist” argument by pointing to the relatively small role that foreign trade played in the U.S. economy in those years. After all, considering the extent of the internal American market and its extreme wealth in raw materials and agricultural land, the American economy was in those days largely self-sufficient.

At most, any decline in foreign trade caused by the the Smoot-Hawley tariff would have made the U.S. economy somewhat “less efficient,” since it would have been deprived of some of the benefits of the working of the “law” of comparative advantage. But these Friedman-inspired economists and historians claim that this would hardly have caused the Depression, or even significantly contributed to it.

However, even if world trade was relatively unimportant to the United States in those years, the fact remains that trading with the United States was extremely important for debt-ridden Europe, especially for Germany. Hoover might have signed the bill because he thought that the stimulating effect on American industry of the reduction of foreign competition in the U.S. home market would bring about a rapid rebound from the 1929-30 recession. Perhaps also the U.S. president believed that a recovery accelerated by the new tariff might come in time to help the hard-pressed Republicans in the approaching 1930 mid-term congressional elections.

But if Hoover entertained such hopes, they were bound to be largely frustrated by the very fact pointed to by the modern economists who minimize the effects of the Smoot-Hawley tariff. Wikipedia quotes the historian Robert Sobel as claiming that “factory payrolls, construction contracts, and industrial production all increased sharply” as Smoot-Hawley took effect. This seems to be a gross exaggeration on Sobel’s part. He is apparently referring to the slight increase in industrial production that occurred in the winter of 1931. (9)

The quote continues: “However, larger economic problems loomed in the guise of weak banks. When the Kredit-Anstalt Bank of Austria failed, the global deficiencies of the Smoot-Hawley Tariff became apparent.”

Whatever “green shoots of recovery” were sprouting in the winter of 1930-31 were soon killed by the frosty winds of the world banking and credit crisis of 1931. In the last year, we have seen yet another example of the devastating effect that a global banking and credit crisis can have on world industrial production, employment and world trade.

The passage of the tariff was the nail in the coffin of any hopes that the European capitalists, including the German capitalists, may have still entertained that they would be able to pay off their debts to America with exports. The money lenders on Wall Street also got the message and cut off any further loans to the Europeans, especially the Germans. How could the Europeans possibly pay off their debts by increasing exports to America in the face of recession and Smoot-Hawley?

The only way they could now “pay” their debts was through bankruptcy. This had been the course advocated all along by the leader of the German Nazi party, Adolf Hitler. Smoot-Hawley had proven the German candidate for dictator—and all who thought like him—correct on this point.

Does this mean that the Smoot-Hawley tariff was the main cause of the Depression after all? In my opinion, this would be going too far. It is more correct to see Smoot-Hawley as part of the overall downward spiral of the world capitalist economy into super-crisis and Depression as each individual capitalist nation scrambled to protect its share of what was left of the market.

Next, I will examine the question of whether the New Deal shortened or extended the Depression.


1 Today, the United States can be attacked by intercontinental ballistic missiles or by determined terrorists such as those who carried out the 9-11 attacks. But an ICBM attack using nuclear weapons would be suicidal for any imperialist rival of the United States. Even leaving aside the question of nuclear weapons, an invasion of the American homeland by another imperialist power, considering both the Atlantic and Pacific oceans and the continental extent of the American homeland, is hard to imagine for as long as I can peer into the future. In contrast, both Germany and Japan were occupied by the United States after World War II. To this day, the United States maintains major forces in these countries.

2 In January 1940, Leon Trotsky, then living in exile in Mexico, revealed that Soviet intelligence had obtained a copy of a document submitted by Prime Minister Baron Tanaka to Emperor Hirohito in 1927. It outlined a plan that envisioned Japanese world domination—not just the domination of Asia. In this case, however, the ambitions of Japanese imperialism far outstripped its actual capabilities, as the outcome of World War II made clear. Instead of achieving world domination, Japan ended up occupied and dominated by the United States. U.S. bases and troops remain in Japan more then 60 years after the end of war!

3 France and other lesser imperialist powers that lay to the west of Germany were to be reduced to satellite imperialist powers. They would continue to share in the imperialist super-profits squeezed out of colonial peoples but only to the extent that Germany allowed. However the European lands that lay to the east of Germany were to be reduced to “third world” status, with colonizing Germans playing the role of colonial settlers.

4 In physics, Germany was second to none, including the United States. Since many of the physicists were of Jewish or partly Jewish origin, Hitler’s Germany essentially made a free gift of them to the United States. This is one of the reasons why the United States developed—and used—atomic weapons during World War II and Germany didn’t. The Germans also led in in the development of rocket science, which became crucial to the development of the ability to actually deliver nuclear weapons during the “cold war.”

5 The alleged persecution of Germans by Poles in the then predominately German city of Danzig became the excuse—though not the real reason—for Hitler’s invasion of Poland in September 1939, which was the beginning of World War II in Europe.

6 Pure landed property—unimproved land—is not a product of human labor and is therefore not even a true commodity. It therefore cannot function as the money commodity.

7 This should be seen in the context of the overall shortage of money-loan capital relative to real capital characteristic of the period between end of World War I and the outbreak of the crisis in 1929, the reasons for which I explored in last week’s post.

8 Since the world market was weak in the post-World I period, America was unwilling to open up its home market to foreign competitors. As I will explain later, the far more expansionary state of the world market after World War II made the U.S. much more willing to open up its home market. This is one of the reasons why the post-World War II period differed from the post-World War I period.

9 During the winter of 1930-31, the U.S. economy was beginning to show tentative signs of a cyclical recovery. For example, after declining sharply from mid-1929 through 1930, industrial production began to rise once again. But these “green shoots” of recovery were killed off by the devastating global banking crisis of 1931, and the U.S.—and world—economy resumed their downward plunge.


3 thoughts on “Does Capitalist Production Have a Long Cycle? (pt 6)

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