The Five Industrial Cycles Since 1945

Between 1968 and 1982, there were no complete industrial cycles. Indeed, the entire period from 1968 to the end of 1982 can arguably be seen as one drawn-out crisis with fluctuations or sub-cycles within it. The normal 10-year cycle resumed in the 1980s, peaking around 1990.

The industrial cycle that began with the 1990 recession peaked between 1997 and 2000. The crisis that ended that industrial cycle actually began with the run on the Thai baht in July 1997, though the U.S. economy didn’t enter recession until 2000. The industrial cycle that began with with the July 1997 run on the Thai currency ended 10 years later with the August 2007 global credit panic, which began in the United States and then spread around the world.

These cycles do not correspond to the National Bureau of Economic Research dates. The NBER is a group of bourgeois economists who decide the “official” periods of what they call “expansions” and “contractions.”

There are plenty of problems with their dates. One is that they try to make recent “contractions” as short as possible. For example, they claim that the “contraction” of 2001 started in April 2001, though there is plenty of evidence that the U.S. economy was in a cyclical downturn no later than the fall of 2000. Their claim that the recovery started as early as November 2001 is also very dubious. (1)

The other problem is that the NBER makes no distinction between different types of “contractions.” For the initial post-World War II period, before 1968, they recognize 1945, 1948-49, 1953-54, 1957-58 and 1960-61 as “contractions” in the U.S. economy. However, not all these “contractions” represent true downturns in the industrial cycle.

In this post, I will examine the first two industrial cycles following World War II—those of 1948-1957 and 1957-1968. Both these industrial cycles were dominated by their boom phases.

Let’s examine the official NBER “contractions” that occurred between 1945 and 1960-61 and see how they relate to my suggestion that there were actually two true industrial cycles between 1945 and 1968.

Comparing the post-WWI and post-WWII ‘contractions’

The first official “contraction” was in 1945. This was obviously not a cyclical crisis but instead represented the shift from a war economy back to a “peacetime” economy. It’s true, however, that industrial production declined in 1945 and a massive wave of layoffs occurred as contracts for war production were canceled.

The type of decline in industrial production that accompanies the transition from a wartime economy back to normal capitalist expanded reproduction is sometimes called a “reconversion crisis.” The NBER also recognizes a similar “contraction” in 1918-19. This “contraction” was also not cyclical but rather represented the “reconversion” crisis after World War I.

After World War I, in addition to the brief “reconversion crisis” of 1918-19, there was the deflationary recession of 1920-21, which hit all the imperialist countries with the exception of Germany, where the postwar inflation continued. In the United States as well as other capitalist countries, even after World War I had ended prices kept soaring as the new Federal Reserve System and the other central banks kept pumping huge amounts of money into the economy during the reconversion crisis.

Since the U.S. dollar had not depreciated against gold during World War I, the rise in U.S. dollar prices in 1919-20 represented a rise not only in terms of dollars but in terms of gold. If the inflation of 1919-20 had not been stopped, the dollar would have faced a massive devaluation against gold, and the United States might have experienced inflation on the scale that occurred in eastern and central Europe.

During this post-World I global inflation, gold production continued to declined sharply, thus helping lay the foundations of the super-crisis 1929-33. In 1919-20, as agricultural production recovered in Europe, the balance of payments swung sharply against the United States, leading to a sharp decline in U.S. gold reserves. The U.S. Federal Reserve System responded by sharply raising its discount rate. As bank lending contracted, inflation quickly gave way to a violent deflation. Between May 1920 and January 1922, producer prices fell by about 45 percent. (2)

The recession of 1920-21 was relatively brief because of the lack of widespread industrial overproduction in the wake of World War I. Halting the inflation of 1919-20 was absolutely necessary to restore normal “peacetime” expanded capitalist reproduction, since the alternative would have been a massive currency devaluation, runaway inflation and a sharp rise in the already high interest rates, which would have swallowed up the profit of enterprise.

As it turned out, even after the deflation of 1920-21 the prices of commodities were still far too high relative to underlying labor values. As a result, gold production remained low. It took the super-crisis of 1929-33 to finally put capitalist expanded reproduction back on a “sound basis.” But then, before the global industrial cycle could fully resume its normal course, there came the U.S. government-induced Roosevelt recession of 1937-38, which set back recovery by several years. Before a new boom could develop a new world war broke out.

The 1920-21 recession, therefore, was not exactly a classic crisis of overproduction. But it does mark the end of the postwar inflation and therefore can be considered the start of the 1920-1929 industrial cycle, the only full industrial cycle between the two world wars.

Now let’s compare what happened after World I with the post-World II period. The next NBER “contraction” after the reconversion crisis of 1945 was the recession of 1948-49. I think it is pretty obvious that this recession was similar in kind, if not in extent, to the recession of 1920-21. Though not exactly a classic business cycle recession, it like the recession of 1920-21 marked the end of the wartime and postwar inflation and therefore the resumption of the “peacetime” industrial cycle.

Two ‘contractions’ necessary to restore normal expanded capitalist reproduction after full-scale war economy

It seems that after world wars like those of 1914-1918 and 1939-45, the capitalist economy has to pass through two types of “contractions” before “normal” conditions of expanded capitalist reproduction are restored.

First, there is the initial “reconversion crisis” when war orders are canceled. During the reconversion crises of both 1918-19 and 1945, the central banks kept the “money supply” expanding at its wartime highs in an attempt to cushion the effects on the level of unemployment of widespread demobilization and canceled war orders. They clearly feared revolutionary political consequences if newly released soldiers in large numbers failed to find jobs as they were demobilized.

But the central banks could not keep the “money supply” expanding at its wartimes levels for very long after the world wars ended. The example of Germany after World War I shows what happens when they attempt to take that route.

So shortly after the immediate reconversion crises ended after both world wars, the central banks took action to halt the wartime and postwar inflation. If they had failed to do so, they would have faced massive devaluations of their currencies against gold and runaway inflation such as actually occurred in Germany. (3) The resulting deflationary recessions finished the transition from a war economy begun by the reconversion crisis back to normal expanded reproduction and the resumption of the industrial cycle.

The industrial cycle resumed with the 1948-9 recession

The recession of 1948-49, by ending wartime and postwar inflation, played the same role as the recession of 1920-21. It therefore can be considered to mark the beginning of the first post-World War II industrial cycle.

One difference between the deflations of 1920-21 and 1948-49 was that the U.S. Federal Reserve System increased its (re)discount rate to halt the post-World War I inflation. This method was not available to the Fed immediately after World War II, because it was still committed to support the price of government securities.

As long as the Fed was committed to keep the rate of interest on government bonds and interest rates in general low, merely raising the discount rate would not have ended the postwar inflation. The U.S. commercial banking system was flush with government bonds, which were convertible at the Fed into Federal Reserve notes—”green money.” Or, technically, into deposits at the Federal Reserve Banks convertible into “green money” whenever the commercial banks needed cash to meet their depositors’ demands.

Under these conditions, the Fed could not discourage the commercial banking system from making loans and thus halt the inflationary growth of bank loans and the consequent expansion of the “money supply” by raising its (re)discount rate. Instead, the Fed had to raise reserve requirements, much like it had done in 1936-37 just before the Roosevelt recession. This worked, and the post-World War II inflation was halted.

In August 1948, the U.S. producer price index peaked at 28.2. It reached a low of 25.9 in December 1949. This was a decline of a little more than 8 percent. Consumer prices also fell during this mildly deflationary recession.

Many people then alive remembered the deflationary recession of 1920-21 when producer prices had plunged by 45 percent. There were widespread expectations in the business world and elsewhere that prices after World War II were due for a similar plunge.

Therefore, the fact that producer prices declined by only 8 percent was a surprise to many. The mildness of this deflation was indeed a harbinger of an inflationary era that was beginning. Prices were entering a long-term upward trend. But why was the deflation of 1948-49 so much milder than the deflation of 1920-21?

At its highest point, in August 1948, according to the official data, producer prices were still slightly below the May 1920 index peak of 28.8. (4) But if you take into account the 40 percent Roosevelt devaluation of the dollar, prices in terms of gold were well below the levels that prevailed at the end of the post-World War I inflation. This was all the more true if we take into account the somewhat higher dollar price of gold—about $40—on the free market as opposed to the “official” dollar price of gold of $35 an ounce.

Therefore, though the World War II war economy and its inflationary aftermath had driven up the general price level in terms of gold, it did not drive it up all the way to the levels that prevailed after World War I. It therefore is not surprising that the postwar price deflation in 1948-49 was much less than the price deflation of 1920-21.

The Korean War and the U.S. recession of 1953-54

The next NBER official “contraction” was in 1953-54. As we saw last week, in the early days of the Korean War it seemed possible that the “local” war on the Korean Peninsula was simply the first stage of a new all-out World War III. This indeed was the perspective of General Douglas MacArthur, who wanted to launch an attack on China with atomic bombs.

Fearing the imminent arrival of a new all-out war economy, the industrial and commercial capitalists went on a massive buying spree, buying raw materials and and other commodities before prices would rise even higher, and perhaps before a new war economy might make them completely unavailable. But after Truman fired MacArthur, it became clear that Washington had decided against launching a new all-out world war at that time.

As soon as this became apparent, the inflationary wave halted and prices stabilized, though at higher levels. (5) Indeed, businesses now had excessive levels of many raw materials. However, the shooting war in Korea was continuing with no end in sight, so prices remained high.

Finally, in July 1953, the new Eisenhower administration negotiated a truce with the (North) Koreans. U.S. war spending was cut back somewhat, though it remained high by traditional “peacetime” standards. But the United States was now the seat of a worldwide empire, and with world empire comes massive militarization. For America, the days of small peacetime military budgets were a thing of the past.

The end of the Korean War marked the beginning of the 1953-54 NBER economic “contraction.” The U.S. recession of 1953-54 has some of the characteristics of a “reconversion crisis” such as those of 1918 and 1945 and some characteristics of a “Kitchin inventory recession,” intensified by the speculative “inventory accumulation” during the Korean world war scare. It does not, however, appear to have marked a major downturn in the industrial cycle proper. (6)

First post-World War II downturn in the global industrial cycle

The first real cyclical downturn in the global industrial cycle after World War II came in 1957-58. The unemployment crisis created by this downturn in the United States was to last into the early 1960s. This slump was far more serious than the recessions of 1945, 1948-9 or 1953-54.

The recession of 1957-58 was not confined to the United States; it was worldwide in its impact. According to Wikipedia, the global downturn “hit economically disadvantaged countries hardest, because it involved a decline in the purchases of raw materials—both agricultural and mineral—by developed nations. The terms of trade of the underdeveloped countries was adversely affected. In Europe, no less than in the United States, there was a fairly sharp decline in investment in fixed capital. (7)

“In the United States, unemployment rose, but there was little or no decline in personal income. Auto sales fell 31 percent over 1957, making 1958 the worst auto year since World War II up to that time. Unemployment in Detroit stood at a high of 20 percent by April. Imports into the United States from Europe stayed high, but the recession in Europe reduced European purchases of American raw materials. And so the balance-of-payments deficit in the United States sharply increased. In Europe, however, a surplus in their balance of payments developed.”

Compared to the downturns that had preceded World War II, the 1957-58 recession had one major new feature. Prices kept rising right through the recession. Wiki notes: “In the U.S. consumer prices rose 2.7% from 1957 to 1958, and after a pause they continued to push up until November, 1959. Wholesale prices rose 1.6% from 1957 to 1959. The continued upward creep of prices became a cause of concern among economists.”

What would explain this unusual behavior of prices during a global crisis of overproduction? I believe it reflects the changed economic policies on the part of the governments and central banks in the wake of the super-crisis of 1929-33.

As I have already explained in previous posts, the U.S. government was determined to do all that it could to prevent a recession from turning into a new super-crisis, or even a major depression of the pre-World War I type.

During the Depression, both the governments and most bourgeois economists—especially the followers of Keynes—had concluded that the key to avoiding major depressions was to prevent a fall in the general price level. Of course, the prices of individual commodities or even whole classes of commodities such as primary commodities might fall, but the cost of living as a whole must continue to inch upward. This was the new doctrine of the (bourgeois) economists. (8)

As long as the cost of living kept rising, the majority of (bourgeois) economists and capitalist governments believed a major depression could not develop. Therefore, when the economic indicators began to decline sharply in the fall of 1957, the Federal Reserve System pumped huge amounts of reserves into the U.S. banking system, and the federal government stepped up its spending—allowing a large deficit in order to increase effective monetary demand.

The Fed slashes the ‘fed funds rate’

The federal funds rate—the rate of interest that commercial banks charge each other for overnight loans—fell from 3.5 percent in the fall of 1957 to as low as 0.5 percent during the winter of 1958 and hit 0.36 percent at one point in July 1958. After 1951, manipulating the “fed funds rate” emerged as the Federal Reserve System’s preferred tool in its attempts to stabilize the economy. (9)

A fall of the fed funds rate from 3.5 to under 0.5 percent over a few months showed just how concerned the Federal Reserve System was about the sudden drop in economic activity that had occurred during the fall and winter of 1957-58. The economy bottomed out by the spring of 1958, and the economic indicators soon resumed their rise. But the success of the Fed in quickly halting the first real post-World War II crisis of overproduction had important long-term consequences. And as it turned out, despite the rising economic indicators the crisis was not quite over after all.

In traditional overproduction crises—those that occurred between 1825 and the 1930s Depression—the industrial and commercial capitalists who had acquired large debts during the preceding boom would often find themselves upon the outbreak of the crisis unable to pay their debts and driven into bankruptcy. Therefore, when a crisis broke out, these capitalists would “panic” and dump their inventories—commodity capital—on the market at low prices even if this meant a major loss of their capital. (10) As a result, the general price level would fall sharply as soon as a crisis broke out.

In the short run, this would mean a wave of bankruptcies, banking and credit crises, plunging production and, not least, sharp drops in employment followed by waves of wage cuts.

But these periodic “panics” played an important role in keeping the capitalist economy “healthy” in the long run. The periodic plunges in the general price level that followed the inflation of credit and prices that occurred during the booms kept prices in line with underlying labor values in the long run.

Falling prices increased the purchasing power of money, and encouraged the production of gold—money material—as falling commodity prices raised the profits in the gold mining and refining industries. They therefore played a necessary role in the expansion of the total global hoard of money material that was a necessary condition for the continued growth of the world market. Without the growth of the world market, capitalist expanded reproduction—that is capitalism itself—would not have been able to continue.

No ‘panic’ in 1957-58

During the 1957-58 world recession, however, large industrial and commercial capitalists did not panic. (11) They were confident that the governments and central banks would move quickly to expand monetarily effective demand. (12) Working with the central banks, the commercial banks would be able to if necessary extend loans to any large industrial and commercial capitalists who might be having trouble with their creditors. This would then be followed by deficit spending by the central governments to further inflate monetarily effective demand.

In the United States in the 1950s, deficit spending consisted of accelerated spending on arms and the interstate highway system—designed to encourage people to purchase automobiles, then the heart of the U.S. industrial economy. Instead of cutting prices on their unsold commodities, the large industrial and commercial capitalists waited until the government “demand management” would take effect and allow them to sell off their overproduced commodities at or near high boom-time prices.

Therefore, it appeared that Keynesian-inspired macro-economics had passed its first real test. Even many Marxists of the time were impressed by the success of Keynesian economics. Within the workers’ movement, Keynes increasingly replaced Marx. True, Keynesian economics had not prevented the recession—but it had apparently been quite successful in preventing the recession from turning into a classic “panic” followed by a prolonged “old-time” depression, which had frequently—though not always—followed panics.

The apparent success of Keynesian policies during the 1957-58 recession appeared more impressive than it really was, since the last major downturn in the global industrial cycle had been the super-crisis of 1929-33 itself, an event still well within living memory.

Workers’ gains, bosses’ loss

In addition, the expansion of social insurance, especially unemployment insurance, which represented real gains by the working class, cushioned the impact of unemployment on the workers in the imperialist countries. This was true if the unemployment was not prolonged.

The bosses were not particularly happy about this, of course. To the extent the workers receive unemployment checks during recessions, they do not face the kind of extreme pressure to get a job at any wage like they did in the days before unemployment insurance. Unemployment insurance makes it more difficult for the bosses to use the high unemployment caused by downturns in the industrial cycle to slash wages and thus increase the rate of surplus value—or what comes to exactly the same thing, the ratio of unpaid to paid labor.

Keynesians hoped to use inflation to keep real wages down

Keynesian economists argued that the “permanent creeping inflation” that was a central plank in their program put downward pressure on real wages as opposed to money wages. Basing themselves on the arguments that I examined in my posts dealing with the economic theories of Keynes, the Keynesian economists explained that cuts in money wages were not the same thing as cuts in real wages. This was because cuts in money wages were generally accompanied by falling price levels.

In his “General Theory,” the “bible” of Keynesian economics, Keynes claimed that falling wages actually caused prices to fall. The Keynesian economists—Keynes himself had died in 1946—told the bosses that if they did succeed in cutting the money wages of the workers, the prices that they charge for their commodities would drop, neutralizing any gains from cutting money wages. The bosses themselves, however, were not entirely convinced by these arguments. They grumbled that the “socialist” policies of governments inspired by Keynesian economics and the “over-strong trade unions” were preventing them from cutting wages. (13)

For those bosses who still weren’t convinced, the Keynesian advocates of “enlightened capitalism” had another argument. Times have changed, they explained. The Soviet Union had just launched an earth satellite—Sputnik was launched in October 1957 just as the recession of 1957-58 was gaining momentum—and “international communism” was threatening the “free world.” If social insurance in general and unemployment insurance in particular was abolished or even cut back, the workers might start listening to “the Communists.” The Keynesian reformers explained to the bosses that it was much wiser to make some concessions—which could be neutralized by the policy of permanent creeping inflation—rather than lose everything. (14)

The price of Keynesian economics that capital cannot pay in the long run

However, there was a price to be paid for the relative “mildness” of the first global post-World War II crisis of overproduction, a price that in the long run the capitalist economy could not pay. Since there was no fall in prices, there was also less stimulation to gold production.

There does appear to have been some stimulation to gold production, since gold production finally rose above the the levels of the late Depression around this time. Even in the absence of price declines, the decline in the turnover of capital caused by the drop in sales lowered the rate of profit in most industries during the 1957-58 recession. But no such drop in turnover occurred in the gold industry. In addition in those years, the gold mining companies, located mostly in apartheid South Africa, were able to hold wages at very low levels.

Under the Bretton Woods international monetary system that was in effect in those years, the South African apartheid gold mining companies could sell all the gold they could dig out of the ground using super-exploited African labor to the U.S. Treasury for $35 an ounce.

So even without a general fall in prices, the rate of profit of the gold mining and refining industry still rose relative to the rate of profit in other industries that was reduced by the recession of 1957-58 and its aftermath. Capital, as we know, is always flowing from industries with relatively lower rates of profits to industries with relatively higher rates of profit. However, the stimulation of gold production that occurred as a result of the 1957-58 global recession would have been considerably greater if prices had actually fallen like they had done in earlier crises.

This contradiction was to come to a head in the course of the second industrial cycle after World War II, which I will examine next week. But even as early as the recession of 1957-58 this contradiction—in the long run fatal to Keynesian economics—began to show itself. Despite the apparent onset of recovery in the spring of 1958, it turned out the economic crisis that had begun in 1957 was not quite over after all.

The U.S. economy double dips

As the Federal Reserve pumped money into the U.S. economy to drive down interest rates, the governments of Europe began to wonder how long the United States would be willing to give them an ounce of gold for every $35 they had in their dollar reserves. How much longer would it be possible to keep gold selling at $35 an ounce while the price of everything else was creeping slowly but relentlessly higher under the Keynesian policy of “permanent inflation”?

Sensing that the a rise in the dollar price of gold—or what comes to exactly the same thing, the devaluation of the dollar—was only a matter of time, they began to demand gold for some of their dollars. Just as it appeared as though the United States was quickly recovering from the 1957-58 recession, the U.S. faced the first major drain on its gold reserve since the super-crisis days of 1931-33. Only 14 years after the Bretton Woods agreement of 1944, the Bretton Woods international monetary system faced a serious crisis.

In order to save the Bretton Woods System, the U.S. Federal Reserve was obliged to quickly raise interest rates again. From a low of under 0.5 percent in the summer of 1958, the fed funds rate rose to 4 percent by the winter of 1960. Now, as Marx noted, business expansions can continue if interest rates are steady or are rising only slowly. But rapid interest rate increases soon prove fatal to business by causing credit to freeze up.

The rise in interest rates necessary to save the Bretton Woods System threatened to abort the recovery that had apparently begun in the spring of 1958. As the U.S. presidential election campaign got underway in 1960, the United States began to slip back into recession, though the rate of decline was less than it had been in 1957-58. The resumption of the recession in the United States meant that U.S. unemployment began to rise once again.

Renewed recession good for JFK, bad for ‘Tricky Dick’

Running against the backdrop of high unemployment left over from 1957-58 and a new rise in unemployment brought on by the renewed recession, the Democratic presidential candidate Senator John F. Kennedy of Massachusetts ran on the slogan of “getting America moving again.” This was a definite echo of the 1932 presidential election—even if the crisis was not nearly as severe. The Republican candidate for president, Vice President Ricard M. Nixon—known as “Tricky Dick”—who was to be the victor in the 1968 U.S. presidential election, blamed the Federal Reserve Board for ruining his first attempt to win the White House.

Since Roosevelt had devalued the dollar in 1933, there was nervous speculation in the international gold market that a new Democratic president might be tempted to devalue the dollar yet again to “get America moving.” At one point, the dollar price of gold rose to $40 an ounce on the free market. This put further pressure on the Federal Reserve Board to keep interest rates relatively high, thereby worsening the recession and subsequent unemployment. (15) As it turned out, however, Kennedy rejected dollar devaluation and was determined to keep the dollar at $35 an ounce.

The London Gold Pool

In order to reinforce the shaky Bretton Woods System, the London Gold Pool was established shortly after Kennedy assumed office. The U.S. Treasury and the European central banks agreed to intervene in the open market to keep the dollar market price of gold at $35. If the price rose above $35, they would sell gold from their reserves; if the dollar price of gold threatened to fall below $35, they would buy gold. The U.S. dollar would be supported not only by the credit and gold of the United States, it would be supported by credit and gold of its European satellite imperialist countries as well.

In the early years of the Kennedy/Johnson administration, the Gold Pool worked well. The United States had emerged from the double dip of 1960-61 with a larger trade surplus and the dollar was once again a strong currency. The Bretton Woods System had managed to survive the first postwar global downturn. But as prices kept creeping up—very slowly to be sure—during the first half of the 1960s, the chances of its surviving the next global economic crisis were not good.

But the approaching demise of the Bretton Woods international monetary system was not the worst danger confronting world capitalism in those years. An even bigger problem involved the secular rise in the rate of interest.

The ticking time bomb of secular rising interest rates

The very success of the capitalist central banks and governments in limiting the effects of recessions meant that interest rates were ratcheting up. In a classic crisis, the rise in interest rates during the boom was offset by a similar fall in interest rates during the crisis and depression that followed. That is, the fall in interest rates during the recession reversed the rise in interest rates that occurred during booms. In this way, the rate of interest was kept below the rate of profit. Or what comes to exactly the same thing, it kept the profit of enterprise—the difference between the total profit defined as surplus value minus ground rent, and interest—positive.

But after World War II, though interest rates continued to fall during recessions, they fell less during the recession than they rose during booms. This was a consequence of the very success of Keynesian polices in limiting the recessions. At first, the capitalist system could tolerate this, because thanks to the Great Depression the post-World War II period had started out with an exceptionally low rate of interest while the rate of profit rose sharply. But as interest rates kept rising more during booms than they fell in recessions, the profit of enterprise came under increasing pressure.

Falling rate of profit on a collision course with rising rate of interest

A situation of secular rising interest rates would have been sustainable only if the rate of profit as a whole was rising sufficiently to offset this increase in interest rates. But nothing of the sort was happening.

The combination of capitalist prosperity and the consequent rise in the demand for the commodity labor power, expanded social insurance, and the need of the capitalists to make economic concessions to the workers so the workers wouldn’t listen to “the Communists,” combined with the renewed rise in the organic composition of capital—caused by what was dubbed “automation”—meant that there was once again downward pressure on the rate of profit. Rising interest rates were on a head-on collision path with a gradually declining rate of profit.

As I explained in earlier posts, profit, ignoring ground rent, is divided into interest, which goes to the money capitalists, and the profit of enterprise, which goes to the industrial and commercial capitalists. If the rate of interest keeps rising, assuming the rate of profit is unchanged, at some point the entire profit will consist of interest alone. And this will happen all the faster if the rate of profit is declining.

For example, if the best that an industrial capitalist can earn is 10 percent—and not without a considerable risk—while the rate of interest on long-term government bonds is 10 percent, it is just as profitable and far less risky for the industrial capitalists to turn into money capitalists and purchase government bonds at 10 percent. But if all the industrial capitalists turn themselves into money capitalists, production of surplus value ceases, and with it capitalism itself. At the point where the rate of interest equals total profit, the very motivation to produce surplus value—that is, to engage in capitalist production—is destroyed.

South African apartheid prolonged the postwar boom

As we examine the contradictions of the post-World War II economy and its Keynesian economic policies, the question becomes not why the postwar boom—really two industrial cycles that were dominated by their boom phases—ended but why it lasted as long as it did.

One major factor working in the direction of prolonging the boom was the bestial system of South African apartheid. Apartheid rule made normal trade union activity for the African gold miners in South Africa—then by far the world’s leading gold producer—impossible. Or, as Marx would say, the conditions of apartheid made it impossible for the gold miners employed in the South African gold mining industry to obtain the full value of their labor power. Remember, it is the industrial workers employed in the gold mining and refining industry, not the central bankers, who in the final analysis create the additonal money and purchasing power that capitalism needs.

As a a result, it took a relatively long time before rising prices finally reduced the rate of profit sufficiently in the gold mining industry to begin to reduce total global gold production. (16) Just like African slavery had played a crucial role in the “rosy dawn”—to use Marx’s ironic words—of capitalist production, the slave-like system of apartheid helped prolong the life of the vampire-like capitalist system during the “cold war” struggle against the Soviet Union and its allies.

While the postwar boom and the Keynesian policies that accompanied it were doomed to collapse in the long run, the success of capitalism in maintaining capitalist prosperity for the two decades after the war played a crucial role in undermining the class consciousness of the European workers—in Western Europe, in Eastern Europe and finally in the Soviet Union itself, as well as preventing the growth of class consciousness in the United States. We must never forget the role that South African apartheid played in this success, whose disastrous consequences we are forced to struggle against today.

The 1960s boom

The 1960s are remembered for many things, for example in the United States the last phase of the Civil Rights Movement and the Black Power Movement that followed, the great movement against the Vietnam War, and at the end of the decade the birth of the modern women’s and LGBT movements.

In France, decades of strong demand for the commodity labor power, which favored the trade unions, climaxed in the great general strike of May 1968. The 1960s were a time when trade unions—and in Europe labor-based political parties—were far more powerful in the imperialist countries than they had ever been before—or have been since. (17)

In any attempt to understand the growth of radical movements in the 1960s that are in such contrast to the decades of reaction that followed, the strength of “organized labor,” both trade unions and in Europe labor-based political parties as well, is one of the least appreciated but perhaps most important factors. The strength of organized labor was made possible by the other important characteristic of the 1960s that distinguishes it from the decades that were to follow—capitalist prosperity.

But at the beginning of the 1960s, the economic situation for the world capitalist economy did not seem all that promising. The United States was going thorough the second dip of the double-dip 1957-61 economic crisis, and U.S. unemployment was stubbornly high—though not as high as during the Depression or, for that matter, today.

The Keynesian advisors to newly elected U.S. Democratic president John F. Kennedy were alarmed by the fact that the U.S. economy was growing much more slowly than the planned economy of the Soviet Union. They urged a major regressive tax cut, which they claimed would increase monetarily effective demand and finally overcome the lingering effects of the economic crisis that had begun in 1957. While President Kennedy did not succeed in getting the tax cut through Congress, it was passed under his successor Lyndon B. Johnson in 1964. It is sometimes called the Kennedy/Johnson tax cut.

The Vietnam War

This period is also noted for something else, the escalation of the Vietnam War. The combination of the regressive tax cuts of 1964 combined with the sudden rise in war expenditures in the mid-1960s caused monetarily effective demand and with it the world capitalist economy to soar. The lingering effects of the 1957-61 economic crisis were finally left behind. The economic boom of the 1960s had arrived.

Keynesian economists, nearing the peak of their influence, claimed that the problem of economic crises had finally been solved. The governments and central banks working together could always boost effective demand whenever it was necessary. If dangerous inflation developed—inflation in excess of 3 percent, for example—they could use the same “tools” in reverse to slow down the inflation.

Not only anything like a repeat of the super-crisis of 1929-33 but even lesser crises like the crisis of 1957-61 would surely be avoided in the future. Indeed, some Keynesian economists suggested that if society was willing to tolerate a somewhat higher rate of inflation—perhaps 4 percent—continuous “full employment” could be assured and even “mild recessions” could be abolished. (18)

Why these hopes were doomed to turn to ashes will be the subject of next week’s post, though the reader who has followed my arguments thus far should have a pretty good idea why these hopes were without foundation.

Next week, I will explain that while the goal of lowering unemployment was a worthy one—unemployment should be abolished entirely—this could not possibly be achieved by simply tolerating a somewhat higher rate of inflation within the framework of the capitalist system. Indeed, the only way to end unemployment on a lasting basis is to transform capitalism into socialism. Unwittingly, these well-meaning pro-inflation “liberal reformers” were preparing the road for Milton Friedman.


1 The bourgeois media claimed that the turn-of-the-century economic downturn—widely called the bust because the new “high tech” industries were hit particularly hard—was one of the shortest and mildest recessions on record, lasting “only” eight months.

Yet the U.S. economy—as did the economies of Europe and Japan—experienced three years of economic stagnation, not eight months, which started around mid-2000 and lasted until mid-2003. The so-called recovery that the NBER claims began at the end of 2001 appears to be related to the aftermath of the 9/11 attacks and does not appear to be a true cyclical recovery. Because the 2000-03 U.S. recession was a so-called “saucer recession” rather than a more severe V-shaped recession such as the one we are now passing through, the true trough of that recession is hard to define. But it wasn’t until mid-2003 that unmistakable signs of a cyclical economic revival set in.

2 Milton Friedman, Anna J. Schwartz and other bourgeois economists claimed that the Federal Reserve System overdid it with its deflationary policies in 1920. But the real problem for the capitalist economy was not that prices fell too much in 1920-21 but that they did not fall enough. Since there wasn’t very much overproduction thanks to World War I, industry ran out of surplus inventories before the prices of commodities had fallen anywhere near back to their actual labor values. If the Fed had somehow succeeded in “moderating” the post-World I deflation, the super-crisis that ended the post-World War I industrial cycle would have almost certainly been even worse than it actually was, since gold production during the 1920s would have been even lower.

3 What seems to happen is that during the reconversion crisis, the central banks continue to rapidly expand the “money supply” in an attempt to reduce the amount of unemployment that is created as a result of demobilization and the reconversion of industry. But the central banks are soon forced to sharply reduce the growth of the “money supply” in order to avoid disastrous devaluations of their currencies against gold.

In Germany after World War I, the German government and central bank, facing a far more serious social and political crisis than the “victorious” capitalist powers, did not take this deflationary action but instead allowed the inflation to continue. Unlike other capitalist countries, Germany avoided the recession and unemployment of 1920-21. Instead, Germany was hit by the hyper-inflationary crisis of 1923 and then the deflationary aftermath, which made the super-crisis of 1929-33 much worse in Germany than it was in most other capitalist countries.

4 Remember, this is official U.S. government data and is not disinterested. In some cases, where prices remain unchanged, for example, the U.S. government will claim that prices have fallen because of the increased quality of the commodities. While the official figures show the general trend of prices, the exact figures shouldn’t be taken too seriously. When commodities of different quality are on the market in one era as compared to another, it is always difficult to compare the prices of commodities between the two eras. How, for example, can we compare today’s computer prices with the “price of computation” before World War II?

5 As the war scare caused prices to soar, world gold production dipped.

6 The fact that a recession immediately followed the Korean War further reinforced the widespread belief in America that war means prosperity and peace means depression.

7 It is this decline in the investment of fixed capital that shows that the 1957-58 recession represented a true downturn in what Marx called the “industrial cycle” and Schumpeter called the “Juglar cycle.”

8 The European Central Bank has a policy of “inflation targeting” that aims not at stable prices but prices that are rising by 1 percent to 3 percent a year. U.S. Federal Reserve Chairman Ben Bernanke has also expressed his support of “inflation targeting.”

Bernanke has explained that the rate of inflation should never fall below 1 percent—as defined by the official U.S. government cost-of-living index. If it does and recession arrives—horror of horrors—the cost of living might actually fall! So when Federal Reserve or European Central Bank officials talk about “price stability,” they mean prices that are rising at an annual rate of 1 to 3 percent as defined by official government statistics. Yet they expect the unions to sign wage contracts that have no cost-of-living clauses in them.

9 By stabilizing the economy, they mean avoiding a major depression and keeping prices rising at a rate of not less than 1 percent as measured by the official government statistics and not more than 3 percent.

10 This is why cyclical crises of industrial overproduction are sometimes called “panics.”

11 By this time, the large industrial and commercial capitalists were not individual capitalists but corporations.

12 Keynesians boast about how their “discoveries” have provided the governments and central banks with the tools to practice “demand management.” While anarchy would continue in the sphere of production—the inevitable result of the private ownership of the means of production—the Keynesians held that demand, in contrast, would be centrally planned by the governments and central banks.

13 From the bosses’ point of view, a union with any strength is over-strong.

14 Many capitalists responded to Keynesian arguments by stepping up their support to the economists who rejected these arguments, such as as those that dominated the economics department of the University of Chicago, among whom was a professor named Milton Friedman.

15 This was part of the long-term price of the Roosevelt devaluation. If the dollar could be devalued once to deal with the effects of one economic crisis, couldn’t it be devalued once again to deal with the effects of another?

16 The post-World War II rise in global gold production continued until 1970. The success in keeping gold production profitable for this long, despite the rise of commodity prices in terms of gold during and after World War II, in no small measure was made possible by apartheid.

17 While prolonged periods of industrial prosperity favor the growth of non-revolutionary reformist tendencies in the workers’ movement, the rise in the number of workers, particularly factory workers in large industrial enterprises, encourages the growth of trade unions and labor-based political parties. The “boom” years from 1896 to 1913, for example, saw the growth not only of the trade unions but also the Socialist parties that were members of the Second International.

On the downside, there was also the steady growth of opportunism in the socialist parties and trade unions during this period.

One of the reasons for the steady growth of political reaction after 1968 has been the absence of a prolonged period of rapid industrial growth, which has reduced the number of workers working in large industrial enterprises in most capitalist countries. This has steadily weakened the trade unions, and with them the labor-based political parties.

18 In 1964-68, a wave of rebellions by working-class African-American youth swept U.S. cities. Even at the height of the 1960s industrial cycle, despite the claims by bourgeois economists that “full employment” had been achieved, it was clear that the largely African-American inner cities were experiencing a major unemployment crisis. This encouraged some Keynesian economists and political liberals to advocate that the government and Federal Reserve System adopt policies to further lower unemployment, which they naively believed could be achieved if only the government were willing to tolerate a somewhat higher rate of inflation—perhaps 4 to 5 percent as opposed to a 1- to 3-percent range.

One Response to “The Five Industrial Cycles Since 1945”

  1. (SFC5) Subject Research | L5 SFC4 Josh Brooks Says:

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