Does Capitalist Production Have a Long Cycle? (pt 8)

The United States hardest hit by the super-crisis

Many volumes could be written about the super-crisis of 1929-33 and the Great Depression. Among the subjects that would have to be dealt with would be the nature of European fascism and Roosevelt’s New Deal in the United States. I obviously cannot do this in these posts. I will simply highlight the most important economic events of the 1930s with special emphasis on the United States, the leading capitalist—and imperialist—country.

Of all the major capitalist nations, the United States was hardest hit by the super-crisis. Why was this? Before attempting to answer, how do I measure the relative severity of the super-crisis in individual capitalist countries?

The relative severity can be measured by the level of industrial production in 1932—the global trough of the economic cycle—as a percentage of the industrial production of 1929, which represented the peak of the 1920-1929 international industrial cycle. (1)

For example, in Britain industrial production was 89 percent of the 1929 level. It had actually been slightly lower in 1931, when industrial production was 86 percent of the 1929 peak.

To keep a sense of perspective, industrial production in 1929 in Britain, unlike that of the United States, had not been much above pre-war levels. Still, the crisis proper of 1929-32 was clearly much milder in Britain than it was in the United States.

In France, industrial production at the bottom was 74 percent of the 1929 level. German industry produced only 59 percent of what it did in 1929. This represented a terrifying decline and implied a huge amount of unemployment and extreme hardship among peasants and small business people. Also, Germany had not enjoyed anything like the prosperity the United States had in the 1920s. Still, if these figures are accurate, the decline in industrial production in Germany was somewhat less severe than the decline in the United States. In 1932, U.S. industry produced only 55 percent as much as it did in 1929! [Parker.Depression.htm]

The extreme severity of the crisis in Germany is not surprising. The German credit system was extremely dependent on money market conditions in the United States. When credit froze up, first because of the industrial and stock market boom of 1928-29, then the Smoot-Hawley tariff of 1930 and finally the massive U.S. banking and credit collapse of 1931-32, it is not surprising that effective demand contracted violently in Germany paralyzing the German economy. (2)

Why was the crisis so severe in the United States?

But what about the United States? The United States was, after all, the big winner—perhaps the only winner—in World War I. It had the largest gold reserves of the world. Yet its economy collapsed more than that of any other major capitalist country.

It’s true that the U.S. economic collapse didn’t have the disastrous political consequences that Germany’s slightly lesser economic collapse had. Germany had suffered the terrible effects of the blockade of 1914-1918, the shock of the lost war, the abortive revolution of 1918 and the hyper-inflation of 1923. The super-crisis of 1929-32 was only the final blow that pushed Germany into the fascist nightmare of the Third Reich. (3)

But this doesn’t change the fact that in a purely economic sense the super-crisis of 1929-33 was more extreme in the United States than in any other large capitalist country in the world. Why was this? I think the reason lies in the extraordinary growth of the U.S. economy in the decades preceding the super-crisis.

Market constrains growth of industrial production

Capitalist expanded reproduction is of necessity broken up into industrial cycles because of the contradiction between socialized production and private appropriation. For reasons I have been exploring in these posts, the ability of the market to expand is far less than is the ability of the industrial capitalists to expand production. The periodic crises that mark the end of one industrial cycle and the beginning of another keep the growth of industrial production in the long run within the limits allowed by the market.

On average, therefore, individual industrial capitalists and individual capitalist nations cannot increase their capitals faster than the market allows. However, what is true on average is not true of each individual industrial capitalist, individual branch of capitalist industry, or individual capitalist nation.

An individual industrial capitalist, branch of capitalist industry, or capitalist nation can grow faster than the world market. But this can only be true if other industrial capitalists or capitalist nations grow at a slower rate than the world market grows, or are eliminated altogether. This is what gives capitalist competition its cutthroat character.

How much faster can an individual capitalist nation grow than the world market average? If its industry has conquered only a small portion of the world market, it can—though it won’t necessarily—grow much faster than a capitalist nation whose industry has captured a much larger portion of the world capitalist market.

For example, if a capitalist nation has 0.5 percent of the world market and it suddenly doubles its production, it still has only 1 percent of the world market, every thing remaining equal. Even though its production has doubled, this doesn’t mean that world capitalist industrial production has increased much. But if a capitalist nation that commands 50 percent of the world market suddenly doubles its production—all things remaining equal—it would have to destroy the industry of all the other capitalist nations combined or face a disastrous crisis of overproduction much worse than even the super-crisis of 1929-33!

When a capitalist nation represents a small part of the world market it can therefore grow much faster than the world market as a whole as long as it can keep conquering an ever larger share of the world market. (4) But as its production comes to represent a larger and larger portion of the world market, it approaches the mathematical limit of 100 percent of the world market. Under these conditions, its rate of growth must begin to slow towards the rate of growth of the world market as whole. (5) If the rate of growth does not slow gradually, a massive crisis of overproduction will force the necessary slowdown. This, I believe, is what happened to American capitalism in the years between 1929 and 1933.

As economic growth slows in a given capitalist country, there are relatively fewer outlets for investment for its industrial capitalists that yield the average rate of profit. Therefore, an expanding portion of the capitalists in such a country become money capitalists, who have to be satisfied with the average rate of interest as opposed to the average rate of profit. Some of their loans will be to foreign countries.

The roots of an aggressive foreign policy

Once the rate of growth of a particular capitalist nation has passed its peak, therefore, the importance of capital exports grows and the capitalist nation is under growing pressure to exercise direct political and military control of the nations to which it exports capital to keep the flow of interest and dividend payments flowing.

Therefore, the growth of an aggressive foreign policy and increased militarism in a major capitalist nation goes hand and hand with the beginnings of its industrial decline. We see this in the history of Britain in the late 19th and early 20th century. And from the Depression onwards, we see the same process unfold for the United States.

The super-crisis of 1929-33 occurred at a time when U.S. industry would not have been able to maintain its previous rate of growth even if the world market had been in a highly expansive phase. But in the 1920s and early 1930s, the world market had entered into an unprecedented phase of stagnation and then contraction. Therefore, U.S. capitalism had a very hard landing indeed, as it transitioned from a period of rapid development to a stage of much slower industrial growth.

It was no accident, therefore, that U.S. foreign policy under Roosevelt transitioned from so-called “isolationism” to “internationalism”—as the bourgeois historians call it. By “internationalism,” they mean that the United States could not be satisfied by anything less than global empire. During the New Deal, the “isolationists” were fighting a losing battle as war clouds gathered over Europe and Asia.

The real purpose of the New Deal—preparation for world war and empire

Roosevelt’s main task upon assuming office in March 1933 was to “unify” American society in preparation for the drive for world financial, political and military domination that loomed ahead. By the fourth decade of the 20th century, economic development had led to a situation where U.S. imperialism could no longer tolerate independence on the part of the other imperialist powers. It was obliged to reduce them to satellite imperialist powers. Nor, of course, could it refrain from dominating the colonial and semi-colonial countries.

But the unprecedented economic collapse of 1929-33 largely destroyed the traditional equilibrium between the two main classes of the United States—the capitalist class and the working class. The old equilibrium had depended on a rate of growth of U.S. industry that was no longer possible.

Unlike in earlier depressions, the U.S. political situation was further complicated by the existence of the Communist, or Third, International, and its U.S. section, the Communist Party USA. By a historical accident, the first five-year plan in the Soviet Union coincided with the capitalist super-crisis. The soaring industrial production and disappearing unemployment in the Soviet Union, combined with the U.S. industrial collapse of 1929-33, began to radicalize significant sections of the American workers and young intellectuals. The U.S. Communist Party, though still relatively small, was considerably larger than any left-wing group is today in the United States and began to grow rapidly.

Because of the changed political as well as economic conditions, the traditional policies of the U.S. capitalists to trade union militancy and working-class radicalization—repression with few or no concessions—was no longer feasible. Some real concessions would have to be made—which would be paid for, at least in part, by the colonial or semi-colonial countries that would soon be falling under U.S. domination.

Roosevelt and his advisors wanted to make these concessions in such a way that the workers would look toward the capitalist government rather than to their own class organizations and strength. In this way, the radicalization of the working class would be contained and then dissipated.

Roosevelt’s initial policy—a higher cost of living through cartelization and dollar devaluation

The drive for U.S. world domination was the administration’s long-term solution to the mounting problems facing American capitalism during the Depression decade. In the short run, the Roosevelt administration’s policy was to restore the profits of the American capitalists by enabling them to raise their prices.

In its drive to increase the cost of living, the administration employed two main methods: cartelization (formal agreements by producers to limit production in order to raise prices) and dollar devaluation (reducing the amount of gold each dollar represented, or what came to exactly the same thing, raising the dollar price of gold).

The policy of cartelization of industry and commerce carried out under the so-called National Recovery Administration was eventually declared unconstitutional by the U.S. Supreme Court. Another form of cartelization that continued, however, was the payment of farmers by the government to limit their production of certain products.

Before it was declared unconstitutional, the NRA contained one highly significant element. Since the NRA granted the right to industrial and commercial capitalists to form cartels—it indeed encouraged it—it was also forced to grant the “right” to workers to form unions. In response to both the administration policy of raising prices and its granting to the workers the right to unionize, a wave of strikes broke out. At first these strikes were defeated, but the foundations were being laid for the rise of the Congress of Industrial Organizations and the unionization of basic industry that occurred in the middle years of the Depression decade.

Dollar devaluation

The second leg of the inflation policy was the devaluation of the U.S. dollar. This policy had two aims. One was to wipe out the temporary advantages in world trade that Britain and other capitalist countries had gained through their devaluations. Remember, the British pound has been devalued starting in 1931. Second, it was hoped that the devaluation of the dollar would quickly raise prices in terms of dollars within the United States.

Shortly after Roosevelt assumed office, the administration suspended the convertibility of the U.S. currency into gold. The administration also moved to void “gold clauses” in contracts.

In the 19th century, the dollar had been a much weaker currency than the British pound, and there was a strong tradition of opposition to the gold standard among U.S. farmers and small businessmen. To protect themselves against the danger of an eventual devaluation of the dollar, many contracts defined debts in terms of gold—real money—rather than in dollars. If the dollar were devalued, many debtors would be obliged to pay additional dollars in proportion to the devaluation to meet debts, thus driving them into bankruptcy.

To carry out a devaluation between 1933 and 1934, the U.S. president ordered the Reconstruction Finance Corporation—a governmental agency created by Herbert Hoover to grant bailout loans to banks during the super-crisis—to make repeated purchases of gold bullion on world markets to push up the dollar price of gold. The price was raised from $20.67 to $35 an ounce, which came to a devaluation of about 40 percent.

Roosevelt’s inflationary policies succeeded in raising the producer price index from 10.4 when he took office in March 1933 to 15.2 in July 1937 (1982 = 100), an increase of about 46 percent. This was a much greater rise than would normally be expected during the first phase of an upward movement in the industrial cycle, when prices generally change little.

It should be mentioned, however, that this increase in prices was in terms of nominal, now-devalued dollars and not in terms of gold. In terms of gold, producer prices were still about 14 percent (calculated by comparing the changes in the producer price index and the dollar price of gold from $20.67 to $35) below the levels of 1933.

All in all, if we compare prices immediately after the dollar was stabilized at its new level of $35 an ounce with the prices prevailing in 1929, prices in terms of gold were about 50 percent below 1929 levels. The huge inflation of prices relative to underlying labor values that had marked the post-World War I period was now resolved. In terms of gold, prices were now below the level that prevailed on the eve of World War I. The contradiction between prices and values had been resolved, but what a price had been paid by the workers, the farmers, and even many capitalists or former capitalists who had been ruined.

We can confirm that the contradiction between prices and values was now resolved by looking at the trend in world gold production. Between 1930 and 1934, a record 3,730 metric tons of gold were produced, an increase of 23 percent over the preceding five-year period. This, combined with a fall in prices of around 50 percent in terms of gold, eliminated the gold shortage that had plagued world capitalism during the 1920s. Since prices remained low in terms of gold throughout the Depression, gold production continued to rise. Over the next five-year period, gold production increased to 5,387 metric tons, an increase of more than 44 percent. (“Central Bank Gold Reserves: An historical perspective since 1845,” by Timothy Green, World Gold Council, November 1999)

The shape of recovery

The history of industrial cycles shows that the sharper the recession, the sharper will be the initial phase of recovery. The economic recovery from the super-crisis was no exception to this general rule. During the first stages of the recovery, between March 1933 and January 1934, Roosevelt kept pushing down the value of the dollar through his policy of gold purchases. Every morning, the president would determine what the value of the dollar—the dollar price of gold—should be for that day and would order the Reconstruction Finance Corporation—an arm of the federal government—to purchase gold bullion on the world market at that price.

Until the dollar was again stabilized at $35 and ounce, expectations would vary on how much Roosevelt would actually push down the dollar. When expectations were strong that he would push down the dollar, the industrial and commercial capitalists would step up their purchases of commodities in an attempt to build up inventories before prices rose even more. When the president didn’t devalue as fast as expected, orders would be canceled, causing prices and industrial production to suddenly decline. It wasn’t until Roosevelt finally stabilized the dollar at its new peg of one troy ounce equals $35 that these erratic fluctuations ceased and the recovery assumed a relatively smooth upward curve.

After Roosevelt finally ceased his daily interference, ending expectations of any further devaluations of the dollar, huge amounts of gold bullion began to flow into the United States from Europe. A lot of this gold was brought to the United States for political reasons.

With a new European war now looming, would capitalism even survive it? It seemed far safer for many European capitalists to own dollar-denominated assets in the United States than to keep their money in Europe, whether in the form of European currencies—who would know what they would be worth in the future—or even gold coin, bullion, or jewelry, which could easily be seized or stolen.

Even though world gold production was now in a major upswing, the distribution of gold was becoming ever more lopsided as gold flowed from Europe into the United States. Germany, now under the Nazi dictatorship of Adolph Hitler, was particularly hard pressed, especially since the United States was still refusing to open its market to German exports.

The Hitler government was obliged to establish a mercantilist-type system putting foreign exchange and foreign trade under strict state control. The state did not engage in much foreign trade itself, unlike the Soviet Union with its state monopoly of foreign trade. Rather the capitalists had to obtain state permission to export, import or sell German marks for other currencies.

Expansion of bank reserves not the work of the Federal Reserve System

As a result of both the rise of gold production and the flight of gold from Europe to America, U.S. banking reserves expanded rapidly once Roosevelt finally stabilized the dollar in 1934. Unlike the huge expansion of bank reserves that occurred during the panic of last fall and winter, the U.S. Federal Reserve System played virtually no role in this expansion of bank reserves. Under Roosevelt, all U.S. gold reserves were centralized in the U.S. Treasury, which among other things greatly expanded the power of the president relative to the Federal Reserve System and Congress.

The individual Federal Reserve Banks that make up the U.S. Federal Reserve System had to sell their gold holdings to the Treasury in exchange for gold certificates. Indeed, the New Deal made it illegal for private U.S. citizens to own monetary gold, or even gold certificates. Though the ban on private ownership of gold bullion and coin was later repealed under Ronald Reagan, only the Federal Reserve Banks are allowed to own gold certificates—but not gold—to this day. With the exception of its ability to set bank reserve requirements, the Federal Reserve was reduced to a passive role under the Roosevelt administration. (6)

The administration also purchased huge amounts of silver bullion, which greatly enriched U.S. silver mining interests. By the late 1930s, a considerable amount of silver certificates circulated side by side with U.S. Federal Reserve Notes. These purchases of silver bullion also helped expand U.S. bank reserves and the money supply under the New Deal.

Reasons of space and time, however, prevent a detailed examination of this incredibly wasteful New Deal program. I will say that Roosevelt’s silver purchases only benefited the silver mining companies and did considerable damage to the economy of China and other countries that still used silver in their currency.

The Roosevelt recession of 1937-38

It is not only the ghost of the super-crisis of 1929-33 that has been casting a dark shadow over the current economic landscape. So has the Roosevelt recession of 1937-38. A debate has been raging over the last few months among bourgeois economists about the policies that Roosevelt pursued after he assumed office in March 1933 and what is the relevance of the experience of the New Deal policies to the situation facing the U.S. and world capitalist economies in the wake of the panic of last autumn and winter and the current global depression. (7)

The debate revolves around the views of Christina Romer, who along with Ben Bernanke is considered perhaps the leading expert on the Depression among the current generation of U.S bourgeois economists. Romer also happens to be President Obama’s leading economic advisor. She and Bernanke can be expected to play a major role in policy-making in the months and—assuming Bernanke is reappointed to his position as chairman of the Board of Governors of the Federal Reserves System—years ahead.

High economic growth in the 1930s?

“The recovery,” Romer notes, “from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war.” However, according to Romer, “the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid.” Really? According to Romer, it was the period from 1933 to 1937 that saw the second fastest growth in the entire history of American capitalism. “Annual real GDP growth averaged over 9 percent” in the years of 1933 to 1936. And “unemployment fell from 25% to 14%.” (The Economist, June 18, 2009)

It should be pointed out that unemployment was calculated differently in those days. The people who were employed in the WPA programs building many useful public works—some still in use today—were counted as unemployed—on the theory, presumably, that they weren’t helping some capitalist make a profit in the “private sector.”

Today, they would be counted as employed—on the principle that the government statistics must do everything they can to minimize the extent of the unemployment problem. If today’s methods of calculating unemployment were in operation in the mid 1930s, official unemployment would have been slightly below 10 percent by 1936, no higher—perhaps somewhat lower—than it is today.

So if we are to believe Romer, far from being a period of terrible economic stagnation that most lay people believe the 1930s to have been, the mid-1930s saw the second greatest growth rate in U.S. history. And what was the period that saw even faster economic growth than the mid-1930s? Why it was the “second world war”!

Expanded reproduction and economic growth versus rise in GDP

What Romer is confusing is a rise in production with the process of expanded reproduction—real economic growth. Since expanded reproduction is a Marxist concept, it is not surprising that a bourgeois economist such as Romer is unacquainted with it. The way the GDP is calculated, no distinction is made between the reopening of a factory that has been forced to shut down due to a crisis of overproduction, for example, and a situation where a new factory is built.

Nor is any distinction made between the full mobilization of the existing factories and labor force to build means of destruction during war and the building of new factories to make additional means of consumption, or additional means of production to make still more means of consumption. Both represent “economic growth” as far as the GDP is concerned and are so reported by the government and the capitalist press.

In fact, what really happened between 1933 and 1936—the years of the Roosevelt “prosperity”—was that many of the factories that had either been completely shut or had sharply curtailed production were re-opened or began to operate at more normal levels again. Capital investment remained very low throughout the years 1933-36. Indeed, except at the very end, the consumption of capital exceeded the accumulation of capital. More machines were either wearing out or simply deteriorating for lack of use than were being built. Even as production rose after 1933, reproduction remained negative.

V-shaped recessions

Romer is describing a V-shaped recession, on steroids. The history of the industrial cycle, at least up to now, has shown that the deeper and sharper a recession is on the downward side, the faster the recovery in industrial production and GDP on the upward side. A “mild” recession—for example, the recession of 1990-91 or 2000-03—means that there is a relatively small amount of idle productive forces that can be reactivated when the recession proper ends.

But in a deep recession like the current one—and all the more with the super-crisis of 1929-33—there is a lot of idle plant and equipment, not to speak of unemployed workers, at the bottom of the recession. With so many means of production idle, the tremendous amount of unemployment means that in the wake of a severe recession industrial production generally rises very rapidly between the time when production reaches its lowest point and the time when industrial production reaches it previous peak. (8)

In reality, the period from 1933 to 1936 represented the depression phase that followed the recession or crisis phase of 1929-33 of the industrial cycle. Remember, the crisis marks the end of one industrial cycle and the beginning of the next industrial cycle. In the wake of a severe recession—and the “recession” of 1929-33 was the severest of all so far in the history of capitalism—it is not surprising that the depression phase of the cycle proper would be marked by a very high rate of growth both in terms of industrial production and GDP.

In severe recessions—both preceding and following the super-crisis of 1929-33—economic growth as measured by the GDP would slow down considerably once industrial production and GDP reached the peak levels of the preceding cycle. (9) But only then does process of expanded reproduction really resume, or what comes to the same thing, real economic growth starts up again.

Excess capacity—productive forces that are unable to function as capital during the crisis—are either eliminated by being closed down or reactivated after the crisis passes. As demand continues to increase, the industrial capitalists are obliged to build new factories and when possible expand existing ones. But since it takes a much longer time to expand an existing factory, not to speak of building a new one from scratch, growth as measured in terms of industrial production and the GDP naturally slows down considerably once the previous peak reached in the preceding industrial cycle has been surpassed.

While the recovery phase of the industrial cycle after 1929-33 followed the expected script as far as the growth in industrial production and GDP were concerned, within a year after the previous peak was reached, the growth of industrial production, GDP and employment didn’t simply slow down. Instead, U.S. GDP and industrial production as well as employment plunged. This was indeed an unprecedented development. What caused the U.S. economy to behave in this way in the 1930s?

The 1937-38 recession is a strange recession in many ways. It was not preceded by an economic boom that followed a period of average prosperity but rather broke out just as the U.S. economy was emerging from the worst crisis-depression cycle in its entire history. And then, just as the economy was on the borderline between depression and average prosperity, a deep recession—no ordinary “Kitchin inventory recession”—erupted. It was the violent recession of 1937-38, along with 1929-33 super-crisis, that put the “Great” into the Great Depression.

The U.S. economy on the eve of the 1937 recession

“American banks,” Romer explains, “were holding large quantities of reserves in excess of their legislated requirements.” This, as I explained, is actually typical of depression periods that follow the crisis-recession proper. But since the crisis-recession of 1929-33 was no ordinary crisis but a super-crisis, the amount of idle reserves held in the U.S. banking system was unusually large.

As I explained in my description of the “ideal industrial cycle,” inventories—commodity capital—are run down during the crisis-recession phase. At some point, no matter how much demand contracts, inventories have to rebuilt. The falling price level—in terms of gold—has the same effect on the quantity of gold money measured in terms of purchasing power as an expansion of gold money measured in terms of weight with prices remaining unchanged. And since gold production never falls to zero, the quantity of gold money keeps growing in terms of weight. And the fall in the price level in terms of gold stimulates gold production.

Therefore, the real quantity of money—the quantity of money in terms of purchasing power as well as the quantity of gold money in terms of weight expands. This builds the basis for a new sudden expansion of the market, which allows industrial production to exceed its best level of the previous industrial cycle.

The rise in the quantity of metallic money both in terms of its purchasing power and in terms of weight now also allows the market to expand on a cash basis as opposed to a credit basis. That is, the new expansion is initially much more sound than the final stages of the preceding expansion was. Only later will overproduction, over-trading and credit inflation develop on a new and higher level, which will end in the next crisis. This in a nutshell is how an upturn in the industrial cycle emerges from the preceding recession.

In addition, the mass unemployment leads to wage cuts—we are seeing this today—which increase the rate of surplus value. There were certainly no lack of wage cuts in the early 1930s.

Were the forces at work in the early and mid 1930s that would be expected to lead to an economic recovery? They certainly were. Indeed, the forces working toward recovery were working overtime in the early 1930s. First, nominal prices fell by a about a third. Counting the effects of Roosevelt’s devaluation of 1933-34, prices in terms of gold fell by about 50 percent. This fall in gold prices expanded the quantity of gold measured in terms of purchasing power.

Second, as we have already seen, gold production began to rise—gold production and refining were one of the few profitable industries during the super-crisis, and gold production remained highly profitable throughout the 1930s. Capital quite naturally flowed into gold mining and refining causing production of gold to just about double during the 1930s. The quantity of gold therefore expanded considerably in terms of weight as well as in terms of purchasing power. This transformed the global liquidity shortage of the 1920s into a massive gold and liquidity glut by the mid-1930s. The foundations of a major upswing in the industrial cycle were falling into place.

Roosevelt’s dollar devaluation along with high unemployment worked to increase the rate of surplus value by devaluing the media in which wages were paid.

While bourgeois economists seem to attribute every change in economic conditions to shifting government or central bank policies, in reality, while I wouldn’t deny that government policies have had some effect, the main forces driving the changes in the U.S. economy through the mid-1930s were the “natural” cyclical forces of the capitalist economy. Government policies played a decidedly secondary role.

It was these typical cyclical forces, working with much greater vigor than usual in the wake of the worst crisis in capitalist history, compared to an “average” industrial cycle, that was responsible for the Roosevelt recovery. The one policy of the government that most encouraged the recovery—public works programs that indeed built some useful projects were largely offset by cuts in spending by cash-strapped state and local governments.

Inflation a threat in the mid 1930s?

As I already mentioned, the policies of the Roosevelt administration were quite frankly inflationary. Farmers were paid not to grow crops, and the so-called National Recovery Administration—NRA—encouraged the cartelization of industry and commerce. But the most powerful inflationary force was the devaluation of the U.S. dollar between 1933 and 1934. Each dollar now represented 40 percent less gold—real money—than before and thus there was powerful upward pressure on prices measured in terms of dollars.

The U.S. economy in 1936 and 1937, however, was barely entering into average prosperity. It was no where near an industrial boom that would represent the development of new overproduction, over-trading and credit inflation. Indeed, the big “problem” was that there was too much gold in the U.S. Treasury and too many reserves in the U.S. banking system.

On the eve of a typical crisis, the problem is quite the opposite: falling gold reserves, or at least gold reserves that are not growing as fast as the economy is—or depreciating currency under the current token money system—and stagnating bank reserves that force the banks to operate at ever lower levels of liquidity. In terms of the industrial cycle, the U.S. economy was still very far from a major new cyclical crisis in 1937. Yet a major crisis occurred anyway. If it wasn’t the industrial cycle, what caused it?

In a word, government policy did. Right after the 1936 elections, this inflationary administration began to suddenly worry about the inflationary potential of the huge excess reserves that were building up in the U.S. banking system. That is, it was suddenly terrified—or pretended to be—by the excesses of a boom that was at least several years in the future.

Unlike today, the rise in idle bank reserves was not based on the creation of token money by the Federal Reserve System. The Fed had nothing to do with the rise in bank reserves in the mid-1930s. The rising bank reserves represented gold that was flowing into the U.S. Treasury, both gold flowing in from war-threatened Europe and the rising level of the production of new gold.

The much lower level of prices in terms of gold, which meant that a given quantity of economic activity could be supported with less money, also contributed to the excess reserve “problem.” These gold-based excess bank reserves did not represent the kind of inflationary threat that the explosion of bank reserves the Federal Reserve System has created over the last year through its expansion of its token money represents today.

To be sure, due to the false theory of value they are taught in their university studies, bourgeois economists have a genuine problem in grasping this fact. As I explained in the posts that deal with the theory of money, token money and metallic money obey quite different laws. The excess of metallic metal in the 1930s—which increased considerably as a result of the 1937-38 recession—had the consequence of driving interest rates to very low levels and keeping them there during World War II. These excess reserves and consequent extremely low interest rates—especially extremely low long-term interest rates—were laying the foundation of a massive economic boom that finally materialized after World War II. More on this in later posts.

Under the conditions of a massive glut in idle money capital in the mid-1930s, the Federal Reserve System retained only one significant tool: its ability to determine the amount of reserves—deposits at the Federal Reserve Banks plus vault cash—that the commercial banks had to maintain behind their deposit liabilities. This gave the Fed the ability to create an artificial shortage of reserves by forcing the banks to maintain very high reserves behind their deposit liabilities. In all other respects, “monetary policy” such as it was—was directly controlled by the White House and its Treasury Department—U.S. finance ministry—and not the Federal Reserve System.

Starting in July 1936, the Fed used its power to create an artificial shortage of bank reserves by increasing its reserves requirement three times.

As we saw above, U.S. commercial banks were holding large quantities of reserves in excess of their legislated requirements. Romer writes: “Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed…. In July 1936, the Fed’s board of governors stated that existing excess reserves could ‘create an injurious credit expansion’ and that it had ‘decided to lock up’ those excess reserves ‘as a measure of prevention.'”

The present-day U.S. bourgeois economist Michael Bordo writes: “Building upon such evidence, the 1937-38 recession was due primarily to the Fed’s doubling of reserve requirements in 1936-37 and the Treasury’s sterilization of gold inflows, with only a minor role for fiscal tightening. Both monetary actions, as Christy [Bordo is referring to Christine Romer—SW] explains, were taken to remove what the Fed viewed as potentially inflationary excess reserves from the balance sheets of the commercial banks.”

By emphasizing the effects of “monetary policy” as opposed to fiscal policy, Bordo is displaying a certain Friedmanite prejudice. But as I explained above, under the conditions of the 1930s both fiscal and monetary policy were controlled directly from the White House. Starting in July 1936, the Federal Reserve Board, which controls the U.S. Federal Reserve System, made the first of three raises in reserve requirements. (10) It was working closely with the administration. The rest of the deflationary measures, however, waited until the election of November 1936. This enabled Roosevelt to take political advantage of the cyclical economic recovery that was then underway.

But after the election, the administration began to curb the WPA public works programs on the excuse that the depression proper was now over—which was barely technically true as we have seen, assuming that the industrial production estimates are accurate. On top of this, Social Security taxes were being collected but no benefits were as yet being paid out. This had the effect of taking money out of circulation and burying it in the U.S. Treasury.

The gold-sterilization policy was implemented by the U.S. Treasury, not the Federal Reserve Board. Under this policy, for each dollar of gold that the Treasury purchased, it borrowed a dollar and in effect buried it in the ground. The Treasury was converted into a great sink of purchasing power, supposedly to fight the “danger” of a future runaway inflationary boom.

Therefore, within a few months of the end of the official depression in December 1936, industrial production first leveled off and then, in the fall of 1937, suddenly turned sharply downward. Employment shrunk as production plunged sending unemployment soaring. The administration quickly reversed its policies, and the government-induced recession soon ended. But the overall effect was to add about two additional years to Depression.

First, there was the recession itself, which lasted about a year, and then there was an interval of time—the depression that followed this recession—before industrial production returned to the 1937 levels. By then, the population had grown, so unemployment remained above the 1937 levels. As a result, Depression mass unemployment continued right up until the war economy began to take effect in 1941-42. (11)

These extremely deflationary policies by the administration overwhelmed the forces of the industrial cycle that were working toward continued economic recovery and pushed the U.S. economy into deep recession. But why did the Roosevelt administration artificially throw the U.S. economy back into deep recession just as it was emerging from the depression phase of the industrial cycle?

It is of course possible the administration misjudged the economic situation and didn’t realize the devastating effects that its economic “game plan” for 1936-37 would have. But the administration actually had from its own perspectives good reasons for following the policies that it did.

One reason might have been foreign policy. The recession of 1937-38 increased the drain of gold away from Europe and made things more difficult for Hitler’s Third Reich as the pressure on Germany’s scanty gold reserves increased. The German government did manage, however, to double its gold reserves in 1938 by annexing Austria, thus adding Austria’s gold reserves to its own. The 1937-38 recession also helped push the European continent further along the road toward war.

This, of course, led to the further growth of U.S. idle bank reserves, but these idle bank reserves were to come in very handy when it came time to finance World War II while denying this money to America’s imperialist opponents.

But the biggest reason for the sudden shift to deflationary—sometimes called recessionary—policies is to be found in the class struggle that was then unfolding in the United States.

Concessions by the New Deal to U.S. workers

The New Deal had made some concessions to the U.S. workers, though the extent of these concessions has been greatly exaggerated. Roosevelt did create public works for the unemployed, for example. The first steps were also taken to create a minimized system of social security and unemployment insurance. Though these were—and remain today—skimpy by European standards, they represented an advance over the complete lack of social insurance that characterized the United States in pre-New Deal days.

The biggest concession that Roosevelt made to the U.S. workers is generally considered to be the Wagner Act—which is sometimes called labor’s “Magna Carta.” The Wagner Act gives workers the right to form unions and bargain collectively.

But didn’t U.S. workers already have this right? You would think that workers would have the right to organize under the Bill of Rights, which forms part of the U.S. Constitution and guarantees freedom of association. However, somehow the freedom of association provision was not interpreted as allowing workers to organize unions! Instead, unions were considered to be “criminal syndicates”!

The Wagner Act created the National Labor Relations Board. The idea was if a certain number of workers in an enterprise want a union, the NLRB holds an election to determine what union if any the workers want to represent them. Therefore, instead of strikes and sometimes bloody struggles—because of the traditional fierce resistance of U.S. bosses to unionization—of the past, there would be a peaceful election instead. Very democratic and enlightened—in theory.

But no legislation, no matter how “enlightened,” can change the basic laws of the class struggle that are rooted in the contradictions of capitalist production. Under the NLRB system, the bosses drag their heels and are only lightly tapped on their hands when they violate the provisions of the Wagner Act that grant the workers the right to organize a union. The struggle gets bogged down in a judicial process. By the time the bosses are finally forced to hold an election for union recognition, the pro-union workers are fired or have quit in disgust. And scabs—replacement workers—who are offered jobs in return for voting against the union have been hired. The union under these conditions finds it difficult to win. As a result, it is far more difficult to win union recognition today in the United States—not that it was ever easy—than it was in the days before labor’s so-called Magna Carta.

Another unfortunate effect of the Wagner Act has been that it encourages the trade union leaders, assuming the union is finally recognized, to depend on the capitalist government rather than the union consciousness and solidarity of the workers. Sometimes the union becomes so bureaucratized that the bosses can find disgruntled workers to demand a decertification election under the same Wagner Act rules. The unions often lose these decertification elections—the bosses’ agents among the workers claim that the workers would be better off without a union since they would not have to pay union dues. The workers are then left without any union protection whatsoever. (12) It is then very difficult if not impossible to get a union back again.

On the eve of the 1937 recession, however, the union movement had tremendous momentum that the NLRB system, which was just being set up, was not able to “tame.” Fighting against both the devastating effects of the super-crisis and then Roosevelt’s inflationary policies, massive strikes broke out in Minneapolis, Toledo and San Francisco.

The Teamster Union—the U.S. truck drivers’ union—emerged greatly strengthened and remained a powerful union for decades—though it’s now a shadow of its former self. The Toledo strike led to the rise of the United Auto Workers Union—which was once also a powerful union, though like the U.S. auto industry itself—is now a shadow of its former self, while the San Francisco General Strike led to the creation of the International Longshoreman’s and Warehouse Union. Unlike most U.S. unions, the ILWU resisted the anti-Communist witch hunt of the post-World War II years, and though it has taken blows, it is in better shape then the Teamsters, UAW and most other U.S. unions today.

The U.S. unionization movement of the 1930s reached it high tide with the successful unionization of the United States Steel Corporation—the gigantic steel monopoly put together by J.P. Morgan at the beginning of the 20th century—and the recognition of the United Auto Workers Union by General Motors and Chrysler—after a wave of sit-down strikes that mark the highest point the U.S. union movement has reached up to the present. Henry Ford and his Ford Motor Company resisted unionization until 1941, when the immanent entrance of the United States into World War II finally forced this fascist-minded industrial capitalist to grant recognition to the United Automobile Workers Union. (13)

It was the sit-down strikes and unionization drives that were the main basis of the government and Federal Reserve polices that caused the Roosevelt recession of 1937-38.

Did Roosevelt worsen the Depression?

A debate has been raging among various bourgeois historians and economists as to whether the New Deal helped recovery from the Depression or rather prolonged it. Those historians and economists who are tied to the U.S. Republican party claim that the New Deal prolonged the Depression by discouraging production through its cartelization, alleged anti-business and above all pro-union policies.

On two occasions, it’s hard to deny that the Roosevelt administration indeed made the Depression longer and deeper then it otherwise would have been. The first was in the fall-winter of 1932-33 between Roosevelt’s election in November and his assumption of office the following March. Roosevelt’s vague statements about the dollar encouraged the belief that the administration was going to devalue the dollar—raise the dollar price of gold—when he assumed office. This led to a speculative run on gold reserves that triggered the final banking crisis in the winter of 1933. This banking crisis temporarily derailed a recovery that had begun in the summer of 1932.

The second occasion was in 1936-37 when the administration, assisted by the Federal Reserve System, withdrew a huge amount of purchasing power from the economy—in effect burying it in the ground in the form of hoarded gold bullion. This sent the U.S. economy into a second tailspin just when it seemed the Depression was ending. The result was to give the Depression a whole new lease on life. On the other hand, Roosevelt’s deficit-financed public works projects, though they were beneficial, were too small to have more then a minor impact on an economy that was already recovering through the cyclical mechanisms of the industrial cycle. Therefore, it is hard to deny that overall the New Deal made the Depression both deeper and longer then it would have been otherwise.

But contrary to the claims of the U.S. Republican Party, the policies that worsened and prolonged the Depression, especially those of 1936-37, had absolutely nothing to do with “pro-labor” policies. Exactly the opposite! It was the desire of the administration to weaken the labor movement that lay behind the deflationary policies of 1936-37 that had such disastrous effects on U.S. workers and the U.S. trade union movement.

Liberal historians and economists associated with the U.S. Democratic Party claim that the recovery occurred because of Roosevelt’s policies. This claim is false. It was the upward movement of the industrial cycle, not Roosevelt’s policies, which was responsible for the recovery of 1933-36, which resumed in 1938 after the administration ended it deflationary policies.

Would the Depression have been worse and have lasted longer if Herbert Hoover had somehow been re-elected as the Democrats claim, or would recovery have been stronger if Hoover had been re-elected? Since we don’t really know what economic policies a hypothetical second Hoover administration would have followed, there is no way to answer this question.


1 These figures are, of course, official government statistics and have to be treated with a certain amount of reserve. However, I assume that the broad picture is accurate.

2 In Germany, industrial production showed no increase for 1929 over 1928. This shows that the global industrial boom of 1928-29 combined with the U.S. stock market bubble of 1928-29 tightened up credit sufficiently to push indebted Germany into recession even before the global economic downturn began in 1929.

3 The low point of the industrial cycle was definitely 1932 in Germany and not 1933. A case, however, can be made that the crisis in Germany started in 1928 rather than in 1929.

4 The home market is part of the world market. Therefore, the conquest of the world market by the industry of a particular capitalist country can be expressed by a faster growth of the home market just as much as it can be expressed by a growing share of foreign markets. If demand within a particular capitalist country were to grow more rapidly than the world market as whole, the home market of that country would make up a larger percentage of the world market than before.

5 Among other things, the rate of growth of the home market will slow relative to the rate of growth of the world market.

6 This is why “monetary policy” was largely ignored by economists during the Depression era.

7 Governments have recently reported that industrial production has begun to rise in certain capitalist countries. It is still possible that a renewal of the banking and credit crisis could abort any incipient rise in industrial production and renew the recession proper. Just last week, a major U.S. bank collapsed. But even if we grant that industrial production has reached its lowest point of the current industrial cycle, this would only mean the end of the recession phase and the beginning of the depression phase of the industrial cycle. The current depression won’t end until industrial production has exceeded the highest levels that it reached before the crisis began in 2007.

8 This should be kept in mind in the coming months. There has been much speculation that the recovery from the recession will be a so-called L-shaped one. If it turns out this way, this would be a very unusual pattern and the depression phase of the current industrial cycle would then be a very prolonged one. It is possible, however, that a more typical V-shaped recovery will emerge like it generally does after a severe recession. If that happens, governments will start to report large increases in GDP and industrial production, causing the capitalist press to report a “stronger and more powerful recovery” while tens of millions remain unemployed!

9 The government did not calculate the GDP before the 1930s, though capitalist economic historians make estimates of GDP for these earlier periods.

10 Since the New Deal, the Federal Reserve Board is known formally as the Board of Governors of the Federal Reserve System, but it is generally still referred to by its pre-New Deal name—the Federal Reserve Board.

11 The significance of the 1937-38 recession has been greatly misunderstood. The U.S. economy was recovering more or less as would be expected after a deep economic crisis. But then the economy suddenly entered a violent new recession just as it seemed to be emerging from the depression phase. It seemed to many as though the capitalist system was at the end of the line. That is, no further expanded reproduction could be expected in the future until capitalism was replaced by another social system.

Since most of the U.S. left was aligned with the Roosevelt administration in those years, the extent to which the administration’s policies were responsible for the sudden recession were not widely understood on the left. In addition, the U.S. Federal Reserve System had not raised its (re)discount rate like it had before earlier recessions. This created the illusion that monetary policy had remained “accommodative.” It was all too easy to overlook the deflationary impacts of the increases in reserve requirements and the gold sterilization policies, which after all involved highly “technical” matters.

Because the 1937-38 recession dragged out the mass unemployment of the Depression, “full employment” didn’t return until the World War II mobilization. This created a myth in U.S. society that only massive military expenditures ended the Depression and could prevent its return in the future. This widespread belief was very useful for Washington during the “cold war,” especially during the Korean and Vietnam wars, since it encouraged the belief among U.S. workers that without massive war expenditures they would face unemployment. This helped build support for the government’s aggressive foreign policy. Things were not helped when much of the left echoed these arguments. A kind of vulgarized Keynesianism replaced Marxist analysis.

12 A bad union is always better than no union. When a decertification is held, workers should always vote for the union, no matter how bureaucratic and unresponsive the union leaders may be to workers’ needs.

13 Henry Ford is often described as some kind of populist or folk hero who voluntarily paid his workers high wages so they could provide a market for his cars. Of course no industrial capitalist has ever made a penny of profit selling commodities to their own workers. At best they can realize the value of their variable capital, but not the surplus value contained in their commodities, by doing this.

In reality, Ford was actually a great admirer of Nazi Germany. He saw eye to eye with the Fuhrer not only on the Jewish question—Ford was a notorious anti-Semite—but also on the union question as well. No real unions were allowed to operate in Hitler’s Third Reich. Ford did his best to emulate Nazi policy in his own factories. He maintained a vicious fascist-like outfit called the Ford Service System that spied on and terrorized any worker who attempted to unionize the work force. Only in 1941, with U.S. entry into the world war immanent was the pro-fascist Ford finally forced to recognize the United Auto Workers.

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