1929: From boom to bust to depression


On Thursday October 24th 1929 the great New York stock exchange panic began. 12,894,650 shares changed hands, many at fire sale prices. The following Black Tuesday October 29th Wall Street began its long meltdown. The Wall Street crash divides two eras: the jaunty ‘jazz age’ of the 1920s and the 1930s – the decade of depression.

Crowd outside Wall Street 1929Crowd outside Wall Street 1929 Everybody knows that shares in New York experienced ‘a little local difficulty’ in October 1929. And everybody knows that millions experienced hunger and destitution for the next ten years – hardship only ended by the horror of World War. But what is the connection? Crises are inherent in a system where production is unplanned and carried out for private profit. Crises take the form of overproduction, with idle workers confronting idle machinesEach recession has its own characteristics and may be set off by a different trigger. The Wall Street crash may be regarded as the trigger of the Great Depression, just as the ‘credit crunch’ marks the beginnings of our present crisis.

Sure, panic played its part. In all capitalist crises apparently accidental factors play a role. In both the 1929 crisis and today the downturn would have come along sooner or later in any case. Industrial production in the USA fell from an index of 127 in June1929 to 122 in September, 117 in October, 106 in November, and 99 in December. Automobile production declined from 660,000 units in March 1929 to 440,000 in August, 416,000 in September, 319,000 in October, 169,500 in November and 92,500 in December.

In other words the recession was already under way in the ‘real economy’ when Wall Street imploded. Galbraith, historian of the events, comments, “Cause and effect run from the economy to the stock market, never the reverse. Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small.” This recession in production reflected itself in the world of shares, of dreams and illusions. The panic on Wall Street in turn had a knock back effect on the world of production and profits.

The Wall Street crash in 1929 was the beginning of a long period of economic difficulties.The Wall Street crash in 1929 was the beginning of a long period of economic difficulties. The collapse was unprecedented. In the USA between 1929 and 1933 national income fell by 30% and industrial production more or less halved. By 1933 over a quarter of the workforce was jobless. According to the League of Nations world unemployment nearly tripled between 1929 and 1932.

After the First World War the USA provided the dynamism for the world economy – and led the world into depression. The upswing was powered by new or expanding industries – mass production of cars and electrical appliances, electricity generation and construction.

Roaring twenties

The boom of the ‘roaring 1920s’ had important similarities with the boom that came to an end in 2007. The ‘boom’ was not accompanied by a real increase in workers’ wages but by a mushrooming of inequality and profits for the rich. Between 1925 and 1929 US industrial shares tripled in price. By 1926 it was clear there was a feverish speculative element to the boom. The Florida land bubble of the 1920s bears clear comparison to the housing bubble that powered the recent boom. And bubbles burst.

The speculative element was fed by the practice of buying shares ‘on the margin’, that is by putting money down representing only a small part of the share price. As long as more or less all shares were going up in price, this seemed to be a passport to effortless prosperity. This is exactly the same as the ‘leverage’ of the banks a couple of years ago, lending thirty or even fifty times as much as their assets to fuel the housing bubble in recent years. In both cases the practice ended in tears.

But every crisis is different, though they all have common elements. The 1929 crash showed important differences with today. The First World War had fostered farming for export in North and Latin America and Australasia to feed the soldiers in Europe. In the aftermath of War there was institutionalised overproduction and distress. In the 1920s two thirds of the world’s population was critically dependent on the price of primary products, mainly farm goods, to determine their standard of living. The collapse of farm prices was a major cause in the drying up of world trade.

Another factor in the shrinkage of trade, which hurt all countries, was the wave of protectionism and competitive devaluations that accompanied the downturn. Devaluation took the form of coming off the gold standard. This international system of payments was effectively destroyed in the Great Depression. These were all attempts to foist the burden on to other countries. They had the effect of impoverishing everyone.

What made the 1929 crash so severe? The counterpart to the growth of world trade in the 1920s, and its collapse in the 1930s, was financial flows between countries. In conventional economic theory poor countries will borrow from rich nations. But in the 1920s bankrupt Germany was being squeezed for war reparations by the ‘victors’, Britain and France, who in turn handed the money over to the wealthy USA to pay for their war loans. These monetary flows were perverse and ultimately unsustainable. Their collapse snapped the daisy chain of international credit and further dried up world trade.

Likewise over the past few years the biggest debtor country in the world has been the USA, living at the expense of relatively poor countries such as China. Martin Wolf, the guru of finance capital, has repeatedly warned that these imbalances cannot go on. He warns (Financial Times 02.12.08):

“The spectacular collapse of the western financial system is a symptom of this big fact. …In the long run, the global economy will have to rebalance. If it doesn’t, The open world economy may even break down. As in the 1930s, this is now a real danger.”

We have not yet seen a descent into full-scale protectionism or monetary chaos, but the tensions are certainly there and they cannot be ruled out.

Most governments between 1929 and 1933 were helpless or unwilling to intervene in the unfolding collapse of their economies, and confined themselves to capitalist clichés about the need to balance the government budget. Over the past couple of years capitalist governments have intervened massively ‘to avoid another 1929.’ We shall discuss how effective they have been later.

What caused the crash of 1929?

The bank crisis was not the cause of the crisis but might have worsened it. Photo from Franklin D. Roosevelt Library.The bank crisis was not the cause of the crisis but might have worsened it. Photo from Franklin D. Roosevelt Library. The Keynesians claim the main reason was a fall in autonomous spending, especially in investment. It is certainly true that private investment collapsed by 90% between 1929 and 1933; construction dropped by 85% and production of capital goods by 75%. But why? The reason seems to be that most profitable opportunities provided by the new industries and new markets in the 1920s had dried up by the end of the decade. In other words the boom was coming to an end anyway. Boom and bust are normal features of capitalist development.

The monetarists like Milton Friedman put the blame on the fall in the money supply caused by the wholesale banking collapse. By 1933 9,000 banks had closed their doors in the USA for ever. The three main waves of bank failures were in 1930, 1931 and 1933. Clearly these occurred too late to cause the collapse, though they could have made it worse. Financial chaos interacted with the collapse in production to drag the economy down further.

Kindleberger is correct when he asserts:

“No quantity theory of money or autonomous shift in spending, with or without a decline in the stock market, can account for these precipitous movements. They require an old-fashioned theory of the instability of the credit system." (Manias, panics and crashes)

The problem is that production under capitalism is really social. Producers all over the world are completely dependent upon one another. They only discover this when the market system, and the money system that greases its wheels, fails us utterly. In like manner, Marx explained, "The law of gravity thus asserts itself when a house falls about our ears.”

Unemployed workers in Britain queuing up outside a union buildning. From Bundesarchiv.Unemployed workers in Britain queuing up outside a union buildning. From Bundesarchiv. Governments saw their tax incomes fall and their outgoings on relief payments spiral as the crisis hit home. This had the natural effect of causing the state to run a deficit in its budget. This deficit was denounced by the economists of the time as financial profligacy. The British minority Labour government for instance was pressured by the establishment to balance the budget at all costs. This they decided to do by cutting unemployment benefits, cutting service pay and cutting the wages of teachers and other civil servants. Naturally this caused a split in the Parliamentary Labour Party. This was not what Labour had been elected to do! Ramsey MacDonald and a handful of other traitors then set up a ‘national’ government to push through these measures with the support of the Tories. The subsequent general election, when all the supporters of the cuts formed a bloc against independent Labour Party candidates, reduced the Party to just 54 seats in parliament. More to the point, it was a stunning psychological blow to the labour movement.

It must never be forgotten that this policy of cuts in the teeth of the crisis was a complete failure in ushering in recovery. This strategy was repeated by Thatcher in the recession of the early 1980s. Its intention was quite clear – to make the working class bear the entire burden of the crisis. This is what the Tories under Cameron have in mind for us if they win the next election. New Labour wants to maintain spending, and is running a huge government deficit, before the election due next year. But they agree with the Tories that huge cuts will have to be made in the future to bridge the gap in state finances.

Roosevelt took office as President of the USA in 1933 at the depths of the slump. A wily capitalist politician representing the Democrats, he stated his aim as to, “reform if you would preserve.” His New Deal represented the first recognition by bourgeois politicians that the depth of the depression, and the anger it was engendering, threatened the existence of the whole capitalist system.

New Deal

Roosevelt’s economic activism coincided in many respects with the rise of Keynesian economics in the 1930s as an alternative to the failed and stultified orthodoxy. Keynes by no means saw himself as a representative of the labour movement. He declared, “The class war will find me on the side of the educated bourgeoisie.” Rather than balancing the budget in hard times, Keynes thought the government should spend money, including deliberately running a budget deficit if necessary, in order to keep up aggregate demand. When elected Roosevelt enrolled millions of unemployed Americans on various make-work schemes and spent government money in doing so. In this alphabet soup of schemes, workers were not paid a full wage, but were given some form of relief to stave off destitution. (There was no universal system of dole in the USA.) This was the relief, not the cure, of unemployment. These projects never covered more than a quarter of the jobless.

Roosevelt also dealt with overproduction in the only way capitalism can. Capitalism deals with the problem by destroying the productive forces. Roosevelt gave the process a helping hand. In 1933 he paid farmers to plough under 100 million acres of cotton (a quarter of that year’s crop) and had 6 million pigs slaughtered. Madness – perpetuating poverty in the midst of plenty!

Did the New Deal work? No. As now important sections of the capitalist class were more concerned about cutting the government budget than for the relief of unemployment. Having dispatched his Republican opponents in the 1936 election with the enthusiastic support of poor people with hope in their hearts, Roosevelt decided in 1937, under the pressure of the capitalist class, to cut the deficit. Relief programmes were scrapped and federal social security taxes began to be collected. As a result the federal deficit fell from 5.4% of GDP to 1.2%. Since this contraction coincided with a steep fall in economic activity (the ‘Roosevelt recession’) unemployment soared in 1937. Hundreds of thousands were laid off from their welfare schemes and the hopes of millions were dashed.

As late as 1940, there were still more than 10 million unemployed in the USA. As the Keynesian economist Paul Krugman put it, “A giant public works program…restored full employment, otherwise known as the Second World War.” The slight downside of the War was, of course, that fifty million people died. The working class exchanged one capitalist horror for another.

One big difference between now and 1929 is that governments are intervening, fearing the political consequences of inaction. In the USA, before Roosevelt’s election, President Hoover did absolutely nothing to alleviate the misery. His only memorial in history is the word Hooverville to describe the slums and shanty towns created to house the unemployed, homeless and hopeless victims of the depression.

Since 2007 governments have intervened against the collapse. They have mainly intervened to bail out the banks. In doing so they have adopted Mussolini’s approach in the great Depression, is private and individual. Loss is public and social. They have nationalised the banks’ losses and left the profits in private hands. As a result £1.5trn has been added to the national debt and the government is running a deficit of more than 10% of GDP in the UK. In America the costs of the bail-out have been reckoned by the head of the bail-out programme as $23.7trn, though even more astronomical figures have been quoted. This money has been borrowed and will eventually have to be repaid. There is a danger that this effort will strangle a future recovery at birth.

Monetary policy has been used to reduce interest rates to record lows all over the world, but it doesn’t seem to be having much effect on the economy. As to fiscal policy, running a budget deficit as proposed by the Keynesians, does not seem to be bolstering aggregate demand since the banks have just swallowed the money to rebuild their assets. At this stage we do not know if government intervention has put a floor on the slump, but it certainly is not providing a swift and easy passage to recovery.

There is a parody of Marxists and Marxism that asserts that we welcome economic slump. It is said we do not care about the hardship of the masses. We concern ourselves only with the radicalising effect on their consciousness that these privations will allegedly bring. We rub our hands together and exclaim, ‘This is the big one!’

Actually this is very far from the sober analysis of economic processes and their effects on consciousness shown by Lenin and Trotsky in their writings. Here is an example. As Trotsky pointed out in 1930 (The ‘Third Period’ of the Comintern ):

“The trouble is that increasing exploitation does not always raise the fighting spirit of the proletariat. Thus, in a conjunctural decline accompanied by growing unemployment, particularly after defeats, increased exploitation does not breed a radicalization of the masses but, quite the contrary, demoralization, atomization, and disintegration. We saw that, for example, in the British right after the 1926 strike. We saw it on a still larger scale in Russia, when the 1907 industrial crisis coincided with the wrecking of the 1905 revolution. If in the past two years intensified exploitation brought about the evident growth of the strike movement, the basis for it was created by a conjunctural rise in the economy, not a decline.”

Crisis and consciousness

In general, there is no one-to-one automatic relationship between crisis and the development of consciousness. How workers will think and what conclusions they draw depends upon the whole preceding period of class struggle as they have experienced it. It is true that the crisis brings a profound questioning as to the nature of the capitalist system and its manifest failure. Things cannot go on in the old way. But it may not provoke immediate revolutionary action. Over a period of years the 1929 crisis, which was political as well as economic, produced revolutionary prospects and counter-revolution across the globe. What happened in the class struggle in each country depended critically on the leadership of the working class.

Let us take the case of the British working class first. The British workers went into the Great Depression only three years after the greatest defeat in their history. In 1926 the Trades Union Congress called a general strike in solidarity against a concerted attempt by the ruling class to drive down the conditions of the miners by actual cuts in wages and increases in hours. The general strike was completely solid. Terrified of the revolutionary prospects it opened up, the leaders of the TUC cravenly sold it out with no guarantees, and left the miners to fight on alone. Beaten on the industrial front, workers turned to the political arena and elected a Labour government in 1929. This government impotently presided over a rise in unemployment to over 3 million in 1931. MacDonald and co. went over to the Tories and Labour was wiped out at the polls.

Where now were British workers supposed to turn? They had suffered industrial and political defeat in five years. The wind had been knocked out of the sails of the working class and the depth of the recession undermined their bargaining position. The early years of the decade saw a grim procession of hunger marches and local battles against cuts in the dole. It is true that, in the latter part of the 1930s, some sections of the working class had recovered enough to begin a fight back, but the new militancy was cut across by the outbreak of War.

In the USA during the 1920s trade unionism had been on the decline. The only workers that were effectively organized were those with craft skills. But, as we saw, a characteristic of the decade was the emergence of new mass production industries such as cars with a semi-skilled or unskilled work force. From 1929 to ’32 unemployment went up to 15 million, getting on for a third of the working class. Those still in work hung on to their jobs for dear life, gritting their teeth against on the track and an atmosphere of fear on the shop floor.

From a superficial point of view the workers seemed cowed. But it would be completely wrong to see that as a sign of acceptance of capitalism. The workers were angry, but felt helpless. When the economy turned up a little from the depths of 1933 some workers saw their chance to fight back.

For the whole decade 1923-32 there were less than 10,000 strikes in the USA, involving less than 4 million workers. The dam broke in 1934 with big strikes in Toledo Auto-Lite, by Minneapolis teamsters and with a general strike of San Francisco longshoremen. These strikes were led by a new generation of militant leaders, not the discredited generation of craft conscious compromisers that ran the unions in the 1920s.

Strike wave

For the decade 1936-45 there were 35,000 strikes. Nearly 16 million workers were caught up in the struggle. Aptly called ‘Labour’s giant step,’ the wave of unionisation took the form of industrial organisation, involving all the workers in the plant regardless of their level of skill or the tool with which they worked. The radicalisation was spilling over into political attitudes as well. More and more workers saw through the New Deal and were striving for real working class alternative to the capitalist politicians.

The decade of the 1930s ushered in by the 1929 Wall Street crash produced political upheavals over time. It provided revolutionary opportunities in France and Spain, and led to black counter-revolution in Nazi Germany, and eventually to World War. The critical determinant as to what was the outcome depended on the leadership of the working class movement. It is for that reason that the era is worthy of study as we enter a new period of economic and political turbulence.

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