Does Capitalist Production Have a Long Cycle? (pt 7)

Eightieth anniversary of start of super-crisis

To understand the policies that are being followed by the governments and central banks today as they combat the aftermath of the panic of last fall and winter, you need to understand the events of 80 years ago. The current governments and central bankers are very much haunted by the ghost of the Depression.

Several weeks ago, I explained how World I and its war economy had led to a huge divergence between prices and values. This contradiction reached it peak in the spring of 1920 and was partially resolved by the deflationary recession of 1920-21. Why then didn’t the Great Depression begin with the deflation of 1920 rather than in 1929?

Industrial overproduction necessary for crisis

The reason was that the war economy had checked the entire process of expanded capitalist reproduction. This greatly limited industrial overproduction. No matter how much gold production declined, if real capital—productive capital plus commodity capita—did not expand, there could be no overproduction. Cyclical crises of overproduction are the product of expanded capitalist reproduction—the form that growth of wealth under capitalism takes—not its absence.

However, once normal capitalist expanded reproduction resumed in the early 1920s, it inevitably once again took the form of an industrial cycle crowned by a crisis of industrial overproduction. This is why disaster struck just as it appeared that the world capitalist economy had finally shaken off the effects of the world war.

For a moment, at the peak of the 1920s industrial cycle, it seemed as though normal capitalist “peace and prosperity” had returned. And then—and not by accident—disaster struck. The combination of a “normal” cyclical crisis of overproduction combined with the still considerable inflation of prices relative to underlying labor values—aggravated further by the whole problem of war debts and the U.S. Smoot-Hawley tariff—set the stage for the disasters that followed. (1)

The super-crisis and the Fed’s reduction of interest rates in 1927

During the summer of 1927, exactly two years before the start of the super-crisis, the U.S. economy was going through a period of stagnation—perhaps a Kitchin inventory recession aggravated by the decision of Henry Ford to suspend production of the now obsolete Model T and retool for the production of the new Model A. The U.S. stagnation was making it more difficult for the British to hang on to their gold reserve as British industry was steadily losing ground in the world market.

In order to counteract the stagnation in the U.S. economy and relieve some of the pressure on Britain’s gold reserve, the Federal Reserve Board decided to lower its (re)discount rate. Some bourgeois economists have even seen this rather routine central bank maneuver as the cause of the Depression.

They argue that it was this cut in rates that caused the speculative boom on Wall Street to get completely out of control. As a result, the argument goes, the boom ended with the October-November 1929 crash and the Depression. Of all the various explanations of the Depression, this is one of the more superficial. However, it is true that the interest rate cut was followed by the final surge of overproduction, over-trading and stock market speculation that marked the peak of the 1920-29 industrial cycle.

By mid-1928, the U.S. economy had shaken off the stagnation of 1927 and industrial production was rising rapidly. The surge in industrial production in 1928 and early 1929 is ignored by almost all bourgeois historians of this period. Instead, they focus only on the stock market boom and ignore what was happening in the sphere of production.

This reflects their status as stock owners—most bourgeois historians own stocks, none work in factories. Especially in the imperialist countries, they are personally completely divorced from the whole process of production.

It’s important to understand that beginning in 1928 there was a real industrial boom and not just a stock market boom. The combination of the industrial boom along with the Wall Street speculation put strong pressure on the New York money market. This, as I noted last week, was behind the sharp rise in U.S. interest rates.

Fed targets stock prices

The Federal Reserve Board decided that something had to be done to break the rapidly expanding stock market bubble on Wall Street. However, most bourgeois economic historians take a dim view of the Federal Reserve’s decision to target stock market prices. “In our view,” Friedman and Schwartz wrote in their “Monetary History,” “the Board should not have made itself an ‘arbiter of security speculation or values’ and should have paid no attention to the stock market boom….” (2)

The attitiude expressed by Friedman and Schwartz and those bourgeois economic historians who have chosen to follow them actually reflects the extreme degeneration of present-day U.S. capitalism. (3) Back in the days of industrial capitalism, the stock market was seen as the servant of the industrial capitalist economy, helping to move capital from sectors of industry and commerce where the rate of profit was below the average to sectors of industry and commerce where it was above the average. (4)

But in today’s “financial capitalism,” the “real economy” is seen rather as the servant of the stock market. Indeed, the real economy is seen as little more than a barely necessary adjunct of Wall Street. From the viewpoint of today’s stock market-crazed culture, the only job of the “real economy” is to keep stock prices on an ever-rising path. (5)

But why would the leaders of the Federal Reserve System at the end of the 1920s have wanted to do anything to actually bring down stock market prices? One reason is, of course, they might have feared that if the stock prices had kept soaring, it would only be a matter of time before the prices would crash.

But the 1920s-era Fed had another and far more fundamental reason to want to see stock market prices decline. They were worried that too much of the increasingly limited quantity of money and credit—relative to the increasing need for money and credit as the economy expanded—was being used to finance the purchase of stocks on credit, or on margin in the lingo of Wall Street, rather than going into the productive economy.

The Fed was hoping to find a way of redirecting the flow of money and credit away from Wall Street and toward the “real economy.” In this way, it hoped to maintain the ongoing 1920s “prosperity.” Friedman and Schwartz, in their “Monetary History,” express righteous indignation about this. According to them, the Federal Reserve had no business trying to determine how credit should be used! To them, this attempt to direct the supply of credit smacked of too much “socialist central planning”! If the “free market” determined that the most “efficient” use for money and credit was in stock market speculation, so be it!

Remember, as “liberal” or “neoliberal” economists, Friedman and Schwartz believed in the holy trinity of traditional liberal marginalist economics. These are Say’s Law, the quantity theory of money, and the law of comparative advantage. If there was a shortage of money and credit, they saw no reason why “the Fed” could not create additional money and credit by simply “expanding the money supply.” To Friedman and Schwartz, the reason the Fed did not create additional money and credit—enough money and credit to support still higher stock market prices and on the side continued industrial and commercial prosperity—is simply inexplicable. (6)

But unlike “free market” theoreticians such as Friedman and Schwartz, the 1920s Fed had to deal with a capitalist economy that did not obey Say’s alleged law, the quantity theory of money or the “law” of comparative advantage, but rather the quite different economic laws that were analyzed by Karl Marx. (7) If money and credit had been abundant—or if the Fed could have created any amount of money and credit it wished simply through discount loans or “open market operations”—the Fed probably would not have been so concerned with the soaring prices on Wall Street.

Even if U.S. capitalism had not yet reached the degree of degeneration that it achieved by 1963 when Friedman and Schwartz published the “Monetary History,” let alone today, it is a safe assumption that the members of the Federal Reserve Board and the heads of the various Federal Reserve Banks that make up the U.S. Federal Reserve System were certainly owners of stocks themselves. They certainly had no objections to higher stock market prices, which increased their personal wealth! Why should they have?

But by 1928, they were faced with the fact that credit was getting very scarce worldwide. And as the U.S. industrial boom and the stock market boom roared on, the global credit crunch was growing steadily worse. Though marginalist economists like Friedman and Schwartz can’t grasp it due to their false theory of value, the various forms of money other than gold, as well as credit, are necessarily based on the money commodity—gold. Since gold was in short supply on the world market at existing prices for reasons I have been examining over the last few weeks, so were the other forms of money based on it, as well as credit. (8)

Behind the 1920s credit crunch

Let’s briefly review the reasons behind the 1920s credit crunch that was reaching an extreme as the industrial cycle approached it cyclical peak. The “long wave” of economic growth between 1896 and 1914, followed by the world war of 1914-1918, caused prices of commodities to rise well above the values of commodities. (9) As a result, the production of gold was severely depressed. This expressed itself at the surface of economic life in the form of a global shortage of gold and other forms of money and credit—especially as the industrial cycle entered its boom phase in 1928.

Bourgeois economists and historians, whether of those days or today, cannot fully understand this, since they reject the law of labor value. But the bourgeois economists and central bankers of the late 1920s, just like those today, do understand that a rapidly falling general price level is a very unpleasant experience for capitalist society. Falling prices are accompanied by vanishing profits—the most painful consequence of all are far as the capitalists are concerned—banking crises and credit collapses with mass chain reaction bankruptcies and mass unemployment, which can bring into question the continued political rule of the capitalist class. (10)

Even before the boom phase of the industrial cycle proper began in 1928, there were many signs of a growing credit crunch. For example, in the United States there was the wave of bankruptcies among small country banks. In 1913, there were 46 bank failures. This was down from the year after the 1907 panic, when bank failures had peaked at 156. During the 1920s, the lowest number of bank failures was 367 in 1922. This rose to 967 in 1926. In 1928, a year of boom and great prosperity, there were still 499 bank failures, far above the crisis-elevated year of 1908! (U.S. Banking History, Civil War to World War II, Richard S. Grossman, Wesleyan University)

Another indication of the overall unhealthy state of the world capitalist economy was the economic stagnation and mass unemployment in the oldest industrial country, Britain. The pre-Depression British unemployment crisis of the 1920s was caused by a combination of Britain’s relative industrial decline and the slow growth of the world market.

In contrast, during the first decades after World War II, though Britain’s relative industrial decline continued, the world market as a whole was growing much faster and unemployment in Britain was therefore much lower. In the post-World War I years, Britain was getting a smaller slice of a stagnant pie. In the first decades after World War II, it was still getting a smaller slice of the pie, but the pie as a whole was now getting larger.

One way out, of course—and in the long run the only real way out under a capitalist economy—was the lowering of prices in terms of gold so they would once again be in line with—or for awhile below—underlying labor values. However, the sharp reduction of the prices of commodities that was objectively necessary for the capitalist economy implied a very severe economic crisis. And like is the case today, the leaders of the Federal Reserve System saw as their main job preventing such a crisis.

How did the Federal Reserve Board attempt to prevent, or at least limit, the looming crisis? The Fed attempted to lower the prices of stocks—mere titles of ownership—which it hoped would prevent a fall, or at least limit a fall, in the prices of real commodities. If this could be done, the Fed hoped that the credit crunch would be eased. With much lower stock market prices and a lower turnover of stocks—the number of stock sales in a given period—much of the scarce supply of money and credit released from the stock market would become available for purchases of and payments for real commodities. In this way, the Fed hoped to stave off a major economic depression.

As soon as the bubble on Wall Street was burst, the Fed would then quickly ease credit much as it had done in the wake of the slight recessions of 1923-24 and 1926-27. And if stock market prices stayed down, there would be room for additional economic growth, at least for awhile. This seems to have been the “economic game plan” of the Fed for 1928-29.

Why it didn’t work

This type of maneuver would probably have worked if it had been simply a problem of the excessive levels of stock prices. The year 1987 gives an example of a stock market crash that lowered interest rates in the money market. This allowed the capitalist economy to expand for several more years.

But unlike in 1987, the stock market speculation of 1928-29 was the mere tip of the iceberg. The real problem was the combination of the approaching cyclical crisis of overproduction combined with inflated prices of commodities in terms of gold relative to the labor values of these commodities. (11)

Lowering stock market prices wasn’t going to be enough. Therefore, the Federal Reserve Board’s attempt to stave off a major crisis could under the prevailing conditions only act as the trigger—but not the real cause—of the very crisis they were trying to stave off.

Three stages of the super-crisis

The super-crisis of 1929-33 can be divided into several phases. The first phase was from the summer of 1929, when the industrial cycle peaked, to the winter of 1931. The second phase was from the spring-summer of 1931 to the summer of 1932, when the economy showed signs of finally bottoming out. The third stage centered on the banking crisis that occurred in the winter of 1933. This banking crisis reached its climax in March 1933, just as Franklin D. Roosevelt assumed office.

This was no coincidence, as I will demonstrate below. As far as the United States is concerned, March 1933 is considered to be the end of the crisis proper, though the Depression and its double-digit unemployment was to continue for another seven long years.

The peak of the industrial cycle

As the Fed’s “tightening” took hold in the summer of 1929, the pace of business began to slow, and the sharp rise in industrial production that had marked the first part of the year ended. This proved to be the actual peak of the industrial cycle. While usually stock market prices start to fall before industrial production peaks, or at the latest more or less coincident with the peak of the cycle as measured by the level of industrial production, this time much to the distress of the Fed, stock market prices as measured by the Dow Jones Industrial Average continued to climb through the summer, peaking only in September. By then, industrial production had already been drifting downwards for some months.

In October-November 1929, however, prices on the New York Stock Exchanged crashed by 40 percent over a three-week period. The hoped-for end of the stock market boom was now at hand. The Federal Reserve Bank of New York eased rapidly—the Federal Reserve Board in Washington was concerned they were easing too rapidly—in a bid to prevent the kind of widespread bank runs that had accompanied many economic crises in the United States during the 19th century and in 1907.

They also hoped to encourage a rapid recovery from the recession that was now clearly underway. During the classic panics from the 19th century through 1907—panic-stricken depositors withdrew their money from the banks. This forced the banks to call in loans and halt any further granting of loans and discounts so they would not be caught without the cash necessary to pay off their panic-stricken depositors.

This caused not only bank credit but commercial credit, which depended on bank credit—consumer credit in the modern sense did not exist—to suddenly contract causing the economy to spiral into deep recession. This is exactly the kind of situation that the Bank of England faced as well in 1847, 1857 and 1866 under the Bank Act of 1844 with one important difference.

Under the 1844 Banking legislation, the British banking system, which had a central bank, was made to behave like a banking system without a central bank. In Britain, such banking panics could be dealt with by simply suspending the Bank Act. This was not possible in the United States, since in the days before the Federal Reserve System began operations in 1914, the United States had no central bank.

In the 19th century, this was tolerable, because the United States was still a largely agricultural country that was not yet the pivot of the global credit system. Many of the urban unemployed could return to their families in the countryside and wait out the storm. The role of the United States in the British-centered financial system was still limited.

But by the time the crisis of 1907 broke out, the United States had become the world’s leading industrial power, and it was only a matter of time before it emerged as the center of the world capitalist credit system.

Fortunately, for the United States and world capitalism, the world economy was still in a “long wave” of high gold production and economic expansion in 1907, and the crisis was quickly overcome. But if it had been a more serious crisis, the results would have been disastrous. Neither the United States nor the world capitalist economy could afford any longer the luxury of a U.S. banking system without a central bank. The Federal Reserve System was created to fulfill the need. Its creation is quite a long story, which I unfortunately do not have the space to go into here.

In 1929, the Federal Reserve System was facing the type of crisis it had been created to deal with. The most immediate concern of the Fed, and especially the Federal Reserve Bank of New York, which functioned as something as a central bank in its own right in those pre-New Deal days, was to prevent an old-fashioned banking panic such as had last occurred in 1907. And it succeeded, or so it seemed at the time.

The “panic” of 1929 was a purely stock market panic. There was no sign of any panicky withdrawal of cash from the banking system. The public—naively as it turned out—apparently had faith that the Federal Reserve System would be able to avoid a recurrence of a banking panic. True, the economy was clearly in recession by the fall of 1929, but without a banking panic and its associated sharp contraction of credit, the bourgeois economists of the day assumed that the recession would be much more limited than those that had occurred before the Federal Reserve System had been created. Or so the bourgeois economic experts of the day believed. As we now know, they couldn’t have been more wrong.

Even in the absence of a classic banking panic, prices, profits, production and employment plunged in the year that followed the stock market crash. The immediate reason was the extreme overextension of credit—bank credit, commercial credit, mortgage credit and to a certain extent non-mortgage consumer credit, which was beginning to become a factor outside of mortgages for the first time, relative to a very small monetary base.

Like would be the case again in 2007-09, the contraction of mortgage credit and real-estate prices played a central role in the collapse of demand. And the overextension of credit was itself both the consequence and symptom of the fundamental problem. Remember, this was an inflated level of commodities prices relative to values now combined with a cyclical crisis of overproduction. Under these explosive conditions, it didn’t take a banking panic to bring about a sharp contraction of credit and thus effective monetary demand sufficient to bring about a sharp fall of prices and profits leading to a sharp contraction of production, investment and employment. The Depression had begun.

Quasi-official unemployment, based on statistics reproduced in Baran and Sweezy’s “Monopoly Capital,” rose from 3.2 percent in 1929—much lower than the unemployment levels of recent years—to 8.7 percent in 1930, a level that is still below today’s official—not the real—unemployment levels. Though perhaps not yet a super-crisis, this was by the standards of pre-World War I recessions already a very severe downturn.

From crisis to super-crisis

However, by the beginning of 1931 it seemed the recession had passed its lowest point and that a new upturn in the industrial cycle was beginning. Industrial production was no longer declining and was beginning to rise. But just as the industrial cycle seemed to be turning up, confidence in the banking system in both Europe and the United States suddenly collapsed.

Large numbers of depositors in the United States began to convert their bank deposits into cash—though not yet gold. The Federal Reserve reacted by expanding the rate of growth of the monetary base—which in those days consisted of money convertible into gold—and not token money, which is the case today. After declining slightly in 1930, the monetary base expanded by 8.56 percent in 1931 and 4.21 percent in 1932.

By the standards of those days, these are very high figures, though it’s a far cry from the rate of growth in the monetary base that the Fed engineered during the recent panic. It will be a number of years before we will know the consequences of the Fed’s actions in the 2008-09 crisis and how they will compare with the results that the Fed achieved in the early 1930s.

Last fall’s panic, however, already sheds new light on the events of 1931-32. Friedman and Schwartz claimed in their “Monetary History” that halting the panic would have been rather easy if only the leadership of the Federal Reserve Board had known what they were doing. However, we can see that even last fall’s doubling of the monetary base within a few months did not prevent a major contraction in credit, monetarily effective demand, profits, industrial production, employment and world trade.

Presumably, a comparable expansion of the monetary base would not have prevented it in 1931-32 either. At best, it might have limited the contraction of credit, demand, and industrial production and employment, somewhat, though perhaps with side effects that would have been very harmful in the long run. In any case, a doubling of the monetary base would not have been compatible with the gold standard then in effect.

And the long-term effects of the Fed’s action of last fall are, as of this writing, still completely unknown. While some recovery in industrial production, employment—with the usual considerable lag—and world trade seems highly probable over the next several years, we do not know what the full effect of the doubling of the monetary base in such a short period of time will be until more time has passed.

Will the doubling of the monetary base result in a brief abortive inflationary recovery, quickly leading to a massive plunge of the U.S. dollar and a renewed crisis as the Federal Reserve applies the brakes in a last-ditch attempt to save the dollar system? If this comes to pass, the Fed actions—or lack of them—in 1931-32 might not look quite as bad as they have to bourgeois economic historians looking back at it from the vantage point of the far more stable post-World War II years.

In any case, the current economic situation is very far from a carbon copy of the economic situation of 80 years ago. For example, there has been no world war within the last 15 years that caused commodity prices in terms of gold to suddenly double. Still—keeping all the relevant differences in mind—when we have the perspective of some years, the current economic “experiment,” inspired by the determination of the current Federal Reserve leadership to avoid what they view as the disastrous errors made by their predecessors in 1931-32, will shed additional light on the tragic events of the early 1930s.

To return to 1931, the Fed’s accelerated expansion of the monetary base had little effect in slowing down the growing wave of bank failures and bank runs, and the resulting contraction of credit and demand, falling prices, falling employment and the renewed plunge of industrial production. The tentative signs of recovery that were appearing in the winter of 1931 disappeared.

Typically banking crises had developed in the United States near the peak in the industrial cycle. Banking panics would mark the transition from boom to recession. However, the banking panic that developed in 1931 occurred when the economy appeared to be near the bottom of a very deep recession. It’s as though there were two back-to-back recessions with virtually no recovery in between. Therefore, the banking crisis of 1931-32 marked the transition not from boom to crisis but rather from crisis to super-crisis. The crisis of 1929-30 had become the super-crisis of 1931-32.

European banking panic leads to devaluation of British pound

On May 11, Austria’s Kredit Anstalt bank failed, sending shock waves through the banking systems of central and eastern Europe, including the German banking system. The crisis then spread to Britain, leading to a run on the gold reserves of the Bank of England. This forced Britain off gold on September 21, 1931, causing the British pound to float downward against the dollar and gold by about 20 percent.

Even before the devaluation of the British pound, the banking and credit situation had been deteriorating in the United States. But the devaluation of the British pound made the situation significantly worse. Until 1931, gold had been flowing into the U.S. Federal Reserve System from abroad. There was also no sign of an internal U.S. gold drain. Even when panic-stricken depositors withdrew cash from U.S. banks, they remained satisfied with government-backed currency such as the U.S. Federal Reserve Notes, and did not choose to exercise their right, which they enjoyed under the gold standard, to convert U.S. government-backed currency into gold coins.

In discussing the crises of his own time, Marx’s co-worker Frederick Engels explained that the credit of the Bank of England banknotes had not been shaken even during the worst of the 19th-century crises, because they were backed by the credit of the entire nation. So far this held good for the credit of the Federal Reserves Notes as well, even as the crisis of 1929-30 was transformed into the super-crisis of 1931-1932.

But after Britain devalued the pound, fears began to develop that it was only a matter of time before the U.S. dollar was also devalued. Wouldn’t the United States devalue the dollar to counteract the temporary competitive advantage that Britain had gained through the devaluation of the pound? While there was still no signs of an internal gold drain, there was a considerable external drain of gold for the first time since the crisis had begun in 1929. In response, the Federal Reserve Board raised its discount rate to check the outflow of gold.

This move has been much criticized by economic historians ranging from right-wing Friedmanites to radical Keynesians. Many right-wing Friedman-inspired historians claim that the Fed “tightened” in response to the crisis. It is true that the Fed did raise interest rates in the fall of 1931 in response to the pound’s devaluation and consequent U.S. gold drain. But as I have shown, this followed months of easing as the Fed unsuccessfully attempted to combat the new stage of the crisis that had begun in the spring of 1931 by allowing the monetary base to grow at a rate of more then 8.5 percent.

Finally, in January 1932, Congress authorized the Federal Reserve System to take additional measures to stabilize the banking system, an obvious pre-condition for a recovery on a capitalist basis. The Fed was authorized to use government bonds as collateral behind its Federal Reserve Notes.

Up to that point, the Fed had been limited to using gold—which had to be 40 percent of the collateral behind the Federal Reserve Notes, and certain high-grade commercial paper backed by actual commodities that could make up the additional collateral required. After a year and half of unprecedented slump, this type of commercial paper had become quite scarce, forcing the Fed to increasingly rely on gold itself as its collateral for Federal Reserve Notes.

From the winter of 1932 onward, the Fed could use U.S. government bonds as well as high-grade commercial paper to cover the 60 percent of the collateral that did not have to be in gold. As a result, the Fed was able to undertake “open market operations” that eased the banking panic. By the summer of 1932, the economy was showing signs of bottoming out.

Was 1932 the real bottom of the super-crisis?

Indeed, certain key indicators including industrial production actually reached their lowest point during the summer of 1932, including stock market prices and more importantly industrial production. Looked at globally, the summer of 1932—this was the low point in both British and German economies—appears to be the lowest point of the crisis. After the summer of 1932, the overall economic trend of the world economy was upward. In the United States, however, the lowest point of the economic cycle is generally considered to be not the summer of 1932 but rather March 1933, when Roosevelt assumed the presidency.

Hoover, Roosevelt and the gold standard

Though in retrospect nothing seems more doomed than his attempt to win reelection, Herbert Hoover was renominated for a second term by the Republican Party. Hoover attempted to repeat the triumph of William McKinley in the 1896 U.S. presidential election. Remember, 1896 was the lowest point—in terms of prices—of the 19th century “Great Depression.” In addition to the long-term “Great Depression,” the U.S. economy was struggling with the aftershocks—that were both economic and political—of a banking panic and consequent recession that had struck in the spring of 1893.

The Democratic Party, which held the presidency under the hated racist “gold Democrat” Grover Cleveland repudiated him and nominated the pro-silver—and racist—William Jennings Bryan instead. (12) Bryan, in essence, demanded that the U.S. dump the gold standard in favor of a silver standard. He demanded the resumption of the “free coinage of silver”—that is, the U.S. mint would mint into legal tender silver dollars any amount of silver bullion presented to it—at the same rate that had prevailed in 1873, when the free minting of silver bullion had been suspended. (13)

This was done in reaction to the steady fall of the price of silver bullion in terms of gold. The idea of basing the dollar on silver rather than gold strongly appealed to indebted farmers and small businessmen. If the free coinage of silver had been resumed, it would have meant that they would be able to repay their debts in cheap silver rather than expensive gold.

The idea of junking the gold standard for a silver standard was strongly opposed by Wall Street. It was also opposed by most American industrial capitalists—with the exception of the silver miners, of course—who feared that the United States would be cut out of the London capital markets if the free coinage of silver resumed. The British money lenders wanted to be repaid in expensive gold and not in cheap silver. Silver was being progressively demonetized in those years due to its sharp drop in value—it was taking less and less labor on average to produce a given quantity of it.

In order to defeat Bryan, McKinley needed to separate the votes of the urban industrial working class from those of the farmers and indebted small businessmen. The Republicans were able to argue that not only was the gold standard necessary if U.S. industry was to continue to grow and ensure a continued increase in industrial jobs—to drive home the point, many industrial bosses threatened to close their factories if Bryan was elected—but also that inflation that would have been caused by a shift to the silver standard would have put downward pressure on real wages. Workers, after all, had no interest in the devaluation of the medium in which their wages were paid. Using these tactics, McKinley and his supporters among the industrial capitalists and on Wall Street had been able to defeat Bryan.

Unlike Roosevelt and the Democrats, who were vague about their plans for the dollar, the Republican candidate put heavy emphasis on his support of the gold standard. But the world of 1932 was a very different one than the world of 1896. The United States was now a creditor nation, not a debtor nation. U.S. industry was not dependent on the London capital markets, quite the reverse. And after more than three years of disappearing jobs and unprecedented unemployment, accompanied, however, by falling prices, U.S. workers were much more concerned about unemployment than they were about the dangers of inflation.

Roosevelt was elected overwhelmingly, not so much for his program—he had none beyond the promise to balance the budget—in the midst of unprecedented depression hardly a Keynesian policy—but rather simply because he was not Herbert Hoover. Under the U.S. Constitution, the presidential election was—and is—held the first Tuesday in November, but the new president didn’t take office until the following March, which has since been moved up to January. Though he had been overwhelmingly repudiated by the voters, Hoover was still president in November, and would remain so throughout the following winter.

Roosevelt’s election raised an interesting question. Would the U.S. dollar remain on the gold standard or would it be devalued once the new Democratic president, who was so vague about his plans for the dollar, took office? The election—but not the taking of office—of Roosevelt led to an immediate deterioration of the economic situation, which up to the election of Roosevelt had been showing signs of bottoming out.

The U.S. Treasury official Francis Gloyd Awalt (1985-1966), who served as acting comptroller of currency during the banking crisis of 1933, wrote that “I became Acting Comptroller in September 1932,” and after the election in November [emphasis added—SW], it was quite evident that the situation was worsening.”

The reason for this “worsening” was that many American bank deposit owners believed that Roosevelt would probably devalue the dollar. That would mean that the dollar price of gold would be increased from $20.67, though how much was of course a matter of speculation. By exercising the right they had under the still prevailing U.S. gold standard, these depositors decided to withdraw money from the banks but demand it in the form not of currency like they had during the banking panic of 1931 but rather in the form of gold coins. When Roosevelt assumed office and increased the price of gold, they would then sell the gold back to the government or banks at the new higher price, making they hoped a tidy dollar profit.

Later, when Roosevelt as expected did increase the dollar price of gold, he insisted that gold be sold to the government at the old price of $20.67. But the speculators in the fall of 1932 could not have known this. Bank runs, which had been tapering off, suddenly resumed. And this time gold itself was being demanded by many of the depositors, not just ordinary cash.

The U.S. Federal Reserve System—unlike the Bank of England during the days of Marx and Engels—now faced both an external gold drain and an internal gold drain. Since the Federal Reserve Banks that made up the Federal Reserve System had to maintain a 40 percent gold balance behind every Federal Reserve Note they issued, as well as 35 percent behind their other dollar liabilities, the more gold was withdrawn from the Federal Reserve Banks the more the ability of the Federal Reserve System to issue new dollars and thus extend credit to its member banks was undermined.

The suspension of the Bank Act—in reverse

The very knowledge that the ability of Federal Reserve System to issue additional dollars and credit was being reduced was sufficient to restart the banking panic on such a scale that the incipient economic recovery, though it continued on a world scale, was for the duration of the winter of 1933 derailed in the United States.

In earlier posts, I explained how the decision to suspend the Bank Act of 1844 had broken crises in Britain during the 19th century. The mere knowledge that the Bank of England could now freely meet the abnormal demand for its banknotes was sufficient to halt the crisis.

In the winter of 1933, the United States went through the reverse process. The knowledge that the ability of U.S. Federal Reserve System to issue banknotes was impaired created a frenzied demand for these notes that was enough to restart the crisis that had seemed to be ending. Soon, bank deposit owners who had previously no intention of speculating on a possible increase in the dollar price of gold were now lining up in front of the banks to demand that they be paid in cash before the cash ran out. The renewed banking crisis was much worse then the banking crisis of 1931-31—or any earlier U.S. banking panic had been. (14)

A cynic might wonder whether it is was in Roosevelt’s interest that things be as bad as possible when he assumed office in March 4, 1933. We have seen how President Obama’s popularity has begun to erode as unemployment has continued to increase since he assumed office. The artificially renewed crisis indeed virtually guaranteed that the U.S. economy would have no way to go but up when Roosevelt assumed office on March 4. FDR would avoid the problem that has beset his present-day successor if the economy began to improve immediately after he took office. And whatever might have been in Roosevelt’s mind—this is exactly what happened. (15)


1 These included not only Depression itself but other disasters that grew out it, including the coming to power of Adolf Hitler in Germany and the new and much greater bloodbath of World War II.

2 Friedman and Schwartz are referring to the Federal Reserve Board, the governmental body that oversees the workings of the U.S. Federal Reserve System.

3 This process has gone much further since Friedman and Schwartz published the “Monetary History” in 1963.

4 In the lingo of the bourgeois economists, the stock market helps move capital from less “productive” fields to more “productive” fields of investment. Productive of what? Why profits, of course.

5 The more the actual process of industrial production is shifted to non-imperialist countries, where wages are only a small fraction of the prevailing wages in the imperialist countries, the greater “financial services” and the stock market loom in the eyes of the bourgeois economists of the imperialist economies. Therefore, the actual process of industrial production is either sneered at or ignored altogether.

6 Friedman and Schwartz even go so far as to suggest that the death of the president of the New York Federal Reserve Bank, Benjamin Strong, in 1928 was the ultimate cause of the Great Depression. They speculate that if Strong had lived he would have seen to it that the Federal Reserve System kept the “money supply” growing, and therefore the Depression would have been avoided. “The shift in the locus of power,” Friedman and Schwartz wrote in the “Monetary History,” “which surely would not of occurred—if Strong had lived.”

That is, Benjamin Strong, an old protegè of the elder J.P. Morgan and very close to Wall Street, would certainly not have supported a policy aimed at sharply lowering stock prices! And if the Federal Reserve System had simply left the Wall Street boom alone, not only would stock prices have continued to rise but the whole Great Depression would have been avoided! This is the wisdom of the alleged “greatest economists” of the 20th century.

7 This is not of course to say that they were consciously aware of the economic laws discovered by Marx and his predecessors, the classical economists. But as practical men—they were all men in those days—they were forced to deal with the effects of the real economic laws, not the imagined economic laws that Friedman and Schwartz used in their work, whose only real purpose was to demonstrate that capitalism is an economic system without contradictions that will last forever.

8 This isn’t simply because the U.S. economy was on a gold standard. Contrary to our modern bourgeois economists, it is also just as true under a system of “fiat money.” Exactly how the basic economic laws operate under a system of “fiat money,” as opposed to a gold standard, will be a subject that I will examine when I take up the post-World War II economy.

9 Marginalist economists can’t possibly grasp this, because they make no distinction between price and value. To them value is price and price is value.

10 The capitalists are not opposed to mass unemployment as such. When they offer a job, the more applicants that apply for the job the better! But if mass unemployment indicates a lack of monetarily effective demand that makes it impossible to sell their commodities at profitable prices, or mass unemployment leads to a social and political crisis that brings into question the continued rule of the capitalist class, that is too much of a good thing.

11 In theory, the contradiction between prices and values could have been relieved by a massive devaluation of the dollar—a sharp increase in the dollar price of gold such as occurred in the 1970s. This was precluded in those days by the gold standard. Today, however, almost all bourgeois economists think this is the course that should have been followed. However, this involves consequences of its own. The place to explore what the consequences of a massive devaluation might have been is in the posts where I will examine the post-World War II economy.

12 Though the U.S. Democratic President Grover Cleveland has been kindly treated by U.S. bourgeois liberal historians for his supposed anti-corruption cvil service reforms, he was widely hated during the 1890s depression because he did absolutely nothing for the unemployed and used force to break up strikes and protests. In the pre-1929 years, Cleveland was remembered with the same “fondness” that Hoover has been since the Depression.

13 This was called “the crime of ’73” by U.S. populist opponents of the gold standard.

14 If Hoover himself had suspended the gold standard and not without reason blamed Roosevelt and the Democrats for the long-term inflationary consequences, the incipient economic U.S. economic recovery of 1932 would probably have continued. The summer of 1932, not March of 1933, would have gone down as the low point of the U.S. crisis. But then the Democrats would have been able to blame Hoover not only for the Depression but for the collapse of the U.S. gold standard as well.

15 Bourgeois historians like to explain what was in the minds of various historical figures. But psychology has shown that we don’t fully understand the operations of our own minds, let alone the minds of those long dead.

2 Responses to “Does Capitalist Production Have a Long Cycle? (pt 7)”

  1. Magnus Granberg Says:

    As I read these posts I wonder what you think of the evidence (for instance in Alan Freeman’s paper “New paradigm…”) of a sucular increase (through multiple cycles, perhaps 2-3) in the composition of capital, fixed capital per worker. Should this be perceived as something made possible only through external circumstances, gold production etc?

    • pmgran Says:

      Funny, I’m reading these posts again, several years later, and I still have the same question. Maybe I put it in a confused way last time; basically, you seem to consider the org comp only in the context of the industrial cycle, but some marxists have presented evidence of a more long term increase, something that would seem to rival your explanations of long term dynamics(?)

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