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What can 1988?
crash
The Crash: 1929 and today
On Monday 19 October 1987, there was pandemonium and panic on the stock exchange in Wall Street, New York. Just before the market closed, dealers came to blows as they fought to make last minute sales of stocks and shares. The market had just suffered an unprecedented 22% fall in share prices from previous levels in just one day. Black Monday of 1987 easily outstripped the notorious terrible Tuesday in October 1929 which started the Wall Street Crash. The fall in 1929 was just a mere 13% drop in value in a day. And yet that crash in prices of Tuesday 29 October 1929 has always been regarded as the beginning of the Great Slump in capitalist production, investment and trade which ensued from 1930-32 and carried on in some countries for the rest of that terrible decade until the Second World War.
So does the crash of 1987 mean that capitalism is heading into another major slump, with all that means for employment, wages, and the rights and conditions of working people? If so, in what ways, if any, will it be different this time?
Worldwide crash
The stock market crash of 1987 was even more extensive and severe than that of 1929 in two principal ways. Firstly, the magnitude of the fall was much greater this time. In the fortnight ending on 26 October, Wall Street saw the value of shares plunge by over 30%, in London the fall was similar, in Hong Kong it was even larger, and in Tokyo it was still nearly 20%. In 1929, the severest fall was in New York. Other exchanges did not experience such quick and steep declines. This time, while New York triggered off the crash, it quickly spread to every other market for shares in the capitalist world. No one was spared-with the exception of Sri Lanka, where investors were obviously hoping that the Indian troops' crushing of the Tamil Tigers would herald a new era of peace!
This international chain reaction is another graphic demonstration of the inextricable links among modern capitalist national economies. No one capitalist nation can avoid the effects of a crisis in another; they stand and fall together. The British government and the employers federation, the CBI, wailed that the crash did not reflect the 'underlying strength' of British industry and claimed they could not understand
By Bob McKee
why a crash in New York should affect London's stock exchange. Leaving aside for the moment the question of whether the British economy is really strong, in saying what they did, the spokesmen for British capitalism were not prepared to recognise that while most shares quoted on stock exchanges were those of nationally based companies, the funds used to buy and sell them were not. Much of the purchasing power for speculation in stock markets comes from funds held by big international banks and multinationals, which shoot around from one country to another in search of the biggest return. Also buyers and sellers of stocks in London are very quickly going to take into account what speculators in New York think of the future of share prices and act accordingly.
What can we learn from the Great Crash on Wall Street in 1929 which can tell us about what might happen in 1988? Just as in 1987, the stock market had been rising fast in a charging 'bull market' from about 1925 up to 1929. Wall Street reached a record high on 3rd September 1929 of 381.17 on the Dow Jones Industrial Share Index. Most share analysts were confident of further rises, and there were very few voices expressing doubts. And yet production and investment had just begun to tall in the summer ot 1!2, and interest rates had reached their highest level since 1921. There was a definite downward drift in prices during October. Just as in 1987, the slump really began on Monday 21 October, with panic selling on the Thursday which was only stopped when the leaders of the big institutions declared that they would 'support' the market prices. | But by Monday 28 October the slump recommenced, this time with no recovery, culminating in Black Tuesday, when the fall in one day equalled the gains of the previous 12 months.
The slump continued right through to 13 November reaching a low of 198.69 on the index, nearly 50% below the high of 3 September. What was the reaction of the political leaders and economic advisers to the crash? Throughout that four weeks from Black Tuesday to mid-November, they all claimed there was no reason for panic. The leading economist, Irving Fisher, called the crash 'a great accident' caused by a
'psychology of panic'. There would be no recession in the real economy, he claimed. President Hoover announced that "the fundamental business of the country, ie the production and distribution of commodities, is on a sound and prosperous basis" • Eugene Stevens, the President of Continental Illinois Bank claimed that "there is nothing in the business situation to justify nervousness". Charles Schwab of US Steel said that industry was in a 'fundamentally sound condition' , a claim repeated by all the other industrial barons. These claims have been echoed, even down to the last word, by Reagan, Thatcher, Lawson and the CBI leaders now after the crash of 1987.
And the capitalist leaders of 1929 also took action to reassure markets. The day after Black Tuesday, banks cut interest rates. And in November Hoover cut taxes, and there was a further fall in interest rates. These are similar to the measures carried out by the banks and governments of 1987 to stem the falls in the market for shares and restore confidence.
1924-29
In 1929 it appeared at first that the words of confidence and measures to provide more and cheaper funds had worked. The market began to recover. From New Year 1930 until April the market rose back to 294.07 on the index, 100 points above the low of November 1929, but still 90 points below the peak of September 1929. It was a bigger recovery than so far achieved in 1987. But after a short lull, in June 1930 prices resumed their fall reaching a new low in December 1930 well below the low of 1929. The fall continued, with a only a brief limited recovery, in 1931 and on through 1932 to reach rock bottom in July with the index at only 41.22! While a rise began in early 1933, the bull market was so weak for the rest of the decade that Wall Street did not reach the November low of 1929 until 1937 and then suffered a further collapse that was not retrieved until after the war. It is clear why, after seeming to recover its nerve between November 1929 and Spring 1930, the stock market then began slippng into a bottomless pit. Because by Spring 1930, a major decline in production and investment had began to bite into the US economy, and the prospects for profits were clearly dismal.
Why did the Great Crash come in
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10 MIR Winter 1988: 1929 and today
October 1929 and why could it not be avoided? The answer to these questions depends on understanding what happened in the boom of 1924-29. Capitalism is a system of production based on competition among owners of capital to obtain the greatest share of profit created by exploiting the labour of the working-class who own no capital. Capital will not be invested and production will not commence unless the return in profits on that capital is sufficiently high to justify its advancement. Thus the key to expansion of production, investment and trade under capitalism is profit. The whole of the Marxist analysis of capitalist production aims to show that profits and therefore investment and production do not move steadily forward under capitalism. On the contrary capitalist production moves in cycles of boom and slump or recession, as Trotsky once described like a human being • breathes in and out.
Moreover there are clearly distinguished epochs of capitalist production when that inhaling and exhaling is easy and healthy, and others when it grows increasingly painful and bronchitic. Thus the period 1896-1914 was generally an epoch of boom, when growth in production and profitability was high, and any downturns were shortlived and confined. However, the period 1918-39 was entirely different, with production and investment sluggish, culminating in a long lasting and extensive slump beginning at the end of 1929. As Trotsky described the post 1919 period: "In the decades preceding the war, crises had the character of short and not too profound interruptions, while each new upswing left the peak of the previous one far below. But now we must expect the opposite: profound, long and painful crises, while the upward movements are weak and short lived," Writings 1932. p173.
The boom of 1924-29 was relatively weak compared to the pre-war period. This was confirmed by the slow expansion of investment; only 3% a year compared to 5% prior to 1919. The productive sectors of the economy did not grow as much as the financial and service sectors. There were less workers employed in US manufacturing in 1929 than in 1919. Spare capacity unused by capitalist enterprises was up to 20% even during the boom of 1924-29. All the factors for a slump in investment and production existed but were only delayed by the speculative creditfinanced dealing in fictitious capital that drove the capitalist economies of the 1920s onward temporarily, while still preparing the way for the Great Crash and Great Depression of the 1930s.
The boom of 1924-29 shows great
"The US economy is fundamentally sound" , President Reagan, 22 October 1987.
"The US economy is fundamentally sound", Andrew Mellon, US Treasury Secretary, 29 October 1929.
similarities with the boom of 1982-87. In 1974-5 capitalism suffered the first simultaneous world- wide recession in production, investment and trade since world war two. This marked a new turning point. Capitalism now entered a new era of relatively sluggish growth. Between 1964 and 1973 output in Japan had increased by 9% per year; in Europe by 4.5%; and in the USA by 3.7%. But despite a short upturn between 1976-9, capitalism went into another recession between 1979-81. In the mid-1970s Japan's growth rate fell to 3.6%; Europe to 2.4% and the USA to 2.6%. By 1980 profitability had declined to one-third on average of its 1960s peak. That is why a recession was inevitable to capitalism in 1979-81-in order to write off capital values of old plant and reduce wage costs to try and restore profits.
The stock market
That recession has been succeeded by what Reagan has boasted of as 60 uninterrupted months of expansion of output, at least in the USA. But the boom of 1982-7 has been the weakest of all those since 1949. Since 1979 output has moved forward in Japan by just 3.8%; in Europe by under 2% and in the USA by about 2%. While profitability did recover somewhat through the cutbacks in the recession of 1981 and the subsequent boom, it only rose to half the levels achieved in the 1960s. And in order to achieve that, major sectors of industrial capacity, particularly in Europe, had to be closed down and unemployment shot up to over 30 million, two-thirds in Europe alone. Capitalism was much leaner but only a little fitter.
And despite
being leaner, excess
Alan Greenspan, Chairman US Federal Reserve Bank, "l detect none of the excesses that could cause the expansion to turn brittle or selfdestruct", two days before 'Black Monday', 22 October 1987.
capacity in industry has continued to grow, just as in the 1920s. Each inhalation and exhalation of the organism of capitalism is becoming more painful The new slump or recession now in prospect will only restore a basis for a further limited spurt forward. There can be no return to the long boom of the 1950s and 1960s. The post-war boom is clearly at an end and capitalism is well into an epoch similar to that between the two world wars, of shallow booms and painful slumps.
The 1982-7 years were just such a shallow boom. Profits and profit rates recovered somewhat from the all time lows reached just prior to the world recession of 1979-81. Production has made some limited steps forward. This improvement in the world economy was expressed in a bull market in all the major stock exchanges for nearly five years. But because the stock market has increasingly become a market for fictitious capital, rather than for raising funds for investment in production as it originally was, prices have wildly outstripped the expansion in real capital values ie the growth of commodities, factories, machinery and profits.
One way of measuring this variance is to compare the average price of shares with the average dividend that can be received in the world's stock markets. Historically, in London this price/ earnings ratio has been around 10/1 to 12/1. In other words it took approximately ten to twelve years of dividends or company profits to pay back the value of the share price. Prior to the crash this ratio was over 18/1. The New York figure was similar, while in Tokyo the price/earnings ratio had reached nearly 70/1 with ratios for some companies meaning that it would take 150 to 200 years to pay back from profits. Clearly the speculative bubble was stretching share prices to sky-high levels when compared to the real state of the economy. In the first half of 1987 share values rose on most markets by anything between 25-50%. This pace of growth could not be maintained.
This explains why the crash was so severe when it came. Stock markets were so overstretched compared to the growth of real values. That is why the comments of government and the CBI about the share crash being unreal and unrelated to real economic strength are so ridiculous. On the contrary what was unreal was the previous high share price level. The crash has established some semblance of reality.
The stock crash of 1929 similarly reduced fictitious capital values to levels more appropriate with real capital values, but also heralded a massive contraction of real values which was also necessary. And the collapse in real
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"There have been eight recessions in the post-war period and the stock market has entered sustained declines, signalling their approach, by lead times avejust under eight raging months"
', National Bureau of Economic Research, USA as reported in the Wall Street Journal, 19 October 1987.
values was severe, although the degree of severity varied among the four capitalist nations who contributed up to 70% of world capitalist production in 1929: the USA, Britain, Germany and France. The USA, the key capitalist economy with 40% of production alone, had seen a 15% growth in overall production from 1924-29 and a 26% growth in industrial production. But it then suffered a fall in national product of 29% in the four years to the end of 1933, while industrial production fell by Protectionism The collapse started in the USA and soon spread to the other capitalist nations. Germany had experienced a frenetic growth of production in just three years from 1926 but its more vulnerable position on world markets led to a massive contraction of national output of nearly 40%. France had expanded by 14% in national output and by 20% in industrial production Because of its colonial markets the Great Depression only led to a fall of 7% in overall output and 15% in industry between 1930-3. Britain had expeparticularly sluggish growth after 1919, never recovering its leading role in world capitalism. Growth in national output between 1924-9 was only 10% and industrial production rose even less. But again because of protected colonial markets, the fall in output overall between 1930-3 was only 4%, although industry declined by Unemployment rose from 10 million in 1929 to 40 million by 1932, with the USA reaching 30% and Britain 25%. National product in the USA rose by 34% from 1933 to 1937, and industrial production recovered by nearly 30% to reach the levels of 1929. But then the US economy experienced a new slump and slipped back. Production did not again reach the levels of 1929 until the USA entered the war in 1941 when unemployment was still over 17%. In Europe, the recovery was sharp in S1OO WILL BUY THIS CAR MUST HAVE CASH LOST ALL ON THE STOCA ДАРКОЗ Germany, output rising by over 45% to 1937 as Hitler put the economy on a war footing. But in France there was little production respite, stagnated at depression levels. Britain surged back with 15% more output and 24% more industrial production than in 1929 by 1937, but this revival had only been possible after nearly 12 years of recession. The inter-war period was clearly one of shallow and short lived growth and lengthy and slumps for Britain.
Many capitalist commentators rule out the possibility of a slump of 1930s proportions because they argue that governments have learnt from those years ot depression and will not commit the same mistakes of policy made then. The mistakes that are referred to are that: governments then did not expand money supply and so lower interest rates and make it easier to invest; they did not cut taxes and expand government spending to boost demand for goods and services in the economy; they actually cut markets for capitalist production when each government posed tariffs and quotas on imports to protect home markets and devalued their currencies to make their own national commodities cheaper on world markets. Rather than cooperate internationally in keeping markets open and supporting each others currencies, the governments of the 1930s engaged in an economic war which drove them all into slump. This time it will be different, the commentators claim. Already governare cutting interest rates and expanding the money supply and central bankers are cooperating in stabilising the value of national currencies, particularly the dollar. But was it really true that the governments of the 1930s were so stupid and selfish that they created a huge slump when there would probably have been just a small recession otherwise? And is it true that the policies adopted now by the governments of 1987 will be any different? US economy Firstly, it is not true that governments and bankers in the depression of the 1930s restricted money supply and kept interest rates high, thus driving the financial system and consequently industry into bankruptcy. In the USA, interest rates fell from nearly 6% to under 2% between 1929-33.
explained above, from the first day after the Great Crash, interest rates were lowered. While prices had actually fallen by 3% between 1924-9 and then fell by over 30% to 1933, money supply rose by 11% up to 1929 and then declined by only 25%. So during the depression, real money supply purchasing power was much higher than in the boom period and much cheaper, but it still did not revive the economy. A similar trend is revealed in each of the other capitalist nations. Money was plentiful and cheap but it made no difference, because the market for profitable production and investment was so poor, there was no demand for money. As the proverb goes, you can lead a horse to water but you cannot It is true that the major capitalist governments tried to cut back government expenditure, thus reducing the market for commodities and employ-
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ment further. Even in the New Deal era, President Roosevelt was calling for 'balanced' government budgets where expenditure did not exceed tax revenues. But this policy, which was also applied between 1924-9, could hardly be blamed for the collapse of 1930-
During the Great Depression, there were several attempts at international cooperation but they all collapsed, because each government made decisions to protect its own capitalist economy rather than be dictated to by other governments. When the US government introduced the Smoot Hawley Tariff Act in June 1930, mainly to protect American agricultural capitalists, the slump in industry had already begun. US restrictions on imports of agricultural goods had a devastating effect on the agricultural economies of Central Europe whose main market was now closed to it. They had borrowed heavily from French and British banks, as had German industry. They began to default on their debts, driving Britain and France into financial crisis, and causing wholesale bankruptcies in US banking. Eventually Britain was forced to end the pound sterling's connection to the value of gold ie the Gold Standard, and devalue its currency. Soon every national government followed suit and tried to maintain its share of dwindling world markets by competitive devaluations, and tariff and quota trade barriers. The collapse of world trade and financial cooperation was a consequence of the unavoidable slump in production and investment. Policies of protection and devaluation were inevitable despite the initial good intentions of the capitalist powers. There is no reason to expect that if the slump in production sets in, that capitalist governments will react any differently now in trying to protect their national economies.
In 1929, what triggered off the Great Depression worldwide was the slump in production and investment in the USA. In 1987 the USA is still the most important and largest capitalist economy. It contributes 38% of world production. It is the most important market for commodities produced by many of the other capitalist nations. Theretore, it the USA is expanding, world capitalism goes forward and it it goes into recession, the world follows.
In the post-war period, the US economy has lost ground relatively to West Germany and Japan. Investment has been lower, growth has been slower and profitability smaller. As a result its share of world manufacturing produc tion and trade has declined. In the recessions of 1974-5 and 1979-81 the US
economy suffered losses of production, capital and employment. The productive sectors of the US economy appeared to be stagnant. Yet the US capitalists had to continue to provide the war machine to protect the interests of imperialism worldwide. Reagan came into office in 1980 at the start of the recession, committed to higher employment, less taxes and less government expenditure to relieve the burdens of the capitalist class and win support of working people alike. But Reagan was also committed to a rearmament programme to grow by 7.5% a year over inflation. This had the accidental byproduct of fuelling the recovery from recession. The arms programme increased profits for the 'military industrial complex' and their spending on other commodities filtered through to the productive sectors of the US economy. It was 'war Keynesianism' or 'negative Keynesianism'
Plaza accord
But how could this extra government spending be financed? Reagan at first claimed he could fund it by cutting welfare spending on the poor. But even his savage measures in this area were not enough. As he was reducing taxes for the rich, there was only one other solution: to borrow the money capital. So after having bitterly attacked the previous Carter administration for driving up the total national debt to $8,000bn, the Reagan regime proceeded to raise that to over $25,000bn in five years. The deficit of government expenditure over revenue reached $220bn in 1987. The US government borrowed the money by issuing US Treasury bonds which paid interest to lenders. Who were the lenders? They were the major commercial banks and multinational companies around the world, particularly those in Japan and West Germany who were flush with dollars received from their successful sales of exports to the USA.
The US government had to offer high rates of interest to attract buyers of their bonds. This had two important consequences. High US rates of interest made it very attractive for banks and multinationals not only to buy US government bonds but also to buy more dollars with other currencies to receive the high rate of interest. This extra demand for dollars over supply drove up the value of the dollar compared to other currencies. As a result, US manufacturers found that their commodities for sale were more expensive because buyers had to pay more dollars to buy a US product. On the other hand US consumers at home found that they had to pay less dollars to buy imports.
The result was that US manufacturers, already weaker on world markets, now lost even more ground and also found that they were driven out of their own domestic market by cheaper European and Japanese imports. On top of this US manufacturers could not improve their costs by investment in better machinery and techniques because the cost of borrowing money to invest was so high due to the high interest rates created by the Us government's need to borrow! Now for the first time in 100 years the US was importing more commodities than it was exporting and its borrowing had made it the world's largest debtor.
So while the US budget deficit at first appeared to start off a boom in production, trade and employment, this was mainly centred in arms, financial services, and general service sectors. Industrial production stagnated and manufacturing employment continued to fall. While arms production may create some employment and purchasing power in the market, arms in themselves add nothing to real production values. Workers cannot eat tanks in order to produce more value and capitalists cannot use missiles to make more commodities for sale. So the resources devoted to arms production are entirely wasted and eventually must reduce the overall surplus-value available to the productive sectors of capitalist economy. Production growth must eventually come to a standstill.
The US government tried to avoid the coming slump in US production and restore the fortunes of US industry by reversing its policies in 1985. It called a conference of the seven major capitalist powers. Under the terms of the so-called Plaza agreement, these nations agreed that they would allow the US government to lower interest rates on their dollar borrowings while the US government attempted to reduce its spending deficit and therefore its borrowing requirement. This meant that it would be less attractive to hold dollars
the value of the dollar would decline compared to other currencies. Thus US industrial goods would be cheaper on home and overseas markets making it possible for the trade deficit to be reduced
In the last two years the US dollar has fallen dramatically in value, by over 40% against an average of other currencies, with an even larger drop against West Germany and Japan, the two main exporters into the US market. But there has been no real improvement in the trade deficit. On the contrary it has got
worse, approaching $170bn in 1987. US industry has so far failed to regain its lost markets. And the US government
had not cut its deficit at all as it
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continued the arms race and also tried to maintain the market for its artificially created boom.
This failure of the Plaza agreement seriously troubled the West German and Japanese capitalists. They were now receiving less value for sales of their commodities to US buyers because the dollar had been devalued, and they were receiving less interest on the dollars they lent back to the US government to pay for Reagan's budget deficit. There was growing disquiet which led to a further meeting in Paris in February 1987 where the 'Louvre Accord' of the seven top capitalist powers was signed. Under this agreement, the value of the dollar was to be supported, in return for which the US government would cut its deficit and Japan and West Germany would gradually expand their economies to allow the USA to reduce their trade deficit by increased exports. Third World debts The Louvre Accord is now in tatters. Following the stock market crash, governments have lowered interest rates to restore investment. But the lowering of interest rates has made holding dollars less attractive. The result has been downward pressure on the value of the dollar. Europe and Japan cannot continue to allow the dollar to tall, making their goods more expensive on world markets, while the USA fails to correct its budget deficit. If there is no action by the USA, Europe and Japan will be forced to protect their markets and/or devalue their currencies. On the other hand if the US government significantly raises taxation or appreciably cuts government expenditure to reduce the deficit it could lower further the profitability of US industry and push it into a deeper recession, while cutting markets for Japanese and European exports. Already the dangers of protectionism have grown as the rivalry between Japan and Europe, Europe and the USA, and the USA and Japan has increased with slowing world trade. These three trading blocs already impose considerable non-tariff barriers to imports from each other, and even tariff rates have been raised on specific commodities. If the world economy moves into stagnation, then the pressures for protectionist overwhelming despite the fine words about cooperation.
Any recession in production and trade will be disastrous for the economies of the Third World, with huge debts owed to the international banks, and vitally dependent on exports to the markets of the USA, Europe and Japan. Defaults on payment of these debts could become an epidemic in any "All the contradictions that make for a devastating slump are piling up. The price of stocks and shares is not in proportion to the economy. It is fictitious capital... The bankers and the stock brokers are under the illusion that the increase in stocks and shares will lead to an increase in production to match it. In fact they will have to come down with a bump as they came down in the past. Stocks and shares will have to come into line with the real economy." Ted Grant, July 1987, MIR No 35, Summer 1987.
recession, forcing the governments of the advanced world to protect the international banks from collapse through government funds. More government spending to help the banks will mean extra taxation and less social spending.
The 1929 Great Crash was followed in less than six months by a major slump in production, investment and trade. The post first world war period was one of weak booms and severe recessions for capitalism, and the weak boom of 1924-29 was followed by the Great Depression of 1930-32. The period since 1975 seems to be similar. The boom of 1924- 29 was healthier than that of 1982-7. It raised production in the 16 major capitalist nations by nearly 4% Militant International Review No 35, Summer 1987 is avallable at 90p plus 20p postage, from World Soclalist Books, 3/13 Hepscott Road, London E9 SHB. This edition Includes Ted Grant's major article, written before the stock market crash, outlining the fundamental processes at work in the world capitalist economy. Undeclared trade wars through currency devaluations; the end of the 'hegemonic' poslton of US capitalism on a world scale, especially In relation to Japan; the advanced overcapacity; the stock market speculation; the explosion of consumer credit; even the world trend for tax cuts-all are explained as factors preparing a world slump. All readers should make sure that they have a copy of this back Issue of the MIR to study alongside the present material. Cheques etc to be made payable to World Socialist Books. '13 per year on average. The 1982-7 boom is weaker.
Unemployment between 1924-9 was only 4-5% on average, although it was much higher in the USA and Germany. Now it is higher on average.
The coming slump The Great Crash of 1987 is making way for the most serious economic decline in capitalism since the early 1930s. Whether it will be as severe as 1930-32 is difficult to judge at this early stage. But it is likely that the inevitable downturn will surpass anything experienced in the post-war period, with significant absolute falls in production and investment. The crash and the slump that will follow illustrate how completely reactionary modern capitalis, in its increasing inability to ism develop a sufficient quantity of products for human need. The long upswing of 1949-73 developed the productive forces enormously, but even then not as much as a world federation of workers democracies could have achieved, cooperating internationally to develop the resources of technique, labour and natural materials available. Private ownership of the means of production and the national state have acted as barriers to economic development during the 20th century. These restrictions, specific to the capitalist mode of production for profit, were partially overcome and temporarily hidden by the long post-war upswing. Now in this period of downswing, these key contradictions in capitalism will exert themselves with renewed force with drastic consequences for the livelihoods of the people of the world.
PERSPECTIVES FOR AMERICAN fian International Revien LABOUR
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