‘Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate’ – attributed to Andrew Mellon circa 1930, reputedly the richest man in the world.
During the first nine months of 1987 Japanese investors poured $15 billion into US share markets. On 19 October $500 billion was wiped off Wall Street. The Chicago futures exchange fell 36 per cent in two days. Tokyo’s Nikkei Dow share market plummeted 49 per cent in 1990. On 16 September 1992 the $1 trillion a day currency market tore sterling out of the Exchange Rate Mechanism. This year the Mexican peso needed a $50 billion rescue. Barings’ fall gave a glimpse of the $23 trillion derivatives casino into which banks and multinationals cast fortunes. This is speculative capital, parasitical and explosive; echoes of the Great Crash of 1929. Coming events cast their shadows before them.
The 1929 Encyclopaedia Britannica’s entry for Capitalism reads, ‘It is certain, however, that though there must always be some tidal movement of rise and fall, the former violence of these rhythms is now much abated [owing] to the better adjustment altogether of world forces of supply and demand.’ US President Coolidge’s 1929 state of the Union message regarded ‘the present with satisfaction and the future with optimism.’ German Social Democrat Hilferding told his party’s 1927 congress, ‘we are in the period of capitalism which in the main has overcome…the blind laws of the market, and we are coming to a capitalist organisation of economy…to organised economy.’
Illusions in a steadily advancing capitalism were shared by all political leaders, trade unionists, Labour reformists, economists and business leaders. But not by Marxists. Henryk Grossman’s The Law of Accumulation and Breakdown of the Capitalist System, 1929, showed why crisis was inevitable and the Crash imminent.
Superficially the years preceding 1929 showed capitalism had recovered from the First World War and the threat of Bolshevism. The League of Nations index based on 1925-29 averages for industrial raw materials, industrial goods and world trade all showed increases from 92 to 111 for the year 1929. US industrial production rose from 95 to 109, Germany’s 87 to 109 and Britain’s 99 to 112.
Closer inspection reveals inter-imperialist rivalries fought out in the First World War unresolved. There was a serious trade imbalance between the major capitalist powers: the USA running a huge surplus with Europe (today Japan runs a surplus with the USA). Profitable investment opportunities were drying up with an overproduction of capital that drove down the rate of profit and intensified the competition for world markets and resources. Excess capital had to be exported or deployed on the stock exchange to avoid a collapse of profits (today capital is desperate for deployment in China, India and the former socialist countries). Britain no longer dominated the world economy and the USA was yet to play this role. Today, growing rivalry between the USA, Japan and Europe reproduces the unstable setting in which credit-fuelled speculation can burst, sending financial meltdown through the capitalist world.
Speculate to accumulate
To encourage trade, particularly with Europe, the US Federal Reserve central bank cut interest rates in 1927. US banks and their customers channelled funds into the stock market. Wall Street share dealing volumes rose 60 per cent from 1927 to 1928 driving up prices, attracting more funds. During 1929 Standard Oil of New Jersey pumped a daily average of $69 million into the market. Loans from non-banking sources used to speculate began to exceed those of banks. Money flowed across the Atlantic as Europeans joined in.
With speculation it is not the asset itself, its usefulness, nor its return, but its price and the prospect that the price will rise that matters. Prices soared. The average price of Wall Street’s leading industrial stock stood at 106 in May 1924, 245 at the end of 1927 and 449 on the last day of August 1929. Profits of 500 per cent plus were recorded, not for producing anything, not for satisfying some want or having some clever thought, but for being there – in the market. A blind, reckless rush to join in consumed people’s savings and drained money from company investment plans. Each feast of profits betokened more feasts to come. Capitalism had prised open the secret of limitless gain.
Great ingenuity was turned to this marvellous game to enable even more fortunes to be piled high. Deposit mechanisms (downpayments known as margins and leverage) promised multiple gains from minimum outlays. Splendidly misnamed investment trusts were devised to swallow up ever greater sums in pursuit of entirely the same number of shares.
The key to the unrelenting rise in share prices was the expansion in credit. The volume of brokers’ loans to speculators rose from $1 billion in the early 1920s to $6 billion in 1928. Money could be borrowed from the Federal Reserve at 5 per cent and lent to speculators for 12 per cent. Instant effortless profit!
Wipeout
‘Don’t part with your illusions; when they are gone you may still exist, but you have ceased to live,’ a Mark Twain quote from the Wall Street Journal 11 September 1929.
Bouts of anxiety swept the markets but those who warned of a fall were denounced as wreckers. Others who sensed the game could not last chose ultimate rather than immediate collapse and took profits while they could.
Signs of doom could be seen in the doubling of stocks of primary products between 1923 and 1929, resulting in an agricultural crisis in the colonies. US industrial output fell during the summer of 1929. At some stage the economy of growing stocks of unsold goods and falling output would reflect onto the stock market.
Infinite expansion of credit is not possible. At some point the loan has to be paid back or credit will dry up. The surge in credit and share prices are competing claims on the real wealth produced. When output falls and goods cannot be sold, some claims will be written off, some loans will not be repaid. Then credit is withdrawn from the market, share prices fall and the stampede to sell begins. Debt levels supporting the share prices are many times higher than can be serviced by the returns from the investment itself. Holding onto shares during a price fall means less and less chance of servicing the debt; bankruptcy looms.
On 21 October 1929 share prices fell. Some Jeremiah had warned that a day of reckoning was on hand. Some people listened. Countering such heresy the eminent economist Professor Irving Fisher suggested that the markets were yet to show the beneficial effects of prohibition which would make workers ‘more productive and dependable’. Thus reassured rapid trading drove the index of leading industrial shares down from 415 to 384. (On 8 July 1932 it closed at 58.)
On 24 October 1929 triple the normal amount of shares changed hands. Prices went into perpendicular fall. Fear and panic gripped.
‘Outside the Exchange on Broad Street a weird roar could be heard. A crowd gathered. Police Commissioner Grover Whalen…dispatched a special police detail to Wall Street to ensure the peace…A workman appeared atop one of the high buildings to accomplish some repairs, and the multitude assumed he was a would-be suicide and waited impatiently for him to jump’ (Galbraith). Among the crowds was Winston Churchill, though on this occasion there is no record of him having anything to say. People looked on in helpless horror as paper fortunes vanished.
Day after day, week after week, shares went mercilessly downwards. Stock that once sold at $20 could be had for 50 cents. Meetings of bankers and statesmen to initiate ‘organised support’ achieved nothing. Every time a government spokesperson made a reassuring statement the market promptly fell. With all else failing John D. Rockefeller made his first public pronouncement in decades, ‘Believing that the fundamental conditions of this country are sound…my son and I have for some days been purchasing sound common stocks’.
‘On La Salle Street in Chicago a boy exploded like a firecracker. Like wildfire the rumour spread that gangsters whose margin accounts had been closed were shooting up the street. Several squads of police arrived to make them take their losses like honest men. In New York the body of a commission merchant was fished out of the Hudson. The pockets contained $9.40 in change and some margin calls.’ (Galbraith)
The US suicide rate had been rising for years but now it had a different class of suicide. Hotel booking clerks enquired whether guests wanted rooms for sleeping or for jumping. Two men jumped hand-in-hand from the Ritz. Word that someone had ‘got caught’ in the market brought creditors down like locusts. Naturally, the financial consequences of an illustrious death had to be considered before deciding to announce it.
Where once was the bonhomie of easy abundance now were narrow eyes of suspicion. Embezzlers and fraudsters were unmasked in the highest places and biggest banks: the former wizards of high finance were now crooks and charlatans. The economists and business people were clueless.
Banks across the USA raced to get their money out of Wall Street. As assets evaporated businesses were unable to meet loan repayments. The banks lost heavily, many closed. Between 1929 and 1933 the number of US banks fell from 25,000 to 18,000. Savings disappeared, a world of furs and jewels was lost. At his 1933 Presidential inauguration, Franklin Roosevelt announced that ‘the money changers have fled from the high seats in the temple of our civilisation’. Thus the Crash was blamed on unscrupulous speculators, an aberration from the presumably honest business of capitalism. Across the Atlantic another scapegoat was invented – the Jew.
The Depression
The financial crisis pulled credit out of companies and production and consumption slumped. By 1933 US industrial output fell to almost half its 1929 level. Thirteen million people were unemployed, 25 per cent of the work force. Farm incomes halved and food stocks were destroyed as people went hungry, too poor to buy them.
Scrambling for money, US banks recalled loans from Europe. World trade fell by 65 per cent. Primary commodity prices collapsed and in 1937 a producer received a third of their 1927 income. By 1932 the capitalist world had 30-50 million unemployed. In May 1931 the Kreditanstalt Bank in Vienna was declared insolvent. The financial system of central Europe rocked; banks fell like rows of dominoes. In August 1932 Germany’s unemployment rate was 44 per cent with a further 26 per cent on part-time work. Fearing communist revolution the Deutsche Bank and the Dresdner Bank swung behind Hitler. In 1922 the National Socialist Party had fewer than 200 members; in 1928 it had six members in the Reichstag. In 1932 it polled 13 million votes and elected 230 members. For Europe as a whole in June 1932 industry was working at 35-40 per cent capacity.
Britain had 3 million unemployed, under 25 per cent of the work force. Worried about a financial crisis in Britain, bankers insisted that the Labour government run a balanced budget and slash wages. The government split, with Ramsay MacDonald joining a National Government including Liberals and Conservatives. It imposed an emergency budget with severe spending and wage cuts. This provoked the threat of a mutiny in the Navy at Invergordon. Further shaken investors took gold out of the country. On 2 September 1931 the National Government, formed to preserve the Gold Standard and save the pound, took sterling off the Gold Standard and the pound sank 30 per cent. Almost all other capitalist countries left the Gold Standard. Exchange rates competition followed as part of a fierce protectionism in which each ruling class tried to unload its losses onto the other. The talk of peace and stability that preceded 1929 gave way to the language of war.
With the planned economy making it almost immune to the international capitalist crisis, the Soviet economy nearly doubled in size during 1927-33.
Reference: JK Galbraith, The Great Crash 1929
